PFBC Q4 Deep Dive: Deposit Costs, Credit Quality, and Loan Growth Shape Outlook

Commercial banking company Preferred Bank (NASDAQ:PFBC) reported Q4 CY2025 results exceeding the market’s revenue expectations, with sales up 7.2% year on year to $78.07 million. Its non-GAAP profit of $2.79 per share was in line with analysts’ consensus estimates.

Is now the time to buy PFBC? Find out in our full research report (it’s free for active Edge members).

StockStory’s Take

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.

Looking ahead, Preferred Bank's outlook centers on managing deposit costs, navigating ongoing competition for funding, and addressing credit quality challenges. Management indicated that loan growth is expected to accelerate in the coming year, supported by strengthening commercial real estate and C&I loan demand, while deposit growth is being targeted at a similar pace. CFO Edward Czajka cautioned that "competition for deposits still remains very, very strong," and the company expects only gradual relief in funding costs. Li Yu emphasized the company's plan to resolve the classified loan exposures over the next two quarters, adding that stability in the broader economy and customer sentiment should underpin moderate growth in 2026.

Key Insights from Management’s Remarks

Management emphasized that net interest margin was pressured by higher funding costs and that credit quality trends were mixed, with both asset sales and loan downgrades impacting results.

• Deposit costs elevated: Management noted that the cost of deposits did not decline as quickly as anticipated, with intense competition from both local and large national banks keeping rates elevated, putting pressure on net interest margin.
• Loan growth gathering momentum: The bank reported stronger loan demand, with commercial real estate and commercial & industrial (C&I) loan categories both showing signs of revival. Management is budgeting for higher loan growth in the coming year compared to last year.
• Credit quality mixed: While nonperforming assets declined, criticized assets increased significantly due to the downgrade of a large loan relationship. The company described this as a unique situation but acknowledged it could take up to two quarters to resolve.
• OREO asset sales: Preferred Bank completed the sale of two large Other Real Estate Owned (OREO) properties, generating a net gain, though one sale included seller financing, which introduces some ongoing exposure.
• Provisioning and reserves: The quarterly loan loss provision increased, reflecting both loan growth and specific credit issues. Management adjusted its risk factors to account for the uptick in criticized loans but expressed confidence in reserve adequacy based on recent portfolio reviews.

Drivers of Future Performance

Management expects that future performance will depend on the pace of deposit repricing, credit quality resolution, and the sustainability of loan growth.

• Persistent deposit competition: Management flagged that competition for deposits remains intense, limiting the pace at which funding costs can fall, even as the Federal Reserve cuts rates. CDs (certificates of deposit) are rolling over at only slightly lower rates, keeping pressure on net interest margin.
• Classified loan resolution: The timeline for resolving the large classified loan relationship is a significant variable. Management hopes to make substantial progress within two quarters, but noted that legal proceedings and borrower actions could affect outcomes and result in further provisioning if conditions worsen.
• Loan and fee income growth: The company is targeting higher loan growth, particularly in commercial real estate and C&I lending. However, management cautioned that fee income may be slightly lower than recent quarters, as some one-time gains from OREO sales are not expected to recur, and strong letter-of-credit fee performance may normalize.

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 $93.64, down from $99.15 just before the earnings. In the wake of this quarter, is it a buy or sell? See for yourself in our full research report (it’s free).

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