Preferred Bank - Earnings Call - Q4 2024
January 28, 2025
Transcript
Operator (participant)
Good day, and welcome to the Preferred Bank Fourth Quarter 2024 Earnings call. All participants will be in 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, then one on your telephone keypad. To withdraw your question, please press star, then two. 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.
Jeff Haas (Director)
Thank you, Michael. Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the fourth quarter ended December 31st, 2024. With me today for 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 the 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 in 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.
Li Yu (Chairman and CEO)
Thank you very much. Tomorrow, January 29th, is the first day of a new year on the 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 close out the year with a net income of $131 million, or $9.64. Return on assets was 19.1%. Return on equity was 18.8%. Okay. Both numbers compared 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 equaled 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 the 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 progress in the credit front. Non-performing loans have reduced from $20 million-$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 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- $0.75 payable in January. This year, meaning 2024, we also repurchased 464,000 shares of our common stock for a 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 tangible book value on common stock also improved from $54.57-$57.86. All of us at Preferred Bank are looking forward to continuing our consistent performances in the year of 2025. Thank you very much. Now, we are ready for your questions.
Operator (participant)
We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Andrew Terrell with Stephens. Please go ahead.
Andrew Terrell (Managing Director and Research Analyst)
Hey, good morning.
Li Yu (Chairman and CEO)
Good morning, Andrew.
Andrew Terrell (Managing Director and Research Analyst)
I wanted 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 four basis points or so. I just wanted to maybe get your thoughts on whether there was any kind of carry forward into Q that could maybe influence it a bit more negatively, or just kind of your thoughts, early reads on the margin kind of as we head here into the first quarter.
Li Yu (Chairman and CEO)
I will add on to my comments. My personal feeling it will not have a major effect in the first quarter. We're also not looking to that the Fed will change the rates in the first quarter. Okay, so the margin, the change of the sensitivity has been a growing effort for about one and a half years. So it seems to be showing results in the fourth quarter, and I think the first quarter will be relatively stable from my personal estimate, maybe slightly affected, not much. Relatively stable. Do you have anything to add?
Nick Pi (Chief Credit Officer)
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 threes going into Q1.
Andrew Terrell (Managing Director and Research Analyst)
Got it. Okay. Yeah, I was going to say the spot question for Matt if he's on here. But do you have the amount out 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?
Edward Czajka (CFO)
We have about just under $1.6 million coming due in Q1 at a.
Wellington Chen (President and COO)
Billion.
Edward Czajka (CFO)
Excuse me. Did I say million?
Wellington Chen (President and COO)
Billion.
Edward Czajka (CFO)
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.
Andrew Terrell (Managing Director and Research Analyst)
Is there maybe a range of?
Yeah, offered.
Edward Czajka (CFO)
Yeah, offered rates now are below that, so.
Andrew Terrell (Managing Director and Research Analyst)
Do you have kind of a range of offered rates?
Edward Czajka (CFO)
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 threes to the mid-fours.
Li Yu (Chairman and CEO)
Actually, Andrew, also depend on competition. Okay. And locally in the Asian community, many of our friends that are running a so-called Chinese New Year special. And Preferred Bank has to stay flexible to compete with them.
Andrew Terrell (Managing Director and Research Analyst)
Yep. Yep. 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 continued utilization of the buyback this year?
Li Yu (Chairman and CEO)
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 these kind of capital ratio, these kind of total consideration. So all these things will measure on a continuous basis. But being we're selling at the low multiple comparatively speaking, and some of our local friends are selling at 19 times earnings. Okay. So there's a chance if our stock is staying depressed, we're obviously thinking about buyback.
Andrew Terrell (Managing Director and Research Analyst)
Got it. Okay. Well, thank you guys for taking the questions. I appreciate it.
Li Yu (Chairman and CEO)
Thank you.
Operator (participant)
The next question comes from Matthew Clark with Piper Sandler. Please go ahead.
Matthew Clark (Managing Director and Senior Research Analyst)
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?
Edward Czajka (CFO)
The spot rate on deposits is $3.63, Matthew.
Matthew Clark (Managing Director and Senior Research Analyst)
Is that for December or at year-end?
Edward Czajka (CFO)
That was December.
Matthew Clark (Managing Director and Senior Research Analyst)
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.
Edward Czajka (CFO)
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 a 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, have 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.
Matthew Clark (Managing Director and Senior Research Analyst)
Okay. And of that $23 million, how much do you expect the charitable contribution to be?
Edward Czajka (CFO)
We're going to have a meeting about that later today, actually, but it's going to be low six figures.
Matthew Clark (Managing Director and Senior Research Analyst)
Okay.
Edward Czajka (CFO)
Low to medium. Low to mid. Low to mid six figures.
Matthew Clark (Managing Director and Senior Research Analyst)
Got it. Okay. Some of us tend to exclude that stuff, so I just want to make sure.
Li Yu (Chairman and CEO)
Matthew, it's $23 million.
Edward Czajka (CFO)
$23.
Matthew Clark (Managing Director and Senior Research Analyst)
$23.
Nick Pi (Chief Credit Officer)
$23.
Matthew Clark (Managing Director and Senior Research Analyst)
Okay. Okay. Great. And then 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 kind of your outlook on criticized.
Li Yu (Chairman and CEO)
Will you answer that, Mitchell?
Nick Pi (Chief Credit Officer)
Sure. The charge-off, actually, because of the delay in resolution of some of the impaired loans, and we decided to charge off first and then we'll recognize recovery in the future if there's any settlement or resolutions at that moment. So with the charge-off, our non-accrual loans is quite a drop 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 the credits, 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 good amount.
Matthew Clark (Managing Director and Senior Research Analyst)
Great. Thank you.
Operator (participant)
The next question comes from Gary Tenner with D.A. Davidson. Please go ahead.
Gary Tenner (Managing Director and Senior Research Analyst)
Thanks. Good morning. 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 would 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?
Li Yu (Chairman and CEO)
Wellington?
Wellington Chen (President and COO)
The churning 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 the nature of our game.
Gary Tenner (Managing Director and Senior Research Analyst)
Okay. So a more sustainable increase in activity levels is what's missing at this point?
Wellington Chen (President and COO)
Yeah.
Gary Tenner (Managing Director and Senior Research Analyst)
Okay.
Li Yu (Chairman and CEO)
Well, actually.
Gary Tenner (Managing Director and Senior Research Analyst)
Go ahead.
Li Yu (Chairman and CEO)
The situation I stated earlier, so far at this stage, I think the entire banking industry, including us, is feeling that it will be moderate.
Edward Czajka (CFO)
There is still certainly activity, but to Wellington's point, the payoff activity has been a little higher.
Gary Tenner (Managing Director and Senior Research Analyst)
Okay. Appreciate that. And Ed, I know you've said you don't want to talk about the full year-end 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?
Edward Czajka (CFO)
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's certainly will add to occupancy expense going forward, as well as personnel expense.
Gary Tenner (Managing Director and Senior Research Analyst)
Great. Thank you.
Operator (participant)
The next question comes from Tim Coffey with Janney. Please go ahead.
Tim Coffey (Managing Director and Associate Director of Depository Research)
Thanks. Morning, everybody. If I can just stick on that loan growth question as well, and maybe more of a question about liquidity. Ed, of the liquidity that you keep on balance sheet, a lot of it's kept short-term instead of going to the securities portfolio. Do you see any reason to change that strategy right now?
Edward Czajka (CFO)
So 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 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.
Tim Coffey (Managing Director and Associate Director of Depository Research)
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?
Edward Czajka (CFO)
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.
Tim Coffey (Managing Director and Associate Director of Depository Research)
Okay. Thanks. And then my other question was on the allowance ratio. It's been coming down throughout the course of 2024, and I'm wondering, is there a level where you think the company feels comfortable having that ratio at?
Li Yu (Chairman and CEO)
Well, Nick, do you want to answer that?
Nick Pi (Chief Credit Officer)
Yes. That's right. There are still several factors we have to take a moderate risk posturing and calibrating our internal quantitative and also qualitative models because of the Fed slowing down and the reductions, which are still kind of a high cost of financing, put a pressure on our customers and stress to 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, I do believe that all those points that I mentioned should not really cause any trouble to the bank.
And we believe, based on the current loan quality trend, everything improvement, and we believe our future reserve should be gradually reduced. So by adding 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 a 1.15%-1.25% range, I believe, which is also in line with our peer banks at this moment.
Li Yu (Chairman and CEO)
Tim, our ongoing philosophy is to charge-off to fully reserve the loan loss once we find. We try to be a little bit more progressive about that, okay? So that's the reason why all the charge-off we had in the first quarter 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. We've been in the 140, 135 range. Now at 1.27, I think it's still 15 to 20 basis points higher than our peer group, okay?
Tim Coffey (Managing Director and Associate Director of Depository Research)
Well, yep. I totally agree. Totally agree. All right. Well, thank you very much. That was great coverage. Those were my questions.
Operator (participant)
Again, if you have a question, please press star, then one. Our next question comes from David Feaster with Raymond James. Please go ahead.
David Feaster (Director of Banking Sector Equity Research)
Hi. Good morning, everybody.
Li Yu (Chairman and CEO)
Hi. Good morning.
David Feaster (Director of Banking Sector Equity Research)
I just kind of wanted to follow up on the loan growth side. It sounded 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.
Li Yu (Chairman and CEO)
Yeah. First quarter, we see a heavy payoff. I mean, comparatively speaking, compared to previous quarter. I think once they make some of the transaction or sales transaction easier to do when the rates is down, the new buyer is able to finance it or price it 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?
David Feaster (Director of Banking Sector Equity Research)
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.
Li Yu (Chairman and CEO)
Yeah. It's kind of 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 sidelines. There's a lot of people willing to invest, okay, or get into new deals. They just haven't felt it's safe enough for them to do that at this point of time, okay? So this is the best feedback that we can get from our customers.
David Feaster (Director of Banking Sector Equity Research)
What do you think gets them off the sidelines? Is it another 50 basis points of cuts? Is it slower inflation? I'm just kind of. We've got the election in the rearview. Just what do you think gets some of those guys off the sidelines?
Li Yu (Chairman and CEO)
Well, that probably is a question to Chairman Powell. I'm kind of limited in that respect about how much, okay? But I think it probably takes some further cuts more than two, okay? Right now, I understand you are forecasting two cuts, okay, for the year, okay?
David Feaster (Director of Banking Sector Equity Research)
Yep. 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 healthier borrowers. Obviously, higher rates have 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?
Li Yu (Chairman and CEO)
Well, you want to answer the first, okay? And see what else we can add on, okay? Nick and I, okay?
Wellington Chen (President and COO)
The first, the health of our clients are very healthy. I think our clients, we are relationship-oriented, so in our loans, are all fully sponsored, and they have multiple flexibility. So that's where we benefit from. Anytime, if a certain project that we get into, if some issue, we will work it out, and the borrower will put up additional collateral or re-margin the loan. That's all. That's the strength of our lending.
Li Yu (Chairman and CEO)
Nick, you want to add anything?
Nick Pi (Chief Credit Officer)
Yeah. Just like Wellington mentioned about our customer, especially our loans, we have very strong sponsors behind it. So whenever we encounter any issues, I believe those sponsors will step up to work with the bank, and we'll work with each other to work out the crisis. So during the past few quarters, you can see we work out this high-rate environment pretty well.
Li Yu (Chairman and CEO)
Yeah. David, it's starting from the underwriting, okay? In the underwriting, our philosophy is obviously that the cash flow, okay, and in case of real estate property, is valued as assets. But one of the dominant factors to us is the guarantor strength. And most of the loan has a 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 is happening. And that is on top of the fact we think we have a fairly good group of customers in terms of they're well-heeled, okay?
David Feaster (Director of Banking Sector Equity Research)
Okay. That's helpful. Have you started to see debt service start to improve as rates have come down?
Li Yu (Chairman and CEO)
Obviously, debt service will improve when the rates come down. But we also see gradually the income level side of the thing to be stable.
David Feaster (Director of Banking Sector Equity Research)
Right.
Li Yu (Chairman and CEO)
Stabilized now.
Nick Pi (Chief Credit Officer)
That's great. Thanks, everybody.
Operator (participant)
This concludes our question and answer session. I would like to turn the conference back over to Mr. Li Yu for any closing remarks.
Li Yu (Chairman and CEO)
Thank you so very much. We're happy with our year 2024. We just are positive also for 2025. Thank you.