Preferred Bank Q1 FY2025 earnings call

• Net income was negatively impacted by an outsized reversal of interest income from non-performing loans and a $1.3 million charge-off of OREO. Non-performing loans totaled $71 million, with $66 million from two relationships; one credit is being sold at par, the other is in bankruptcy with collateral value support. The bank has started a thorough review of its $200 million trade finance segment due to tariff war uncertainties. Deposit cost is reducing, and there's $23 million left in the buyback program with $65 million total available under the program.

Preferred Bank's first quarter net income was $30 million or $2.23 a share. Net interest margin was 3.75% for the quarter; without the interest income reversal related to non-performing loans, it would have been ~4.06%. There was a negative loan growth of $6 million (0.1% of total loan portfolio) but deposits increased 2.6% linked-quarter and deposit cost is reducing. The trade finance segment of the loan portfolio is approximately $200 million.

• Margin for the quarter excluding reversals was 3.94%. Expense run rate is estimated to be $21.5 million to $22 million for the next couple of quarters and then accelerating. Still $23 million remains in the share buyback program.

• Uncertainties from the tariff war affecting loan demand, including supply chain changes, cost increases, inflation, and potential impact on property values and borrower ability to absorb tariffs.

Q: Hey, good morning, everyone. Just wanted 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, I'm just wondering if it was, how much might be below the 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 if you had it?

A: Hey, Matthew, this is Ed. I don't -- unfortunately, I don't have the March spot rate, but the margin for the quarter sounds the non-accrual 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.

Q: Hey, good afternoon. 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 a flat-to-down expectation more appropriate?

A: 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 I've experienced many different things, including the 2008 meltdown with a simple, I mean sub -- to sub that of home loans can mushroom into a total financial system meltdown, okay? So this tariff business is many angled and depend on which way it turns, it could affect seriously even the property value of many of our borrowers. So we're taking close look on that. Likewise, we sensed that many, many of our current customers, whether it's the C&I customers, the realty customer, they like to do a little wait-and-see. When the wait-and-see is over, we do not know. So it likely could be that by -- and I mean later second quarter, this thing just pick up and we are poised, we have a -- we have a large relationship staff is out there is busy and try to bring in -- bring in loans and we just have to be very careful with it.

Q: Hey, thanks, everybody. Good morning. I have 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 get paid down as less activity occurs. Is that a reason why you're looking at it near term?

A: You mean the trade finance segment? 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 -- under the -- their supply chain is outside of China. Some of them is a little bit heavy 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 portfolio.

Q: Great. Thank you. Good morning, everybody. Mr. Yu, 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 as it turns out to be one that you've probably ever seen. So I'm wondering how are you positioning the bank right now?

A: Well, being that it's just started to have this trade finance, I mean the tariff situation, I guess it -- because the liberation date is April the 2nd, okay, 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 are smaller customers. And probably if they are in this particular business of importing or exporting a given product 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 that are 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 inflationary to our economy. If they absorb that, it will be decreasing demand. Okay? And then how many of them are facing the situation and the empty shelf when the supply cannot catch up, and where all the supply chain can be -- can be switched to different countries. So what we're doing right now is we're having our loan office 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'll be successful in handling this kind of matter. And while we're doing it, we're also learning. So each case is different, okay? I guess the best way I can describe how to position the bank is knowing more what each customer is doing right now. And hopefully, if there is some negative situation come along, we will 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.