Good afternoon, everyone, and welcome to the Preferred Bank Q4 2025 Ernie's Conference Call. All participants will be in a 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 and then one on a touch-tone telephone. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. I would now like to turn the conference call over to Jeffrey Haas with Financial Profiles. Sir, please go ahead.

Thank you, Jamie. Hello, everyone, and thank you for joining us to discuss Preferred Bank Financial Results for the fourth quarter ended December 31st, 2025. With me today from management are Chairman and CEO Li Yu, President and Chief Operating Officer Wellington Chen, Chief Financial Officer Edward Chayka, Chief Risk Officer Nick Pai, 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 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.

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. 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. Looking forward that we're seeing that our loan demand getting stronger. For the quarter, our total loan gross is 182 million dollars or over 12 percent. Deposit growth was $115 million or 7.4 percent. The round of the year for loan and deposit growth in 7.3 percent or 7.2 percent respectively. During the quarter we have sold two large pieces of OREO. result in a net gain of 1.8 million dollars between the two. The income was reported in the section of non-interest income. The loss, the result of loss was reported in the non-interest expense section why this is based on the current principal generally accepted accounting for the quarter non-performing assets declined slightly however criticized assets did increase 97 million dollars principally this is due to that we place a large line nine loans longer relationship into the classified status. For the quarter loan loss provision was 4.3 million dollars. Most analysts economists most enough economists is forecasting 2026 to be a year of relatively gross instability customers feeling also indicating they have improved outlook for 2026 any sudden changes in government policy of directions which we just had one we're

hoping 2026 to be more of a great year well thank you very much ladies and gentlemen at this time we'll begin the question and answer session to ask a question you may press star and then one using a touchstone telephone to withdraw your questions you may press star and two if you are using a speakerphone we do ask you please pick up the handset prior to pressing the keys to ensure the best sound quality again that is star and then one 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. Please go ahead with your question.

Hey good morning everyone. Good morning. 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 and also the average margin in the month of December.

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.

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, you know, maybe one or two 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 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.

Okay. Got it. And is it – you know, it sounds like loan growth, you expect to maybe step up a little bit this year from the, you know, 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 deposit ratio?

That's a both-fair statement.

Okay. 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?

Forecast probably somewhere in the neighborhood of 22, maybe slightly below that. But, you know, 21.5 to 22 should be about right.

Why don't you use a 21.5 to 22.5? Okay. Bigger margin.

I like it. Okay, thank you.

I'll give it to you, Matt.

Our next question comes from Gary Tenner from DA Davidson.

Please go ahead with your question. Thanks. Just a quick follow-up on the deposit side of things, if you could kind of update us on the seed 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.

Appreciate that. And just out of curiosity, last quarter when you talked about the CDs maturing in fourth quarter, they were maturing at 4.1 and you sort of posited, you know, 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 fourth quarter. or is that kind of what played out?

Yes, 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.

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 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 and effectiveness.

Our next question comes from Andrew Terrell from Stevens. Please go ahead with your question.

Andrew.

I was hoping to just follow up on the time deposit, you know, competition. I was hoping you could just maybe expand up on that a bit more and just, you know, sounds like high threes for you guys right now. Is that, you know, 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.

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 thing, it makes it more challenging for us because of their size.

No, it makes a little sense. On the downgraded loan this quarter, the $123 million relationship, I appreciate all the color you guys, you know, put in the release around the, you know, LTVs and debt service there that both look pretty good. I just hoping you could talk a little bit more about, you know, the pathway to curing this, you know, what the timeline and outcome looks like as you see the picture today. And then also just, you know, there's a pretty large relationship, 2% in the loan book. Is this the largest relationship at the bank, or are there other, you know, similarly large relationships that you guys have?

I want to answer that.

You, I believe this is one of the large relationships, correct, for the bank at this moment.

In terms of the workout, it's a little bit early to, you know, 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, et cetera.

And our first choice, obviously, we know these customers, they are late in payments and they are having problems with other banks. And the principle is that because these properties still have very positive value in their eyes And the information we have is to finance it out of our market. So the bank is going to be waiting for these things, these procedures done, and so in case if we bring the loan and that we have to go, we are not going to be shy away from that we will do immediately. And then the current marketplace is pretty reasonable, I mean, as we got to pay for these. We're not seeing the market situation in 2008-9, 2011-12 that you have to bottom fall. It's a matter of time to resolve it. Well, reasonably underwritten.

I appreciate all the color there, and thanks for the questions.

Our next question comes from Tim Coffey from JANI. Please go ahead with your question.

Good morning, everybody. Hi. Mr. Yu, as we start looking at loan growth this next year, what do you think are the best opportunities for growth? Like what loan product?

Well, basically we see a sort of like a commercial market, like basically commercial real estate and the C&I loan. We see both side demand is reviving a bit right now. In fact, internally, we're projecting a higher number than previously right now. So it's still very early to tell, as you know that not only we have the normal economy, but we do have very active changes and practices from time to time. So it will be, in terms of everything was smooth, no change, overly optimistic situation, too. But I'd like to say that we're budgeting a higher number than last year, Paul.

Great, thanks. And then, Ed, looking at non-interest expenses for the full year in terms of the growth rate, is kind of a mid to high single digits number reasonable?

Yeah, that's about what we're looking at is, yeah, right in that neighborhood, Tim. You're right on. You're spot on.

And then the kind of general thoughts on cherry purchases for this year?

Well, we just have to see what the total picture is. You know, first of all, that obviously we have to see what our loan growth is. All possibility, all funds will have to be reserved for loan growth. And secondly, that deposit situation. When we have a balance sheet fixed, then we wonder whether it is additional availability for it. But I would say that the situation is not quite as – Right.

Sure. And then I guess I want to kind of make sure I dot the I and cross the T's on the classified loans. Given the uniqueness of this situation, what does the timeline for disposition look like? Or how does this play out?

Well, first of all, that amount of relationship, there are several different roles. Some of them for the early maturity date than the other one. So, first of all, obviously, we will be given our customer the opportunity, okay? that particular relationship the opportunity of and then then the legal procedure will stop if they fail to do that now I would say that internally we will say that probably we will have majority of a good portion of all all taking care of shouldn't be taking care of all resolved sometime within two I think we'll give ourselves so much time to get a lot of the work done.

Okay. That's very helpful. Those are my questions.

Our next question comes from Liam Cuhill from Raymond James. Please go ahead with your question.

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? Is there anything in particular we should take into account?

That's the 19.4 million. Yeah, 19.4 million. Okay. Right.

So this one is the most updated appraisal we conducted after we classified this loan and the battery came out even higher than the previous one. So with everything in mind. No, how much is the value? $48 million? It's $49 million. $49 million. $49 million. dollars and our loan is 19.5.

Very helpful. Again, that is one loan that we like to think that the borrower will want to find a way to resolve that, okay, because it's true. There's too much difference between the assumed market value is the appraisal value. There's too much difference.

Thank you very much. And then just one more from me. For fee income in 2026, would the 4Q number, excluding the one-time 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 non-interest income without the gain on sale of other real estate.

Thank you very much. I'll step back.

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 two. Again, that is star and then one to join the question queue. Our next question is a follow-up from Matthew Clark from Piper Sandler. Please go ahead with your question.

Hey, thanks. I just want to clarify your expense guidance for this year. Does that exclude Oreo costs? Because, you know, 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. I just want to make sure we're on the same page.

Yes, it will grow through the year. there's there's no question about it yeah and 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 okay okay and then did you repurchase any shares this quarter yeah we did we did enough talk we did an October but it was a nominal amount, Matthew, so.

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, you know, expected to accelerate this year.

Yeah, there are a few deals that have been brought to us that we end up taking a look at it. As you know, that has been nothing on our main effort in MAAs. But there are a couple of years we'll take a look at it, and probably the pricing structure required that's still not to pass. We'll continue to look at it. We know that there may be another one or two coming up, but we'll take a look at it.

Great. Thanks again.

And our next question comes from Arif Ngad from Cygnus Capital. Please go ahead with your question.

Yes, hello. Thanks for taking my questions. My first question is really, if I'm reading it correct, that EPS, which after the fact was about 20 cents.

That sounds about right, yes.

20 cents. 1.8 million dollars equal to maybe 10 cents.

3.6. 3.6. Yeah, so that's about right.

Okay, thank you. And then my next question is, Do you provide any financing, involve yourself with any?

One of them is we provide financing, okay. The other one is outright cash sale. Yes, much smaller loan.

Got it. And then the last question I had was, it's confirmed the $121 million of loans that, you know, in Zion. Are those loans paying current?

As far as I know, we don't know exactly the status of the other two banks. loan and we don't have any idea about their structures and all I know is that we are in addition you know trust lenders to work are those loans being you know are you receiving current interest and debt service on those loans yes we have been receiving the payments but no it's been slow down that's correct when you so they're they're like behind in interest service or their current interest service?

I'm not following.

Generally they're behind interest services. That's one of the primary reasons that's the weakness of the loan bank.

Thanks 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.

Because of the guarantors getting involved with litigation with other banks so probably not 100% using all the cash flow from those profits to make the payment to our bank.

And then, you know, just to finalize the question on this topic, you know, given the, you know, where the allowance for credit loss has 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 know, you're adequately reserved and we don't get surprised as we did this quarter with significant increase in how recent of a scrub have you done of your portfolio to kind of give you that comfort?

All these loans under this relationship, we go with, because it's a standard in care, we go with the принципе of 1,000 dollars. And as the release mentioned about the local value, it's at around 65%. So there's no specific reserve on this loan. However, the 4.3 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 credit size loans, we have adjusted our Q factor side, especially on the credit track area. We increased five basis point of the entire real estate segment. So, you know, these are the component of our reserve at this moment. but our Q factors that actually count on 42.5% are reserves. So we do believe the reserves should be amortized up to cover our credit situation.

Thank you very much.

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 for now that we have challenges and try to, within the next six months period of time, try to resolve these issues on the quitter side. But overall, everything remains the same, we're still in the same company, we're structured with a normal operation, normal matrix, and so on, and we sort of like still look forward to 2026. Thank you very much.

And with that, ladies and gentlemen, we'll conclude today's conference call-in presentation. Thank you for joining. You may now disconnect your lines.