Preferred Bank (PFBC) Q3 2026 Earnings Report, Transcript and Summary

Good day, and Welcome to the Preferred Bank Third Quarter 2026 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 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 call over to Jeffrey Haas of Financial Profiles. Please go ahead.

Thank you, Drew. Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the third quarter ended September 30th, 2026. With me today from management are Chairman and CEO Li Yu, President and Chief Operating Officer Wellington Chen, Chief Financial Officer Edward Czajka, Chief Risk Officer Nick Pi, 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 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 document 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. Good day, everyone. Preferred Bank's third quarter net income was $32.9 million, or $2.73 per share. This quarter was negatively affected by a $2.1 million recovery of interest income. Deposits grew $77 million, or 1.2% on a linked quarter basis. As everybody is already aware of, the deposit market is very competitive. Looking forward, this condition will likely go into the year 2027. The banks are now not only facing more competition from non-bank institutions, but also strangely, we see many of our customers invest their extra funds into the Treasuries. Loans for the quarter decreased $14 million after we placed a large credit on the for-sale status. Unlike at the beginning of the third quarter when we reported on our last conference phone call, this time, our pipeline seems to be very solid. We are very hopeful that in the fourth quarter to have good, solid growth. As we reported earlier, the net interest income was affected by a reversal of interest income, and that has affected our net interest margin. This quarter net interest margin was reported at 3.49%. Without this $2.1 million adjustment, it would have been 3.60%. Going forward, we see a stable interest rate market condition. If the Fed fund is going to adjust higher, then it will further benefit our net interest margin as Preferred Bank is an asset-sensitive bank. Resolution of nonaccrual loans is continuing, but slower than what we hoped for. The level of nonaccrual remains stubborn, largely because several credit was scheduled to be resolved in this quarter and are stuck in the court proceedings that has pushed back to third and fourth quarter next year. The pace of migration seems to have slowed down or subsided. There were only $20 million of additional credit that was classified as substandard that remain on accrual status. The rest of them have all been included in the nonaccrual number. We are pleased with our consistent cost control of overhead, even under a very inflationary period. We are constantly looking for opportunities to gradually improve our non-interest income. With the outlook of a strong 2027 economy and relatively stable interest rate environment, we are looking forward to a good 2027 year. Thank you. Ready for your questions.

At this time, we will open up the lines for Q and A. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has 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 comes from Matthew Clark with Piper Sandler. Please go ahead.

Morning, everyone.

Hi.

Hi. Wanted to start on the deposit side. Maybe Ed, can you update us on how much in the way of CDs you have maturing here in the fourth quarter, and the weighted average roll-off and roll-on rates that you expect?

Yeah, we have just under $1.7 billion maturing in the fourth quarter, so it is a fairly heavy quarter from a maturity standpoint. Weighted average yield is 3.81%. Those are likely to come on anywhere between 3.75%-4% as they roll over.

Okay, so not that big of a headwind there. Do you happen to have the spot rate, your deposit cost spot rate at the end of September? If not, the month of September.

Yeah, I do. Total deposit cost was 306 for the month of September. The spot margin was 358.

Okay. The deposit beta, I think on the way down was about 69%. Any thoughts on what you might experience on the way up this time?

Sure

Assuming we get maybe another rate hike in December and maybe one in March?

Definitely slower, Matthew. As you can see, we were able to decrease total deposit costs by 3 basis points in a very, very difficult rate environment. I think part of what you see in terms of the deposit growth versus deposit costs was a function of management's discipline toward keeping the deposit costs down. Although that likely cost us some growth in the quarter. Our focus is on keeping the costs under control.

Okay. Just a couple on credit. Do you have the criticized loan balance at the end of September? I think it was $170 million at the end of June. How much of your NPAs do you think you can get rid of by the end of the first quarter, and any concern around losses there?

Yeah, Matthew, the total classified loan was $177.6 million, which covers classified +$11.5 million OREO. So which is around $17.7 million above what we just disclosed for nonaccrual. So that's the classified loans. For our resolutions side, I believe during the fourth quarter, as Miss Xue mentioned, that some of the loans actually is in the bankruptcy court, but we do believe all these BK proceedings heading the right direction. And several bankruptcy court approved to sell the property in bankruptcy court. If that's a continued delay, then probably we're going to foreclose, and we're going to dispose by ourselves. Hopefully by Q4, there will be a couple of large loans will be disposed. However, it totally depends on the court decision. Sometimes even though the collateral property has a good loan to value and we can fully recover, however, we have to subject to our bankruptcy court's proceedings. And we do have options for handling that as well.

Okay, thank you.

Thank you. The next question comes from Andrew Liesch with StoneX Financial. Please go ahead.

Morning, everyone.

Hi, Andrew.

Just a question on the loan growth. Hi. Just a question on the loan growth here in the quarter. Were there outsized pay downs? Just what was the cause of the more modest pace of growth than what you might have been expecting?

You want to comment about that, Johnny?

Yes, Andrew. The loan growth it's a combination of both. The payoff, we have some unexpected payoff, and also production, it was not as robust as the second quarter production. But having a lot of loans that is in the pipeline kind of delaying funding and all that, so it does carry over to this quarter. And that is why we are looking at the fourth quarter together with the new loan production, looking at a stronger pipeline.

Got it. Have you had any customers telling you that they may delay projects that may not pencil in the face of higher rates?

That is the case, too. With the higher rate, people are a little bit more conscientious about the project itself. But also having said that, with the market itself, higher rate, they actually looking for more option, some opportunity to pick up some better deals.

Got it. Expenses were very well controlled this quarter, down quite a bit from the second quarter. Anything unique in that number? Where do you think a good jumping off point or good starting point for the fourth quarter would be?

So we had a decrease in professional services, primarily legal fees, which are typically associated with the problem loans. Our incentive compensation accrual was lower this quarter than it was in the prior quarter due to profitability being slightly less. On a go-forward basis, I would say for Q4, look for somewhere between $23 million and $24 million, Andrew.

Got it. Makes sense. That covers my questions. Thanks.

Thank you.

Thank you. Again, if you have a question, please press star then one. The next question comes from Andrew Terrell with Stephens. Please go ahead.

Hey, good morning.

Andrew.

Maybe just a housekeeping on the deposits. It looks like a lot of the deposit growth maybe happened towards the end of the quarter, just comparing the end of period versus the average. Anything that you feel like was more transitory in the deposit base at the end of the period, or is this the end of period number kind of a good launch point in the fourth quarter?

It's a good launch point for the next quarter, Andrew. There's nothing magical there. A number of the broker deposits we have specifically maturing and coming on late in the quarter as opposed to early in the quarter. That's why you see a bit of a discrepancy between the quarterly average and the quarter-end balance.

Okay, great. I appreciate it. I just wanted to get your views on overall kind of deposit growth in this environment. I appreciate all the color on the loan side, but it sounds like a tougher deposit market. Just your views on ability to kind of core fund growth and at what kind of cost?

Well, Andrew, the market is situational. The deposit pricing is all over the place. You are probably familiar with what bank is posting generally in the threes for TCDs. Because money market and interest-bearing DDAs, it is all over the place. Everybody has different deals, every customers and all. But on the TCD, which generally more available information on the bank side in the mid to high threes. But all the security houses is in close to mid-fourths. Some of them, the latest we see, E*TRADE, is offering 4.75%. Right now, because the Treasury nature is being not taxable in California income tax, which is a 13% top rate. So a 5% Treasury become 5.65% effective yield. So we see many of the customer take off after their CD renewed, they are moving to Treasury. This is the general market, is moving right now with all the interest rate environment, it is all over the place. We just have to do everything we can, just hold on to our customers. Meanwhile, try to grow a little bit.

All right, great. I appreciate your perspective and thanks for taking the questions.

Thank you. This concludes our question and answer session. I would like to turn the conference back over to Mr. Li Yu for any closing remarks.

Thank you. That, well, it's eventful third quarter for us. We hope that fourth quarter we see operation equally as consistent as we had right now, but hopefully this many item we'll work on will show positive results. Thank you.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.