Q4 2024 Preferred Bank Earnings Call
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Okay.
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'll 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.
Speaker Change: 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. Thank you for joining us to discuss preferred bank's financial results for the fourth quarter ended December 31st 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.
Speaker Change: Hi, and Deputy Chief operating Officer, Johnny to 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.
Speaker Change: 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 banks 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.
Speaker Change: The 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 results could differ materially from its expectations as set forth. In these statements preferred bank assumes no obligation to update such forward looking.
Speaker Change: Okay.
Speaker Change: At this time I'd like to turn the call over to Mr. Li Yu. Please go ahead.
Li Yu: Thank you very much.
Speaker Change: Tomorrow January 'twenty lives is a first of a new year and the lunar calendar, which I personally observed.
Speaker Change: And I like to use this opportunity to the wish every one of you I'm most happy and most healthy.
Speaker Change: Yeah.
Speaker Change: No I wasn't preferred bank.
Speaker Change: We closed out the year with a net income of 131 million or $9.64.
Speaker Change: Return on assets.
Speaker Change: Was 19, 1% return on investment of equity was 18.
Speaker Change: 8% pace.
Speaker Change: Both number compares very well, whereas the peer group.
Speaker Change: The Street average.
Speaker Change: For the fourth quarter, our net income was $33 million or $2.25 a share.
Speaker Change: This number was negatively impacted by a correction to the rental expenses accumulated over a five year.
Speaker Change: In the total amount of.
Speaker Change: $8 $1 million.
Speaker Change: This nonrecurring expense adjustment equal to.
Speaker Change: Roughly 42 cents on the after tax.
Speaker Change: Basis.
Speaker Change: Yeah.
Speaker Change: Yes.
Speaker Change: 2024 is a slow growth year for the banking industry.
Speaker Change: We true.
Speaker Change:
Speaker Change: Not an exception.
Speaker Change: Our loan growth for the year of 7% and deposit growth of three 6% was moderately compared to previous year, but probably very much in line.
Speaker Change: What is the industry average.
Speaker Change: Looking forward our presence.
Speaker Change: We don't see.
Speaker Change: Activity has significant increases yet.
Speaker Change: For the quarter, we have made.
Speaker Change: Good progress in the credit front.
Speaker Change: Non performing loans has reduced from $20 million to $10 million, a 50% improvement.
Speaker Change: And.
Speaker Change: Criticized loans reduce 33% during the fourth quarter.
Speaker Change: We hope the new year with see further <unk>.
Speaker Change: In this area.
Speaker Change: Yeah.
Speaker Change: Yes.
Speaker Change: The unfortunate event on Los Angeles Wildfire has brought.
Speaker Change: Various significant damage.
Speaker Change: To our community.
Speaker Change: Early survey indicated that may be one.
Speaker Change: Commercial real estate loans property maybe.
Speaker Change: It can be.
Speaker Change: Damage.
Speaker Change: Yeah.
Speaker Change: Great for me.
Speaker Change: Our mortgage loan portfolio seems to be unaffected.
Speaker Change: And also personally I'm, so pleased to see that none of our employees home suffered Amy.
Speaker Change: Significant damage.
Speaker Change: We have fought back.
Speaker Change: We'll be dedicating our best effort.
Speaker Change: Help me.
Speaker Change: <unk> with our communities.
Speaker Change: And homes.
Speaker Change: Yeah.
Speaker Change: In December our board has announced the increase in dividends from 70 cents.
Speaker Change: 275 cents payable in January.
Speaker Change: Dish this year, meaning 2024.
Speaker Change: We also repurchased 464 million dollar well, let me just a quick 1000 shares of common stock with total consideration of 34 million.
Speaker Change: Yes.
Speaker Change: D.
Speaker Change: Leverage.
Speaker Change: Capital ratio has actually improved.
Speaker Change:
Speaker Change: Kevin.
Speaker Change: 5% in the beginning.
Speaker Change: To 11 three.
Speaker Change: 3%.
Speaker Change: End of the year.
Speaker Change: Come on.
Speaker Change: Sure I mean tangible book value on common stock.
Speaker Change: Also improved from $50 54 to.
Speaker Change: <unk> to $57.
Speaker Change: 86 cents.
Speaker Change: All of US at preferred bank is looking forward to continue.
Speaker Change: Our consistent.
Speaker Change: Memphis.
Speaker Change: The year of 2000.
Speaker Change: 25.
Speaker Change: Thank you very much now we're ready for your questions.
Speaker Change: We will now begin the question and answer session.
Speaker Change: Ask a question you May press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
Speaker Change: Anytime you 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.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: The first question comes from Andrew <unk> with Stephens. Please go ahead.
Andrew: Hey, good morning.
Speaker Change: Morning, Andrew.
Speaker Change: I wanted to check in and just on the margin here to start off with I mean, considering that they kind of have your mix of floating rate loans. You guys. Obviously didn't have a really impressive job and in the fourth quarter. The marginally down you know.
Speaker Change: Four basis points or so I just wanted to maybe get your thoughts on whether there was any kind of carry forward into <unk> that could maybe influenced 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.
Speaker Change: My I will have an add on to my comments in my personal feeling it would not have a major effect in first quarter. We also not looking.
Speaker Change: Looking to secure that the fed would change the rates in the first quarter.
Speaker Change: So the margin.
Speaker Change: Change of D a sensitivity.
Speaker Change: Hey.
Speaker Change: Calling effort for about one one and half years.
Speaker Change: It seems to be showed results in the fourth quarter first.
Speaker Change: First quarter will be relatively stable from my personal estimate maybe slightly affected by much.
Relatively stable.
Speaker Change: As a nation drag.
Speaker Change: Andrew the just to give you the the spot because I know I'll get that question. Some time on the call today that the spot margin for December was $3 98 was the quarterly NIM of 406, you can see the pattern there but to Mr. Use comment not seen a lot of no further compression from where we're at so I still think we are.
Speaker Change: The very very high threes going into Q1.
Speaker Change: Got it okay. Yeah, I was going to have a spike question for format if he's on air Bud.
Speaker Change: Do you have the amount out of the time deposits repricing in the first quarter and then you know the three theyre coming up at and what the what the kind of new offered radios.
Speaker Change: Yeah.
Speaker Change: We have about just under 1.6 million coming due in Q1.
Speaker Change: Excuse me did I say.
Speaker Change: Goodness.
Speaker Change: At a weighted average rate of 475 so.
Speaker Change: We will look for that to to continue to come down on the <unk> side in terms of funding costs.
Speaker Change: The Ranger.
Speaker Change: Yeah I'll start.
Speaker Change: Hey, Yeah offered rates now are below that so.
Speaker Change: Do you have kind of a range of offered rates.
Speaker Change: Well it depends on the term right now we're seeing it very wide dispersion.
Speaker Change: Not only amongst our our own but a nationwide in our local area in terms of deposit rates based on maturity and duration. So we.
Speaker Change: We have priced it accordingly, but suffice to say we're anywhere from the low threes to the mid mid force.
Speaker Change: Actually Andrew also depend on competition.
Speaker Change: And.
Speaker Change: Locally in the Asian community that that many of all of our.
Speaker Change: France that is running a so called debt.
Speaker Change: Chinese new year's special and preferred bank has to stay flexible to compete with somebody else.
Speaker Change: Yeah, Yeah understood Okay.
Speaker Change: Then on capital I saw the sort of buyback in the corner and then obviously the dividend announcement just wanted to get your thoughts on.
Speaker Change: Capital repatriation on into 2025, and specifically whether you thought you know should we expect a continued utilization of the buyback this year.
Speaker Change: Yeah.
Speaker Change: Payback will probably depend on our continuous calculation.
Speaker Change: <unk> D in the loan growth prospect and then also the pricing of the stock and the deposits level and.
Speaker Change: These <unk> capital ratio of these kind of a total consideration. So all these things would miss you on a continuous basis.
Speaker Change: We are selling at a low multiple comparatively speaking and.
Speaker Change: Some of our local brands and setting a 19 times earnings Okay. So there's a chance if our stock stays depressed.
Speaker Change: Obviously, we're thinking about buybacks.
Speaker Change: Got it okay well. Thank you guys for taking my questions I appreciate it.
Speaker Change: Thank you.
Speaker Change: The next question comes from Matthew Clark with Piper Sandler. Please go ahead.
Matthew Clark: Hey, good morning, everyone.
Speaker Change: [laughter].
Speaker Change: Uh huh.
Speaker Change: And.
Speaker Change: Thank you.
Speaker Change: Andrew I don't think you have a choice, but to put to ask about the spot rate on deposits. If you had it at yearend ideally.
The spot.
Speaker Change: Spot rate on deposits is 363.
Speaker Change: Yeah.
Speaker Change: And is that for December or at year end.
Speaker Change: December.
Speaker Change: Okay.
Okay.
Speaker Change:
Speaker Change: And then.
Speaker Change: 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.
Speaker Change: Any projects here.
Speaker Change: Turning to work on here.
Speaker Change: Is it part of that expense growth.
Speaker Change: 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.
Speaker Change: So so far we're gonna have probably be making a fairly.
Speaker Change: Fairly healthy donation to the local wildlife excuse me wildfire relief funds. So that will increase our donation expense. We're also gonna have payroll taxes elevated in Q1, as we normally do with incentive compensation payout in.
Speaker Change: 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 noninterest expense at about 23 million for Q1.
Speaker Change: Okay and of that 23 million how much do you expect the charitable contribution today.
Speaker Change: Yeah.
Speaker Change: Well, we're gonna have a meeting about that later today.
Speaker Change: But it's going to be.
Speaker Change: Low low six figures.
Speaker Change: I've come to a meeting or.
Speaker Change: Low to mid low to mid six figures.
Speaker Change: Got it.
Speaker Change: Okay.
Speaker Change: Those tend to exclude that stuff. So I just want to make sure.
Speaker Change: Hmm.
Speaker Change: Okay.
Speaker Change: 23.
Speaker Change: Okay, Great and then.
Speaker Change: And then just shifting to credit can you just remind US you know the makeup of or maybe just.
Speaker Change: Give us a sense for the makeup of the charge offs. This quarter I know they were.
Speaker Change: Previously reserved for but just kind of remind us of the situation there and then in terms of your expectation.
Speaker Change: For upgrading credits you know 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.
Nick: Nick will you answer sure.
Speaker Change: F L. A the charge off actually because of.
Speaker Change: The delay in the resolution of some of the tank car loans and I'm.
Speaker Change: We decided to charge off firsthand that well.
Speaker Change: Recognize recovery in the future your fathers and settlement of all of our solutions at that moment. So what was the charge of our nonaccrual loans is client dropped substantially for.
Speaker Change: For the criticize I believe I as Michel mentioned in the release that.
Speaker Change: We probably have some of the loan so I'll be a paid off.
Speaker Change: <unk>.
Refinanced through the Q1 and also a few of the auto credits.
Speaker Change: Scheduled to be a subtle and resolved and also a couple of to crowded we probably use the additional collateral we're gonna upgrade who slows in Q1. So we believe for Q1 criticized loans should be.
Speaker Change: Somewhat dropped.
Speaker Change: And a good amount.
Speaker Change: Great. Thank you.
Speaker Change: The next question comes from Gary Tenner with D. A Davidson. Please go ahead.
Gary Tenner: Hi, Thanks, good morning.
Gary Tenner: I was curious about the comment about not really seeing any increased activity levels you had.
Gary Tenner: 75% loan growth I think for the year, which most of them actually were very happy with.
Gary Tenner: Their churn within the portfolio at all payoffs versus production or our pipelines not building at this point in your.
Gary Tenner: <unk> base.
Gary Tenner: Why don't you.
Gary Tenner: Well the churning, it's always the factor.
Gary Tenner: Our bank we are.
Gary Tenner: Yeah.
Gary Tenner: We do well.
Gary Tenner: Short term a.
Gary Tenner: Loans in quite a bit and Oh journey and also on the C&I side, you can see the up and down.
Gary Tenner: Paul.
Gary Tenner: It's the nature of C&I revolving line of credit and so order here and people feel a little bit bullish and can only.
Gary Tenner: Increased.
Gary Tenner: Expanding their business and all of that so that's one.
Gary Tenner: That's the nature of walking.
Okay. So a more a more sustainable increase in activity levels is what's missing at this point.
Gary Tenner: Okay.
Gary Tenner: Yes.
Gary Tenner: Okay.
Gary Tenner: Got it.
Gary Tenner: Stay the early.
Gary Tenner: So far at this stage I think.
Gary Tenner: And higher banking industry, including us is feeding that it will be moderate.
Gary Tenner: Yeah.
Speaker Change: There are there is there is still certainly activity, but to Wellington's point. The payoff activity has been a has been a little higher.
Speaker Change: Okay I appreciate that and I know you've said you don't want to be at the full year on expenses and I appreciate that but I'm just thinking out loud in terms of the.
Speaker Change: If if activity levels remain.
Speaker Change: <unk> will be lower.
Speaker Change: <unk> is there.
Speaker Change: Hiring or anything to be done to <unk>.
Speaker Change: Tried to drive increased activity through through lenders or anything.
Speaker Change: Well certainly we always have you know when we do our annual planning, we certainly have a lot of new individuals' budgeted in for our relationship officers and business development officers.
Speaker Change: Question really becomes how well do we execute on that.
Speaker Change: In terms of other initiatives going forward, obviously it costs continue to increase but we're also establishing a a branch right in the middle of Manhattan, as well, which we expect to open in March.
Speaker Change: And that certainly adding to the will add to our occupancy expense going forward as well as personnel expense.
Speaker Change: Great. Thank you.
Speaker Change: Yeah.
Speaker Change: The next question comes from Tim Coffey with Janney. Please go ahead.
Tim Coffey: Okay. Thanks, Martin I right if I can.
Speaker Change: Let's stick on that loan growth question as well.
Tim Coffey: And maybe more of a question about liquidity.
Tim Coffey: Although liquidity to keep on balance sheet, a lot of it's kept short term instead of going into securities portfolio do you see any reason to change that strategy right now.
Speaker Change: So thank you for the question Jim.
Speaker Change: Very timely because over the last three weeks or so we've been purchasing.
Speaker Change: <unk>, specifically 10 year.
Speaker Change: We made about $60 million in purchases over the last three weeks and a 10 year treasury at an average yield of about 466. So we've been taking are 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.
Speaker Change: Okay.
Speaker Change: That's good to hear is this kind of an initial salvo or is this kind of.
Speaker Change: Yeah.
Speaker Change: See how it goes and then try to take them out.
Later on.
Speaker Change: Yes, let's take a look right now and then see what it looks like later on yes, Tim we're not going to I don't I don't foresee us continuing in that fashion, but certainly at the time was was here to start to put some money to work in a long term fashion, given where rates are at relative to our historical rates.
Speaker Change: Okay.
Speaker Change: And then my other question was on the the allowance ratio, it's been coming down throughout the course of 'twenty four.
Speaker Change: Wondering is there a level where you can't keep it you.
Speaker Change: The company feels comfortable having that ratio at.
Speaker Change: When Nick do you want to answer that yes.
Nick: Yes sure.
Speaker Change:
There are still.
Speaker Change: Several factors so we have to take like a modular with posturing calibrating our.
Speaker Change: Internal quantitate T ran over so quantitative models because of that.
Speaker Change: You know defense slowing down.
Speaker Change: Reductions some of 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 to policy changes from the.
Speaker Change: New administrations Andaz Congress, we have to a close watch on that May impact the.
Speaker Change: Economy is slow and also the reason that I know your fliers.
Speaker Change: Now at this moment, which might give.
Speaker Change: Somehow impacted local economy. So we still have to factor all those in however, with.
Speaker Change: I too believe that are all of those points that I mentioned.
Speaker Change: Should I be really costs anyhow.
Speaker Change: Travelling to the bank and we believe it will be it sounds occurring.
Speaker Change: Loan quality trends everything improvement.
Speaker Change: And we believe our future reserve should be a gradually.
Speaker Change: Reduced.
Speaker Change: So if I add all $6 6 million of charge offs, we still at.
Speaker Change: 1.3%, However, as I mentioned earlier, we want to.
Speaker Change: No charge at all of those things first and so.
Speaker Change: I believe in the long run it should be reduced to a 1.15% to a 1.25% range I believe which is also in line with our peer banks at this moment.
Tim Coffey: Tim Oh.
Speaker Change: Philosophy is to charge to fully reserve the loan losses and once we find the weak.
Tim Coffey: Right.
Tim Coffey: EBIT was progressive.
Tim Coffey: All of that.
Tim Coffey: So that's the reason why all the all the charge offs, we had in the first quarter, but a previously fully reserved.
Tim Coffey: <unk> from last year, Okay. So when we first identified the weaknesses in these credits.
Tim Coffey: And that has been a philosophy, that's why our reserve ratio is always slightly higher than our peer group would be.
Tim Coffey: In the 141 35 range not at one point to seven I think its still 15 to 20 basis points higher than our peers.
Tim Coffey: Hey.
Tim Coffey: Well yeah.
Tim Coffey: I totally agree okay, great all right well. Thank you very much that was great color those are my questions.
Tim Coffey: Okay.
Speaker Change: Again, if you have a question. Please press Star then one.
Speaker Change: Our next question comes from David Feaster with Raymond James. Please go ahead.
David Feaster: Hey, good morning, everybody.
Speaker Change: Hi, good morning.
Speaker Change: I was just kind of wanted to follow up on on the loan growth side you. It sounded like you alluded to payout payoff activity being still somewhat elevated I'm curious the competitive landscape. If you could touch on that and what youre seeing the payoffs for US is it asset sales is that you know the comparator.
Speaker Change: The landscape is it.
Speaker Change: You know just folks just paying off right now, we're just kind of curious what you're seeing.
Speaker Change: Yes.
Speaker Change: This quarter, we see a heavy pay off.
Speaker Change: Comparatively speaking compared to previous quarter I'd say it was may.
Speaker Change: It makes some of the transaction.
Speaker Change: Tramped sales transaction easier to do when the rates is down.
Speaker Change: The new buyers able to finance it all off.
Speaker Change: Price. It correctly you saw so mostly is the elevated payoff activity a regulation stays about consistent with the third quarter.
Speaker Change: So this is on the loan goes far above its okay.
Speaker Change: Okay that makes sense.
Speaker Change: 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, where you're seeing opportunities.
Speaker Change: Yes, it's it's kind of a abstract on these these things because we tried to survey our customers bye bye.
Speaker Change: Constant.
Speaker Change: Feedback from our relationship officer, the generals generally I think the market rate.
Speaker Change: Ray has not come down enough.
Speaker Change: For them to really be very active about the thing there's a lot of money on the sideline theres a lot of people willing to invest or getting into new day. They just haven't feel it's safe enough for them to do that at this point of time.
Speaker Change: So this is the best feedback so we can get from our customers.
What do you think what do you think gets them off the sidelines is it you know another 50 basis points. It cuts is it you know slower inflation, yeah, just kind of you know we've got the election in the rearview just what do you think get some of those guys off the sidelines.
Speaker Change: Well that property is a question to chairman power.
Speaker Change: I'm kind of a.
Speaker Change: In that respect about how much okay, but I think it probably takes some some further cuts more than two paths right now I understand you are forecasting two cuts okay for the year.
Speaker Change: Yep.
Speaker Change: Okay.
Speaker Change: And then just if I could squeeze one more and going back to the credit side you know the banker there's credit trends Youre seeing are encouraging you know things are kind of working their way through the system.
Speaker Change: 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 Youre seeing on the credit broadly.
Speaker Change: Right.
Speaker Change: Well.
Speaker Change: Why don't you want to answer the first.
Speaker Change: See.
Speaker Change: What else, we can add Nick.
Speaker Change: Nick.
Speaker Change: Yeah.
Speaker Change: The first.
Speaker Change: The health of all.
Speaker Change: Our clients are very healthy I think our client we are relationship.
Speaker Change: Orient just so we all know in our loans all will be sponsored.
Speaker Change: And they have multiple.
Speaker Change: The flexibility so that's where we benefit from any time you have a certain project that we get into some issue we will work it out and borrow put up additional.
Speaker Change: Collateral or a re margin alone.
Speaker Change: Yes.
Speaker Change: The strength of our <unk>.
Speaker Change: Matthew on or anything.
Speaker Change: Yeah, just like Wilmington mention about our customer.
Especially our long so we have very strong sponsor.
Speaker Change: Behind it so whenever there is a encounter any issues with those sponsors west step up to work with our bank and will work with each other to water out of the crisis. So during the past few quarters you can see our you know.
Speaker Change: What are all of this our cause.
Ray: Hi, Ray.
Speaker Change: Environment pretty well.
Speaker Change: Yeah, David it's starting from the underwriting.
Speaker Change: Underwriting that our philosophy is obviously that cash flow okay.
Speaker Change: And in case of real estate property is value of the assets, but one of the dominant factor to us is a guarantor strength in most of our lung cancer, killing tool. Okay. So during a difficult time, you'll find.
Speaker Change: If the customer is personally guaranteed alone they tend to.
Speaker Change: The most serious of try two two mitigated whatever the situations happen.
Speaker Change: And that is on top of that we think we have a well.
Speaker Change: So really good group of customer in Germany.
Speaker Change: Oh, okay.
Speaker Change: Okay. That's helpful. Al have you started to see that service started to improve as rates have come down.
Speaker Change: Okay.
Speaker Change: Obviously, that's served as we improve the rates come down.
Speaker Change: We also see that gradually.
Speaker Change: The income level side of the thing to be stable.
Speaker Change: Correct paper lifestyle.
Speaker Change: That's great. Thanks, everybody.
Speaker Change: Yes.
Speaker Change: This.
Speaker Change: <unk> our question and answer session I would like to turn the conference back over to Mr. Li Yu for any closing remarks.
Speaker Change: Thank you so very much.
Speaker Change: Happy without our year 2024.
Speaker Change: We just.
A positive also for 2025.
Speaker Change: Thank you.
Speaker Change: <unk>.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.