Preferred Bank Q3 2026 Earnings Call Transcript

Preferred Bank (NASDAQ:PFBC) reported third-quarter financial results on Friday. The transcript from the company’s third-quarter earnings call has been provided below.

This transcript is brought to you by Benzinga APIs. For real-time access to our entire catalog, please visit https://www.benzinga.com/apis/ for a consultation.

View the webcast at https://edge.media-server.com/mmc/p/p36xbvyw/

Summary

Preferred Bank reported a third-quarter net income of $32.9 million, or $2.73 per share, impacted by a $2.1 million recovery of interest income.

Deposits grew by $77 million, a 1.2% increase, despite competitive pressures from non-bank institutions and customers investing in Treasuries.

The loan portfolio decreased by $40 million due to a large credit being placed for sale, with a positive outlook for growth in the fourth quarter.

Net interest margin was affected by the interest income reversal, reported at 3.49%; excluding the adjustment, it would have been 3.60%.

Management highlighted ongoing resolutions for nonaccrued loans are slower than expected due to court proceedings, but they remain optimistic about future resolutions.

Future outlook includes a stable interest rate environment and strong economic conditions anticipated for 2027, supporting a positive growth expectation.

Cost control measures were effective, with a decrease in professional services and incentive compensation due to slightly lower profitability.

Deposit costs were managed effectively, with a total deposit cost of 3.06% for September, indicating disciplined cost control amid a challenging rate environment.

Full Transcript

OPERATOR

Good day and welcome to the Preferred Bank third quarter 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 touchtone 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 (Investor Relations)

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.

Li Yu (Chairman and Chief Executive Officer)

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, the deposit market is very, very competitive. Looking forward, this condition will likely go into the year 2027. 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 Treasuries.

Loans for the quarter decreased $40 million after we placed a large credit in for-sale status. Unlike at the beginning of the third quarter, when we reported in our last conference call, our pipeline seems to be very solid and we’re very hopeful in the fourth quarter to have 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 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 rate is going to adjust higher, then it will further benefit our net interest margin as we prefer that, as an asset-sensitive bank. Resolution of nonaccrued loans is continuing but slower than what we hoped for. The level of nonaccruals remains stubborn, largely because several credits were scheduled to be resolved in this quarter and are stuck in court proceedings. That has been pushed back to the third and fourth quarter next year, and the pace of migration seems to have slowed down or subsided. There were only $20 million of additional credit that was classified as substandard, which remains on accrual status.

The rest of them all have been included in the accrual 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. 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 a 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 (Analyst)

Morning everyone. Hi. 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 weighted average roll-off and roll-on rates that you expect?

Edward Czajka (EVP and Chief Financial Officer)

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.

Matthew Clark (Analyst)

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?

Edward Czajka (EVP and Chief Financial Officer)

Yeah, I do. Total deposit cost was 3.06% for the month of September and the spot margin was 3.58%.

Matthew Clark (Analyst)

Okay. And then 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? Assuming we get maybe another rate hike in December and maybe one in March.

Edward Czajka (EVP and Chief Financial Officer)

Definitely slower, Matthew. As you can see, we were able to decrease total deposit costs by three basis points in a 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.

Matthew Clark (Analyst)

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?

Nick Pi (Chief Credit Officer)

Yeah, Matthew, the total classified loan was 177.6 million, which covers Class 5 plus 11.5 OREO, which is around 17.7 million above what we just disclosed for nonaccrual. So that’s the classified loans. For our resolution side, I believe during the fourth quarter, as Mr. Yu mentioned, some of the loans are in the bankruptcy court. But we do believe all these bankruptcy proceedings are heading in the right direction, and several bankruptcy courts approved the sale of the property in bankruptcy court. If that’s continued to be delayed, then we’re probably going to foreclose and we’re going to dispose by ourselves. So hopefully by Q4 there will be a couple of large loans that will be disposed.

However, it totally depends on the court decision. So sometimes even though the collateral property has a good loan-to-value and we can fully recover, we have to be subject to the bankruptcy court’s proceedings, and we do have options for handling that as well.

Matthew Clark (Analyst)

Okay, thank you.

OPERATOR

Thank you. The next question comes from Andrew Leisch with StoneX Financial. Please go ahead.

Andrew Leisch (Analyst)

Morning everyone. Hi. There’s 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?

Li Yu (Chairman and Chief Executive Officer)

Want to comment about that?

Wellington Chen (President & Chief Operating Officer)

Yes, Andrew, the loan growth—it’s a combination of both. We had some unexpected payoffs, and also production wasn’t as robust as the second quarter production, with a lot of loans in the pipeline delayed in funding and all that. So those carry over to this quarter, and that’s why we’re looking at the fourth quarter, together with new loan production, as having a stronger pipeline.

Andrew Leisch (Analyst)

Got it. Have you had any customers telling you that they may delay projects that may not pencil in the face of higher rates?

Wellington Chen (President & Chief Operating Officer)

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 seen that, with the market itself higher rate, they are actually looking for more options—some opportunity to pick up some better deals.

Andrew Leisch (Analyst)

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, a good starting point for the fourth quarter would be?

Edward Czajka (EVP and Chief Financial Officer)

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 and 24 million, Andrew.

Andrew Leisch (Analyst)

Got it. Makes sense. That covers my question. Thanks.

OPERATOR

Thank you. 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 (Analyst)

Hey, good morning. 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 end-of-period number kind of a good launch point in the fourth quarter?

Edward Czajka (EVP and Chief Financial Officer)

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 were 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 or quarter-end balance.

Andrew Terrell (Analyst)

Okay, great. I appreciate it. And then just wanted to get your views on overall 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 at what kind of cost?

Li Yu (Chairman and Chief Executive Officer)

Well Andrew, the market is situationally—the deposit pricing is all over the place. You are probably familiar with what banks are posting for CDs, okay, because money market and interest-carrying DDAs are all over the place. Everybody has different deals, every customer. But on the CDs, which are generally more available information, the banks are in the mid to high threes, but all the securities houses are close to mid 4s, and some of them—the latest we see—E*TRADE is offering 4.75%, okay.

And right now, because Treasuries are not taxable in California income tax, which is a 13% top rate, a 5% Treasury becomes a 5.65% effective yield. So we see many of the customers take off after their CD renewed; they are moving to Treasuries. So this is the general market that’s moving right now. With all the interest rate environment, it’s all over the place. We just have to do everything we can—just hold on to our customers and meanwhile try to grow a little bit.

Andrew Terrell (Analyst)

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 (Chairman and Chief Executive Officer)

Thank you. Well, it’s eventful for us. We hope that in the fourth quarter we see operations equally as consistent as we have right now, but hopefully the many items we’re working 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.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.