Preferred Bank (PFBC) Earnings Call Transcript & Summary

Good day, and welcome to the Preferred Bank Third Quarter 2026 Earnings Conference Call. [Operator Instructions] 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 30, 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 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. Good day, everyone. Preferred Bank's third quarter net income was $32.9 million or $2.73 per share. This quarter were negatively affected by $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 that the deposit market is very, very competitive. Looking forward, this condition will likely go into the year 2027. The banks are now not only facing more competition from nonbank institutions, but also strangely, we see many of our customers deposit -- invest extra funds into the treasuries. Loans for the quarter decreased $40 million after we placed a large credit on the for sale status. Unlike at the beginning of the third quarter when we reported in our last conference phone call, but this time, our pipeline seems to be very solid, and we're very hopeful that in the fourth quarter to have a good solid growth. As we reported earlier, the net interest -- net interest income was affected by a reversal of interest income, and that has affected our net interest margin. This quarter, net interest margin reported 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 we Preferred Bank, is an asset-sensitive bank. Resolution of nonaccrual loans is continuing but slower than what we hope for. The level of nonaccrual remains stable, largely because several credit was scheduled to be resolved in this quarter are stuck in the court proceedings that has pushed it back to third and fourth quarter -- fourth quarter next year. The pace of migration seems a slowdown or subsided. There were only $20 million of additional credit that was classified as substandard that remain on accrual status. The rest of them are all have been included in the non-accural number. We are pleased with our consistent cost control of overhead even under a very inflationary period. And we are constantly looking for opportunities to gradually improve our noninterest income. And with the outlook of a strong 2027 economy and relatively stable interest rate environment, we're looking forward to a good 2027 year. Thank you. Ready for your questions.

[Operator Instructions] The first question comes from Matthew Clark with Piper Sandler.

I 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?

Yes. We have just under $1.7 million maturing in the fourth quarter. So it's a fairly heavy quarter from a maturity standpoint. Weighted average yield is 3.81%. Those are likely to come on anywhere between 3.75% to 4% as they roll over.

Okay. So not that big of a headwind there. And then do you happen to have the spot rate -- your deposit cost spot rate at the end of September, if not the month of September?

Yes, I do. Total deposit cost was 306% for the month of September and the spot margin was 3.58%.

Okay. And then deposit beta, I think, on the way down was about 69%. Any thoughts on what you might experience on the way up this time, assuming you 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 very, very difficult rate environment. So 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. And then 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. And then 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?

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

The next question comes from Andrew Liesch with StoneX Financial.

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