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DATE
Monday, July 21, 2025 at 2 p.m. ET
CALL PARTICIPANTS
Chairman and Chief Executive Officer — Li Yu
President and Chief Operating Officer — Wellington Chen
Chief Financial Officer — Edward Czajka
Chief Credit Officer — Nick Pi
Deputy Chief Operating Officer — Johnny Sue
Investor Relations (Moderator) — Jeff Haas
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TAKEAWAYS
Net Income: Net income was $32.8 million for the second quarter ended June 30, 2025.
Earnings Per Share: GAAP earnings per share were $2.52 for Q2 2025
Loan Growth: Approximately 7% annualized loan growth, driven by both C&I line usage and construction commitments being funded.
Deposits: Deposit balances remained flat in the second quarter ended June 30, 2025 compared to the first quarter as the company deliberately managed deposit costs.
Net Interest Margin (NIM): Net interest margin was 3.85% in the second quarter ended June 30, 2025, compared to 3.75% in the first quarter.
Share Repurchases: $56 million of common shares repurchased at an average price of $80.81 per share
Asset Quality: Decreases in nonaccrual, criticized, and past due loans over the prior quarter; management states reserves are sufficient.
CD Maturities: $1.4 billion in CDs set to mature in Q3 2025 at an average rate of 4.21%; Current CD renewal and offering rates are near, but slightly under, 4% as of Q2 2025.
Operating Expenses: Totaled $22.5 million; Guidance for the next couple of quarters is a range of $21.8 million to $22.6 million.
Bonds Portfolio Activity: $200 million in incremental borrowings invested mid-quarter; Funded at a rate about 80 basis points cheaper.
Branch Expansion: New Manhattan branch performing well in loan origination, with a Silicon Valley branch planned for the second half of the year.
SUMMARY
Preferred Bank (PFBC 4.63%) reported sequential improvements in profitability and net interest margin, while maintaining strict control over deposit costs and flat deposit balances. Loan growth accelerated, supported by increased C&I drawdowns and funding of existing construction commitments, with management noting tentative signs of sustained demand entering July. Share buybacks deployed a significant portion of capital at higher average prices, with new authorization untapped due to valuation considerations. Positioning for potential long-term earnings benefit amid modest near-term NIM dilution.
Chief Financial Officer Edward Czajka stated the bank received insurance reimbursement for legal costs tied to a resolved nonaccrual loan, which temporarily reduced professional services expense.
Chairman and CEO Li Yu said, "we try to control our cost of the deposits." explaining the rationale for flat deposit levels.
Existing OREO property faced further valuation declines and remains unsold, with management indicating no fixed timeline for resolution and a preference to avoid a "fire sale"
Management cited persistent external uncertainties, including tariffs and inflation, and continues monthly tracking of borrowers affected by supply issues.
No new timeline was given for the resolution of the remaining OREO asset, which management said may be sold if a suitable offer emerges.
INDUSTRY GLOSSARY
OREO (Other Real Estate Owned): Foreclosed property held on the bank's balance sheet, typically acquired through loan default, awaiting resolution or sale.
C&I (Commercial and Industrial Loans): Bank loans extended to businesses for short-term funding, working capital, or operating needs.
CD (Certificate of Deposit): A time deposit product with fixed interest, offered to depositors for a specified term.
Net Interest Margin (NIM): The difference between the income a bank earns on loans and investments and the interest it pays out to depositors, relative to its interest-earning assets.
Full Conference Call Transcript
Operator: 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.
Jeff Haas: 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 Sue. 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 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.
Li Yu: 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 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 the policy of returning excess 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. The second quarter will show good improvement in asset quality. Nonaccrual loans, criticized loans, and past due loans have decreased reasonably from the previous quarter, and we believe the trend should continue into the second half of the year. At this time, we have not identified any additional loss contents on these loans. We believe that the 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.
Operator: We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone 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.
Matthew Clark: Hey. Thanks, and good morning.
Li Yu: Good morning.
Matthew Clark: On margin, if you had the average margin in the month of June and the cost of deposits as well.
Jeff Haas: Yeah. Hi, Matthew. The margin for June was 3.83%. Cost of deposits, $3.41. 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. Been fairly steady.
Matthew Clark: 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?
Edward Czajka: We have $1.4 billion that's gonna roll off in Q3 at a weighted average rate of 4.21%. Current offered rate is right around four, maybe a touch above four, and then some slightly below four. So on average, probably just under 4%.
Matthew Clark: 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?
Edward Czajka: Yeah. So looking forward, Matthew, you know, we hit $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.
Matthew Clark: Great. And then last for me, just on the buyback. It sounds like you bought back $56 million worth in Q2. 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?
Li Yu: 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 we decide on the extended buyback and we'll come into...
Edward Czajka: 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 announced 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.
Matthew Clark: Understood. Thank you.
Operator: The next question comes from Gary Tenner with D.A. Davidson. Please go ahead.
Gary Tenner: Thanks. Good morning.
Jeff Haas: Good morning.
Gary Tenner: 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, obviously, a lot stronger than it was in the prior period. Particularly in the C&I 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.
Li Yu: You want to answer the first?
Jeff Haas: Yeah. I think that the loan growth, as you can see, the first quarter because of the tariff, so our C&I clients kind of held back on a lot of uncertainty. At 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 find new customers. Going forward, as Mr. Yu mentioned, it looks like demand's up, but, you know, actuals are uncertain. We never know. It depends on the market.
Gary Tenner: Okay. And how about on the commercial construction side? Is that just a function of new transactions or just, you know, existing commitments funding?
Jeff Haas: Gary, the majority of that is existing commitments, I think. Both loans that were booked earlier are funding on as construction progresses. But we do see more new requests.
Gary Tenner: 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. If you 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 loan growth? Maybe just talk about the thought process around that.
Edward Czajka: No. I think it was just an opportunity that we saw relative to the funding and then the assets that we invested in. Obviously, going to dilute the margin a little bit, but obviously increase EPS. And we felt the ten-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 it about 80 basis points cheaper.
Gary Tenner: Okay. Thank you.
Operator: The next question comes from Andrew Terrell with Stephens. Please go ahead.
Andrew Terrell: Hey. Good morning.
Li Yu: Good morning.
Andrew Terrell: 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 know, really good growth in the second quarter. Just wanted to hear from you guys maybe your thoughts on competition right now and where new loans are coming on, rate-wise.
Li Yu: Okay. You want to try that again?
Jeff Haas: Yeah. I mean, there are lenders out there that continue to offer very low fixed-rate loans, 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 customers to help them continue growth. So that's pretty much what we have.
Andrew Terrell: 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?
Li Yu: Our goal is to continue to grow deposits. Obviously, one of the conditions is that we have to keep the cost in control. And we have worked on that for about four or five months now, and it seems to be that it's a reasonable situation. Depending on the funding needs or the loan growth, we may be a little more aggressive on the deposit.
Andrew Terrell: Got it. Okay. Thank you for taking the questions.
Li Yu: Thank you.
Operator: The next question comes from David Feaster with Raymond James. Please go ahead.
David Feaster: Hi. Good morning, everybody.
Li Yu: Hi. Good morning, David.
David Feaster: I just wanted to maybe start with getting an update on OREO. You still got remaining. You know, 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 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.
Li Yu: Once in a while in corporate life, we have some unlucky situations, 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, 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 will get rid of it then. So, obviously, if a good offer comes in next month, we will be selling it. We thought this thing was resolved about last year.
It's still hanging out there.
David Feaster: Yeah. Okay. So no real updated timeline on resolution?
Li Yu: No. Not really.
David Feaster: 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 a kind of an update on how things are going there and any other plans for de novos or organic expansion opportunities?
Li Yu: Yes. Manhattan is one of our most promising new branches. Right now, they are 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. We will open a Silicon Valley branch in the second half of the year.
David Feaster: Okay. Perfect. And then maybe last one, you know, kind of following up on 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 was hoping you could maybe touch on the pulse of your clients and, you know, just kind of what you're hearing from them, and at what point do you think growth can really start to accelerate?
Li Yu: Well, growth to accelerate is not necessarily a condition of cleaning up of the uncertainties. We may have the tariff clearing up, but the question is the aftershock effect is not known. Because when the tariff is being levied on other people, there are definitely suppliers internationally that will not be able to meet the tariff requirement. And definitely, there will be some shifts and changes in supply chains from geographically or all companies within that. Because from my knowledge, many of the products that were imported to this country are operating at a less than 20% total profit margin.
So needless to say, if somebody can do that and the market cannot absorb it here, then we're gonna have changes. So we're waiting for the results of these things gradually coming in, how many are affecting our customers or the market in general. It's still unknown right now. Internally, we are keeping monthly tracking of our borrowers that have a supply situation or are affected by the tariff situation. We've added them mostly, and we keep in contact with our customers monthly, knowing what their plan is. If you know that's if you don't think that their numbers... So the countries get their numbers. Not everybody is agreeing to that.
David Feaster: 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.
Li Yu: Yes. We are keeping our eyes very close on that. We are not a big bank, but we have a lot of close contact with our customers.
David Feaster: Yeah. That's great. Thanks, everybody.
Operator: This concludes our question and answer session. I would like to turn the conference back over to Mr. Li Yu for any closing remarks.
Li Yu: Thank you so very much. And yeah, we hope that we are able to handle the turbulence in 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.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.