Preferred Bank

Good afternoon, everyone, and welcome to the Preferred Bank Q4 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 and then one on a touch-tone telephone. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. I would now like to turn the conference call over to Jeffrey Haas with Financial Profiles. Sir, please go ahead. Thank you, Jamie.

Hello, everyone, and thank you for joining us to discuss preferred bank financial results for the fourth quarter ended December 31st, 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. Li Yu. Please go ahead.

Thank you. Thank you, ladies and gentlemen. Thank you for joining the earnings conference. I'm very pleased to report that for the first quarter of 2025, we have The company, the bank's net income was $34.8 million, or $2.79 a share. For the full year, the bank earned $134 million, or $10.41 a share. Our profitability for the year is believed to be among the top tier of the banking industry. Our net interest margin for the fourth quarter declined from the third quarter. Principal reason for the decline was federal rate cuts. With a 70% floating rate loan portfolio, the rate cut did reduce our loan interest income. However, cost of deposits remained stubbornly In fact, many analysts have reported that between quarters, the banking industry, the entire banking industry, cost of deposits may have increased greatly. Looking forward, we're seeing that our loan demand is getting stronger for the quarter. our total loan growth is $182 million or over 12%. Deposit growth was $115 million or 7.4%. The round of the year for loan and deposit growth in 7.3% or 7.2% respectively. During the quarter, we have sold two large pieces of OREO, resulting in a net gain of $1.8 million between the two. The income was reported in the section of non-interest income. The loss, the sale that resulted in loss was reported in the a non-interest expense section. Why? This is based on the current principle of generally accepted accounting principles. Quarter to quarter, non-performing assets declined slightly. However, put aside assets that increase, $97 million. Principally, this is due to that we placed a large nine loans loan relationship into the classified status. For the quarter, loan loss provision was $4.3 million. analysts, economists, most economists is forecasting 2026 to be a year of relatively gross instability. Our customers feeling also indicating they have improved outlook for 2026. Barring any sudden changes in government policy or directions, which we just had one. We're hoping 2026 to be more of a growth year for preferred banks. Thank you very much. I will answer your questions.

Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and then 1 using a touch-tone telephone. To withdraw your questions, you may press star and 2. If you are using a speaker phone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality. Again, that is star and then 1 to join the question queue. We'll pause momentarily to assemble the roster. And our first question today comes from Matthew Clark from Piper Sandler. Please go ahead with your question.

Good morning, everyone. Good morning. I just want to start on the margin and get some visibility there, at least in the near term. Do you have the spot rate on deposits, spot rate on deposit costs at the end of the year or even the month of December and then also the average margin in the month of December?

Hi, Matthew. This is Ed. The margin for December was 3.66, slightly below that of the quarter. That was with the full effect of the December rate cut. Total cost of deposits was 3.17 for the month of December. So that's coming down about six, seven basis points a month.

Okay. Yeah, and that's where I was headed. Deposit beta this quarter looks to be about 40% on interest bearing. Sounds reasonable. Things are still pretty competitive. What are your thoughts on the deposit beta going forward, assuming we get maybe one or two rate cuts this year?

Well, it's going to depend on a number of things. Obviously, the rate cuts will play a big key role. But the other thing that Mr. Yu alluded to is the competition for deposits still remains very, very strong. So I would foresee... a similar pattern in terms of about five or six basis points a month as we have CDs rolling off and then coming on at lower rates. They're just not coming on at rates that we thought we would see at this point, given what's happened with the Federal Reserve.

Okay. Got it. It sounds like loan growth, you expect to maybe step up a little bit this year from the you know, 7.3% pace last year. I would assume you're going to try to grow deposits at a similar pace. Is that fair, just given your loan deposit ratio?

That's a both-fail statement.

Okay. And then just last one for me on expenses, the run rate, a little noise this quarter, but stripping that out a little better than expected on comp. How should we think about the run rate here in the first quarter with some seasonality?

I'm going to forecast probably somewhere in the neighborhood of 22, maybe slightly below that. But, you know, 21.5 to 22 should be about right.

Why don't you use a 21.5 to 22.5? Okay. Bigger margin.

I like it. Okay, thank you. Yeah, yeah.

Our next question comes from Gary Tenner from DA Davidson.

Please go ahead with your question. Thanks. Good morning. Just a quick follow-up on the deposit side of things. If you could kind of update us on the CD maturities in the first quarter and kind of the out and in rate that you expect.

Sure. So we have about 1.3 billion maturing in Q1 at a weighted average rate of 396. They're currently coming on right now at about... Around 370 to 380 right now on average, Gary?

I appreciate that. And just out of curiosity, last quarter when you talked about the CDs maturing in the fourth quarter, they were maturing at 4.1, and you sort of posited kind of new CDs in the mid to high threes. So it sounds like that number was towards the upper end of that repricing range in the fourth quarter. Is that kind of what played out?

Yes, yes, yes. Yes, as we said, we would have expected CD rates, market rates to come down a little more than they did given the Federal Reserve's actions.

Okay, and that 70% floating rate portfolio now, does that, have you, with the fourth quarter cuts, did you clear through any significant floors that changed the number?

It probably only affected about 150 to 200 million of the loan book. Right now, we have about 45% of the floors are in the 0 to 100 basis point bucket in terms of their protection effectiveness.

Thank you.

Our next question comes from Andrew Terrell from Stevens. Please go ahead with your question.

Hey, good morning.

Andrew.

Hey, I was hoping to just follow up on the time deposit competition commentary. I was hoping you could just maybe expand upon that a bit more and just, you know, sounds like high threes for you guys right now. Is that generally in line with your competition? Are you trying to, you know, price ahead, price below to pick up more deposits? Just curious, you know, where you're at versus the market, kind of your strategy or expectations there?

I think the challenge is kind of walking the tightrope, right? We want to bring deposit costs in. That's really a big goal of ours, but at the same time, we want to grow the deposits. So that's been kind of a challenge. What we've seen in the marketplace is not only local competition still being fairly stiff, but we're seeing some large money center banks still out there promoting CDs and right in our marketplace. And when you have those guys doing that type of thing, it makes it more challenging for us because of their size.

Yeah, no, it makes a lot of sense. On the downgraded loan this quarter, the $123 million relationship, I appreciate all the color you guys put in the release around the LTVs and debt service there. They both look pretty good. I was hoping you could talk a little bit more about, you know, the pathway to curing this, you know, what the timeline and outcome looks like as you see the picture today. And then also just, you know, this is a pretty large relationship, 2% of the loan book. Is this the largest relationship at the bank, or are there other, you know, similarly large relationships that you guys have?

I want to answer that. You...

I believe this is one of the large relationships, correct, for the bank at its core.

In terms of the workout, it's a little bit early to be able to tell what the future is going to hold for this particular relationship. There are several options that we've utilized in the past. We've sold notes. We've foreclosed and taken back property, et cetera.

Andrew, our first choice, obviously, we know these customers, they are late in payments, and they are having problems with other banks. But the principle is that because these properties still have value, very positive value in their eyes, and the information we have is they're working very hard, trying to finance it all from other alternatives. So the bank is going to be waiting for them to get these things, these procedures done. So in case if they are not able to continue the loan and that we have to go through the foreclosure procedure, we are not going to be shy away from that. We'll do it immediately. And then the current marketplace is pretty... pretty reasonable, I mean, as regard to pay for these properties, you know, at this point in time. So in other words, we're not seeing the market situation, 2008, 9, 2011, 12, that you have to bottom four off. It's not happening. Market has been very stable. So it's a matter of time to resolving these things, as these loans are basically fundamentally Well, reasonably underwritten.

Great. Okay. I appreciate all the color there, and thanks for the questions.

Our next question comes from Tim Coffey from Janney. Please go ahead with your question.

Great. Thank you. Good morning, everybody. Mr. Yu, as we start looking at loan growth this next year, what do you think are the best opportunities for for growth, or what loan product?

Well, basically, we're still sort of like a commercial market, basically commercial real estate and the C&I loans. We see both side demand is reviving a bit right now. In fact, internally, we're budgeting a higher number than previously right now. It's still very early to tell, as you know, that not only we have the normal economy, but we do have a very active government that practices from time to time. So it will be, you know, if we venture in some way, I think that's all there is to it. overly optimistic situation, too. But I'd like to say that we're budgeting a higher number than last year for our upcoming yields of this year.

Okay, great. Thanks. And then, Ed, looking at non-interest expenses for the full year in terms of the growth rate, is kind of a mid- to high-single-digit number reasonable?

Yes. Yeah, that's about what we're looking at is, yeah, right in that neighborhood, Tim. You're spot on.

Okay. And then just kind of general thoughts on Sherry purchases for this year?

Well, we just have to see what the total picture is. First of all, that obviously we have to see what our loan growth is, okay, during the year and now. All possibility, all funds will have to be reserved for loan growth. And secondly, that deposit situation will also be very important. So when we have the balance sheet all fixed, then we probably will turn around to see whether it is additional availability for purchases or repurchases. But I would say that the... The situation is not quite as, how should I say, conducive to repurchases as last year.

Right. Sure. Absolutely. And then I guess what I want to kind of make sure I dot the I and cross the T's on the classified loans. Given the uniqueness of this situation, what does the timeline for disposition look like? Or how does this play out?

Well, first of all, that amount of relationship, there are several different moments. Some of them are the earlier maturity day than the other one. So first of all, obviously, we will be giving our customer the opportunity of that particular relationship, the opportunity of resolving these matters to our satisfaction. then the legal procedure will start if they fail to do that. Now, I would say that internally we would say that probably we would have a majority of, a good portion of all taking care, I shouldn't say taking care, all resolved sometime within two quarters. Nick, do you think I'm too optimistic or... I think we'll give ourselves so much time to get a lot of the work done.

Okay. Okay. Great. That's very helpful. Those are my questions. Thank you.

Thank you.

Our next question comes from Liam Cuhill from Raymond James. Please go ahead with your question.

Hi. Good morning, everyone. This is Liam on for David Seaster. So there's been a good amount of discussion surrounding the classified downgrade, but I did just want to touch on the well-secured multifamily loan that was downgraded to non-accrual. Did you have the credit metrics for that loan? Is there anything in particular we should take into account?

You mean that the 19.4? Yeah, 19.4. Okay. Right.

So this is the most updated appraisal we conducted after we classified this loan. And the value came out even higher than the previous one. So with everything in mind. No, how much is the value?

$48 million?

It's $49 million.

$49 million.

$49 million. And our loan is 19.5.

That's very helpful.

Thank you. Again, there's one law that we like to think that the borrower will want to find a way to resolve that, okay, because there's too much difference between the assumed market value is the appraisal value. There's too much difference between the appraisal.

No, thank you very much. And then just one more from me. For fee income in 2026, would the 4Q number, excluding the one-time Oreo impact, be a good baseline?

I think it would be, yes. I think that's probably a good baseline, maybe slightly below that. The LC fee income was very, very strong this year. Not sure we can exactly reproduce that number, but I'm sure we'll get close to that. Okay. I would take that non-interest income without the gain on sale of other real estate.

Thank you very much. I'll step back.

Once again, if you would like to ask a question, please press star and then 1. To withdraw your questions, you may press star and 2. Again, that is star and then 1 to join the question queue. Our next question is a follow-up from Matthew Clark from Piper Sandler. Please go ahead with your question.

Hey, thanks. I just want to clarify your expense guidance for this year. Does that exclude Oreo costs because, you know, the midpoint of your guide for the first quarter of $22 million, you know, annualizes obviously to $88 million. would be below this past year and would imply some significant growth after the first quarter. I just want to make sure we're on the same page.

Yes, it will grow through the year. There's no question about it. And we will have, you know, we still have a couple of small Oreo properties, so there will be some expense related to those as well.

Okay, okay. And then did you repurchase any shares this quarter?

No, not this quarter. Did you? Yeah, we did in October, but it was a nominal amount, Matthew.

Okay. And then just last one for me on M&A. Just wanted to get an update on your appetite for M&A to the extent you see some opportunities with M&A expected to accelerate this year.

Yeah, there are a few deals that have been brought to us that we end up taking a look at it. As you know, that has not been our main effort in MAAs. But a couple of years, we'll take a look at it. And probably the pricing structure requires that it's still not to our satisfaction. So we'll continue to look at it. We know that there may be another one or two coming up, but we'll take a look at it.

Okay, great. Thanks again.

And our next question comes from Arif Ngat from Cygnus Capital. Please go ahead with your question.

Yes, hello. Thanks for taking my questions. My first question is really more just to clarify the diluted EPS of $2.79. If I'm reading it correctly, it looks like your gain on sale of the Oreo properties is included in that EPS, which after tax was about $0.20. I just want to confirm, am I reading that correctly, the tax of that gain of the EPS was $2.59?

That sounds about right, yes.

Okay, appreciate it. $1.8 million is equal to $3.6 million.

Yeah, so that's about right.

Okay, thank you. And then my next question is, on those Oreo properties you sold in the fourth quarter, did you provide any financing to the buyers, or have you completely absolved yourself of any exposure to those properties going forward? we one of them as we provide financing okay the other ones are right cash sales correct got it so you still have a loan through one of those properties going forward yes much smaller got it okay um and then the last question i had was um with respect to the uh increase in the classified loans um can you please confirm the 121 million of loans that are with the relationship where there's litigation going on with other banks. I'm assuming you're referring to Western Alliance and Zion. Are those loans paying current? Are they performing or no?

As far as I know, we don't know exactly the status of the other two banks. We don't have any idea about their structures. All I know is that we are in the first position trust lender to work fully secure by a problem.

But are those loans being, you know, are you receiving current interest and debt service on those loans currently?

Yes. We have been receiving the payments, but no. It's being slowed down. It's being slowed down. That's correct.

Sorry. So they're like behind in interest service or they're current in interest service? I'm not following.

Generally they're behind interest services.

Okay.

That's one of the primary reasons that's the weakness of the loan that we classified.

Thanks for clarifying. I'm just really more trying to understand the context of a 1.14 times debt coverage ratio if the loan's not paying.

Because of the guarantors getting involved with litigation with other banks, so probably they're not 100% using all the cash flow from those profits to make the payment to our bank. It's not that. Yeah.

Got it. Okay. That's helpful. And then, you know, just to, you know, finalize the question on this topic, you know, given the, you know, where the allowance for credit loss has stood at the end of the quarter or end of the year and your increase in the provision for credit loss, what gives you comfort that, you know, you're adequately reserved and we don't get surprised as we did this quarter with significant increase in non-performing and criticized amounts? How recent of a scrub have you done of your portfolio to kind of give you that comfort that you're adequately reserved?

All these loans under this relationship would go with, because it's a standard in care, would go with a relatively wonderful analysis. And as the release mentioned about the low development, around 65%. So there's no specific reserve on this loan. However, the 4.3 provision for this quarter was mainly the result of a combination of many, many factors, including the loan growth, including other specific reserve for some of the loans. Just to give you an example, we've fully reserved this relationship to under unsecured credit, and also based on Q factors. So due to the movement of all this relationship and increase of the criticized loans, We have adjusted our Q factor side, especially on the credit trend area. We increased buy basis point of the entire risk segment. So these are the component of our reserve at this moment. Our Q factor side actually count on 42.5% of our reserve. So we do believe the reserve should be amortized cover our credit situation.

Okay. Thank you very much.

And ladies and gentlemen, with that, we've reached the end of today's question and answer session. I'd like to turn the floor back over to management for any closing remarks.

Well, thank you very much for coming out. Before we go back, we have a little challenges within the next six months period of time to try to resolve these issues on the credit side. But overall, everything remained the same. We're still the same company. We're still structured with a normal operation, normal matrix and so on. We sort of still look forward to 2026. Thank you very much.

And with that, ladies and gentlemen, we'll conclude today's conference call-in presentation. Thank you for joining. You may now disconnect your lines.