Preferred Bank
(NASDAQ:) reported a strong second quarter with a net income of $33.6 million, or $2.48 per share, driven by loan and deposit growth. Despite an increase in non-performing loans and charge-offs, the bank remains confident in its risk protection measures and future earnings.
Looking ahead, Preferred Bank expects limited loan demand in the third quarter but foresees an increase in the fourth quarter with potential rate cuts.
Key Takeaways
- Preferred Bank posted a second quarter net income of $33.6 million, or $2.48 per share.
- The bank witnessed an 8% annualized growth in loans and a 5% annualized increase in deposits.
- There was a $9 million charge-off and a $22 million rise in non-performing loans.
- Preferred Bank is seeking reapproval for a $77.5 million stock buyback program.
- The bank’s TCE ratio improved by 53 basis points.
- Loan demand is expected to be subdued in Q3 but may improve in Q4 with potential rate cuts.
- Preferred Bank reduced its floating rate loans while increasing its fixed rate loans, with 21% of floating rate loans having floors and 98% of floaters secured with floors.
Company Outlook
- Loan demand may be limited in Q3 but could increase in Q4 due to anticipated rate cuts.
- Core deposit growth has been primarily from existing clients, with future growth expected from new clients.
Bearish Highlights
- The bank reported $9 million in charge-offs, mainly from one C&I loan and previously resolved real estate loans.
- An increase in non-performing loans by $22 million was noted, although the bank believes these are well protected.
Bullish Highlights
- Preferred Bank has maintained consistent operating expenses and income.
- The bank is actively managing its balance sheet to reduce asset sensitivity.
Misses
- The bank is cautious about stock repurchases due to current trading prices.
Q&A Highlights
- There was a discussion on the charge-off related to resolved real estate loans, with optimism about potential recovery through litigation.
- The bank clarified that 21% of loan cuts were within 100 basis points, and this percentage is growing as loans are renewed.
- CD maturities are expected to bring relief in the coming quarters as rates have started to decline.
In conclusion, Preferred Bank’s second quarter demonstrated strength in key areas such as loan and deposit growth, while also facing challenges with charge-offs and non-performing loans. The bank is optimistic about its risk management and the potential for improved loan demand later in the year. The focus remains on organic growth, dividends, buybacks, and strategic opportunities, with a cautious approach to stock repurchases.
InvestingPro Insights
Preferred Bank (PFBC) has shown impressive performance based on the latest data from InvestingPro. With a market capitalization of $1.21 billion and a P/E ratio adjusted to 8.37 for the last twelve months as of Q1 2024, the bank appears undervalued compared to its earnings potential.
Moreover, the bank has demonstrated a commitment to shareholder returns by increasing its dividend for 3 consecutive years and maintaining dividend payments for 11 consecutive years. The current dividend yield stands at an attractive 3.07%.
InvestingPro Tips, including analysis on the bank’s profitability and stock performance trends, could be valuable for investors. Preferred Bank has shown strong returns over the last week, month, and three months, indicating potential interest from momentum investors.
To access additional insights and analysis, investors can use the coupon code PRONEWS24 to receive up to 10% off a yearly Pro or Pro+ subscription, offering 15 additional InvestingPro Tips for Preferred Bank.
Full transcript – Preferred Bank (PFBC) Q2 2024:
Operator: Good afternoon, and welcome to the Preferred Bank Second Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note that today’s event is being recorded. I will now turn the floor over to Jeff Haas of Financial Profiles. Please proceed.
Jeff Haas: Thank you, Jamie. Hello, everyone, and thank you for joining us for the discussion on Preferred Bank’s financial results for the second quarter ended June 30, 2024. Today, we have Chairman and CEO Li Yu, President and COO Wellington Chen, CFO Edward Czajka, and CCO Nick Pi present. Management will provide a summary of the results before opening the call to questions. Please be aware that statements made by management may include forward-looking statements subject to various risks and uncertainties. For more details on these risks, refer to the bank’s SEC filings. Now, I will hand over to Mr. Li Yu for the update.
Li Yu: Thank you. I am delighted to announce Preferred Bank’s second quarter net income of $33.6 million, or $2.48 per share. We achieved an 8% annualized loan growth and a 5% annualized deposit growth this quarter. Despite a $9 million charge-off, we remain optimistic about our performance and future prospects.
The charge-offs are related to a loan that was previously fully reserved in the previous quarter, and there was an increase in non-performing loans of $22 million. These non-performing loans are either fully reserved or adequately protected by collateral, and their resolution is not expected to significantly impact our future earnings. The root of the loan losses came from criticized loans, which decreased by $13 million from the previous quarter. We have been consistent with our operating non-interest expense and non-interest income and have been working to reduce the asset sensitivity of our balance sheet. We believe we are close to reaching our optimal level in this regard. The expected interest rate relief is not likely to have a significant effect on our future income statements.
A year ago, the bank announced a buyback program of $150 million, and we have repurchased $72.5 million of our own common stock. We are seeking reapproval or an extension to repurchase the remaining $77.5 million. Our TCE ratio improved by 53 basis points due to the bank’s earning capability.
In terms of margins, the total margin for June was 3.89%, and the total cost of deposits was 4.08%. We have reduced our floating rate loans and increased fixed rate loans to achieve a more balanced position. Non-interest expenses are expected to remain between $20 million and $20.5 million going forward.
The valuation of the $18 million hotel loan was done over a year ago, and the property value has improved. The property is currently in a partnership dispute, and we expect to redeem it at the foreclosure date. As for asset sensitivity, we do not anticipate making any drastic changes, but may consider putting some cash to work in the future. We prefer to keep both sides of the balance sheet relatively short, so we are focusing on that strategy. I am interested in hearing your perspective on buybacks given the recent improvement in your currency. Additionally, I would like to know your thoughts on potential expansion opportunities and any general comments on capital priorities.
Edward Czajka mentioned that the primary focus for capital allocation remains on organic growth, followed by dividends, buybacks, and strategic initiatives. He also highlighted that the recent buyback occurred at an average price of under $60, and they will be more cautious moving forward due to current trading levels.
In terms of net charge-offs, it was mentioned that the majority of the $9 million related to one C&I loan and a previously resolved real estate loan. The resolution process for these loans involves litigation and post-judgment examinations in hopes of recovering some funds.
Regarding CD repricing, maturing rates are at 5%, while current offering rates range from the 3s to 5s depending on the term.
Overall, the focus remains on organic growth and prudent capital allocation strategies in light of market conditions. Thank you for your insights during the call. following sentence:
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