Preferred Bank Q1 2025 Earnings Report

Preferred Bank EPS Results

• Actual EPS: $2.23
• Consensus EPS: $2.33
• Beat/Miss: Missed by -$0.10
• One Year Ago EPS: $2.44

Preferred Bank Revenue Results

• Actual Revenue: $65.96 million
• Expected Revenue: $70.78 million
• Beat/Miss: Missed by -$4.83 million
• YoY Revenue Growth: N/A

Preferred Bank Announcement Details

• Quarter: Q1 2025
• Date: 4/25/2025
• Time: Before Market Opens
• Conference Call Date: Friday, April 25, 2025
• Conference Call Time: 2:00PM ET

Preferred Bank (NASDAQ:PFBC) (NASDAQ: PFBC) is a California-chartered commercial bank headquartered in Los Angeles. Founded in 1991, the bank provides banking and financial services to businesses, professionals and individuals, with a particular focus on small and middle-market companies and the Chinese-American community.

The bank offers commercial and industrial loans, commercial real estate financing, construction loans, small business lending, residential mortgage loans and consumer credit. Its deposit products include checking, savings, money market and time deposit accounts, along with treasury management, online banking and other cash-management services for business customers.

Preferred Bank serves customers through a network of branches and offices in California and the New York metropolitan area, including markets in Southern California, Northern California and communities in the New York region. Li Yu has served as the bank’s chairman and chief executive officer since its founding.

Preferred Bank Q1 2025 Earnings Call Transcript

Key Takeaways

• In Q1, net income was $30 million ($2.23 per share), but was hit by a $3 million interest reversal on non-performing loans and a $1.3 million OREO charge-off.
• Non-performing loans totaled $71 million at quarter-end, with $66 million tied to two previously disclosed credits.
• Both large non-performing credits are well-collateralized—with one loan under contract for sale and the other proceeding through bankruptcy court—and are expected to resolve within the next two quarters.
• Deposits rose 2.6% sequentially with lower funding costs, offsetting a 0.1% decline in loans, while normalized expenses are forecast at $21.5 million–$22 million per quarter.
• Management has begun a diligent review of its ~$200 million trade finance portfolio amid global tariff uncertainties to monitor potential customer impacts.

Presentation

[Operator]

Good day, and welcome to the Preferred Bank Q1 2025 Earnings Conference 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 will be an opportunity to ask questions. To ask a question, you may press star, then one on a telephone keypad. To withdraw your question, please press star, then two. 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, SVP at Financial Profiles]

Thank you, Jacob. Hello, everyone. Thank you for joining us to discuss Preferred Bank's financial results for Q1 ended 31 March 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.

[Jeff Haas, SVP at Financial Profiles]

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, Chairman and CEO at Preferred Bank]

Thank you. Good morning. Preferred Bank's Q1 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 OREO in the amount of $1.3 million. The non-performing loans totaled $71 million at quarter end, of which $66 million of the $71 million related to one relationship or two credits. This event is previously disclosed to you in early March. The two credits or two loans have a collateral value which well protects the loan amount, and there are no loss content being identified at this time. Total credit trend seems to be okay.

[Li Yu, Chairman and CEO at Preferred Bank]

The total classified, I mean, criticized loan portfolio is reduced $30 million from previous quarter end or 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 have a negative loan growth of $6 million, 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.

[Li Yu, Chairman and CEO at Preferred Bank]

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 customers differently. We have already started to monitor our loan portfolio. We started by a thorough review of our trade finance segment of our business, which equaled to approximately $200 million, a little bit over $200 million of our loan portfolio. And as time goes on, within the next ensuing months, realizing that the many, I mean, uncertainties, and their implications, and their side effects that happen 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 star, then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Matthew Clark with Piper Sandler. Please go ahead.

[Matthew Clark, Senior Research Analyst at Piper Sandler]

Hey, good morning, everyone.

[Li Yu, Chairman and CEO at Preferred Bank]

Hello.

[Matthew Clark, Senior Research Analyst at Piper Sandler]

Just 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 406. 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.

[Edward Czajka, CFO at Preferred Bank]

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

[Matthew Clark, Senior Research Analyst at Piper Sandler]

That 3.94 is for the quarter, but do you have it for March?

[Edward Czajka, CFO at Preferred Bank]

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

[Matthew Clark, Senior Research Analyst at Piper Sandler]

Okay. 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. 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, Chairman and CEO at Preferred Bank]

Matthew, I will have Nick Pi answer the question, okay?

[Nick Pi, Chief Credit Officer at Preferred Bank]

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. The other one.

[Li Yu, Chairman and CEO at Preferred Bank]

Okay. You might mention that we have, I mean, non-refundable deposits.

[Nick Pi, Chief Credit Officer at Preferred Bank]

Yes. For that particular deal, we just received non-refundable deposits. The deal is pretty sure that will be closed within a very short period of time.

[Li Yu, Chairman and CEO at Preferred Bank]

On that credit, Matthew, I wanted to know, 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.

[Nick Pi, Chief Credit Officer at Preferred Bank]

Correct. This year. Matthew, just to give you additional color, we just received the most updated appraisal report in April, and the value came out similar as before, and the loan-to-value is around 62%. With the note sale, after the note sale closed, I believe our loan-to-value will be even more. The other one is currently in bankruptcy court. The borrower's counsel, along with the bank's counsel, we all agree to file a motion to the BK Court for selling this particular property. This is an apartment, 188 units, also with a good value to support the credit. We believe through the BK Court's process, this is the best way for the bank to get rid of this. We think within a quarter or two, because BK Court normally is a little bit slower than other avenues of sale.

[Nick Pi, Chief Credit Officer at Preferred Bank]

We believe this will be resolved. These two loans will be resolved within a quarter or two.

[Matthew Clark, Senior Research Analyst at Piper Sandler]

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

[Nick Pi, Chief Credit Officer at Preferred Bank]

The one is under note sale to be closed soon is around $28.5 million. The other one in the bankruptcy court is $37 million.

[Matthew Clark, Senior Research Analyst at Piper Sandler]

Okay. Thank you. Just shifting gears to the expense run rate, Ed, assuming you do not have any more write-downs on OREO from here, how should we think about the run rate in Q2?

[Edward Czajka, CFO at Preferred Bank]

As you see, we came in at about $23.4 million. 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 $1.3 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 to 22 million for the next couple of quarters, and probably accelerating after that.

[Matthew Clark, Senior Research Analyst at Piper Sandler]

Okay. Great. 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, Chairman and CEO at Preferred Bank]

Okay. Based on the report, Ed, I mean, this department gave me, okay, that we bought back altogether 532,000 shares during the first 24 days of the month, okay? There's only one day purchase in March, okay? All this number is done in April, okay? So we have a total of $65 million available under a buyback program. We have spent about $40 million. We have still $23 million left to purchase.

[Matthew Clark, Senior Research Analyst at Piper Sandler]

Okay. Did you say you did buy back stock in Q1, though?

[Edward Czajka, CFO at Preferred Bank]

No. There was just one day. 31 March was the only day we were in the market, but we were in the market for the entirety of April.

[Matthew Clark, Senior Research Analyst at Piper Sandler]

Okay. Thank you.

[Operator]

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

[Andrew Terrell, Managing Director at Stephens]

Hey, good afternoon. Mr. Yu, 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 open 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, Chairman and CEO at Preferred Bank]

Obviously, as a guy operating bank, I hope we can continue to do that. We are poised to continue to do that. As you know, as an older person that I've experienced many different things, including the 2008 meltdown, where the simple, I mean, sub-debt of home loans can mushroom into a total financial system meltdown, okay? This tariff business is many angled, and depending on which way it turns, it could affect seriously even the property value of many of our borrowers. We are taking a close look on that.

[Li Yu, Chairman and CEO at Preferred Bank]

Likewise, we sense that many of our current customers, whether it's C&I customers or real estate customers, they like to do a little bit wait and see. When the wait and see is over, we do not know. It likely could be that by, I mean, later in Q2, this thing just pick up.

[Li Yu, Chairman and CEO at Preferred Bank]

We are poised. We have a large relationship staff who is out there, is busy, and trying to bring in loans. We just have to be very careful with it.

[Andrew Terrell, Managing Director at Stephens]

Yep. Understood. Okay. For the second NPL loan, you guys talked about the one that's in bankruptcy court. I think you said it was a $37 million note. Do you have a recent appraisal on that as well? And if so, a refreshed LTV?

[Nick Pi, Chief Credit Officer at Preferred Bank]

Yeah. That appraisal also pretty up to date, right? 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, Managing Director at Stephens]

Okay.

[Li Yu, Chairman and CEO at Preferred Bank]

I read the briefing of the call 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 million, which is well sufficient to cover our exposure. We're the first trustee.

[Andrew Terrell, Managing Director at Stephens]

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, Analyst at D.A. Davidson]

Hey, thanks, everybody. Good morning. 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 lines get paid down as less activity occurs. Is that a reason why you're looking at it near-term?

[Li Yu, Chairman and CEO at Preferred Bank]

You mean the trade finance segment?

[Gary Tenner, Analyst at D.A. Davidson]

Yeah. Yes.

[Li Yu, Chairman and CEO at Preferred Bank]

It's happening in, and out in 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.

[Gary Tenner, Analyst at D.A. Davidson]

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 the full quarter impact of the rate cuts in 2024?

[Li Yu, Chairman and CEO at Preferred Bank]

Ed, can you answer that?

[Edward Czajka, CFO at Preferred Bank]

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

[Gary Tenner, Analyst at D.A. Davidson]

Yeah. Sorry. I may have meandered there a bit. The loan interest revenue was down about $10 million sequentially from $112, call it $101. You had the $3 million 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?

[Edward Czajka, CFO at Preferred Bank]

Yes. Yes. Exactly.

[Gary Tenner, Analyst at D.A. Davidson]

I just want to get a sense of how that. Yeah.

[Edward Czajka, CFO at Preferred Bank]

Gary?

[Gary Tenner, Analyst at D.A. Davidson]

No, go ahead. Sorry.

[Edward Czajka, CFO at Preferred Bank]

Also, as you know, as we're renewing loans, and originating loans, they are coming off of a higher base typically. When they come to renew, they're typically coming down a little bit in terms of yield. That's part of the effect as well.

[Gary Tenner, Analyst at D.A. Davidson]

Okay. Got it. Thank you.

[Operator]

Thank you. Again, if you have a question, please press star, then one. The next question comes from Tim Coffey with Janney. Please go ahead.

[Tim Coffey, Managing Director and Associate Director of Depository Research at Janney]

Thank you. Morning, everybody.

[Li Yu, Chairman and CEO at Preferred Bank]

Hi.

[Tim Coffey, Managing Director and Associate Director of Depository Research at Janney]

Mr. Yu, just kind of following up on the comments you made about having been through a couple of cycles before. Grant, this might be the most telegraphed cycle, as it turns out to be one that you've probably ever seen. I am wondering, how are you positioning the bank right now?

[Li Yu, Chairman and CEO at Preferred Bank]

Being that it's just started to have this trade finance, I mean, the tariff situation, I guess because the liberation date is 2 April, I think it's caught everybody off guard. Being that most of our customers, and all the community bank's customers, and also many of the regional bank customers, they are smaller customers. Probably if they are in this particular business of importing or exporting or getting product from the foreign countries, everybody is operating on a different profit margin.

[Li Yu, Chairman and CEO at Preferred Bank]

Some of them, very few of them will be able to absorb so-called the tariffs that are on the table right now, which is 20%, 25%. Very few people can afford that. 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?

[Li Yu, Chairman and CEO at Preferred Bank]

How many of them are facing the situation, and the empty shelf when the supply cannot catch up? Where all the supply chain can be switched to different countries? What we're doing right now is we're having our loan office going out, discuss with each of our trade finance customers, and knowing what are they reacting, how do they try to react on the matter. From that, we internally seriously discuss about what is the likelihood they will be successful in handling this kind of matter. While we're doing it, we're also learning. 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. Hopefully, if there's some negative situation come along, we'll be affected less. Nobody can escape from the big situation.

[Li Yu, Chairman and CEO at Preferred Bank]

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, Managing Director and Associate Director of Depository Research at Janney]

No, I think you did. I think you did. I think that was very helpful. I mean, I hear you. It's a fluid situation, outcome highly uncertain. As it comes to underwriting loans right now, has anything changed?

[Li Yu, Chairman and CEO at Preferred Bank]

Yes. We are on certain segment of our loans. We put more attention to it. For used to be, if you know that in the Western United States, especially in California, industrial property has been in the lowest vacancy, and most safe lending products for the past 10 to 15 years. Unfortunately, we're already seeing many of the transactions being slowed down. 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. What I heard from the early indication is that cap rate is starting to see pressure. Not actually happening yet, but everybody is worried about that. We as a lender have to be careful about that.

[Li Yu, Chairman and CEO at Preferred Bank]

Today, as an industrial part, I used to be the most thoughtful lending segment on CRE basis want to do. Now we have to slow down, and be very careful, probably demand more margin, more cushion, and more DCR now.

[Tim Coffey, Managing Director and Associate Director of Depository Research at Janney]

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

[Edward Czajka, CFO at Preferred Bank]

Every quarter, Tim. Every quarter.

[Tim Coffey, Managing Director and Associate Director of Depository Research at Janney]

Great. Great. What you got?

[Edward Czajka, CFO at Preferred Bank]

It's about $1.16 billion at an average rate of 4.28%. Our offering rates are in the mid 3% now, mid to high 3%.

[Tim Coffey, Managing Director and Associate Director of Depository Research at Janney]

Is that for the current quarter?

[Edward Czajka, CFO at Preferred Bank]

I'm sorry?

[Tim Coffey, Managing Director and Associate Director of Depository Research at Janney]

Oh, I'm sorry. Is that for the current quarter?

[Edward Czajka, CFO at Preferred Bank]

That's for Q2. Yes, this quarter.

[Tim Coffey, Managing Director and Associate Director of Depository Research at Janney]

Okay. Good.

[Edward Czajka, CFO at Preferred Bank]

The one we're in. 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. The margin was 3.84, excluding the reversals. And loan yields were 7.55 for March. Sorry, Tim.

[Tim Coffey, Managing Director and Associate Director of Depository Research at Janney]

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

[Li Yu, Chairman and CEO at Preferred Bank]

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, Chairman and CEO at Preferred Bank]

We thank you very much for attending the conference. I guess sometimes I think personally I'm a little bit paranoid about the tariff situation. Maybe just because my personal background has been in more recession than most of you probably can. There is nothing wrong to be too careful. We like to be a little bit more careful. Thank you.

Participants

Executives

• Li Yu, Chairman and CEO
• Edward Czajka, CFO
• Nick Pi, Chief Credit Officer

Analysts

• Tim Coffey, Managing Director and Associate Director of Depository Research at Janney
• Gary Tenner, Analyst at D.A. Davidson
• Andrew Terrell, Managing Director at Stephens
• Jeff Haas, SVP at Financial Profiles
• Matthew Clark, Senior Research Analyst at Piper Sandler