Preferred Bank Navigates Headwinds with Resilient Balance Sheet in Q1 2025

Preferred Bank (PFBC) delivered a mixed but cautiously optimistic set of results for the first quarter of 2025, balancing strong capital metrics and deposit growth against headwinds from nonaccrual loans and macroeconomic uncertainty. While net income dipped modestly to $30.0 million, the bank’s robust asset quality and strategic focus on risk management underscore its resilience in turbulent conditions.

Financial Performance: A Dip Amid Challenges

Net income of $30.0 million, or $2.23 per diluted share, marked a $197,000 sequential decline from Q4 2024 and a $3.4 million year-over-year drop. The primary drivers were a $2.8 million reduction in interest income due to nonaccrual loans and a $208,000 interest reversal linked to a wildfire-damaged loan. A $1.3 million write-down on an OREO property further pressured earnings. Net interest income fell to $62.7 million, with the net interest margin contracting to 3.75%—down from 4.06% in Q4 2024—as loan yields softened.

Asset Growth and Loan Dynamics

Total assets surged to $7.1 billion, bolstered by a $155.9 million deposit increase to $6.07 billion. Loan balances dipped slightly to $5.63 billion, reflecting a cautious stance in the face of trade policy uncertainty. While 2024 saw 7% annual loan growth, Q1’s modest contraction underscores lingering hesitancy among borrowers. Management emphasized that import tariff disputes remain a key drag on demand, with a “deep-dive” underway to reassess its trade finance portfolio.

Asset Quality: A Bright Spot

The bank’s balance sheet showed notable strength in credit metrics. Non-accrual loans totaled $78.9 million, with $65.6 million tied to two well-secured loans expected to incur no losses. Criticized loans fell 18.9% to $129.2 million, and net charge-offs turned negative at ($97,000), a stark contrast to $6.6 million in Q4 2024. The allowance for credit losses grew to $72.3 million, covering 1.28% of loans—evidence of prudent provisioning.

Noninterest Income and Efficiency Gains

Noninterest income rose to $4.0 million, driven by a $268,000 increase in letter-of-credit fees and $163,000 in gains from SBA loan sales. Cost discipline shone through as noninterest expenses fell 17.6% quarter-over-quarter to $23.4 million, excluding a prior-quarter $8.1 million lease adjustment. This brought the efficiency ratio down to 35.1%, a significant improvement from Q4’s 48.9%.

Capital Strength and Dividend Resilience

Capital ratios remained fortress-like: the tangible common equity (TCE) ratio rose to 10.96%, the leverage ratio to 11.52%, and the common equity tier 1 ratio to 11.86%. Tangible book value per share increased to $59.30, up 2.5% from year-end. Despite earnings pressures, management maintained confidence, hiking dividends to $0.75 per share and repurchasing $34 million in stock (464,000 shares).

Risks and Uncertainties

The Q1 results highlighted vulnerabilities. Nonaccrual loans continue to weigh on interest income, while competitive pressures in deposit pricing—particularly in Asian markets—could test margins. Rising noninterest expenses, driven by payroll taxes and wildfire-related legal costs, also warrant monitoring. The Los Angeles wildfire’s impact on commercial real estate loans remains under watch, though initial losses were minimal.

Analysts are divided: while consensus estimates point to a 13.4% upside to the current $85.98 share price (with an average target of $97.50), GuruFocus’s $82.90 valuation suggests a 3.58% downside. This dichotomy reflects broader uncertainty about the bank’s exposure to trade policy and its ability to reignite loan growth.

Conclusion: A Bank Built for Volatility

Preferred Bank’s Q1 results paint a picture of a bank that’s weathering turbulence with discipline. Its fortress balance sheet, strong capital ratios, and improving efficiency metrics provide a solid foundation, even as loan demand stagnates. The $59.30 tangible book value and shareholder-friendly capital actions—dividends and buybacks—reinforce its defensive appeal.

While headwinds like trade tariffs and deposit competition linger, the bank’s asset quality and cost management give it room to maneuver. With its stock trading at 1.45x tangible book value (below its five-year average of 1.6x), PFBC offers investors a blend of stability and potential upside—if macro risks abate. For now, the bank’s strategy of prioritizing risk mitigation over rapid growth seems prudent, positioning it to capitalize when conditions stabilize.

In sum, Preferred Bank’s Q1 results affirm its resilience. Investors seeking a conservative play in banking may find value here, provided they’re patient through the current policy-driven uncertainty.