Preferred Bank (PFBC) 2025 Q4 法說會逐字稿

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 two large pieces of REO result in a net gain of $1.8 million between the two. 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, (inaudible) assets did increase $97 million, okay? principally, this is due to that we placed a large line nine 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) Matthew Clark, 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.

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.

Gary Tenner, 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. 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.

Andrew Terrell, 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 timeline 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 one 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.

Tim Coffey, 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 (inaudible) 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 two quarters. Nick, do you think I'm too optimistic or --?

What should promise heading?

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

Liam Coohill, 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 (multiple speakers) yes, these are the 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 one 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) Matthew Clark, 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. And then did you repurchase any shares this quarter?

No, that's --

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

Okay. And then just last one 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 one or two, but we'll take a look at it.

Arif Gangat, 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 (inaudible)

3.6. Yes. So that's about right.

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 absolved yourself with any exposure to those properties going forward.

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

Correct.

Got it. So you still have a loan to one 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 two 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.

(inaudible)

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 (inaudible) 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 two 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 six 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 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.