Preferred Bank (PFBC) 2023 Q4 法說會逐字稿

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.

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.

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 first 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 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, 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 out of the 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 to 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 begin 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 see it -- Preferred Bank believe the banking industry is in the process of 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.

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Matthew Clark, Piper Sandler.

Hey. Good morning, everyone. All right. 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?

Yeah. Hi, Matthew. Yeah. You have all that.

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.

And the rates that they're coming off at? And what you're putting people in this state?

The average rate that's coming off that is a 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.

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 non-CD book?

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.

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 depends on the rate outlook, but any sense for the NII decline this year based on your rate forecast?

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, we’ll 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 it.

In fact, Matthew, that's something that difficulty we're facing, there's so many uncertainties we have today. You are aware that our loan portfolio is very asset sensitive. But yeah, and many of them, or a majority of them have rated for, 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 production, we can actually contribute increased net interest income enough.

Got it. Okay. Thanks for that. 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?

Yeah. I'm expecting it to come in anywhere between 19% to 19.5% on Q1. As you'll recall, it typically is a higher quarter for us in Q1 every year.

Yeah, 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?

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 balancing with our capital ratio.

Yeah. The previous $50 million, 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.

Yeah. Okay. Thank you.

Tim Coffey, Janney.

Good morning.

Hi.

Just a follow-up on the -- with your comments about rate cuts and business demand. I'm wondering, do you -- where do you -- how many rate cuts, let's say 25 basis points, do we need to spur demand for more loans?

That's a great question, Tim.

Tim, based on our conversation with our customers, it is really -- and also if you have one or two rate cuts, okay? And they are also seeing their cuts ahead, they'll be basically, being more aggressive with their new investments. And they are obviously, by the fourth quarter, we have a little bit more production. You can see that it's already indicated 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 and they are able to, I mean, catch the opportunity to do some opportunities buying, so we think it generally will increase, okay? But it also has to do with the size of the rate cut, the 25 basis, 50 basis, going often or what.

And which is really a national sports right now, okay? Everybody is predicting. 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.

Got it. Okay. That was my question. Thank you very much.

(Operator Instructions) Gary Tenner, D.A. Davidson.

Thanks. Good morning. I wanted to ask a follow up on the loan outlook question, and you just addressed it a little bit by the commentary in the fourth quarter. How much of that fourth-quarter activity do you think where folks just trying to get transactions in before year end? And what is that -- has that translate to the pipeline, at least for first quarter activity levels?

I will have Wellington answer the question first, okay?

Hi, Gary. That's a good question. I think that it's interesting that because we pretty much raised ourselves last year 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, 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 factors.

Okay. And just in terms of the pipeline heading here into the first quarter then. Most of last year was light on loan growth as you pointed out, before the strong fourth quarter. So what does the early part of '24 look like from what you could tell?

Okay. This is Li Yu. First, for the pipeline, it is better than the past -- than third quarter. And partly, so far, in a very early stage, only is 26 days into the year, okay? -- 24 days into the year, okay? It seems to be a little bit more active than the third quarter.

But whether it will end up in the same level of fourth quarter, we do not know. Because first quarter is like you have projected. That there's a rush in the quarter end, year-end. But it seems to be better than third quarter.

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

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 an average.

Yeah. As an average, yeah. Some will be immediate, and some will be farther than that for sure. But yeah, it's around 100, 125.

There's still a portion of our portfolio is real old portfolio. It was sitting in the floor rate that was effective in 2021, 2020. So there's -- some of them is -- for the newer loan production is concerned, probably right around 100 to 125 basis points.

Thanks very much.

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.

Well, thank you very much, that we think that -- we think we have a good year by our standard. So we certainly would like to keep that relative profitability compared to the industry going forward. And hopefully, that we will also be doing the things that shareholders --friendly things that -- in the coming new year, in this new year. Thank you very much.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.