Preferred Bank (NASDAQ:PFBC) Q1 2025 Earnings Call Transcript

Preferred Bank (NASDAQ:PFBC) Q1 2025 Earnings Call Transcript April 25, 2025

Preferred Bank misses on earnings expectations. Reported EPS is $2.23 EPS, expectations were $2.33.

Operator: Good day, and welcome to the Preferred Bank First Quarter 2025 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that 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: Thank you, Jacob. Hello, everyone, and thank you for joining us to discuss Preferred Bank’s financial results for the first quarter ended March 31st, 2025. 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 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: Thank you. Good morning. Preferred Bank’s first quarter net income was $30 million or $2.23 a share. This quarter’s net income was negatively impacted by an outsized reversal of interest income related to the elevated level of non-performing loans. It is also negatively impacted by a charge-off of our real estate owned loan, OREO in the amount of $1.3 million. The non-performing loans totaled is $71 million at quarter-end, of which $66 million of the $71 million related to — were related to one relationship, two credits. This event as previously disclosed for you in March — in early March. The two credits or two loans have a collateral value, which will protect the loan amount, and there are no loss compounding identified at this time.

Total credit trend seems to be okay. The total classified — I mean criticized loan portfolio, okay, is reduced $30 million from previous quarter and are roughly 20% and there are very few migrations into this category during the quarter. The reversal of interest has also impacted our net interest margin, which is reported at 3.75% for this quarter. Without this effect, we internally estimate the net interest margin would have been much closer to 4.06% reported last quarter. This quarter, we had a negative loan growth of $6 million, equal to approximately 0.1% of our total loan portfolio. But our deposit increased 2.6% on a linked-quarter basis and the deposit cost is reducing as planned. Looking ahead, loan demand does not seem to improve much mainly because we’re currently under the uncertainty of a tariff war with the whole world.

This tariff situation was truly very much unpredictable, bringing many, many of the uncertainties ranging from supply chain changes, cost increases, inflation, or empty shelves, empty product, warehouse, all these things can affect each and every one of our customer differently. So we have already started to monitoring our loan portfolio. We started by a thorough review of our trade finance segment of our business, which equal to approximately $200 million, little over $200 million of our loan portfolio. And as time goes on, within next ensuing months is realizing that the many coming uncertainties and their implications and their side-effects that happened with tariff war, we will continue our review process diligently. Thank you. I’m ready for your question now.

Operator: [Operator Instructions] The first question comes from Matthew Clark with Piper Sandler. Please go ahead.

Matthew Clark: Hey, good morning, everyone. Just wanted to start on the margin outlook from here. If you had the average margin in March, excluding any reversals, just kind of a normalized margin in March, I’m just wondering if it was, how much might be below the 4.06% and then spot rate, if you had it at the end of the month ideally, but I’ll take the average for the month if you had it?

Q&A Session

Edward Czajka: Hey, Matthew, this is Ed. I don’t — unfortunately, I don’t have the March spot rate, but the margin for the quarter sounds the non-accrual reversals would have been 3.94%. So it’s holding up much better than as I’ve previously discussed on these — the margins holding up much better than we had anticipated.

Matthew Clark: And that 3.94% is for the quarter, but you have it for March?

Edward Czajka: I don’t. I think I can get that for you.

Matthew Clark: Okay. And then just on the non-performing relationship, can you just let us know which of the two is being sold at par? Just trying to get a sense for the dollar amount of that $66 million or $67 million? And then on the other piece that’s not being sold, it sounds like you’re pretty confident in the collateral value, but can you give us more color as to why and kind of the timing of that resolution process?

Li Yu: Matthew, I will have Nick Pi answer the question. Okay?

Nick Pi: Hi, Matthew. This is Nick speaking. For the two credits, one of them is pretty desirable land in a good area. A lot of builders they try to offer to purchase, and currently, the property is under — the note sale is under the contract, and we expect that to be closed very shortly. And the other one…

Li Yu: Okay, you might have mentioned that we have un — I mean — I mean non-refundable deposits, okay?

Nick Pi: Yes. And for that particular deal, we just received non-refundable deposits. So the deal is pretty sure that will be closed within a very short period of time.

Wellington Chen: On that credit, Matthew, you wanted to know is, first of all, the appraisal value is still very good. I mean it’s in — the LTV is in the 50s. In the meantime, we’re setting the note at par.

Edward Czajka: Correct. This year. So Matthew, I’ll just give you additional color that we just received, the most updated appraisal report in April, and the value come out with a similar as before and the loan-to-value is around 62%. So with the note sell — after the note sell closed, I believe [indiscernible]. The other one is currently in bankruptcy court, the Bar’s Councils as long as with the Bank’s Council, we all agree to file motion to the BK Court for selling this particular property. This is apartment, 188 units with a — also with a good value to support the credit. So we believe through the BK Court’s process, this is the best way for the bank to get rid of this. So we think within a quarter or two because BK — BK normally a little bit slow than other avenue of sale. So we believe that this will be resolved. These two loans will be resolved within a quarter or two.

Matthew Clark: Okay. And the size of the one in terms of dollars, the size of the one that’s in bankruptcy?

Edward Czajka: One is under note sale to be closed soon is around $28.5 million. And the other one in bankruptcy court is $37 million.

Matthew Clark: Okay. Thank you. And then just shifting gears to the expense run rate, Ed, I’m assuming you don’t have any more write-downs on OREO from here. How should we think about the run rate in 2Q?

Edward Czajka: So, as you see, we came in at about $23.4 million. And as I’ve talked about previously, we have a outsized personnel expense line item, which is employer pay taxes due to the incentive compensation payout in Q1. That happens every Q1. In addition to that, as you’ve pointed out, the $1.3 million write-down that puts Q1 normalized at about just over $21 million in terms of the run rate. Going forward, I would estimate it to be $21.5 million to $22 million for the next couple of quarters and probably accelerating after that.

Matthew Clark: Okay, great. And then just last one for me, if I may, on the buyback. It didn’t look like there was any shares repurchased this quarter, probably for obvious reasons, but what’s your appetite for buying back the stock here?

Li Yu: Okay, based on the report that this department gave me, okay, that we bought back altogether 532,000 shares during the first 20, 24 days of the month’s scale, and it is only one day purchase in March. All this number is done in April and so we have a total of $65 million available under our buyback program. We have spent about $40 million. We have still $23 million left to purchase.

Matthew Clark: Okay. Did you say you did buyback stock in the first quarter though?

Edward Czajka: No, there was just one day — 3/31 was the only day we were in the market, but we were in the market for the entirety of April.

Matthew Clark: Okay. Thank you.

Operator: Thank you. The next question comes from Andrew Terrell with Stephens. Please go ahead.

Andrew Terrell: Hey, good afternoon. I heard some of the comments in the prepared remarks, just uncertainty, maybe impacting the kind of net growth expectations for the loan portfolio. Just hoping to unpack that a little bit more, where you’re seeing demand from a client perspective, where it’s a little softer right now? And then maybe specifically, do you still feel like you can grow the loan portfolio in this environment or is a flat-to-down expectation more appropriate?

Li Yu: Obviously, as a guy operating bank, I hope we can continue to do that. We are poised to continue to do that. But as you know, as an older person, that I’ve experienced many different things, including the 2008 meltdown with a simple, I mean sub — to sub that of home loans can mushroom into a total financial system meltdown, okay? So this tariff business is many angled and depend on which way it turns, it could affect seriously even the property value of many of our borrowers. So we’re taking close look on that. Likewise, we sensed that many, many of our current customers, whether it’s the C&I customers, the realty customer, they like to do a little wait-and-see. When the wait-and-see is over, we do not know. So it likely could be that by — and I mean later second quarter, this thing just pick up and we are poised, we have a — we have a large relationship staff is out there is busy and try to bring in — bring in loans and we just have to be very careful with it.

Andrew Terrell: Yeah, understand. Okay. For the second NPL loan, you guys talked about the one is in bankruptcy court. I think you said it was $37 million note. Do you have a recent appraisal on that as well? And if so, like a refreshed LTV?

Wellington Chen: Yeah, that appraisal also pretty up there, right? It’s — I believe we did one back in November last year, still within six months, and the value can support loan-to-value around 71%.

Andrew Terrell: Okay.

Li Yu: I read the briefing of the court information between the lawyers’ communication. Of course, it’s quoting the things are read, okay? There is a cash offer sitting out there with these parties at $49 million, which is well sufficient to cover our exposure. We’re the first trustee.

Andrew Terrell: Okay. Understood. Thank you for taking the questions.

Operator: Thank you. The next question comes from Gary Tenner with D.A. Davidson. Please go ahead.

Gary Tenner: Hey, thanks, everybody. Good morning. I have two questions. The first is with the commentary around trade finance, the $200 million portfolio, it would seem to me that the kind of nearest risk or near-term risk is more that those trade finance get paid down as less activity occurs. Is that a reason why you’re looking at it near term?

Li Yu: You mean the trade finance segment?

Gary Tenner: Yeah.

Li Yu: It’s happening in and out in a situation depending each customer is different. Some of them has currently, everything is normal. I mean, under the — under the — their supply chain is outside of China. Some of them is a little bit heavy in China, but these people are well-stocked inventories right now. So, so far, we don’t have any activity in terms of abnormal activity yet on the portfolio.

Gary Tenner: And then second question, just on the net or the loan interest revenue given that $3 million of interest reversals. So, loan interest revenue was down $10 million sequentially. You have that $3 million, and I assume a couple of million dollars just with a lower day count. Is the rest of that delta, call it, $5 million lower quarter-over-quarter simply full-quarter impact of the rate cuts in 2024?

Li Yu: Ed, Can you answer that?

Edward Czajka: I’m sorry, Gary. I apologize. Can you repeat the question?

Gary Tenner: Yeah, sorry, I may have meandered there, but so the loan interest revenue was down about $10 million sequentially from $112 million, call it to $101 million. So again, the $3 million of reversals probably a couple of million dollars lower on day count. Is the rest of that data just the full-quarter impact of rate cuts from last year?

Edward Czajka: Yes, yes, exactly.

Gary Tenner: Can we get a sense of how…

Edward Czajka: Gary?

Gary Tenner: No, go ahead. Sorry.

Edward Czajka: Also, as you know, as we are renewing loans and originating loans, they are coming off of a higher base typically. And then when they come to renew, they’re typically coming down a little bit in terms of yield. So that’s part of the effect as well.

Gary Tenner: Okay. Got it. Thank you.

Operator: [Operator Instructions] The next question comes from Tim Coffey with Janney. Please go ahead.

Tim Coffey: Great. Thank you. Good morning, everybody. Mr. Yu, just kind of follow up on the comments you made about having been through a couple of cycles before. Grant, this might be the most telegraph cycle as it turns out to be one that you’ve probably ever seen. So I’m wondering how are you positioning the bank right now?

Li Yu: Well, being that it’s just started to have this trade finance, I mean the tariff situation, I guess it — because the liberation date is April the 2nd, okay, I think it’s caught everybody off-guard and being that most of our customers and all the community banks’ customer and also many of the regional bank customers, they are smaller customers. And probably if they are in this particular business of importing or exporting a given product from the foreign countries, everybody is operating on a different profit margin. Some of them — very few of them will be able to absorb so-called the tariffs that are on the table right now is 20%, 25%, very few people can afford that. And whether the importer can absorb that, it is questionable.

If they absorb that, it will be inflationary to our economy. If they absorb that, it will be decreasing demand. Okay? And then how many of them are facing the situation and the empty shelf when the supply cannot catch up, and where all the supply chain can be — can be switched to different countries. So what we’re doing right now is we’re having our loan office going out discuss with every — each of our trade finance customers, and knowing what are they reacting, how do they try to react on the matter? And from that, we internally seriously discuss about what is the likelihood they’ll be successful in handling this kind of matter. And while we’re doing it, we’re also learning. So each case is different, okay? I guess the best way I can describe how to position the bank is knowing more what each customer is doing right now.

And hopefully, if there is some negative situation come along, we will be affected less. Nobody can escape from the big situation. I don’t know whether I answered that to your question or not, because I don’t know how to do it better.

Tim Coffey: No, I think you did. I think you did. I think that’s very helpful. And then just on the underwriting front, I mean I hear you, it’s a fluid situation, outcome highly uncertain, but as it comes to underwriting loans right now, has anything changed?

Li Yu: Yes. We are on certain segment of our loans. We put more attention to it. For it used to be, if you know that in Western United States, especially in California, industrial property has been in the lowest vacancy and most safe lending products for the past 10, 15 years. Unfortunately, we’re already seeing many of the transactions being slowed down, and the buyer and seller are concerning and they’re not sure about their tenants or if they are the owner user, whether they can continue to operate profitably in this line of business or not. So what I heard from an early indication is that cap rate is started to see pressure, not actually happening yet, but everybody is worried about that. We as a lender has to be careful about that. So today, as an industrial product used to be the most thoughtful lending segment on a CIE basis [indiscernible] now we have to slow down and be very careful, public demand, more margin, more cushion, and more DCR now.

Tim Coffey: Yeah. All right. That’s helpful. And then one final question for Ed. Ed, are there any material time deposit roles coming up in the several quarters?

Edward Czajka: Every quarter, Tim, every quarter.

Tim Coffey: Great.

Edward Czajka: That’s about $1.16 billion at an average rate of 4.28. And our offering rates are in the like mid-3s now, mid to-high 3s.

Tim Coffey: I’m sorry, is that for the current quarter?

Edward Czajka: That’s for Q2. Yes, currently. That’s correct, for one way. And I want to — I’m going to steal some of your time here, Matt — Tim and get back to Matthew Clark. I do have the spot rate for March. The margin was 3.84%. Excluding the reversals and loan yields were 7.55 for March. Sorry, Tim.

Tim Coffey: No, that’s all good. Those were all my questions. I appreciate your time. Thank you.

Li Yu: Thank you, Tim.

Operator: Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Li Yu, Chairman and Chief Executive Officer for any closing remarks.

Li Yu: We thank you very much for attending the conference. I guess sometime I think personally I’m a little paranoid about the tariff situation, maybe just because my personal background has been in more recession than most of you probably can. So — but there’s nothing wrong to be too careful. And we’d like to be a little more careful. Thank you.

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