Preferred Bank (NASDAQ:PFBC) Q4 2023 Earnings Call Transcript

Preferred Bank (NASDAQ:PFBC) Q4 2023 Earnings Call Transcript January 25, 2024

Preferred Bank isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and welcome to the Preferred Bank Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, today’s event is being recorded. I would now like to turn the conference over to Jeff Haas with Financial Profiles. Please go ahead.

Jeff Haas: Thank you, Rocco. Hello, everyone and thank you for joining us to discuss Preferred Bank’s financial results for the fourth quarter ended December 31, 2023. With me today from management are Chairman and CEO, Li Yu; President and Chief Operating Officer, Wellington Chen; Chief Financial Officer, Edward Czajka; and Chief Credit Officer, Nick Pi. 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 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: 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 fourth quarter net income was $35.8 million or $2.60 a share. We closed out the year with a record earnings of $150 million or $10.52 a share. We attribute this to our active margin management and our continuous cost control. During the fourth quarter, credit quality remained stable. We have a reduction in total criticized loans. However, we have an increase of nonperforming loan. The increase in nonperforming loans is one real estate relationship whereby it was previously classified and now are in the foreclosure process which means we’ll be closer to the ultimate resolution.

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 fourth quarter, there were no loan charge-offs. And then provision for the fourth quarter was $3.5 million which leads to a reserve on the loan losses total of 1.49%. For the year 2023, our loan and deposit increases for the new production 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, towards the end of the year, it will be closer to our historical level of demand.

Likewise, we are projecting that the deposit cost will continue to moderate. During the quarter, the bank has — well, let me put it the other way. Our bank has generated a significant amount of free cash flow for the year 2023. We have used $50 million of the cash flow to buy back roughly 800,000 shares of our own capital stock and the rest were used to enhance our capital position. And we have also announced the increase, the dividends by 27% beginning 2024. In January, we also announced a new buyback program of another $50 million of capital stock. So, we are very mindful of looking for opportunity to return capital to our shareholders. And going forward, in the year 2024, we’ll be carefully balancing ourselves between growth, capital enhancement and shareholder return.

Also during the first quarter, we have also begun to restructure our security portfolio. We sold $29 million securities for $929,000 loss which does not affect the capital position as 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 that banking industry is in the process — beginning the process of back to normal, okay? 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: [Operator Instructions] And today’s first question comes from Matthew Clark at Piper Sandler.

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Q&A Session

Matthew Clark: Starting with the margin, can you give us a sense for what the average margin was in December, if 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?

Li Yu: Matthew. Yes. You have all that.

Edward Czajka: The margin — the spot margin for December, as you see, it’s 4.24% for the quarter, it was 4.15% in December. Looking forward to the first quarter, I would expect a similar decrease in the margin that we experienced in the fourth quarter from the third. However, it does appear to be moderating, as Mr. Yu said, the deposit cost increases are certainly moderating. In terms of CDs that are repricing, we have about a little over 1.1 billion of CDs that we’ll reprice in Q1.

Matthew Clark: And the rates that they’re coming off at and what you’re putting people in this state?

Edward Czajka: The average rate that’s coming off at is 4.65%. So that’s why it’s my belief, this moderation in terms of deposit cost will take hold in the first quarter, because we’re not seeing the kinds of differences between maturing CDs and renewal CDs.

Matthew Clark: 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 will be some lag with the CD given how larger CD book is, but how active might you be on kind of non-CD book?

Edward Czajka: 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 to, 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, 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.

Matthew Clark: 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?

Edward Czajka: It’s going to largely depend on volumes, Matthew. I would like to be able to tell you with the level of certainty, what we expect it 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, see a decline in net interest income if there are 6 rate cuts. We’re not necessarily convinced there will be 6, however, we’re prepared for.

Li Yu: In fact, Matthew, that’s something that difficulty we’re facing. There’s so many uncertainties we’re having here.. You are aware that our loan portfolio is very asset sensitive. But yet, many of them or majority of them haverate flow, okay? To the extent, when it’s coming down, some of them will be less affected than the others. So hopefully, in the past experience is that with new loan productions, we can actually contribute increased net interest income enough.

Matthew Clark: Got it. Okay. And then on expenses, a nice decline here. I don’t know how sustainable that is necessarily. So just any guidance on the 1Q run rate?

Edward Czajka: Yes. I’m expecting it to come in anywhere between 19% to 19.5% in Q1. As you’ll recall, it typically is a higher quarter for us in Q1 every year.

Matthew Clark: Yes, understood. And then lastly, on the buyback, it sounds like a bit of a balance. You were pretty active in finishing the $50 million in just three 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 million?

Li Yu: We certainly hope that we will buy back a whole big amount of it which means that out operating cash flow which will allow us to do that. But we keep on looking at ourselves between where we’re actually earning, what are projecting the forward operation looks like and balance it was our capital ratio.