Preferred Bank's Q2 2025 Earnings: A Glimpse of Resilience in a Turbulent Economic Climate

In a year marked by global trade wars, shifting tariff policies, and economic uncertainty, Preferred Bank (PFBC) has delivered a Q2 2025 earnings report that turns the spotlight on its operational discipline and strategic adaptability. With net income of $32.8 million and a 9.3% sequential increase in earnings per share to $2.52, the bank has outperformed expectations in a challenging environment. But can this performance justify a bullish outlook, or does the shadow of trade risks and lingering credit concerns temper its long-term potential? Let's dissect the numbers and context to find out.

Operational Efficiency: A Bright Spot in a Cost-Conscious Era

Preferred Bank's efficiency ratio of 31.79% in Q2 2025 is a standout metric, significantly better than industry averages. This improvement, achieved despite a $1.3 million write-down on an OREO property in Santa Barbara, underscores the bank's ability to manage costs while scaling its operations. Total noninterest expenses dropped to $22.5 million, driven by lower payroll taxes and reduced incentive compensation payouts compared to the prior quarter. While year-over-year expenses rose by $2.8 million due to higher occupancy and personnel costs, the bank's focus on disciplined spending remains a key strength.

The efficiency gains are particularly notable given the broader economic context. As trade uncertainties push companies to delay investments and loans, banks that can maintain lean operations—like Preferred Bank—are better positioned to preserve margins.

Asset Quality: A Rebound Amid Lingering Risks

The bank's asset quality has shown marked improvement, with non-accrual loans declining by 35.1% to $51.2 million. This reduction was fueled by the successful sale of a large non-accrual loan at par and optimism about resolving another $37.1 million non-accrual loan without losses, despite its bankruptcy status. Total criticized loans also fell to $104.5 million, reflecting a cleaner credit portfolio.

However, the road to full recovery isn't without bumps. The bank's allowance for credit losses (1.29% of loans) and its exposure to high-tariff regions—particularly in its $200 million trade finance portfolio—remain red flags. Management's proactive monitoring of supply chain disruptions and margin pressures in these sectors is a positive, but the “wait-and-see” attitude among borrowers could delay loan growth and asset recovery.

Deposit Growth and Strategic Resilience

Deposit growth of 2.7% year-over-year to $6.08 billion highlights Preferred Bank's ability to attract and retain customers, even as broader economic uncertainty looms. This resilience is tied to its regional focus: Southern California, New York, and Texas markets are critical to its customer base, and the bank's relationship banking model has helped it maintain a competitive edge.

The deposit growth is also a strategic win in a low-yield environment. With the Federal Reserve's rate cuts limited to two in 2025 (per the CBRE macroeconomic report), banks must rely on deposit growth to fund higher-yielding loans. Preferred Bank's ability to expand its deposit base without aggressive repricing—unlike some peers—suggests a sustainable advantage.

The Elephant in the Room: Trade Uncertainties and Loan Exposure

While Preferred Bank's Q2 results are encouraging, trade uncertainties cast a long shadow. The bank's CEO, Li Yu, has openly acknowledged that “loan demand does not seem to improve much” due to global tariff wars. The $200 million trade finance portfolio is under deep review, with clients grappling with inventory delays, margin compression, and shifting supply chains.

The risk is twofold: first, the potential for further credit deterioration in the trade finance segment, and second, the broader economic slowdown that could exacerbate non-performing loans. While the bank's capital ratios (14.43% total capital, 10.26% tangible capital) provide a buffer, the resolution of the two large non-accrual loans—currently under note sale and bankruptcy proceedings—will be a critical near-term test of its asset quality.

Strategic Investment Recommendation: Cautious Bullishness

Preferred Bank's Q2 performance demonstrates its ability to navigate a volatile macroeconomic environment through operational efficiency and disciplined risk management. The improvement in net interest income (up 7.6% year-over-year) and deposit growth, combined with a strong capital position, supports a cautiously bullish outlook.

However, investors should not ignore the risks. Trade policy shifts and the resolution of non-accrual loans remain key variables. A strategic entry point for investors could involve a position in PFBC with a stop-loss at $45 (based on its 52-week low of $42 in 2025) and a target of $52–$54, factoring in the bank's earnings momentum and capital resilience.

In the long term, Preferred Bank's regional focus and trade finance expertise could pay dividends if global tariffs stabilize or are rolled back. For now, the bank's Q2 results suggest it has the tools to weather the storm—but patience and close monitoring of trade developments will be essential for investors.