Preferred Bank (PFBC) Q1 2026 Earnings Transcript

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Date

Wednesday, April 22, 2026 at 2 p.m. ET

Call participants

• Chairman and Chief Executive Officer — Li Yu
• President and Chief Operating Officer — Wellington Chen
• Chief Financial Officer — Edward Czajka
• Deputy Chief Operating Officer — Johnny Hsu

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Takeaways

• Net Income -- $31.3 million, or $2.53 per share, with this quarter negatively affected by interest reversal on a nonaccrual loan relationship.
• Nonaccrual Loans -- A nine-loan relationship totaling $179 million was placed on nonaccrual; $9.4 million and $48.5 million of loans were sold at par, reducing exposure by roughly 50%.
• Sequential Loan and Deposit Growth -- Loans grew 1.1% and deposits grew 1.2% quarter over quarter.
• Net Interest Margin (NIM) -- 3.57% for the quarter, down from 3.74% previously, attributed to a $3.4 million interest income reversal.
• Deposit Costs -- March deposit cost was 3.10%; cost declines have slowed compared to Q4.
• Certificates of Deposit (CDs) -- $1.35 billion maturing in the quarter at a 3.89% average rate, with new rates expected to be similar or slightly lower.
• Noninterest Expense -- $23.5 million for the quarter; over $1 million attributed to payroll tax from bonus payouts and stock vesting events, expected to normalize to the high $22 million to low $23 million range in Q2.
• Share Repurchases -- Approximately 400,000 shares bought back during the quarter at an average price of $89.90 per share.
• Loan Pricing and Competition -- Management observed “a lot of people pricing below 6% on a fixed-rate basis,” while the company maintains a conservative approach on long-term loan pricing due to rate uncertainty.
• Asset Liability Position -- Roughly 75% of loans are variable rate and 25% are fixed, consistent with previous periods.
• Large Corporate Depositor Strategy -- Interest-bearing checking and money market accounts are increasingly tied to Fed funds to balance interest rate risk.
• Resolution Path -- Nonaccrual loan group resolution is expected primarily via note sales, though foreclosure and bankruptcy processes are in play depending on individual circumstances.

Summary

Management provided new information on their expectations for net interest margin going forward, indicating that the March figure was 3.71%, which they see as representative for the coming period. They said, "With the sale of the note on April 1, we are going to recoup some interest that we reversed out, so that will be a little bit of a tailwind for Q2." The CEO signaled a flexible stance in capital deployment, highlighting a "leaning toward our long-term shareholder viewpoint" and prioritizing security over aggressive buybacks. Management confirmed no significant change in overall balance sheet profile in the past twelve months, despite a shift to more fixed-rate lending since rates peaked in 2023. They noted competitive market conditions are resulting in loan pricing that the bank finds inadequately compensatory, which is likely to influence loan volume and growth strategy.

• Management emphasized an inflection in credit attention due to the nonaccrual relationship, linking the issue to "some irregular withdrawals were found—I guess everybody knows—by Western Alliance Bank; they published an announcement, and the whole thing started to go sour from that point on in the next several months to the point we had to call it nonaccrual, and we have to resolve that immediately," but stated other credit trends remain stable.
• Excess capital deployment will be guided by flexibility and economic conditions rather than set targets for share buybacks.
• Demand for loans is described as slowing, with CEO Li Yu pointing to oil price volatility as a direct factor affecting business activity and loan demand in the short and long term.
• Interest rate sensitivity has shifted to near neutral, enabled by repositioning time deposits and aligning deposit rates to Fed funds, minimizing risk from uncertain future rate moves.

Industry glossary

• C&I Loans: Commercial and industrial loans, typically unsecured and extended to businesses for general corporate purposes.
• TCD Portfolio: Time Certificates of Deposit portfolio, referring to the bank’s book of deposits with fixed maturities and interest rates.
• Nonaccrual: Loans on which the bank has stopped accruing interest because of doubt about full collectability, often due to borrower financial distress.

Full Conference Call Transcript

Evan New: Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the first quarter ended 03/31/2026. With me today from management are Chairman and CEO, Li Yu; President and Chief Operating Officer, Wellington Chen; Chief Financial Officer, Edward Czajka; 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 1995. Such forward-looking statements are based on 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 SEC-required documents the Bank files with the Federal Deposit Insurance Corporation, or FDIC. If any of these uncertainties materialize or any of these assumptions prove incorrect, Preferred Bank's results could differ materially from its expectations 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.

Li Yu: Thank you very much. I am very pleased to report first quarter net income of 31.3 million dollars, or 2.53 dollars per share. This quarter's net income was negatively impacted by the placement of a large relationship into non-performing status. If you recall, in February and March, we issued a press release informing all of you that we placed a nine-loan relationship on a nonaccrual basis. This relationship consists of two C&I loans of a small 2 million dollars, and the rest are all commercial real estate loans in a total amount of 177 million dollars on a nonaccrual basis.

Shortly after the announcement, we were able to sell one loan at par of 9.4 million dollars, and on April 1, we sold another two loans at par for 48.5 million dollars. So as of today, we have effectively reduced the relationship by approximately 50%, and we will continue our progress in the second quarter and in the third quarter. Hopefully, by that time, we should have substantial resolution of this situation. Loan growth was a moderate 1.1% sequentially, and deposit growth was a moderate 1.2% sequentially. Market competition, especially in pricing, has been very severe. It seems to me that the war in the Middle East is trending toward a more stabilized basis.

I assume, hope I do not mislead you; we should concentrate on economic affairs in the ensuing months. Our net interest margin was 3.57% for this quarter, which is down from 3.74% in the previous quarter. Again, the reversal of interest income is the main reason. Since this reversal of interest income is nonrecurring, we are very hopeful, especially when there seems to be no imminent rate movements, that our net interest margin will rebound in the ensuing quarters. Operating overhead, or noninterest expense, has been stable, and we will continue to keep it on a stable basis in the future.

For your information, the Bank has repurchased roughly 400 thousand shares of our common stock for total consideration at roughly 89.90 dollars per share. Thank you very much. I am ready for your questions.

Operator: We will now open the call for questions. We will now begin the question-and-answer session. To ask a question, please press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. We will pause momentarily to assemble our roster. The first question will come from Matthew Clark with Piper Sandler. Please go ahead.

Matthew Clark: Hey, good morning, everyone. Just on the loans held for sale, the move there. I am assuming 48.5 million dollars of that is the two loans that you sold on April 1 at par, but I want to confirm that and also what else is in there. And any pricing thoughts on the other two? On deposit costs, I want to get a sense for where your deposit costs were in March and your thoughts on competition going forward along those lines. Just remind us how much you have in CDs coming due in the quarter and the rate it is rolling off at, and the renewal rate that you expect.

And lastly, on the expense run rate going forward, how should we think about noninterest expense?

Edward Czajka: Yes, you are correct. Part of that 76 million dollars is the two notes sold at par on April 1 totaling 48.5 million dollars. There are two other notes in there that we are actively marketing at this point as well to sell the notes. That is why they are placed in held for sale. On deposit costs, they are coming down, but not at the same velocity they were in Q4, so the pace of decline is starting to slow. For your record, March deposit cost was 3.10% overall. In terms of maturities, we have 1.35 billion dollars maturing in the quarter at a 3.89% rate.

Those will likely be put on at similar rates, maybe a little bit lower, but we are getting close to the point where we are reaching stagnation in terms of the rolling off of CDs to newer, lower-priced CDs. On expenses, we were at roughly 23.5 million dollars for the quarter. Over 1 million dollars of that was heightened payroll tax related to bonus payout and related to stock vesting, which both occurred in the first quarter. As we go forward into Q2, I am looking for something in the high 22 millions to low 23 millions.

Matthew Clark: Great. Thanks again.

Operator: The next question will come from Gary Tenner with D.A. Davidson. Please go ahead.

Gary Tenner: Thanks. Good morning. I wanted to ask on loan growth. The production must have been pretty decent this quarter just to have the defined growth of loans held for investment and loans held for sale. Can you talk about production, competition, and pricing? In terms of the activity levels and quality of credit that you are seeing come through, how does that look today?

Li Yu: Pricing is all over. We are still facing a lot of people pricing below 6% on a fixed-rate basis. We cannot afford to do that. Especially when the movement of interest rates is unclear at this point in time, we have not been getting the rate cuts that were previously forecast. So most people have been, frankly speaking, doing long-term fixed-rate loans lower than we want to do them. On the quality side, we see the quality pretty much in the same situation. I do not think the industry has been loosening on quality. Based on my colleagues, they have been very much controlling themselves in that aspect, and likewise, obviously, we try to do that too.

Gary Tenner: Alright. Thank you.

Operator: The next question will come from Andrew Terrell with Stephens. Please go ahead.

Andrew Terrell: Hey, good afternoon. I want to start on the margin. The 3.4 million dollars interest reversal seems like that is 19 to 20 basis points of margin or so. As that normalizes in 2Q, if we add that back in, it gets closer to, like, a 3.75% type margin, so similar to your fourth quarter. Is that how you are thinking about 2Q? Or how else should we think about trends of the NIM going into 2Q and then throughout the year? And on the note sales, good to see you get out of them in April at a pretty good price.

When you talk about resolution of the remainder of these credits by the third quarter timeframe, is note sales the primary avenue, or are there other plans on the nonperformers?

Edward Czajka: I think you are directionally correct but probably about five basis points high there. The margin for March came in at 3.71%. We are looking for something in that area as we go forward. With the sale of the note on April 1, we are going to recoup some interest that we reversed out, so that will be a little bit of a tailwind for Q2. It might be a little higher than that, but right around the 3.70% number is probably good for us.

Li Yu: Obviously, note sale is the quickest and best for us if we can get the price that we want to get. That is really also a pricing issue for us. Each loan has its different nature—most clearly, the loan-to-value ratio based on appraisal. Normally speaking, when the situation is narrow, you do not get as good pricing as loans with a bigger margin. In the meantime, the other resolution process, which is foreclosure, is still going on. Right now, most of the loans have filed bankruptcy or started that process, so we have to deal with bankruptcy too. It depends on what the bankruptcy judge is awarding.

They might award certain cases more time to sell it or to operate it, to reorganize it. To the extent we can get them immediately, we will resell them. Each property has a different resolution nature—not necessarily very predictable.

Andrew Terrell: Understood. Thank you. And just one more on the competitive backdrop. If I add back in the held-for-sale loans this quarter, it looks like you were tracking mid–single digits. In this environment, is that a decent cadence through the year for loan growth, or are we more likely to see some compression?

Li Yu: About three months ago, I said internally we were guiding ourselves to do high single-digit growth. However, we did not know there would be a war involving Iran. Whether and how much that changes things, we do not know. Plus, the administration is presenting more changes in many aspects that usually relate to banks. We are bouncing backwards and forwards in terms of our internal expectations. We have to be realistic. When wars are going on and petroleum prices go through the roof, you are not going to sustain the same loan demand as in a peacetime situation. All we can do is stay alert, but we still hope this will be a growth year for Preferred Bank.

Andrew Terrell: Great. Thanks so much for taking the questions.

Operator: The next question will come from David Feaster with Raymond James. Please go ahead.

David Feaster: Hey, good morning, everybody. I wanted to follow up on the growth discussion. Could you help break down the dynamics behind the slower growth we are seeing? It sounds like we may be seeing somewhat of a slowdown in demand. Is that a fair characterization? Any commentary on how payoffs and paydowns have been playing into this and where you are seeing the most opportunity within the pipeline to grow loans right now? And then shifting to credit, you have been very active managing credit and worked through a lot of issues. Do you think we are at or near an inflection here? Are you seeing continued migration, or is some of this broader macro?

Is credit at that point yet, or is it still pretty uncertain?

Li Yu: I think demand slowdown is a foregone conclusion. Just think about when oil is going to 100 dollars per barrel. When products are related—various products related—the short-term and long-term effects are hard to measure, and the supply nature also makes it immeasurable. Definitely that is a factor; we may not see it all yet reflected in our economy. That is what we are discussing in-house at Preferred Bank. On credit, I do not know if in the past we have been this busy on credit. This transaction is really the inflection point on current attention.

It has been a group of loans that was performing pretty well until some irregular withdrawals were found—I guess everybody knows—by Western Alliance Bank; they published an announcement, and the whole thing started to go sour from that point on in the next several months to the point we had to call it nonaccrual, and we have to resolve that immediately. Other than that, our total credit picture has remained stable. I can send you the FDIC statistics about our ten-year charge-off ratio; we are probably lower than the average of the banking group. So we are not struggling about credit in the past, but we are struggling about this group of credits right now.

David Feaster: You are still sitting on a lot of excess capital. You have been more active with buybacks. How are you thinking about capital priorities today, especially with the stock moving a bit higher from where you repurchased more recently? And given the current rate backdrop and the market looking at the Fed on pause, has your thinking on managing rate sensitivity shifted at all?

Li Yu: There are two groups of investors. One group represents more active traders. Their idea is that if you have enough capital, you just go do the buyback as much as you can immediately. Then we have another group of long-term investors—probably their position in the Bank hardly moves a lot in the past ten years—and we also have rating agencies. Both of them seem to say, you need to play it safe on your capital. Look at the future economy, look at your earnings focus, and determine on a flexible basis what you can do year by year. Our Board decided security is above all. So we are leaning toward our long-term shareholder viewpoint.

On rate sensitivity, my feeling is that within the next few rate moves, Preferred Bank is near neutral in asset sensitivity, particularly because of a lot of the time deposits—our TCD portfolio. Under the current status, where the rate is not moving, actually our TCD rate we are paying is slowly improving each quarter, albeit very slowly because of market competition. We are not fearful about the economy yet. With all the things happening—war is one of them—what will that do to our economy? Are we going to have a recession ahead of us, low growth, or high growth? This question is puzzling almost everyone at this point in time because of a lot of uncertainty.

So this year, the challenge is, in my opinion, to stay flexible.

Edward Czajka: Similarly, we have not really changed much in terms of the balance sheet profile in the last twelve months. Since we hit the higher rates in 2023, we started doing more fixed-rate loans. The percentage between fixed and variable on the book is about the same as it has been—about 75/25 variable to fixed. Along with that, we try to get more and more of our large corporate deposit accounts—interest-bearing checking and money market—tied directly to Fed funds. To the extent we can tie them to Fed funds, it makes our asset-liability matching, as Mr.

Yu said, closer to neutral than the asset sensitivity we had going into 2021–2022 when we were highly asset sensitive and took advantage of all the rate hikes. We are kind of on a pause in terms of changing the balance sheet and want to keep it where it is right now, with flexibility. If this war continues and inflation creeps up, we may not be looking at rate cuts as the next rate change from the FOMC. We want to stay flexible, and what we have always done is keep both sides of the balance sheet short, and that way we can react to anything.

David Feaster: That is helpful. Thank you.

Operator: This will conclude our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Li Yu: Thank you so much for your interest in Preferred Bank. We hope what we have described today is our roadmap for the next few quarters and that we can produce even better financial results in the next period of time. Thank you very much.

Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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