Preferred Bank (PFBC) Earnings Call Transcript & Summary

Good day, and welcome to the Preferred Bank Fourth Quarter 2024 Earnings Call. [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 a first day of a new year under Lunar calendar, which I personally observe. 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 closed 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%, okay? 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 5 years in the total amount of $8.1 million. This nonrecurring expense adjustment equal to roughly $0.42 on the after-tax basis. The year 2024 is a slow growth year for the banking industry, okay? 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 has significant increases yet. For the quarter, we have made good progresses in the credit front. Nonperforming loans has reduced from $20 million to $10 million, a 50% improvement. And criticized loans reduced 33% during the fourth quarter. We hope the new year will see further progress in this area. The unfortunate event of Los Angeles wildfire has brought very significant damage to our community. Early survey indicated there may be one commercial real estate loans 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' home 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 an increase in dividends from $0.70 to $0.75 payable in January this year, meaning 2024. We also repurchased $464 million -- 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 11.33% at the end of the year. And common share -- I mean, 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.

[Operator Instructions] The first question comes from Andrew Terrell with Stephens.

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

My -- I will have Ed add on to my comments. My personal feeling, it would not have a major effect in the first quarter. We're also not looking just that the Fed will change the rates in the first quarter. So the margin -- the change of the sensitivity has been growing effort for about 1, 1.5 years. So it seems to be showing results in the fourth quarter. And I think first quarter will be relatively stable from my personal estimate, maybe slightly affected, not much, relatively stable. Ed, do you have anything to add?

Yes. Andrew, the -- 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. Yes, I was going to say the spot question formality is on here. But do you have the amount, Ed, 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...

Billion.

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 our offered...

And then maybe the range of -- yes, offered.

Yes, 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 in 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, also depends on competition, okay? And locally in the Asian community that 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, yes.

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

Buyback will probably depend on our continuous calculation between the loan growth prospect and then also the pricing of the stock and the deposits level and these kind of capital ratio, these kind of total consideration. So all these things would measure on the continuous basis. But being we're selling at a low multiple, comparatively speaking, and some of our local friends are selling at 19x earnings, okay? So there's a chance if our stock is staying depressed, we're obviously thinking about buybacks.

The next question comes from Matthew Clark with Piper Sandler.

Andrew, I don't think I have a choice, but let's ask about the spot rate on deposits if you had it at year-end, ideally?

The spot rate on deposits is 3.63%, Matthew.

And is that for December or at year-end?

That was December.

Okay. 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 kind of any projects you're planning to work on here as a part of that expense growth?

Well, 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 fairly healthy donation to the local wildlife -- excuse me, wildfire 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 2 of the assets we're working through. So right now, I'm looking at noninterest 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 6 figures.

Low to medium.

Low to mid, low to mid-6 figures.

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

Matthew, it's [indiscernible].

$23 million, $23 million.

Okay. Great. And then -- 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 debt service? Or just give us some more color on kind of your outlook on criticized.

Nick, will you answer the question?

Sure. The charge-off actually because of the delay in resolution of some of the impaired loans. We decided to charge-off first and will recognize recovery in the future if there's any settlement or resolutions at that moment. So with the charge-off, our nonaccrual loans is quite dropped substantially. And for the criticized, I believe, as Mr. Yu mentioned in the release that we probably have some of the loans will be 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, we probably with additional collateral, we're going to upgrade those loans in Q1. So we believe for Q1, criticized loans should be somewhat dropped in a [indiscernible].

The next question comes from Gary Tenner with D.A. Davidson.

I was curious about the comment about not really seeing any increased activity levels. You had 7.5% loan growth, I think, 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 and so churning. And also on the C&I side, you can see the up and down, people. It's 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 what -- that's the nature of [ our team ].

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

Yes.

Well, actually, no. The situation 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. Appreciate that. And Ed, 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 the -- if activity levels remain relatively lower, is there hiring or anything to be done to try to drive increased activity through lenders or anything?

Well, certainly, we always have -- 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're also establishing a branch right in the middle of Manhattan as well, which we expect to open in March. And that's certainly adding to the -- will add to occupancy expense going forward as well as personnel expense.

The next question comes from Tim Coffey with Janney.

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

So thank you for the question, Tim. Very timely because over the last 3 weeks or so, we've been purchasing treasuries, specifically 10-year. We made about $60 million in purchases over the last 3 weeks in 10-year treasury at an average yield of about 4.66%. So we've been taking -- trying to take advantage of some of the displacement that's been going on, 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 salvo? Or is this kind of just see how it goes and then try to take another look later on?

Yes. Take a look right now and then see what it looks like later on, yes, Tim. We're not going to -- 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. Good. 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 you think you feel -- the company feels comfortable having that ratio at?

Well, Nick, do you want to answer that?

Yes. There are still several factors. We have to take like a moderate risk posture in calibrating our internal quantitative and also qualitative models because of the Fed slowing down in the rate reductions, which are still kind of a high cost of financing put a pressure on our customers and stress to our business and also the economy. And also the policy changes from the new administration and also Congress, we have to closely watch on that. It may impact the economy as well, and also the recent L.A. 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, with -- I do believe that all those points that I mentioned should not be really cause any deep trouble to the bank. And we believe based on the current loan quality trend, everything improvement. We believe our future reserve should be gradually reduced. So if I add on $6.6 million charge-off, we're still at 1.38%. However, as I mentioned earlier, we want to charge off those things first. And so I believe in the long run, it should be reduced to 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 charge-off to fully reserve the loan loss once we finally try to be a little bit more aggressive about that, okay? So that's the reason why all the charge-offs we had in the fourth quarter are previously fully reserved starting from last year, okay? So when we first identified the weaknesses in these credits, okay, 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, okay?

[Operator Instructions] Our next question comes from David Feaster with Raymond James.

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

Yes. Fourth quarter, we see a heavy payoff. I mean comparatively speaking, compared to previous quarter, I'd say once they make some of the transaction or sales transaction easy to do when the rates is down, the new buyer is able to finance it all or prices correctly and so on. So mostly is the elevated payoff activity. Our origination stays about consistent with the third quarter, okay? So this is on the loan growth front of it.

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 kind of curious, the pulse of the landscape from your perspective and where you're seeing opportunities.

Yes. It's kind of an abstract on these things because we try to survey our customers by -- I mean, have a constant, I mean, 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, okay, or getting to new -- they just haven't feel it's safe enough for them to do that at this point of time. So this is the best feedback that we can get from our customers.

What do you think gets them off the sidelines? Is it another 50 basis points of cuts? Is it slower inflation? Just kind of -- we've 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 Chairman Powell. I'm kind of [indiscernible] in that respect about how much, okay? But I think it probably takes some further cuts, more than 2. Right now, I understand you are forecasting 2 cuts, okay, for the year, okay?

Yes. Okay. And then just if I could squeeze one more in. 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 health of your 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. Just could you just touch on the health of your borrowers and what you're seeing on the credit broadly?

Well, one of -- you want to answer the first, okay, and see what else we can add on, okay, Nick and I after.

The first -- the health of our clients are very healthy. I think our clients -- we are relationship oriented. So we -- and our loans are all fully sponsored and they have multiple flexibility. So that's where we benefit from. And any time if a certain project that we get into had 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, do you want to add anything?

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

David, it's starting from the underwriting, okay? Underwriting that our philosophy is, obviously, that's the cash flow, okay? And in case of real estate property is value of the assets. But one of the dominant factor to us is the guarantor strength and most of the loan have the guarantor, okay? 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 happening. And that is on top of the fact we think we have a fairly good group of customers in terms of the wherewithal, okay?

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

Obviously, debt service will improve, the rates come down. But we also see that gradually, the income level side of it seems to be stable, stabilized now.

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 our 2025. Thank you.

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