Preferred Bank Q3 FY2024 earnings call

• Net income was $33.6 million with $2.46 per share. - Successfully reduced non-performing loans with no charge-offs but $800,000 interest recovery; criticized loans increased due to one relationship (temporary). - Net non-interest expense increased, leading to $1.7 million OREO valuation charge. - Loan demand increased, net loan increase ~10% annualized. - Deposits decreased slightly; started monitoring deposits to avoid high-cost ones, reducing cost of deposits. - Net interest margin improved; loan sensitivity balanced with deposit sensitivity. - TCD portfolio has different cost reduction dynamics. - Fed rate cuts expected, focused on monitoring.

Preferred Bank's third quarter net income was $33.6 million or $2.46 per share. The loan portfolio consists of 26% fixed rate loans and 74% floating rate loans (most with floors). Deposits decreased slightly from the previous quarter. Net interest margin improved due to lower deposit costs and changes in loan-to-deposit leverage. Net non-interest expense increased, partly due to a $1.7 million valuation charge on OREO. The efficiency ratio was 30.6%, but excluding the OREO charge, it would be ~28.5%. Revenue contribution isn't broken down by distinct product segments beyond loans and deposits.

• Expect continuous moderate rate cuts. - Margin outlook depends on rate cut pace; steady 25 bp cuts ideal for matching asset and liability repricing. - Q4 operating expense expected to be between 20.5% to 21%. - Anticipate loan and deposit beta dynamics based on rate cut pace affecting margin.

• Uncertainties in operations and business environment affecting forward-looking statements. - Risks related to loan portfolio sensitivity, deposit mix changes, and economic factors that could materially impact results.

Q: Talked about margin and deposit spot rate in September.

A: Margin for September excluding recovery was 4.03%, cost of deposits spot at end of September was 3.96%.

Q: Details on floating rate loans with floors.

A: 99% of 74% floating rate loans have floors; ~22-23% floors within 75-100 bp of actual rate, remainder over 100 bp.

Q: Loan and deposit beta outlook.

A: Depends on rate cut pace; steady 25 bp cuts ideal for margin stability.

Q: Stock buyback.

A: Bought back 110,000 shares recently, not in market due to price exceeding desired.

Q: Floating rate loans split by index.

A: ~90% prime based, remainder SOFR/treasury.

Q: Deposits mix change.

A: Switched higher cost interest-bearing demand deposits to TCDs, including flipping brokered money market to brokered CD.

Q: CD renewals in Q4.

A: ~$1.2 billion CDs maturing in Q4, paying avg 5.07%, renewing at 3.45%-4.5%.

Q: Loan growth pipeline and competition.

A: Loan demand surging, but need to defend existing loans from competition; added new producers.

Q: Expense guidance for Q4.

A: Operating expense expected 20.5%-21%.

Q: Credit side color.

A: Criticized loans increased due to one relationship, but 4/7 loans brought current, others expected to be current soon; criticized loans ~$52M excluding one-off, credit quality stable.

Q: Competitive landscape and loan pricing.

A: Facing competition, pricing loans ~1% lower, added new producers; Silicon Valley operation starting, focus on hiring bankers.

Q: Margin trajectory next year.

A: Depends on rate cut pace; expecting margin north of 3.50% if rate cuts end mid/late 2025.