Preferred Bank (PFBC) 2024 Q4 法說會逐字稿

Good day and welcome to the Preferred Bank fourth-quarter 2024 earnings call. All participants will be on listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Jeff Haas of Financial Profiles. Please go ahead.

Thank you, Michael. Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the fourth quarter ended December 31, 2024. 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 that 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 very much. Tomorrow, January 29, is the first day of New Year on the lunar calendar which I personally observed. And I'd like to use this opportunity to wish every one of you a most happy and most healthy New Year.

Now with Preferred Bank. We close out the year with a net income of $131 million or $9.64. Return on assets was 19.1%. Return on investment of equity was 18.8%. Both number compares very well with the peer group and industry average. For the fourth quarter, our net income was $30.3 million or $2.25 a share. This number was negatively impacted by a correction to the rental expenses accumulated over five years in the total amount of $8.1 million. This non-recurring expense adjustment equals to roughly $0.42 on the after-tax basis.

The year 2024 is a slow growth year for the banking industry. We too are not an exception. Our loan growth for the year of 7% and deposit growth of 3.6% was moderate compared to previous year, but probably very much in line with the industry average. Looking forward at present, we don't see the activity as significant increases yet.

For the quarter, we have made good progresses in the credit front. Non-performing loans has reduced from $20 million to $10 million, a 50% improvement. And criticized loans reduced 33% during the first quarter. We hope the new year, we see further progress in this area.

The unfortunate event of Los Angeles wild fire has brought very significant damage to our community. Early survey indicated that maybe one commercial real estate loan property may be significantly damaged. Gratefully, our mortgage loan portfolio seems to be unaffected. And also personally, I'm so pleased to see that none of our employees' homes suffered any significant damage. We, at Preferred Bank, will be dedicating our best effort to help rebuild our communities, our businesses, and homes.

In December, our Board has announced the increase in dividends from $0.70 to $0.75 payable in January. This year, meaning 2024, we also repurchased 464,000 shares of our common stock for total consideration of $34 million. The leverage capital ratio has actually improved from 10.85% in the beginning of the year to 11.3% at the end of the year. And tangible book value on common stock also improved from $50.54 to $57.86. All of us at Preferred Bank is looking forward to continue our consistent performances in the year of 2025.

Thank you very much. Now, we are ready for your questions.

We will now begin the question-and-answer session. (Operator Instructions)

Andrew Terrell, Stephens.

Hey. Food morning.

Good morning, Andrew.

I wanted to check in just on the margin here to start off with. I mean, considering the heavier mix of floating rate loans, you guys obviously did a really impressive job in the fourth quarter, the marginally down 4 basis points or so. I just wanted to maybe get your thoughts on whether there was any kind of carry-forward into 1Q that could maybe influence it a bit more negatively or just kind of your thoughts or early reads on the margin as we head here into the first quarter.

I would add on to my comments, my personal feeling, it would not have a major effect in first quarter. We're also not looking to that the Fed would change the rates in the first quarter. So the margin, the change of the sensitivity has been a growing effort for about one, one-and-a-half years. So it seems to be showing results in the first quarter. And I think first quarter will be relatively stable, for my personal estimate, maybe slightly affected, not much, relatively stable. Ed, do you have anything to add?

Yeah. Andrew, just to give you the spot, because I know I'll get that question sometime on the call today, the spot margin for December was 3.98%, with a quarterly NIM of 4.06%. You can see the pattern there. But to Mr. Yu's comment, not seeing a lot of further compression from where we're at. So I still think we're in the very, very high 3s going into Q1.

Got it. Okay. Yeah, I was going to save the spot question for Matt if he's on here. But do you have the amount of the time deposits repricing in the first quarter, and then the rate they're coming up at and what the kind of new offered rate is?

We have about just under $1.6 million coming due in Q1 at a -- excuse me. Billion. Did I say million? Billion, excuse me. At a weighted average rate of 4.75%. So we'll look for that to continue to come down on the TCD side in terms of funding costs.

And then maybe the range of offered.

Yeah, offered rates now are below that.

Do you have kind of a range of offered rates?

Well, it depends on the term. Right now, we're seeing a very wide dispersion, not only amongst our own, but nationwide and our local area in terms of deposit rates based on maturity and duration. So we have priced it accordingly. But suffice to say, we're anywhere from the low 3s to the mid 4s.

Actually, Andrew, it also depends on competition. And locally, in the Asian community, many of our friends that is running a so-called Chinese New Year special and Preferred Bank has to stay flexible to compete with them.

Yeah. Understood. Okay. And then on capital, I saw some of the buyback in the quarter and then obviously the dividend announcement. Just wanted to get your thoughts on capital repatriation into 2025 and specifically whether you thought should we expect a continued utilization of the buyback this year?

Buyback will probably depend on continuous calculation between the loan growth prospect and then also the pricing of the stock and the deposits level and this kind of capital ratio, this kind of total consideration. So all these things would miss you on the continuous basis. But being we're selling at the low multiple, comparatively speaking, and some of our local friends are setting a (inaudible) times earnings, there's a chance, if I start staying depressed, we're obviously thinking about buyback.

Got it. Okay. Well, thank you guys for taking the questions. I appreciate it.

Thank you.

Matthew Clark, Piper Sandler.

Hey. Good morning, everyone. And thank you, Andrew. I don't think I have a choice but to ask about the spot rate on deposits if you had it at year end ideally.

The spot rate on deposits is 3.63%, Matthew.

Is that for December or at year end?

That was December.

Okay. And then how about on the expense run rate in the New Year. I guess, give us a sense for where you think you might start and any projects you're planning to work on here as a part of that expense group?

We do have a number of things. I don't want to talk about the full year, but I will talk about the first quarter if that's okay. So far, we're going to have probably be making a fairly healthy donation to the local wild fire relief funds. So that will increase our donation expense. We're also going to have payroll taxes elevated in Q1 as we normally do with the incentive compensation payout. In addition to that professional services, specifically legal, has been running higher than normal due to two of the assets we're working through. So right now, I'm looking at non-interest expense at about $23 million for Q1.

Okay. And of that $23 million, how much do you expect the charitable contribution to be?

Well, we're going to have a meeting about that later today, actually. But it's going to be low six figures.

Low to medium.

Low to mid six figures.

Got it. Okay. Some of us tend to exclude that stuff, so I just want to make sure.

(inaudible)

$23 million, yeah.

Okay. Great. And just shifting to credit, can you just remind us the makeup of -- or maybe just give us a sense for the makeup of the charge-offs this quarter? I know they were previously reserved for, but just kind of remind us of the situation there. And then in terms of your expectation for upgrading credits, off criticized, is that just a function of what rates have done and how that's helped that service? Or just give us some more color on your outlook on criticized.

Nick, will you answer that question?

Sure. The charge-off actually because of the delay in the resolution of some of the impaired loans. And we decided to charge off first and well recognize recovery in the future if there's any settlement or resolutions at that moment. So with the charge-off, our non-accrual loans dropped substantially. And for the criticized, I believe, as Mr. Yu mentioned in the release, that we'll probably have some of the loans paid off or refinanced through the Q1 and also a few of the other credits are scheduled to be settled and resolved. And also a couple of credit, probably, with additional collateral, we're going to upgrade those loans in Q1. So we believe for Q1, criticized loan should somewhat drop in (inaudible).

Great. Thank you.

Gary Tenner, D.A. Davidson.

Thanks. Good morning. I was curious about the comment about not really seeing any increased activity levels. You had 7.5% loan growth for the year which most banks will be very happy with. Is there a churn within the portfolio at all, payoffs versus production, or are pipelines not building at this point in your customer base?

Wellington?

Well, the churn is always the factor. As you know, our bank, we do short-term loans quite a bit, so churning. And also on the C&I side, you can see the up and down. People is the nature of C&I revolving line of credit. And so over the year end, people feel a little bit bullish and increase expanding their business and all that. So that's the nature of our (inaudible).

Okay. So a more sustainable increase in activity levels is what's missing at this point?

Yeah.

Okay.

Well, actually, no. I stated earlier, so far at this stage, I think the entire banking industry including us is feeling that it will be moderate.

There is still certainly activity. But to Wellington's point, the payoff activity has been a little higher.

Okay. I appreciate that. And I know you said you don't want to talk about the full-year on expenses, and I appreciate that. But I'm just thinking out loud in terms of if activity levels remain, (inaudible) will be lower. Is there hiring or anything to be done to try to drive increased activity through lenders or anything?

Well, certainly, we always have -- when we do our annual planning, we certainly have a lot of new individuals budgeted in for relationship officers and business development officers. The question really becomes how well do we execute on that. In terms of other initiatives, going forward, obviously, IT costs continue to increase. But we are also establishing a branch right in the middle of Manhattan as well which we expect to open in March. And that certainly will add to occupancy expense going forward as well as personnel expense.

Great. Thank you.

Tim Coffey, Janney.

Thanks. Good morning, everybody. If I could stick on that loan growth question as well and maybe more of a question about liquidity, the liquidity that you keep on balance sheet, a lot of it's kept short-term instead of growing the securities portfolio. Do you see any reason to change that strategy right now?

Thank you for the question, Tim. Very timely, because over the last three weeks or so, we've been purchasing treasuries, specifically 10-year. We made about $60 million in purchases over the last three weeks in 10-year treasury at an average yield of about 4.66%. So we've been trying to take advantage of some of the displacement that's been going on the longer end of the curve. I think we've done pretty well because this is one of the first times you have the 10-year exceeding fed funds in quite a while.

Okay. That's good to hear. Is this kind of an initial style though? Or is this kind of let's see how it goes and then try and see what it looks like later on?

Yes, it's take a look right now and then see what it looks like later on. Yes, Tim. I don't foresee us continuing in that fashion. But certainly the time was here to start to put some money to work in a long-term fashion given where rates are at relative to historical rates.

Okay. Great. And then my other question was on the allowance ratio. It's been coming down throughout the course of '24 and I'm wondering, is there a level where the company feels comfortable having that ratio at?

Well, Nick, you want to answer that?

Yes, Mr. Yu. There are still several factors we have to take like a moderate risk posturing, calibrating our internal quantitative and also qualitative models. Because of the fed slowing down in the reductions which are still kind of a high cost of financing, put pressure on our customers, and stress to our business and also the economy. And also, the policy changes from the new administrations and also Congress, we have to closely watch on that. It may impact the economy as well. And also the reason, LA fires, we don't know at this moment, which might give some impact to the local economy. So we still have to factor all those in. However, I do believe that all those points that I mentioned should not be really causing any big trouble to the bank. And we believe based on the current loan quality trend, everything improvement, we believe our future reserve should gradually reduce.

So if I add on $6.6 million charge-off, we're still at the 1.38%. However, as I mentioned earlier, we want to charge off those things first. I believe in the long run, it should be reduced to a 1.15% to 1.25% range, I believe, which is also in line with our peer banks at this moment.

Tim, our philosophy is to fully reserve the loan loss and once we finally, we'll try to be a little bit more progressive about that. So that's the reason why all the charge-off we had in the fourth quarter, previously fully reserved started from last year, when we first identified the weaknesses in these credits. And that has been our philosophy. That's why our reserve ratio is always slightly higher than our peer group in 1.40%, 1.35% range. Now, at 1.27%, I think it's still 15 to 20 basis points higher than our peer group.

Yeah, I totally agree. All right. Well, thank you very much. That was great. Those are my questions.

(Operator Instructions)

David Feaster, Raymond James.

Hi. Good morning, everybody.

Hi. Good morning.

I just wanted to follow up on the loan growth side. It sounds like you alluded to payoff activity being still somewhat elevated. I'm curious of the competitive landscape, if you could touch on that? And what you're seeing the payoffs for? Iis it asset sales? Is it the competitive landscape? Is it just folks just paying off, for that matter? Just kind of curious what you're seeing.

Fourth quarter, we see a heavy payoff, I mean, comparatively speaking, compared to previous quarter. I think (inaudible) transaction, sales transaction is easy to do when the rates is down, the new buyer is able to finance it all, all prices correctly, and so on. So mostly, the elevated payoff activity. Our origination stays about consistent with the third quarter. So this is on the loan growth (inaudible).

Okay. That makes sense. And with rates coming down a bit, have you started to see any -- it doesn't sound like the pipelines changed much, have you seen any change in demand from your clients? Just curious, the pulse of the landscape from your perspective and where you're seeing opportunities.

Yeah. It's an abstract on these things because we try to survey our customers by having a constant feedback from our relationship officer. Generally, I think the market feels that rate has not come down enough for them to really be very active about the thing. There's a lot of money on the sideline. There's a lot of people willing to invest or getting to new. They just haven't feel it's safe enough for them to do that. They just want to (inaudible). So this is the best feedback we can get from our customers.

What do you think gets them off the sidelines? Is it another 50 basis points and cuts? Is it slower inflation? We got the election in the rear view. Just what do you think gets some of those guys off the sidelines?

Well, that probably is a question to (inaudible). I'm kind of (inaudible) in that respect about how much. But I think it probably takes some further cuts more than two. Right now, I understand you are forecasting two cuts for the year.

Yes. Okay. And then just if I could squeeze one more and going back to the credit side, the credit trends you're seeing are encouraging. Things are kind of working their way through the system. I was hoping you could just touch on the healthier borrowers. Obviously, higher rates has impacted the floating rate borrowers, but it seems like you've had a lot of success with clients pledging additional collateral. Could you just touch on the health of your borrowers and what you're seeing on the credit broadly?

Well, Wellington, you want to answer the first, okay? To see what else we can add on. Nick and I --

The first, the health of -- Our clients are very healthy. I think that our clients -- we our relationship oriented and our loans are all fully sponsored and they have multiple flexibility. So that's where we benefit from. At any time, if a certain project that we get into have some issue, we will work it out and the borrower will put up additional collateral or remargin the loan. That's all. That's the strength of our lending.

Nick, you want to add anything?

Yeah. Just like Wellington mentioned about. Our customer, especially our loans, we have very strong sponsor behind it. So whenever we encounter any issues, I believe, those sponsors will step up to work with the bank. And we work with each other to weather out the crisis. So during the past few quarters, you can see all this high rate environment pretty well.

Yeah.

David, starting from the underwriting, in underwriting, our philosophy is obviously that the cash flow and in case of real estate property, value of the assets. But one of the dominant factor to us is the guarantor strength. And most of the loan has a guarantor. So during a difficult time, you find out if the customer is personally guaranteeing the loan, they tend to be more serious to try to mitigate whatever the situation is happening. And on top of that, we think we have a fairly good group of customer (inaudible) well with all.

Okay. That's helpful. Have you started to see that service started to improve as rates have come down?

Obviously, the service will improve when the rates come down. We also see that gradually, the income level side seems to be stable, stabilized.

That's great. Thanks, everybody.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Li Yu for any closing remarks.

Thank you so very much. We're happy with our year 2024. We just are positive also for 2025. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.