Is Now the Time to Buy Preferred Bank (PFBC) Amid Strong Q2 Earnings and Strategic Growth?

Preferred Bank (NASDAQ: PFBC) has long been a standout in the regional banking sector, offering a blend of operational efficiency, disciplined capital management, and a loyal customer base. With its Q2 2025 earnings report now public, the question on investors' minds is whether this moment marks an opportunity to invest in a bank that appears to be navigating macroeconomic headwinds with resilience. The answer lies in three critical areas: the sustainability of its financial performance, the trajectory of its net interest margin, and the long-term appeal of its tangible book value growth.

Sustainability of Financial Performance: A Tale of Two Metrics

PFBC's Q2 2025 results reflect a nuanced picture. The bank reported net income of $32.8 million, or $2.52 per diluted share, outperforming the Zacks Consensus Estimate of $2.43. This 9.3% sequential increase in earnings is a positive sign, though the year-over-year decline of 2.2%—driven by a $2.8 million rise in noninterest expenses—raises questions about cost discipline. The efficiency ratio of 31.79% (vs. an estimated 31.1%) underscores this tension, as the bank faces inflationary pressures on occupancy and personnel costs.

However, the broader context suggests sustainability. PFBC's net interest income (NII) grew 1.2% year-over-year to $66.87 million, supported by a 1.9% quarter-over-quarter increase in its loan portfolio. Total deposits, while modestly up $161.5 million year-over-year to $6.08 billion, remain stable, reflecting customer retention in a competitive deposit market. The bank's capital ratios—tangible capital at 10.26%, common equity tier 1 at 11.18%—remain well above regulatory thresholds, ensuring it can withstand further economic volatility.

Net Interest Margin: A Strategic Balancing Act

PFBC's net interest margin (NIM) of 3.85% in Q2 2025 is a mixed signal. While it improved from the prior quarter's 3.75%, it fell short of the 3.96% recorded in the same quarter of 2024. This compression is partly due to the bank's strategic borrowing of $200 million from the FHLB to invest in U.S. Treasuries—a move that added to NII but sacrificed margin. This calculated trade-off highlights PFBC's adaptability in a low-yield environment.

The bank's loan growth, now totaling $5.74 billion, is another key factor. With non-accrual loans declining 35.1% to $51.2 million, PFBC has demonstrated proactive credit risk management. The allowance for credit losses at 1.29% of loans also suggests prudent provisioning. These metrics indicate that PFBC is not merely chasing yield but is prioritizing quality, which bodes well for long-term stability.

Tangible Book Value Growth: A Compelling Long-Term Story

The most compelling aspect of PFBC's financial profile is its tangible book value per share (TBVPS). As of June 30, 2025, TBVPS stood at $60.19, reflecting a 12.9% annualized growth over five years. This outpaces many regional banks and aligns with a projected 10.1% increase to $66.30 by June 2026.

TBVPS is a critical metric for banks, as it strips away intangible assets (like goodwill) and provides a clearer picture of liquidation value. PFBC's TBVPS growth is driven by its 19% average ROE over five years and a disciplined approach to capital allocation. The bank's current P/TBV ratio of 1.4x (based on a share price of $92.61) suggests it is trading at a discount to tangible value, a rare occurrence in the banking sector.

Investment Considerations: Balancing Caution and Opportunity

PFBC's Q2 results and long-term TBVPS growth trajectory make a strong case for cautious optimism. The bank's ability to maintain profitability despite margin compression, coupled with its robust capital ratios and improving credit quality, positions it well for a recovery. However, investors should remain mindful of sector-wide risks, including potential interest rate volatility and regulatory scrutiny of noninterest expenses.

For long-term investors, PFBC's TBVPS growth and attractive valuation offer a compelling value proposition. The bank's focus on its niche markets—particularly the California Chinese-American community—and its diversified commercial lending strategy provide durable competitive advantages. Meanwhile, its strategic use of FHLB borrowings to boost NII demonstrates management's agility in navigating a challenging rate environment.

Conclusion: A Buy for the Patient Investor

Preferred Bank's Q2 earnings reaffirm its status as a well-managed regional bank with a clear path to sustainable growth. While near-term challenges like rising expenses and margin compression persist, the long-term fundamentals—strong TBVPS growth, disciplined capital management, and a resilient loan portfolio—suggest that PFBC is poised to outperform in the years ahead.

For investors with a 3–5 year horizon, PFBC represents a compelling opportunity to capitalize on its tangible value and strategic adaptability. The current P/TBV ratio of 1.4x, combined with analysts' 10.1% TBVPS growth projection, implies significant upside potential. However, patience is key; the bank's focus on quality over quantity means growth may be measured rather than explosive. In a market where “safe” investments are scarce, PFBC's blend of resilience and value creation makes it a standout choice.