Preferred Bank Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
April 25, 2025

There are 9 speakers on the call.

Operator

day, and welcome to the Preferred Bank First Quarter twenty twenty five Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on a telephone keypad. To withdraw your question, please press then 2.

Operator

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.

Speaker 1

Thank you, Jacob. Hello, everyone, and thank

Speaker 2

you for joining us to discuss Preferred Bank's financial results for the first quarter ended 03/31/2025. With me today from management are Chairman and CEO, Lee Yu President and Chief Operating Officer, Wellington Chen Chief Financial Officer, Edward Chaeka Chief Credit Officer, Nick Pye 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.

Speaker 2

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.

Speaker 2

Li Yu. Please go ahead.

Speaker 3

Thank you. Good morning. Preferred Bank's first quarter net income was $30,000,000 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 OREO in the amount of $1,300,000 The nonperforming loans totaled $71,000,000 at quarter end, of which $66,000,000 of the $71,000,000 related to one relationship or two credits.

Speaker 3

This event is previously disclosed to you in March early March. The two credits or two loans have a collateral value, which will protect the loan amount and there are no loss content being identified at this time. Total credit trends seems to be okay. The total classified I mean, criticized loan portfolio, okay, is reduced $30,000,000 from previous quarter end or roughly 20%. And there are very few migrations into this category during the quarter.

Speaker 3

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 estimates the net interest margin would have been much closer to the 4.06% reported last quarter. This quarter, we have a negative loan growth of $6,000,000 equal to approximately 0.1% of our total loan portfolio, but our deposit increased 2.6% on the 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.

Speaker 3

So we have already started to monitoring our loan portfolio. We started by have a thorough review of our trade finance segment of our business, which equal to approximately $200,000,000 a little bit over $200,000,000 of our loan portfolio. As time goes on within next ensuing months, realizing that many uncertainties and their implications and their side effects that happened with this tariff war, we will continue our review process diligently. Thank you. I'm ready for your question now.

Operator

Thank you. 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 then two.

Operator

At this time, we will pause momentarily to assemble our roster. The first question comes from Matthew Clark with Piper Sandler. Please go ahead.

Speaker 4

Hey. Good morning, everyone.

Speaker 5

Morning. Just

Speaker 4

want 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. Just wondering if it was how much might be below the four zero six? 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.

Speaker 6

Hey, Matthew, this is Ed. Unfortunately, don't have the March spot rate, but the margin for the quarter sans the nonaccrual reversals would have been 3.94. So it's holding up much better than as I previously discussed on these, the margin is holding up much better than we had anticipated.

Speaker 4

And that $394,000,000 is for the quarter, but you have it for March?

Speaker 6

I don't, but I can get that for you later.

Speaker 4

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 $66,000,000 or 67,000,000 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?

Speaker 3

Matthew, I will have Nick Pye answer the question.

Speaker 5

Hi, Matthew. This is Nick speaking. For the two credits, one of them is pretty right desirable land in a good area. A lot of builders, they try to offer to purchase and currently the property is under the no sale is under the contract, and we expect that to be closed for shortly. And the other one

Speaker 3

Okay, you might mention that we have I mean non refundable deposits. Yes.

Speaker 5

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.

Speaker 3

On that credit, Matthew, I wanted to know is that first of all, the appraisal value is still very good. I mean, it's in the LTVs in the 50s. In the meantime, we're setting the note at par.

Speaker 5

Correct, this year. So Matthew, just give you additional color that we just received the most updated appraisal report in April and the value come out with similar as before, and the long term value is around 62%. So with the note sell after the note sell closed, you know, I believe our note about what we even explore. The other one is currently in bankruptcy court. The borrower's counsel, as long as with the bank's counsel, we all agree to file motion to the BK Corp for selling this particular property.

Speaker 5

This is apartment, 188 units with 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 court normally a little bit slower than other avenue of sale. So we believe that this will be resolved. These two loans will be resolved within a quarter or two.

Speaker 4

Okay. And the size of the one in terms of dollars, the size of the one that's in bankruptcy?

Speaker 5

One is under no sell. To be closed soon is around 28,500,000.0. And the other one in the bankruptcy court is $37,000,000

Speaker 4

Okay. Thank you. Then just shifting gears to the expense run rate, Ed, assuming you don't have any more write downs on OREO from here, how should we think about the run rate in 2Q?

Speaker 6

So as you see, we came in at about $23,400,000 And as I've talked about previously, we have an outsized personnel expense line item, which is employer paid taxes due to the incentive compensation payout in Q1. That happens every Q1. In addition to that, as you've pointed out, the $1,300,000 write down, that puts Q1 normalized at about just over $21,000,000 in terms of the run rate. Going forward, I would estimate it to be 21,500,000.0 to $22,000,000 for the next couple of quarters and probably accelerating after that.

Speaker 4

Okay, great. And then just last one for me, if I may, on the buyback. I don't didn't look like there was any shares repurchased this quarter, probably for obvious reasons. But what's your appetite for buying

Speaker 3

on the report, mean, this department gave me that we bought back altogether 532,000 shares during the first twenty four days of month. And there's only one day purchase in March. All this number is done in April. So we have a total of $65,000,000 available under a buyback program. We have spent about $40,000,000 We have still $23,000,000 left to purchase.

Speaker 4

Okay. Did you say you did buy back stock in the first quarter though?

Speaker 6

No, there was just one day. Threethirty one was the only day we were in the market, but we were in the market for the entirety of April.

Speaker 4

Okay. Thank you.

Operator

Thank you. The next question comes from Andrew Terrell with Stephenson. Please go ahead.

Speaker 7

Hey, good afternoon. Mr. Yig, 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, 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?

Speaker 7

Or is a flat to down expectation more appropriate?

Speaker 3

Obviously, as a guy operating, 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 two thousand and eight meltdown with a simple I mean, sub debt of home loans can mushroom into a total financial system meltdown. So this tariff business is many angle and depending on which way the turns, it could affect seriously even the property value of many of our borrowers. So we're taking a close look on that.

Speaker 3

Likewise, we sensed many of our current customers, whether it's in C and I customers or real estate customer, they like to do a little bit wait and see. When the wait and see is over, we do not know. So it likely could be that by I mean, later in the second quarter, this thing just pick up. And we are poised. We have a large relationship staff who's out there is busy and try to bring in loans, and we just have to be very careful with it.

Speaker 7

Yes. Understood. Okay. For the second NPL loan, guys talked about the one that's in bankruptcy court. I think you said it was $37,000,000 note.

Speaker 7

Do you have a recent appraisal on that as well? And if so, like a refreshed LTV?

Speaker 5

Yes. That appraisal also pretty up there, right? I believe we did one back in November, still within six months. And the value can support loan to value around 71%.

Speaker 3

I read the briefing of the court information between the lawyers communication. Of course, it's quoting the things I read, okay? There is a cash offer sitting out there with these parties at $49,000,000 which is a wealth of sufficient to cover our exposure with the First Trust team.

Speaker 7

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.

Speaker 1

Hey. Thanks, everybody. Good morning. I have two questions. The first is with the commentary around trade finance, the $200,000,000 portfolio, it it would seem to me that the kind of nearest risk or near term risk is more that those trade finance ons get paid down as less activity occurs.

Speaker 1

Is that the reason why you're looking at it near term?

Speaker 3

You mean the trade finance segment?

Operator

Yes.

Speaker 3

Well, it's happening in and out in a situation depending on each customer is different. Some of them has currently everything is normal. I mean, they're under the I mean, their supply chain is outside of China. Some of them is a little bit heavy in China, but these people are well stocked inventory right now. So far, we don't have any activity in terms of abnormal activity yet on the portfolio.

Speaker 1

And then second question, just on the net or the loan interest revenue, given that $3,000,000 of interest reversals. So loan interest revenue was down $10,000,000 sequentially. You have that $3,000,000 and I assume a couple of million dollars just with a lower day count. Is the rest of that delta, call it, dollars 5,000,000 lower quarter over quarter, simply the full quarter impact of the rate cuts in 2024?

Speaker 3

Ed, could you answer that?

Speaker 6

I'm sorry, Gary. I apologize. Can you repeat the question?

Speaker 1

Yep. Sorry, I may have meandered there a bit. So the loan interest revenue was down about 10,000,000 sequentially from $112 call it, dollars 101,000,000. So you get the $3,000,000 of reversals, probably a couple of million dollars lower on day count. Is the rest of that delta just the full quarter impact of rate cuts from last year?

Speaker 6

Yes, yes, exactly.

Speaker 1

All right, so want to get

Speaker 3

a sense of how that

Speaker 6

yes, go Also, Gary?

Speaker 1

No, go ahead. Sorry.

Speaker 6

Also, as you know, as we're 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.

Operator

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

Speaker 8

Great. Thank you. Good morning, everybody. Hi. Mister mister Yu,

Speaker 3

it's kind of follow-up

Speaker 8

on the comments you made about, you know, having been through a couple cycles before. Grant, this might be the most telegraphed cycle if it turns out to be one that you've probably ever seen. So I'm wondering, how are you positioning the bank right now?

Speaker 3

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 2, I think it's caught everybody off guard. And being that most our customers and all the community banks customer and also many of the regional bank customer, they are smaller customers. And probably if they are in this particular business of importing or exporting or giving products 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 on the table right now, which is 20%, twenty five %, very few people can afford that.

Speaker 3

And whether the importer can absorb that, it is questionable. If they absorb that, it will be inflation only to our economy. If they absorb that, it will be decreasing demand, okay? And then how many of them are facing the situation in the empty shell when the supply cannot catch up and where all the supply chain 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.

Speaker 3

And from that, we internally seriously discuss about what is the likelihood they will 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 a bank is knowing more what each customer is doing right now.

Speaker 3

And hopefully, if there's some negative situation come along, we'll 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.

Speaker 8

No, I think you did. I think you did. I think that was 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?

Speaker 3

Yes. We are on certain segment of our loans. We put more attention to it. For 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 ten, fifteen 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're the owner user, whether they can continue to operate profitably in this line of business or not.

Speaker 3

So what I heard from early indication is 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 partner used to be the most thoughtful lending segment on CIE basis want to do. Now we have to slow down and be very careful, probably demand more margin, more cushion and more DCR now.

Speaker 8

All right. That's helpful. And then one final question for Ed. Ed, are there any material time deposit rolls coming up in the several quarters?

Speaker 6

Every quarter, Tim, every quarter.

Speaker 8

Great. What you got?

Speaker 6

It's about $1,160,000,000 at an average rate of $4.28 And our offering rates are in the mid-3s now, mid- to high-3s.

Speaker 8

That's for the

Speaker 6

long quarter, I'm sorry?

Speaker 8

I'm sorry, is that for the current quarter?

Speaker 6

That's for Q2. Yes, current. This quarter, the one we're in. I want to I'm going to steal some of your time here, Tim, and get back to Matthew Clark. I do have the spot rate for March.

Speaker 6

The margin was 3.84% excluding the reversals and loan yields were 7.55% for March. So sorry, Tim.

Speaker 8

That's all good. Those are all my questions. I appreciate your time. Thank you.

Speaker 3

Thank you, Tim.

Operator

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

Speaker 3

We thank you very much for attending the conference. I guess, 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, okay. So but there's nothing wrong to be too careful, and we like to be a little bit more careful. Thank you.

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Earnings Conference Call
Preferred Bank Q1 2025
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