Preferred Bank's fourth quarter results were met with a negative market reaction, as investors focused on rising deposit costs and credit quality developments despite the company reporting year-over-year revenue growth and non-GAAP profit in line with Wall Street expectations. Management attributed the margin pressures to federal rate cuts, with CEO Li Yu explaining that "the cost of deposits remains stubbornly high," even as loan demand and deposit growth improved. Additionally, the quarter saw an increase in criticized assets, driven by the downgrade of a large loan relationship, which management acknowledged as a key concern for near-term performance.
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Preferred Bank (PFBC) Q4 CY2025 Highlights:
- Revenue: $78.07 million vs analyst estimates of $74.5 million (7.2% year-on-year growth, 4.8% beat)
- Adjusted EPS: $2.79 vs analyst estimates of $2.79 (in line)
- Adjusted Operating Income: $49.39 million vs analyst estimates of $53.35 million (63.3% margin, 7.4% miss)
- Market Capitalization: $1.01 billion
While we enjoy listening to the management's commentary, our favorite part of earnings calls are the analyst questions. Those are unscripted and can often highlight topics that management teams would rather avoid or topics where the answer is complicated. Here is what has caught our attention.
Our Top 5 Analyst Questions From Preferred Bank’s Q4 Earnings Call
- Matthew Clark (Piper Sandler) asked about the near-term outlook for deposit costs and margins. CFO Edward Czajka explained that deposit costs are declining slowly, projecting a continued reduction of about five to six basis points per month as CDs reprice.
- Gary Tenner (D.A. Davidson) requested an update on CD maturities and repricing. Czajka detailed that $1.3 billion in CDs will mature in Q1 and are being replaced at rates only modestly below the prior level, reflecting persistent competition.
- Andrew Terrell (Stephens) inquired about the strategy for pricing deposits relative to competitors. Czajka described the balancing act between attracting growth and managing cost, noting that large national banks remain active in the market, making aggressive rate cuts difficult.
- Tim Coffey (Janney) sought clarity on the outlook for noninterest expense growth. Czajka guided to mid- to high-single-digit growth for the year, with some seasonal variation and lingering OREO-related expenses.
- Arif Angad (Cygnus Capital) questioned the adequacy of reserves amid the spike in criticized loans. CEO Li Yu and Chief Risk Officer Nick Pi emphasized recent portfolio reviews and incremental adjustments to risk factors, expressing confidence in the current allowance coverage.
Catalysts in Upcoming Quarters
As we look to upcoming quarters, our team will monitor (1) the pace at which deposit costs decline relative to market interest rates, (2) tangible progress in resolving or reducing classified and criticized loan exposures, and (3) the ability to sustain above-average loan growth in the competitive commercial banking landscape. Any shift in credit quality or funding cost trends will be key to assessing the bank’s execution.
Preferred Bank currently trades at $82.66, down from $99.15 just before the earnings. Is there an opportunity in the stock?The answer lies in our full research report (it’s free).
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