Preferred Bank Q2 FY2025 Earnings Call

Good day, and welcome to the Preferred Bank Second Quarter 2025 Earnings Conference Call. 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, 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. 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% on an annualized basis. Early indication in July is that loan demand seems to have increased; however, to the extent of which is still too early to tell. Our deposits remained flat. Perhaps one of the reasons is that we are trying to control our cost of 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 excess capital to our shareholders. However, this quarter's purchase was relatively large in the amount of $56 million, which may have affected net interest income, PPNR, and net interest margin a little bit. The second quarter will show good improvement in asset quality. Nonaccrual 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 loss content 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 tariffs, the industry, and inflation. I just hope this matter 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.

The first question today comes from Matthew Clark with Piper Sandler.

On the margin, could you provide the average margin in the month of June and the cost of deposits as well?

Yes. Matthew, the margin for June was 3.83%, and cost of deposits was 3.41%. As a side note, those have been relatively consistent throughout the quarter. There has not been much change either on the asset yield side or on the cost of deposit side. It's been fairly steady.

Okay. And 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 some slightly below 4%. So on average, probably just under 4%.

Got it. Okay. And then on the expense side, there was a little bit higher this quarter with the OREO costs. What are your thoughts on the kind of run rate going forward in the second half?

Yes. So looking forward, Matthew, we had $22.5 million this quarter. I'm looking at about anywhere from $21.8 million to, say, $22.6 million going out in the next couple of quarters. We did receive some insurance reimbursement on some legal matters related to a nonaccrual 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.

Yes. Okay. Great. And then last for me, just on the buyback. It sounds like you bought back $56 million worth in 2Q. 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 of quarters. So we're continually evaluating the overall situation and will decide on the extent of buyback we'll commit to.

Yes, Matthew, we repurchased approximately $56 million worth of shares at around $80 to $81 per share on average. During the shareholder meeting in May, we mentioned receiving approval for an additional $125 million in repurchases. However, we have not yet begun that process as the current price per share compared to book value is significantly higher than it has been in the past. As Mr. Yu indicated, we are being cautious about buying back at these elevated prices.

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

So I was curious about loan growth. You made the comment that it 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 on the C&I side and some commercial construction. So wondering if you could provide some color on what occurred there in the second quarter and kind of the pipeline into the third quarter?

Okay. Do you want to answer the first?

Yes. I think that the loan growth, as you can see, was affected in the first quarter because of the tariffs and everything; our C&I clients kind of held back due to a lot of uncertainty in the second quarter. Of course, that's a combination of usage of their line of credit to upsize their business as well as finding new customers. So going forward, as Mr. Yu mentioned, it looks like demand is up, but actual results are uncertain. It depends on the market.

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

Gary, the majority of that is existing commitments. I think loans that were booked earlier are funding as construction progresses.

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 done in the mid part of the quarter. Can you share 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 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.

The next question comes from Andrew Terrell with Stephens.

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

Okay. Do you want to try that again?

I mean, there are lenders out there who continue to offer very low fixed-rate loans, and that has been consistent. I mean we always compete with other lenders 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 customers to help them continue growth. So that's pretty much what we have.

Okay. 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. Anything specific driving that? And maybe just a little more on expectations around deposit growth?

Our goal is to continue to grow deposits. Obviously, one of the situations is that we have to keep the cost in control. We have worked on that for about 4 or 5 months now, and it seems to be a reasonable situation. Depending on the funding needs of the loan growth, we may be a little more aggressive on the deposits.

The next question comes from David Fester with Raymond James.

I just wanted to start with getting an update on the OREO that you've still got remaining. I'm glad to see one of those nonaccruals get resolved. Obviously, we took the write-down. It sounds like you had a contract that maybe fell through. Just curious your thoughts on the timeline for resolution of that? And anything broadly on credit, exclusive of those two. It seems like it held up really well, but just curious your thoughts on the credit side?

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

Okay. So no real updated timeline on resolution.

No, nothing.

Okay. And then one of the initiatives you guys have been working on is the new branch that came online in Manhattan. I was hoping you could give 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 the most promising branches. Right now, they're very vibrant in their loan generation, so we're very happy with the progress they're making so far. There will be new branches that we will open, specifically our Silicon Valley branch in the second half of the year.

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

Growth accelerating is not necessarily contingent on clearing up the uncertainties. We may have the tariffs clearing up, but the aftershock effects are not known. When the tariffs are levied on others, there definitely will be suppliers internationally that will not meet the tariff requirement today, leading to shifts and changes in supply chains. Many products imported to this country operate at less than 20% total profit margin. If someone can absorb that and the market cannot accommodate it here, then we will have changes. We're waiting for the results of these things to gradually come in. The impact on our customers or the market in general is still unknown right now. Internally, we are keeping monthly track of all the borrowers that have a supply situation affected by the tariff conditions. We evaluate monthly and stay in contact with our customers knowing their plans.

Okay. That makes sense. So you're kind of reading between the lines, don't get too excited about the drawdowns on the C&I line; still a lot of uncertainty?

Yes. We are keeping a very close eye on that. We are not a big bank. So we have a lot of close contacts with our customers.

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

Thank you so very much. Yes, we hope that we're able to handle the turbulence of the past few months. We certainly feel that we can continue to do that. But we do hope that the overall condition of the economy is clearer. Thank you.

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