Preferred Bank

Good morning, and welcome to the Preferred Bank Third Quarter 2025 Earnings Conference Call. All participants will be in 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 one on your telephone keypad. 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 with Financial Profiles. Please go ahead.

Thank you, Kim. Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the third quarter ended September 30, 2025. With me today from management are Chairman and CEO Lee Yu, President and Chief Operating Officer Wellington Chen, Chief Financial Officer Edward Chayka, Chief Risk Officer Nick Pye, 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 banks, operations, and business environment, all of which are difficult to predict and many of which are beyond the control of preferred banks. 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. Lee Yu. Please go ahead.

Thank you. Thank you. Good morning. I'm very pleased to report to our shareholders that we have a record earnings per share increase of $2.84 a share for the third quarter of 2025. Net income for the quarter was $35.9 million. Both numbers compare very handsomely with previous quarters.

This quarter our credit quality has improved.

Non-performing loans has reduced. from $52 million to $17 million. And largely because of one loan of $37 million that we had foreclosed and moved to OREO. But the good news is that that OREO was sold as of today, sold in October, for a reasonably good gain. We tried very hard, tried to close it in September 30, but didn't make it. All other matrix of the credit quality seems to be stable. And I've taken a look about all the charge-offs for the year.

They totaled a very acceptable $1.8 million. This quarter, we had some reasonable loan growth and deposit growth.

Loan growth, 2.3%, all $133 million. Deposit growth, 2.5%, all $151 million. It seems to us that at the marketplace, our shareholders, our customers, has really become a little bit more optimistic in their businesses. but still remain quite cautious because there's a whole lot of uncertainties still remaining in our economy. Looking forward to the first quarter of 2025, we think there will be some reasonable loan growth. Hopefully that will match the number of the third quarter. Our net interest income and net interest margin both improved in the third quarter from previous quarters. We have hold our operating overhead on interest expense pretty steady as compared to previous quarters. Because of the increase in net interest income, efficiency ratio now is less than 30%. And all other aspects of the operation seems to be pretty stable. And during the third quarter, we have repurchased $6.3 million of our own shares. Having said all the good things about this quarter, that's something that we have to admit. We found ourselves making a mistake in the past in calculating the diluted earnings per share numbers as of June 30, 2025, and resulted in underreporting the net income for the first half by $0.05. But this number has been properly updated in this report's up year-to-date number. Thank you so very much, and I'd like to answer your question now.

We would now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Gary Kenner with D.A. Davidson.

Thanks. Good morning. Good morning, Gary. Hey, I was hoping you could update us a little bit on just where the loan portfolio should stay from a floating rate component. I think as we've gone through the last several quarters of, you know, I had the breakouts late last year and then the one in September, I think you would have cleared at least some portion of the floors you have in the portfolio. So could you talk about kind of you know, kind of the variable rate or the floating rate bit of the portfolio and where the floors are at this point.

Yeah, Gary, so as of 9.30, about 29% of the book now is either fixed rate or long adjustable, and then 71% is floating. Of that 71%, 98% has floors on them, although as we've talked about before, some of those are not in the money, so we have about 1.6 million of loans with floors that would kick in within the next 100 basis points of decline. Right now, we only have about 55 million that are at or below the floor, or where the floor is kicking in. So, still have a ways to go for a lot of these loans before the floors start to become meaningful.

Great. Thank you. And then, Just as it relates to the buyback, I know some activity this quarter. Can you talk about just price sensitivity around the buyback?

We sort of measure the buyback against the income level we have and the share prices we have. And from quarter to quarter or from month to month, we review our position and come to the point that how much we want to do the buyback. That's something to do with our growth rate, too. As you know, if the growth rate gets to be stronger, our buyback may have slowed down a little bit, but we're measuring it based on, you know, and there's no formula for it.

Male Speaker 1 Okay, fair enough.

And if I could speak in, oh, go ahead. Male Speaker 2 Oh, no, I was just going to add to that for everyone else on the line as well. We have been active in the month of October, so we've repurchased 128,000 shares in October because we had some price softness over the last few weeks for 11.2 million, so.

Appreciate that. If I could just ask one more question. In terms of the loan yields in the quarter, was there any noise in that number, or was that, was it 763, a pretty clean number?

Yes.

Yes. Yeah. The noise was in the prior quarter, Gary. Yeah. Okay. All right. Just wanted to confirm. Thank you.

Our next question comes from Adam Kroll. with Piper Sandler.

Hi, this is Adam Kroll. I'm from Matthew Clark, and thank you for taking my questions. So maybe just to start on the margin, I was wondering if you had the average margin in the month of September in the cost of deposits?

The margin for September was 387. Cost of deposits was 3.36.

Okay, perfect. And then how are you thinking about the margin in the fourth quarter, assuming, you know, we get a rate cut later this month and in December as well? And just what do you have coming due on the CD side and kind of the rate that that's rolling off or is coming on today?

Well, there's a lot packed in there, but I'll start. First off, we got about 1.27 billion of CDs maturing at an average rate of 410 in Q4. CDs are now coming on in the mid to high threes, so we'll expect some benefit there. In terms of the margin for Q4, given the rate cut we had in September and what we're likely to have in Q4, not as asset sensitive as we have been in the past, not only because of the larger preponderance of fixed rate and longer dated adjustable rate loans, but also due to the fact that we have many of our corporate deposit clients whose interest rates on interest checking and some money market are directly tied to Fed funds. So when Fed funds does move, we do get to move a fairly sizable chunk downward in terms of the pricing. that's been very beneficial in managing the margin. You can see it has not been declining even though we've been in a kind of a declining rate environment here.

Got it. That's super helpful. And then last one for me, I'd be curious to know just what you're seeing on the credit migration front within Criticized and Classified.

City migration seems to be a pretty reasonable situation. Nick, do you want to answer that?

Yeah, in Q3, I believe our quality will be in line with our expectations. So all of the problem loans also, our resolution side, is also developing as expected. So we didn't really... Got it. Thank you for taking my questions.

Our next question is comes from Andrew Terrell with Stevens.

Hey, good morning. Hey, I wanted to check in first just on, on loan growth. Um, this year I heard the comments just around, it sounds like you're hoping, you know, starting off next year at this high single digit loan growth rate, but I'm curious, you know, to the extent you have visibility in the fourth quarter, um, just how pipelines are shaping up. It sounds like just reading between the commentary that you'd expect slower growth in the fourth quarter, but just wanted to make sure I've kind of got that right.

Yeah, we think there will be growth in the fourth quarter. We hope that we'll do as much as in the third quarter, but this is still October, slightly early, okay? And it seems to be the activity level, it seems to be maintaining, okay, at the third quarter space. So, but, and we internally, we hope that maybe with the interest rate cut in the later part of third quarter, first quarter would be even more helpful to our loan growth. But all this is still kind of an up in the air situation. Especially every holiday season seems to be very much different to us. Some holiday people seem to be busy in closing the loans left and right. Some other holidays, people are vacationing more than ever. It is something that is pretty hard for us to have a very clear picture, but the general trend is upward trend.

Okay, great. That's good to hear. And then, Ed, if I could check in with you on just expenses you guys have been running. If I back out the kind of Oreo the past couple of quarters in that low $21 million territory, just wanted to get a sense on your expectations, near-term expense run rate, if that's still a fair approximation. And then, yeah, as we look out into 2026, anything we should be aware of kind of budget-wise or just check in on kind of rate of expense growth, just general expectation?

Well, yeah, as you said, we had the small OREO piece for this quarter, so we came in at 21.5 on non-interest expense. I would expect to see around 22 to 22.5 going forward and then, you know, probably going up anywhere from 250 to 500 a quarter in 26.

Great. I appreciate it.

And then I've actually got a question on the deposit composition this quarter. Is that a really strong growth in the, I think it's the interest-sparing demand category, a little less so in some of the time buckets. I'm curious if there is any contemplated makeshift that you guys did, or that's just how deposits came in this quarter. Just any color on the flows in the specific deposit buckets would be helpful.

Well, on a strategic basis, okay, We certainly like to increase our demand deposit, no-cost demand deposits, but it is harder and harder to get nowadays because all the institutions that have large cash balances all like to be paid somewhat for their money. So this is a trend that more cash is moved from the DDA account, the non-interest-bearing DDA account, to the interest-bearing. DDA account, okay? And having said that, our job, I think, is to manage the cost and interest-bearing DDA account properly, okay? And going to the future from the strategic basis, okay? And other than that, it's banking normal. Whatever we have, a reasonable cost, we take it in. And whenever it's available, we stake it, and hopefully that becomes good funding base for growths.

Andrew, we also, with this quarter, with the fairly strong deposit growth, were able to let some of our brokered CDs run off and not renew as well. So that was advantageous.

Yep, yep, got it. Okay, if I could actually just sneak one more in. Do you have the specific dollar estimate of the expected Oreo gain in the fourth quarter?

Probably into that. I mean, $3 million to $4 million range.

Great. Okay. Thank you for taking the questions.

Thanks. Our next question comes from David Feaster with Raymond James.

Hi. Good morning, everybody. Hi, David. I just wanted to switch back to maybe the loan growth side. I mean, you know, X the Oreo transfer, you're in the low double digits. Sounds like you're expecting growth to kind of remain relatively stable, I mean, which is really strong. I'm just curious, could you touch on how demand's trending, maybe a little bit of color on the pipeline, how new origination yields are, and just where you're seeing more opportunities today, and is this a function of of y'all gaining share or maybe some of that uncertainty that we've talked about in the past, maybe getting more confidence in the economy or anything. Just kind of curious what you're seeing from that side.

I don't think you want to answer the first and I'll add to it.

Yeah, the loan growth for the fourth quarter, I mean, for the third quarter was, you know, again... On the existing, like Mr. Yu mentioned, our existing customer, our confidence, and there's more activity, so there's CNI increase. And then other activities, it's a new relationship that we've been building on over the years, and sometimes it takes a little bit while to bring them in-house. So that's where we're at. And other than that, I think that our CRE and the Just, you know, normal CRE activity, construction, long advance. That's where we are, and that's why we're looking at the going forward fourth quarter looking like, you know, very similar to third quarter.

Calvin, you want to add to anything?

Yeah, to add to that, I think we're right. We see our teams that we've been able to see more deals coming through the pipeline. more deals to be reviewed with more, like Mr. Yu said, with the rate cuts and a little bit more optimistic from the borrowers, there's a lot more opportunities for us.

So I guess you get the feeling of the situation, but obviously the common sense logic is that with the rate cuts, and hopefully it's going to be two rate cuts before the end of the year, that there are many, many transactions that previously is not become much doable in terms of financing is concerned. There are some people who are finally willing to sell because they can get a slightly better situation in their pricing and so on. So we are hopeful that, especially in the CIE side, there will be some growth.

And that's a great point. I mean, you know, I guess first point, could you touch on maybe the competitive dynamics And then, you know, in the past, you know, year or so, there's payoffs and paydowns have been a headwind. Has that slowed at all? Or, I mean, again, to your point that maybe down, that could have pushed more people into selling. Do you think payoffs and paydowns could be a bigger headwind as we look forward? Or just kind of curious what your thoughts are.

Well, in my past 34 years, payoff has always been a painful situation. for us, it is expected to continue. And it is expected to continue in a little bit heavier pace than before. Because simple fact is that many of the loans by all institutions that they are priced at a higher interest rate, it's currently staying on the books. Obviously many of the borrowers seeking to lower their interest burden, refinance will become national sports. And I hope while we're doing it, when we're getting payoffs, what we hope is we're also getting our fair share of the paying off the other people in the situation. So hopefully all that gave me is the payoff and some of the new additional origination is really a push.

Okay. And... Okay. And then, you know, you guys have been really active managing your asset sensitivity. Ed, you've done a great job getting in front of this. Sounds like it's, you know, much less significant than it has been in the past. You've got the floors that should also help. Are there any other actions that you guys, or do you think most of that, you know, most of the actions that you'd be interested in making to manage your asset sensitivity are Is that completed or are you still, is that ongoing? Like would you expect to maybe put more into the securities book or do more fixed rate or just any other, you know, those types of maneuvers or are you pretty comfortable with where you're sitting?

I think that most of the things that we continue doing is being proactive in interest rate management. And if you remember one time we're 90% floating rate loan bank and now we're nearly 70% floating rate on banks, and that takes about one and a half year to accomplish. And we started that way back. I'm sure you remember that, okay? And I guess the trend is to do the best in our ability in looking at the interest rate trends and making adjustments from time to time, okay? by switching to the more fixed rate loans or switching to the more floating rate loans. This is constantly in our DNA, and that's what's causing us to have acceptable return on equity, return on investment. I think that counts for a big factor. In the meantime, obviously, between the securities, because they're yielded and so on, And in the marketplace, we will make the adjustment from time to time. But by and large, that's only maybe less than 10% of the annual sheet. So it's not as critical as managing the loan portfolio.

Yeah. Do you think maybe, I guess, thinking a bit longer term or as we look over to next year, even into 2027, I know it's somewhat of a hard question to answer, but has any of these moves to, you know, take off some of that rate sensitivity, maybe limited some of the upside in the margin, or where do you think, I mean, like, again, you've, it's not hard to see y'all getting north of four, but I mean, you know, it wasn't that long ago, you guys were in the mid to high fours. Is that still an achievable target given your, you know, your current, you know, composition of the rate sensitivity of the balance sheet or has that kind of ceiling maybe been brought down as a result of this?

Actually, if you really look at analyzing our sensitivity level, we are pretty reasonably within balance in the situation. In the short term, we're a little bit rate sensitive. In the intermediate term, because of deposit portfolio of large time certificate deposit portfolio, in the long term, we're really a rate liability sensitive asset. That's why we're in a situation where we're able to improve the earnings in the fourth quarter and third and fourth quarter because it's a factor. And going forward, of course, there's no set formula. I have not been taught, I don't think anybody has been taught by the banking books how to do these kind of things other than to stay alert and try to do the best you can. Okay? Yeah. Especially with a very simple organization. Okay, we just... Try to be conscientious. Try to be alert.

Okay.

Thanks, everybody.

This concludes our question and answer session.

I would like to turn the conference back over to Lee Yu for any closing remarks.

Thank you so much for your interest in PreferBank. We're very happy that we were able to report a very good quarter of results, and we hope it will continue for our shareholders. Thank you.