Preferred Bank (PFBC) Earnings Call Transcript
July 22, 2026
Earnings Call Speaker Segments
Good day, everyone, and welcome to the Preferred Bank second quarter 2026 earnings conference call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Jeff Haas of Financial Profiles. Please go ahead, sir.
Thank you, Cole. Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the second quarter ended June 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 Pott ], 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 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 risks 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. Thank you.
Thank you all for joining our conference phone call. Good morning. We are pleased to report that our net income for the second quarter of 2026 was $33.5 million or $2.78 a share. This number compares favorably with previous quarter and same quarter previous year. It also exceeded our internal budget. For this quarter, we have been quite focused on the resolution of troubled assets. Non-performing loans during the quarter has been reduced $70 million or 41.5%. And likewise, the criticized loans have been reduced by $90 million all the before percent with the large reduction in classified assets or criticized loans. The reserve requirement on these items has been reduced. Therefore, our provision expense for the quarter is $1.2 million. Looking ahead at June 30, okay, we still have 3 more long-term totaling $60 million, non-performing loans, totaling $60 million, scheduled to be resolved in the second half of 2026. However, as each one of them is not in its own bankruptcy case proceeding, the exact timing of the resolution will be at the mercy of our legal system. This quarter we have satisfactory or good production activities. Loan increased $125 million of two descending order basis. But if you count in the, we also made up the $70 million loan we sold, the actual origination effort was quite good. On the deposit side, it only increased $52 million or 0.8% in quarter basis. We are aware nationwide all banks, the entire banking industry, is reporting stiff competition in deposits. Going forward, this will also be our focused area. The net interest margin was 3.73%, favorably affected by the interest recovery. And our efficiency ratio was steady at 32% and currently a inflationary environment. All these underlying activities make us feel pretty comfortable about our operations and we are optimistic regarding the remainder of the year. Thank you very much. I'm ready for your questions.
And ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] And our first question today will come from Matthew Clark with Piper Sandler. Please go ahead.
I guess first on the loan yields, nice interest recovery there. Stripping that out, it looks like loan yields maybe reset to about 7%. Barring additional recoveries, I guess maybe any comments on loan pricing, whether or not you can kind of hold that yield if the Fed stays on hold, or do you think there's some incremental pressure there?
I will first like, want to answer that, okay?
Well, the market is very competitive. We try to squeeze every 10 bps, 25 bps out of each transaction and we're at the mercy of a lot of our competitors who are still out there offering much lower, you know, kind of low or that it just doesn't make sense. Now, having said that, a lot of uncertainties in the market and that's why we want to make sure that we are disciplined enough to continue to take on the loan that give us some quality loan. Again, quality loan that give us a type of return that we need to continue our earnings.
Well, Matthew, every bank every year is crying for loan competition. It's become a standard language nowadays. But we're very fortunate. We're able to, I guess because we turn over more stones, we get our little better yields than our peer group. And that probably can verify that by the call reports.
Okay, great. And then on the deposit pricing side, sounds like from the release that there was some upward pressure on deposits throughout the quarter. Do you have the cost of deposits in the month of June and then maybe remind us of the CDs that you have coming due over the next two quarters and the roll-off, roll-on rates?
Two quarters. You threw me a curveball there, Matthew. First off, the cost of deposits, total deposits was 3.06% as of the month of June. Cost of interest-bearing deposits was 3.44%. The cost of total deposits has been held in check, not necessarily by the rate environment, but by the fact that somewhat we're seeing a slight change in the mix of our deposits. We've seen some decent growth in DDA, which has certainly helped keep deposit costs down. In terms of going forward, we have $1.5 billion maturing in the Q3 of total CDs at an average rate of 3.80%. Those will likely come back on at a slightly higher rate than 3.80%. And I don't have the fourth quarter roll-off, so.
That's okay. Okay. So NIM probably resetting back down to the low 3.50s is fair here in the 3Q.
So, on an adjusted basis, it was 3.60% for Q2. When you strip out the noise with respect to the interest recoveries, it was 3.60%. So, yes, we would expect probably mid-3.50s for Q3.
Okay. And then last one for me, just on the expense run rate, relatively flat this quarter. The outlook there in the second half?
Yes, we were a little disappointed with respect to non-interest expense this quarter, Matthew. Professional services, namely legal fees, were elevated because of the large relationship that we're working through right now that Mr. Yu touched on. In terms of going forward, I would look at, I would say Q3 is going to be fairly flat to Q2. Might be a little better. That's all. Because, you know, she's...
It's not everything start to catch up in cost. It's just getting simpler. Every same service, same item is cost a little bit more nowadays, you know.
Great, thanks again. And our next question will come from Gary Tenner with D.A. Davidson. Please go ahead.
I just wanted to ask about loan growth. Sounded like you guys have a fairly constructive outlook for the back half of the year, if I interpreted that correctly. Could you kind of talk about maybe expectations around that?
Well, obviously, Q2 was very strong, as Mr. Yu mentioned, without the sale of the two.
Net growth would have been closer to $180 million, but in terms of Q3... Actually, $194 million. In any... And then also, that's after a large payoff, you know, activities. Okay, so actually, the new loan origination... But, you know... Things just bouncing around, partially affected by interest rate movement in the Fed level. I still remember in early spring, in springtime, the whole country is anticipating rate cuts. And there's a lot of optimism going forward and people getting into the deal based on a, I mean, in the case of a CRE activity or in the case of real estate based on a new cap rate, they want to come into deal. Then suddenly things take a change in June and everybody is talking about, oh, there will be rate increases in July, okay? Now with July's call report, where is it? So we see a lot of hesitation on the customer side. At least they get to be delayed or just not going forward as fast as it used to be. So that and the much increased level of activities from the non-bank lenders, their competition, okay? We think going forward in the third quarter, certainly we will be a lot tougher in the second quarter, okay? But whether it will recover in the fourth quarter and it will become a lot, we just have to be very flexible and take opportunity as they come. I don't know that answers your question on that, because that's about all we do, all.
Yes, no, I appreciate the thoughts on that. Thank you.
And our next question will come from David Feaster with Raymond James. Please go ahead.
Look, the loan origination trend, it's extremely encouraging. I'm curious how much of this is really a function of improving demand versus increasing productivity from your team. And just kind of like where are you seeing strength? How's the pipeline shaking up and, you know? Again, how is demand across your footprint?
Well, again, from my angle, I see in the second quarter, I just mentioned that early in the quarter, there's a lot more optimism in our customers' level than it is today regarding the rate of cost they have to pay, so obviously that the same amount, the same level of optimism is not there anymore compared to the springtime. But how's the pipeline shaping up? How do you see the activities going forward? Can you guys answer that?
Yes. I'll chime in. I have some ideas. Yes, David. The pipeline's still pretty good. I think opportunities are still out there to review deals. We're getting a lot of deals that we are looking at. Not all of them seem to make sense from a combination of a pricing standpoint or what have you. But the pipeline is still pretty vibrant.
We're seeing more deals right now. Again, as I mentioned earlier, their loan demand is high out here, but it's the quality loan demand that we're looking for. And every quality loan demand we have, we're more competitive because every bank out there or private lender, they all want those type of loans. Or maybe not private lender. But they, so, and we try to squeeze every penny out, you know, squeeze another 10 bps or maybe 20, whatever, a little bit here and there. So our production team, they work very hard, keep turning stone, keep turning up quality loan demand, and then we have to, again, be disciplined, be very selective. So having said all that, to repeat what we did in the second quarter, as Mr. Yu said, well, you know, we always try to do our best to, you know, build a loan portfolio that's profitable and sustainable.
Yes. Okay. And then, you know, we touched on the deposit pricing competition. I mean, the NIB growth you saw this quarter was great. And that's, you know, obviously helped with the funding cost side and on the margin as well. I'm curious, how do you think about, again, with this competitive backdrop, how do you think about your ability to drive core deposit growth going forward?
That is also a mandate within our internal operation, okay? But realizing that everybody is doing the same thing, and realizing we've got one more situation that is really affecting us, which is the stock market. Especially the opportunity that AI stock is providing to the general public. We see many, many customers investing their excess cash to the stock market today as compared to the old days where saving in the bank is to make something comfortable. But the trend is that everybody is joining the stock market now. So this is another competition level that we're facing right now. We just have to try our best to improve our mix at the deposit level. Okay. The cost you just have to pay whatever is out there, you know.
Yes. And maybe kind of just to that point, right, maybe a philosophical question. You know, how do you think about NII growth relative to the margin here? I know in the past we've discussed and you know, you look at the margin as an output, not an input, right? I'm curious, is that still the philosophy? And whether you're willing to compete? You know, you talk about paying what you're going to pay. Are you willing to compete on pricing and sacrifice some margin to drive NII growth? And just help us think through the margin trajectory as we look forward kind of in this rate environment.
Frankly speaking, this bank has traditionally given a lot of opportunity that our loan office brings to us. But because many of the loans that we bring over do not meet a rate requirement, which because the deposit we have to pay, we like to be the most selective in our rates. So, I mean, I think that's the problem. Competition, low-cost competition is never, never our answer to all situations. And when you do too much, then you're loading your balance sheet with all kinds of low-rate loans. And it's hard to get out of it, I guess. We all see several cases that caused some, even the bank failure, you know. So we are very careful that try to stay, first of all, hopefully, asset sensitive that will keep our deposits loan rate aligned. And number two is situation, select the rate of the loan we think is proper for us. The plates come to us and we become a little bit selective sometimes, you know.
David, I'll just add to that. And you and I have had this discussion many times. We focus more on net interest income growth as opposed to managing to the margin. The margin is simply a mathematical output of how well we execute it.
Okay. And I mean, again, you're operating with a healthy margin. I'm just kind of curious if we're willing to, you know, sustain it there, if we're focused on expanding it as we kind of look beyond that, you know, the fourth quarter and beyond.
Yes. I'm sorry, was there a question in there?
It was an open-ended statement, I guess. You know, we've already talked about, you know, there's differential in loan yields on payoffs versus new origination. Pricing is tight. Deposit pricing is difficult. So, I mean, those obviously all lead to, you know, those kind of all point to stagnation, some compression in the margin going forward and probably on into next year. That's helpful. Thanks, everybody.
And our next question will come from [ Tim Kofay ] with [ Breen Capital ]. Go ahead.
Just getting back to the deposit question and the competition. I guess your first half of the year on deposit growth, you're running kind of low single digits. Is that a reasonable run rate for the full year?
Well, we hope not. We'd certainly like to increase that. But, you know, as we've talked about before, and Tim, you know this, there's no pipeline for deposits. So that's the real challenge in not necessarily knowing what's, you know, what's coming 3 months, 2 months down the road. So we just have to continue to work. You know, I think the, you know, as I said, the growth in DDA on a year-to-date basis very encouraging. We'd like to continue to work toward that end, for sure.
Okay. And then, so how should I think about your loan to deposit ratio? Because it does seem like you've got some room to kind of potentially hold it at the current level. Is there any appetite to take it higher?
Well, right now we're running about 95%, bounce around a bit in there. And internally that we are both here comfortable with that particular situation. So I guess short-term we can let it rise a little bit, but long-term we'd like to keep that ratio in here.
We think liquidity for us is very important.
Right. Okay. Got it. And then on the allowance, it's running at the low end of the historical range, say 6 years or so. Everything remains kind of the way it is right now, no changes to really the inputs that determine a provision at this point. Do you feel the need to kind of refill the bucket?
I'm not, I'll let, I think Nick probably should answer that. So the question was, do we want to, in terms of, increase the ALLL to the total?
Yes, so for Q2, our ratio is 1.22% of the total loan and based on the current credit quality trend of the bank. As you know, at Q2 we have a lot of resolutions and credit trend is heading in the right directions. So we do reserve a quarter sizable reserve on the Q side as well in terms of covering the current uncertainties regarding inflation, high employment, all those kind of things. So we believe for the upcoming quarters, it should still stay approximately at a similar level of the reserve at this moment. Definitely, if there's any changes, we will adjust that right away in order to adjust our assumptions for a reserve site.
Okay, great. And then, this is my last question, it has to do with capital. Say loan growth doesn't pick up the way you're anticipating, would you consider getting back into the market for buying back shares?
Yes, obviously that will be one of the use of the capital items that was continuous under evaluation going forward.
Great. Those are my questions. I appreciate your time. Thank you.
Thank you, Tim. And this will conclude our question-and-answer session. I'd like to turn the conference back over to Mr. Li Yu for any closing remarks.
Thank you so very much, and I hope that we can continue to report results and exceed our own expectations.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
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