Preferred Bank (PFBC)

Commercial banking company Preferred Bank (NASDAQ:PFBC) announced better-than-expected revenue in Q4 CY2025, with sales up 7.2% year on year to $78.07 million. Its GAAP profit of $2.79 per share was in line with 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.

In general, banks make money from two primary sources. The first is net interest income, which is interest earned on loans, mortgages, and investments in securities minus interest paid out on deposits. The second source is non-interest income, which can come from bank account, credit card, wealth management, investing banking, and trading fees. Thankfully, Preferred Bank’s 10% annualized revenue growth over the last five years was decent. Its growth was slightly above the average banking company and shows its offerings resonate with customers.

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 1.2% 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 year-on-year revenue growth of 7.2%, and its $78.07 million of revenue exceeded Wall Street’s estimates by 4.8%.

Net interest income made up 95.6% 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 is certainly important, but the overall profitability of this growth matters for the bottom line. For banks, we look at efficiency ratio, which is non-interest expense (salaries, rent, IT, marketing, excluding interest paid out to depositors) as a percentage of total revenue.

Investors place greater emphasis on efficiency ratio movements than absolute values, understanding that expense structures reflect revenue mix variations. Lower ratios represent better operational performance since they show banks generating more revenue per dollar of expense.

Over the last five years, Preferred Bank’s efficiency ratio couldn’t build momentum, hanging around 31.7%.

In Q4, Preferred Bank’s efficiency ratio was 31.2%, falling short of analysts’ expectations by 150.2 basis points (100 basis points = 1 percentage point). This result was 7.6 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%.

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 17.5% compounded annual growth rate over the last five years, higher than its 10% 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, EPS didn’t budge over the last two years, a regression from its five-year trend. We hope it can revert to earnings growth in the coming years.

In Q4, Preferred Bank reported EPS of $2.79, up from $2.25 in the same quarter last year. This print was close to analysts’ estimates. Over the next 12 months, Wall Street expects Preferred Bank’s full-year EPS of $10.44 to stay about the same.

The balance sheet drives banking profitability since earnings flow from the spread between borrowing and lending rates. As such, valuations for these companies concentrate on capital strength and sustainable equity accumulation potential.

Because of this, tangible book value per share (TBVPS) emerges as the critical performance benchmark. By excluding intangible assets with uncertain liquidation values, this metric captures real, liquid net worth per share. On the other hand, EPS is often distorted by mergers and flexible loan loss accounting. TBVPS provides clearer performance insights.

Preferred Bank’s TBVPS grew at an incredible 13% annual clip over the last five years. The last two years show a similar trajectory as TBVPS grew by 12.6% annually from $51.17 to $64.83 per share.

Over the next 12 months, Consensus estimates call for Preferred Bank’s TBVPS to grow by 10.3% to $71.49, mediocre 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 11.5%, which is considered safe and well capitalized in the event that macro or market conditions suddenly deteriorate.

Return on equity (ROE) reveals the profit generated per dollar of shareholder equity, which represents a key source of bank funding. Banks maintaining elevated ROE levels tend to accelerate wealth creation for shareholders via earnings retention, buybacks, and distributions.

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 is a bright spot for Preferred Bank.

We enjoyed seeing Preferred Bank beat analysts’ revenue expectations this quarter. We were also happy its tangible book value per share narrowly outperformed Wall Street’s estimates. On the other hand, its EPS was in line and its net interest income was in line with Wall Street’s estimates. Zooming out, we think this was a fine quarter with no major surprises. The stock remained flat at $99.32 immediately after reporting.

When considering an investment in Preferred Bank, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

Preferred Bank’s business quality ultimately falls short of our standards. Although its revenue growth was decent over the last five years, it’s expected to deteriorate over the next 12 months and its declining net interest margin shows its loan book is becoming less profitable. And while the company’s astounding EPS growth over the last five years shows its profits are trickling down to shareholders, the downside is its projected EPS for the next year is lacking.

Preferred Bank’s P/B ratio based on the next 12 months is 1.4x. This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $109.25 on the company (compared to the current share price of $99.32).