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spk06: Good afternoon, everyone, and welcome to the Preferred Bank third quarter 2023 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and one using a touch-tone telephone. To withdraw your questions, you may press star and two. 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.
spk03: 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 Lee Yu, President and Chief Operating Officer Wellington Chen, Chief Financial Officer Edward Chayka, Chief Credit Officer Nick Pye, 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 banks' operations and business environment, all of which are difficult to predict and many of which are beyond the control of preferred banks. 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.
spk00: Thank you. 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, we have a little bit of loan growth. Loan demand continues to be low, as our customers seem to be much more cautious these days, and our underwriting standard remains elevated. On the deposit side, the increase was $94 million for the quarter. We have seen deposit costs slow down, and Looking forward to the fourth quarter, we think the trend will continue. Credit quality remains generally stable. We have a small increase in total criticized assets, but we have a bigger increase in the non-performing loans. The non-performing loan increase is basically the migration of two loans from a lower classification to the non-accrued category. Loan number one is a $16.1 million loan that was borrowed by one of our very good borrowers 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're notified, we're just notified that the property is in escrow, okay, and the borrower should be closing it in later part of October and pay Preferred Bank off. There's another $2.2 million of loan is in the same category. It's the discussion between the beneficiaries for a large and complex estate. 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 loan, which is classified, which is included in the criticized category. A large loan of $23.5 million should be paid off today. We've confirmed that was the lending bank that took over this loan. We will obviously update you later when all these things happen. 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. Therefore, our allowance total has increased to 1.46%. We believe that's one of the top level allowance 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 remaining outstanding shares. And we plan to continue the activity under the current program. I'd also like to report, where's the large amount of buyback and where's the dividends? Preferred banks' 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'll see the future estimates going up. And we are very pleased with that. We will continue to pledge ourselves to operate the bank efficiently and prudently. Thank you very much. I'm ready for your questions.
spk06: Ladies and gentlemen, at this time, we'll begin the question and answer session. If you would like to ask a question, please press star and then 1 using a touch-tone telephone. If you are using a speakerphone, we do ask that you please pick up your handset prior to pressing the keys to ensure the best sound quality. To withdraw your questions, you may press star and 2. Once again, that is star and then 1 to join the question queue. We'll pause momentarily to assemble the roster. Our first question today comes from Matthew Clark from Piper Sandler. Please go ahead with your question.
spk09: Thanks. Good morning, everyone. 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? It looks like you're pretty much in line with your prior guidance of 440. Okay.
spk10: 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, 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 415 to 425 for Q4 and somewhere between 390 and 4, or Q1 of 24, notwithstanding any actions by the Fed.
spk09: Got it. Thank you. 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, you know, should we assume some seasonal increase in 1Q?
spk10: 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 neighborhood of 19.5 to 19.8. Great. Okay.
spk09: And then just on credit, good to hear some of those isolated issues of resolving themselves as it relates to non-performers and criticized. But can you remind us of your SNCC exposure and what might be criticized within that portfolio? It sounds like one of the loans that's resolving itself, the 23 or so million is within that SNCC book.
spk00: And just the overall status of that portfolio. If you want to answer that question,
spk01: Yeah, for SNCC loans, they have submitted to the bank for their second semi-annual 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, the rest of the SNCC loans are stable without any credit issues at this time.
spk10: The total SNCC relative to total loans is about, I believe, 11%. It's 11%, correct.
spk09: Okay. And then just on office commercial real estate, thanks for the additional color in the release on that. But can you, I think, you know, one of the more popular questions these days seems 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 peer office, or maybe not. Maybe it's just the central business district, which is pretty nominal.
spk00: Well, we have obviously the business district with a little amount we have in that, and basically they're very small properties and very small offices being well-occupied. I don't think we have any classified assets in-office property, right?
spk01: No, not at this time.
spk00: We have not. That's about the best I can answer you. If I don't stay good, I cannot answer any more than that.
spk01: And also give you a little bit more color, Matthew, on our office products. We have recently conducted this stress test. Unbelievably, the office side, the DCR, all those ratios are pretty good to come out. So we do not expect any immediate issues about our office product at this time. And some of the loans, I believe, within 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 can cover the DCR, no issues whatsoever at this time.
spk09: Okay. I'll step back. Thanks.
spk06: Our next question comes from Tim Coffey from Janney. Please go ahead with your question.
spk08: Great, thanks. This is a question on the non-accrual loans. If you were to account for payoffs that you anticipate getting this week, what would that non-accrual number be? Because I'm assuming it would be less than 19. 19 plus 2.2?
spk00: Minus 2.2. Yeah, it would be, right. A little under 17. Okay.
spk08: Great. And then if we kind of, we think about loan growth over the next 12 months, but what are some of the biggest headwinds that you're seeing right now?
spk00: Well, I think interest is still the biggest headwind, okay? Because, you know, based on what we see, our borrowers seem to be, they're all, you know, stable and affluent, okay? But, I mean, they just, you know, I guess like everybody else, I mean, They just don't want to commit to some actions that when the interest rate picture is not clear.
spk08: You said your underwriting was remaining stable. I'm wondering, is there any places that you're starting to tighten your underwriting?
spk00: We have tightened it before. What I use the word is actually elevated, you know, because we are more picky on the location. We're very much picky on the guarantors. And I guess the other mathematics is LTVs. You can lower it down a little bit, I mean, requirement. But that's what we're staying elevated is these two categories now.
spk08: Okay. Also, cap rates in your footprint, are you starting to see, you know, commercial real estate cap rates starting to move or budge at all?
spk01: Yeah. Yes, based on the most recent appraisals, the cap rate has gone up a little bit because of the current market situation, but has not yet been out of control at this time. So valuations still maintain pretty good for our bank, because normally we maintain our long-term valuation around 55% around. So even with a little bit high cap rate, I believe our cushion is still there, and our credit should be performing well.
spk08: Okay, great. Those are my questions. Thank you very much.
spk00: Thank you.
spk06: Our next question comes from Andrew Terrell from Stevens. Please go ahead with your question.
spk07: Hey, good afternoon. Hi, Andrew. If I could start maybe on the non-accruals this quarter, I appreciate all the commentary you gave there. I think you gave the LTV for the second smaller loan, sub-20%. For the $16.1 million loan that you referenced, do you have the LTV for that specific credit?
spk01: Yes, that credit, based on the most recent appraisal, that is around under 50%.
spk10: And, Andrew, just to clarify, that's a classified, not a non-accrual loan? That's classified. Yeah, that's not part of the non-accrual, so...
spk07: Oh, I see. Okay.
spk10: Okay.
spk07: Got it. And then if I can move over maybe to deposit growth, you guys had some good deposit growth this quarter. It's good to see. I hear some of the commentary around the loan growth and the challenges there right now, but could you maybe talk about the pipeline for incremental deposit growth, what you're seeing there, and then more specifically on the pricing front, where new time deposits are being priced at today?
spk00: Well, so far what we see is for us, and even in the immediate marketplace we're dealing with, deposit rate offering has been stable. And I don't see, I don't think there's much bank change, basically, their deposit rate that's offering, you know, to their customers. Therefore, the fluidity of the interbank, I mean, deposit transfer and so on, is much more limited in this quarter compared to previous quarter. I guess it's the matter of opening up new accounts in our offices, meeting new people, and opening new accounts that caused the $94 million increase. So we do not see if the Fed does nothing. We do not foresee those big deposit rate changes in the next quarter. Meaning fourth quarter.
spk07: Okay. And what's the kind of level that new CD deposits are being priced at today?
spk00: We are priced at a 5.03, okay, average CD amount. That's the highest rate we have. But there's different categories that's lowest, okay. So it's ranging from four to that, okay. Okay.
spk07: I appreciate the color. Thanks for taking the questions.
spk00: You're welcome.
spk06: Our next question comes from Eric Spector from Raymond James. Please go ahead with your question.
spk05: Hey, this is Eric on the line for Dave Feaster. Thanks for taking the question. While we're on the CD front, I'm just curious if you could provide some color just on the maturity schedule.
spk10: Well, generally speaking, most of the CD maturities are a year. So we have basically a constantly rotating maturity schedule of the entire portfolio. For the fourth quarter, I think we have about $400 million to $500 million, I believe, maturing for the fourth quarter.
spk05: Okay. And that's laddered out kind of similarly by quarter? Okay.
spk02: Yes.
spk05: Okay, thank you. And then just curious on the demand front, it looks like growth is primarily from Resi Mortgage and Resi Construction. Just curious your appetite for Resi growth at this point and what's driving the growth there.
spk00: On the demand side?
spk05: Yeah. Yeah, on the demand side.
spk00: Well, we highly depend on our customers on a daily basis. Many of the commercial customers, business customers, are dealing with us. So you see, after the last scale that we had in March with the meltdowns, everybody is putting so much attention in uninsured deposits and so on. We are a business bank, and we're dealing with business. And business, their deposit is basically uninsured. And they don't want to be cutting up into pieces. ICS and so on, they cannot operate that way. So we have a couple of very, several very large customers. Their deposits, they sign up all the conversion to ICS, but they're not being breakdown. They don't want to actually use it, but they want to have the activity to turn into ICS one day if they need it. But the fact is that for the community banks, there may be regional banks too, I mean, if that issue doesn't get resolved, everybody will have to worry about the large DDA they're getting from their customers and changing their nature of liquidity coverage. So I don't know. The issue is still out there. We don't have an answer to you. But as the pure dollar amount of the DDA, we're just like everybody else, seeing that small migration into the higher cost area. But we hope the pace has slowed down. In fact, I hope the pace almost will end in this quarter. But, you know, time is to tell. Okay.
spk05: I just wanted to touch on more on the loan demand side. Like growth this quarter was driven by resi mortgage and resi construction. Just curious what drove the growth there.
spk00: Yeah, we obviously, I mean, our commercial real estate market, which is our biggest loan and biggest category, and, you know, it depends on the maturity schedule of pay down and so on, and also that we have a number of old construction loans being paid down, okay? So these are the things that to change it from quarter to quarter is, We have never treated the mortgage as a main cause of our new generation. In fact, we had, you know, you may not know that, but we have previously disclosed that our internal goal is to keep our mortgage product to less than 10%.
spk05: Okay, I appreciate the color. And I just wanted to get an update on the SBA department and expansion in the Houston LPO. Are you looking at additional expansion opportunities? Just kind of any color there would be helpful.
spk00: Can I bring in another level, okay, in changing from a more macro basis? To me, at this point in time, doing a new loan is a lot less profitable than buying back the stock. But new loan will give us long-term growth. But since the loan demand is not there, We like to concentrate our effort in managing our liquidity, managing our profitability, and managing our return to our investors. Opening new locations is not our immediate endeavor at this point in time.
spk05: Understood. Well, thank you for taking the questions, and congrats on a good quarter.
spk06: Our next question comes from Gary Tenner from DA Davidson. Please go ahead with your question.
spk04: Thanks. Good morning. A bunch of my questions have been answered, but just wanted to ask in terms of kind of balance sheet management, you know, you've continued to allow the AFS portfolio to run off, pay down the FHLB debt this quarter. So as you think of the liquidity on the balance sheet, which is ample, any thoughts in terms of, you know, putting any of that to work in the securities portfolio? in anticipation of locking in some yield potentially for the longer term?
spk00: This is something Ed is continuously looking into it, and we continue to talk to each other about that. It seems to be every time we do something, we're wrong. Because three months ago, we were talking about locking into some Treasury paper. I'm glad we didn't do that. There will come a time. Yes, sometimes it's just, you know, I guess for us, that's not the major income of ours. It's just more diversification. So we like to be a little bit more careful, a little bit more cautious so that it wouldn't allow a lot of adjustment right down of our portfolio.
spk10: And, you know, Gary, the profitability of the overall bank, is really one of the main drivers behind having such a large cash position that we've had over the last 10 years. We have not had to go after that last dollar of income and put that money at risk. And so we find ourselves in a very good position right now with our liquidity because we haven't done that, and with respect to our tangible capital levels as well.
spk04: Yeah, I mean, certainly it's been a huge advantage to have a small portfolio in this environment. and not thinking so much about current profitability, but, you know, down the road profitability. But I appreciate the thoughts on that. And then just I missed some of the numbers around the buyback. I had the total shares purchased the last couple of quarters, but what was the average price per share?
spk10: The average price per share through the total buyback is just a hair over $58 a share. Great. Thanks very much.
spk06: And ladies and gentlemen, at this time we'll be concluding today's question and answer session. I'd like to turn the floor back over to Mr. Yu for any closing remarks.
spk00: Well, thank you very much. Everything in this quarter seems to be more stable than the previous quarter. And from my side, I'm just scared to see some of the legacy changes Maybe when you're setting the legacy, loans is getting resolved gradually. These things do take time, but I'm also happy to see the new migration into the category is very, very limited. So with that, I just hope that we can continue to be this way. Thank you.
spk06: And ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for joining. You may now disconnect your lines.
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