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 touchtone 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.
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 J. 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 their own 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. 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 a little bit of loan growth, okay? Loan demand continued to be low as our customers seem 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 slow down, 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 non-performing loans. The non-performing loan increase is basically the migration of two loans from a lower classification to the non-core 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 are notified, 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 pay Preferred Bank off. There's another $2.2 million dollars loan is in the same category.
It's the discussion between the, I mean, 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. We're also scheduled to have another large loans, which is classified, which is included in the criticized category. Okay. 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, okay, 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, okay. 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 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 reporting earnings quarter by quarter, beating consensus estimates. Quarter after quarter, we see the future estimates going up, okay? 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.
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 One using a touch-tone telephone. If you are using a speakerphone, we do ask 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 Two. Once again, that is Star and then One 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.
Thanks. Good morning, everyone.
Yeah.
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 4.40.
Yes, that's always good to see you, 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 4.15-4.25 for Q4 and somewhere between 3.90 and 4 for Q1 of 2024, notwithstanding any actions by the Fed.
Okay. 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 kind of run rate expectations for the fourth quarter? And then, you know, 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 neighborhood of 19.5-19.8.
Great. Okay. And then just on credit, 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 the loans that's resolving itself, the $23 million or so, is within that SNC book, and just the overall status of that portfolio.
Nick, you want to answer that?
Yeah. For SNC 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, 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, 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 pure office, or maybe not. Maybe it's just the central business district, which is pretty nominal.
Well, we have obviously the business district in the with a little amount we have in that, and basically they are very small properties and very, you know, small offices 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.
And also give you-
If I only stay good, I cannot answer any more than that, you know.
And also give you a little bit more color, Matthew, on our office products. We have recently conducted the stress test. Unbelievably, the office side, the DCR, all those ratios are pretty good come out. So, we do not expect any immediate issues about our office product at this time. And some of the loans are below within a handful of those credit, with a little bit weak DCR ratio. However, we do have very strong individual guarantors behind it. So global cash flow can cover that these are no issues whatsoever at this time.
Okay. I'll step back. Thanks.
Our next question comes from Tim Coffey from Janney. Please go ahead with your question.
Great, thanks. Just 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.
The 19 + 2.2.
Seventeen.
-2.2.
Yeah, it would be-
Right.
Yeah.
Okay.
A little under 17. Little under 17.
Okay, great. Then, if we kind of think about loan growth over the next 12 months, what are some of the biggest headwinds that you're seeing right now?
Well, I think interest is still the biggest headwinds. Headwind, okay? Because, you know, based on what we see, our borrowers seems 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, there's they just don't want to commit into some actions that when the interest rate picture is not clear.
Okay. You said your underwriting was remaining, you know, stable. I'm wondering, is there any places that you're starting to tighten your underwriting?
We had tightened it before. What I use the word is actually elevated, you know, because we are more picky on the location. We're very more much picky on the guarantor. Okay? And I guess the other mathematics is LTVs. I mean, you can lower it down a little bit, I mean, requirement, but, but that's where we're staying elevated is the, these, these two categories now.
Okay. Also, so on cap rates in your footprint, are you starting to see, you know, commercial real estate cap rates starting to move or budge at all?
Yes. Based on the most recent appraisals, the cap rate has gone up a little bit because the current CRE market situation, but has not yet got out of control at this time. So valuations still maintain pretty good for our bank, because normally we maintain our loan-to-value ratio around 55% around. So, even with a little high cap rate, I believe our cushion is still there, and our credit should be performing well. Yeah.
Okay. Great. Those are my questions. Thank you very much.
Thank you.
Our next question comes from Andrew Terrell from Stephens. Please go ahead with your question.
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?
Yes. That credit office is the most recent appraisal. That is around under 50%.
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...
Oh, I see. 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. I don't think there's much bank change. Basically, their deposit rate that's offering, you know, to their customer. Therefore, the fluidity of the interbank, I mean, deposit transfer and so on, is much more limited in this quarter compared to previous quarter, okay? I guess it's the matter of opening up new accounts in our offices, meeting new people, and opening new accounts that cause the $94 million increase, okay? So we do not see if the Fed does nothing. We do not foresee those big deposit rate changes in the next quarter, meaning first quarter.
Okay. And what's the kind of level that new CD deposits are being priced at today?
We are priced at the 5.03, okay, average CD amount. That's the highest rate we have, but there's different category that's lowest, okay? So it's ranging from 4 to that, okay?
Okay. I appreciate the color. Thanks for taking the questions.
You're welcome.
Our next question comes from Eric Spector, from Raymond James. Please go ahead with your question.
Hey, this is Eric on the line for Dave Feaster. Thanks for taking the question.
Just while we're on the CD front, I'm just curious if you could provide some color just on the maturity schedule?
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-$500 million, I believe, maturing for the fourth quarter.
Okay. And then that's laddered out kind of similarly-
Yes.
to last quarter? Okay.
Yeah.
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?
On demand side?
Yeah.
Yep, on the demand side.
Well, we highly depend on our customers that on a daily basis, many of the commercial customers, business customers, so are dealing with us. So you see, after last scale that we had in March with the meltdowns, okay, so on, situation, everybody started putting so much attention in uninsured deposits, so on. We are a business bank, and we're dealing with business. And business, their deposits basically uninsured, okay? And they don't want to be cutting up into pieces into ICS and so on. They cannot operate that way, okay? So we have a couple of several very large customers. Their deposits, they sign up all the conversion to ICS, but they're not being broken 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 coverage. So I don't know. The issue is still out there. We don't have 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 is slowed down. In fact, I hope the pace almost will end in this quarter, but, you know, time is to tell. Yeah.
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?
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 the changes 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%.
Yeah, I appreciate the color. Then, I just wanted to get an update on the SBA department and 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, okay, in changing it from a more macro basis? Okay, to me, at this point in time, doing a new loan, 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 of time.
Understood. Well, thank you for taking the questions, and congrats on a good quarter.
You may not like-
Our next question comes from Gary Tenner from D.A. Davidson. Please go ahead with your question.
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, you know, in anticipation of locking in some yield potentially for the longer term?
We, this is something Ed is continuously looking into it, and we continue to talk to each other about that, you know. Seems to be every time we do something, we were wrong, okay? Because three months ago, we're talking about locking into some Treasury paper. I'm glad we didn't do that.
There will come a time.
Yeah, sometimes, it just, you know... I guess, for us, that's not the major income of ours, it's a small 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, a write-down of our portfolio, you know?
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.
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, down the road profitability. But I appreciate the, the thoughts on that. And then just, I missed some of the numbers around the buyback. I have the total shares purchased 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.
Great. Thanks very much.
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, you know, everything, you know, that in this quarter seems to be more stable than the previous quarter, okay? And I'm, you know, from my side, I'm just glad to see some of the legacy, and maybe when you said the legacy loans is getting resolved gradually, you know. These things do take time, but I'm also happy to see the new migration into the category is very, very limited, you know. So with that, I just hope that we can continue to be this way. Thank you.