Good day, and welcome to the Preferred Bank Fourth Quarter 2024 Earnings Call. All participants will be in listen-only mode. [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 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 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 29th, 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 close out the year with a net income of $131 million, or $9.64. Return on assets was 19.1%. Return on investment or equity was 18.8%. Both numbers 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 equal 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 exceptional. 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 fourth quarter. We hope the New Year will 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's 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 an 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 11.33% 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]. The first question comes from Andrew Terrell with Stephens. Please go ahead.

Hey, good morning.

Good morning, Andrew.

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?

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.

Got it. Okay. Yes, 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 re-pricing 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 --

Billion.

Excuse me, billion. Did I say million? Billion. Excuse me. At a weighted average rate of 475. So we'll look for that to continue to come down on the PCD side in terms of funding costs.

Any other 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 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.

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

Yes, understood. Okay. And then on capital, I saw 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?

Buyback will probably depend on a 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 miss you on a continuous basis. But being with something at the low multiple, comparatively speaking, and some of our local friends is setting a 19 times earnings, okay? So there's a chance if our stock is staying depressed, we're obviously thinking about buyback.

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

Thank you.

The next question comes from Matthew Clark with Piper Sandler. Please go ahead.

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 363, Matthew.

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? 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?

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.

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 mid six figures.

Got it. Okay. Some of us tend to exclude that stuff, so I just want to make sure. Okay. Great. And then just shifting to credit, can you just remind us, 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? Just give us some more color on your outlook on criticized?

Nick, will you answer the 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 known accrual loans has quite drop substantially. And for the criticized, I believe, as Mr. Yu [ph] 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 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 good amount.

Great. Thank you.

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

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?

Wellington?

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.

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

Yes.

Okay.

Well, actually, as you 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've 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 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, you know, 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.

The next question comes from Tim Coffey with Janney. Please go ahead.

Thanks. Good morning, everybody. 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?

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.

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. 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?

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 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.

Tim, our open philosophy is to charge-off -- to fully reserve the loan loss once we're fine away. 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 were 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're being in the 140, 135 range, not at 1.27. I think it's still 15 to 20 basis points higher than our peer group, okay?

Well, yes, I totally agree. Totally agree. All right, well, thank you very much. That was great. Those are my questions. Operator [Operator Instructions]. Our next question comes from David Feaster with Raymond James. Please go ahead.

Hey, good morning, everybody.

Hi, good morning.

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.

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.

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 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.

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?

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?

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 you'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?

Wellington, you answer the first, okay? And see what else we can add on, okay?

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.

Nick, you want to add anything?

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

Yes.

David, it's starting from the underwriting, okay? Underwriting that our philosophy is obviously that the cash flow, okay? And in case of real estate property, is the value of the assets, but one of the dominant factors to us is the guarantor strength, and most of the loans have 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 and try to mitigate whatever the situation is happening. And that is on top of that, we think we have a fairly good group of customers in terms of their own well-with-all, 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 when the rates come down, but we also see that gradually the income level side of the thing 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 our 2025. Thank you.

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