Preferred Bank: Asset Quality Heals, but the Deposit War Heats Up
Preferred Bank's second-quarter 2026 report is a study in contrasts. On one hand, the regional lender (market cap ~$1.1B) delivered a confident cleanup: nonperforming loans fell 41.5% ($70M) and criticized loans dropped 34% ($90M), with provision expense of just $1.2M. The CEO, Li Yu, framed it as a resolution milestone: “During the quarter, have been reduced $70 million or 41.5%. And likewise, the criticized loans have been reduced by $90 million or 34%.” — Li Yu, Chief Executive Officer (CEO) · 2026-07-22 But the forward-looking tone is more cautious, dominated by deposit competition, margin pressure, and the emergence of an unusual competitor: the stock market itself.
Asset Quality: A Resolved Headache, but With a Cost
The improvement in credit metrics is the quarter's headline. Yet the CFO, Edward Czajka, noted the cleanup is not free: “Professional services, mainly legal fees, elevated because of the large relationship that we are working through right now that Mr. Yu touched on.” — Edward J. Czajka, Chief Financial Officer (CFO) · 2026-07-22 The bank still has nonperforming loans of $60M scheduled for resolution in H2, but timing depends on bankruptcy courts. This is a marked shift from the prior quarters when the large relationship (the $123M loan tied to litigation with other banks) dominated the calls. In the Q1 2026 call, Li Yu described the options:
Now, with the largest credits resolved or on track, the bank's attention has pivoted from credit risk to funding.Obviously, note sale is the quickest and best for us if we can get the price that we want to get.
The New Battlefield: Deposits and the AI Stock Magnet
Deposit growth was a meager $52M (0.8% QoQ), and management attributes the softness to competition across the entire industry. But the most novel twist is the CEO's observation that the stock market — particularly AI names — is siphoning deposit dollars: “And especially the opportunity that AI stock is providing to the general public. We see many, many customers are investing their excess cash into the stock market today.” — Li Yu, Chief Executive Officer (CEO) · 2026-07-22 This is a fresh theme for the company; the stock market keyword appears in the current quarter's top-30 list for the first time in a year. It is not just a local phenomenon — other regional banks are flagging similar funding pressures. KeyCorp's call mentioned deposit growth as a priority, and Fifth Third noted Talent acquisition alongside data-center loans. The CFO's guidance underscores the challenge: total deposit cost was 3.06% in June, with $1.5B of CDs maturing in Q3 at an average 3.80%, likely to reprice higher.
Preferred Bank's response is discipline, not growth at any cost. Li Yu is explicit about the bank's philosophy: “Frankly speaking, that this bank has traditionally given up a lot of opportunities that our loan officers bring to us... we like to believe in being selective, you know, in our rates.” — Li Yu, Chief Executive Officer (CEO) · 2026-07-22 That selectivity, combined with a focus on quality loan demand, is designed to protect the balance sheet, but it also constrains growth. The CFO adds: “We focus more on net interest income growth as opposed to managing to the margin. The margin is simply a mathematical output of how well we execute.” — Edward J. Czajka, Chief Financial Officer (CFO) · 2026-07-22
Margin and Growth: A Softer Outlook
The margin, which came in at 3.73% (3.60% adjusted for recoveries), is expected to compress to mid-3.50s in Q3. As Czajka summarized:
Loan demand remains a mixed bag. The pipeline is "vibrant," but Loan demand is selective, with borrowers hesitating due to shifting rate expectations and aggressive non-bank competition. Li Yu noted: "We see a lot of hesitation on our customer side." This is a departure from the previous quarter's optimism, when the bank was guiding toward high-single-digit loan growth; now the focus is on flexibility and being "at the mercy" of the market.So on an adjusted basis, it was 3.60% for Q2... we would expect probably mid-3.50s for Q3.
The bank's Deposit pricing strategy remains disciplined, but the high cost of funding and the loan-to-deposit ratio near 95% leave limited optionality. Management is not planning to raise the ratio; instead, they will lean on organic deposit growth and, if loan growth stalls, consider share buybacks. The CEO left the door open: “Yes. Obviously, that will be that will be 1 of the uses of capital items that we will continuously keep under evaluation.” — Li Yu, Chief Executive Officer (CEO) · 2026-07-22
What changed at Preferred Bank this quarter is a real turning point. The credit story that dominated the past two years is finally easing, replaced by a funding and margin narrative that is both industry-wide and idiosyncratic. The AI-driven stock market frenzy is an unexpected drain on retail deposits, and the bank's response — disciplined selectivity rather than price war — positions it to maintain quality, but likely at the cost of near-term growth. The next two quarters will test whether the bank can navigate the deposit squeeze without sacrificing its hard-won credit improvements.