Preferred Bank - Earnings Call - Q3 2025

Transcript

Speaker 0

Good morning, and welcome to the Preferred Bank Third Quarter twenty twenty five Earnings Conference Call. All participants will be in listen only mode. 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.

Speaker 1

Thank you, Kim. Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the third quarter ended 09/30/2025. With me today from management are Chairman and CEO, Lee Yu President and Chief Operating Officer, Wellington Chen Chief Financial Officer, Edward Chaika Chief Risk Officer, Nick Pye and Deputy Chief Operating Officer, Johnny Hsu. Management will provide a brief summary of the results and then we will open up the call to your questions. During the course of this conference call, statements made by management may include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such forward looking statements are based upon specific assumptions that may or may not prove correct. Forward looking statements are also subject to known and unknown risks, uncertainties and other factors relating to Preferred 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.

Speaker 2

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 2025. Net income for the quarter was $35,900,000 Both numbers compare very handsomely with previous quarters. This quarter, our credit quality has improved.

Nonperforming loans has reduced from $52,000,000 to $17,000,000 and largely because of one loan of $37,000,000 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, tried to close it on September 30, but didn't make it. All other metrics of the credit quality seems to be stable. And I'll take a look about all the charge offs for the year.

They totaled a very acceptable $1,800,000 This quarter, we had some reasonable loan growth and deposit growth. Loan growth 2.3% or $133,000,000 deposit growth 2.5% or 151,000,000 It seems to us that at the marketplace, our shareholders 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 2025, we think there will be some reasonable loan growth, okay? Hopefully, that will match the number of the third quarter, okay? Our net interest income and net interest margin both improved in the third quarter from previous quarters.

We have hold our operating overhead, our non interest expense, pretty steady as compared to previous quarters. 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 $6,300,000 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 06/30/2025, and resulted underreporting net income for the first half by $5 but this number has been properly updated in this report's up year to date number. Thank you so very much, and I'd like to answer your question now.

Speaker 0

The first question comes from Gary Tenner with D. A. Davidson.

Speaker 3

Thanks. Good morning.

Speaker 4

Good morning, Gary.

Speaker 3

Hey, 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 have 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 this point?

Speaker 5

Yes. Gary, so as of ninethirty, 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 have talked about before, some of those are not in the money. So we have about $1,600,000 of floor of loans with floors that would kick in within the next 100 basis points of decline. Right now, we only have about $55,000,000 that are at or below the floor or where the floor is kicking in.

So still have a ways to go for a lot of these loans before the floors start to become meaningful.

Speaker 3

Great. Thank you. 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?

Speaker 2

We sort of measure the buyback against the income level we have and the share prices we have. And from quarter to quarter or from month to month, we review our position, come to the point that 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 us.

Speaker 3

Okay, fair enough. And if I could just go ahead, Ed.

Speaker 5

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 have repurchased 128,000 shares in October because we had some price softness over the last few weeks for $11,200,000 so.

Speaker 3

Appreciate that. If I could just ask one more question. In terms of loan yields in the quarter, was there any noise in that number or was that it 7.63%, a pretty clean number? Yes. Yes.

Speaker 6

That's pretty clean number.

Speaker 5

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

Speaker 3

Okay. Alright. Just wanted to confirm. Thank you.

Speaker 0

Our next question comes from Adam Kroll with Piper Sandler.

Speaker 7

Hi. This is Adam Kroll on for Matthew Clark and thank you for taking my questions. 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?

Speaker 5

The margin for September was 3.87%, cost of deposits was 3.36%.

Speaker 7

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 or is coming on today?

Speaker 5

Okay. Well, there is a lot in that packed in there, but I will start. First off, we got about $1,270,000,000 of CDs maturing at an average rate of 4.1% in Q4. CDs are now coming on in the mid to high 3s. So we will expect some benefit there.

In terms of the margin for Q4, given the rate cut we had in September and what we are 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. And you can see it has not been declining even though we have been in a kind of a declining rate environment here.

Speaker 7

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?

Speaker 2

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

Speaker 6

Yes. In Q3, I believe our asset quality will be in line with our expectations. So all of the problem loans also on our solutions side is also developing as we expected. So we're to have very many things at this time. Management is closely monitoring some of these things that are currently happening, I.

Speaker 7

Got it. Thank you for taking my questions.

Speaker 0

Our next question comes from Andrew Terrell with Stephens.

Speaker 8

Hey, good morning.

Speaker 6

Hi, Andrew.

Speaker 2

Hey,

Speaker 8

I wanted to check-in first just on loan growth. As you 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. Sounds like just reading between the commentary that you'd expect slower growth in the fourth quarter, but just wanted to make sure I've kind of got that right.

Speaker 2

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

But all this is still kind of an 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 less and right. Some other hard of these things, people is vacationing more than ever. So mean, is something that is pretty hard for us to have a very clear picture, but the general trend is upward trend.

Speaker 8

Okay, great. That's good to hear. 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 $21,000,000 territory. Just wanted to get a sense on your expectations, near term expense run rate, if that's still a fair approximation. And then yes, 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?

Speaker 5

Well, yes, as you said, we had small OREO piece for this quarter. So we came in at 21.5% on non interest expense. I would expect to see around 22% to 22.5% going forward and probably going up anywhere from $250,000,000 to 500,000,000 a quarter in 'twenty six.

Speaker 8

Great. I appreciate it. And then I've actually got a question on the deposit composition this quarter. You had 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 is 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.

Speaker 2

Well, on a strategic basis, okay, we certainly like to increase our demand deposit, no cost demand deposits. But it's harder and harder to get nowadays because institutions that have large cash balances all like to be paid somewhat, I mean, for their money. So this is a trend that more cash is moved from the DDA account and non interest bearing DDA account to the interest bearing DDA account, okay? And having said that, our job, I think, is to manage the cost of non interest bearing DDA account properly and going to the future from the strategic basis. And other than that, it's banking normal.

Whatever we have reasonable cost, take it in. And whenever it's available, we just take it and hopefully that becomes good funding base for growth.

Speaker 5

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.

Speaker 8

Yes, yes. Got it. Okay. If I can actually just sneak one more in, do you have the specific dollar estimate of the expected OREO gain in the fourth quarter?

Speaker 2

Probably into the 3,000,000 to $4,000,000 range.

Speaker 8

Great. Okay. Thank you for taking the questions.

Speaker 2

Thanks, Ed.

Speaker 0

Our next question comes from David Feaster with Raymond James.

Speaker 4

Hi, good morning everybody.

Speaker 3

Hi, David.

Speaker 4

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 getting more confidence in the economy or anything? Just kind of curious what you're seeing from that side.

Speaker 2

Well, I think you want to answer the first and I'll add to it.

Speaker 9

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 confidence and there's more activity. So there's C and I increase. And then other activity is 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 add. 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.

Speaker 2

Kevin, you want to add anything, Sung?

Speaker 9

Yes. To add to that,

Speaker 10

I think we're right. We see our teams that we've being 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 for our borrowers. There are a lot of opportunities more opportunities for us.

Speaker 2

So I guess you get the feeling of the situation. Obviously, the common sense logic is that with the rate cuts, and hopefully, it's going to be two 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 is finally willing to sell because they can get a slightly better situation in pricing, okay, and so on. So we are hopeful that especially in the CIE side, there will be some growth.

Speaker 4

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, your point, maybe down or 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.

Speaker 2

Well, in my past thirty four years, payoff has always been a painful situation for us. It is going to expected to continue. And it is expected to continue in a little bit heavier pace than before because simple fact is that many of the loan by all institutions that they are priced at a higher interest rate. They're it's currently staying on the books. Obviously, many of the borrowers seeking to lower their interest burden.

Refinance will become national sports. Okay? And I hope while we're doing it, while we're getting payoffs, what we hope is we're also getting our sales 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.

Speaker 4

Then you guys have been really active managing your asset sensitivity. Ed, you've done a great job getting in front of this. 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 that most of the actions that you'd be interested in making to manage your asset sensitivity, is that completed?

Or are 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? Are you pretty comfortable with where you're sitting?

Speaker 2

I think that most of the things that we continue doing is being proactive in 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 one point five year to accomplish. And we started that way back. I am 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 that counts for big factor. In the meantime, obviously, the securities because they are 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.

Speaker 4

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've it's not hard to see you all 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?

Speaker 2

Actually, if you really look at analyzing our sensitivity level, we are pretty reasonably within balance situation. In the short term, we're a little bit rate sensitive. In the intermediate term, because of deposit portfolio of large time certificate deposit portfolio, in the long term, we're really a rate liability sensitive asset. So we that's why we're in a situation we're able to improve the earnings in the fourth quarter and third and fourth quarter because it's a definite particular 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 books how to do these kind of things other than just stay alert and try to do the best you can, okay? Yes. Especially with very simple organization, okay? We just try to be conscientious and try to be alert. Okay.

Speaker 4

Thanks everybody.

Speaker 0

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

Speaker 2

Thank you so much for your interest in Preferred Bank, okay? 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.