Preferred Bank Earnings Call: Profits Strong, Risks Rising

Preferred Bank ((PFBC)) has held its Q4 earnings call. Read on for the main highlights of the call.

Preferred Bank’s latest earnings call painted a picture of a bank delivering top-tier profitability and healthy balance sheet growth, yet navigating through mounting margin pressure and a sizable credit issue that clouds the near-term outlook. Management stressed confidence in its reserve coverage and expressed growing optimism for 2026 loan demand, but acknowledged that rate cuts, stubbornly high deposit costs, and a large classified loan relationship are key headwinds that investors should watch closely.

Strong Full-Year Profitability Anchors the Story

Preferred Bank reported full-year 2025 net income of $134.0 million, or $10.41 per share, with fourth-quarter net income of $34.8 million, or $2.79 per share. Management emphasized that this level of profitability places the bank in the upper tier of the industry. Despite market and rate volatility, the franchise continues to generate robust earnings power, giving the bank flexibility to absorb higher provisions, invest in growth, and handle balance sheet pressures without compromising overall performance.

Loan Growth Accelerates in the Quarter

Loan growth was a standout positive in the quarter, with total loans increasing by $182 million, representing more than 12% growth for the period. For the full year, loans rose 7.3%, underscoring sustained demand across the bank’s lending portfolio. Management noted that this momentum reflects improving borrower sentiment and positions the bank for higher volume heading into 2026, particularly important given that roughly 70% of the loan book is floating rate and sensitive to interest-rate movements.

Solid Deposit Growth Supports Franchise Stability

Preferred Bank delivered quarterly deposit growth of $115 million, or 7.4%, and full-year deposit growth of 7.2%. This balance sheet funding growth is crucial as competition for deposits remains intense, especially from larger banks. The ability to attract and retain deposits at scale supports ongoing loan expansion while limiting the need for more expensive wholesale funding, though management acknowledged that deposit pricing remains a key pressure point for margins.

One-Time OREO Sales Add to Earnings, But Are Non-Recurring

The bank sold two large OREO properties in the fourth quarter, generating a net gain of $1.8 million recorded in noninterest income, with related GAAP reclassifications flowing through noninterest expense. While this transaction provided a roughly $0.20 per share benefit to earnings, management clearly framed it as a one-time event. Investors are encouraged to view these gains as opportunistic boosts rather than a recurring earnings driver.

Loan Demand and Customer Outlook Improve for 2026

Management reported that loan demand is strengthening, and customers are increasingly optimistic about 2026. The bank is budgeting higher loan growth for 2026 than it delivered in 2025, reflecting both an improving economic backdrop in its markets and deeper customer engagement. This growing pipeline is particularly important given the sensitivity of Preferred Bank’s largely floating-rate loan portfolio to future rate moves and credit conditions.

Reserve Coverage Strengthened Through Provisioning

The quarterly provision for loan losses was $4.3 million, driven by loan growth and specific credit issues. Management increased qualitative (Q) factors by roughly five basis points, bringing Q-factor-based reserve coverage to about 42.5%. Executives cited this level as providing comfort that reserves are adequate in light of current risks, especially given the rise in criticized assets and the complications associated with a large classified loan relationship.

Fee Income Establishes a Realistic Baseline

Fee income in the fourth quarter, excluding the one-time OREO gain, was presented as a reasonable baseline heading into 2026, though management suggested it could run slightly below Q4 levels. LC (letter of credit) fees were particularly strong in 2025, supporting noninterest income. The message to investors is that core fee generation is stable but not expected to be a major growth engine, making net interest income and credit costs the primary swing factors for earnings.

Deposit Costs Finally Show Signs of Easing

The bank highlighted an improving trend in deposit costs, with December’s month-end cost of deposits at 3.17% and trending down by roughly 6–7 basis points per month. December’s net interest margin came in at 3.66%, reflecting the full impact of the December rate cut. While funding remains expensive by historical standards, this downward trajectory in deposit costs offers some relief and should help partially offset margin compression as rate cuts filter through the asset side of the balance sheet.

Fed Rate Cuts and High Deposit Costs Pressure Margins

Despite deposit cost improvements, net interest margin declined in the fourth quarter versus the third, primarily due to federal rate cuts hitting a loan portfolio where about 70% is floating rate. This dynamic reduces loan yields more quickly than deposit costs can reset, especially in a competitive market where deposit pricing remains sticky. Management acknowledged that margin pressure is a central challenge and will likely persist in the near term, even as they work to reprice CDs and lower funding costs.

Large Classified Loan Drives Criticized Asset Spike

Criticized assets increased by $97 million in the quarter, mostly stemming from a single large loan relationship totaling roughly $121–$123 million across several loans being moved into classified status. This credit migrated sharply within the quarter and is now a focal point in the bank’s asset-quality narrative. While management expressed confidence that this issue should be resolved over the next couple of quarters, the size of the relationship relative to the bank’s balance sheet is meaningful and has heightened investor attention on credit trends.

Nonaccrual Multifamily Loan Adds to Asset-Quality Pressure

Adding to the asset-quality story, a well-secured multifamily loan of $19.4 million was downgraded to nonaccrual status. An appraisal suggests collateral value of around $49 million, providing substantial coverage, but the nonaccrual designation nonetheless adds to headline risk and pressures asset-quality metrics. The bank’s message is that while collateral support is strong, the credit downgrade reflects conservative risk management in a more uncertain environment.

Borrower Delinquencies and Litigation Complicate Workouts

The large classified loan relationship has experienced slowed interest payments and is involved in litigation with other banks, which complicates the timing and strategy for a workout. These factors increase classification risk and extend the resolution timeline. While management expects to address the issue within a couple of quarters, the combination of payment delinquency and legal complexity introduces additional uncertainty around credit costs and recovery outcomes.

Provision and Expense Volatility Expected to Persist

Fourth-quarter provision expense of $4.3 million reflected both loan growth and specific reserve builds, while noninterest expense included “noise” from OREO-related items and other one-offs. Looking ahead, management expects noninterest expenses to grow in the mid- to high-single digits for the year. Investors should anticipate some ongoing volatility in both provision and expense lines as the bank navigates its credit issues and absorbs higher operating costs in a competitive environment.

CD Repricing and Competitive Pressure on Funding

A key near-term challenge is the scheduled rollover of approximately $1.3 billion in CDs in the first quarter, at a weighted average rate of 3.96%. Management expects these deposits to reprice in the 3.70%–3.80% range, reflecting an effort to lower funding costs while retaining balances amid intense competition from larger banks. This dynamic underscores the delicate balance between protecting margins and defending market share in a high-rate, deposit-sensitive environment.

Share Repurchases Take a Back Seat to Balance Sheet Growth

Preferred Bank executed only nominal share repurchases in October and effectively paused buybacks for the rest of the quarter. Management signaled that the current environment is less conducive to repurchases than last year. Capital deployment is likely to prioritize supporting loan and deposit growth and maintaining balance sheet strength, with buybacks treated as opportunistic rather than strategic in the near term.

Guidance: Margin Headwinds, Growing Loan Demand, and Controlled Costs

Looking ahead, management guided to continued margin pressure as Fed rate cuts reduce asset yields faster than funding costs can reprice. They indicated a roughly 40% beta on interest-bearing deposits and expect ongoing CD repricing to lower costs by about 5–6 basis points per month, with December’s deposit cost at 3.17% and net interest margin at 3.66%. Approximately $1.3 billion of CDs rolling in the first quarter at 3.96% are expected to reprice down to roughly 3.70–3.80%, providing gradual relief. Loan demand is seen strengthening into 2026, and the bank is budgeting higher loan growth than in 2025, supported by a predominantly floating-rate portfolio. On expenses, the bank is targeting a first-quarter run-rate of about $21.5–$22 million and full-year noninterest expense growth in the mid- to high-single digits. Provisioning will remain responsive to credit developments, including the ~$97 million increase in criticized assets, while capital actions like share buybacks and potential M&A will be evaluated opportunistically based on funding and growth needs.

The call ultimately framed Preferred Bank as a fundamentally profitable lender with solid loan and deposit growth and healthy reserves, but operating through a period of compressed margins and heightened credit scrutiny. Management’s confidence in resolving its large classified relationship and its more upbeat view on 2026 demand are positives, yet investors will be watching closely how quickly deposit costs fall, how the classified credits are resolved, and whether earnings can remain in the industry’s top tier amid a challenging rate and competitive backdrop.