Preferred Bank (NASDAQ:PFBC) reported second-quarter financial results on Wednesday. The transcript from the company's second-quarter earnings call has been provided below.

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Summary

Preferred Bank reported a net income of $33.5 million, or $2.78 per share, for Q2 2026, exceeding both the prior quarter and the same quarter last year, as well as internal budget expectations.

The company significantly reduced non-performing and criticized loans by $70 million (41.5%) and $90 million (34%), respectively, lowering reserve requirements and reducing provision expenses to $1.2 million.

Loan production was strong with an increase of $125 million, though deposit growth was modest at $52 million (0.8%), amidst stiff industry-wide competition for deposits.

Net interest margin stood at 3.73%, with the efficiency ratio steady at 32% despite inflationary pressures.

Management remains optimistic about the year ahead, though they anticipate increased competition and potential margin compression in loan and deposit pricing.

The bank plans to resolve $60 million in non-performing loans in the second half of 2026, contingent on legal proceedings.

There is a focus on core deposit growth, despite competition from the stock market, particularly AI-related investments, drawing away customer funds.

Strategically, the bank emphasizes quality loan origination over volume, with a preference for maintaining asset sensitivity and selective rate competition.

Full Transcript

OPERATOR

Good day, everyone, and welcome to the Preferred Bank second quarter 2026 earnings 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 remarks, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two.

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.

Jeff Haas, Financial Profiles

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 Chaeca, 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 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. Please go ahead.

Li Yu, Chairman & CEO

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 the previous quarter and the same quarter of the 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 have been reduced $70 million, or 41.5%.

And likewise, the criticized loans have been reduced by $90 million, or 34%. With the large reduction in classified assets, 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, we still have three more loans 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 involved in its own bankruptcy case proceeding, the exact timing of the resolution will be at the mercy of our legal.

This quarter we have satisfactory or good loan production activities. Loan increased $125 million on a two descending quarter 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% on a quarter basis. We are well aware nationwide all banks or the entire banking industry is reporting stiff competition in deposits. Going forward, this will also be our focused area.

Net interest margin was 3.73%, favorably affected by the interest recovery, and our efficiency ratio was steady at 32% under the current 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.

OPERATOR

And ladies and gentlemen, we will now begin the question-and-answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time we will pause momentarily for the first question. And our first question today will come from Matthew Clark with Piper Sandler. Please go ahead.

Matthew Clark, Analyst at Piper Sandler

Hey, good morning. 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?

Li Yu, Chairman & CEO

I will first let Will answer that.

Wellington Chen, President & COO

Well, the market is very competitive. We try to squeeze every 10 bps to 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 rate 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 the type of return that we need to continue our earnings.

Li Yu, Chairman & CEO

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 a little bit better yields than our peer group. And that probably can be verified by the core reports.

Matthew Clark, Analyst at Piper Sandler

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 roll-off, roll-on rates.

Edward Chaeca, Chief Financial Officer

Two quarters—you threw me a curve ball 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 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.

Matthew Clark, Analyst at Piper Sandler

Okay, so NIM probably resetting back down to the low 3.50s is fair here in the 3Q.

Edward Chaeca, Chief Financial Officer

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 yeah, we would expect probably mid-3.50s for Q3.

Matthew Clark, Analyst at Piper Sandler

Okay. And then last one for me just on the expense run rate, relatively flat this quarter. The outlook there in the second half.

Edward Chaeca, Chief Financial Officer

Yeah, we were a little disappointed with respect to noninterest 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. So 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.

Li Yu, Chairman & CEO

You know, everything starts to catch up in cost. It's just getting—simply every same service, same item is costing even more nowadays, you know.

Matthew Clark, Analyst at Piper Sandler

Great, thanks again.

OPERATOR

And our next question will come from Gary Tenner with D.A. Davidson. Please go ahead.

Gary Tenner, Analyst at D.A. Davidson

Thanks. Good morning. Just wanted to ask about loan growth. It 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 notes, net growth would have been closer to $180 million. But in terms of Q3...

Li Yu, Chairman & CEO

In any—and then also that's after a large payoff, you know, activities. 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 to the deal based on the—I mean, in the case of C&I 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. Now with July's COVID report—where is it? So we see a lot of hesitation on the customer side. At least they get to the OR—just not going forward as fast as it used to be. So that and the much increased level of activities from the nonbank lenders—their competition. We think that going forward in the third quarter certainly will be a lot tougher than the second quarter.

But whether it will recover in the fourth quarter and it will become or not, we just have to be very flexible and take opportunity as they come. I don't know that answered your question. That's about all we do, all we can do.

Gary Tenner, Analyst at D.A. Davidson

Yeah, no, I appreciate the thoughts on that, thank you.

OPERATOR

And our next question will come from David Feaster with Raymond James. Please go ahead.

David Feaster, Analyst at Raymond James

Hey, good morning everybody. Look, the loan origination trends—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?

Li Yu, Chairman & CEO

Well, from my angle, I see in the second quarter increasing demand. I just mentioned earlier 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 the same level optimism is not there anymore compared to the springtime. But how the pipeline shaping up? How do you see the activities going forward? Can you guys answer that?

Wellington Chen, President & COO

You want to take a shot first? Yeah, I'll chime in. I have some ideas. Yeah, David, the pipeline is 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. It's just we're seeing more deals right now. Again, as I mentioned earlier, loan demand is high out here, but it's the quality loan demand that we're looking for.

And every quality loan demand, we more competitive because every bank out there or private lender, they all want those type of loans—or maybe not private lender, but then 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 say, well, we always try to do our best to build a loan portfolio that's profitable and sustainable.

David Feaster, Analyst at Raymond James

Yeah, okay. And then we touched on the deposit pricing competition. I mean, the NIB growth you saw this quarter was great, and that's 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?

Li Yu, Chairman & CEO

That is also a mandate within our internal operation. 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 and especially the opportunity that AI stock is providing to the general public. We see many, many customers investing their excess cash into the stock market today as compared to the old days where saving in the bank, so make them comfortable there.

But the trend is that everybody is joining the stock market now. So this is another competition level that we're facing right now. And we just have to, you know, try our best to increase our—to improve our mix of deposit level. The cost, you just have to pay whatever is out there, you know.

David Feaster, Analyst at Raymond James

And maybe kind of just to that point—right, maybe a philosophical question—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. 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.

Li Yu, Chairman & CEO

Frankly speaking, this Bank has traditionally given up a lot of opportunity that our loan officers bring to us. But because many of the loans they bring over do not meet our rate requirement—which, because the deposit we have to pay—we like to be a little more selective in our rates. So, I mean, competition—low-cost competition—is never our answer to all situation. And when you do too much, then you load 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 cause some even the bank failure. So we are very careful that—try to stay, first of all, hopefully asset sensitive—that will keep U.S. deposits and loan rate aligned. And number two is situation—select the rate of the loans we think is proper for us. So the place comes to us, we become a little bit selective sometimes.

Edward Chaeca, Chief Financial Officer

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.

David Feaster, Analyst at Raymond James

Okay. And I mean, again, you're operating with a healthy margin. I'm just kind of curious if we're willing to sustain it there, if we're focused on expanding it as we kind of look beyond that, the fourth quarter and beyond.

Edward Chaeca, Chief Financial Officer

I'm sorry, was there a question in there?

David Feaster, Analyst at Raymond James

It was an open-ended statement. I guess—

Edward Chaeca, Chief Financial Officer

You know what it is? I mean, 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, this kind of all point to some compression in the margin going forward and probably on into next year.

David Feaster, Analyst at Raymond James

That's helpful. Thanks everybody.

OPERATOR

And our next question will come from Tim Kofay with Breen Capital. Go ahead.

Tim Kofay, Analyst at Breen Capital

Thanks, Lauren. Everybody, getting back to the deposit question and the competition. So I guess first half of the year on the deposit question, growth, you're running kind of low single digits. Is that a reasonable run rate for the full year?

Edward Chaeca, Chief Financial Officer

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 coming three months, two months down the road. So we just have to continue to work. You know, I think the—as I said, the growth in DDA on a year-to-date basis is very encouraging. We'd like to continue to work toward that end for sure.

Tim Kofay, Analyst at Breen Capital

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?

Li Yu, Chairman & CEO

Right now we're running about 95%, bounce around a bit in there, and internally we both feel 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. We think liquidity for us is very important.

Tim Kofay, Analyst at Breen Capital

Right, okay, got it. And then on the allowance, it's running at the low end of kind of the historical range—say six years or so. You know, say everything remains kind of the way it is right now—no changes to really kind of the inputs that determine a provision. At this point, do you feel the need to kind of refill the bucket?

Edward Chaeca, Chief Financial Officer

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 loan?

Nick Pi, EVP CCO

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, Q2 we have a lot of resolutions and credit trend is heading in the right directions—so we do reserve quite a sizable reserve on the Q side as well in terms of covering the current uncertainties regarding inflation, unemployment, all those kind of things. So we believe for the upcoming quarters it should be still approximately the similar level of the reserve at this moment.

Definitely, if there's any changes, we will adjust that right away and adjust our assumptions for the reserve side.

Tim Kofay, Analyst at Breen Capital

Okay, great. And then just my last question 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?

Li Yu, Chairman & CEO

Yes, obviously that will be one of the use-of-capital items that we continue under evaluation going forward.

Tim Kofay, Analyst at Breen Capital

Great. Okay, those are my questions. I appreciate your time. Thank you.

OPERATOR

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.

Li Yu, Chairman & CEO

Thank you so very much. And I hope that we can continue to report results in exercising and owning our expertise.

OPERATOR

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.