Preferred Bank (PFBC) Q2 2026 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Preferred Bank Second Quarter 26 Earnings Conference Call. All participants will be in a listen-only mode. Please note that this event is being recorded. I would now like to turn the conference over to Jeffrey 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 06/30/2026. With me today from management are Chairman and CEO, Li Yu; President and chief operating officer, Wellington Chen chief financial officer, Edward J. Czajka; Chief Risk Officer, Nick Pi; and Deputy Chief Operating Officer, Johnny Hsu. Management will provide a brief summary of the results, and then we will open 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 2000. 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. A detailed description of these risks and uncertainties, please refer to the 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 would like to turn the call over to Mr. Li Yu. Please go ahead.

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 off $2.78 per 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. Nonperforming 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--criticized loans. The reserve requirement on these items has been reduced. Therefore, our provision expense for the quarter was $1.2 million. Looking ahead, at June 30, we still have problem loans totaling $60 million nonperforming loans of $60 million scheduled to be resolved in the second half of 2026. However, as each 1 of them is involved 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 loan production activities. Loans increased $125 million or on a second-quarter basis. But if you count in that we also made up the $70 million of loans 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 aware nationwide all banks, the entire banking industry is reporting stiff competition in deposits. Going forward, this will also be our focus area. Net interest margin was 3.73%. Favorably affected by the interest recovery. And our efficiency ratio was steady at 32% in 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 am ready for your questions.

And ladies and gentlemen, we will now begin the question-and-answer session. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press Star then 2. And our first question today will come from Matthew Clark with Piper Sandler. Please go ahead.

Hey. Good morning. I guess, first, on the loan yields, nice to see a recovery there. Stripping that out, it looks like loan yields, maybe reset to about 7%, barring, you know, 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 you think there is some incremental pressure there?

I will first let Will 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 are at the mercy of a lot of our competitors that are still out there offering much lower, you know, kind of lower rate that but it just does not make sense. Now having said that, a lot of uncertainties in the market and that is why we wanna make sure that we are disciplined enough to continue to take on the loans that give us some quality loan. Again, quality loans that give us a type of return that we need. To continue our earnings.

Well, Matthew, every bank, every year is crying about loan competition. It has become a standard language nowadays. But we are very fortunate. We are able to, I guess because we turn over more stones, we get our little bit better yields than our peer group. And that is probably can verify that by the call reports then. 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 2 quarters and the roll off, roll on rates?

2 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 are seeing a slight change in the mix of our deposits. We have 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 do not have the fourth quarter roll off.

Okay. that is okay. So, NIM probably resetting back down to the low 3.50s is fair? In the 3 q?

So on an adjusted basis, it was 3.60% for Q2. When you strip out the noise with respect to the interest recoveries, was 3.60%. So, yes, we would expect probably mid-3.50s for Q3.

Okay. And then last 1 for me. Just on the expense run rate, relatively flat this quarter. The outlook there in the second half?

Yeah. We were a little disappointed with respect to non interest expense this quarter, Matthew. Professional services, mainly legal fees, elevated because of the large relationship that we are 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.

that is all. Because, you know, it is--yeah, it is not-- everything start to catch up in cost. Okay? It just gonna simply every same service, same item, It costs maybe more nowadays, you know. Yeah.

Great. Thanks again.

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

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?

Okay. Well, obviously, Q2 was very strong, as Mr. Yu mentioned, without the sale of the 2 notes net growth would have been closer to $180 million But in terms of Q3 Actually, $194 million.

Okay. In any case, and then also, that is after a large payoff. You know, activities. Okay? So I actually the new loan origination was--but you know, things just bouncing around partially affected by interest rate movement in the same level. Okay? I still remember in early spring, k, in springtime, the whole country was anticipating rate cuts. And there is a lot of optimism going forward and people getting into the deal based on that. I mean, in the case of I mean, C&I activity or in the case of real estate based on a new cap rate. They wanted to come into the deal. Then suddenly, things take a change in June. And everybody is talking about, oh, there will be a rate increases in July. Okay? Now with July's current report, where is it? So we see a lot of hesitation on our on the customer side. At least they get 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 lender, their competition. Okay? We think that going forward the third quarter, certainly, we will be a lot tougher than the second quarter. 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 do not know if that answers to your question or not because of that is about all we do all we can do, you know.

No. I appreciate the thoughts on that. Thank you.

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

Hey. Good morning, everybody.

Morning, David. Look. The loan origination trends, it is it is extremely encouraging. I am curious how much of this is really a function of improving demand versus increasing productivity from your team, and it--and just kind of like, where are you seeing How's the pipeline shaping up? And, you know, again, how is demand across your footprint? Well, from my angle, I see in the second quarter, the increase in demand, I just mentioned early in the quarter, there is a lot more optimism in our customers' level than it is today. Regarding the rate of cost they have to pay. So they are obviously that 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?

You wanna take a shot first? Yeah. I will--I have some Yeah, David. The pipeline's still pretty good. I think opportunities are still out there. To review deals, and we are 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 is just--we are seeing more deals right now. Okay. Again, as I mentioned earlier, your loan demand is high out here. But it is the quality loan demand that we are looking for. And every quality loan demand we are more competitive because everybody out there or private lender, they all want those types of loans. Or maybe not private lender. But they are trying to squeeze every penny out, you know, squeeze another 10 bps or maybe 20 or whatever, a little bit here and there. So our production team, they work very hard, keep turning stones, keep turning up, you know, quality loan demand, and then we have to, you know, 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 is profitable and sustainable.

Yeah.

And then, you know, we touched on the deposit pricing competition. I mean, the DDA growth you saw this quarter was great. and that is obviously helped with the funding cost side and on the margin as well. I am 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 have got 1 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 are investing their excess cash into the stock market today. As compared to the old days, that, well, saving in the bank is to make something make them comfortable. But the trend is that everybody is joining the stock market now. So this is another competition level that we are facing right now. And we just we just have to, you know, try our best to increase our to improve our mix of deposit level. Okay? Okay. The cost, you just have to pay whatever is out there, you know. Yeah.

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 have discussed and you know, you look at the margin as an output, not an input. Right? I am curious. Is that still the philosophy and whether you are willing to compete? You know, you talk about paying what you are 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, that this bank has traditionally given up a lot of opportunities that our loan officers bring to us. K? But because many of the loans that brought over does not meet our rate requirement, which because that the deposit we have to we have to pay, we like to believe in being selective, you know, in our rates. K? So I mean, 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. it is hard to get out of it, I guess. We all saw several cases that cause some of the even the bank failure. You know? So we are very careful to try to stay, first of all, hopefully, asset-sensitive, that will keep us deposits and loan rate aligned. Okay? And number 2, select the rate of the loans that we think is proper for us. So when the plays come to us, we become little bit selective. Sometimes. You know?

David, I will 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.

Okay.

And, I mean, again, you are operating with a healthy margin. I am just kind of curious if we are willing to you know, sustain it there, or focused on expanding it as we kind of look beyond that the fourth quarter and beyond. I am sorry. Was that was there a question in there? It was an open ended it was an open ended statement, I guess. Yep.

You know, it is. I mean, we have we have already talked about, you know, there is 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.

that is helpful. Thanks, everybody.

And our next question will come from Tim Coffey with, Janney. Go ahead.

Excellent, everybody. Just back to deposit question on competition. I guess your first half of the year on deposit growth, you are running in kind of low-single digits. Is that a reasonable run rate for the full year?

Well, we hope not. We certainly like to increase that. But as we have talked about before, Tim, you know this, there is no pipeline for deposits. So that is the real challenge and not necessarily knowing what is, you know, what is coming 3 months, 2 months down the road. So, we just have to continue to work. I think that, you know, as I said, the growth in DDA on a year to date basis is very encouraging. We would 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 have got some room to kind of, you know, maybe potentially hold it at the current level. Is there any appetite to take it higher?

Well, right now, we are running about 95%. Okay. 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 would like to keep that ratio. We think liquidity for us is very important for us. Right.

Okay. Got it. And then on the allowance, it is, you know, it is running at the low end of kind of the historical range that you have-- that you 6 years or so. You know, say everything remains 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? I am not--I--I will let I think Nick probably should answer that.

So the question was, do we want to, in terms of, increase the ALL to 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 had a lot of resolutions, and the credit trend is heading on the right direction. So we do have a quite sizable reserve on the Q2 side as well in terms of covering the current uncertainties regarding our inflation as our reserve. And you know, high employment, all those kind of things. So we believe for the coming quarters, it should still stay approximately at the similar level of the reserve at this moment. Definitely, if there is any changes, we will adjust that right away and in order to adjust our assumptions for our reserves side.

Okay. Great. And then just my last question. Has to do with capital. Say loan growth does not pick up the way you anticipate, would you consider getting back into the market for buying back shares?

Yes. Obviously, that will be the that will be 1 of the uses of capital items that we will continuously keep under evaluation. Going forward.

Great. Okay. Those are my questions. I appreciate your time. Thank you. Thanks, Tim.

And this will conclude our question-and-answer session. I would 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 in excess of only our expectation. Okay. Thank you.

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