Preferred Bank

Good day and welcome to the Preferred Bank second quarter 2025 earnings conference call. All participants will be in a 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 touch tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Jeffrey Haas of Financial Profiles. Please go ahead.

Thank you, Betsy. Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the second quarter ended June 30, 2025. With me today from 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 Security 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 banks operations and business environment all of which are difficult to predict and many of which are beyond the control of preferred banks 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. I'm very pleased to report that Preferred Bank's second quarter net income was $32.8 million, or $2.52 a share. which is a reasonable improvement from the previous quarter. This quarter, we have a loan growth of roughly 7 percent on annualized basis. Early indication in July is that the loan demand seems to have increased, however, to the extent of which is still too early to tell. Our deposits remain flat. Perhaps one of the reasons is that we try to control our cost of the deposits. Net interest margin this quarter was 3.85% as compared to the 3.75% reported last quarter. During the quarter, we have continued to buy back our stock in accordance with our policy of returning access capital to our shareholders. However, this quarter's purchase is relatively large in the amount of $56 million, which may have affected net interest income, PPNR, and net interest margin a little bit. Second quarter will show good improvement in assets quality. Non-accrued loans, criticized loans, and past due loans all decreased reasonably from the previous quarter, and we believe the trend should continue into the second half of this year. At this time, we have not identified any additional lost contents on these loans. We believe our loan loss reserve is sufficient to cover any exposure. There's still a lot of uncertainty in our economy. The tariff, the interest rate, and the inflation. I just hope these matters will clear up very soon so we can have a clearer and better operating environment to work under. Thank you very much, and I'm ready for your questions.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your questions have 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 today comes from Matthew Clark with Piper Sandler. Please go ahead.

Hey, thanks and good morning. Good morning. On the margin, if you had the average margin in the month of June and the cost of deposits as well.

Yeah. Hi, Matthew. The margin for June was 383, cost of deposits 341. And as a side note to that, those have been relatively consistent through the quarter. There's not been much change either on the asset yield side or on the cost of deposit side. It's been fairly steady.

Okay. Can you remind us what you have coming due on the CD side and the rate that it's rolling off on and what you're offering currently?

We have $1.4 billion that's going to roll off in Q3 at a weighted average rate of $4.21. Current offered rate is right around $4, maybe a touch above $4, and then some slightly below $4. So on average, probably just under 4%.

Got it. Okay, and then on the expense side, a little bit higher this quarter with the Oreo cost. What are your thoughts on the kind of run rate going forward in the second half?

Yeah, so looking forward, Matthew, you know, we hit 22.5 this quarter. I'm looking at about anywhere from 21.8 to, say, 22.6. Going out in the next couple of quarters, we did receive some insurance reimbursement on some legal matters related to a non-accrual loan that was resolved in earlier quarters. So we did have some lightening up on professional services costs. And then, of course, obviously we wouldn't expect the OREO write-down in future quarters.

Yep. Okay, great. And then last for me, just on the buyback, it sounds like you bought back $56 million worth into Q. But can you also just give us either the number of shares or the price at which you bought it back and what's left in the remaining authorization?

I think the price right now is higher than we have experienced in the past couple quarters. So we're continually evaluating these. the overall situation and would decide on the extent of buyback we're coming to.

Yeah, Matthew, the $56 million we did was right around $80 a share, $80, $81 a share on average. At the shareholder meeting in May, and we renounced that, we got approval for another $125 million repurchase. We have really not started to execute on that simply because the price per share relative to book value right now is at a much higher spread than it has been. So we're, as Mr. Yu said, being cautious on buying back at a high price.

Understood. Thank you.

The next question comes from Gary Tenner with D.A. Davidson. Please go ahead.

Thanks. Good morning. So I was curious about loan growth. You made the comment that seems to have picked up a bit in July, but just looking at the second quarter growth, obviously a lot stronger than it was in the prior period, particularly in the CNI side and some commercial construction. So wondering if you could provide some color on kind of what occurred there in the second quarter and kind of the pipeline into the third quarter.

Do you want to answer that first?

Yeah, I think that... The loan growth, as you can see, the first quarter, because of the terror of everything, so our CNI client kind of held back on a lot of uncertainty. And the second quarter, you know, of course, there's a combination of usage of their line of credit to upsize their business as well as applying a new customer. So going forward, as Mr. Yu mentioned, it looks like the demands of actual is We never know. You never know. It depends on the market.

Okay. And how about on the commercial construction side? Is that just a function of – is that new transactions or just, you know, existing commitments funding?

Well, Gary, the majority of that's existing commitments, I think. Both loans that were booked earlier are funding as construction progress goes.

But we do see more new requests, right?

Yes.

Okay. Appreciate that. And then last thing for me, just in terms of the $200 million of borrowings that you put into the bond portfolio, it looks like that was pretty well in the mid part of the quarter. Just kind of take a look at the average balance sheet. Any thoughts about doing any more of that in the back half of the year? Is it dependent more on the pace of loan growth? Maybe just talk about the thought process around that.

No, I think it was just an opportunity that we saw relative to the funding and then the assets that we invested in. Obviously, it's going to dilute the margin a little bit, but obviously increase EPS. And we felt the 10-year was at a very good level, especially from a long-term perspective, to put quite a bit of money there. So that's what we ended up doing. And we funded at about 80 basis points cheaper. Okay. Thank you.

The next question comes from Andrew Terrell with Stevens. Please go ahead.

Hey, good morning. Hey, I want to go back to the loan growth a little bit. You know, it sounds like, you know, July a little bit better, and you obviously had really good growth in the second quarter. Just wanted to hear from you guys maybe your thoughts on competition right now and kind of where new loans are coming on at rate-wise.

Okay, you want to try that again?

Competition is stiff. I mean, we have, there are lenders out there continue to offer very low fixed rate loans, all that, and that has been consistent. I mean, you know, we always compete with the lenders out there in that market. But I think that we are a relationship-driven bank. And we always consistently provide quick and excellent service to our existing customer to help them continue growth. So that's pretty much what we have.

Okay. Okay. Thank you. And then I wanted to ask on the deposit side, just some rotation out of the interest-bearing demand and non-interest-bearing categories this quarter? You know, anything specific driving that and maybe just a little more on expectations around deposit growth?

This will be our goal is to continue to grow deposits. Obviously, one of the situation conditions is that we have to keep the cost in control, okay? And we have worked on that for about four or five months now. And it seems to be now it's a reasonable situation. And depending on the funding needs or the loan growth, we may be a little more aggressive on the deposits.

Got it. Okay. Thank you for taking the questions.

Thank you.

The next question comes from David Fester with Raymond James. Please go ahead.

Hey, good morning, everybody. Good morning, David. I just wanted to maybe start with, you know, getting an update on the Oreo that you've still got remaining. You know, glad to see one of those non-accruals get resolved. You know, obviously we took the write-down. It sounds like you had a contract that maybe fell through. Just kind of Curious your thoughts on the timeline for resolution of that, and just anything broadly, you know, credit exclusive to those two, it seems like it's held up really well, but just kind of curious your thoughts on the credit side.

Once in a while in a corporate life, we have some unlucky situation and only one thing, and this is obviously the one. The property side of it was very high valuation, and it has been continuously valued downward. Every time we get into escrow, it seems to be it's automatically fall out in the future. So we obviously want to get rid of that, okay? But we don't want to fire sale it. So we'll continue to try to market it. And when it gets too close to what we want, we get rid of it. So obviously, if a good offer comes in next month, we will be selling it. We thought this thing was resolved about last year. But it's still hanging out there.

Yeah. Okay. So no real updated timeline on resolution? No. Okay. And then, you know, one of the initiatives I know you guys have been working on, we have the new branch that came online in Manhattan. I was just hoping you could get kind of an update on how things are going there and any other plans for de novos or organic expansion opportunities.

Yes, Manhattan is one of our most promising branches. Right now, they're very, very vibrant in their loan generation. So we're very happy with the progress they're making so far. And then, yes, there will be new branches open that we will open of our Silicon Valley branch in the second half of the year.

Okay, perfect. And then maybe last one, you know, just kind of following up on, you know, some of the commentary you've already made and, you know, reading the release, I thought the commentary was pretty encouraging about maybe some of the uncertainty clearing up and increased clarity, you know, in the prepared remarks. Maybe it sounded like that uncertainty is still kind of an overhang. I'm just, I was hoping you could maybe touch on the pulse of your clients, you And, you know, just kind of what's your hearing from them? And at what point do you think, you know, growth can really start to accelerate?

Well, growth to accelerate is not a necessary condition of clearing up of the uncertainties. We may have to care of clearing up, but the question is the aftershock effect is not known. When the tariff is being levied on other people, there are definitely the suppliers internationally that will not be able to meet the tariff requirement today. And definitely there will be some shifting and changes in supply chains from geographically or company within that. Because For my knowledge, many of the product that was imported to this country is operating at the less than 20% profit margin, total profit margin. So needless to say, if somebody can do that and the market cannot absorb it here, then we're going to have changes. So we're waiting for the results of these things gradually come in, how many is affecting the market. our customer or the market in general, it's still unknown right now. Internally, we are keeping monthly tracking of all the borrowers that has a supply situation or affected by tariff situation. We evaluate them monthly and we're in contact with our customer monthly knowing what their plan is. If you know that every country has their numbers, for the countries to get their numbers, not everybody is agreeing to that. Okay.

That makes sense. And so you're kind of just reading between the lines. Don't get too excited about the drawdowns on the C&I lines. There's still a lot of uncertainty. Yes.

We are keeping our eyes very close on that. We are not a big bank, so we have a lot of – we're very close contact with our customers.

Yeah. That's great. Thanks, everybody.

This concludes our question and answer session. I would like to turn the conference back over to Mr. Liu for any closing remarks.

Thank you so very much, Gay. And, yeah, we hope that we're able to handle the turbulence in the past few If you must, we certainly fear that we can continue to do that, okay? But we do hope that the overall condition of the economy is clear. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.