Preferred Bank Third Quarter 2025 Earnings Call - Record $2.84 EPS as OREO sale cleans up the balance sheet

Kim, Conference Call Operator: Good morning and welcome to the Preferred Bank Third Quarter 2025 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today’s presentation, there will be an opportunity to ask questions. To ask a question, you may press star one on your telephone keypad. To withdraw your question, please press star then two. 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.

Jeffrey Haas, Financial Profiles Representative, Financial Profiles: 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.

Li Yu, Chairman and CEO, Preferred Bank: Thank you. 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. Non-performing loans have reduced from $52 million to $17 million, largely because of one loan of $37 million that we have foreclosed and moved to OREO. The good news is that that OREO was sold as of today, sold in October for a reasonably good gain. We tried very hard, tried to close it on September 30, but didn’t make it. All other metrics of the credit quality seem to be stable, and I’ve taken a look at 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 that at the marketplace, our shareholders, our customers, have 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 quarters. We have held our operating overhead or non-interest expense pretty steady as compared to previous quarters, because of the increased net interest income. Efficiency ratio now is less than 30%. All other aspects of the operation seem to be pretty stable.

During the third quarter, we have repurchased $6.3 million of our own shares. 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 in underreporting the net income for the first half by $0.05. This number has been properly updated in this report’s up-to-date number. Thank you so very much, and I’d like to answer your question now.

Kim, Conference Call Operator: We would now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Gary Peter Tenner with D.A. Davidson.

Gary Peter Tenner, Analyst, D.A. Davidson: Thanks. Good morning.

Edward Czajka, Chief Financial Officer, Preferred Bank: Good morning, Gary.

Gary Peter Tenner, Analyst, D.A. Davidson: 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’ve gone through the last several quarters, 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. Can you talk about the variable rate or the floating rate bit of the portfolio and where the floors are at this point?

Edward Czajka, Chief Financial Officer, Preferred Bank: Yeah, Gary, 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. We have about $1.6 million 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. Still have a ways to go for a lot of these loans before the floors start to become meaningful.

Gary Peter Tenner, Analyst, D.A. Davidson: Great. Thank you. Just as it relates to the buyback, I know some activity this quarter. Can you talk about just price sensitivity around the buyback?

Li Yu, Chairman and CEO, Preferred Bank: We sort of measure the, you know, buyback against the income level we have and the share prices we have. From quarter to quarter or from month to month, we review our position and 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, if the growth rate gets to be stronger, our buyback may have slowed down a little bit. We’re measuring it based on, you know, and there’s no set formula for us.

Gary Peter Tenner, Analyst, D.A. Davidson: Okay, fair enough. I guess we can.

Edward Czajka, Chief Financial Officer, Preferred Bank: That’s why.

Gary Peter Tenner, Analyst, D.A. Davidson: Oh, go ahead, Ed.

Edward Czajka, Chief Financial Officer, Preferred Bank: Oh, 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. We’ve repurchased 128,000 shares in October because we had some price softness over the last few weeks for $11.2 million.

Gary Peter Tenner, Analyst, D.A. Davidson: Appreciate that. In fact, just ask one more question. In terms of the loan yields in the quarter, was there any noise in that number, or was that 7.63%? A pretty clean number?

Edward Czajka, Chief Financial Officer, Preferred Bank: Yes. Yes.

Li Yu, Chairman and CEO, Preferred Bank: That’s a pretty clean number.

Edward Czajka, Chief Financial Officer, Preferred Bank: Yeah, the noise was in the prior quarter, Gary. Yeah.

Gary Peter Tenner, Analyst, D.A. Davidson: Okay. All right. I just wanted to confirm. Thank you.

Kim, Conference Call Operator: Our next question comes from Adam Kroll with Piper Sandler.

Adam Kroll, Analyst, Piper Sandler: Hi, this is Adam Kroll. I’m from Matthew Clark, and thank you for taking my questions. Maybe just to start on the margin, I was wondering if you had the average margin in the month of September and the cost of deposits?

Edward Czajka, Chief Financial Officer, Preferred Bank: The margin for September was 3.87%. Cost of deposits was 3.36%.

Adam Kroll, Analyst, Piper Sandler: Okay. Perfect. How are you thinking about the margin in the fourth quarter, assuming we get a rate cut later this month and in December as well? What do you have coming due on the certificates of deposit side and the rate that that’s rolling off versus coming on today?

Edward Czajka, Chief Financial Officer, Preferred Bank: Okay. There’s a lot packed in there. I’ll start. First off, we got about $1.27 billion of certificates of deposit maturing at an average rate of 4.10% in Q4. Certificates of deposit are now coming on in the mid to high 3% range, 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. When Fed funds does move, we do get to move a fairly sizable chunk downward in terms of the pricing.

That’s been very beneficial in managing the margin, and you can see it has not been declining, even though we’ve been in a kind of a declining rate environment here.

Adam Kroll, Analyst, Piper Sandler: Got it. That’s super helpful. Last one for me. I’d be curious to know just what you’re seeing on the credit migration front within criticized and classified.

Li Yu, Chairman and CEO, Preferred Bank: CD migration seems to be a pretty reasonable situation. Nick, you want to answer that?

Nick Pi, Chief Risk Officer, Preferred Bank: Yeah. I think Q3 has revised the quality moving in line with our expectations. All the problem loans also on the solution side is also developing as we expected. We didn’t really overthink that this time. Management is closely monitoring some of these things that currently happen. High employment, inflation, or by the terrorist elements from China and all those kind of things. Okay.

Adam Kroll, Analyst, Piper Sandler: Got it. Thank you for taking my questions.

Kim, Conference Call Operator: Our next question comes from Robert Andrew Terrell with Stephens.

Robert Andrew Terrell, Analyst, Stephens: Hey, good morning.

Gary Peter Tenner, Analyst, D.A. Davidson: Morning, Andrew.

Robert Andrew Terrell, Analyst, Stephens: Hey, I wanted to check in first just on loan growth. Mr. Yu, I heard the comments just around it sounds like you’re hoping, you know, starting off next year at this high single-digit loan growth rate. 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, just wanted to make sure I’ve kind of got that right.

Li Yu, Chairman and CEO, Preferred Bank: Yeah. We think there will be growth in the fourth quarter. We hope that we’ll do as much as the third quarter, but this is still October, slightly early, okay? It seems the activity level seems to be maintaining, okay, at the third quarter pace. We internally hope that maybe with the interest rate cut in the later part of the third quarter, first quarter would be even more helpful to our loan growth. 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 holidays people seem to be busy in closing the loans left and right. Some other holidays seem to be people vacationing more than ever, okay? It is something that is pretty hard for us to have a very clear picture, but the general trend is upwards for everything.

Robert Andrew Terrell, Analyst, Stephens: Okay. Great. That’s good to hear. 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. As we look out into 2026, anything we should be aware of kind of budget-wise or just check in on rate of expense growth, just general expectation?

Edward Czajka, Chief Financial Officer, Preferred Bank: As you said, we had the small OREO piece for this quarter. We came in at $21.5 million on non-interest expense. I would expect to see around $22 million to $22.5 million going forward, and then probably going up anywhere from $250,000 to $500,000 a quarter in 2026.

Robert Andrew Terrell, Analyst, Stephens: Great, I appreciate it. I’ve actually got a question around the deposit composition this quarter. You guys 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 was any contemplated makeshift that you guys did, or if that’s just how the deposits came in this quarter. Any color on the flows in the specific deposit buckets would be helpful.

Li Yu, Chairman and CEO, Preferred Bank: On a strategic basis, we certainly like to increase our demand deposits, no-cost demand deposits. It is harder and harder to get nowadays because all the institutions that have large cash balances all like to be paid somewhat for their money. This is a trend that the more cash is moved from the DDA account, a non-interest-bearing DDA account, to the interest-bearing DDA account. Having said that, our job, I think, is to manage the costs in non-interest-bearing DDA account properly, and going to the future from the strategic basis. Other than that, it’s a banking normal. Whenever we have a reasonable cost, we take it in, and whenever it’s available, we stake it, and hopefully that becomes a good funding base for our growths.

Edward Czajka, Chief Financial Officer, Preferred Bank: Andrew, we also, with this quarter, with the fairly strong deposit growth, were able to let some of our brokered certificates of deposit run off and not renew as well. That was advantageous.

Robert Andrew Terrell, Analyst, Stephens: 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?

Li Yu, Chairman and CEO, Preferred Bank: Probably into the, I mean, $3 to $4 million range.

Robert Andrew Terrell, Analyst, Stephens: Great. Okay. Thank you for taking the questions.

Edward Czajka, Chief Financial Officer, Preferred Bank: Thanks, Ed.

Kim, Conference Call Operator: Our next question comes from David Pipkin Feaster with Raymond James & Associates.

David Pipkin Feaster, Analyst, Raymond James & Associates: Hi, good morning, everybody.

Edward Czajka, Chief Financial Officer, Preferred Bank: Hi, David.

David Pipkin Feaster, Analyst, Raymond James & Associates: I just wanted to switch back to maybe the loan growth side. I mean, you know, ex the OREO transfer, you’re in the low double digits. It sounds like you’re expecting growth to kind of remain relatively stable, which is really strong. I’m just curious, could you touch on how demand’s trending? Maybe a little bit of color on the pipeline, how new origination yields are, and just where you’re seeing more opportunities today. Is this a function of y’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.

Li Yu, Chairman and CEO, Preferred Bank: Do you want to answer the first and I add to it?

Nick Pi, Chief Risk Officer, Preferred Bank: Yeah. The loan growth for the fourth quarter, I mean, for the third quarter was, you know, again, on the existing, like Mr. Yu mentioned, and our existing customer confidence, and there’s more activity. There’s those CNI increase. Other activity is a new relationship that we’ve been building on over the years, and you know, sometimes it takes a little bit of a while to bring them in-house. That’s where we’re at. Other than that, I think that our CRE and just normal CRE activity, construction loan advance, that’s where we are. That’s why we’re looking at the going forward fourth quarter looking like, you know, very similar to third quarter.

David Pipkin Feaster, Analyst, Raymond James & Associates: Johnny, you want to add anything?

Jeffrey Haas, Financial Profiles Representative, Financial Profiles: Yeah. To add to that, I think we’re right. We see our teams that we’ve been able to see more deals coming through the pipeline, more deals to be reviewed. Like Mr. Yu said, with the rate cuts and a little bit more optimistic from the borrowers, there are a lot of opportunities, more opportunities for us.

Li Yu, Chairman and CEO, Preferred Bank: I guess you get the feeling of the situation, but you know, 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, that there are many, many transactions that previously were 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 their pricing, okay, and so on. We are hopeful that, especially in the CIE side, there will be some growth.

David Pipkin Feaster, Analyst, Raymond James & Associates: That’s a great point. Could you, I guess, first point, touch on maybe the competitive dynamics? In the past year or so, payoffs and takedowns have been a headwind. Has that slowed at all? To your point that maybe down or that could have pushed more people into selling, do you think payoffs and takedowns could be a bigger headwind as we look forward? Just kind of curious what your thoughts are.

Li Yu, Chairman and CEO, Preferred Bank: In my past 34 years, payoff has always been a painful situation for us, okay? It is going to be expected to continue, okay? It is expected to continue at a little bit heavier pace than before because the simple fact is that many of the loans by all institutions are priced at a higher interest rate, that they’re currently staying on the book. Obviously, many, many of the borrowers seeking to lower their interest, their burden, their refinance will become national sports, okay? I hope while we’re doing it, while we’re getting payoffs, what we hope is we’re also getting our fair share of the paying off the other people, okay, in the situation. Hopefully, all that game is the payoff, and some of the new additional origination is really a push, okay?

David Pipkin Feaster, Analyst, Raymond James & Associates: Okay. You guys have been really active managing your asset sensitivity, Ed. 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 the actions that you’d be interested in making to manage your asset sensitivity, is that completed, or is that ongoing? 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?

Li Yu, Chairman and CEO, Preferred Bank: I think that most of the things that we continue doing is being proactive in interest rate management. If you remember, one time we were a 90% floating rate loan bank, and now we’re nearly a 70% floating rate loan bank. That takes about one and a half years to accomplish. We started that way back. I’m sure you remember that, okay? I guess the trend is to do the best in our ability in looking at the interest rate trend and making adjustments from time to time, okay, by switching to the more fixed-rate loans or switching to the more floating rate loans. This is constantly in our DNA. That’s what’s causing us to have an acceptable return on equity, return on investment. I think that counts for a big factor. In the meantime, obviously, between the securities because their yield is so on.

In the marketplace, we will make the adjustment from time to time. By and large, that’s only maybe less than 10% of our balance sheet. It’s not as critical as managing the loan portfolio.

David Pipkin Feaster, Analyst, Raymond James & Associates: Yeah. 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, you know, take off some of that rate sensitivity maybe limited some of the upside in the margin? Where do you think, I mean, like again, it’s not hard to see y’all getting north of 4, but, you know, 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?

Li Yu, Chairman and CEO, Preferred Bank: 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 of our deposit portfolio of large-time certificates of deposit portfolio, in the long term, we’re really a rate liability-sensitive asset. 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 is a particular factor, okay? Going forward, of course, there’s no set formula. I have not been taught, I don’t think anybody has 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?

David Pipkin Feaster, Analyst, Raymond James & Associates: Yeah.

Li Yu, Chairman and CEO, Preferred Bank: Okay. Especially, we’re a very simple organization. We just try to, you know, be conscientious and try to be alert.

David Pipkin Feaster, Analyst, Raymond James & Associates: Okay, thanks everybody.

Kim, Conference Call Operator: This concludes our question and answer session. I would like to turn the conference back over to Li Yu for any closing remarks.

Li Yu, Chairman and CEO, Preferred Bank: 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.