Preferred Bank Executing On Rate Leverage, But The Street Isn't All That Interested

As far as managing what is within their control, I can’t find much fault with Preferred Bank (NASDAQ:PFBC) since my last update on this smallish ($5B in assets) California bank. Rate leverage has been very strong, operating leverage has been very strong, and credit quality has likewise been quite good. But, banks being out of favor, the shares have done only a little better than the average regional bank since my last update, falling about 5% - beating the market by around 10%, as well as peers like East West (EWBC), Hope Bancorp (HOPE), and Pacific Preferred (PPBI), while underperforming Cathay General (CATY) by a few points.

Macro headwinds remain real, and I don’t expect the Street to stop worrying about this issue for at least another quarter or two. Preferred still has some leverage to further rate hikes, but the bank is already seeing demand destruction for loans and I don’t see much sustainable operating leverage with loan growth. Long term, I still think this is a good bank and I think the valuation is attractive, but this could be stagnant money until the Street is ready to look past the coming slowdown.

 

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Preferred Bank Executing On Rate Leverage, But The Street Isn't All That Interested

Preferred Bank Offers An Attractive Mix Of Loan Growth, Efficiency, And Rate Leverage

 

It’s been a while since I’ve updated my thoughts on Preferred Bank (PFBC), but in the roughly three years since my last update on this small, well-run California-based bank, the shares have comfortably outperformed the peer group (by around 30%), as the bank’s high credit quality/underwriting ability and low expenses have seen it through the challenges and disruptions created by the pandemic.

I still expect the bank to generate long-term core earnings growth in the high single-digits, and I expect dividend growth in the double digits. I do also have some concerns regarding competition and a time-lag for realizing benefits from higher rates, but with upside toward $90, this is still a name to consider.

 

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Preferred Bank Offers An Attractive Mix Of Loan Growth, Efficiency, And Rate Leverage

Strong Growth In Niche Commercial Lending Taking PacWest Into 2019

Loan growth has been relatively disappointing across the banking sector during this rate cycle, but several banks have reported improving momentum in the fourth quarter, and with better than 20% growth in originations in the fourth quarter, I’d say PacWest (PACW) certainly qualifies. Rising deposit costs are going to be an issue in 2019, but PacWest’s low expense ratio and niche commercial lending franchises should offer some cover.

The attempted acquisition of El Dorado Savings didn’t work out, but I fully expect this highly acquisitive bank to remain on the hunt for opportunities to grow its core deposit base and/or expand its footprint beyond its Southern California base. PacWest isn’t wildly undervalued, but I like the risk/reward/quality combination and the company’s position in niche commercial lending.

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Strong Growth In Niche Commercial Lending Taking PacWest Into 2019

Preferred Bank Showing Some Strains, But Still Well-Positioned And Undervalued

 As an exceptionally asset-sensitive bank with a fast-growing Southern California lending business, the past couple of years have been particularly strong for Preferred Bank (PFBC). Prepayments and intense lending competition remain notable headwinds, and the rate cycle isn’t going to be nearly as helpful from this point on, but Preferred looks like a higher-risk, faster-growing small bank that is worth consideration from investors who want more dynamic options in the banking sector.

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Preferred Bank Showing Some Strains, But Still Well-Positioned And Undervalued