Preferred Bank NASDAQ: PFBC reported third-quarter 2026 net income of $32.9 million, or $2.73 per share, as deposit growth and continued expense control were partly offset by a reversal of interest income and ongoing delays in resolving nonaccrual loans.
Chairman and CEO Li Yu said the quarter was negatively affected by a $2.1 million recovery of interest income, which reduced reported net interest income and net interest margin. The bank reported a net interest margin of 3.49% for the quarter; excluding the adjustment, Yu said the margin would have been 3.60%.
Yu said Preferred Bank views the interest-rate environment as relatively stable going forward. He added that additional increases in the federal funds rate would benefit the company’s margin because the bank is asset-sensitive.
Deposits Rise Amid Competitive Funding Conditions
Deposits increased by $77 million, or 1.2% from the prior quarter. However, management emphasized that competition for deposits remains intense and could continue into 2027, with banks competing not only against other banks but also non-bank financial institutions and Treasury securities.
Yu said some customers have shifted excess funds into Treasuries. In response to an analyst question, he noted that the tax treatment of Treasuries in California can make their effective yields particularly attractive for certain customers.
Chief Financial Officer Edward Czajka said the bank had just under $1.7 billion of certificates of deposit maturing in the fourth quarter, carrying a weighted-average yield of 3.81%. He said those deposits were expected to roll over at rates between 3.75% and 4%.
Total deposit cost was 3.06% during September, while the spot margin was 3.58%, Czajka said. He added that management expects deposit costs to rise more slowly if interest rates move higher, citing the bank’s focus on pricing discipline. That approach helped reduce total deposit costs by 3 basis points during what he described as a difficult rate environment, though it may have limited deposit growth.
Czajka also said the quarter-end deposit balance provides a reasonable starting point for the fourth quarter. The difference between average deposits and the period-end balance reflected brokered deposits that matured and were renewed later in the quarter.
Loan Balances Decline, but Pipeline Improves
Loans decreased by $14 million during the quarter after the bank moved a large credit into held-for-sale status. Deputy Chief Operating Officer Johnny Hsu said the decline also reflected unexpected loan payoffs and production that was less robust than in the second quarter.
Still, management said it sees a stronger setup entering the fourth quarter. Yu described the current loan pipeline as solid, and Hsu said loans that had experienced funding delays were carrying into the fourth quarter alongside new production.
Hsu acknowledged that higher interest rates have caused some customers to evaluate projects more carefully. At the same time, he said some borrowers are looking for opportunities to pursue potentially better deals in the current market.
Nonaccrual Loan Resolutions Delayed by Court Proceedings
Management said the resolution of nonaccrual loans continued during the quarter but at a slower pace than it had anticipated. Yu said several credits expected to be resolved during the quarter remained tied up in court proceedings, with some resolutions pushed into the third and fourth quarters of next year.
President and Chief Operating Officer Wellington Chen said total classified loans were $177.6 million at the end of September, including $11.5 million of other real estate owned. He said this was about $17.7 million above the nonaccrual balance disclosed by the bank.
Chen said several bankruptcy courts had approved property sales and that the bank hopes to dispose of several large loans during the fourth quarter. The timing, however, depends on court decisions. If delays continue, Chen said Preferred Bank could foreclose and dispose of collateral itself.
Yu said the pace of credit migration had slowed or subsided. He said approximately $20 million of additional credits were classified as substandard but remained on accrual status, while the remainder of the classified exposure had been included in the nonaccrual balance.
Expenses Decline as Bank Targets Further Efficiency
Preferred Bank said it continued to manage overhead costs despite inflationary conditions. Czajka attributed the quarter-over-quarter decline in expenses partly to lower professional-services costs, particularly legal fees associated with problem loans, as well as lower incentive-compensation accruals resulting from lower profitability.
For the fourth quarter, Czajka said management expects noninterest expense to be between $23 million and $24 million.
Yu said the bank is also seeking opportunities to gradually improve noninterest income. Looking ahead, he said management expects a strong economy in 2027 and a relatively stable interest-rate environment, while acknowledging the competitive conditions in deposit gathering and the need to complete credit resolutions.
About Preferred Bank (NASDAQ:PFBC)
Preferred Bank NASDAQ: PFBC is a commercial bank headquartered in Los Angeles, California. Founded in 1991, the bank provides banking and financial services to businesses, professionals and individuals, with a particular focus on commercial banking and relationship-based service.
The bank's principal offerings include commercial and industrial loans, commercial real estate financing, construction and residential real estate loans, and consumer lending. Preferred Bank also provides deposit accounts, cash-management services, online banking and other treasury-management solutions for business and personal customers.
Preferred Bank operates a network of full-service branches in California and New York, serving customers in major metropolitan markets including the greater Los Angeles area, the San Francisco Bay Area and New York City.
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