Preferred Bank Q1 Earnings Call Highlights

Key Points

• Preferred Bank reported Q1 net income of $31.3 million ($2.53/share), but results were “negatively impacted” by placing a large borrower relationship of about $77 million on non‑accrual, helping push net interest margin down to 3.57% from 3.74%.
• Management has reduced that relationship by roughly 50% through loan sales—including two loans sold at par totaling $48.5 million plus a $9.4 million loan—and said remaining remediation will rely on further note sales, foreclosures and bankruptcy proceedings.
• The bank saw moderate sequential loan and deposit growth (1.1% and 1.2%), with deposit costs easing (March cost 3.10%) but facing intense pricing competition and $1.35 billion of deposits maturing in Q2 at an average 3.89%; buybacks also continued (~400,000 shares at ~$89–90).

Preferred Bank NASDAQ: PFBC reported first-quarter net income of $31.3 million, or $2.53 per share, but management said results were “negatively impacted” by the move of a large borrower relationship to non-performing status.

Non-accrual relationship drove margin pressure

Chairman and CEO Li Yu said the bank placed a nine-loan relationship on non-accrual status during February and March, noting it included “two C&I loans of a small $2 million” with the remainder in commercial real estate loans. Yu said the non-accrual total was “only $77 million” at the time it was placed on non-accrual.

Yu added the bank has already reduced exposure through loan sales. “Shortly after the announcement, we’re able to sell one loan at par of $9.4 million,” he said. “On April the 1st, we have sold another two loans at par for $48.5 million.” Yu said that, as of the call, the bank had “effectively reduced the relationship by roughly 50%,” and it planned to continue working through the issue into the second and third quarters with the goal of achieving “substantial resolution.”

Net interest margin was 3.57% for the quarter, down from 3.74% in the prior quarter. Yu attributed the decline primarily to a reversal of interest income tied to the non-accrual move, which he characterized as non-recurring, and said management is “very hopeful that our net interest margin will rebound” in coming quarters.

Loan sales and resolution paths still developing

During the Q&A, CFO Edward Czajka confirmed that the move in loans held for sale included the two notes sold at par on April 1. Czajka said that “part of that $76 million, $48.5 million, is the two notes sold at par,” and added that “two other notes” were also in held-for-sale as the bank actively markets them.

Yu said the bank’s goal is to sell remaining loans “as close to the par as possible,” while acknowledging it has been “writing down some of the loans.” He also described the overall resolution outlook as less predictable given differing property and credit circumstances across the remaining loans.

Asked whether note sales would be the primary remediation tool, Yu said sales are “the quickest and best” outcome if pricing is acceptable. At the same time, he noted that other processes are underway, including foreclosure and bankruptcy proceedings. Yu said most of the loans have bankruptcy filings, and the timing and outcomes can depend on what a bankruptcy judge decides, including whether a borrower is granted time to sell, operate, or reorganize.

Moderate balance sheet growth amid intense pricing competition

Yu reported “moderate” sequential growth in both loans (up 1.1%) and deposits (up 1.2%). He said competition—particularly on pricing—has been “very severe.” In response to a question on loan pricing, Yu said rates in the market are “all over the place,” including competitors offering long-term fixed-rate loans “below 6%,” adding, “We can’t afford to do that,” especially given uncertainty around the interest rate outlook and the absence of previously expected rate cuts.

Yu also said he has not seen the industry loosen underwriting standards. “We see the quality pretty much the same situation,” he said, adding that peers appear to be “very much controlling themselves” on credit quality.

On the macro backdrop, Yu tied demand uncertainty to geopolitical risk and energy prices. He said internally the bank had previously guided itself to “high single digit” growth, but pointed to uncertainty stemming from conflict in the Middle East and broader policy changes. “We have to be realistic,” Yu said, adding that in wartime conditions and rising energy prices, “you’re not going to see the same loan demand as you are in a peacetime situation.”

Pressed further on demand trends, Yu said, “I think demand slowdown is a foregone conclusion,” citing the potential impact of oil moving toward $100 per barrel and the difficulty of measuring second-order effects.

Deposit costs easing, but deceleration expected

Czajka said deposit costs are declining, though the pace of improvement has slowed versus the fourth quarter. He said March deposit cost was 3.10% overall. Czajka also disclosed that $1.35 billion in deposits will mature in the second quarter at an average rate of 3.89%, and said those balances will “likely be put on at similar rates, maybe a little bit lower.” He cautioned the bank is nearing “stagnation” in the benefit from rolling higher-cost CDs into lower-priced products.

Expenses and capital: stable overhead, buybacks continue

Yu said non-interest expense has been stable and management intends to keep it that way. Czajka provided additional detail, saying non-interest expense was “roughly 23.5” (million) for the quarter, including more than $1 million tied to elevated payroll taxes related to bonus payouts and stock vesting. Looking ahead, Czajka said he expects a second-quarter expense run rate “in the high 22s to low 23s.”

Yu also said the bank repurchased roughly 400,000 shares of common stock at “roughly $89-$90 a share.” On capital priorities, he described differing shareholder perspectives, ranging from more aggressive buyback advocates to long-term holders and rating agency considerations. Yu said the board’s view is that “security is above all,” and that the bank is leaning toward the long-term shareholder viewpoint and maintaining flexibility given economic uncertainty.

On interest rate sensitivity, Yu said Preferred Bank is “sort of near neutral” currently, in part due to its time certificate of deposit portfolio. Czajka said the bank has not made major changes to its balance sheet profile in the past 12 months, and characterized the loan book as roughly 75/25 variable to fixed. He also said the bank has been working to tie more large corporate deposit accounts directly to Fed funds to improve asset-liability matching. Both executives emphasized maintaining a short balance sheet posture to preserve flexibility if inflation rises or the Fed’s next move is not a rate cut.

About Preferred Bank NASDAQ: PFBC

Preferred Bank NASDAQ: PFBC is a California-chartered commercial bank headquartered in Los Angeles. The institution offers a full range of banking products and services to businesses and individuals, with a particular emphasis on commercial real estate lending, business banking, treasury management and deposit accounts. Preferred Bank operates through branch offices across Southern California and national loan production offices in major U.S. markets.

The bank's core lending portfolio focuses on commercial real estate acquisition, development and investment properties.

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