Skip to content
    PFBC
    Earnings call· Jun 2026(Q2 FY26)

    Preferred Bank PFBC

    Jul 22, 2026 Source

    Executive summary

    Preferred Bank Q2 FY26 — Strong Loan Origination and Asset Quality Improvement

    Preferred Bank delivered a strong Q2 FY26, driven by significant improvements in asset quality and robust loan origination, which exceeded internal expectations. While the bank maintained a healthy net interest margin, it faces intense competition for deposits and pressure on loan yields amid market uncertainty. Management emphasizes a focus on net interest income growth over margin percentage, navigating a competitive landscape with disciplined lending and a cautious approach to capital deployment.

    Highlights

    5

    • Net income for Q2 FY26 was $33.5 million or $2.78 per share, exceeding internal budget.

    • Non-performing loans were reduced by $70 million, a 41.5% decrease.

    • Criticized loans were reduced by $90 million, a 40% decrease.

    • Loan portfolio increased by $125 million on a net basis, with actual origination efforts being strong.

    • Net interest margin was 3.73%, favorably affected by interest recovery, and the efficiency ratio remained steady at 32%.

    Concerns

    5

    • Stiff competition in deposits is reported nationwide, leading to upward pressure on deposit pricing.

    • The loan market remains very competitive, with pressure on loan yields.

    • Customer hesitation and delays in loan activities due to uncertainty around interest rate movements.

    • Elevated professional services expenses, particularly legal fees, impacted non-interest expense in Q2 FY26.

    • The stock market, particularly AI stocks, presents another level of competition for customer deposits.

    Guidance & targets

    4
    CategoryTargetConfidence
    Net Interest Margin (NIM)
    mid-3.50s
    high materiality
    Medium
    Non-interest expense
    fairly flat to Q2
    medium materiality
    Medium
    Allowance for Loan Losses (ALLL) ratio
    approximately at a similar level
    medium materiality
    Medium
    Share buyback consideration
    will be one of the use of the capital items that was continuous under evaluation going forward
    medium materiality
    Low

    Operational metrics

    13
    Net income
    $33.5 millioncompares favorably with previous quarter and same quarter previous year
    Q2 FY26

    Exceeded internal budget.

    Diluted EPS
    $2.78
    Q2 FY26

    Exceeded internal budget.

    Non-performing loans reduction
    $70 million41.5%
    Q2 FY26

    Part of resolution of troubled assets.

    Criticized loans reduction
    $90 million40%
    Q2 FY26

    Part of resolution of troubled assets, leading to reduced reserve requirement.

    Provision expense
    $1.2 million
    Q2 FY26

    Reduced due to large reduction in classified assets or criticized loans.

    Loan increase (net)
    $125 million
    Q2 FY26

    On a net basis, after accounting for $70 million in sold loans, actual origination effort was strong.

    Loan origination (gross)
    $194 million
    Q2 FY26

    Derived from $125 million net increase plus $70 million in sold loans ($125M + $70M = $195M, rounded to $194M as per transcript's 'closer to $180 million, but in terms of Q3... Actually, $194 million').

    Deposit increase
    $52 million0.8%
    Q2 FY26

    Reflects stiff competition nationwide.

    Cost of total deposits
    3.06%
    June 2026

    Helped by a slight change in mix and decent growth in DDA.

    Cost of interest-bearing deposits
    3.44%
    June 2026

    Reflects competitive deposit environment.

    CDs maturing
    $1.5 billion
    Q3 FY26

    These will likely come back on at a slightly higher rate than 3.80%.

    Loan to deposit ratio
    95%
    Q2 FY26

    Management is comfortable with this ratio; short-term it can rise slightly, but long-term goal is to maintain it for liquidity.

    Remaining non-performing loans for resolution
    $60 million
    H2 FY26

    Scheduled to be resolved in the second half of 2026, but timing is at the mercy of the legal system due to bankruptcy cases.

    Industry KPIs

    10
    MetricValueDetails
    Loans$125 millionUSD
    Deposits$52 millionUSD
    Capital returns—
    Allowance reserves1.22%%
    Net interest income—
    Net interest margin3.73%%
    Net charge offs npls—
    Total operating expenses—
    Provision for credit losses$1.2 millionUSD
    Efficiency ratio operating leverage32%%

    Risks & headwinds

    6
    Stiff deposit competitionongoing

    0.8% QoQ deposit growth

    Mitigation: Focus on improving deposit mix, including DDA growth; acknowledging market realities for deposit costs.

    Competitive loan market and yield pressureongoing

    Market is very competitive; competitors offering much lower rates

    Mitigation: Disciplined approach to take on quality loans that provide necessary returns; turning over more stones to find better yields.

    Customer hesitation and delays in loan activities due to rate uncertaintyQ3 FY26

    Shift from early spring optimism for rate cuts to June uncertainty about rate increases

    Mitigation: Being flexible and taking opportunities as they come; maintaining discipline in loan selection.

    Stock market competition for customer depositsongoing

    Many customers investing excess cash into AI stocks

    Mitigation: Trying best to improve deposit mix; acknowledging that deposit costs are dictated by the market.

    Elevated professional services expensesQ2 FY26

    Legal fees were elevated in Q2 FY26

    Mitigation: Related to working through a large relationship; Q3 expected to be fairly flat to Q2 or slightly better.

    Repricing of maturing CDs at higher ratesQ3 FY26

    $1.5 billion in CDs maturing in Q3 FY26 at 3.80% average rate, expected to reprice higher

    Mitigation: Managing deposit mix and overall funding costs; focusing on NII growth rather than just NIM.

    What to watch in Q3 FY26

    5

    Net Interest Margin (NIM) trajectory

    Q3 FY26
    Current3.60% (adjusted Q2 FY26)
    Targetmid-3.50s

    Why it matters

    NIM is a key profitability metric, and its trajectory will indicate the impact of deposit repricing and loan yield pressures.

    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.

    Q&A highlights

    7

    Asked about loan pricing and the ability to maintain loan yields around 7% given market competition, especially after stripping out interest recoveries.

    Management acknowledged the very competitive market and pressure on yields, but emphasized discipline in taking on quality loans that provide necessary returns. They noted their ability to achieve better yields than peers due to thorough origination efforts.

    “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.”

    asked by Matthew Clark · answered by Li Yu

    2 min read6 chapters

    Detailed Narrative

    01

    Asset Quality Improvement and Provision Expense

    Preferred Bank demonstrated significant improvement in asset quality during Q2 FY26. Non-performing loans were reduced by $70 million, representing a 41.5% decrease, while criticized loans saw a $90 million reduction, or 40%. This substantial clean-up led to a lower provision expense of $1.2 million for the quarter. However, the bank still has three long-term non-performing loans totaling $60 million scheduled for resolution in the second half of 2026, with exact timing subject to legal proceedings.

    02

    Loan Origination and Market Dynamics

    The bank reported strong loan production activities, with a net loan increase of $125 million in Q2 FY26. Accounting for $70 million in sold loans, actual origination efforts were robust, totaling approximately $194 million. Despite this, the market remains highly competitive, with pressure on loan pricing. Management noted a shift in customer sentiment, with optimism for rate cuts in early spring giving way to hesitation and delays in loan activities due to renewed uncertainty about future rate increases.

    03

    Deposit Environment and Funding Costs

    Deposit growth was modest, increasing by $52 million or 0.8% quarter-over-quarter, reflecting stiff nationwide competition. The cost of total deposits was 3.06% in June, with interest-bearing deposits at 3.44%. The bank observed a slight positive shift in deposit mix, with decent growth in DDA helping to manage costs. Looking ahead, $1.5 billion in CDs are maturing in Q3 FY26 at an average rate of 3.80%, expected to reprice slightly higher, contributing to ongoing funding cost pressures. The rise of AI stocks also presents a new competitive front for customer cash.

    04

    Net Interest Margin and NII Strategy

    The reported net interest margin (NIM) for Q2 FY26 was 3.73%, favorably impacted by interest recoveries. On an adjusted basis, stripping out these recoveries, NIM was 3.60%. Management anticipates NIM to reset to the mid-3.50s for Q3 FY26. The bank's philosophy prioritizes net interest income (NII) growth over strictly managing the NIM percentage, viewing NIM as a mathematical output rather than an input, and maintaining discipline in loan selection despite competitive pressures.

    05

    Expense Management and Outlook

    Non-interest expense was relatively flat in Q2 FY26, though management expressed disappointment due to elevated professional services, primarily legal fees, related to working through a large relationship. For Q3 FY26, the expectation is for non-interest expense to remain fairly flat to Q2, potentially improving slightly. The bank acknowledges the general inflationary environment contributing to rising costs across various services.

    06

    Capital and Liquidity Position

    The bank maintains a comfortable loan-to-deposit ratio of approximately 95%, which management is comfortable with in the short term, though liquidity remains a key focus. Capital allocation strategies are continuously evaluated, with share buybacks being a potential use of capital if loan growth does not accelerate as anticipated. The allowance for loan losses ratio stood at 1.22% of total loans in Q2 FY26, deemed appropriate given current credit trends and coverage for economic uncertainties.

    AI-generated summary of the company’s earnings call. Not investment advice.