Preferred Bank’s $125M Buyback: A Bold Move to Unlock Undervalued Shareholder Value

Introduction
Preferred Bank’s announcement of a $125 million stock buyback program marks a pivotal moment for shareholders. With the bank’s shares trading at or near undervalued levels, this move signals confidence in its financial resilience and strategic vision. But is this a shrewd capital allocation strategy, or a risky bet in uncertain times? Let’s dissect the numbers.

Financial Health: A Foundation of Strength

Preferred Bank’s Q1 2025 results reveal a solid balance sheet despite near-term headwinds. Key metrics include:

• Robust Capital Ratios: Tangible common equity (TCE) stands at 10.96%, comfortably above regulatory minimums, with a leverage ratio of 11.52%. These figures underscore a fortress-like capital structure.
• Deposit Growth: Total deposits surged by $155.9 million (2.6%) to $6.07 billion, reflecting strong customer trust.
• Asset Quality: Nonaccrual loans totaled $78.9 million, with $65.6 million of these well-secured and unlikely to result in losses. Criticized loans dropped 18.9% to $129.2 million, signaling improving credit health.

The efficiency ratio improved to 35.1%, highlighting effective cost management, while ROE of 15.96% ranks among the highest in regional banks. Even with reduced net interest income (due to nonaccrual loan adjustments and write-offs), Preferred Bank’s core operations remain resilient.

The Strategic Rationale: Buying Back Value

The $125M buyback is a direct response to two critical factors:

1. Undervalued Share Price:
2. With a book value per share of $59.30 (as of March 2025) and a market cap of $1.13 billion, the stock trades at approximately 1.4x book value (assuming ~$86/share). While not deeply discounted, this suggests room for upside if the bank’s performance improves.

4. Excess Capital Allocation:

5. The bank’s liquidity is robust, with $925 million in cash and equivalents, and minimal debt exposure. The buyback allows it to return capital to shareholders while retaining ample flexibility for growth or unforeseen risks.

The buyback also sends a confidence signal to investors: management believes the stock is worth more than its current price and is willing to put capital behind that belief.

Potential Benefits: Boosting EPS and Share Price

The buyback could catalyze two key outcomes:

• Earnings Per Share (EPS) Expansion:
  With 13.1 million shares outstanding, repurchasing $125M in stock at current prices would retire approximately 1.45 million shares. This would reduce shares outstanding by ~11%, directly lifting EPS. For example, if earnings remain flat, diluted EPS could rise to $2.49 from $2.23—a 11.6% increase.

• Share Price Appreciation:
  A buyback reduces the float, potentially tightening supply and driving upward pressure on the stock. Historically, buybacks correlate with 20-30% outperformance in undervalued banks over 12-18 months.

Risks to Consider

No strategy is without risk. Key concerns include:

1. Economic Uncertainties:

2. Tariff policies and geopolitical tensions could dampen loan demand, particularly in trade finance—a key revenue driver.

3. Interest Rate Volatility:

4. A prolonged low-rate environment could further compress net interest margins, though Preferred Bank’s strong fee income (e.g., SBA loan sales) offers a buffer.

5. Credit Quality Deterioration:

6. While criticized loans are declining, any sharp economic slowdown could strain asset quality.

Mitigants:
- The bank’s 1.28% allowance for credit losses and diversified loan portfolio reduce downside risk.
- Deposit growth and cost discipline provide a margin of safety.

Conclusion: A Compelling Entry Point

The buyback underscores management’s belief that Preferred Bank is undervalued and positioned to weather near-term challenges. For investors:

• Buy Now: If the stock trades below $85, the buyback could drive a 20%+ upside within 12 months.
• Hold for Dividend Growth: The $0.75 quarterly dividend (yielding ~0.85%) is safe, with room for increases as earnings stabilize.
• Avoid Overpaying: Wait for dips below $80/share to minimize risk.

Final Take: Preferred Bank’s buyback isn’t just a financial maneuver—it’s a strategic bet on its own future. With a fortress balance sheet and improving metrics, this could be a rare chance to buy a quality bank at a discount. Act swiftly.

This article is for informational purposes only. Investors should conduct their own due diligence before making decisions.