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- Preferred Bank beat expectations in Q2 2026, reporting net income of $33.5 million, or $2.78 per share. Management said results were better than both the prior quarter and a year earlier, helped by lower provision expense as troubled assets were reduced.
- Credit quality improved sharply, with nonperforming loans down $70 million and criticized loans down $90 million. The bank said it still has three nonperforming loans totaling $60 million slated for possible resolution in the second half of 2026, though timing is uncertain due to bankruptcy proceedings.
- Loan and deposit growth remained solid, but competition is intense. Loans rose $125 million quarter over quarter and deposits increased $52 million, while management warned that pricing pressure in both lending and deposits is likely to compress margins into the mid-3.50% range and potentially into next year.
Preferred Bank (NASDAQ:PFBC) reported second-quarter 2026 net income of $33.5 million, or $2.78 per share, with Chairman and CEO Li Yu saying the results compared favorably with the prior quarter and year-earlier period and exceeded the bank's internal budget.
Management used the company's earnings call to highlight progress on credit resolution, continued loan production and a competitive environment for deposits and loan pricing. Yu said the bank was "quite focused on the resolution of troubled assets" during the quarter, which helped lower its provision expense.
Credit Metrics Improve as Troubled Assets Decline
Yu said nonperforming loans declined by $70 million, or 41.5%, during the quarter. Criticized loans fell by $90 million, or 34%. With that reduction in classified assets, the bank's reserve requirement on those items decreased, contributing to a provision expense of $1.2 million for the quarter.
Looking ahead, Yu said Preferred Bank still has three nonperforming loans totaling $60 million that are scheduled to be resolved in the second half of 2026. However, he cautioned that each loan is tied to its own bankruptcy proceeding, making the timing uncertain.
Chief Risk Officer Nick Pi said the allowance for loan losses stood at 1.22% of total loans at the end of the quarter. Based on current credit quality trends, including second-quarter resolutions, Pi said management expects the reserve ratio to remain at approximately a similar level in upcoming quarters, barring changes in assumptions or conditions.
Loan Growth Strong, but Competition Remains Intense
Preferred Bank reported loan growth of $125 million, or 2%, on a quarterly basis. Yu said loan production activity was "satisfactory or good" and noted that underlying origination effort was stronger when accounting for $70 million of loans sold during the quarter and large payoff activity.
Analysts asked whether the second-quarter trend reflected stronger borrower demand or improved internal productivity. Yu said demand increased during the second quarter, especially earlier in the period when customers were more optimistic about potential interest rate cuts. But he said sentiment shifted later in the quarter as rate expectations changed, causing some customers to delay deals or move more slowly.
President and Chief Operating Officer Wellington Chen said the pipeline remains "pretty good" and "vibrant," but he emphasized that not all opportunities make sense from a pricing or risk standpoint. Deputy Chief Operating Officer Johnny Hsu said loan demand is high, but the bank is focused on "quality loan demand," where competition from banks and other lenders is strongest.
Management said pricing pressure is persistent. Chen said the bank is trying to "squeeze every 10 basis points, 25 basis points out of each transaction," while remaining disciplined on credit quality and return requirements. Yu said Preferred Bank has traditionally passed on opportunities that do not meet its rate requirements, adding that competing primarily on low pricing is "never our answer to all situation."
Margin Boosted by Interest Recovery; Compression Expected
The bank's net interest margin was 3.73% in the quarter, which Yu said was favorably affected by interest recovery. Chief Financial Officer Edward Czajka said that excluding the effect of interest recoveries, the adjusted margin was 3.60% for the second quarter.
Czajka said management expects the margin to move to the mid-3.50% range in the third quarter. He also said tighter loan pricing and difficult deposit pricing point to some margin compression going forward and "probably on into next year."
When asked whether the bank focuses more on margin or net interest income growth, Czajka said Preferred Bank focuses more on net interest income growth, describing the margin as "simply a mathematical output of how well we executed."
Deposit Costs Rise as Competition Broadens
Deposit growth remained a key focus for management. Yu said deposits increased by $52 million, or 4.8%, on a quarterly basis, but he acknowledged stiff competition for deposits across the banking industry.
Czajka said the cost of total deposits was 3.06% in June, while the cost of interest-bearing deposits was 3.44%. He said total deposit costs have been held in check partly because of a slight shift in the deposit mix, including "decent growth" in demand deposits.
Preferred Bank has $1.5 billion of certificates of deposit maturing in the third quarter at an average rate of 3.80%, Czajka said. He added that those CDs will likely renew at a slightly higher rate.
Yu said the bank faces another form of competition for customer cash: the stock market, particularly opportunities tied to artificial intelligence stocks. He said some customers are investing excess cash in equities rather than keeping it in bank deposits.
Asked about the bank's loan-to-deposit ratio, Yu said it was running around 95%. He said management is comfortable with that level and could allow it to rise somewhat in the short term, but over the long term the bank wants to maintain liquidity.
Expenses, Capital and Outlook
Preferred Bank's efficiency ratio was steady at 32%, which Yu noted came despite an inflationary environment. Czajka said noninterest expense was somewhat disappointing in the quarter, with professional services costs, mainly legal fees, elevated due to work on a large relationship. He said third-quarter expenses are expected to be fairly flat with the second quarter, though they "might be a little better."
On capital deployment, Yu said share repurchases remain one possible use of capital and are under continued evaluation, particularly if loan growth does not develop as anticipated.
Yu said management feels "pretty comfortable" about operations and is optimistic about the remainder of the year, though executives repeatedly pointed to uncertainty around interest rates, borrower behavior, deposit competition and the timing of credit resolutions tied to bankruptcy proceedings.
About Preferred Bank (NASDAQ:PFBC)
Preferred Bank (NASDAQ: PFBC) is a California-chartered commercial bank headquartered in Los Angeles. The institution offers a full range of banking products and services to businesses and individuals, with a particular emphasis on commercial real estate lending, business banking, treasury management and deposit accounts. Preferred Bank operates through branch offices across Southern California and national loan production offices in major U.S. markets.
The bank's core lending portfolio focuses on commercial real estate acquisition, development and investment properties.
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