Preferred Bank (PFBC) Q4 2025 Earnings Transcript

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DATE

Thursday, January 22, 2026 at 2 p.m. ET

CALL PARTICIPANTS

• Chairman and Chief Executive Officer — Li Yu
• President and Chief Operating Officer — Wellington Chen
• Chief Financial Officer — Edward Czajka
• Chief Risk Officer — Nick Pi
• Deputy Chief Operating Officer — Johnny Tzu
• Corporate Secretary — Jeffrey Haas

TAKEAWAYS

• Net Income -- $34.8 million for the quarter, and $134 million for the year, directly reported by management.
• EPS -- $2.79 per diluted share for the quarter, and $10.41 for the year, with management noting a $0.20 one-time OREO gain contribution in Q4.
• Net Interest Margin (NIM) -- 3.66% for December after the full effect of a rate cut, slightly below the quarter's average.
• Total Cost of Deposits -- 3.17% for December; declined by about six to seven basis points per month, per Chief Financial Officer Edward Czajka.
• Loan Portfolio Sensitivity -- 70% of loans are floating rate; federal rate cuts notably reduced loan interest income.
• Quarterly Loan Growth -- $182 million, or over 12%, indicating strengthening loan demand as cited by management.
• Quarterly Deposit Growth -- $115 million, or 7.4%; annual deposit growth was 7.2%.
• Annual Loan Growth -- 7.3%, as stated by Chief Executive Officer Li Yu.
• Classified (Criticized) Assets -- Increased by $97 million, including the downgrade of a large $123 million relationship.
• Nonperforming Assets -- Declined slightly in the quarter; no material impact on overall asset quality reported.
• Loan Loss Provision -- $4.3 million for the quarter; Chief Executive Officer Li Yu detailed it results from both loan growth and updated risk factors related to criticized loans.
• OREO Transactions -- Two large OREO properties sold, producing a net gain of $1.8 million (recorded in noninterest income); one property was financed by the bank, and the other was a cash sale.
• CD Maturities and Pricing -- $1.3 billion in CDs maturing in Q1 at a 3.96% rate, currently repricing to 3.70%-3.80%.
• Expense Guidance -- Forecasted to be $21.5 million-$22 million in Q1, with mid to high single-digit annual growth expected; seasonal and OREO charges anticipated.
• Share Repurchases -- None in the quarter; "not quite as conducive to repurchase as last year," per Chief Executive Officer Li Yu.
• Multifamily Nonaccrual Loan -- $19.5 million balance against a $49 million updated appraisal.
• Fee Income Baseline -- "Q4 number excluding the one-time OREO impact" is the suggested baseline for 2026; "LC fee income was very, very strong this year."
• M&A Activity -- Management continues to evaluate deals, but current "pricing structure required of us is not to our satisfaction."
• Classified Loan Performance -- $121 million relationship is behind in interest service but is fully secured, according to management.
• Reserve Adequacy -- Chief Executive Officer Li Yu said, "we do believe the reserve should be more resolved to cover our credit situation," noting updated Q factors and specific reserves applied.

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RISKS

• Criticized Assets Increase -- $97 million increase in criticized assets, driven by the downgrade of a single large loan relationship, which management admits is currently "behind in interest services."
• Deposit Cost Pressure -- Edward Czajka said, "competition for deposits still remains very, very strong," and deposit costs have moderated only slowly despite Federal Reserve actions.
• Share Repurchases Outlook -- Li Yu said, "the situation is not quite as conducive to repurchase as last year," indicating constrained capital allocation flexibility.

SUMMARY

The fourth quarter showed durable profitability, but asset quality concerns surfaced with the classification of a $121 million loan relationship that is not current on interest. Elevated deposit competition continues to compress net interest margin, with deposit repricing tailwinds emerging only gradually. Management signaled higher budgeted loan growth for 2026, while expense guidance projects modestly higher operating costs after seasonal and OREO-related fluctuations.

• The multifamily nonaccrual loan is secured by collateral valued more than double the outstanding balance, which may limit loss severity.
• Fee income for 2026 could moderate compared to 2025, given unusually strong letter-of-credit revenues last year, as commented by Chief Financial Officer Edward Czajka.
• Capital is being prioritized for credit portfolio support and organic growth, pushing share buybacks lower on the agenda as confirmed by management.
• Active review and discipline are shaping management's M&A approach, with current deal offers described as misaligned with internal return thresholds.

INDUSTRY GLOSSARY

• OREO (Other Real Estate Owned): Real property acquired by the bank through foreclosure or relinquishment of the collateral backing a defaulted loan.
• CD (Certificate of Deposit): A time deposit with a fixed maturity and specified interest rate, frequently used in banking to lock in funding at established rates.
• Criticized Assets: Loans or other assets identified by the bank's risk management as displaying elevated risk, typically falling into regulatory categories such as Special Mention, Substandard, or Doubtful.
• Q Factor (Qualitative Factor): Management-assigned components within reserve calculations to account for uncertain or qualitative risks not captured purely in historical loss data.

Full Conference Call Transcript

Jeffrey Haas: Thank you, Jamie. Hello, everyone, and thank you for joining us to discuss Preferred Bank financial results for the fourth quarter ended 12/31/2025. 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 Tzu. 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 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, ladies and gentlemen. Thank you for joining the earnings conference. I'm very pleased to report that for 2025, 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. Amid interest margin for the fourth quarter declined from the third quarter. The 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, the cost of deposits remains stubbornly high.

In fact, many analysts have reported that between quarters, the banking industry, the entire banking industry, cost of deposits may have increased slightly. Looking forward, we are seeing that our loan demand is getting stronger. For the quarter, our total loan growth is $182 million or over 12%. Deposit growth was $115 million or 7.4%. To round out the year, loan and deposit growth was 7.3% and 7.2%, respectively. During the quarter, we sold two large pieces of OREO, resulting in a net gain of $1.8 million between the two. The income was reported in the section of noninterest income. The loss, the result of the loss, was reported in the noninterest expense section.

This is based on the current principle of generally accepted accounting principles. For the quarter, nonperforming assets declined slightly. However, criticized assets did increase by $97 million. Principally, this is due to placing a large loan relationship into the classified status. Our loan loss provision was $4.3 million. Most economists are forecasting 2026 to be a year of relatively stable growth. Our customers' feelings also indicate they have an improved outlook for 2026. Barring any sudden changes in the current policy or directions, which we just had one, we are hoping 2026 to be more of a growth year for Preferred Bank. Thank you very much. I will answer your questions.

Operator: To ask a question, you may press star and then 1 using a touch-tone telephone. To withdraw your questions, you may press star and 2. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality. Again, that is star and then 1 to join the question queue. We'll pause momentarily to assemble the roster. And our first question today comes from Matthew Clark from Piper Sandler. Go ahead with your question.

Matthew Clark: Hey. Good morning, everyone. 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?

Edward Czajka: Hi, 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 six, seven basis points a month.

Matthew Clark: Okay. Yeah. And that's where I was headed. Deposit beta this quarter looks to be about 40% on interest-bearing. Sounds like things are still pretty competitive. What are your thoughts on the beta? The deposit beta? Going forward? Assuming we get maybe one or two rate cuts this year?

Edward Czajka: 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 five or six 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.

Matthew Clark: Got it. And 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?

Li Yu: That's a fair statement.

Matthew Clark: Yeah. 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?

Edward Czajka: I'm going to forecast probably somewhere in the neighborhood of 22. Maybe slightly below that. But, you know, 21.5 to 22 should be about right. You know?

Matthew Clark: Okay. Thank you. I'm getting it now. Yeah.

Operator: Our next question comes from Gary Tenner from D. A. Davidson. Please go ahead with your question.

Gary Tenner: Thanks. Good morning. 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?

Edward Czajka: 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 3.70% to 3.80% on average.

Gary Tenner: Appreciate that. And just out of curiosity, last quarter, when you talked about the CDs maturing in the fourth quarter, they were maturing at 4.1% and you sort of posited kind of new CDs in the mid to high threes. So it sounds like that number was towards the upper end of that repricing range in the fourth quarter? Is that kind of what played out?

Edward Czajka: Yes. Yes. 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.

Gary Tenner: Okay. And that 70% floating rate portfolio now, does that have you with the fourth quarter cuts, did you clear through any significant floors?

Edward Czajka: It probably only affected about $150 to $200 million of the loan book. Right now, we have about 45% of the floors are in the zero to 100 basis point bucket in terms of their protection effectiveness.

Operator: Our next question comes from Andrew Terrell from Stephens. Please go ahead with your question.

Andrew Terrell: Good morning. I was hoping to just follow-up on the time deposit commentary. I was hoping you could just maybe expand upon that a bit more and just, you know, sounds like high threes for you guys right now. Is that generally in line with your competition? Are you trying to, you know, price ahead, price below to pick up more deposits? Just curious, you know, where you're at versus the market, kind of your strategy, your expectations there.

Edward Czajka: I think the challenge is kind of walking the tightrope. 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 it makes it more challenging for us because of their size.

Andrew Terrell: No. It 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 that both look pretty good. I was hoping you could talk a little bit more about the pathway to curing this. You know, what the timeline and outcome looks like as you see the big picture today. And then also just, you know, as a pretty large relationship, 2% of the loan book. Is this the largest relationship with the bank, or are there other, you know, similarly large that you guys have?

Li Yu: I believe this is one of the large relationships. Correct. For the bank, that is small. 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, you know, that we've utilized in the past. We've sold notes, we've foreclosed and taken back property, etcetera. But our first choice, obviously, we know these customers, they are late in payments, and they are having problems with other banks. But their principle is that because these properties still have value, very positive value in their eyes.

And the information we have is that they are working very hard, trying to finance it out from other alternatives. So the bank is going to be waiting for them to get these procedures done. So in case they are not able to continue the loan, and we have to go through the foreclosure procedure, we are not going to shy away from that. We'll do it immediately. And the current marketplace is pretty reasonable as regard to pay for these properties at this point in time. So in other words, when I see in the market situation 2011-2012 that you have to bottom four off, it's not happening. The market has been very stable.

So it's a matter of time to resolve the thing as these loans are basically fundamentally well, reasonably underwritten.

Andrew Terrell: Okay. I appreciate all the color there, and thanks for the questions.

Operator: Our next question comes from Tim Coffey from Janney. Please go ahead with your question.

Tim Coffey: Great. Thank you. Good morning, everybody. Mr. Yu, as we start looking at loan growth this next year, what do you think are the best opportunities for growth? Or, like, what loan product?

Li Yu: Basically, we are still a sort of like a commercial market that we basically focus on commercial real estate and C&I loans. We see both sides' demand is reviving a bit right now. In fact, internally, we're budgeting a higher number than the previous year right now. So it's still very early to tell. As you know, not only do we have the normal economy, but we do have a very active government that changes practices from time to time. So it will be, you know, if we mentioned some for the babies, it was lose no change, or go this way, I think that's overly optimistic.

But I like to say that we're budgeting a higher number than last year for our upcoming year.

Tim Coffey: Okay. Great. Thanks. 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 digits number reasonable?

Edward Czajka: Yes. That's about what we're looking at, right in that neighborhood, Tim. You're spot on.

Tim Coffey: Okay. And then the kind of just general thoughts on share repurchases for this year?

Li Yu: Well, we just have to see what the total picture is. You know, first of all, obviously, we have to see what our loan growth is during the year. And all possibility, all funds will have to be reserved for loan growth. And secondly, the deposit situation will also be very important. So when we have the balance sheet fixed, then we probably would turn around to see whether there is additional availability for repurchases. But I would say that the situation is not quite as conducive to repurchase as last year.

Tim Coffey: Right. Well, sure. Absolutely. And then I guess this is what I want to kind of make sure I dot the I and cross the T's on the classified loans. I mean, given the uniqueness of this situation, what does the timeline for disposition look like? Or how does this play out?

Li Yu: Well, first of all, that amount of relationship there. There are several different loans. Some of them have earlier maturity dates than the other ones. So first of all, obviously, we will be giving our customary opportunity to that particular relationship, the opportunity of resolving matters to our satisfaction. And then the legal procedure will start if they fail to do that. Now I would say that internally, we will say that probably we will have the majority of a good portion of all resolved sometime within two quarters. Nick, do you think I'm too optimistic? Or what's your take?

Nick Pi: That is the goal where we're heading, Mr. Yu. Yes. Of course, we'll try to solve the issues. I think we'll give ourselves that much time to get a lot of the work done.

Tim Coffey: Okay. Great. That's very helpful. Those are my questions. Thank you.

Operator: Our next question comes from Liam Coohill from Raymond James. Please go ahead with your question.

Liam Coohill: Hi. Good morning, everyone. 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, or is there anything in particular we should take into account?

Li Yu: You mean the $19.4 million? Yes. Based on the most updated appraisal we conducted after we classified this loan, the value came out even higher than the previous one. So with everything in mind, the value is $49 million, and our loan is $19.5 million.

Liam Coohill: That's very helpful. Thank you. And then just one more from me. For fee income in 2026, would the Q4 number excluding the one-time OREO impact be a good baseline?

Edward Czajka: 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.

Liam Coohill: Thank you very much. I'll step back.

Operator: Once again, if you would like to ask a question, please press star and then one. To withdraw your questions, you may press star and 2. Again, that is star and then 1 to join the question queue. Our next question is a follow-up from Matthew Clark from Piper Sandler. Please go ahead with your question.

Matthew Clark: Hey. Thanks. 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, you know, annualizes obviously to $88 million, would be below this past year and would imply some significant growth after the first quarter. Just want to make sure we're on the same page.

Edward Czajka: Yes. It will grow through the year. There's no question about it. And we will have, you know, we still have a couple of small OREO properties, so there will be some expense related to those as well.

Matthew Clark: Okay. And then did you repurchase any shares this quarter?

Li Yu: No. Not this quarter. We did in October, but it was a nominal amount, Matthew.

Matthew Clark: Okay. 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?

Li Yu: Yeah. There are a few deals that have been brought to us that we end up taking a look at. As you know, that has been nothing main effort in M&A. But there are a couple of deals we take a look at, and probably the pricing structure required of us is not to our satisfaction. So we'll continue to look at it. We know that there may be another one or two coming up, we'll take a look at it.

Matthew Clark: Okay. Great. Thanks again.

Operator: And our next question comes from Arif Angad from Cygnus Capital. Please go ahead with your question.

Arif Angad: Yes. Hello. Thanks for taking my questions. First question is really more just to clarify the diluted EPS of $2.79. If I'm reading it correctly, it looks like your gain on sale of the OREO property is included in that EPS, which after tax was about 20¢. Just want to confirm, am I reading that correctly? The effect of that gain on the EPS was $2.59?

Edward Czajka: That sounds about right. Yes.

Li Yu: $1.8 million after equal to $3.6 million. Yeah. So that's about right.

Arif Angad: Okay. Thank you. 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 of any exposure to those properties going forward?

Li Yu: One of them we provided financing. The other one was an outright cash sale.

Arif Angad: Got it. So you still have a loan through one of those properties going forward?

Li Yu: Yes. Much smaller loan.

Arif Angad: 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, assuming you're referring to Western Alliance and Zions. Are those loans paying current? Are they performing or no?

Li Yu: As far as I know, we don't know exactly the status of the other two banks' loans, and we don't have any idea about their structures. All I know is that we are in a first position, you know, trust lender to the world. Fully secured by a problem.

Arif Angad: But are those loans being paid, you know, are you receiving current interest in debt service on those loans? Currently?

Li Yu: Yes. We have been receiving the payments, but it's being slowed down. That's correct.

Arif Angad: Sorry. So when you I did so they're behind in interest service or they're currently in interest service? I'm not following.

Li Yu: Generally, they're behind in interest services. That's one of the primary reasons that's the weakness of the loan that we classified.

Arif Angad: For clarifying. I'm just really more trying to understand the context of a 1.14 times debt coverage ratio if the loan's not paying.

Li Yu: Because of the guarantors getting involved with litigation with other banks. So a property that is not 100% using all the cash flow from those properties to make the payment to our bank and to spend that.

Arif Angad: Got it. Okay. That's helpful. And then, you know, just to finalize the question on this topic, you know, given where the allowance for credit losses stood at the end of the quarter or end of 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 a significant increase in nonperforming and criticized loans? How recent of a scrub have you done of your portfolio to kind of give you that comfort that you're adequately reserved?

Li Yu: All these loans under this or go with because it's substandard in care, we go with the principal one for case analysis. And as the release mentioned about the rookie virus, around 5%. So there's no specific reserve on this one. However, the $4.3 million provision for this quarter was mainly the result of a combination of many, many factors, including the loan growth, including other specific reserve for some of the loans. Just to give you an example, we fully reserve this relationship to under unsecured credit. And also based on Q factors.

So due to the movement of all this relationship, and increase of the criticized loans, we have adjusted our Q factor side, especially on the credit trend area. We increased five basis points of the risk entire risk segment. So these are the components of our reserve at this moment. Our Q factors are actually kind of around 42.5% reserve. So we do believe the reserve should be more resolved to cover our credit situation.

Arif Angad: Got it. Okay. Thank you very much.

Operator: 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.

Li Yu: Well, thank you very much for being with us. For now, Preferred Bank, we have a little challenge and they try to within the next six months period of time, try to resolve these issues on the credit side. But overall, everything remains the same. We are the same company with a well-structured balance sheet, normal operations, normal metrics, and so on, and we still look forward to 2026. Thank you very much.

Operator: And with that, ladies and gentlemen, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.

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