Operator
For 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 than one on a touch-tone phone. To withdraw your question, please press star than 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. 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 Chayka, Chief Risk Officer Nick Pai, and Deputy Chief Operating Officer Johnny Su. 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-licking statements. At this time, I'd like to turn the call over to Mr. Lee Yu. Please go ahead.
Thank you. Good day, everyone. Preferred Bank's third quarter net income was $32.9 million, dollars or two dollars seventy three cents per share this quarter were negatively negatively affected by a two point one million dollars recovery of interesting deposits grew seventy seven million dollars or 1.2 percent of the linked quarter basis as everybody is already aware of that 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 deposit their extra, I mean, invest their extra funds into the treasuries long for the quarter because $40 million after after we place a large credit on them for sale status like at the beginning of the third quarter when we reported to our last conference phone call but this time okay our pipeline seems to be very solid okay and we're very hopeful that in the fourth quarter to have a good solid work. 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 fund is going to adjust higher, then it would further benefit our net interest margin as we prefer that as a sensitive bank. Resolution of none of cool loans is continuing but slower than what we hope for. The level of none will remain stubborn, largely because several credit was scheduled to be resolved in this quarter and are stuck in a court proceedings that has pushed back to third and fourth quarter. The pace of migration seems to have slowed down or subsided. There were only $20 million of additional credit that was classified as subsended, as it remained on accrued status. The rest of them all have been included in the number. number we are pleased with a consistent cost control of overhead even under a very inflationary period and 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 20 2027 year thank you ready for your questions at this time we will open up the lines for a Q&A.
Operator
To ask a question, you may press star then one on your telephone keypad. If you're 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.
Hi. I 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 in the weighted average roll-off and roll-on rates that you expect?
Yeah, 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.
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?
Yeah, I do. Total deposit cost was 306 for the month of September, and the spot margin was 358.
Okay. And then the deposit beta, I think on the way down, was about 69%. and 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?
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 causes some growth in the quarter. Our focus is on keeping the costs under control.
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, you know, how much of your NPAs do you think you can get rid of, you know, by the end of the first quarter? And any concern around losses there?
Yeah, Matthew, the total classified loan was $177.6 million, which covers classified plus $11.5 OREO, which is around $17.7 million above what we just disclosed for non-accrual. So that's the classified loan. So for our resolution side, I believe during the fourth quarter, as Ms. Shewer mentioned, that the sum of the loans actually is in the BK core, but we do believe all these BK proceedings are heading in the right direction. and several BK court approved to sell the property in BK court. If that's a continued delay, then probably we're going to foreclose and we're going to dispose by ourselves. So hopefully by Q4 there will be a couple of large loans will be disposed. However, it totally depends on the court decision. So sometimes even though the collateral property is a good loan-to-value and we can fully recover, however, we have to subject to our BKP course proceedings. And we do have options for handling that as well.
Operator
Thank you. The next question comes from Andrew Leach with Stonex Financial. Please go ahead.
Good morning, everyone. I have a question on the loan growth. 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?
Do you want to comment about that, John McCain?
Yes, Andrew. The loan growth, it's a combination of both. The payoff, we have some unexpected payoff, and also production. production, it wasn't as robust as the second quarter production, but having a lot of loans that's in the pipeline kind of delaying funding and all that, so it does carry over to this quarter, and that's why we're looking at the fourth quarter together with the new loan production, looking at a stronger pipeline.
Got it. Have you had any customers telling you that they may delay projects that may not pencil in the phases of higher rates?
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 said that with the market itself, higher rate, actually, you know, looking for more option, some, you know, opportunity to pick up some better deals.
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 or good starting point for the fourth quarter would be?
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 million and $24 million, Andrew.
Makes sense. That covered my question.
Operator
Thank you. Thank you. Again, if you have a question, please press star then one. The next question comes from Andrew Terrell with Stevens. Please go ahead.
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 of the fourth quarter?
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 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 in the quarter-end balance.
Okay, great. I appreciate it. And 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, you know, it sounds like a tougher deposit market. Just your views on ability to kind of core fund growth and what kind of cost.
Well, Andrew, the market is situation where the deposit pricing is all over the place. You are probably familiar with what bank is posting generally in the threes for TCDs because money market and industry care and DDAs, it's all over the place. Everybody has a different deal with every customer. But on the TCD, which is generally more available information, the banks are in the mid to high threes. But all the security houses is in close to mid-fourth. And some of them, the latest we'll see, E-Trade is offering 4.75. And right now, because the Treasury nature is being not taxable in California income tax, which is at 13% top rate, so a 5% Treasury becomes 5.65% effective yield. So we see many of the customers take off after their CD renewed, they are moving to treasury so this is the general market is moving right now with all the interest rate to empire 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 all right great appreciate your perspective and thanks for the questions thank you this concludes our question and answer session I would like to turn the conference back over to mr. Lee you for any closing remarks thank you that well it's it's eventful for us we hope that first quarter we see operation equally as consistent as we had right now but hopefully this main item will work on will show positive results thank you thank you the conference has now concluded thank you for attending today's presentation you may now disconnect
