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spk02: Good day and welcome to the Preferred Bank fourth 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 today's 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 Haas with Financial Profiles. Please go ahead.
spk00: 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 Lee Yu President and Chief Operating Officer Wellington Chen, Chief Financial Officer Edward Chayka, and Chief Credit Officer Nick Pye. 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 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. Lee Yu. Please go ahead.
spk06: 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 first quarter net income was $35.8 million, or $2.60 a share. We close out the year with a record earning of $150 million, or $10.52 a share. We attribute this to our active margin management and our continuous cost control. During the first quarter, credit quality remained stable. We have a reduction in total criticized loan. However, we have an increase of non-performing loan. The increase in non-performing loan is a 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 to 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 MPL. During the first quarter, there were no loan charge-offs, and then provision for the first quarter was $3.5 million, which leads to a reserve on the loan losses total of For the year 2023, our loan and deposit increases of the new productions is below our historical level. However, it was in line with industry averages. Looking forward with the projected rate decreases. We believe loan demand will recover gradually and hopefully toward 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 that cash flow to buy back roughly 800,000 shares of our own capital stock. And the rest we've used to enhance our capital position. And, okay. 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 begun to restructure our security portfolio. We sold $29 million securities for $929 million. thousand dollars 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 use. We here at Preferred Bank believe the 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.
spk02: Thank you. We will 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 press star then two. Once again, ladies and gentlemen, that is star then one if you have a question. And today's first question comes from Matthew Clark at Piper Sandler. Please go ahead.
spk07: Hey, good morning, everyone. Hi. 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, you know, what's coming up, how much is coming up for renewal and at what rate.
spk01: Yeah, I'm at you. Yeah, you have all that. The spot margin for December, as you see, it's 424 for the quarter. It was 415 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 a little over $1.1 billion of CDs that will reprice in Q1.
spk07: And the rates that they're coming off at and what you're putting people into at this point?
spk01: The average rate it's coming off at 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 maturing CDs and renewal CDs.
spk07: Okay. 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 You know, moving deposit costs, I assume there'll be some lag with the CD, you know, given how large your CD book is. But, you know, how active might you be on kind of non-CD book?
spk01: 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. Okay. as do, 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.
spk07: Okay. And then one of your competitors, you know, a lot larger, you know, guided down on NAI by 4% to 6% with six rate cuts this year and also assuming i think three to five percent loan growth um i think we currently have you in the low single digits for the year um 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 any sense for the nai decline uh this year based on your rate forecast
spk01: It's going to largely depend on volumes, Matthew. I would like to be able to tell you with a 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, you know, what our balance sheet consists of. So, certainly, we'll 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.
spk06: In fact, Matthew, that's something that difficulty we're facing is so many uncertainties we have today. You are aware that our loan portfolio is very asset sensitive, but yet a majority of them has rate fall. To the extent when it's coming down, some of them will be less affected than any others. So hopefully in the past experiences with new loan productions, we can actually you know, contribute increases in net interest income, you know.
spk07: 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 one Q run rate?
spk01: 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.
spk07: Yep, understood. And then lastly, on the buyback, it sounds like a bit of a balance. You were pretty active in finishing that $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?
spk06: We certainly hope that we will buy back a whole big amount of it, which means that our operating cash flow, which will allow us to do that. But we keep on looking at ourselves between what we're actually earning, what our projecting the forward operation looks like. And the balance was a capital ratio.
spk01: 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.
spk07: Yep. Okay. Thank you.
spk02: And our next question today comes from Tim Coffey with Jannie. Please go ahead.
spk05: Good morning, David Killiman. Just a follow-up on your comments about rate cuts and business demand. I'm wondering, how many rate cuts of, say, 25 basis points do we need to spur demand for more loans?
spk01: That's a great question, Tim.
spk06: Tim, based on our conversation with our customers, okay, It is really more so if you have one or two rate cuts 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 first quarter we have a little bit more production. You can see that there's already indications some of our, how should I say, more progressive type of customers are already engaged in some transactions. when they feel that the rate has peaked and they're able to catch the opportunity to do some of the opportunities value. So we think it generally will increase, okay? But it also has to do with the size of the rate cutting, the 25 bases, 50 bases, when often, when what? And which is really a national sports right now. 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.
spk05: Right. Okay. That was my question. Thank you very much. Thank you.
spk02: And ladies and gentlemen, as a reminder, if you would like to ask a question, please press star then 1. Our next question comes from Gary Tenner with DA Davidson. Please go ahead.
spk03: Thanks. Good morning. I wanted to ask a follow-up on 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 activity do you think were folks just trying to get transactions in before year end, and what is that? has that translate to kind of the pipeline, at least for, you know, first quarter activity levels?
spk06: I would have, why don't you answer the question first, okay?
spk04: Hi, Gary. That's a good question. I think that, you know, 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, you know, when there's a good opportunity, they want to capture it and close it. So I'm not so sure about the year-end factor.
spk03: And just in terms of the pipeline kind of heading here into the first quarter then, you know, most of last year was light on loan growth, as you pointed out, before the strong fourth quarter. So, you know, what does the early part of 24 look like from what you can tell?
spk06: Okay. Uh, this is Lee Yu. Okay. Uh, first quarter pipeline is, is better than the pipeline than, than third quarter. Okay. And probably, you know, so far I've been very early stage, when is 2016 into the year. Okay. Uh, 2020, 24 days into the year. Okay. Uh, it's, it's, it's, it's, It seems to be a little bit more active than a third quarter, but whether it will end up in the same level of fourth quarter, we do not know. Because fourth quarter, like you have projected, there's kind of a rush in the quarter end, year end. But it seems to be better than third quarter. Appreciate that.
spk03: And then if I guess one more... Ed, can you just remind us kind of what amount of rate cuts do you need until floors in your variable portfolio, you know, start to matter?
spk01: At this point, it's probably about 100 to 125 basis points of rate cuts before they start to matter, as we've gotten, you know, 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... It's around 100, 125.
spk06: Yeah, but there's still a portion of portfolios, real old portfolio was sitting in the flow rate that was effective in 2021 and 2020. So there's some of them is for the newer long production is concerned, probably right around 100, 125 basis points. Thanks very much. Thank you.
spk02: This concludes our question and answer session. I'd like to turn the conference back over to the management team for any final remarks.
spk06: Well, thank you very much. We think that 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 will We'll also be doing the things that's shareholder-friendly things in the coming new year, in this new year. Thank you very much.
spk02: 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.
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