Preferred Bank

Good day and welcome to the Preferred Bank First Quarter 2025 Earnings Conference Call. All participants will be in lesson-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 your telephone keypad. To withdraw your question, please press star, then two. Please note that this event has been recorded. I would now like to turn the conference over to Jeff Haas of Financial Profiles. Please go ahead.

Thank you, Jacob. Hello, everyone. Thank you for joining us to discuss Preferred Bank's financial results for the first quarter ended March 31, 2025. With me today for management are Chairman and CEO Lee Yu, President and Chief Operating Officer Wellington Chen, Chief Financial Officer Edward Chayka, 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. Forward-looking statements are also subject to known and unknown risk 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. Lee Yu. Please go ahead.

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 of our real estate over our yield 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 one relationship or two credits. This event is previously disclosed to you in early March end. The two credits, or two loans, have a collateral value which will protect the loan amount, and there are no loss compounds identified at this time. Total credit trend seems to be okay. The total classified, I mean, criticized loan portfolio is reduced $30 million from previous quarter and are roughly 20 percent, 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 percent 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 increase 2.6% on the mean 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 wall with the whole world. This current situation is truly very much unpredictable, bringing many, many of the uncertainties, ranging from supply chain changes, you know, cost increases, inflation, or empty shelves, empty product warehouse. All these things can affect each and every one of our customers 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, a little bit over $200 million of our loan portfolio. And as time goes on, within the next ensuing months, realizing that the 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.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 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.

Hey, good morning, everyone.

Hello.

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 that you had it.

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

And that 3.94 is for the quarter, but you have it for March?

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

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 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?

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

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 no-sell is under the contract, and we expect that to be closed very shortly.

And the other one... Okay, you might mention that we have non-refundable deposits.

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.

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

Correct. So, Matthew, just give you an 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 percent. So, with the note sale, after the note sale closed, you know, I believe our notary public loan will be even more. 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 a motion to the BK Corp for selling this particular property, this apartment. 188 units 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 are 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.

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

One is under no sale. To be closed soon is around $28.5 million. And the other one in the bankruptcy court is $37 million.

Okay. Thank you. And 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?

So, as you see, we came in at about $23.4 million, 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, 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 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.

Okay, great. And then just last one from 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?

Okay, based on the report that the department gave me, we bought back altogether 532,000 shares during the first 20 years. 24 four days of the other months, okay. And it is only one day purchasing March, all these numbers done in April. So we have a total of 65 million not available under a buyback program, we have spent about $40 million, we have to $23 million left to purchase.

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

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.

Okay. Thank you.

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

Hey, good afternoon. Mishi, I heard some of the comments and 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, you know, where you're seeing demand from a client perspective, where it's a little softer right now. And then maybe, you know, specifically, do you still feel like you can grow the loan portfolio in this environment or is a flat to down expectation more appropriate?

Obviously, as a guy operating a 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-debt of home loans can mushroom into a total financial system meltdown. So this tariff business is, is many angles, and depending on which way it turns, it could affect seriously even the property value of many of our borrowers. So we're taking a close look on that. Likewise, we sense that many of our current customers, whether it's the 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. So it likely could be That by, you know, by, I mean, later 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.

Yeah, understood. Okay. For the second NPL loan you guys talked about, the one that's 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?

Yeah, that appraisal also pretty update, right? I believe we did one back in November last year, still within six months. And the value I can support to vary around 71%. Okay.

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. It's $49 million. which is well sufficient to cover our exposure. We're the first trustee.

Okay, understood. Thank you for taking the questions.

Thank you. The next question comes from Gary Tanner with DA Davidson. Please go ahead.

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 signs get paid down as less activity occurs. Is that a reason why you're looking at it near-term?

You mean the trade finance segment? Yeah. Yes. 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, their supply chain is outside of China. Some of them is a little bit heavier 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 portfolios.

And then second question, just on the net, are the loan interest revenue, given that $3 million of interest reversals. So loan interest revenue is 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?

Ed, can you answer that?

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

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

Yes, yes, exactly. I just want to get a sense about that.

Also, Gary? No, go ahead. Sorry.

Also, you know, as you know, as we're, you know, 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.

Got it. Thank you. Thank you.

Again, if you have a question, please press star, then 1. The next question comes from Tim Coffey with Genie. Please go ahead.

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

Well, being that it's just started to have this, I mean, the tariff situation, I guess, because the liberation date is April the 2nd, I think it's caught everybody off guard. And being that most of our customers and all the community banks' customers, and also many of the regional banks' customers, they are all smaller customers. And probably if they are in this particular business of importing or exporting or getting 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 tariff 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 inflation to our economy. If they absorb that, it will be decreasing demand. And then how many of them are facing the situation an 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 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. I guess the best way I can describe how to position a bank is knowing more what each customer is doing right now. 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.

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?

Yes. We are on certain segments 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're the owner-user, whether they can continue to operate profitably in this line of business or not. What I heard from an early indication is the cap rate has started to see pressure. Not actually happening yet, but everybody is worried about that. We as a lender have to be careful about that. Today, as an industrial part, I used to be the most thoughtful, you know, lending segment on a 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.

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

Every quarter, Tim, every quarter. Great. Great. What do you got? It's about $1.16 billion at an average rate of $4.28. And our offering rates are in the mid-threes now, mid to high threes.

And that's for the current quarter?

I'm sorry?

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

That's for Q2. Q2. Yes, currently. This is the one we're in. And 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 384, excluding the reversals, and loan yields were 755 for March. So, sorry, Tim.

No, no, it's all good. Those are all my questions. I appreciate your time. Thank you.

Thank you, Tim. 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.

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