Preferred Bank Q4 FY2025 earnings call

Key Points

• 2025 net income was $134 million or $10.41 a share, among top tier in banking.
• Q4 interest margin declined due to federal rate cuts; 70% floating rate loan portfolio affected loan interest income. Deposit costs remained high.
• Q4 loan growth $182 million (+12%), deposit growth $115 million (+7.4%); full-year loan and deposit growth 7.3% and 7.2% respectively.
• Sold two OREO pieces for net gain, with income in noninterest income and loss in noninterest expense.
• Nonperforming assets slightly declined, but criticized assets increased due to a large loan relationship being classified.
• Hoping 2026 to be a growth year barring sudden policy changes.

For 2025, the bank's net income was $134 million or $10.41 a share. In Q4, net income was $34.8 million or $2.79 a share. The interest margin in Q4 declined due to federal rate cuts, with a 70% floating rate loan portfolio. Loan growth for Q4 was $182 million (over 12%) and deposit growth was $115 million (7.4%). Full-year loan and deposit growth was 7.3% and 7.2% respectively. The bank sold two large pieces of OREO, resulting in a net gain of $1.8 million. Nonperforming assets declined slightly, but criticized assets increased by $97 million. Loan loss provision was $4.3 million.

Forward-Looking

• Expect loan growth to step up from 7.3% pace; deposit growth expected similar.
• Expense run rate forecasted around $21.5 to $22 million in Q1.
• M&A appetite exists, but pricing structures of potential deals need to be satisfactory.

Risks

• Interest rate changes impacting loan income and deposit costs.
• High deposit costs and strong competition for deposits.
• Uncertainties in the workout of criticized loans, including a large loan relationship with ongoing issues.

Q: Matthew Clark on margin, deposit beta, loan growth, expenses A: Edward Czajka mentioned Q4 margin was 3.66%, deposit cost of deposits may have increased; loan growth expected to step up, expense run rate forecasted around 21.5 - 22.

Q: Gary Tenner on CD maturities A: Edward Czajka said about $1.3 billion in CDs maturing in Q1 at 3.96% weighted average rate, coming on at 3.70% - 3.80% on average.

Q: Andrew Terrell on loan downgrade, pathway to cure A: Li Yu discussed that the downgraded loan is a large relationship, with options like selling notes, foreclosing, and waiting for customers to resolve issues; loans are fundamentally well underwritten.

Q: Tim Coffey on loan growth opportunities, expenses, classified loans A: Li Yu said focusing on commercial real estate and C&I loans, expense run rate forecasted, and classified loans situation with multiple options for resolution.

Q: Liam Coohill on classified loan credit metrics, fee income A: Li Yu provided credit metrics of a classified loan, and Edward Czajka said Q4 fee income excluding one-time OREO impact is a good baseline.

Q: Matthew Clark on expense guidance, share repurchases, M&A A: Edward Czajka on expense guidance, Li Yu on no share repurchase in Q4 and M&A appetite with some deals reviewed but pricing not satisfactory.

Q: Arif Angad on EPS, OREO financing, classified loans A: Edward Czajka and Li Yu confirmed EPS effect of OREO gain, OREO financing details, and that classified loans have been receiving payments but are behind in interest service.