Preferred Bank Q4 2023 Earnings Call Transcript

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January 25, 2024

There are 8 speakers on the call.

Operator

Please note today's event is being recorded. I would now like to turn the conference over to Jeff Haws with Financial Profiles. Please go ahead.

Speaker 1

Thank you, Rocco. Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the Q4 ended December 31, 2023. With me today from management are Chairman and CEO, Lee Yu President and Chief Operating Wellington Chen Chief Financial Officer, Edward Cieca and Chief Credit Officer, Nick Pye. 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 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 Please refer to the SEC required documents 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 statements. At this time, I'd like to turn the call over to Mr.

Speaker 1

Lee Yu. Please go ahead.

Speaker 2

Thank you. Good morning, ladies and gentlemen. Thank you for Coming to our earnings conference phone call. I'm pleased to report that the bank's 4th quarter net income was $35,800,000 or $2.60 a share. We closed out the year with a record earning of $150,000,000 or $10.52 a share.

Speaker 2

We attribute this to our active margin management and our continuous Cost Control. During the Q4, credit quality remained stable. We have a reduction in total criticized loan. However, we have an increase of nonperforming loan. The increase in nonperforming loan is a one real estate relationship, whereby it was previously classified and now are in the foreclosure process, which mean we'll be closer to the ultimate resolution.

Speaker 2

The loan The value ratio of this real estate relationship is 70%. The collateral is industrial property Fully occupied with cash flow insufficient to support the loan. We are currently projecting There will be no losses on this particular NPL. During the Q1, there were no loan charge offs. And then Provision for the Q4 was $3,500,000 which leads to a reserve on the loan losses total of 1.49 percent.

Speaker 2

For the year 2023, our loan and deposit increases of the new productions is below our historical level, however, was in line with industry averages, Looking forward with the projected rate decreases, We believe loan demand will recover gradually. And hopefully, toward the end Of the year, it will be closer to our historical level of demand. Likewise, we are projecting that the deposit costs will continue to moderate. During the quarter, the bank has well, let me put it the other way. Our bank generated a significant amount of free cash flow for the year 2023.

Speaker 2

We have used $50,000,000 of the cash flow to buy back roughly 800,000 shares of our own capital stock. And the rest we have used to enhance our capital position. And we have also announced The increase the dividends by 27% beginning 20 24, okay. In January, we also announced a new buyback program of another $50,000,000 capital stock. So we are very mindful of looking for opportunity to return capital to our shareholders.

Speaker 2

And going forward in the year 2024, we'll be carefully balancing ourselves between growth, capital enhancement and shareholder return. Also during the Q1, we have also begin to restructure our security portfolio. We sold $29,000,000 securities for a $929,000 loss, which does not affect The capital position is they are already marked, okay. And we will buy back the same securities, I mean similar securities for better yields. We here at Preferred Bank believe The banking industry is in the process beginning the process of back to normal, okay.

Speaker 2

And with that, We certainly hope that we will return to our historical level of growth. Thank you very much. I'm ready for your questions.

Operator

Thank you. We will now begin the question and answer And today's first question comes from Matthew Clark at Piper Sandler. Please go ahead.

Speaker 3

Hey, good morning everyone. Hi. Starting with the margin, can you give us a sense for what the average margin was in December? Do you have spot rates at year end on total or interest bearing? And then if you can also give us some visibility on CD repricing, what's coming up, how much is coming up for renewal and at what rate?

Speaker 4

Yes. Hi, Matt. Yes. You have all that. Yes.

Speaker 4

The spot margin for December, as you see, it's $424,000,000 for the quarter, it was $415,000,000 in December. Looking forward to the Q1, I would expect a similar decrease in the margin that we experienced in the Q4 from 3rd. However, it does appear to be moderating as Mr. Yu said, deposit cost increases are certainly moderating. In terms of CDs that are repricing, we have about a little over 1,100,000,000 CDs that will reprice in Q1.

Speaker 3

And the rates that they're coming off at and what you're putting people into at this point?

Operator

The average

Speaker 4

rate it's coming off at is a 4.65%. So that's why it's my belief this moderation in terms of deposit costs will take hold in the Q1 we're not seeing the kinds of differences between maturing CDs and renewal CDs.

Speaker 3

Okay. Okay. And then with the expectation for a few rate cuts this year, assuming that's on the conservative side, How are you thinking about moving deposit costs? I assume there'll be some lag with the CD given how Larger CD book is, but how active might you be on kind of the non CD book?

Speaker 4

Well, part of so what we've done On some of the money market accounts that we have, some of the larger corporate money market accounts, we've actually tied those into Fed funds. And so when we get a reduction in the Fed funds rate, some of those money market accounts will come down automatically, as do, as you know, a significant portion of our loan portfolio. What we'll be focused on in the latter part of the year won't be so much net interest margin per se, Matthew, how it's going to be net interest income. And what we've seen in the past, alluding to what Mr. Yu talked about, what we've seen in the past when rates do come down, in a decent economic environment, our loan volume picks up significantly.

Speaker 4

That loan volume pickup will drive earnings going forward, will help drive net interest income, not so much the margin, but net interest income going forward.

Speaker 3

Okay. And then one of your competitors, A lot larger, guided down on NII by 4% to 6% With 6 rate cuts this year and also assuming I think 3% to 5% loan growth, I think we currently have you in the low single digits for the year. And you have, I think, 80% of your book variable. Your competitor has about just under 60%. So I mean, again, it kind of depends on the rate outlook, but any sense for kind of the NII decline this year based on your rate forecast?

Speaker 4

It's going to largely depend on volumes, Matthew. I would like to be able to tell you with a certain with a level of certainty what we expected to be in terms of net interest income. There's too many variables to call that right now. You have your models and A lot of the guys have their models and know what our balance sheet consists of. So certainly, we'll see a decline in net interest income if there are 6 rate cuts.

Speaker 4

We're not necessarily convinced there will be 6. However, we're prepared for.

Speaker 2

In fact, Matthew, that's something the difficulty we're facing is many uncertainties I have today. You are aware that our loan portfolio is very asset sensitive, but yet And many of them or majority of them has rate fall, okay? Due to the extent, when it's coming down, some of them will be less and maybe others. So hopefully, it was in the past experiences that with new loan productions, we can actually contribute increase in net interest income.

Speaker 3

Got it. Okay. Thanks for that. And then on expenses, a nice decline here. I don't know how sustainable that is necessarily.

Speaker 3

So just any guidance on the 1Q run rate?

Speaker 4

Yes, I'm expecting it to come in anywhere between 19% to 19.5% on Q1.

Speaker 5

Okay. And then just

Speaker 4

As you'll recall, it typically is a higher quarter for us in Q1 every year.

Speaker 3

Yes, understood. And then lastly on the buyback, it sounds like a bit of a balance. You were pretty active in Finishing that $50,000,000 in just 3 quarters, maybe it's a little bit spread out, but is the expectation that you likely get it done by the end of the year, the latest 50,000,000

Speaker 2

We certainly hope that we will buy back a whole big amount of it, which means that our Operating cash flow, which has allowed us to do that. But we keep on looking at ourselves between Well, we're actually earning without projecting the forward operation looks like and balance it with our capital ratio.

Speaker 4

The previous $50,000,000 Matthew, we purchased at an average of just over $58 a share. And with today's price being what it is, you can see The value proposition isn't quite the same as it was. However, there's still value there.

Speaker 3

Yes. Okay. Thank you.

Operator

And our next question today comes from Tim Coffey with Janney. Please go ahead.

Speaker 6

Good morning, David Killeman.

Operator

Hi. Good afternoon.

Speaker 6

Hey. Just a follow-up on Your comments about rate cuts and business demand, I'm wondering, do you what do you how many rate cuts I'd say 25 basis points, do we need to spur demand for more loans?

Speaker 4

That's a great question, Tim.

Speaker 2

Tim, based on our conversation with our customers, It is really more so if you have 1 or 2 rate cuts, okay, and they are also seeing their cuts ahead, They will be basically being more aggressive in their new investments. And they are obviously by the Q4, we have I mean, a little bit more production. You can see that is already indication some of our, how should I say, more progressive type of Customers already engaged in some transactions. So when they feel that the rate has peaked, okay, and they are able to, I mean, Got to catch the opportunity to do some opportunities buying. So we think it generally will increase, okay?

Speaker 2

Okay. But it also has to do with the size of the recurrence, the 25 basis, 50 basis, going off and what And which is really a national sports right now, okay. Everybody is believing, I think. We hope we have the crystal ball, But the general trend is that sooner or later you get there, it's a matter of time.

Speaker 6

Got it. Okay. That was

Speaker 3

my question. Thank you very much.

Speaker 2

Thank you.

Operator

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

Speaker 7

Thanks. Good morning. I wanted to ask a follow-up on the kind of the loan outlook question and you just addressed it a little bit by the commentary in the 4th quarter. How much of that Q4 activity do you think were folks just trying to get transactions in for year end? And what does that Has that translate to kind of the pipeline at least for Q1 activity levels?

Speaker 2

I will have why don't you answer the question first,

Speaker 5

Hi, Gary. That's a good question. I think that it's interesting that because we pretty much raised ourselves last Sure to really continue to take care of our good customer. And it seems like we our customer is always looking for opportunities. So Whether it's year end situation, I'm not so sure.

Speaker 5

They always when there's a good opportunity, they want to capture it and close it. So I'm not so sure of all the year end factor.

Speaker 7

And just in terms of the pipeline kind of heading here into the Q1 then, most of last year was line of loan growth as you pointed out before the strong Q4. So what does the early part of 2024 look like from what you could tell?

Speaker 2

Okay. This is Li Yu, okay. 1st quarter pipeline is better than the pipeline than Q3, okay? And probably So far, I've been very early stage, roaming is 26 to 8 into the year, okay, 24 days into the year, okay? It seems to be a little bit more active than the 3rd quarter, but Whether it will end up in the same level of Q4, no, we do not know.

Speaker 2

Because Q4, there's like you have projected, there's kind of a rush in the quarter end, year end. But it seems to be better than Q3.

Speaker 7

Appreciate that. And then if I guess one more, Ed, can you just remind us kind of What amount of rate cuts do you need until floors in your variable portfolio start to matter?

Speaker 4

At this point, it's probably about 100 to 125 basis points of rate cuts before they start to matter As we've gotten with the As average.

Speaker 5

As an average. Yes.

Speaker 4

Yes. As an average, yes. Some will be immediate and some will be farther than that for sure. But It's around $100,000,000 $125,000,000

Speaker 2

Yes, but the still a portion of our portfolio is real old portfolio was sitting in the flow rate that was effective in 2021 or 2020. So there's some of them is For the newer loan production is concerned probably right about 100 basis points to 125 basis points.

Speaker 7

Thanks very much.

Operator

Thank you. This concludes our question and answer session. I'd like to turn the conference back over to the management team for any final remarks.

Speaker 2

Well, thank you very much that We think we have a good year by our standard. So we certainly like to keep our That relative profitability compared to the industry going forward and hopefully that We'll also be doing the things that's shareholders friendly things that in the coming New Year in this New Year. Thank you very much.

Operator

Thank you. This concludes today's conference call. We thank you all for attending today's presentation.

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Key Takeaways

  • Preferred Bank reported record Q4 net income of $35.8 million ($2.60/share) and full-year net income of $150 million ($10.52/share), driven by active margin management and continuous cost control.
  • The bank’s credit quality remained stable in Q4, with reductions in criticized loans and one real estate relationship moving into foreclosure (70% LTV, fully occupied collateral) where no loss is projected.
  • In 2023 the bank generated significant free cash flow, deploying $50 million to repurchase ~800,000 shares, enhancing capital with the remainder, raising dividends by 27% for 2024, and announcing a new $50 million buyback program.
  • Management expects loan demand to recover as interest rates moderate and deposit costs continue to decline, shifting focus toward net interest income growth fueled by higher loan volumes.
  • The bank has begun restructuring its securities portfolio, selling $29 million of securities at a $929,000 loss to reinvest in higher-yielding assets, anticipating a return to historical growth as industry normalizes.
AI Generated. May Contain Errors.
Earnings Conference Call
Preferred Bank Q4 2023
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