Preferred Bank Q4 FY2024 earnings call

• Wished everyone a happy Lunar New Year. - Highlighted year-end net income, ROA, and ROE. - Noted moderate loan and deposit growth in 2024. - Reported progress in credit front with reduced NPLs and criticized loans. - Mentioned impact of LA wildfire on commercial real estate loan but unaffected mortgage portfolio. - Announced dividend increase to $0.75 and repurchase of 464,000 shares for $34 million. - Leverage capital ratio improved from 10.85% to 11.33% and tangible book value increased from $50.54 to $57.86.

For the year, Preferred Bank had a net income of $131 million, with a return on assets of 19.1% and return on equity of 18.8%. In the fourth quarter, net income was $30.3 million, or $2.25 a share, negatively impacted by an $8.1 million non-recurring rental expense adjustment. Loan growth for 2024 was 7% and deposit growth was 3.6%. Non-performing loans reduced from $20 million to $10 million (a 50% improvement) and criticized loans decreased by 33% during the fourth quarter.

• No significant activity increases seen yet. - Buyback depends on loan growth prospect, stock pricing, deposit levels, etc. - Margin expected to be relatively stable in Q1; Dec spot margin was 398, Q4 NIM 4.06%. - Around $1.6 billion in time deposits re-pricing in Q1 at 475, offered rates from low threes to mid-fours.

• Uncertainties related to Fed rate changes. - Economic conditions and policy changes. - Impact of LA wildfire on local economy.

Q: Hey, good morning. 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. And in the fourth quarter, the margin only down four 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, early reads on the margin, kind of as we head here into the first quarter?

A: I will have add on to my comments. My personal feeling here would not have an immediate effect in the first quarter. We're also not looking just 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 and a half years. So it seems to be showing results in the first quarter, and I think the 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, 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 398 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.

Q: 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?

A: The spot rate on deposits is 363, Matthew.

Q: Is that for December or at year end?

A: That was December.

Q: Okay. Okay. And then how about on the expense run rate in the New Year? Just 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?

A: 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, has been running higher than normal due to the assets we're working through. So right now, I'm looking at non-interest expense at about $23 million for Q1.

Q: Thanks. Good morning. I was curious about the comment about not releasing any increased activity levels. You had 7.5% loan growth I think, for the year, which most of us are actually 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?

A: Well, 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. 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.

Q: Thanks. Good morning. If I could just stick on that loan growth question as well, and bring in more of a question about liquidity. Ed, 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?

A: 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 466. 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.

Q: Thanks. 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, the company feels comfortable having that ratio at?

A: 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 and the rate reduction, which is 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 close watch on that. It may impact the economy as well, and also the reason the 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 be really causing any deep 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 around 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% to a 1.25% range, I believe, which is also in line with our pure banks at this moment.

Q: Hey, good morning, everybody. 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.

A: First quarter, we see a heavy payoff, I mean, comparatively speaking, compared to previous quarter. I think once it makes some of the transaction or sales transaction easy to do when the rate is down, the new buyer is able to finance it or price it correctly and so on. So mostly it's the elevated payoff activity. Our origination stays about consistent with the third quarter, okay? So this is on the loan growth side of its scale.

Q: 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?

A: Yes, it's kind of abstract on these things, because we try to survey our customers by, I mean, have 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 get into new deal. They just haven't feel its 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.

Q: What do you think gets them off the sidelines? Is it another 50 basis points in cuts? Is it slower inflation? We've got the election in the rearview. What do you think gets some of those guys off the sidelines?

A: Well, that probably is a question to Chairman power. In that respect about how much, okay? But I think it probably takes some further cuts, more than two paths. Right now, I understand you are forecasting two cuts for the year, okay?

Q: 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 healthier borrowers. Obviously, higher rates has impacted the floating rate borrowers, but it seems like你've had a lot of success with clients pledging additional collateral. Could you just touch on the healthier borrowers and what you're seeing on the credit broadly?

A: The first, the health of a client. Our clients are very healthy. I think our clients, we are relationship-oriented, and our loans are all fully sponsored, and they have multiple flexibility. So that's what we benefit from. At any time, if a certain project that we get into is 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 strengths of our lending.