Preferred Bank Q3 2023 Earnings Call Transcript

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October 18, 2023

There are 10 speakers on the call.

Operator

Afternoon, everyone, and welcome to the Preferred Bank Third Quarter 2023 Earnings Conference Call. All participants will be in a listen only mode. Please also note, today's event is being recorded. At this time, I'd like to turn the floor over to Jeff Haas of Financial Profiles. Please go ahead.

Speaker 1

Thank you, Jamie. Hello, everyone, and thank you for joining us to discuss Preferred Bank's Financial results for the Q3 ended September 30, 2023. With me today from management are Chairman and CEO, Lee Yu President and Chief Operating Officer, Wellington Chen Chief Financial Officer, Edward Cieca Chief Credit Officer, Nick Pai 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.

Speaker 1

Such forward looking statements are based upon specific assumptions that may or may not prove to our own risks, and 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 the bank files with the Federal Deposit Insurance 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.

Speaker 1

Please go ahead.

Speaker 2

Thank you. Thank you. Good morning, ladies and gentlemen. I'm very pleased to report another quarter of record income. For the Q3, Preferred Bank earned a net income of $38,000,000 or $2.71 a share.

Speaker 2

Compared to the Q2, net income and net income, net interest income both increased and our expenses Decreased. For the quarter with this, We have very a little bit of loan growth, okay. Loan demand continue to be No. As our customers seems to be much more cautious these days and Underwriting standard remain elevated. On the deposit side, the increase Was $94,000,000 for the quarter.

Speaker 2

We have seen deposit costs slow down. And looking forward to Q4, we think the trend will continue. Credit quality remained generally stable. We had a small increase in total criticized assets, But we have a bigger increase in the non performing loans. The non performing loan increase It's basically the migration of 2 loans from a lower classification to the non accrual category.

Speaker 2

Loan number 1 is a $16,100,000 loan that was owed by a borrower by One of our very good borrower for many, many years. Unfortunately, The gentleman passed away recently and the large and complex estate has caused The delay of resolution of this loan. And we'll notify we just notified that the Property is in escrow, okay. And the borrower Should be closing it in later part of October and pay preferred bank off. There's another $2,200,000 alone is in the same category.

Speaker 2

It's The discussion between the beneficiaries for a large and complex estate. This loan was secured by a property. Loan to value ratio is less than 20%. And I'm happy to report we have received full payment yesterday. And we're also scheduled to have another large loans, which is classified which is including the criticized Category A.

Speaker 2

Large loan of $23,500,000 should be paid off Today, we've confirmed that was the lending bank that took over this loan. So we will obviously update you later They win all these things, happiness. For the quarter, we have made a provision of $3,500,000 The charge off for the quarter is $80,000 Last quarter, there's no charge off, Okay. Therefore, our allowance total has increased to 1.46%. We believe that's one of the we believe that's Our operating costs remain under control.

Speaker 2

Efficiency ratio was 25% for the quarter. Since the Q2 Of 2023, we have been actively buying back of our own stock. As of today, a total of 720,000 shares has been repurchased with a total consideration of approximately $42,000,000 The buyback is highly beneficial or accretive to the EPS for our remaining outstanding shares. And we plan to continue the activity under the current program. I also like to report with the large amount of buyback and with the dividends, Preferred Bank's tangible capital ratio actually increased to 10 point 1%.

Speaker 2

The bank has been In the last several years, has been reporting earnings quarter by quarter beating consensus estimates. Quarter after quarter, we see the future estimates going up, okay. And We are very pleased with that. We will continue to pledge ourselves to operate the bank efficiently and prudently. Thank you very much.

Speaker 2

I'm ready for your questions.

Operator

Ladies and gentlemen, at this time, we'll begin the question and answer session. Our first question today comes from Matthew Clark from Piper Sandler. Please go ahead with your question.

Speaker 3

Thanks. Good morning, everyone. Just starting on the margin, do you have the spot rate on deposits, either Total or interest bearing at the end of September and then the average NIM in September and any expectations for the Q4, it looks like you're pretty much in line with your prior guidance of $440,000,000

Speaker 4

Yes. That's always good to see, Thank you. In terms of the spot rate, the margin for September was 4.34%, so kind of in line with the entire quarter. And then the total cost of deposits was $342 excuse me, dollars 3.62 for the month of September. In terms of the margin going forward, I think you can probably extrapolate what's been happening over the last quarter or so and project that going on into Q4 and Q1 of next year.

Speaker 4

I would estimate somewhere in the neighborhood of $415,000,000 to $425,000,000 for Q4 and somewhere between $390,000,000 and $4,000,000 for Q1 of 'twenty four, Notwithstanding any actions by the Fed.

Speaker 3

Okay. Got it. Thank you. And then just shifting gears to expenses. Good to see no additional OREO related costs or very minor costs this quarter.

Speaker 3

What's kind of run rate expectations for the Q4. And then should we assume some seasonal increase in 1Q?

Speaker 4

In answer to your second question, yes, you'll see the seasonal increase in Q1 of next year. For Q4 would be somewhere in the neighborhood of 19.5 percent to 19.8 percent.

Speaker 3

Great. Okay. And then just on credit, could hear some of those Isolated issues are resolving themselves as it relates to non performers and criticize. But can you remind us of your SNC exposure and what might be criticized within that portfolio. It sounds like one of the loans that's Resolving itself the $23,000,000 or so is within that SNC book and just the overall status of that portfolio?

Speaker 2

Rick, do you want to answer that?

Speaker 5

Yes. For SNC loans, they have submitted to the bank for their 2nd semiannual review in around September and there's only one small loan. It's around over $2,000,000 exposure has been downgraded. Other than that is the rest of the SNC loans are stable Without any credit issues at this time.

Speaker 4

The total SNC relative to total loans is about, I believe, 11%.

Speaker 5

It's 11%. Correct.

Speaker 3

Okay. And then just on office commercial real estate, thanks for the additional Color in the release on that, but can you I think one of the more popular Questions these days seems to be around the reserve associated with that portfolio. And I would assume there's only some portion of that portfolio that you're more concerned about. Maybe it's the peer office or maybe not, maybe it's just the central business district, which is pretty nominal.

Speaker 2

Well, we have obviously the businesses with a little amount we have in that. And basically, they are very small properties, very small offices being well occupied. I don't think we have any classified assets In office property, right?

Speaker 5

No, at this time.

Speaker 2

We have not. That's about the best I can answer you.

Speaker 5

And also if I

Speaker 2

don't want to stay good, I cannot answer any more than

Speaker 5

And also give you a little bit more color, Matthew, on our office products. We have recently conducted the stress test. Unbelievably, the office side that this all those ratios are pretty good come up. So we do not Any immediate issues about our office project at this time. And some of the loans are below, we think a handful of those credit With a little bit weak this year ratio, however, we do have very strong individual guarantors behind it.

Speaker 5

So global cash flow can cover These are no issues whatsoever at this time.

Speaker 3

Okay. I'll step back. Thanks.

Operator

Our next question comes from Tim Coffey from Janney. Please go ahead with your question.

Speaker 6

Great. Thanks. Just a question on the non accrual loans. If you were to account for payoffs that you anticipate getting this week, what would that non accrual number be? Because I'm assuming it would be less than 19.

Speaker 2

19 plus 2.2.

Speaker 5

17. Minus 2.2. Yes, it would be. Yes, right.

Speaker 4

Yes, a little under 17, Little under 17.

Speaker 6

Okay, great. And then if we kind of we think about loan growth over the 12 months. But what are some of the biggest headwinds that you're seeing right now?

Speaker 2

Well, I think interest is still the biggest headwinds Headwind, okay. Because based on what we see, our borrowers seems to be they're all stable And affluent, okay. But I mean, they just I guess, like everybody else, I mean, there's They just don't want to commit into some actions that when the interest rate picture is not clear.

Speaker 6

Okay. You said your underwriting was remaining stable. I wonder, Is there any places that you're starting to tighten your underwriting?

Speaker 2

We have tightened it before. When I use the word is actually elevated, Because we are more picky on the location. We're very much picky on the guarantor. And I guess the other mathematics TVs, you can lower it down a little bit, I mean, requirement. But that's where we're staying elevated is these two categories

Speaker 5

Okay.

Speaker 2

Also on

Speaker 6

cap rates in your footprint, are you starting to see Commercial real estate cap rates starting to move our budget at all?

Speaker 5

Yes. Based on the most recent appraisals, the cap has gone up a little bit because of current CRE market situation, but has not yet that out of control at this time. So valuation still maintain Pretty good for our bank because normally we maintain our loan to value ratio around 55% around. So even with a little bit high cap, I believe our cushion is still there and our credit should be performing

Speaker 7

well.

Speaker 6

Okay. Great. Those are my questions. Thank you very much.

Speaker 2

Thank you.

Operator

Our next Question comes from Andrew Terrell from Stephens. Please go ahead with your question. Hey, good afternoon.

Speaker 4

Hi, Andrew.

Speaker 8

If I could start maybe on the non accruals this quarter, I appreciate all the commentary you gave there. I think you gave the LTV for the 2nd smaller loan sub-twenty percent. For the $16,100,000 loan that you referenced, do you have the LTV for that specific credit.

Speaker 5

Yes. That credit up is the most recent appraisal that It's around under 50%.

Speaker 4

And Andrew, just to clarify, that's a classified, not a non accrual loan.

Speaker 5

That's classified loan.

Speaker 4

Yes. That's not part of the non accrual, so.

Speaker 8

I see. Okay. Okay. Got it. And then if I can move over maybe to deposit growth, you guys had some good deposit growth this quarter.

Speaker 8

It's good to see. I hear some of the commentary around the around the loan growth and the challenges there right now, but could you maybe talk about the pipeline for incremental deposit growth, what you're seeing there? And then More specifically on the pricing front, where new time deposits are being priced at today?

Speaker 2

Well, so far, what we see is for us and even in the immediate marketplace we're dealing with, Deposit rate offering has been stable. And I don't see I don't think there's much bank change basically their deposit rate that's offering to their customer. Therefore, the fluidity of the interbank, I mean, deposit Transfer and so on is much more limited in this quarter compared to previous quarter, okay. I guess it's the matter of opening up new accounts in our office Meeting new people and opening new contact caused the $94,000,000 increase, okay? So we Do not see if the Fed does nothing.

Speaker 2

We do not foresee those big deposit rate changes in the next quarter, Meaning, close quarter.

Speaker 8

Okay. And what's the kind of level that new CD deposits

Speaker 2

We are priced at the 5.03, okay, as you see the amount. That's the highest rate we have. But there's different categories that's lowest, okay. So it's ranging from 4 to that, okay.

Speaker 8

Okay. I appreciate the color. Thanks for taking the questions.

Speaker 2

You're welcome.

Operator

Our next question comes from Eric Hector from Raymond James, please go ahead with your question.

Speaker 9

Hey, this is Eric on the line for Dave Feaster. Thanks for taking the question. Just while we're on the CD front, I'm just curious if you could provide some color just on the maturity schedule.

Speaker 4

Generally speaking, they most of the CD maturities are a year. So we have basically a constantly rotating maturity schedule of the entire portfolio. For the Q4, I think we have about $400,000,000 to $500,000,000 I believe maturing for the Q4.

Speaker 9

Okay. And then that's laddered out kind of similarly growth by quarter? Yes.

Operator

Okay. Thank you.

Speaker 9

And then just curious on the demand front, it looks like growth was primarily from resi mortgage and resi construction. Just curious your appetite for Resi growth at this point and what's driving the growth there?

Speaker 2

On demand side?

Speaker 9

Yes. Yes, on the demand side.

Speaker 5

Well,

Speaker 2

we highly depend on our customers On a daily basis, many of the commercial customers, business customers are dealing with us. So you see, After less scale that we have in March with the meltdowns, I guess, so on such way, everybody is putting so much attention in Uninsured deposits are on. We are a business bank and we're dealing with business. And business, their deposit is basically uninsured. And they don't want to be Cutting up into pieces into ICS and so on.

Speaker 2

They cannot operate that way. So we have a couple of very Several very large customers, their deposits, they sign up all the conversion to ICS, but not being breakdown. They don't want to actually use it, They won't have the activity to turn into ICS when they need it. But the fact is that For the community banks, there may be regional banks too. I mean, if that issue doesn't get Resolved.

Speaker 2

Everybody will have to worry about the large DDA they are getting from our customers And changing the nature of liquidity coverage. So I don't know that issue is still out there. We don't have answer to you. But as the pure dollar amount of the DDA win, we're just like everybody else seeing that Small migration into the higher cost area, but we hope the pace has slowed down. In fact, I hope the pace almost We'll end in this quarter, but time is to tell.

Speaker 9

Okay. I just wanted to touch on more on the loan demand side, like growth this quarter was driven by resi mortgage and resi construction. Just curious, what drove the growth there?

Speaker 2

Yes, we obviously, I mean, outcome commercial real estate market, which is our biggest loan and Biggest category and it depends on the maturity schedule of pay downs and so on. And also that We have a number of old construction loans being paid down, okay? So these are the things that changes from quarter over Quarter is we have never treated the mortgage as a main cause of our new generation. In fact, we had you may not know that, but we have previously disclosed that our

Speaker 9

Okay. Appreciate the color. And just wanted to get an update on the SBA department expansion in the Houston LPO. Are you looking at additional expansion opportunities? And just kind of any color there would be helpful.

Speaker 2

Can I bring in another level, okay, in changing in the form of more macro basis? Okay, to me, at this point in time, Doing a new loan is a lot less profitable than buying back the stock. But new loan will give us long term growth. But since the loan demand is not there, we like to Concentrating our effort in managing our liquidity, managing our profitability and managing our We turn to our investors. Opening new locations is not our immediate Endeavor at this point of

Speaker 9

time. Understood. Well, thank you for taking the questions and congrats on a good quarter.

Operator

Our next question comes from Gary Tenner from D. A. Davidson. Please go ahead with your question.

Speaker 7

Thanks. Good morning. A bunch of my questions have been answered, but just wanted to ask in terms of kind of balance sheet management. You've continued to allow the AFS portfolio to run off, paid down the FHLB debt this quarter. So as you think of the liquidity on the balance sheet, which is ample, Any thoughts in terms of putting any of that to work in the securities portfolio In anticipation of locking in some yield potentially for the longer term?

Speaker 2

This is something Ed is continuously looking into it and we continue to talk to each other about that. Seems to be every time we did something wrong, okay? Because 3 months ago, we're talking about locking into some treasury paper. I'm glad that we didn't do that.

Speaker 4

There will come a time. Yes,

Speaker 2

sometime, it's just I guess, For us, that's not the major income of ours. It's a small diversification. So we'd like to be a little bit more careful, A little bit more cautious, so that it wouldn't allow a A lot of adjustment and write down of our portfolio.

Speaker 4

And Gary, the profitability of the overall bank It's really one of the main drivers behind having such a large cash position that we've had over the last 10 years. We have not had to go after that last dollar of income and put that money at risk. And so we find ourselves in a very good position right now with our liquidity Because we haven't done that and with respect to our tangible capital levels as well.

Speaker 7

Yes. I mean, certainly, it's been a huge advantage to have Small portfolio in this environment, and not thinking so much about current profitability, but down the road profitability, but I appreciate the thoughts on that. And then just, I missed some of the numbers around the buyback. I have the total shares purchased the last couple of quarters, but what was the average price per share?

Speaker 4

The average price per share through the total buyback is just a hair over $58 a share.

Speaker 7

Great. Thanks very much.

Operator

And ladies and gentlemen, at this time, we'll be concluding today's and answer session. I'd like to turn the floor back over to Mr. Yu for any closing remarks.

Speaker 2

Well, thank you very much that we Everything that in this quarter seems to be more stable than the previous quarter, okay. And from my side, I'm just scared to see some of the legacy And maybe when you said the legacy loans is getting resolved gradually, these things do take time. But I'm also happy to see the new migration into the category is very, very limited. So with that, I just hope

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