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Preferred Bank (PFBC) Q1 2021 Earnings Call Transcript

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Preferred Bank (NASDAQ: PFBC)
Q1 2021 Earnings Call
Apr 21, 2021, 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon and welcome to the Preferred Bank First Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode.

[Operator Instructions]

Please note, this event is being recorded.

I would now like to turn the conference over to Jeff Haas of Financial Profiles. Please go ahead.

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Jeffrey Haas -- Investor Relations, Financial Profiles, Inc.

Thank you, Betsy. Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the first quarter ended March 31, 2021.

With me today from management are Chairman and CEO, Li Yu; President and Chief Operating Officer, Wellington Chen; Chief Financial Officer, Edward Czajka; Chief Credit Officer, Nick Pi; and Deputy Chief Operating Officer, Johnny Hsu. Management will provide a brief summary of the results and then we will open up the call to your questions.

During the course of this conference call, statements made by management may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based upon specific assumptions that may or may not prove correct. Forward-looking statements are also subject to known and unknown risks, uncertainties and other factors relating to Preferred Bank's operations and business environment, all of which are difficult to predict and many of which are beyond the control of Preferred Bank.

For a detailed description of these risks and uncertainties, please refer to the SEC required documents that the Bank files with the Federal Deposit Insurance Corporation or FDIC. If any of these uncertainties materialize, or any of these assumptions prove incorrect, Preferred Bank's results could differ materially from its expectations as set forth in these statements. Preferred Bank assumes no obligation to update such forward-looking statements.

At this time, I'd like to turn the call over to Mr. Li Yu. Please go ahead.

Li Yu -- Chairman and Chief Executive Officer

Thank you. Good morning. Preferred Bank's first quarter income was a bank record of $21.2 million or $1.42 per share compared to prior quarter quite favorably because this quarter we have only 90 days as compared to the fourth quarter of 92 days. In addition, in this quarter, we have a quarterly specific payroll taxes on bonus distribution.

This quarter featured strong deposit growth on an annualized basis is 25% plus. We are thrilled to have these additional deposits because it gave us more opportunity to grow and to do many things. But we have also noticed the excess cash flow has been moderately compressing our capital ratio, return on assets, net interest income and net interest margin.

First quarter loan growth was $104 million or 10.4% on an annualized basis. We have noticed throughout various contact with our customers, and generally, they are more optimistic about the future of our economy. And now they are planning or already taking action to commit to more business expansion transaction or investment transactions. Some of them even went as far as fearing about potential inflation and then wants to commit their resources to assets at this point of time.

To meet this increased demand, we have, one, added the team of four relationship officers and total team of six in Houston, Texas. In California, we have so far added five relationship officers and we'll continue to look for new talents throughout the year. We're working on areas in New York and other places for new relationship officers.

Internally, we are convinced that the next Fed interest rate move will be going up rather than coming down. So, with that, we are actively and we have been always been preparing ourselves to have a balance sheet become very asset sensitive.

As of March 31, credit metrics seem stable. The total deferred COVID-19 loans -- related loans was down to $25.8 million, which is quite moderate. Operating expense was slightly higher, but considering the quarter-specific payroll taxes, it is not much different as compared to previous quarters.

And as you are well aware of, our business model is that we have one-on-one high touch service relationship with our customers and we eagerly waiting for the economy to open up, so we can reach out to our customers more actively.

Thank you very much. I'm ready for your questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Matthew Clark from Piper Jaffray. Please go ahead.

Matthew Clark -- Piper Jaffray -- Analyst

Hey. Good morning, everyone.

Li Yu -- Chairman and Chief Executive Officer

Good morning.

Matthew Clark -- Piper Jaffray -- Analyst

If you could just first start on the margin and the contribution from PPP. I don't know -- I don't think it's that material, but I was trying to hone in on the core margin excluding PPP, if you had the contribution in net interest income this quarter.

Li Yu -- Chairman and Chief Executive Officer

That's best answered by Ed Czajka.

Edward Czajka -- Executive Vice President and Chief Financial Officer

I would say, Matthew, due to the fact that PPP totals about $94 million, the rate including fees was about 2% in the most recent month. So, it's pretty negligible against a $4 billion portfolio. So, I would say probably maybe a basis point on the margin.

Matthew Clark -- Piper Jaffray -- Analyst

Okay. That's fine. And then, on the outlook for the margin, you guys put up some pretty good growth and maybe you can speak to the rate on new originations. I know you have a lot of floors on your existing portfolio, but given the growth, is it fair to assume that we should see some incremental pressure on the margin just from the new business?

Li Yu -- Chairman and Chief Executive Officer

Okay. Matt, margin prediction has become a situation that we watch our tongue. For instance, just to be statistically mentioning, for the first quarter, we have a -- pay-off rate is 90 basis points higher than the rate of new loan being done. This has widened up from the previous quarter of $0.32 -- 32 basis points. And it is a growing trend. When you have a low interest rate environment for a long, extended period of time, people sort of -- kind of pricing their loans lower on the competition side. And also, you mentioned that we have nearly a large portion of our loans at the floor. Yes. And many of the floor was made -- it was about two, three years ago, was quite high. And all the customers coming back and renegotiating on those floors, in many cases, we have to agree to the changes. So, these two factors going forward is that will have additional negative pressure to the NIM. Not [Indecipherable] net interest income. But what the positive force is continuously reducing of the interest cost plus the potential interest cost reduction when we refinance of the sub-debt and also our growth. So, if we had strong growth, it will balance out some of the margin compression situation.

Matthew Clark -- Piper Jaffray -- Analyst

Yeah, that's great.

Li Yu -- Chairman and Chief Executive Officer

[Speech Overlap]

Matthew Clark -- Piper Jaffray -- Analyst

Yeah, NII is clearly the focus. And then, just on the C&I growth this quarter, also very strong. Could you just give us a sense for where that came from maybe by industry type or business type this quarter?

Edward Czajka -- Executive Vice President and Chief Financial Officer

You want to mention that -- I had some statistics. You want to mention -- you want to discuss first?

Wellington Chen -- President and Chief Operating Officer

Hi, Matt. This Wellington. Again, as Mr. Yu mentioned, our clients are bullish and very upbeat and they see opportunity. Some existing client relationship is their business expansion and they're also taking over some new relationship that adds to the base, our industry. We have, for example, the produce packaging, healthcare professional, data centers, communication. These are some of the example. Also, like building material, like pipes, fasteners, etc.

Li Yu -- Chairman and Chief Executive Officer

Just to also tell you, the new clients represents most of the growth, but there are about additional usage [Indecipherable] by existing client in the neighborhood of $40 million.

Matthew Clark -- Piper Jaffray -- Analyst

Okay, that's helpful. Thank you. And then, just on the non-interest expense side of things, maybe for Ed, in terms of the run rate, it sounds like you guys have hired some additional relationship officers that probably put a little bit of upward pressure on that comp line. I guess, how should we think about the overall run rate and the potential for additional hires for the rest of the year?

Edward Czajka -- Executive Vice President and Chief Financial Officer

So, we don't have the Houston LPO, for instance, personnel. That's not a fully baked quarter in there. That's about half the quarter. So, in addition to that, the payroll tax expense was fairly high in Q1 as it is every year because we pay our incentive compensation every February of every year. So, that's a bump of about $500,000 to $600,000 on the run rate. So, I would say going forward, we were 15.65 in this quarter. I'd say going forward, we'll be right around -- probably right around 15 would be my guess.

Matthew Clark -- Piper Jaffray -- Analyst

Okay, great. And then, maybe just lastly on the loans that were sold. Can you just give us some color there in terms of what exactly was the amount that was sold and the property type and the situation in general?

Li Yu -- Chairman and Chief Executive Officer

We had one significant loan was downgraded to substandard. And we don't want to keep this loan in our portfolio because it's been substandard. So, we sold it.

Matthew Clark -- Piper Jaffray -- Analyst

Got it. Thank you.

Operator

Our next question comes from Gary Tenner from DA Davidson. Please go ahead.

Gary Tenner -- D.A. Davidson & Co. -- Analyst

Thanks. Good morning. Thanks. Good morning. I was hoping just to get a little bit of color in terms of your comments about working to be more asset sensitive. I mean, you talked about floors a little bit, but would love to get an update on -- today, the amount of your portfolio that's floating? How much of the portfolio is subject to floors and how [Indecipherable] the floors are. But any commentary on what you're doing to become more asset sensitive as you noted in the press release would be appreciated.

Li Yu -- Chairman and Chief Executive Officer

Ed, you had it handy.

Edward Czajka -- Executive Vice President and Chief Financial Officer

Yeah, so. Hi, Gary. Of the total book -- and again, this is as of year-end. I apologize. We didn't quite get it updated in time for 03/31 because it requires a lot of data work. But of the total book, 82% floating rate, 18% either fixed rate or tied to CDs and secured by CDs. Of the floating rate, over 99% have floors, OK? In terms of where we move going upward, Gary, and I think that's probably where you're headed in terms of interest rate increases, the first 25 basis points only moves about $50 million of the portfolio. The next $50 million moves another $42 million. The next 25 basis points moves another $12 million. And then, after we get to 75 basis points, we really start to see a majority of the portfolio start to reprice. So, you can assume that roughly -- we're roughly 50 to 75 basis points in in terms of upside down on the floors.

Gary Tenner -- D.A. Davidson & Co. -- Analyst

Yeah, that's great. I appreciate the color. And then, in terms of loan growth for the year, obviously, you talked about the new hires. Good quarter ex-PPP this quarter. Expectations for growth for the remainder of the year based on kind of pipeline and what you're seeing here from customers right now?

Li Yu -- Chairman and Chief Executive Officer

Well, here's the situation that -- I have always been saying that our crystal ball is kind of not that clear. So, I'd like to think that the sentiment among all our staff is that business is increasing, people is more active. But to quantify it on a percentage is difficult. And as you know, historically, we have always been having a reasonable organic growth. And obviously, we have dedicated ourselves to continue at least the historical level. But, again, there's a lot of variables -- economy, when it's open, what time it become -- pick up speed and those other things. So, I really cannot answer quantify it, but I'd just say that we feel that the growth will continue in the next few quarters.

Gary Tenner -- D.A. Davidson & Co. -- Analyst

Okay. And just with regard to the Houston LPO and the hires there, what's the focus in terms of lending there? Is it C&I? Is it commercial real estate? What's the target?

Li Yu -- Chairman and Chief Executive Officer

Okay. Outside of California, we are obviously -- we started off with CRE. And gradually, as we rooted into the community, we are gradually getting more C&I. In the California new hires, two new loan officers are -- five new loan officers, three or four of them is C&I.

Gary Tenner -- D.A. Davidson & Co. -- Analyst

So, Houston initially will be more commercial real estate focused. That makes sense.

Li Yu -- Chairman and Chief Executive Officer

Yes, yes.

Gary Tenner -- D.A. Davidson & Co. -- Analyst

Great. All right. Thank you for taking my questions.

Operator

Our next question comes from David Feaster from Raymond James.

David Feaster, Jr. -- Raymond James -- Analyst

Hey. Good afternoon, everybody.

Edward Czajka -- Executive Vice President and Chief Financial Officer

Hi, David.

David Feaster, Jr. -- Raymond James -- Analyst

I would just like to get an update on the Houston LPO. That's pretty exciting. Just curious to hear maybe how the contribution was in the quarter, how the pipeline is trending and just I guess kind of the early read on that.

Li Yu -- Chairman and Chief Executive Officer

Well, you want to -- you want me to answer that.

Wellington Chen -- President and Chief Operating Officer

Well, we can both answer that. I think that our pipeline -- our initial first pipeline meeting about couple of weeks ago, they had -- they presented over. I would say, 10 real doable deals. So, now, it's just a matter of getting their back office people in place and start putting the deals together. And just after this meeting, we have weekly pipeline meeting with them. And so, it looks like, so far the officer that we have there, they know the market. They have customer base and seems like the customer are all portable.

Mr. Yu?

Li Yu -- Chairman and Chief Executive Officer

Okay. David, number wise speaking, there is no contribution from Houston in the first quarter. And as of today, we have not booked any loans yet, but a couple of them is ready to be closed.

David Feaster, Jr. -- Raymond James -- Analyst

Okay. Okay. That's encouraging. The growth is going to clearly be there. But just maybe more broadly, just given some of the recent consolidation and disruption in Texas and across the country, does that create an opportunity for maybe some more of these de novo type expansions and what markets are kind of at the top of your priority list?

Li Yu -- Chairman and Chief Executive Officer

Well, you know that we are people specific type of expansion. In other words, we always find a banker and a team. Then we go to the area where he or his -- hers expertise in those areas, have a relationship in the area. So, we -- I'm not sure which area that will come out for us. We are working on several areas right now. So, we are not sure which one will be end up the first. Available talents that can be higher. But there are about three or four regions we are currently looking at it. And other regions will be just -- maybe by the grace of God will fall on our laps.

David Feaster, Jr. -- Raymond James -- Analyst

Yeah, OK. And then maybe just following up on your commentary on new loan yields, how are new loan yields trending? You talked about the 90 basis point spread. Was that more of a function of mix or continued pressure on pricing? And has the steepening of the curve at all allowed you guys to maybe have better pricing in your conversations?

Li Yu -- Chairman and Chief Executive Officer

I have to qualify the answers that I just got the information couple of days ago and I have not dived enough into that. But my first reading the situation is that this quarter -- the mix is one of the issue. And it shouldn't be as big as 90 basis points because last quarter was 32 basis points. And with the so-called day in, day out, the other deals coming in -- so it should be less than 90 basis points. We cannot really quantify that much yet. But the trend is, it probably will continue to compress it a bit in terms of yield is concerned just because, one thing, competition, OK? And people are pricing their loans on a 10-year fixed rate below our net interest margin. So, unless there is one or two very specific cases that we will get them for because of other reasons, there is -- we cannot compete with that.

David Feaster, Jr. -- Raymond James -- Analyst

Yeah. Where do you see the most competition? Do you find it from the larger banks or is it the smaller community banks that are being the most competitive?

Li Yu -- Chairman and Chief Executive Officer

Larger banks.

David Feaster, Jr. -- Raymond James -- Analyst

Okay. All right. Thanks, everybody.

Operator

Our next question comes from Tim Coffey from Janney.

Timothy Coffey -- Janney Montgomery Scott -- Analyst

Thank you. Good morning, everybody.

Edward Czajka -- Executive Vice President and Chief Financial Officer

Hello, Tim.

Timothy Coffey -- Janney Montgomery Scott -- Analyst

Mr. Yu, if I were to ask you about kind of commentary on the deposit growth in the quarter, will it be any different than what Wellington was describing in terms of the loan growth that you saw more activity by clients as well as the introduction of new clients to the bank?

Li Yu -- Chairman and Chief Executive Officer

Well, deposits inflow, actually, most of them coming from our existing clients. We have not taken in any new clients in the quarter that represent a huge deposit basis. And it can be more than one or two, but it come basically from our existing customers. So, it grows. That means, generally, we feel our customer base financial condition is getting better. So, this is what we observed.

Timothy Coffey -- Janney Montgomery Scott -- Analyst

With the tax filing date being pushed back, do you anticipate any kind of outflow in deposits that's well above the seasonal type that you would see in 2Q?

Li Yu -- Chairman and Chief Executive Officer

Well, I hope -- it is my selfish hope that the deposits, we will lose couple of hundred million dollar deposit during the tax date because that will improve our net interest income.

Timothy Coffey -- Janney Montgomery Scott -- Analyst

Yeah. No, no, that would definitely help.

Li Yu -- Chairman and Chief Executive Officer

Likely to be reducing a bit in expense.

Timothy Coffey -- Janney Montgomery Scott -- Analyst

Okay. And then, Ed, as we look at kind of the time deposits maturing this next quarter, do you have any idea what -- can you share what the volume might be and what the price differential could be?

Edward Czajka -- Executive Vice President and Chief Financial Officer

I do. I can.

Timothy Coffey -- Janney Montgomery Scott -- Analyst

Great.

Edward Czajka -- Executive Vice President and Chief Financial Officer

Tim, it's just under $500 million will be maturing over the second quarter at an average rate of 95 basis points to be replaced somewhere around 50 basis points. We actually have just recently lowered again our offered CD rate. So, that's the beta for the quarter.

Timothy Coffey -- Janney Montgomery Scott -- Analyst

Okay, great. Thanks, Ed. And then, Mr. Yu, the Houston LPO, obviously, you've got a really experienced team leader out there. And the goal that you set of about -- with loan originations of $150 million by the middle of next year, are you getting the sense that you could do better than that. Or is it too early?

Li Yu -- Chairman and Chief Executive Officer

Well, so far, this is a goal that our Houston leaders set for us. So, obviously, we have the psychology of our staff to be worried about because, if you set too high to push a goal, people will get negative reaction out of that. But, obviously, we do everything. If they can produce $500 million during the first year, we in Los Angeles can be sitting with our hands on the -- I don't know, sitting on our hands. But judging from the prior experience we have to starting with a new office, we think that is close to reasonable and we hope it's going to be better.

Timothy Coffey -- Janney Montgomery Scott -- Analyst

Okay, all right. Great, thank you very much for that. Those are all my questions.

Operator

Our next question comes from Andrew Terrell from Stephens.

Andrew Terrell -- Stephens Inc. -- Analyst

Hey, thanks. Good morning.

Li Yu -- Chairman and Chief Executive Officer

Hi.

Edward Czajka -- Executive Vice President and Chief Financial Officer

Good morning.

Andrew Terrell -- Stephens Inc. -- Analyst

So, credit trends looked pretty positive this quarter and it was nice to see the negative charge-off number. Can you just remind us kind of what the outlook is for the loan loss reserve moving forward as we go throughout this year?

Li Yu -- Chairman and Chief Executive Officer

Well, let me just -- first of all, it's a CECL calculation. So, I want to say something first and then get, Nick, our expert in CECL to talk about that. And first of all, let me recall your memory. In 2020, we provided loan loss provision of $26 million. We had a charge-off of $5.4 million. So, the $21 million must have one to two areas. One is the general macroeconomic situation. The second of all is what we called reserve for proactive downgrades. And we like to think, some of them is quite proactive. Now, what is -- after we make those provisions, these credit did not deteriorate. So, somewhere along in the future periods, it will be upgraded, together with a general improvement in the macro situation. So, it is conceivable that we may have some releases in next year, in this year, late this year or mid this year. We just don't know because it depends on the calculation. But I want to tell you personally, I am very happy that we don't have to use up, then receive in the first quarter. It's kind of nice to retain the availability.

So, Nick, you want to -- anything to add?

Nick Pi -- Executive Vice President Chief Credit Officer

Tim, just like Mr. Yu mentioned, for this year's projection, I believe it's not as last year because the quality of our loan portfolio is quite stable at this time. In terms of declining in the volume of deferment request and the volume of downgrade changes and non-performing assets as well as past due 30 days loans are quite limited. So, for this year, we believe that it's supposed not to be like last year. We try to make -- just like Mr. Yu mentioned, we'll make a reserve to prepare ourself during the pandemic time. So, this year or next year, probably, we don't need that much of a reserve and there will be perhaps some reversion. That's our -- the picture at this time.

Andrew Terrell -- Stephens Inc. -- Analyst

Okay. That's extremely helpful color. I appreciate it. Just thinking about some of the liquidity on the balance sheet, obviously, a lot of liquidity and you guys are not alone. And then maybe kind of -- yes, deposit flows can sway this near-term, but can you just remind us, over the longer term, where you like to manage the cash balances just as a percentage of total earning assets?

Li Yu -- Chairman and Chief Executive Officer

It's a two-edged sword in the situation. There are times we are fighting for deposits like crazy because of the loan growth and generally the tighter deposit market. And this happened to be -- the country is flush with cash. And I was reading the other reports, other banks. It all seems to be, everybody is flush with cash. But as an operator, I can -- only speaking of the operator and not a financial engineer, as an operator, deposit just like capable staff. You need to get it when you see it. And even though it's a short-term negative, but long term it's productive. What we just hope to see is we get deposit gradually reducing our costs and we slowly grow into it and will eat the differences in so-called a negative number and not -- because once we turn away certain deposit, turn away certain relationship, would it come back when we needed them? So, as an operator, our consideration is slightly different.

Andrew Terrell -- Stephens Inc. -- Analyst

Yeah. Understood. Thank you guys for taking my questions and congrats on a good quarter.

Li Yu -- Chairman and Chief Executive Officer

Thank you.

Operator

[Operator Instructions]. Our next question comes from Steve Moss with B. Riley Securities.

Steve Moss -- B. Riley Securities -- Analyst

Hi, good morning, guys.

Edward Czajka -- Executive Vice President and Chief Financial Officer

Hi, Steve.

Steve Moss -- B. Riley Securities -- Analyst

Hi, Ed. Just one question here. Most my questions have been asked and answered. In terms of just the other half of the deposit base here, your interest-bearing savings and checking deposits basically stable quarter-over-quarter in terms of cost. Just wondering if those were repriced lower here with CDs.

Edward Czajka -- Executive Vice President and Chief Financial Officer

The majority of the repricing within that category, Steve, took place in 2020 -- excuse me, when rates were coming down quite precipitously. So, there's not been any repricing in the money market or now or savings account categories.

Li Yu -- Chairman and Chief Executive Officer

Going forward, repricing is, if anything, very, very moderate because we already -- close to the low of our peer group.

Steve Moss -- B. Riley Securities -- Analyst

Got it, OK. Well, that's my only remaining question. Great quarter. Thank you very much.

Li Yu -- Chairman and Chief Executive Officer

Thank you.

Edward Czajka -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Li Yu, Chairman and CEO, for any closing remarks.

Li Yu -- Chairman and Chief Executive Officer

Thank you very much. I hope we are really in the last leg of this pandemic. So, I pray that everyone stay safe and we get back, which I hope is a new boom cycle for our economy. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 32 minutes

Call participants:

Jeffrey Haas -- Investor Relations, Financial Profiles, Inc.

Li Yu -- Chairman and Chief Executive Officer

Edward Czajka -- Executive Vice President and Chief Financial Officer

Wellington Chen -- President and Chief Operating Officer

Nick Pi -- Executive Vice President Chief Credit Officer

Matthew Clark -- Piper Jaffray -- Analyst

Gary Tenner -- D.A. Davidson & Co. -- Analyst

David Feaster, Jr. -- Raymond James -- Analyst

Timothy Coffey -- Janney Montgomery Scott -- Analyst

Andrew Terrell -- Stephens Inc. -- Analyst

Steve Moss -- B. Riley Securities -- Analyst

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