Preferred Bank
NASDAQ:PFBC
Preferred Bank
Preferred Bank, founded in 1991 and headquartered in Los Angeles, California, has carved out a niche as a leading player catering to the financial needs of middle-market businesses and high-net-worth individuals. The bank's roots reflect its strategic focus on relationship banking, emphasizing personalized service and tailored solutions. This approach distinguishes Preferred Bank from larger institutions, as it thrives on its ability to offer flexibility and rapid decision-making. With a concentration in commercial real estate and business lending, Preferred's operations are heavily tied to the dynamic economic ecosystem of Southern California. Its agility in meeting the complex demands of its clients is bolstered by a team of seasoned banking professionals who offer bespoke financial strategies, seamlessly blending traditional banking services with a forward-thinking approach to addressing financial complexities.
In terms of its business model, Preferred Bank capitalizes on its robust loan portfolio, which consists largely of real estate, commercial, and personal loans, generating interest income, which is its primary revenue stream. By maintaining a disciplined risk management framework, the bank balances loan growth with asset quality, ensuring profitability while safeguarding its financial health. Additionally, the bank earns significant non-interest income through banking services such as cash management and foreign exchange services, which serve the dual purpose of enhancing client relationships and diversifying revenue streams. As a public company, Preferred Bank leverages its solid financial performance and regional expertise to attract investors, underscoring its commitment to growth and shareholder value. In navigating the competitive and regulatory financial landscape, Preferred Bank's targeted lending approach and regional expertise continue to underpin its success in delivering consistent financial results.
Earnings Calls
In the first quarter of 2025, Preferred Bank reported a net income of $30 million, or $23 per share. This was affected by a significant interest income reversal due to $71 million in nonperforming loans, primarily tied to two credits. Though loan growth slightly declined by $6 million, deposits saw a 2.6% increase. The net interest margin was at 3.75%, lowered by interest reversals, but a normalized margin would be closer to 4.06%. Management highlighted ongoing concerns over tariffs impacting future loan demand, suggesting a cautious approach in the months ahead.
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Good day, and welcome to the Preferred Bank First Quarter 2025 Earnings Conference. [Operator Instructions]. And I'd 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 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.
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.
Thank you. Good morning. Preferred Bank's first quarter net income was $30 million or $23 a share. This quarter net income was negatively impacted by an outsized reversal of interest income related to the elevated level of nonperforming loans. It is also negatively impacted by a charge-off of our real estate on OREO in the amount of $1.3 million.
The nonperforming loans totaled is $71 million at quarter end, of which $66 million of the $71 million related to related to one relationship or 2 credits. This event as previously disclosed to you in March -- early March. The 2 credits or 2 loans have a collateral value, which will protect the loan amount, and there are no loss content being 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 end are 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 had a negative loan growth of $6 million, equal to approximately 0.1% of our total loan portfolio. But our deposit increased 2.6% on a linked quarter basis and the deposit costs 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.
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 over $200 million of our loan portfolio. And as time goes on within the next ensuing months, realizing that many uncertainties and their implications and the side effects that happen with this tariff war. We will continue our review process diligently. Thank you. I'm ready for your questions now.
[Operator Instructions]. The first question comes from Matthew Clark with 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 you might be below the 4.04% -- 4.06%. And then spot rate, if you had it at the end of the month, ideally, but I'll take the average for the month.
Matthew, this is Ed. I don't -- unfortunately, I don't have the March spot rate, but the margin for the quarter sounds the nonaccrual reversals would have been 3.94%. So it's holding up much better than as I've previously discussed on these, the margins 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. I can get that for you later.
Okay. And then just on the nonperforming relationship, can you just let us know which of the 2 is being sold at par? Just trying to get a sense for the dollar amount of that $66 million 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?
I will have Nick Pi answer the question, okay?
Matthew, this is Nick speaking. For the 2 credits, one of them is a 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. And the other one --
You might mention that -- we have -- I mean, nonrefundable deposits.
Yes. And for that particular deal, we just received nonrefundable deposits. So the deal is pretty sure that will be closed within a very short period of time.
On that credit, Matthew, 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 selling the note at par.
Correct. This year. So Matthew, just to 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 loan-to-value is around 62%. So with the note sale -- after the note sale closed, I believe our loan-to-value will be even lower. The other one is currently in bankruptcy court. The borrowers council as long as with the bank's counsel, we all agree to file motion to the BKC for selling this particular property.
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 2, because BK court normally are a little bit slower than other avenue of sale. So we believe this will be resolved. These 2 loans will be resolved within a quarter or 2.
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 $20.5 million. And the other one bankruptcy court is $37 million.
Okay. 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 pay 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 million to $22 million for the next couple of quarters and probably accelerating after that.
Okay. Great. And then just last one for me, if I may, on the buyback. I didn't look like there was any shares repurchased this quarter, probably for obvious reasons. But what's your appetite back to stock here?
Okay. Based on the report his department gave me, we bought back altogether 532,000 shares during the first 24 days of the month. And there's only 1 day purchase in March. All this number is done in April. So we have a total of $65 million available under our buyback program, we have spent about $40 million. We have still $23 million left to purchase.
Okay. Did you say you did buy back stock in the first quarter though?
No. There was just 1 day. 3/31 was the only day we were in the market, but we're in the market for the entirety of April.
The next question comes from Andrew Terrell with Stephens.
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, 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 it a flat to down expectation more appropriate?
Obviously, as a guy operating 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 have experienced many differencing, including the 2008, meltdown with a simple, I mean, sub debt of home loans can much into total financial system away.
So this tariff business 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 many of our current customers, whether it's the C&I customers or real estate customer, they like to do a little bit of wait and see.
When the wait and see is over, we do not know. So it likely could be 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 very careful with it.
Yes. Understood. Okay. For the second NPL loan you guys talked about the one is 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?
Yes. That appraisal also pretty update, right? I believe we did one back in November last year, still within 6 months. The value can support loam-to-value around 71%.
I read the briefing of the core information between the lawyers communication, of course, it's quoting the things are, okay? There is a cash offer sitting out there with these parties. It's $49 million, which is a well sufficient to cover our exposure with the First Trustee.
The next question comes from Gary Tenner with DA Davidson.
I had 2 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?
You mean the trade finance segment?
Yes.
Yes. Well, it's happening in and out in a situation depending each customer is different. Some of them has currently -- everything is normal. I mean, under the -- I mean, the supply chain is outside of China. Some of them is a little bit heavier in China, but these people are well stocked inventory right now. So, so far, we don't have any activity in terms of abnormal activity on the portfolio.
And then 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?
Ed, could you answer that?
I'm sorry, Gary, I apologize. Can you repeat the question?
Yes. Sorry, I may have meandered there a bit. So the loan interest revenue was down about $10 million sequentially from $112 million, call it to $101 million. So 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?
Yes. Yes, exactly.
And to get a sense of how that also --
Gary?
No, go ahead. Sorry.
Also, as you know, as we're renewing loans and originating loans 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 Instructions] The next question comes from Tim Coffey with Janney.
Mr. Yu, you just kind of follow-up on the comments you made about having been through a couple of cycles before. Grant, this might be the most telegraph cycle. It turns out to be one that you'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 finance -- I mean, not the tariff situation. I guess because the liberation date is April 2, I think it's caught everybody off guard. And being that most of our customers and all the community banks customer and also many of the regional bank customers, they're all smaller customers.
And probably, if they are in this particular business of importing or exporting and 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% and 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 not to our economy. If they applaud that, it will be decreasing demand, okay?
And then how many of them are facing the situation in the empty shelf 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 officers 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?
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.
I guess the best way I can describe how the position of the bank is now more what each customer is doing right now. And hopefully, if there's some negative situation come along will be affected less. Nobody can escape from the big situation. I don't know whether I answered that to your question or not, 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 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 segment of our loans. We put more attention to it. For us to be, if you know that in the Western United States, especially in California, industry property has been in the vacancy and the 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 are the owner user, whether they can continue to operate profitably in this line of business or not. So what I heard from an early indication is that 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 product used to be the most thoughtful lending segment on a CIE bases we want to do. Now we have to slow down and be very careful, public 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 roles, I mean that's in the several quarters?
Every quarter, Tim, every quarter.
Great.
$1.1 billion at an average rate of 4.28%. And our offering rates are in the like mid-3s now, mid- to high 3s.
I'm sorry, that's for the current quarter?
That's for Q2. Yes, current one we're in. And 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. The margin was 3.84%, excluding the reversals and loan yields were $755 for March. So sorry, Tim.
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.
We thank you very much for attending the conference. I guess sometimes, I think personally, I'm a little bit paranoid about it, about the situation maybe just because personal background has been in more recession than most of you probably. So -- but there's nothing wrong to be too careful. And we like to be a little more careful. Thank you.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.