PFBC Q1 Deep Dive: Credit Concerns and Tariff Uncertainty Weigh on Results

Commercial banking company Preferred Bank (NASDAQ:PFBC) missed Wall Street’s revenue expectations in Q1 CY2025, with sales falling 6.9% year on year to $66.66 million. Its non-GAAP profit of $2.23 per share was 4.5% below analysts’ consensus estimates.

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

StockStory’s Take

Preferred Bank’s first quarter results drew a negative reaction from the market, as management pointed to elevated non-performing loans and a reversal of interest income as primary headwinds. CEO Li Yu explained, “This quarter’s net income was negatively impacted by an outsized reversal of interest income related to the elevated level of non-performing loans.” The bank also took a charge-off on a real estate-owned loan, and overall loan growth was slightly negative amid cautious credit trends. Management’s comments reflected concern over the outsized impact of specific loan relationships and their effect on both net interest income and margin.

Looking ahead, management remains cautious due to ongoing uncertainty surrounding global tariffs and their impact on the bank’s customers. CEO Li Yu acknowledged that, “Loan demand does not seem to improve much mainly because we’re currently under the uncertainty of a tariff war with the whole world.” The bank has begun a detailed review of its trade finance portfolio and is closely monitoring customer responses to changing supply chains and cost structures. The team highlighted that future loan growth and asset quality will depend heavily on how these macroeconomic factors evolve.

Key Insights from Management’s Remarks

Management pointed to a mix of elevated credit costs, specific loan workout actions, and external economic risks as drivers of the first quarter’s underperformance and persistent uncertainty.

• Non-performing loans drive reversals: The primary factor impacting results was a large reversal of interest income due to an elevated level of non-performing loans, with $66 million of $71 million in non-performing balances tied to two credits within one relationship. Management emphasized that the collateral value is expected to cover the exposure, though resolution is ongoing, including a note sale and bankruptcy proceedings.
• Loan growth remains subdued: The quarter saw modest negative loan growth as both real estate and commercial borrowers delayed activity amid uncertainty. CEO Li Yu noted that many clients are in "wait-and-see" mode, particularly in segments exposed to shifting tariff policies and supply chain disruptions.
• Margin pressure from loan dynamics: Net interest margin was reported at 3.75%, but management stated it would have been closer to 4.06% without interest reversals on non-accrual loans. CFO Edward Czajka estimated that normalizing for these items, margin is holding up better than expected but remains sensitive to non-performing asset developments.
• Deposit growth and cost management: Deposits increased 2.6% sequentially, and deposit costs are trending lower as planned. However, management acknowledged that ongoing repricing of time deposits, along with competition, will continue to influence funding costs.
• Trade finance exposure under review: The trade finance portfolio, approximately $200 million in size, is undergoing a detailed review as management assesses customer resilience to tariff-related disruptions. The bank is conducting outreach to understand how clients are managing inventory, supply chains, and margin pressures stemming from new trade barriers.

Drivers of Future Performance

Management expects future performance to hinge on resolving credit issues and navigating the business impacts of ongoing tariff and trade policy uncertainty.

• Resolution of non-performing loans: The timing and outcome of two large non-performing loan exposures—one under contract for note sale and the other in bankruptcy proceedings—will be critical for near-term asset quality and earnings stability. Management expects both to be resolved within the next quarter or two, pending legal outcomes and buyer follow-through.
• Tariff-driven loan demand uncertainty: The escalation of global tariffs is causing clients to delay borrowing and investment decisions. Management is monitoring the situation closely, recognizing that changes in supply chains and cost structures may suppress loan growth or prompt further credit review, especially in trade finance and industrial lending segments.
• Deposit repricing and funding costs: The bank faces ongoing repricing of time deposits, with CFO Edward Czajka noting that about $1.16 billion in deposits are rolling at rates above current market offerings. The outcome of these repricings will affect net interest margin and overall profitability.

Catalysts in Upcoming Quarters

Looking ahead, we will be tracking (1) the resolution progress on the two large non-performing loans and any related asset quality recovery, (2) the pace of deposit repricing and its effect on funding costs, and (3) how clients in the trade finance segment and affected industries respond to evolving tariff and supply chain challenges. The trajectory of loan demand and credit quality as these external uncertainties play out will also be a key focus.

Preferred Bank currently trades at $84.29, down from $85.80 just before the earnings. At this price, is it a buy or sell? Find out in our full research report (it’s free).

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