Preferred Bank (NASDAQ:PFBC) Q3 2023 Earnings Call Transcript

Preferred Bank (NASDAQ:PFBC) Q3 2023 Earnings Call Transcript October 18, 2023

Operator: Good afternoon, everyone, and welcome to the Preferred Bank Third Quarter 2023 Earnings Conference Call. [Operator Instructions]. 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.

Jeff Haas: Thank you, Jamie. Hello, everyone, and thank you for joining us to discuss Preferred Bank’s financial results for the third quarter ended September 30, 2023. 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 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. I’m very pleased to report another quarter of record income. For the third quarter, Preferred Bank earned a net income of $38 million or $2.71 a share. Compared to the second quarter, net income and — net interest income both increased and our expenses decreased. For the quarter, it is — we have very — a little bit of loan growth. Loan demand continues to be low as our customers seems to be much more cautious these days and our underwriting standards remain elevated. On the deposit side, the increase was $94 million for the quarter. We have seen deposit costs slowdown. And looking forward to fourth quarter, 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 nonperforming loans. The nonperforming loan increase is basically the migration of 2 loans from a lower classification to the cool category. Loan number one is a $16.1 million loan that was borrowed 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 will notify — we just notified that the property is in Escrow, okay? And the borrower should have — should be closing it in later part of October and paid Preferred Bank off. There’s another $2.2 million a loan is in the same category — is the discussion between the — between the beneficiaries for a large and complex estate, okay.

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, okay, largely over $23.5 million should be paid off today. We’ve confirmed that with the lending bank that took over this role. So we will obviously update you later that with all these things happens. For the quarter, we have made a provision of $3.5 million. 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 one of the — we believe that’s one of the top level — allow us number among our West Coast peer group.

Our operating costs remain under control. Efficiency ratio was 25% for the quarter. Since the second quarter 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 million. 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 10.1%. 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 hedge ourselves to offer the bank efficiently and prudently. Thank you very much. I’m ready for your questions.

Operator: [Operator Instructions] Our first question today comes from Matthew Clark from Piper Sandler.

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Q&A Session

Matthew Clark : 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 fourth quarter, looks like you’re pretty much in line with your prior guidance of $4.40.

Edward Czajka: Yes. That’s always good to see, Matthew. 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 $3.42 million — excuse me, $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. I would estimate somewhere in the neighborhood of $4.15 to $4.25 for Q4 and somewhere between $3.90 and $4 for Q1 of ’24 notwithstanding any actions by the Fed.

Matthew Clark : Okay. Got it. And then just shifting gears to expenses. Good to see no additional OREO-related costs or very minor costs this quarter. What’s kind of run rate expectations for the fourth quarter? And then should we assume some seasonal increase in 1Q?

Edward Czajka: In answer to your second question, yes, you’ll see the seasonal increase in Q1 of next year. My expectations for Q4 would be somewhere in the root of $19.5 million to $19.8 million.

Matthew Clark : Great. Okay. And then just on credit, could hear some of those isolated issues are resolving themselves as it relates to nonperformers and criticized. But can you remind us of your SNC exposure? And what might be criticized within that portfolio? It sounds like one of them that’s resolving itself the $23-or-so million is within that SNC book. And just the overall status of that portfolio?

Li Yu: Nick, do you want to answer that?

Nick Pi: Yes. For SNC loans, they have submitted to the bank for their second semiannual review in around September, and there’s only one small loan. It’s around over $2 million in exposure has been downgraded. Other than that is — the rest of the SNC loans are stable without any credit issues at this.

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

Nick Pi: It’s 11%, correct.

Matthew Clark : 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 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 pure office or maybe not, maybe it’s just the central business district, which is pretty nominal.

Li Yu: Well, we have, obviously, the business has shifted, with a little amount we have in that. And basically, they are very small properties, a very small office being well occupied. I don’t think we have any classified assets in office property, right?

Nick Pi: No, not at this time.

Li Yu: Not — that’s about the best I can answer. And also on stay good, I cannot answer any more than that.

Nick Pi: And also give you a little bit more color of Matthew on our office products. We have recently conducted the stress test, unbelievably on the office side that these are — all those ratios are pretty good comet. So we do not expect any immediate issues about our office project at this time. And some of the loans are below we think a handful of those credits with a little bit weak DCR ratio. However, we do have very strong individual guarantors behind it. So global cash flow, I can cover, these are no issues whatsoever at this time.

Operator: Our next question comes from Tim Coffey from Janney.

Tim Coffey : Just a question on the nonaccrual loans. If you were to account for payoffs that you anticipate getting this week, what would that nonaccrual number be? Because I’m assuming it would be less than 19%.

Li Yu: The 19 plus 2.2.

Edward Czajka: 17 would be —

Nick Pi: Minus 2.2 would be right.

Edward Czajka: A little under 17%, a little under 17%.

Tim Coffey : Okay. Great. And then if we kind of — we think about loan growth over the next 12 months, where are some of the biggest headwinds that you’re seeing right now?

Li Yu: Well, I think the 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 to get. But I mean, they just — I guess, like everybody else, I mean they just don’t want to commit into some actions that the interest rate picture is not clear.

Tim Coffey : Okay. You said your underwriting was remaining stable. I’m wondering, is there any places that you’re starting to tighten your underwriting?

Li Yu: We have tightened it before. When I used the word is actually elevated because we are more picky on the location. We’re very more much picky on the guarantor. And I guess the other mathematics is TVs, I mean you can lower it down a little bit. I mean, requirement. But that’s what we’re staying elevated is these 2 categories now.

Tim Coffey : Okay. Also on cap rates in your footprint, are you starting to see commercial real estate cap rates starting to move our budge at all?