Preferred Bank ($PFBC)

Good day, and welcome to the Preferred Bank First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to [ Mr. Evan No ]. Please go ahead.

Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the first quarter ended March 31, 2026. With me today from management are Chairman and CEO, Li Yu; President and Chief Operating Officer, Wellington Chen; Chief Financial Officer, Edward Czajka; 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 on 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 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 very much. I'm very pleased to report the first quarter net income of $31.3 million or $2.53 a share. This quarter's net income was negatively impacted by the placement of a large relationship nonperforming status. If you recall, at probably February and March, we have issued a press release and informing all of you that we have placed a 9 loan relationship on a nonaccrual basis. This relationship consists of 2 C&I loans of more $2 million and risk are all in commercial real estate loans in the total amount of only $77 million on a nonaccrual basis. Shortly after the announcement we're able to sell one loan at par of $9.4 million. And on April 1, we have sold another 2 loans at par for $48.5 million. So as of today, we have effectively reduced the relationship by roughly 50%. And we'll continue our progress in the second quarter and in the third quarter, hopefully, by the time that we should have substantial resolution on this situation. Loan growth is moderate 1.1% sequentially and deposit growth was moderate 1.2% sequentially. Market competition, especially in the pricing end of it has been very severe. It seems to me that the war in the Middle East is trending towards a more stabilized basis. I assume -- I hope our country to soon concentrate on our economic affairs given the assuming months. Our net interest margin was 3.457% for this quarter, which is down from 3.74% in the previous quarter. Again, the reversal of interest income is the main reason. Since this reversal of interest income is nonrecurring, we're very hopeful especially when there seem to be no imminent rate movements. We're very hopeful that our net interest margin will rebound in the ensuing quarters. Our operating overhead or noninterest expense has been stable, and we will continue to keep it on a stable basis in the future. And for your information that the bank has repurchased roughly 400,000 shares of our own common stock for the total consideration of roughly $90 a share. Thank you very much. I'm ready for your questions.

[Operator Instructions] And the first question will come from Matthew Clark with Piper Sandler.

Just on the loans held for sale, the move there. I'm assuming $48.5 million of that is the 2 loans that you sold on April 1 at par, but just want to confirm that. And also what else is in there?

Yes. You're correct. Part of that $76 million, $48.5 million is the 2 notes sold at par on April 1. There's 2 other notes in there that we are actively marketing at this point as well to sell the notes. That's why they're placed in held for sale.

Okay. And any any pricing thoughts there on the other 2?

We hear they would like to get as much as close as to the part as possible. And we have been getting down some of the loans, okay? So this is our goal.

Got it. Okay. Great. And then on deposit costs. I want to get a sense for where your deposit costs were either at the end of March or in March and your thoughts on the competition going forward along those lines, just remind us how much you have in CDs coming due in 2Q and the rate it's rolling off on and the renewal rate that you expect to come on on?

Well, that's a lot of questions in one, Matthew, but I'll take a stab at it. The deposit costs are coming down but not to the same -- not in the same velocity they were in Q4. So that that is starting to slow in terms of the lowering of deposit costs as we go forward. For your record, March deposit cost was [ 3.10 ] overall. In terms of maturities, we have $1.35 billion maturing in the quarter at a [ 3.89 ] rate those will likely be put on at similar rates, maybe a little bit lower, but we're getting close to the point where we're reaching stagnation in terms of the rolling off of CDs to newer lower-priced CDs.

Okay. Great. And last one for me, just on the expense run rate going forward. How should we think about noninterest expense?

So we're at roughly [ 23.5% ] for the quarter. Over $1 million of that was heightened levels of payroll tax related to bonus payout and related to stock vesting, which both occurred in the first quarter. So as we go forward into Q2, I'm looking for something in the high 22 to low 23s.

Next question will come from Gary Tenner with D.A. Davidson.

Just wanted to ask on loan growth. I mean the production, I think, must have been pretty decent this quarter, just to have kind of the line growth of [ LHI ] and loans up for sales. So can you talk about production, competition and pricing in terms of [ volume ].

Pricing is all over the place. We're still facing a lot of people is pricing below [ 6 ] on the fixed rate basis. We can't afford to do that. So -- and especially when the movement of the interest rate is unclear at this point in time, we have not been getting them the rate cuts that were previously for Canada, okay? So most people have been having, let's say, frankly speaking, they're doing rate a little bit less than I expected.

Okay. So yes, so they're doing long-term fixed rate loans lower than you want to do them. In terms of just the activity levels and quality of credit that you're seeing come through? How does that look today?

Well, we see the quality pretty much the same situation. And I don't think the industry has been losing on the quality. And based on my colleagues have been very much controlling themselves in that aspect. And likewise, obviously, we try to do that too.

The next question will come from Andrew Terrell with Stephens.

I wanted to start on just the margin, the $3.4 million interest reversal. It seems like that's 19, 20 basis points of margin or so. Just as that normalizes in 2Q, I guess if we add that back in, it gets closer to like a [ 3.75 ] type margin similar to your fourth quarter. I just wanted to verify that's how you're kind of thinking about margin for 2Q? Or how should we think about trends of the NIM going into 2Q and then kind of throughout the year?

Yes. I think you're -- directionally, you're correct, but probably about 5 basis points high there. So we're -- the margin for March came in at [ 3.71 ] just so you know that. And so we're looking for something in that area as we go forward. Now with the sale of the note on April 1, we are going to recoup some interest that we reversed out. So that's going to be a little bit of a tailwind for Q2. So it might be a little higher than that. But right around the [ 370 ] number, I think, is probably good for us.

Great. Okay. And then just on the note sales, good to see you guys get out of get out of them in April at a pretty good price. Should we expect that when you talk about resolution of some of the remainder of these credits by kind of third quarter time frame, is note sales the primary avenue in which you're seeking to remediate or any other planned kind of actions on the nonperformers?

It's obviously, that is the note sales is the quickest and best for us if we can get the price that we want to get, okay? And that is really also like pricing issue for us. And actually, each loan has its different nature. Most clear situation is the loan-to-value ratio based on appraisal. Normally speaking, that obviously that when the situation narrow, you don't get as good a pricing as the sort of the loan with a bigger margin in a situation. So in the meantime, the other resolution process, which is for closure process still going up. And right now, most of the loan has been filed bankruptcy. So we have to go through dealing with the bankruptcy too, and it depends on what the bankruptcy judge is awarding. They might award in certain cases, they have more time to selling it, to operate it, to reorganize it, that's something out of here. But to the extent we can get them immediately then we will resell them. So therefore, each property is kind of has a different resolution nature, not that it's very necessarily predictable.

Yes. Understood. Okay. I appreciate it. And then just one more for me on the some of the commentary around competition. I understand it's a tougher market here. Just wanted to maybe reframe expectations on kind of loan and deposit growth for the year. If I add back in kind of the HFS loan this quarter, it looks like you were kind of tracking mid-single digits. Do you feel like in this competitive backdrop, a decent cadence through the year for loan growth? Or are we more likely to see some compression just given the competitive environment?

Yes. I think about 3 months ago in the press conference, I was saying internally, we're guiding ourselves doing high single digit. So -- but however, internally, we didn't know there's a war in Iran. So whether how much the change on that issue alone, we do not know. And plus, we seem to have administration that is presenting more changes in every aspect of situation that usually bank gets related to any of the changes they want to make. So we -- our situation right now is that we're bouncing back towards forward in terms of our own internal expectation so on. We have to be realistic. When the war is going on, when there's no petroleum, when the prices go to the roof, you're not going to say the same loan demand as you are in a peace type situation. So I guess all these kind of situations, all we can do is stay alert, but we still hope that this will be a growth year for Preferred Bank.

The next question will come from David Feaster with Raymond James.

I just wanted to follow up on that growth discussion. I was hoping you could maybe help break down a bit of the dynamics behind the slower growth that we're seeing. It sounds like, to your point that we may be seeing somewhat of a slowdown in demand, is that a fair characterization if I'm reading between the lines? And then just any commentary on how payoffs and paydowns have been playing into this? And where you're seeing the most opportunity to -- within the pipeline and to grow loans right now?

I think demand slowed down is a foregone conclusion. And I just think about what the petroleum price is going to, I mean, $100 out a barrel -- not petroleum oil, okay? When the product all related, all the various products were related and the long-term -- short-term and long-term effect is hard to measure. And the supply nature also makes you miserable. So definitely, that will affect it's just we have -- we may not see it at all yet at this point of time, reflecting the economy we have. So that is what we are pretty much confused at in-house at Preferred Bank.

Okay. And then maybe just shifting gears back to the credit side. I mean, obviously, look, you guys have been very active managing credit. You've worked through a lot of issues. And so I assume that you've done a pretty deep dive into the book at this point. Do you think we're at or near an inflection here? Are you seeing continued migration? Or is some of this broader macro side? Like do you think credit is not at that point yet, and it's still pretty uncertain?

Okay. Well, number one issue is that I don't know in the past, we have been this busy on credit or not. Again, it seems to be this transaction is really the inflection point on a current attention and so on. And even with that, it has been a long group of loans that was performing, coming pretty well until there's some irregular retail was found by, I guess, everybody knows by [ Western Security Bank ]. [ Western Alliance Bank ] they published an announcement and the whole thing just started to get the sour from that point in the next several months to the point we have to call it a nonaccrual, and we had to resolve that immediately. Other than that, our total credit picture has been remain generally stable. And I can send you the FDIC statistics about our 10-year charge-off ratio were probably lower than the average of the banking group. So I do not know that we have been struggling about credit in the past, but we are struggling about credit -- this group of credit right now.

Okay. And maybe just last one for me. You're still sitting on a lot of excess capital. You've been more active with the buyback. I'm just kind of curious how you think about capital priorities today? The stock moved a bit higher from where you've repurchased more recently. But just kind of curious how you think about capital priorities today?

Well, there are 2 groups of pictures, the 2 group of -- I mean the 2 group facades. One group representing the more so or the active trader investor type. And the idea is that you have enough capital, you just go do the buyback, whatever you can immediately as much as you can. So that's one group. And then we have another group of long-term investors, probably their position of banks hardly moving a lot in the past 10 years. And plus we have also a rating agency. Both thing to say, well, you need to play it safe on your capital. What you need to do is look at the future economy, look at the earnings focus on and determine on a flexible basis what you can do year from the year. So I guess our Board decided the security is above all situation. So we're leaning, David toward about our long-term shareholder viewpoint.

That makes sense. And maybe if I could just squeeze one more in. Just kind of curious with the rate backdrop today you're obviously naturally asset sensitive. But given the market is kind of looking at this as the Fed on pause maybe for now at least, has your thoughts on managing rate sensitivity shifted at all?

Well, I will say some [indiscernible]. My feeling is that within the next group rates. For Preferred Bank, particularly, we are sort of like near neutral in asset sensitivity, particularly because of a lot -- I mean not TCD portfolio. And under the current status when the rate is not moving, actually, our TCD rate we're paying is improving in each quarter. I don't know very slowly about nowadays because the market competition. So we just are not clear about the economy yet. Again, likewise with all the things that were happening to us, I mean, obviously, we can always name the war is one of them. Well, would that do to our economy? Would it create -- would you be able to tell me whether we're going to have recession ahead of us? Or we have low growth ahead of us or high growth ahead of us? And this question is possibly generally almost everyone at this point in time because a lot of uncertainty we're facing. So this year, the challenge is, in my opinion, stay flexible, alert, flexible. I don't know Ed, how are you feeling?

Yes. Well, no, I think similarly, we haven't really changed much in terms of the balance sheet profile in probably the last 12 months since we -- at the higher rates in '23, started doing more fixed rate loans. That percentage between fixed and variable on the book is about the same as it's been about 75-25 variable to fixed. Along with that, we try to get more and more of our large corporate deposit accounts, interest-bearing checking and money market tied directly to Fed funds to large corporate accounts. To the extent we can tie them to Fed funds, it makes our asset liability matching, as Mr. Yu said, more closer to neutral than the asset sensitivity we had, say, going into 2021, 2022, and we are highly asset sensitive and took advantage of all the rate hikes. So I think we're kind of in a pause mode in terms of change in the balance sheet and want to kind of keep it where it is right now. As much as you said, flexibility. I mean, if this war continues and we get into a point where inflation creeps up we may not be looking at rate cuts as the next rate change from the FOMC. So I think we want to stay flexible. And what we've always done is keep both sides of the balance sheet short and that way, we can react to anything.

And this will conclude our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Well, thank you so much for your interest in Preferred Bank that we hope what we have described today is our road map going into the next few quarters. And hopefully, that we can produce an even better financial results in the next few previous times. Thank you. Thank you very much.

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