PFBC Q3 deep dive: deposit competition and credit challenges weigh on results

Commercial banking company Preferred Bank (NASDAQ:PFBC) fell short of the market’s revenue expectations in Q3 2026, with sales falling 7% year on year to $69.7 million. Its non-GAAP profit of $2.73 per share was 1.6% above analysts’ consensus estimates.

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StockStory’s take

Preferred Bank’s third quarter results fell short of Wall Street’s revenue expectations, and the market responded with a negative reaction. Management identified heightened deposit competition and a modest decline in loan balances as key factors behind the softer performance. CEO Li Yu highlighted that “the deposit market is very competitive” and pointed out that many customers are moving funds to U.S. Treasuries, which offer more attractive yields, impacting both deposit growth and costs. The bank also continued to face delays in resolving nonaccrual loans, as court proceedings extended timelines for asset resolution, further pressuring results.

Looking ahead, management’s guidance is shaped by expectations of a stable interest rate environment and a stronger loan pipeline. CEO Li Yu said, “We are very hopeful that in the fourth quarter to have good, solid growth,” citing a more robust loan production pipeline. Management indicated that, as an asset-sensitive bank, Preferred Bank could benefit if interest rates rise further, but ongoing competition for deposits and slow resolution of nonaccrual loans remain uncertainties. Cost control and gradual improvements in non-interest income are also expected to be focal points in the coming quarters.

Key insights from management’s remarks

Management attributed the quarter’s performance to slower loan growth, deposit market headwinds, and persistent credit resolution delays. Several strategic and operational themes emerged from the call.

• Deposit competition intensifies: Management described a challenging environment for deposit gathering, with many customers moving funds to U.S. Treasuries for higher after-tax yields. This trend put pressure on both deposit growth and the cost of funds, as Preferred Bank aimed to balance rate discipline with customer retention.
• Loan growth pipeline solidifying: Loan balances declined modestly this quarter, largely due to unexpected paydowns and subdued new loan production. However, management signaled that the current loan pipeline is “very solid,” and they expect stronger new production in the next quarter as delayed fundings materialize.
• Credit resolution lagging: The bank’s efforts to resolve nonaccrual loans were hampered by court delays, particularly for credits in bankruptcy proceedings. Management explained that, while the pace of new problem loans has slowed, the resolution timeline for existing issues has been pushed into the next year.
• Cost control measures effective: Overhead expenses remained well managed despite inflationary pressures. CFO Edward Czajka attributed the lower non-interest expense to reduced legal fees and lower incentive accruals, both linked to credit costs and profitability.
• Non-interest income a work in progress: Management reiterated its goal of gradually improving non-interest income, but acknowledged that the core business remains reliant on net interest income amid a competitive landscape and limited near-term fee growth.

Drivers of future performance

Preferred Bank’s outlook is shaped by its ability to navigate deposit competition, manage credit quality, and leverage an improving loan pipeline amid stable rates.

• Deposit retention and pricing: Management expects continued competition from both banks and non-bank alternatives, as customers increasingly favor higher-yielding alternatives like Treasury securities. This will require balancing deposit growth with disciplined pricing, potentially impacting funding costs and net interest margin.
• Loan production rebound: The bank anticipates that a stronger loan pipeline and delayed fundings will lead to improved loan growth in upcoming quarters. However, management cautioned that higher rates have made some customers more selective about new projects, introducing some uncertainty to the loan production outlook.
• Credit resolution timing: The pace of resolving nonaccrual and classified loans will remain a key swing factor. While management is optimistic that court proceedings are moving in the right direction, actual timing of asset resolution is uncertain and could affect both earnings and asset quality metrics.

Catalysts in upcoming quarters

In the upcoming quarters, our analysts will be focused on (1) the pace and quality of loan growth as the pipeline converts to funded loans, (2) stabilization or improvement in deposit costs and retention as market competition persists, and (3) timely resolution of nonaccrual and classified loans through court and bankruptcy proceedings. The trajectory of non-interest income and ongoing cost management will also be important markers of operational effectiveness.

Preferred Bank currently trades at $107.08, down from $108.62 just before the earnings. Is the company at an inflection point that warrants a buy or sell? See for yourself in our full research report (it’s free).

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