KBRA Affirms Ratings for Preferred Bank

KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for Los Angeles, California-based Preferred Bank (NASDAQ: PFBC) (“the bank”). The Outlook for all long-term ratings is Stable.

Key Credit Considerations

Preferred Bank’s ratings remain anchored by its consistently strong profitability metrics, highlighted by FY25 ROA of 1.84%, which continues to benefit from a high-yielding loan portfolio and lean cost structure associated with the bank’s branch-light model. Although the margin compressed during 2025 as rate cuts flowed through a still asset sensitive balance sheet and deposit costs remained comparatively high, PFBC generated a robust NIM of 3.81% as the bank grew both loans and deposits by ~7% respectively. We also note that earnings expectations entering 2026 have remained healthy, though we acknowledge that PFBC remains firmly spread-driven, with fee income still modest at 5% of revenues, leaving earnings durability somewhat more sensitive to rate cuts than similarly rated peers.

Conversely, the funding profile remains a rating constraint, as time deposits represented 54% of deposits at YE25, and uninsured deposits approximated 50% of total deposits. The bank has, nonetheless, continued to manage funding prudently, including ongoing use of reciprocal deposits, maintenance of a sizable liquidity position, and selective repricing actions that brought the average cost of total deposits down to 3.37% for FY25 and to a spot 3.17% in December 2025. While PFBC’s predominantly jumbo CD deposit base has historically proven relationship-oriented, and deposit growth remained positive through 2025, the franchise still operates with above peer concentration on both sides of the balance sheet, and the funding mix leaves it more exposed to persistent deposit competition. Despite the concentration on the deposit side, we believe that the bank maintains adequate liquidity management, including an abundant cash and cash equivalents position of $827 million, or 11% of total assets. Furthermore, combined with unencumbered securities and off-balance sheet contingent funding sources, total available liquidity is considered adequate at roughly 73% of uninsured deposits.

Asset quality metrics have somewhat normalized, though current issues remain concentrated in a handful of credits rather than reflecting broad-based deterioration, in our view. After resolving the two large CRE nonaccruals that drove the 1Q25 spike in NPAs, the bank downgraded a ~$123 million relationship in 4Q25 tied to complex litigation involving the borrower’s principals and other banks. In February 2026, PFBC moved the ~$116 million real estate portion and ~$2 million C&I portion to nonaccrual due to sluggish cash flow and unacceptable payment patterns. With that said, the secured real estate exposure is backed by five income-producing properties with a blended LTV of ~53%, and management has taken no specific reserve on that secured piece while fully reserving the small unsecured portion and expects the majority to be resolved by 2H26. We view contemporary asset quality issues as central to ratings consideration, but also as largely idiosyncratic and mitigated by strong collateral and first lien positioning. Moreover, a separate ~$20 million multifamily nonaccrual also appears well secured, and management does not expect material loss content there. Still, the late-2025 downgrade underscores the volatility that can emerge from PFBC’s comparatively chunky relationship sizes and elevated investor real estate concentration, particularly for a bank of its size.

In our view, capital remains adequate in the context of strong pre-provision earnings and historically conservative collateral-based underwriting, though the relatively more capital-intensive balance sheet and concentration in higher risk-weighted assets necessitate maintenance of capital ratios at or above the current range. PFBC’s regulatory CET1 ratio (10.9% as of YE25) has generally lagged peer averages, while the TCE ratio (10.1% as of YE25) is viewed more favorably. We also expect capital deployment to be somewhat more conservative near term as management balances organic growth and shareholder returns in the context of elevated problem asset levels.

Overall, KBRA continues to acknowledge PFBC’s differentiated business model, including its organic growth strategy, high-touch relationship model, and disciplined operating execution have supported above-peer profitability over time, and management has continued to reposition the balance sheet away from its earlier peak asset sensitivity. At the same time, PFBC’s comparatively high loan yields and strong earnings profile are achieved with a business mix that carries somewhat more concentration and relationship size risk than a typical community bank, which, in our view, is acceptable at the current rating level so long as existing problem assets resolve broadly as expected and meaningful loss content does not emerge.

Rating Sensitivities

Barring an exogenous event, a rating upgrade is unlikely. Conversely, rating pressure would most likely develop if the current problem asset resolution timeline extends materially beyond expectations, if meaningful loss content emerges from the litigation-driven relationship or broader credit migration such that earnings become more volatile, or if consolidated regulatory capital ratios decline to, and are maintained at, levels below the current range.

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