Preferred Bank NASDAQ: PFBC reported fourth-quarter 2025 net income of $34.8 million, or $2.79 per share, as management pointed to stronger loan demand but continued pressure on net interest margin tied to Federal Reserve rate cuts and still-elevated deposit costs.
For the full year, Chairman and CEO Li Yu said the bank earned $434 million, or $10.41 per share, adding that the company’s profitability “is believed to be among the top tier of the banking industry.”
Net interest margin pressured by rate cuts and deposit competition
Yu said the bank’s net interest margin declined from the third quarter, primarily due to federal rate cuts. With roughly 70% of the loan portfolio in floating-rate loans, the rate changes reduced loan interest income, while deposit costs “remained stubbornly high,” he said.
Chief Financial Officer Edward Czajka provided additional detail during Q&A, saying the net interest margin in December was 3.66%, “slightly below that of the quarter,” reflecting the full impact of the December rate cut. Czajka also said total cost of deposits was 3.17% in December and has been trending down by roughly six to seven basis points per month.
Analysts asked about deposit betas and whether deposit repricing would improve if additional Fed cuts occur. Czajka said the path will depend not only on rates but also on competitive pressure for deposits, which management described as “very, very strong.” The bank expects a continued pattern of CDs rolling off and coming back on at lower rates, though Czajka noted that new CD rates have not declined as much as management expected given the Fed’s actions.
Loan and deposit growth improved, with focus on commercial lending
Preferred Bank posted quarterly loan growth of $182 million, which Yu described as “over 12%,” alongside deposit growth of $115 million, or 7.4%. For the year to date, Yu said loan and deposit growth were 7.3% and 7.2%, respectively.
Looking to 2026, Yu said loan demand is strengthening, particularly in commercial real estate and C&I lending, and the bank is budgeting for higher growth than in the prior year—while cautioning that policy shifts could influence outcomes. When asked whether deposit growth would be targeted at a similar pace to loan growth, management agreed that was a fair assumption given the bank’s loan-to-deposit considerations.
On the funding side, Czajka said the bank has about $1.3 billion in CDs maturing in the first quarter at a weighted average rate of 3.96%, while new CDs are currently pricing around 3.70% to 3.80% on average. Management also commented on competitive dynamics, noting that money-center banks have been actively promoting CDs in the bank’s market, complicating efforts to bring deposit costs down while still growing balances.
Credit: criticized assets increased on large relationship downgrade
Yu said non-performing assets declined slightly in the quarter, but criticized assets rose by $97 million. He attributed the increase primarily to moving a “large nine-loan relationship” into classified status.
During the Q&A, management discussed a large relationship described as roughly $123 million and said it is among the bank’s larger relationships. Yu said the borrower is late on payments and experiencing issues with other banks, but he emphasized that the underlying properties “still have value.” Management said the bank’s preferred path is for the customer to refinance or resolve the situation through alternative financing, but it is prepared to pursue foreclosure if necessary.
Yu said the bank believes the commercial real estate market remains “very stable” compared with the downturn periods of 2008 through 2012, and suggested the loans were “fundamentally” and “reasonably underwritten.” On timing, Yu said the bank’s internal goal is to have a “good portion” of the relationship issues “resolved sometime within two quarters,” with Chief Risk Officer Nick Pi calling that “the goal where we’re heading.”
Management also addressed a well-secured multifamily loan that was downgraded to non-accrual, identified on the call as a $19.5 million loan. The bank said an updated appraisal valued the property at $49 million, higher than a prior appraisal, and management expressed the view that the borrower has an incentive to resolve the situation given the difference between the appraisal value and the loan balance.
For the quarter, Yu said the loan loss provision was $4.3 million. In response to questions about reserve adequacy, management said the quarter’s provision reflected multiple factors including loan growth and specific reserves on other loans. Management also said it adjusted qualitative factors, including increasing by five basis points across the real estate segment due to credit trend movements, and stated that qualitative factors represented 42.5% of the total reserve. The bank said it believes its reserves “should be more than enough to cover our credit situation.”
OREO sales boosted non-interest income; fee income baseline discussed
Yu said the bank sold two large other real estate owned (OREO) assets during the quarter, producing a net gain of $1.8 million that was recorded in non-interest income. He added that a sale that resulted in a loss was recorded in non-interest expense, which he said reflected GAAP presentation.
When asked whether the OREO gains affected quarterly EPS, management agreed with an analyst’s estimate that the after-tax impact was about $0.20 per share (implying roughly $2.59 per share excluding the gain). Management also said one of the two OREO sales included buyer financing, while the other was an all-cash sale, leaving the bank with a smaller loan exposure tied to one of the properties.
On outlook for fee income in 2026, management said the fourth-quarter level excluding the one-time OREO impact is a reasonable baseline, though it noted letter of credit fee income was “very, very strong” and may be difficult to reproduce exactly.
Expense expectations, capital actions, and M&A view
On expenses, Czajka said the bank expects first-quarter non-interest expense to run around $21.5 million to $22.5 million, adding in a later exchange that expenses are expected to rise through the year and that there could be some additional OREO-related costs given remaining smaller properties. For the full year, management said a mid- to high-single-digit non-interest expense growth rate is reasonable.
Regarding capital actions, management said it did not repurchase shares during the quarter, though it did conduct a nominal amount of repurchases in October. Yu said the bank’s ability to repurchase shares in 2026 will depend on the “total picture,” particularly loan growth and deposit conditions, and suggested the environment is “not quite as conducive” to repurchases as last year.
On mergers and acquisitions, Yu said the bank has reviewed a few potential deals, but pricing expectations have not been satisfactory. He said the bank will continue to evaluate opportunities as they arise.
In closing remarks, Yu said the bank expects to work through its credit challenges over the next six months while maintaining normal operations, and said management continues to look ahead to 2026 as a potential growth year, barring sudden shifts in government policy.
About Preferred Bank NASDAQ: PFBC
Preferred Bank NASDAQ: PFBC is a California-chartered commercial bank headquartered in Los Angeles. The institution offers a full range of banking products and services to businesses and individuals, with a particular emphasis on commercial real estate lending, business banking, treasury management and deposit accounts. Preferred Bank operates through branch offices across Southern California and national loan production offices in major U.S. markets.
The bank's core lending portfolio focuses on commercial real estate acquisition, development and investment properties.
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