Preferred Bank Q3 FY2026 earnings call

• Asset Quality Improvement: Significant reduction in troubled assets with NPLs down 41.5% and criticized loans down 34%. Provision expense was low at $1.2 million due to reduced reserve requirements on classified assets. Three remaining NPLs totaling $60 million are pending resolution in H2 2026, subject to legal proceedings.
• Loan Origination & Production: Strong origination activity despite market headwinds. Management emphasized a disciplined approach to securing high-quality loans that meet yield requirements, actively competing against non-bank lenders and other banks.
• Deposit Strategy: Acknowledged stiff competition in deposits industry-wide. Growth was driven partly by an improved mix toward Demand Deposits Accounts (DDA), which helped control overall deposit costs. Management recognizes the challenge of retaining deposits as customers shift excess cash to the stock market, particularly AI-related equities.
• Operational Discipline: Maintained a tight efficiency ratio of 32%. Management highlighted the need to be selective in loan pricing, avoiding low-rate loans that could burden the balance sheet, while focusing on sustainable earnings quality.

As Preferred Bank is a specialized banking institution, specific product segment breakdowns (e.g., Commercial vs. Consumer) are not disclosed in the transcript. The overall financial performance for Q2 2026 is as follows:

• Net Income: $33.5 million ($2.78 per share), exceeding internal budgets and previous year/quarter comparisons.
• Net Interest Margin (NIM): 3.73%, positively impacted by interest recoveries.
• Efficiency Ratio: Steady at 32%.
• Loan Growth: Increased by $125 million (2% quarter-over-quarter); however, net growth excluding the sale of two notes was approximately $194 million.
• Deposit Growth: Increased by $52 million (8% quarter-over-quarter).
• Non-Performing Loans (NPL): Reduced by $70 million (41.5%).
• Criticized Loans: Reduced by $90 million (34%).

• Net Interest Margin (NIM): Expected to normalize to the mid-350s range in Q3 2026 after stripping out one-time interest recoveries that boosted Q2 results.
• Loan Growth: Outlook for Q3 is more challenging than Q2 due to customer hesitation regarding interest rate uncertainty (potential hikes vs. cuts) and increased competition from non-bank lenders. Recovery or stabilization in Q4 remains uncertain and dependent on market conditions.
• Non-Interest Expense: Expected to remain flat or slightly better than Q2. Elevated professional services (legal) fees in Q2 related to large asset resolutions are expected to subside, though general inflationary pressures on service costs persist.
• Capital Allocation: Share buybacks remain a potential use of capital if loan growth does not accelerate as anticipated, but this is under continuous evaluation.

• Legal & Resolution Risk: The timing for resolving three remaining $60 million non-performing loans is dependent on external bankruptcy proceedings and the legal system, creating uncertainty for H2 2026.
• Market Competition: Intense competition from both traditional banks and non-bank lenders for high-quality loan deals, pressuring yields and requiring aggressive pricing strategies.
• Deposit Retention: Significant risk of deposit outflows as customers divert funds into the equity market (specifically AI stocks) rather than holding them in bank accounts, complicating core deposit growth efforts.
• Interest Rate Volatility: Customer hesitation in deal-making due to conflicting signals on Fed rates (cuts vs. hikes) has slowed loan pipeline velocity and affected real estate and CMI transaction activity.
• Inflationary Pressures: Rising costs for professional services and general operational inputs continue to impact non-interest expenses.

Q: Matthew Clark asked about loan yield sustainability given competitive pricing pressure and deposit cost trends.

A: Wellington Chen noted that while market competition forces banks to squeeze every basis point, they maintain discipline to ensure loan quality and adequate returns. Li Yu added that the bank’s proactive approach ('turning stones') yields better results than peers. Regarding deposits, CFO Edward Czajka reported June deposit costs were controlled via DDA growth, but maturing CDs will likely reprice higher, potentially compressing NIM to the mid-350s in Q3.

Q: Gary Tenner queried the outlook for loan growth in H2 2026 given strong Q2 performance.

A: Management explained that Q2 origination was robust, but Q3 faces headwinds from customer hesitation due to interest rate uncertainty (shifts from anticipated cuts to potential hikes) and aggressive non-bank lender competition. While the pipeline remains vibrant, deal execution has slowed. Management expects Q3 to be tougher than Q2, with recovery in Q4 depending on market flexibility and opportunity capture.

Q: David Feaster asked whether management prioritizes Net Interest Income (NII) growth over margin expansion and how they handle deposit competition.

A: Management confirmed their philosophy focuses on NII growth, viewing margin as a mathematical output of execution rather than a target to manage aggressively. They avoid sacrificing margin for volume by being highly selective on loan rates, refusing low-cost loans that don't meet return hurdles. They also acknowledged the difficulty of driving core deposit growth as customers move cash to the stock market (AI stocks), forcing them to accept prevailing market rates to retain funds.

Q: Tim Coffey asked about the loan-to-deposit ratio trajectory and whether the bank would consider share buybacks if loan growth slows.

A: Li Yu stated the loan-to-deposit ratio is currently ~95%, which management considers comfortable for liquidity reasons, with no immediate appetite to significantly increase it. Regarding capital, he confirmed that share repurchases are a valid option for deploying excess capital if loan growth opportunities do not materialize as expected, though this is evaluated continuously.