Preferred Bank Posts $32.9 Million Profit as Net Interest Margin Narrows to 3.49%
Key Facts
Preferred Bank said on October 23 that net income was $32.9 million, or $2.73 per diluted share, in the third quarter of 2026, down $3.0 million from the same period in 2025. The decline came as net interest income before provision for credit losses fell to $66.7 million, down $4.6 million from a year earlier. Net interest margin narrowed to 3.49%, from 3.73% in the second quarter and 3.92% a year earlier. The bank attributed much of the quarter-over-quarter change to an interest income reversal in the third quarter, after a recovery in the previous quarter. The bank’s shares closed at $106.72 on October 23, according to EL7 data.
The chief executive said the reversal of $2.1 million in interest income in the third quarter, compared with a recovery of $2.9 million in the second quarter, was the main factor behind the difference in margin between the two periods. The reversal followed the transfer of a $56.7 million loan and four other loans totaling $13.5 million to nonaccrual status. The bank said the move contributed to the decline in net interest income, which fell from $71.3 million in the third quarter of 2025 to $66.7 million in the latest period. The chief executive said, "The variance is largely due to the reversal of $2.1 million in interest income in the third quarter and the recovery of $2.9 million in interest income in the second quarter." In addition, the coupon on subordinated debt rose to 6.44% in the third quarter after switching from a fixed to a floating rate on June 16, compared with 3.375% before the change; the bank said the increase had a smaller effect on margin compression.
The nine-month comparison presents a different picture from the weakness in the latest quarter: net interest income rose 0.6% to $202.014 million in the period ended September 30, 2026, from $200.842 million in the same period of 2025. Noninterest income also increased to $5.0 million in the third quarter, from $3.7 million a year earlier. The bank attributed the increase mainly to a $431,000 gain from the call of an investment security and a $748,000 rise in letter of credit fees. The operating efficiency ratio was 30.9%, compared with 32.3% in the second quarter and 28.7% in the third quarter of 2025. This reflects an improvement in the ratio from the previous quarter, while it remained above its level a year earlier.
In asset quality, nonperforming loans and loans 90 days or more past due and still accruing interest totaled $109.4 million on September 30, excluding loans held for sale. The total was $98.9 million on June 30 and $51.3 million at the end of 2025. The provision for credit losses was $2.1 million, while the allowance coverage ratio for loans held for investment rose to 1.26% from 1.22% in the previous quarter. The bank said the average loan-to-value ratio in its portfolio of troubled commercial real estate loans was 60.8%, and that it had identified no material expected losses in the portfolio. The figures reflect an increase in loans under the specified measure since the end of last year, alongside a slight quarterly rise in the coverage ratio.
Settlements for several loans the bank had expected to complete during the quarter were delayed after becoming tied to bankruptcy court decisions; the bank said the settlements could move to the fourth quarter of 2026 or the first quarter of 2027. On business conditions, the chief executive said the bank sees a stronger loan pipeline and hopes it will lead to good growth in the fourth quarter. He added that the latest Federal Reserve rate increase could support net interest margin because the bank’s balance sheet is asset-sensitive. Management, however, expected deposit competition and market conditions to persist through 2027. The chief executive said, "It is very likely that deposit competition and market conditions will continue through 2027."