Preferred Bank(PFBC)Q2 2026 法說會逐字稿

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. For a detailed description of these risks and uncertainties, please refer to the required documents the Bank files with the Federal Deposit Insurance Corporation. 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, or $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%. Likewise, the criticized loans have been reduced by $90 million, or 34%. With the large reduction in classified assets and 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 nonperforming loans of $60 million scheduled to be resolved in the second half of 2026. However, each of them is involved in its own bankruptcy proceeding; the exact timing of the resolution will be at the mercy of our legal system. This quarter, we had satisfactory loan production activity. Loans increased $125 million on a quarter basis, but if you count that we also made up the $70 million of loans we sold, the actual origination effort was quite good. On the deposit side, deposits increased $52 million, or 0.8% on a quarter basis. We are aware that nationwide all banks and the entire banking industry are reporting stiff competition in deposits. Going forward, this will also be our focus area. Net interest margin was 3.73%, favorably affected by interest recoveries. 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. 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 additional recoveries. Any comments on loan pricing—whether you can hold that yield if the Fed stays on hold, or do you think there is some incremental pressure there?

I will first let Will answer that.

Well, the market is very competitive. We try to squeeze every 10 basis points, maybe 25 basis points, out of each transaction, and we are at the mercy of a lot of competitors that are still offering much lower rates. Now having said that, there are a lot of uncertainties in the market, and that is why we want to make sure that we are disciplined enough to continue to take on loans that give us quality and the type of return that we need to continue our earnings.

Well, Matthew, every bank every year talks about loan competition. It has become standard language nowadays. But we are very fortunate—we turn over more stones and get a bit better yields than our peer group. You can probably verify that by the call reports.

Great. And then on the deposit pricing side, it sounds from the release that there was some upward pressure on deposits throughout the quarter. Do you have the cost of deposits for 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?

Matthew, you threw me a curveball there. First off, the cost of deposits—total deposits was 3.06% as of the month of June. The 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 a slight change in the mix of our deposits. We have seen 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%. I do not have the fourth quarter roll-off figure.

Okay. So NIM probably resetting back down to the low 3.50s is fair in Q3?

On an adjusted basis, it was 3.60% for Q2 when you strip out the noise with respect to the interest recoveries. 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. What's the outlook there in the second half?

We were a little disappointed with noninterest expense this quarter, Matthew. Professional services, mainly legal fees, were elevated because of the large relationship that we are working through right now that Mr. Yu touched on. In terms of going forward, I would say Q3 is going to be fairly flat to Q2 and might be a little better.

Everything is starting to catch up in cost. The same services and items just cost more nowadays.

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 have a fairly constructive outlook for the back half of the year, if I interpreted that correctly. Could you talk about expectations around that?

Well, Q2 was very strong, as Mr. Yu mentioned. Without the sale of the two notes, net growth would have been closer to $180 million. In terms of Q3—actually, we recorded $194 million.

In any case, that was after a large payoff activity. The new loan origination was good, but activity bounces around partially affected by interest rate movements. In early spring, the country was anticipating rate cuts and there was a lot of optimism; people got into deals based on that. In the case of C&I activity or real estate, they wanted to come into deals. Then suddenly things changed in June and there was talk about rate increases in July. With that change, we see a lot of hesitation on the customer side—deals get delayed or do not move forward as fast. Also, there is an increased level of activity from nonbank lenders and competition. Going forward, the third quarter will certainly be tougher than the second quarter. Whether it will recover in the fourth quarter, we just have to be flexible and take opportunities as they come. That's about all we can do.

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. The loan origination trends are encouraging. I'm curious how much of this is a function of improving demand versus increasing productivity from your team. Where is the pipeline shaping up and how is demand across your footprint?

The pipeline is still pretty good. Opportunities are out there; we continue to review deals and are looking at many transactions. Not all of them make sense from a pricing standpoint, but the pipeline remains vibrant.

We are seeing more deals right now. Loan demand is high, but we are focused on quality loan demand. For every quality loan, we become more competitive because everyone—private lenders and others—want those types of loans and try to squeeze another 10 or 20 basis points. Our production team works very hard, keeps turning stones and finding quality loan demand. We have to be disciplined and selective. We always try to build a loan portfolio that is profitable and sustainable.

Yes.

You touched on deposit pricing competition. The DDA growth you saw this quarter was great and helped funding cost and margin. How do you think about your ability to drive core deposit growth going forward?

Improving deposits is a mandate within our internal operations, although everybody is doing the same. Another factor affecting us is the stock market, especially the opportunity AI stocks are providing to the general public. Many customers are investing excess cash into the stock market today rather than leaving it in the bank. This is another level of competition we face. We will try our best to improve our deposit mix, but you have to pay whatever it costs in the market.

A philosophical question: How do you think about net interest income growth relative to the margin? In the past you've said margin is an output, not an input. Is that still the philosophy, and are you willing to compete on pricing and sacrifice some margin to drive NII growth? Help us think through the margin trajectory in this rate environment.

Frankly, this bank has traditionally given up many opportunities that our loan officers bring to us because many loans do not meet our rate requirements given what we have to pay for deposits. We like to be selective in our pricing. Low-rate competition is never our answer to every situation; if you do too much of it, you load your balance sheet with low-rate loans and it is hard to get out of. We have seen cases that caused bank failures. We try to stay asset-sensitive to keep deposit and loan rates aligned, and we select loan rates that are proper for us. When opportunities come, we are a bit selective sometimes.

David, as we've discussed many times, we focus more on net interest income growth as opposed to managing to the margin. The margin is a mathematical output of how well we execute.

Okay.

And again, you are operating with a healthy margin. I'm curious if you are willing to sustain it there or focused on expanding it beyond the fourth quarter. Sorry—was that a question or an open-ended statement? It was an open-ended statement, I guess. Yep.

There is a differential in loan yields on payoffs versus new originations. Pricing is tight and deposit pricing is difficult. Those factors point to some compression in the margin going forward and probably 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 the deposit question on competition. Your first half of the year on deposit growth is running in low-single digits. Is that a reasonable run rate for the full year?

We hope not. We would certainly like to increase that, but as we've talked about before Tim, there is no pipeline for deposits. That is the real challenge—not necessarily knowing what is coming two or three months down the road. We just have to continue to work. Growth in DDA year-to-date is encouraging, and we'd like to continue toward that end.

Okay. How should I think about your loan-to-deposit ratio? It seems like you have room to potentially hold it at the current level. Is there appetite to take it higher?

Right now we are running about 95%, which bounces around a bit. Internally we feel comfortable with that level. Short term we can let it rise a little, but long term we'd like to keep that ratio. Liquidity is very important for us.

Got it. On the allowance, it is running at the low end of the historical range the past six years or so. If everything remains the same, do you feel the need to refill the bucket?

I will let Nick answer that.

For Q2 our ratio is 1.22% of total loans. Based on the current credit quality trend, we had a lot of resolutions in Q2 and credit trends are heading in the right direction. We believe we have a sizable reserve in Q2 covering current uncertainties such as inflation and employment. We believe the reserve should stay approximately at a similar level in the coming quarters. If there are changes, we will adjust our assumptions and reserves immediately.

Great. Last question: if loan growth does not pick up as anticipated, would you consider getting back into the market for buybacks?

Yes. That will be one of the uses of capital we will continuously keep under evaluation going forward.

Great. Those are my questions. I appreciate your time. Thank you.

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. I hope that we can continue to report results in excess of our expectations. Thank you.

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