Preferred Bank’s Q1 Miss Highlights Trade-Driven Headwinds, but Fundamentals Remain Solid

Preferred Bank (PFBC) delivered a mixed Q1 2025 report, missing EPS estimates by $0.10 to land at $2.23, while revenue fell short of expectations by $3.8 million. The results sent shares down 8.1% in pre-market trading, pushing the stock to $79.01—near its 52-week low of $71.43. Yet beneath the headline numbers, the bank’s financial health score of 3.27/5 and improving efficiency metrics suggest resilience amid macroeconomic turbulence.

Ask Aime: Should I sell Preferred Bank (PFBC) after its disappointing Q1 2025 earnings?

The earnings miss stems largely from headwinds tied to global trade tensions. CEO Lee Yu highlighted how 20-25% tariffs are paralyzing borrower behavior, with clients adopting a “wait and see” approach. This has stalled loan growth, with Preferred’s loan portfolio shrinking by $6 million (0.1%) quarter-over-quarter. Meanwhile, deposits rose 2.6% to $66.65 million, a positive sign of balance sheet stability.

Ask Aime: How does Preferred Bank's Q1 2025 report impact your investment strategy?

Margin Pressures and Non-Performing Loans
Preferred’s net interest margin (NIM) dipped to 3.75%, below its normalized 3.94%, due to reversals of interest income from non-performing loans (NPLs). Management stressed that excluding these reversals, the NIM would have been 3.84%—closer to Q4’s 4.06%. Two significant NPLs totaling $65.6 million are under close watch: a $28.5 million loan with non-refundable deposits and a $37 million bankruptcy case with potential collateral recovery. Both are deemed well-secured, with appraised values covering 50-71% of the loan amounts.

The trade finance portfolio—$200 million of total assets—is a key vulnerability. Management warned that industrial property values could decline if tariff-driven uncertainty persists, though criticized loans fell 20% Q/Q. Cost discipline shone through, with the efficiency ratio improving to 35.1%, despite a $1.3 million OREO write-down tied to fire damage.

Shareholder Returns and Outlook
Preferred remains committed to capital returns, with a 3.49% dividend yield and a $23 million remaining buyback authorization. While Q1 buybacks were limited to one day, the bank’s track record of four consecutive dividend hikes suggests management confidence.

Analysts revised FY2025 estimates upward post-earnings, citing the bank’s strong collateral positions and improving loan yields (7.55% in March). However, the cautious tone on tariffs and supply chains underscores risks.

The Bottom Line
Preferred Bank’s Q1 stumble reflects broader economic fragility, but its fundamentals—strong deposits, disciplined costs, and robust collateralization—argue for a cautiously optimistic stance. The stock’s current valuation, near its 52-week low, could attract investors seeking a defensive play in financials.

Crucial catalysts include stabilization in global trade policies and signs of loan demand rebounding by late Q2. With a “GREAT” financial health score and a margin trajectory stabilizing near 3.8%, PFBC appears positioned to weather near-term volatility. However, investors must weigh the risks of further tariff escalation against the bank’s proven resilience.

In conclusion, Preferred Bank’s Q1 results are a snapshot of a solid institution navigating choppy waters. While tariff-driven uncertainty clouds the near term, the stock’s valuation, dividend yield, and improving efficiency metrics make it a compelling long-term bet—if trade tensions ease. For now, the wait continues.