Q4 2023 Preferred Bank Earnings Call
Good day and welcome to the preferred Bank first quarter 2023 earnings Conference call.
All participants will be in listen only mode.
Should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
To ask a question you May press Star then one on your telephone keypad.
To withdraw your question. Please press Star then two.
Please note today's event is being recorded.
I would now like to turn the conference over to Jeff halls, where its financial profiles. Please go ahead.
Thank you Rocco.
Hello, everyone and thank you for joining us to discuss preferred banks 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 our 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.
Correct forward looking statements are also subject to known and unknown risks uncertainties and other factors relating to preferred banks 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.
S E C 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 banks result to 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.
Earnings Conference phone call.
I'm pleased to report that.
The bank's fourth quarter net income was.
$35 $8 million or $2 67.
Yeah.
We closed out the year with a record of $150 million off <unk>.
$10.52 per share.
We attribute this to our App.
Active margin management, and a continuous cost control.
Yeah.
During the fourth quarter credit quality remains stable.
We have a reduction in total criticized loans. However, we have an increase.
Oh.
Nonperforming loan.
The increase in nonperforming loans is a one real estate relationship.
Whereby was previously classified and now are in the foreclosure process, which means we'll be closer to the ultimate resolution.
The loan.
The valley ratio of this real estate relationship is 70%.
Our collateral is industrial property fully occupied with cash flow.
Sufficient to support them.
We are currently projecting.
There would be no.
Losses.
This.
But the killer.
MPL.
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 all dollar 1.49%.
Okay.
For the year 2023.
Our loan and deposit increases.
And you put that shows is below the historical level. However was in line with industry averages.
Looking forward with the projected rate decrease here.
We believe loan demand will recover gradually.
And hopefully towards the end of the year it'd be closer to our historical level of demand.
Likewise real projections that deposit costs will continue to moderate.
During the quarter the bank has.
Well, let me put it out of the way the all bank has generated a significant amount of free cash flow for the year of 2023.
We have used $50 million of that cash flow to buy back roughly.
Our capital stock.
And the rest will be used to enhance our capital position.
And.
We have also announced that the increase the dividends.
By putting your 7% beginning 2012.
<unk> 24.
In January we also announced a new buyback program for about another $50 million capital stock.
Yes.
So.
We are very mindful of looking for opportunity to re tenant them.
Capital to our shareholders.
Going forward in the year 2024 will be carefully balancing ourselves between gross.
Capital enhancement.
Shareholder return.
Also during the fourth quarter. We have also began to restructure our securities portfolio, we sold $29 million securities for a $929000 loss, which does not affect the capital position.
<unk> is already Marc.
And we will buy back those same securities that we have similar security to your competitor.
We see it the preferred bank believe the banking industry is in the process of beginning the process of back to normal.
And with that we certainly hope that we will return to.
<unk> historical <unk>.
Level of World.
Thank you very much I'm ready for your questions.
Thank you.
I'll now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If your question has already been addressed and you'd like to withdraw your question. Please.
Please press Star then two.
Once again, ladies and gentlemen that of stars and one if you have a question.
And today's first question comes from Matthew Clark of Piper Sandler. Please go ahead.
Hey, good morning, everyone.
Aye.
Starting with the in the margin.
Can you give us a sense for.
What the average margin was in December.
You have spot rates at year end on total are interest bearing.
And then if you can also.
Give us some visibility on C.
CD repricing, you know, what's coming up how much is coming up for renewal and at what rate.
Yeah, Hi, Matt Yeah, you'll have all of that.
Yeah.
The March the spot margin for December as you see it's 424 for the quarter. It was 415 in December.
Uh huh.
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 will reprice in Q1.
And the rates that they're coming off at and what would your putting people out of the space.
Average rate is coming off that is a 465. So that's why it's my belief. This moderation in terms of deposit costs will take hold in the first quarter, because we're not seeing the kinds of differences between our maturing Cds and renewal Cds.
Okay.
Okay, and then with the expectation for a few rate cuts this year.
I'm, assuming that's on the conservative side, how are you thinking about.
Hum moving deposit cost.
Assume there'll be some lag with the C D. Given how larger city book is but you know how active might you be on kind of the non CD book.
Well part of it 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 wont 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. You talked about what we've seen in the past when rates do come down.
And Ah.
Decent economic environment, our loan volume picks up significantly that loan volume pickup will drive earnings going forward will draw helped drive net interest income not so much the margin, but net interest income going forward.
Okay, and then one of your competitors you know a lot larger.
You know guided down on NII by 4% to 6%.
With fixed 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.
Again, it kind of depends on the rate outlook, but any any sense for kind of the NII decline. This year based on your rate forecast.
Yeah.
It's going to largely depend on volumes, Matthew I would like to be able to tell you with a certain 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.
A lot of the guys have their models and know what our balance sheet consist of so certainly we will see a decline in net interest income if there are six rate cuts.
We're not necessarily convinced there will be six however, we're prepared for it.
In fact, Massoud, that's something that difficulty we're facing as so many uncertainties.
Yeah, you are aware of that our loan portfolio is very asset sensitive but yet.
Many of them are majority of who has the right tool.
To the extent when it's coming down some of them will be less affected.
Yes.
So hopefully it was in the past experience is that was new loan production. So we can actually.
No.
Contribute to increasing net interest income.
Got it okay.
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 <unk> run rate.
Yeah, I I'm I'm expecting it to come in anywhere between 19 to 19 and a half on Q1.
Okay, and then Jim.
As Youll recall that typically has a higher quarter for us in Q1 every year.
Jim: Yep understood and then lastly on the buyback it sounds like.
A bit of a balance you are pretty active in finishing that $50 million in just three quarters. It 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 buyback.
Buybacks I hope they come out of it which means that our operating cash flow, which as you know, which is which will allow us to do that but it will keep on looking at ourselves between well, we actually owning what are projected to be the full operation looks like.
And balance without with a capital ratio.
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 the value proposition isn't quite the same as it was however, there's still value there.
Yeah, Okay. Thank you.
And our next question today comes from Tim Coffey with Janney. Please go ahead.
Good morning, gentlemen.
Hi, Tim.
Yeah, just a follow up on the your comments about rate cuts and business demand I'm wondering do you know.
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.
Jim: Tim are based on our conversation with our customers.
Tim Smith: Customers Okay.
It is really mostly a few have had one or two rate cuts.
<unk> also seen their pencil a bit dull.
There will be basically being more aggressive.
Investments.
And obviously by the fourth quarter, we have labor.
A little bit more production you can see that is already indicating some of all how should I say more progressive type of customers already engaged in some transactions. So when they feel that the latest peak, okay and they are able to.
Catch the opportunity to do some of the opportunities right. So we think it Jamie we increase.
Hey.
But it also has to do with the size of the REIT cutting them 45 days or 50 basis point, often that won't work and which isn't really a national sports right now.
[laughter], but it wouldn't be right.
The crystal ball, but the general trend is that.
Sooner or later you get it's abandoned rough time.
Got it Okay that was my question. Thank you very much.
Yeah.
Thank you.
And ladies and gentlemen, as a reminder, if you would like to ask a question. Please press Star then one.
Our next question comes from Gary Tenner with D. A Davidson. Please go ahead.
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 fourth quarter.
You know how much of that fourth quarter ought to be do you think where folks just trying to get transactions before year end.
And what does that has.
How does that translate to kind of the pipeline at least for first quarter activity levels.
I will why don't you answer the question first.
Hi, Gary that's a good question I think that you know it.
Gary: Interesting that because so we pretty much brace ourselves last year to really continue to take care of our customer and same site. We our customers always looking for opportunities. So whether it's year end situation I'm not so sure. They always you know when there's a good opportunity they want.
To capture it and close it.
Now so sure up all the you haven't factored.
Okay, and just in terms of the pipeline and kind of heading here into the first quarter then.
Most of the last year, which was light on loan growth as you pointed out.
Before the strong fourth quarter. So you know what is the early part of 2004, it looks like from what you can tell.
Okay.
The U K.
First quarter pipeline.
And probably you know so far I've been very early stage dwindling its 26 days into.
Into the year of 'twenty 'twenty four days into the UK.
It's it's it's.
Yes.
It seems to be a little bit more activity in the third quarter, but it.
Whether it will end up in the in the same level of fourth quarter and now we do not know because for US what it is it does like do you have projected is kind of a rush in the in the quarter.
Yeah.
But it is seems to be better than them then.
In third quarter.
Tim Smith: I appreciate that and then if I guess one more.
Can you just remind us kind of what.
What amount of rate cuts do you need until floors in your variable portfolio.
You know start to start to matter.
At this point, it's a it's probably about 100 to 125 basis points of rate cuts before they start to matter as we've gotten with <unk>.
Yes. The average is an average yes, some will be immediate and some will be farther than that for sure but yeah. It's it's around 100 120 ever does skew a portion of our portfolio is real old portfolio was trending in the in the floor rate that was effective in 2021. So I guess does it is there.
Of them is.
Tim Smith: As for the new loan production was constrained Bobby.
100 <unk> hundred.
The 25 basis points.
Thank you very much.
Thank you.
Concludes our question and answer session I would like to turn the conference back over to the management team for any final remarks.
Well. Thank you very much that are we think that.
Tim Smith: We think we have a good year by all by all standards. So we certainly would like to keep all that.
Relative profitability compared to the industry going forward and hopefully that.
We will also be doing their thing.
Shareholders friendly things that are in.
In the coming years 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.
Yeah.
[music].