Preferred Bank Moves $117M Loan to Nonaccrual Amid Borrower's Legal Woes

LOS ANGELES, CA – February 23, 2026 – Preferred Bank (NASDAQ: PFBC) has reclassified a massive $117.6 million loan relationship to nonaccrual status, signaling a severe default by a major borrower and raising questions about credit quality within the regional banking sector. The move, announced today, involves $115.6 million in commercial real estate (CRE) loans and $2.0 million in commercial and industrial loans.

In a statement, the Los Angeles-based commercial bank attributed the downgrade to the borrower's mounting legal and financial troubles. According to the bank, the principals of the borrowing entity are entangled in “several complicated lawsuits with other banks which caused sluggish cash flow and unacceptable payment patterns.” This situation prompted the bank to stop recognizing interest income from the loans, a standard accounting practice for assets considered highly unlikely to be repaid according to their original terms.

Despite the significant size of the loan, Preferred Bank expressed confidence that the issue will not materially harm its financial results. “Based upon the value of the collateral, the Bank believes the resolution of these loans will not result in any significant impact to the Bank’s 2026 earnings,” the company stated, pointing to a substantial equity cushion in the underlying real estate assets.

A Problem Brewing for Months

Today’s announcement did not come without warning signs. The reclassification to nonaccrual is an escalation of a problem that first surfaced on the bank's books in the fourth quarter of 2025. During that period, the entire relationship was downgraded to a “substandard” classification, a regulatory category for assets that are inadequately protected by the current sound worth and paying capacity of the obligor.

Financial disclosures from that period reveal a notable deterioration in asset quality metrics. At the end of 2025, Preferred Bank’s total nonaccrual loans had already surged to $51.3 million, a nearly threefold increase from the $17.6 million reported just three months prior. Concurrently, the bank’s portfolio of “criticized assets”—loans flagged for potential weakness—grew by $97 million in the same quarter. This increase was primarily attributed to the downgrade of what was then described as a single large loan relationship, which appears to be the same one now moved to nonaccrual.

In response to these growing risks, the bank increased its provision for credit losses to $4.3 million in the fourth quarter of 2025, up from $2.5 million in the preceding quarter. While the bank’s overall earnings for 2025 were robust, this specific credit issue drew negative attention from investors, who are increasingly scrutinizing bank balance sheets for exposure to a volatile commercial real estate market.

All Eyes on the Collateral

Preferred Bank’s confidence rests squarely on the value of the five properties securing the $115.6 million real estate portion of the debt. The portfolio consists of two multifamily properties, two neighborhood retail centers, and one larger shopping center. According to the bank, these properties have a combined appraised value of $219.3 million.

This creates an aggregate loan-to-value (LTV) ratio of 52.7%, a figure well below the typical industry threshold of 65% to 75% for commercial properties. A lower LTV suggests a significant equity buffer that could protect the bank from losses even if it is forced to foreclose and sell the properties in a distressed scenario. The individual LTVs on the loans range from a low of 37.6% to a high of 66.7%.

However, a closer look at the portfolio reveals some nuances. The largest single exposure is a $48.5 million loan on a shopping center, which also carries the highest LTV at 66.7%. Critically, its appraisal date of November 13, 2024, is the oldest in the portfolio, predating more recent shifts in interest rates and market sentiment. Recognizing this, Preferred Bank has confirmed that a “new appraisal has been ordered” for this specific property. The results of that updated valuation will be a key factor in determining the bank’s true level of risk.

The other appraisals are more recent, with two conducted in February 2026, one in November 2025, and another in February 2025, providing a more current view of the collateral's worth.

A Bellwether for Broader CRE Concerns

While Preferred Bank's problem is tied to a single, legally troubled borrower, it unfolds against a backdrop of persistent uncertainty in the commercial real estate market. Higher interest rates over the past two years have pressured property valuations and increased borrowing costs, making it more difficult for some owners to refinance debt. While the multifamily sector has remained resilient due to strong housing demand, the retail sector, which includes neighborhood and shopping centers like those in the bank's collateral pool, has faced more uneven performance.

This incident serves as a case study for the challenges facing regional banks, which are often heavily concentrated in CRE lending. The health of these institutions is closely tied to the financial stability of their borrowers and the underlying value of their real estate collateral. The fact that the default was triggered by external legal disputes, rather than a direct failure of the properties themselves, also highlights the complex, non-financial risks that can ripple through the banking system.

For now, Preferred Bank maintains a strong capital position and a history of high profitability that provides a cushion to absorb potential shocks. Its Total Capital Ratio stood at a healthy 15.11% at the end of 2024, well above regulatory requirements. Yet, the market will be watching closely to see how the bank manages the resolution of this significant non-performing asset and whether the value of its collateral holds firm under pressure.