Preferred Bank's Q1 2025 Earnings Call: Diverging Views on Loan Demand and Credit Strategies

Loan demand and customer activity levels, credit portfolio management strategies, loan demand and customer behavior, trade finance portfolio and customer activity are the key contradictions discussed in Preferred Bank's latest 2025Q1 earnings call.



Earnings Impacted by Non-Performing Loans:
- Preferred Bank's Q1 net income was $30 million or $2.23 per share, negatively impacted by an outsized reversal of interest income related to elevated non-performing loans, including a $1.3 million charge-off of a real estate owned loan.
- The non-performing loans totaled $71 million at quarter-end, with $66 million related to one relationship, with collateral values protecting the loan amount and no identified loss compounding.

Margin and Loan Growth:
- The net interest margin was reported at 3.75%, impacted by interest reversals. Internally, it was estimated to have been closer to 4.06% as reported last quarter.
- There was a negative loan growth of $6 million, equal to approximately 0.1% of the total loan portfolio, with deposit increase of 2.6% on a linked-quarter basis, and deposit costs reducing as planned.

Loan Demand Uncertainty:
- Loan demand is not expected to improve due to uncertainty from tariff wars, which can impact supply chains, cost increases, and demand fluctuations.
- The bank is closely monitoring its $200 million trade finance segment to assess potential impacts from these uncertainties.

Share Repurchase and Financial Outlook:
- Preferred Bank has purchased 532,000 shares under its buyback program, with $65 million available, and $23 million remaining to be purchased.
- The expense run rate for Q2 is estimated to be $21.5 million to $22 million, with the potential for acceleration afterward.

Underwriting and Loan Classification:
- The bank is being cautious with industrial loans due to potential tenant concerns and increasing cap rates, requiring more underwriting scrutiny.
- The classified loan portfolio was reduced by $30 million from the previous quarter, with very few migrations into this category during the quarter.