Preferred Bank (PFBC)

Commercial banking company Preferred Bank (NASDAQ:PFBC) reported Q3 CY2025 results topping the market’s revenue expectations, with sales up 3.7% year on year to $74.98 million. Its GAAP profit of $2.84 per share was 10.6% above analysts’ consensus estimates.

Company Overview

Founded in 1991 with a focus on serving the Pacific Rim community in Southern California, Preferred Bank (NASDAQ:PFBC) is a commercial bank that provides banking products and services to small and mid-sized businesses, entrepreneurs, real estate developers, and high net worth individuals.

Regional banks, financial institutions operating within specific geographic areas, serve as intermediaries between local depositors and borrowers. They benefit from rising interest rates that improve net interest margins (the difference between loan yields and deposit costs), digital transformation reducing operational expenses, and local economic growth driving loan demand. However, these banks face headwinds from fintech competition, deposit outflows to higher-yielding alternatives, credit deterioration (increasing loan defaults) during economic slowdowns, and regulatory compliance costs. Recent concerns about regional bank stability following high-profile failures and significant commercial real estate exposure present additional challenges.

Preferred Bank competes with other regional commercial banks in Southern California such as East West Bancorp (NASDAQ: EWBC), Cathay General Bancorp (NASDAQ: CATY), and larger national institutions like JPMorgan Chase (NYSE: JPM) and Bank of America (NYSE: BAC) that also serve the small and mid-sized business market.

Net interest income and and fee-based revenue are the two pillars supporting bank earnings. The former captures profit from the gap between lending rates and deposit costs, while the latter encompasses charges for banking services, credit products, wealth management, and trading activities. Thankfully, Preferred Bank’s 10.2% annualized revenue growth over the last five years was impressive. Its growth beat the average banking company and shows its offerings resonate with customers, a helpful starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within financials, a half-decade historical view may miss recent interest rate changes, market returns, and industry trends. Preferred Bank’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 2.8% over the last two years. Note: Quarters not shown were determined to be outliers, impacted by outsized investment gains/losses that are not indicative of the recurring fundamentals of the business.

This quarter, Preferred Bank reported modest year-on-year revenue growth of 3.7% but beat Wall Street’s estimates by 3.5%.

Net interest income made up 96% of the company’s total revenue during the last five years, meaning Preferred Bank lives and dies by its lending activities because non-interest income barely moves the needle.

Net interest income commands greater market attention due to its reliability and consistency, whereas non-interest income is often seen as lower-quality revenue that lacks the same dependable characteristics.

Topline growth alone doesn't tell the complete story - the profitability of that growth shapes actual earnings impact. Banks track this dynamic through efficiency ratios, which compare non-interest expenses such as personnel, rent, IT, and marketing costs to total revenue streams.

Markets emphasize efficiency ratio trends over static measurements, recognizing that revenue compositions drive different expense bases. Lower efficiency ratios signal superior performance by indicating that banks are controlling costs effectively relative to their income.

Over the last four years, Preferred Bank’s efficiency ratio couldn’t build momentum, hanging around 31.8%.

Preferred Bank’s efficiency ratio came in at 28.7% this quarter, beating analysts’ expectations by 152.6 basis points (100 basis points = 1 percentage point). This result was 1.9 percentage points better than the same quarter last year.

For the next 12 months, Wall Street expects Preferred Bank to maintain its trailing one-year ratio with a projection of 32.4%.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Preferred Bank’s EPS grew at an astounding 16.6% compounded annual growth rate over the last five years, higher than its 10.2% annualized revenue growth. However, this alone doesn’t tell us much about its business quality because its efficiency ratio didn’t improve.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Preferred Bank, its two-year annual EPS declines of 3.8% mark a reversal from its (seemingly) healthy five-year trend. We hope Preferred Bank can return to earnings growth in the future.

In Q3, Preferred Bank reported EPS of $2.84, up from $2.46 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Preferred Bank’s full-year EPS of $9.84 to stay about the same.

Banks profit by intermediating between depositors and borrowers, making them fundamentally balance sheet-driven enterprises. Market participants emphasize balance sheet quality and sustained book value growth when evaluating these institutions.

This is why we consider tangible book value per share (TBVPS) the most important metric to track for banks. TBVPS represents the real, liquid net worth per share of a bank, excluding intangible assets that have debatable value upon liquidation. EPS can become murky due to acquisition impacts or accounting flexibility around loan provisions, and TBVPS resists financial engineering manipulation.

Preferred Bank’s TBVPS grew at an incredible 13.2% annual clip over the last five years. The last two years show a similar trajectory as TBVPS grew by 13.5% annually from $48.75 to $62.81 per share.

Over the next 12 months, Consensus estimates call for Preferred Bank’s TBVPS to grow by 9.6% to $68.82, solid growth rate.

Leverage is core to a financial firm’s business model (loans funded by deposits). To ensure economic stability and avoid a repeat of the 2008 GFC, regulators require certain levels of capital and liquidity, focusing on the Tier 1 capital ratio.

Tier 1 capital is the highest-quality capital that a firm holds, consisting primarily of common stock and retained earnings, but also physical gold. It serves as the primary cushion against losses and is the first line of defense in times of financial distress.

This capital is divided by risk-weighted assets to derive the Tier 1 capital ratio. Risk-weighted means that cash and US treasury securities are assigned little risk while unsecured consumer loans and equity investments get much higher risk weights, for example.

New regulation after the 2008 financial crisis requires that all firms must maintain a Tier 1 capital ratio greater than 4.5%. On top of this, there are additional buffers based on scale, risk profile, and other regulatory classifications, so that at the end of the day, firms generally must maintain a 7-10% ratio at minimum.

Over the last two years, Preferred Bank has averaged a Tier 1 capital ratio of 11.6%, which is considered safe and well capitalized in the event that macro or market conditions suddenly deteriorate.

Return on equity, or ROE, tells us how much profit a company generates for each dollar of shareholder equity, a key funding source for banks. Over a long period, banks with high ROE tend to compound shareholder wealth faster through retained earnings, buybacks, and dividends.

Over the last five years, Preferred Bank has averaged an ROE of 19.3%, exceptional for a company operating in a sector where the average shakes out around 7.5% and those putting up 15%+ are greatly admired. This shows Preferred Bank has a strong competitive moat.

We enjoyed seeing Preferred Bank beat analysts’ revenue expectations this quarter. We were also glad its net interest income outperformed Wall Street’s estimates. Zooming out, we think this was a good print with some key areas of upside. The stock traded up 3.6% to $89.22 immediately after reporting.

Updated: December 4, 2025 at 11:19 PM EST

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

There are some bright spots in Preferred Bank’s fundamentals, but its business quality ultimately falls short. First off, its revenue growth was decent over the last five years. And while Preferred Bank’s declining net interest margin shows its loan book is becoming less profitable, its TBVPS growth was exceptional over the last five years.

Preferred Bank’s P/B ratio based on the next 12 months is 1.5x. This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $108 on the company (compared to the current share price of $95.22).