Operator: Good day, and welcome to the Preferred Bank Q3 2026 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, then one on a touch-tone phone. To withdraw your question, please press star, then two. 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.
Jeffrey Haas: Thank you, Drew. Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the Q3 ended 30 September 2026. With me today from management are Chairman and CEO Li Yu, President and Chief Operating Officer Wellington Chen, Chief Financial Officer Ed Czajka, Chief Risk Officer Nick Pi, and Deputy Chief Operating Officer Johnny Hsu. Management will provide a brief summary of the results and 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.
Jeffrey Haas: 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 document 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: 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 competitive. Looking forward, this condition will likely go into the year 2027. The banks are now not only facing more competition from non-bank institutions, but also strangely, we see many of our customers invest their 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 on our last conference phone call, that this time, our pipeline seems to be very solid.
Li Yu: We're very hopeful that in the fourth quarter to have a good, solid growth. As we reported earlier, the net interest income was affected by a reversal of interest income, and that has affected our net interest margin. This quarter net interest margin was reported at 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 funds is going to adjust higher, then it would further benefit our net interest margin as Preferred Bank is an asset-sensitive bank.
Li Yu: Resolution of nonaccrual loans is continuing, but slower than what we hoped for. The level of nonaccrual remains stubborn, largely because several credit was scheduled to be resolved in this quarter are stuck in the court proceedings. That has pushed back to third and fourth quarter. Fourth quarter next year. The pace of migration seems to have slowed down or subsided. There were only $20 million of additional credit that was classified as substandard that remain on accrued status.
Li Yu: The rest of them all have been included in the nonaccrual number. We are pleased with our consistent cost control of overhead, even under a very inflationary period. We are constantly looking for opportunities to gradually improve our non-interest income. 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: At this time, we will open up the lines for Q&A. 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. If at any time your question has been addressed and you would like 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 Matthew Clark with Piper Sandler. Please go ahead.
Matthew Clark: Good morning, everyone.
Nick Pi: Hi.
Matthew Clark: Hi. Wanted to start on the deposit side. Ed, can you update us on how much in the way of CDs you have maturing here in Q4, and the weighted average roll-off and roll-on rates that you expect?
Ed Czajka: Yeah. We have just under 1.7 million maturing in Q4, so it is 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.
Matthew Clark: Okay, not that big of a headwind there. Do you happen to have the spot rate, your deposit cost spot rate at the end of September? If not, then month of September.
Ed Czajka: Yeah, I do. Total deposit cost was 3.06% for the month of September, and the spot margin was 3.58%.
Matthew Clark: Okay. The deposit beta, I think on the way down was about 69%. Any thoughts on what you might experience on the way up this time
Ed Czajka: Sure
Matthew Clark: assuming we get maybe another rate hike in December and maybe one in March?
Ed Czajka: Definitely slower, Matthew. As you can see, we were able to decrease total deposit costs by 3 basis points in a very difficult rate environment. 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.
Matthew Clark: Okay. 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. How much of your NPAs do you think you can get rid of by the end of Q1, and any concern around losses there?
Nick Pi: Yeah, Matthew. The total classified loan was $177.6 million, which covers classified plus $11.5 million OREO. Which is around $17.7 million above what we just disclosed for nonaccrual. That is the classified loan. For our resolution side, I believe during Q4, as Matthew mentioned, some of the loans actually are in the BK court. But we do believe all these BK proceedings are heading in the right direction. Several BK courts approved to sell the property in BK court.
Nick Pi: If that is continued delay, then probably we are going to foreclose, and we are going to dispose by ourselves. Hopefully by Q4, there will be a couple of large loans will be disposed. However, it totally depends on the court decision. Sometimes, even though the collateral property has a good loan-to-value and we can fully recover, however, we have to subject to BK court proceedings. We do have options for handling that as well.
Matthew Clark: Okay. Thank you.
Operator: Thank you. The next question comes from Andrew Liesch with StoneX Financial. Please go ahead.
Andrew Liesch: Morning, everyone.
Ed Czajka: Hi, Andrew.
Andrew Liesch: Just a question on the loan growth here in the quarter. Were there outsized pay downs? Just what was the cause of the more modest pace of growth than what you might have been expecting?
Ed Czajka: You want to comment about that, Jonathan?
Johnny Hsu: Yes, Andrew. The loan growth is a combination of both the payoff, we have some unexpected payoff, and also production. It wasn't as robust as the Q2 production. Having a lot of loans that's in the pipeline kind of delaying funding and all that, does carry over to this quarter. That's why we're looking at the Q4 together with the new loan production, looking at a stronger pipeline.
Andrew Liesch: Got it. Have you had any customers telling you that they may delay projects that may not pencil in the face of higher rates?
Johnny Hsu: That is the case, too. With the higher rate, people are a little bit more conscientious about the project itself. But also having said that, with the market itself, higher rate, they actually looking for more option on the opportunity to pick up some better deals.
Andrew Liesch: Got it. Expenses were very well controlled this quarter, down quite a bit from Q2. Anything unique in that number? Where do you think a good jumping off point, a good starting point for Q4 would be?
Ed Czajka: Yeah, we had a decrease in professional services, primarily legal fees, which are typically associated with the problem loans. 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.
Andrew Liesch: Got it. Makes sense. That covers my questions. Thanks.
Johnny Hsu: Thank you.
Operator: Thank you. Again, if you have a question, please press star then one. The next question comes from Andrew Terrell with Stephens. Please go ahead.
Andrew Terrell: Hey, good morning.
Ed Czajka: Hey, Andrew.
Andrew Terrell: 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 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 Q4?
Ed Czajka: No, it is a good launch point for the next quarter, Andrew. There is 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 is why you see a bit of a discrepancy between the quarterly average and the quarter-end balance.
Andrew Terrell: Okay, great. I appreciate it. 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 at what kind of cost.
Li Yu: 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 is all over the place. Everybody has different deals. Every customer is. But on the TCD, which is generally more available information the bank side in the mid to high 3s. But all the security houses is in close to mid-4s. Some of them, the latest we see, E*TRADE, is offering 4.75%, okay?
Li Yu: Right now, because the treasury nature is being not taxable in California income tax, which is a 13% top rate. So a 5% treasury become 5.65% effective yield, okay? So we have seen many of the customer take out after their CD renewed, they are moving to treasury. This is the general market, is moving right now with all the interest rate environment, it is all over the place. We just have to do everything we can, just hold on to our customers. Meanwhile, try to grow a little bit.
Andrew Terrell: Great. Appreciate your perspective and thanks for taking the questions.
Operator: 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.
Li Yu: Thank you. Well, it is eventful Q3 for us. We hope that Q4 we see operation equally as consistent as we have right now, but hopefully this many of the item we will work on will show positive results. Thank you.
Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
