Preferred Bank Aktie

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 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 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 3.06% 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 million 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. Yu 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 court decision. So sometimes, even though the collateral property has a good loan to value, and we can fully recover. However, we have to 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?

Do you want to comment about that, Wellington?

Yes, Andrew. The loan growth is a combination of both the payoff. We had some unexpected payoffs and also production is -- it wasn't as robust as the second quarter production. But having a lot of loans that's in the pipeline, kind of delay in funding and all that, so it does carry over to this quarter. And that's why we're 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 face of higher rates?

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

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

Yes. So we had a decrease in professional services, primarily legal fees, which are typically associated with the problem loans. And then 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.

[Operator Instructions]

The next question comes from Andrew Terrell with Stephens.

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 it 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?

No, 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. So that's why you see a bit of a discrepancy between the quarterly average and the month end -- quarter end balance.

Okay. Great. I appreciate it. And then just wanted to get your views on just 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 what kind of cost?

Well, Andrew, the market situation with the deposit pricing is all over the place. You are probably familiar with what bank is posting generally in the 3s for TCDs, okay, because money market and interest-bearing DDAs, it's all over the place. Everybody has a different view with every customer. But on the TCD, which is generally more available information, the banks are in the mid- to high 3s. But all the security houses is in close to mid-4s. And some of them, the latest we see E*TRADE is offering 4.75, okay? And right now, because of Treasury nature is being not taxable in California income tax, which is a 13% top rate. So a 5% Treasury became 5.65% effective yield, okay? So we see many of the customer take up after their CD renewed, they are moving to Treasury. So this is the general market is moving right now with all the interest rate environment, it's all over the place, okay? We just have to do everything we can just hold on to our customers, and meanwhile, try to grow a little bit.

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 -- well, it's an eventful third quarter for us. We hope that fourth quarter, we'll see operation equally as consistent as we have right now, but hopefully, this -- many of the items we're working 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.

Good day, everyone, and welcome to the Preferred Bank second quarter 2026 earnings conference call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Jeff Haas of Financial Profiles. Please go ahead, sir.

Thank you, Cole. Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the second quarter ended June 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 risks 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.

Thank you all for joining our conference phone call. Good morning. We are pleased to report that our net income for the second quarter of 2026 was $33.5 million or $2.78 a share. This number compares favorably with previous quarter and same quarter previous year. It also exceeded our internal budget. For this quarter, we have been quite focused on the resolution of troubled assets, okay?

Non-performing loans during the quarter has been reduced $70 million or 41.5%. And likewise, the criticized loans have been reduced by $90 million or 34%. With the large reduction in classified assets or criticized loans, okay? The reserve requirement on these items has been reduced. Therefore, our provision expense for the quarter is $1.2 million.

Looking ahead at June 30, okay, we still have 3 more loans totaling $60 million -- non-performing loans, totaling $60 million, scheduled to be resolved in the second half of 2026. However, as each one of them is involved in its own bankruptcy case proceeding, the exact timing of the resolution will be at the mercy of our legal system. This quarter we have satisfactory or good loan production activities. Loan increased $125 million or 2.0% linked quarter basis. But if you count in the -- we also made up the $70 million loan we sold, the actual origination effort was quite good. On the deposit side, it only increased $52 million or 0.8% linked quarter basis.

We are well aware of nationwide, all banks or the bank -- entire banking industry, is reporting stiff competition in deposits. Going forward, this will also be our focused area. Net interest margin was 3.73%, favorably affected by the interest recovery. And our efficiency ratio was steady at 32% and currently an inflationary environment. All these underlying activities make us feel pretty comfortable about our operations and we are optimistic regarding the remainder of the year.

Thank you very much. I'm ready for your questions.

And ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] And our first question today will come from Matthew Clark with Piper Sandler. Please go ahead.

I guess first on the loan yields, nice interest recovery there. Stripping that out, it looks like loan yields maybe reset to about 7%, barring additional recoveries. I guess maybe any comments on loan pricing, whether or not you can kind of hold that yield if the Fed stays on hold? Or do you think there's some incremental pressure there?

I will first let Wellington answer that, okay?

Well, the market is very competitive. We try to squeeze every 10 bps, 25 bps out of each transaction and we're at the mercy of a lot of our competitors who are still out there offering much lower kind of lower rate that it just doesn't make sense. Now, having said that, a lot of uncertainties in the market and that's why we want to make sure that we are disciplined enough to continue to take on the loan that give us some quality loan. Again, quality loan that give us a type of return that we need to continue our earnings.

Well, Matthew, every bank, every year, is crying for loan competition has become a standard language nowadays. But we're very fortunate that we're able to, I guess because we turn over more stones, we get a little better yields than our peer group, okay? And that probably can verify that by the call reports.

Okay, great. And then on the deposit pricing side, sounds like from the release that there was some upward pressure on deposits throughout the quarter. Do you have the cost of deposits in the month of June and then maybe remind us of the CDs that you have coming due over the next two quarters and the roll-off, roll-on rates?

Two quarters. You threw me a curveball there, Matthew. First off, the cost of deposits, total deposits was 3.06% as of the month of June. Cost of interest-bearing deposits was 3.44%. The cost of total deposits has been held in check, not necessarily by the rate environment, but by the fact that somewhat we're seeing a slight change in the mix of our deposits. We've seen some decent growth in DDA, which has certainly helped keep deposit costs down. In terms of going forward, we have $1.5 billion maturing in the Q3 of total CDs at an average rate of 3.80%. Those will likely come back on at a slightly higher rate than [ 3.80% ] -- and I don't have the fourth quarter roll-off, so.

That's okay. Okay. So NIM probably resetting back down to the low 3.50s is fair here in the 3Q?

So, on an adjusted basis, it was 3.60% for Q2. When you strip out the noise with respect to the interest recoveries, it was 3.60%. So, yes, we would expect probably mid-3.50s for Q3.

Okay. And then last one for me, just on the expense run rate, relatively flat this quarter. The outlook there in the second half?

Yes, we were a little disappointed with respect to non-interest expense this quarter, Matthew. Professional services, namely legal fees, were elevated because of the large relationship that we're working through right now that Mr. Yu touched on. So in terms of going forward, I would look at, I would say Q3 is going to be fairly flat to Q2. Might be a little better.

That's all. Because everything start to catch up in cost, okay? It's just getting simpler. Every same service, same item costs a little bit more nowadays, you know.

And our next question will come from Gary Tenner with D.A. Davidson. Please go ahead.

Just wanted to ask about loan growth. It sounded like you guys have a fairly constructive outlook for the back half of the year, if I interpreted that correctly. Could you kind of talk about maybe expectations around that?

Well, obviously, Q2 was very strong, as Mr. Yu mentioned, without the sale of the 2 notes, net growth would have been closer to $180 million, but in terms of Q3...

Actually, $194 million. In any -- and then also, that's after a large payoff activities, okay? So actually, the new loan origination. But things just bouncing around, partially affected by interest rate movement in the Fed level, okay? I still remember in early spring, in springtime, the whole country is anticipating rate cuts. And there's a lot of optimism going forward and people getting into the deal based on that, I mean, in the case of C&I activity or in the case of real estate based on a new cap rate, they want to come into deal. Then suddenly things take a change in June and everybody is talking about, oh, there will be rate increases in July, okay?

Now with July's call report, where is it? So we see a lot of hesitation on the customer side. At least they get to be delayed or just not going forward as fast as it used to be. So that -- and the much increased level of activities from the non-bank lenders, their competition, okay? We think going forward in the third quarter, certainly we will be a lot tougher than the second quarter, okay? But whether it will recover in the fourth quarter and it will become a lot, we just have to be very flexible and take opportunity as they come. I don't know that answers your question on that, because that's about all we do -- all we can do.

Yes, no, I appreciate the thoughts on that.

And our next question will come from David Feaster with Raymond James.

Look, the loan origination trend, it's extremely encouraging. I'm curious how much of this is really a function of improving demand versus increasing productivity from your team. And just kind of like where are you seeing strength? How's the pipeline shaking up? Again, how is demand across your footprint?

Well, from my angle, I see in the second quarter, the increase in demand, I just mentioned that early in the quarter, there's a lot more optimism in our customers' level than it is today regarding the rate of cost they have to pay, okay? So obviously that the same level of optimism is not there anymore compared to the springtime. But how's the pipeline shaking up? How do you see the activities going forward? Can you guys answer that?

Do you want to take a shot first?

Yes. I'll chime in. I have some ideas. Yes, David. The pipeline's still pretty good. I think opportunities are still out there to review deals. We're getting a lot of deals that we are looking at. Not all of them seem to make sense from a combination of a pricing standpoint or what have you. But the pipeline is still pretty vibrant. It's just we're seeing more deals right now.

Again, as I mentioned earlier, the loan demand is high out there, but it's the quality loan demand that we're looking for. And every quality loan demand we have, we're more competitive because every bank out there or private lender, they all want those type of loans, or maybe not private lender. But they, so, and we try to squeeze every penny out, squeeze another 10 bps or maybe 20 bps, whatever, a little bit here and there.

So our production team, they work very hard, keep turning stone, keep turning up quality loan demand, and then we have to, again, be disciplined, be very selective. So having said all that, to repeat what we did in the second quarter, as Mr. Yu said, well, we always try to do our best to build a loan portfolio that's profitable and sustainable.

Yes. Okay. And then, we touched on the deposit pricing competition. I mean, the NIB growth you saw this quarter was great. And that's, obviously helped with the funding cost side and on the margin as well. I'm curious, how do you think about, again, with this competitive backdrop, how do you think about your ability to drive core deposit growth going forward?

That is also a mandate within our internal operation, okay? But realizing that everybody is doing the same thing, and realizing we've got one more situation that is really affecting us, which is the stock market. Especially the opportunity that AI stock is providing to the general public. We see many, many customers investing their excess cash into the stock market today as compared to the old days where saving in the bank is to make something make them comfortable. But the trend is that everybody is joining the stock market now. So this is another competition level that we're facing right now. We just have to try our best to improve our mix at the deposit level. The cost you just have to pay whatever is out there.

Yes. And maybe kind of just to that point, right, maybe a philosophical question. How do you think about NII growth relative to the margin here? I know in the past we've discussed and you look at the margin as an output, not an input, right? I'm curious, is that still the philosophy? And whether you're willing to compete? You talk about paying what you're going to pay. Are you willing to compete on pricing and sacrifice some margin to drive NII growth? And just help us think through the margin trajectory as we look forward kind of in this rate environment.

Frankly speaking, that this bank has traditionally give up a lot of opportunity that our loan office brings to us, okay? But because many of the loans that we bring over does not meet a rate requirement, which because that the deposit we have to pay, we like to be the most selective in our rates. So, I mean, competition, low-cost competition is never, never our answer to all situations. And when you do too much, then you're loading your balance sheet with all kinds of low-rate loans. And it's hard to get out of it, I guess. We all see several cases that cause some of the, even the bank failure. So we are very careful that try to stay, first of all, hopefully, asset sensitive that will keep our deposits and loan rate aligned. And number two is situation, select the rate of the loans we think is proper for us. The price come to us, we become a little bit selective sometimes.

David, I'll just add to that. And you and I have had this discussion many times. We focus more on net interest income growth as opposed to managing to the margin. The margin is simply a mathematical output of how well we executed.

Okay. And I mean, again, you're operating with a healthy margin. I'm just kind of curious if we're willing to sustain it there, if we're focused on expanding it as we kind of look beyond that, the fourth quarter and beyond.

Yes. I'm sorry, was there a question in there?

It was an open-ended statement, I guess.

Yes. I mean, what it is, we've already talked about there's differential in loan yields on payoffs versus new origination. Pricing is tight. Deposit pricing is difficult. So, I mean, those obviously all lead to those kind of all point to some compression in the margin going forward and probably on into next year.

And our next question will come from Tim Coffey with Brean Capital.

Just getting back to the deposit question and the competition. I guess your first half of the year on deposit growth, you're running kind of low single digits. Is that a reasonable run rate for the full year?

Well, we hope not. We'd certainly like to increase that. But as we've talked about before, and Tim, you know this, there's no pipeline for deposits. So that's the real challenge in not necessarily knowing what's coming 3 months, 2 months down the road. So we just have to continue to work. I think the, as I said, the growth in DDA on a year-to-date basis is very encouraging. We'd like to continue to work toward that end, for sure.

Okay. And then, so how should I think about your loan to deposit ratio? Because it does seem like you've got some room to kind of potentially hold it at the current level. Is there any appetite to take it higher?

Well, right now we're running about 95%, okay? It bounce around a bit in there. And internally that we are both here comfortable with that particular situation. So I guess short-term we can let it rise a little bit, but long-term we'd like to keep that ratio in here. We think liquidity for us is very important.

Right. Okay. Got it. And then on the allowance, it's running at the low end of how the historical range, say 6 years or so. Everything remains kind of the way it is right now, no changes to really kind of the inputs that determine a provision at this point. Do you feel the need to kind of refill the bucket?

I'm not, I'll let, I think Nick probably should answer that. So the question was, do we want to, in terms of, increase the ALLL to the total loan?

Yes, so for Q2, our ratio is 1.22% of the total loan and based on the current credit quality trend of the bank. As you know, at Q2 we have a lot of resolutions and credit trend is heading in the right directions. So we do reserve a quite a sizable reserve on the Q side as well in terms of covering the current uncertainties regarding inflation reserve, unemployment, all those kind of things. So we believe for the upcoming quarters, it should still stay approximately at a similar level of the reserve at this moment. Definitely, if there's any changes, we will adjust that right away in order to adjust our assumptions for a reserve site.

Okay, great. And then, this is my last question, it has to do with capital. Say loan growth doesn't pick up the way you're anticipating, would you consider getting back into the market for buying back shares?

Yes, obviously that will be one of the use of the capital items that was continuous under evaluation going forward.

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Mr. Li Yu for any closing remarks.

Thank you so very much, and I hope that we can continue to report results and exceed -- only our expectation, okay? Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.

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 Niu. 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 on the 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 a small $2 million and the rest are all in commercial real estate loans in the total amount of $177 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 that time that we should have substantial resolution on the 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 more stabilized basis. I assume -- I hope our country can soon concentrate on our economic affairs in the ensuing 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 I 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 pricing thoughts there on the other 2?

Well, we generally 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?

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 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 million 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.

I 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 held for sale. So if you talk about production competition and pricing in terms of the loan book?

Well, pricing is all over the place. We're still facing a lot of people is pricing below 6 on a fixed rate basis. We can't afford to do that. So -- and especially when the movement of our interest rate is unclear at this point in time, we have not been getting them the rate cuts that we previously forecasted, okay? So most people have been having, let's say, frankly speaking, they're doing rates 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 loosening on the quality. And based on my colleague has 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. So 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 3.70% 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 sale 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 a pricing issue for us. And actually, each loan has its different nature. The 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 foreclosure process still going on. And right now, most of the loan has been filed bankruptcy filing. 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 or to operate it, to reorganize it, that's something out our -- but to the extent we can get them immediately in, 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 loans this quarter, it looks like you were kind of tracking mid-single digits. Do you feel like in this competitive backdrop, that's 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 backwards forward in terms of our own internal expectation and so on. We have to be realistic when the war is going on, when there's no petroleum, with the price going 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 slowdown is a foregone conclusion. Just think about when the petroleum price is going to, I mean, $100 out a barrel -- not petroleum oil, okay? When the product are related, all the various products they related and the long-term -- short-term and long-term effect is hard to measure. And the supply nature also makes it immeasurable. So definitely, that will affect. It's just we have -- we may not see it at all yet at this point of time, reflected in our economy. So that is what we are pretty much convinced 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 our 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 return 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 on 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 remaining 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 this 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 has 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 is 2 groups of pictures, the 2 group of -- I mean the 2 group of thoughts. One group representing the more so or the active trader investor type. And their 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 hardly their position of bank hardly moved a lot in the past 10 years. And plus, we have also a rating agency. Both seem 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 your earnings forecast on and determine on a flexible basis what you can do year from 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 [indiscernible]. My feeling is that within the next peer group of 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 where the rate is not moving, actually, our TCD rate we're paying is improving in each quarter. I don't know very slowly nowadays because of the market competition. So we just are not clear about our economy yet. Again, like with all the things that were happening to us, I mean, obviously, we can always name the war is one of them. What, 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 puzzling 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, is stay flexible, stay alert, flexible. I don't know, Ed, how you feel it?

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, the 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 when we were highly asset sensitive and took advantage of all the rate hikes.

So I think we're kind of on a pause mode in terms of changing the balance sheet and want to kind of keep it where it is right now. As Mr. Yu 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 period of time. Thank you. Thank you very much.

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

Good afternoon, everyone, and welcome to the Preferred Bank Q4 2025 Earnings Conference Call. [Operator Instructions]. Please also note today's event is being recorded.

I would now like to turn the conference call over to Jeffrey Hass with Financial Profiles. Sir, please go ahead.

Thank you, Jamie. Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the fourth quarter ended December 31, 2025. With me today from management are Chairman and CEO, Li Yu; President and Chief Operating Officer, Wellington Chen; Chief Financial Officer, Edward Chica, 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. Third 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 of 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, okay. 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 remains stubbornly high. In fact, many analysts has reported that between quarters, the banking industry, the entire banking industry, cost of deposits may have increased slightly.

Looking forward that we're seeing that our loan demand 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 out the year, for loan and deposit growth in 7.3% or 7.2% respectively.

During the quarter, we have sold 2 large pieces of REO result in a net gain of $1.8 million between the 2. The income was reported in the section of noninterest income, okay? The loss, the sale to result loss was on in the noninterest expense action. Why -- this is based on -- the current principle of generally accepted accounting principle groups.

For the quarter, nonperforming assets declined slightly. However, [indiscernible] assets did increase $97 million, okay? principally, this is due to that we placed a large line 9 loans loan relationship into the classified status. For the quarter, loan loss provision was $4.3 million. Okay. Most analysts, economists, most economists is forecasting 2026 a year of relatively gross stability, okay.

Our customers' feeling also indicating they have improved outlook for 2026. Barring any sudden changes in government policy of directions, which we just had one, okay. We're hoping 2026 to be more of a growth year for Preferred Bank.

Thank you very much. I will answer your questions.

[Operator Instructions]. And our first question today comes from Matthew Clark from Piper Sandler.

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.

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 6, 7 basis points a month.

Okay. Yes. And that's where I was headed. Deposit beta this quarter looks about to be about 40% on interest-bearing. It sounds like things are still pretty competitive. What are your thoughts on the beta, the deposit beta going forward, assuming we get maybe 1 or 2 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 5 or 6 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. And is it -- it sounds like loan growth, you expect to maybe step up a little bit this year from the 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 to deposit ratio?

That's a post-sales statement.

Yes.

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 21.5% to 22% should be about...

Why don't you use a 21.5% to 22.%.

Okay. bigger margin.

Our next question comes from Gary Tenner from D.A. Davidson.

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 3.96%. They're currently coming on right now at about around 370 to 380 right now on average, Gary?

I appreciate that. And just curious, you last quarter, when you talked about the CDs maturing in the fourth quarter, they were maturing at 4.1% and you had sort of positive kind of new CDs in the mid- to high 3s. So it sounds like that number was towards the upper end of that repricing range in the fourth quarter? Or 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 million to $200 million of the loan book. Right now, our -- we have about 45% of the floors are in the 0 to 100 basis point bucket in terms of their protection effectiveness.

Our next question comes from Andrew Terrell from Stephens.

I was on 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 so like high 3s for you guys right now. Is that generally in line with your competition? Are you trying to price ahead, price below to pick up more deposits? Just curious, where your adverse to market kind of your strategy, your expectations there?

I think the challenge is kind of walking the tight growth, 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 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.

Yes. That 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 the pathway to curing this what the time line and outcome looks like as you see the picture today?

And then also just is a pretty large relationship, 2% on the loan book. Is this the largest relationship with the bank? Or are there other similarly large relationships that you guys have?

You want to answer that you or...

I believe this is 1 of the large relationship correct for the back end is not.

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 foreclosed and taken back property, et cetera, but....

Andrew, our first choice, obviously, we know these customers, they are late in payments and they are having a problem with other banks, okay? And -- but the principle is that because these properties still have very, very positive value in their eyes. And the information we have is that we're very far try to finance from other alternatives. So the bank is going to be waiting for them to get these things these procedures done. Okay.

So in case, if they are not able to continue the loan, and we had to go through the further procedure, we are not going to be shy away from that immediately. And then the current marketplace is pretty reasonable I mean, as regard to pay for these properties just on that time. So in other words, we're not seeing the market situation in 2008, '09, 2011, '12, that you have to bottom 4, it's not happening, market has been very stable.

So it's a matter of time to resolving thing as these loans are basically fundamentally. Well, reasonably underwritten.

Our next question comes from Tim Coffey from Janney.

Mr. Yu as we start looking at loan growth next year, -- what do you think are the best opportunities for growth? Like what loan product?

Well, basically, we see sort of like the commercial market, they're basically commercial real estate and in the C&I loan. We see both side demand is reviving a bit right now, okay? In fact, internally, we're budgeting as higher number than previous year right now. So it's still very early to tell. As you know that not only we have we have the normal economy, but we do have a very active government, okay, that changes. And in fact, this is from time to time, okay.

So you will be if we mentioned some [indiscernible] smooth, no change or goes rate, I think that's always over the optimistic situation, too. But I'd like to say that we're budgeting a higher number there last year for our upcoming deals this year.

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

Yes. That's about what we're looking at is, yes, right in that neighborhood, Tim, you're right, you're spot on.

And then to kind of just general thoughts on share repurchases for this year.

Well, we just have to see what what the total picture is, first of all, that obviously, we have to see what our loan growth is, okay, during the year. And our possibility, all funds will have to be reserve for the loan growth. And secondly, that deposit situation will also be very important.

So when we have the balance sheet of fixed end, we probably would turn out to see whether it's additional availability for purchases of the repurchases. But I would say that the situation is not quite as -- how should I say, conducive to repurchase as last year.

Right. Sure. Absolutely. And then I guess I want to kind of make sure I've got the eye and cross the Ts on the classified loans. I mean given the uniqueness out of this situation, what is the time line for disposition look like? Or how does this play out?

Well, first of all, there's an amount of relationship. There are several different loans, some of them earlier maturity date than the other one. So first of all, obviously, we will be giving our customer the opportunity that particular relationship. The opportunity of resolving these matters to our satisfaction.

And then the legal procedure will start if they fail to do that. And I would say that internally, we will say that probably we will have majority of a good portion of all taking care of -- so taking care of all results sometime within 2 quarters. Nick, do you think I'm too optimistic or

What should promise heading, ye.

Yes, we try to set the I think we'll give ourselves so much time to get a lot of the work

Our next question comes from Liam Chill from Raymond James.

This is Liam on for David Feaster. 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 nonaccrual. Did you have the credit metrics for that loan? Is there anything in particular we should take into account?

You mean that the 19...

Yes, 19 at the numbers what Okay. credit metrics.

Right. So based on the most updated pie conducted after we classified this loan and the battery come out even higher than previous one. So with everything in mind, no, how much of that is $8 million.

It's $49 million.

$49 million and our loan is 19.5%. -- sorry.

One loan that we like to think that the borrower will want to find a way to resolve that, okay, because it's -- there's too much difference between -- we assume the market area is the appraisal of add. There's too much difference in numbers.

No, and then just 1 more for me. For fee income in 2026, would the 4Q number, excluding the onetime 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. So I would take that noninterest income without the gain on sale of other real estate.

[Operator Instructions] Our next question is a follow-up from Matthew Clark from Piper Sandler.

Just want to clarify your expense guidance for this year. Does that exclude OREO costs because the midpoint of your guide for the first quarter of $22 million annualizes, obviously, the $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 -- 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, that's...

Yes, we did in October, but it was a nominal amount, Matthew so.

Okay. And then just last 1 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?

Yes, there are a few deals that have been brought to us that we end up taking a look at it. As you know that that has been nothing main effort in M&A, but they are company years would take a look at it. And probably the pricing structure required other still not to as satisfactory. So we'll continue to look at it. We know that there may be another 1 or 2, but we'll take a look at it.

And our next question comes from Arif ingot from Cygnus Capital.

My first question is really more just to clarify the diluted EPS of $279 million 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. Just want to confirm, am I reading that correctly, the effect of that gain, the EPS was $259 million?

That sounds about right, yes.

It was $1.8 million for.

$3.6 billion. Yes. So that's about right.

Okay. 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 absolve yourself with any exposure to those properties going forward.

We -- one of them as we provide financing -- the other 1 is or cash sales.

Correct.

Got it. So you still have a loan to 1 of those properties going forward.

Much smaller loan.

Got it. Okay. And then the last question I had was with respect to the increase in the classified loans. 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 Zions, -- are those loans paying current -- are they performing or not?

As far as I know that we don't know exactly the status of the other 2 banks slowing and we don't have any idea about their structures. All I know is that we are in a first position trust lender to were fully secured problem.

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

Yes. We have been receiving the payments by.

It's been so staying slowdown.

That's correct.

Sorry. So when you -- so they're like behind in interest service or they're currently in service. I'm not following.

Behind into services at the primary reason that's the weakness of the.

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

Because of the guarantors gained with litigation with other banks, so probably that is not 100% using all the cash flow from those properties to make the payment to our banks that's our gas.

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

All these loans on the digital relationships we do with a substandard impaired, we go with the notice [indiscernible] as the release mentioned about the route value around 65%. So there's no specific reserve on us. However, the 4.3 provision for this quarter was mainly the result of the combination of many manufacturers, including the loan growth, including other specific reserve for some of the loans, just to give you an example.

We fully reserved this relationship to under unsecured credit and also based on 2 factors. So due to the movement of all this relationship and increase of the criticized loans, we have adjusted our key factor side, especially on the credit track area. We increased 5 basis point of the entire rest segment. So these are the component of our reserve at this moment our Q factor side actually count around 42.5% or reserve.

So we do believe the reserves should be have more detail to cover our credit situation.

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. That's being for now that refer back, we have better challenges as an attractive within the next 6 months period time try to resolve these issues that on the better side. But overall, everything remains the same. With the same company we see attractive with with a normal operation, normal matrix and so on. And we sort of like Steve look forward to 2026. Thank you very much.

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

Good morning, and welcome to the Preferred Bank Third Quarter 2025 Earnings Conference Call. [Operator Instructions]. 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, 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 morning. I'm very pleased to report to our shareholders that we have a record earnings per share of $2.84 a share for the third quarter of 2025. Our net income for the quarter was $35.9 million. Both numbers compare very handsomely with previous quarters.

This quarter, our credit quality has improved. Nonperforming loans has reduced from $52 million to $17 million and largely because of one loan of $37 million that we have 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, okay. We tried very hard try to close it on September 30, but didn't make it.

All other metrics of the credit quality seems to be stable. And I take 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% or $133 million. Deposit growth 2.5% or $151 million. It seems to us at the marketplace, our shareholders or 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 fourth 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 quarter. We have hold our operating overhead or noninterest expense pretty steady as compared to previous quarters, okay? Because of the increased 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, okay? 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 under reporting the net income for the first half by $0.05. I mean -- but this number has been properly updated in this reports up year-to-date number.

Thank you so very much, and I'd like to answer your question now.

[Operator Instructions]. The first question comes from Gary Tenner with D.A. Davidson.

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 -- had the rate cuts 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 the variable rate or the floating rate bit of the portfolio and where the floors are at this point?

Ed?

Yes, 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 floor -- 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 we still have a ways to go for a lot of these loans before the floors start to become meaningful.

Great. 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?

Well, we sort of measure the buyback against the income level we have and the share price we have -- and from quarter-to-quarter or from month-to-month, we will review our position to come to the point of how much we want to do the buyback. It has something to do with our growth rate, too. As you know, the growth rate gets to be stronger, our buyback may have slowed down a little bit. But we are measuring it based on -- there's no set formula for it.

Okay. Fair enough. Go ahead Ed.

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 is that -- was it [ $763, ] a pretty clean number?

I think that's pretty...

Yes. The noise was in the prior quarter, Gary, yes.

Our next question comes from Adam Kroll with Piper Sandler.

This is Adam Kroll on for Matthew Clark. 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 $3.87. Cost of deposits was $3.36.

Okay. Perfect. And then how are you thinking about the margin in the fourth quarter, assuming we get a rate cut later this month 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 versus coming on today?

Okay. Well, there's a lot in that packed in there. But I'll start. First off, we've got about $1.27 million -- excuse me, $1.27 billion of CDs maturing at an average rate of 410 in Q4. CDs are now coming on in the high -- mid- to high 3s. 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. So 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.

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

Yes. In Q3 [ I believe ] our asset quality will be in line with our expectations. So all the probable loans also our solution side is also developing as we expected. So we don't have -- any [indiscernible] things at this time. Management is closely monitoring some of these things that currently happen [indiscernible].

Our next question comes from Andrew Terrell with Stephens.

I wanted to check in first just on loan growth. This year, I heard the comments just around -- it sounds like you're hoping starting off next year at this high single-digit loan growth rate. But I'm curious to the extent you have visibility in the fourth quarter, 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 I just want to make sure I've kind of got that right.

We think there will be growth in the fourth quarter. We hope that we'll do as much as the third quarter, but it is still October, slightly early, okay? And it seems to be -- the activity level seems to be maintaining at the third quarter space. So -- and we -- internally, we hope that maybe with the interest rate cut in the later part of the third quarter, first quarter will be even more helpful to our loan growth.

But all this is still kind of 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 loan left and right. Some other holiday seems to be people vacationing more than ever, okay. So I mean 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 as we look out to 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, yes, as you said, we had a small OREO piece for this quarter. So we came in at $21.5 million on noninterest expense. I would expect to see around $22 million to $22.5 million, going forward and then probably going up anywhere from $250 million to $500 million a quarter in '26.

Great. I appreciate it. And then I've actually got a question around the deposit composition this quarter. You had a really strong growth in the -- I think it's the interest-bearing demand category, a little less so in some of the time buckets. I'm curious if there was any contemplated mix shift 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 and low-cost demand deposits. But it's harder and harder to get nowadays because all the institutions that have large cash balances all like to be paid some more for their money.

So this is a trend that more cash is moved from the DDA account and noninterest-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 and going into the future from the strategic reason, okay? And other than that, it's a banking normal. Whatever we have a reasonable cost, we take it in. And whenever it is available, we just take it and hopefully, that becomes the funding base for growth.

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

Yes. 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 -- I mean, $3 million to $4 million range.

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

Our next question comes from David Feaster with Raymond James.

I just wanted to switch back to maybe the loan growth side. I mean, ex the OREO transfer, you're in the low double digits. It 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 is 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 you all gaining share or maybe some of that uncertainty that we've talked about in the past, maybe get more confidence in the economy or anything? Just kind of curious what you're seeing from that side.

[indiscernible] do you want to answer that first, and I'll add to it.

Yes. The loan growth for the fourth -- I mean, for the third quarter was, again, on the existing, like Mr. Yu mentioned that our existing customer are confident and there's more activity. So there's C&I increase.

And then other activity is 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 just normal CRE activity, construction loan advance, that's where we are. And that's why we're looking at the going forward fourth quarter, looking like very similar to third quarter.

[ Johnny, ] do you want to add anything?

Yes. To add to that, I think we're right. We see our teams that we be 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 have a feeling of the situation. But obviously, the common sense logic is that with the rate cuts and hopefully, it's going to be 2 rate cuts before the end of the year, there are many, many transactions that previously is not doable, 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 the pricing, okay, and so on. So we are hopeful that especially in the CRE side, there will be some growth.

And that's a great point. I mean, could you -- I guess, first point, could you touch on maybe the competitive dynamics? And then in the past 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 -- that could push 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 going to expect it to continue, okay? 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 that currently is staying on the book. Obviously, many of the borrowers seeking to lower the interest burden that refinance will become national sports, okay? And I hope while we're doing it, we're getting payoff, hope is we're also getting our fair share of the -- paying off the other people in the situation. So hopefully, all that game is a payoff and some of the new additional origination is really a push, okay.

Okay. And -- okay. And then you guys have been really active managing your asset sensitivity, and you've done a great job getting in front of this. It sounds like it's 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 -- most of the actions that you'd be interested in making to manage your asset sensitivity, 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 -- 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 interest rate management. And if you remember, one time, we're 90% floating rate loan bank and now we're nearly 70% floating rate loan bank, and that takes about 1.5 years to accomplish. And we started that way back. I'm sure you remember that, okay? So -- and I guess the trend is to do the best in our ability in looking at the interest rate trends and making adjustment from time to time, by switching to the more fixed rate loans or switching to the more floating rate loans.

This is constantly in our DNA. And what's causing us to have acceptable return on equity, return on investment, I think the for a big factor. In the meantime, obviously, between the securities because their yield 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 balance sheet. So it's not as critical as managing the loan portfolio.

Yes. Do you think maybe, I guess, thinking a bit longer term or as we look over to next year or even into 2027, I know it's somewhat of a hard question to answer, but has any of these moves to 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 -- it's not hard to see you getting north of 4%, but I mean, it wasn't that long ago, you guys were in the mid- to high 4s. Is that still an achievable target given your current 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 our deposit portfolio of large time certificate deposit portfolio in the long term, we're really a rate liability-sensitive asset. So that's why we're in the situation we're able to improve the earnings in the fourth quarter and third and fourth quarter because it is a [indiscernible] factor.

And going forward, of course, there's no set formula. I have not been taught -- I don't think anybody have been taught by the banking book on how to do these kind of things other than just stay alert and try to do the best you can, okay? Especially we're a very simple organization, okay? We just try to be conscientious and try to be alert.

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

Thank you so much for your interest in Preferred Bank. 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.

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