Preferred Bank
NASDAQ:PFBC
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Preferred Bank
Earnings Call Analysis
Q3-2023 Analysis
Preferred Bank
Preferred Bank reported a strong third quarter with a net income of $38 million, translating to $2.71 per share. Notably, compared to the previous quarter, there was an increase in both net income and net interest income while expenses decreased.
The bank experienced an increase in deposits by $94 million for the quarter with slowing deposit costs, a trend expected to continue into the fourth quarter. Additionally, the bank has kept its operating costs in check, boasting an impressive efficiency ratio of 25% for the quarter.
Credit quality remained generally consistent, with a small uptick in total criticized assets and a larger increase in nonperforming loans primarily due to two loans reclassified to nonaccrual status. Provisions for loan losses were set at $3.5 million, with charges-offs of $80,000, bringing the allowance total to 1.46%. Management conveyed confidence in their top-level allowance reserve compared to peers.
Preferred Bank has been actively repurchasing its shares since the second quarter of 2023. To date, 720,000 shares have been bought back for about $42 million, a strategy that has been accretive to earnings per share (EPS). The buyback program is set to continue under the current plan, and despite the repurchases and dividends paid, the tangible capital ratio has increased to 10.1%, indicating a strong balance sheet.
The bank's performance has consistently surpassed consensus estimates, with future projections trending upward. This trend is a testament to the bank's operational efficiency and prudent financial management.
With a majority of CD maturities being one year, the bank has a recurrently rotating maturity schedule that contributes to their stable funding base. Around $400 to $500 million in CDs are anticipated to mature in the fourth quarter, similarly distributed over subsequent quarters. Moreover, the bank has emphasized a cautious approach to any new loan originations, suggesting a preference for managing liquidity and existing profitability over aggressive expansion.
The bank's conservative approach has served well, particularly with the choice not to invest heavily in treasury papers three months prior, proving advantageous during the recent volatility in interest rates. The bank maintains a strong liquidity position and is steadfast in its decision to be cautious about seeking out the last dollar of income at the potential expense of future stability.
The average repurchase price for the share buybacks was slightly over $58 a share, signaling the bank's belief in the undervaluation of its stock and commitment to enhancing shareholder value.
The closing notes from the conference call reflect the bank's stable performance and management's attention to resolving legacy loans while keeping an eye on the potential for new issues. The executives expressed contentment with the progress and the seemingly limited new entries into problematic loan categories.
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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.
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.
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, with this -- 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 nonaccrual category. Loan number 1 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 notify -- we just notified that the property is in escrow. And the borrower should have -- should be closing it in later part of October and pay Preferred Bank off.
There's another $2.2 million loan is in the same category, is 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 loans, which is classified -- which is include in the criticized category, large loan of $23.5 million should be paid off today. We've confirmed that with the lending bank that took over this loan. So we will obviously update you later when 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. Therefore, our allowance total has increased to 1.46%. We believe that one of the -- 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 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. And we are very pleased with that. We will continue to hedge ourselves to operate a bank efficiently and prudently.
Thank you very much. I'm ready for your questions.
[Operator Instructions] Our first question today comes from Matthew Clark from Piper Sandler.
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%.
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 4.15% to 4.25% for Q4 and somewhere between 3.90% and 4% for Q1 of '24 notwithstanding any actions by the Fed.
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.
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.
Great. Okay. And then just on credit, could this -- good to 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?
Nick, do you want to answer that?
Yes. For SNC loans, they have submitted to the bank but there are 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 time.
The total SNC relative to total loans is about, I believe, 11%.
It's 11%, correct.
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 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 pure office or maybe not, maybe it's just the central business district, which is pretty nominal.
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 is being well occupied. I don't think we have any classified assets in office property, right?
No, not at this time.
We have not. That's about the best I can answer you. [indiscernible] stay good, I cannot answer any more than that.
And also give you a little bit more color 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 come up in this meantime. 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 a very strong individual guarantors behind it. So global cash flow, I cannot cover, these are no issues whatsoever at this time.
Our next question comes from Tim Coffey from Janney.
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 million.
The $19 million plus $2.2 million.
$17 million...
Minus $2.2 million...
Yes, it would be...
Yes. Right. Yes.
A little under $17 million, a little under $17 million.
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?
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 -- when interest rate picture is not clear.
Okay. You said your underwriting was remaining stable. I'm wondering, is there any places that you're starting to tighten your underwriting?
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 LTVs, I mean you can lower it down a little bit. I mean, requirement. But that's what we're staying elevated is these two categories now.
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?
Yes. Based on the most recent appraisals, the cap rate has gone up a little bit because of the current CRE market situation, but has not yet that out of control at this time. So valuations still maintains pretty good for our bank because normally, we maintain our loan-to-value ratio 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.
Our next question comes from Andrew Terrell from Stephens.
If I could start maybe on the nonaccruals 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?
Yes. That credit is the most recent appraisal. That is around under 50%.
And Andrew, just to clarify, that's a classified, not a nonaccrual loan.
That's a classified.
Yes. That's not part of the nonaccrual. So.
All right. Okay. Okay. 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?
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 -- think the much -- there's much bank change basically their deposit rates that offering to their customers. Therefore, the fluidity of the interbank, I mean, deposit transfer and so on, is much limited in this quarter compared to previous quarter. I guess it's a matter of opening up new accounts in our offices, meeting new people and opening new account that cost, the $94 million increase. So we do not see -- if the Fed does nothing. We do not foresee the big deposit rate changes in the next quarter -- meaning fourth quarter.
Okay. And what's the kind of level that new CD deposits are being priced at today?
We have priced at the 5.03%, after CD amount. That's the highest rate we have. But there's different categories that's lowest in case. So it's ranging from 4% to that, okay?
Our next question comes from Eric Spector from Raymond James.
This is Eric on the line for David Feaster. Probably on the CD front. I'm just curious if you could provide some color just on the maturity schedule.
Generally speaking, they -- 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.
Okay. And then that's laddered out kind of similarly quarter by quarter?
Yes.
Okay. And then just curious on the demand front, it looks like growth was primarily from resi mortgage and resi construction. Just curious your appetite for resi growth at this point? And what's driving the growth there?
On the demand side?
Yes.
Yes, on the demand side.
Well, we're highly dependent on our customers that on a daily basis, meaning the commercial customers, business customers who are dealing with us. So you see after last scale that we had in March with the meltdowns, I guess, so on actually, everybody is putting so much attention in uninsured deposits 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 in two pieces into ICS and so on, I think 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 then not being break down. They don't want to actually use it, but they want to have the activity to turn into ICS when they -- 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 are getting from our customers and changing the nature of liquidity and coverage.
So I don't know that issues still out there. We don't have an answer to you. But as the pure dollar amount of 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 pace almost will end in this quarter, but time is to tell that.
Okay. 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?
Yes. We -- obviously, I mean, our commercial -- real estate market, which is our biggest loan and biggest category. And it depends on the maturity schedule of pay downs and so on and also that we have a number of full construction loans being paid down. So these are the things that the changes on quarter-to-quarter is, we have never treated the mortgage as the main cause of our new generation. In fact, we had -- you may not know that, but we have previously disclosed that our internal goal is to keep our mortgage product to less than 10%.
Okay. I appreciate the color. And just wanted to get an update on the SBA department expansion in the Houston LPO. Are you looking at additional expansion opportunities? And just kind of any color there would be helpful.
Can I bring in another level, 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'd like to concentrate our efforts in managing our liquidity, managing our profitability and managing our return to our investors. Opening new locations is not an immediate endeavor at this point in time.
Our next question comes from Gary Tenner from D.A. Davidson.
Bunch of my questions have been answered, but just wanted to ask in terms of kind of balance sheet management. You've continued to allow the AFS portfolio to run off, paid 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 putting any of that to work in the securities portfolio in anticipation of locking in some yield potentially for the longer term.
We -- this is something and is continuously looking into it. And we continue to talk to each other about that. It seems to be every time we did something we were wrong, that's because 3 months ago, we were talking about a lot of -- do some treasury paper. I'm glad we didn't do that.
They will come at time.
Yes, some time it was just a [ standoff ], I guess for us, that's not the major income of us. It's small diversification. So we like to believe we care for, a little bit more cautious so that it wouldn't allow a lot of adjustment, the write-down of our portfolio.
And 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.
Yes. 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 down the road profitability. But I appreciate the thoughts on that. And then just I missed some of the numbers are on the buyback. I have the total shares purchased in the last couple of quarters. But what was the average price per share?
The average price per share through the total buyback is just a hair over $58 a share.
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.
Well, thank you very much that we -- everything that -- in this quarter seems to be more stable than the previous quarter. And from my side, I'm just got to see some of the legacy. When you said 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 hope that we can continue to be this way. Thank you.
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.