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Preferred Bank Reports Quarterly Earnings

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LOS ANGELES, July 18, 2018 (GLOBE NEWSWIRE) -- Preferred Bank (NASDAQ:PFBC), an independent commercial bank, today reported results for the quarter ended June 30, 2018. Preferred Bank ("the Bank") reported net income of $17.4 million or $1.14 per diluted share for the second quarter of 2018. This compares favorably to net income of $11.7 million or $0.80 per diluted share for the second quarter of 2017 and to net income of $16.6 million or $1.09 per diluted share for the first quarter of 2018. Net income for the six months ended June 30, 2018 was $34.0 million or $2.22 per diluted share compared to net income of $22.0 million or $1.51 per diluted share for the same period last year. This represents a YTD increase in net income of $12.0 million or 54.6%, part of which is due to the federal tax rate decrease as a result of the Tax Cuts and Jobs Act. However, pre-tax income increased on a YTD basis by $11.8 million or 34.0%.

Highlights from the second quarter of 2018:

  •   Return on Assets 1.83%
  •   Return on Beginning Equity 18.82%
  •   Linked quarter deposit growth 4.55%
  •   Linked quarter loan growth 2.90%
  •   Efficiency ratio 35.30%
  •   Net interest margin 4.07%
     

Li Yu, Chairman and CEO, commented, "For the quarter ended June 30, 2018, Preferred Bank's net income was $17.4 million or $1.14 per share.  This represents a 48.5% and 41.3% increase, respectively, compared to the same quarter of 2017, and on a pre-tax basis, earnings increased by 27.6%.

"The quarter's net income was negatively impacted by the reversal of approximately $811,000 of accrued interest related to the 'New York loans' which were placed on non-accrual status during the quarter.

"Deposits have resumed their more traditional growth pattern.  During the quarter, we updated our offered deposit rates to remain competitive in our markets.  Total deposits increased $148.6 million or 4.6% on a linked quarter basis.

"Loans increased $89.6 million or 2.9% on a linked quarter basis.  This is before our moving $47.3 million of the above mentioned 'New York loans' to held-for-sale status.

"During the past several months our Bank has been actively working on up-grading our core operating systems which are scheduled to be converted this quarter.  The new system will allow us to be more efficient and to significantly expand our customers' capabilities within the system and offer new products as well.  Costs related to this conversion have caused our overhead to increase somewhat but our overall cost control remains effective.  The efficiency ratio for the quarter was quite strong at 35.3%.

"The net interest margin for the quarter was 4.07%, a slight compression from the first quarter's 4.14% margin. This was anticipated as the Bank moved in late March to increase offered deposit rates.  In addition to that, recall that we benefitted in the first quarter from the ‘leveraging' of the balance sheet. Overall cost of funds did increase during the quarter as anticipated but we are pleased at the overall level being above 4% as this is very strong relative to our recent history and to our peer banks.

"Our Bank has been delivering top tier returns among our peer group and management remains dedicated to continue this effort."

Net Interest Income and Net Interest Margin. Net interest income before provision for loan and lease losses was $37.4 million for the second quarter of 2018. This compares favorably to the $31.3 million recorded in the second quarter of 2017 and to the $36.1 million recorded in the first quarter of 2018. The comparisons to both prior periods is favorable due primarily to loan growth partially offset by an increase in interest expense on deposits. The Bank's taxable equivalent net interest margin was 4.07% for the second quarter of 2018, a 32 basis point increase over the 3.75% achieved in the second quarter of 2017 and a 7 basis point decrease from the 4.14% posted in the first quarter of 2018. The margin compressed slightly this quarter compared to the first quarter of 2018 mainly due to deposit growth, which was fairly steady during the quarter coupled with slightly slower loan growth during the quarter. In addition, the Bank recorded a reversal of loan interest income of $811,000 when the New York loans were placed on nonaccrual status. Partially offsetting these items is a full quarter's benefit of the March FOMC rate hike as well as a small benefit from the June rate hike which moved yields on loans higher.

Noninterest Income. For the second quarter of 2018, noninterest income was $1,756,000 compared with $1,275,000 for the same quarter last year and compared to $1,564,000 for the first quarter of 2018. The increase from the second quarter of 2017 is primarily due to an increase in letter of credit ("LC") fees as well as net gains on the sale/call of investment securities of $112,000. The increase over the first quarter of 2018 was mainly due to the gain on investment securities as well as other income which was up by $152,000.

Noninterest Expense. Total noninterest expense was $13.8 million for the second quarter of 2018, an increase of $1.4 million over the second quarter of 2017 and an increase of just $75,000 from the $13.7 million recorded in the first quarter of 2018. Salaries and benefits expense totaled $8.8 million for the second quarter of 2018, an increase of $180,000 over the $8.6 million recorded for the first quarter of 2018 and an increase of $1.1 million over the $7.7 million recorded in the second quarter of 2017. The increase over both periods is primarily due to staffing increases. Occupancy expense totaled $1.3 million for the quarter, an increase of $82,000 over the $1.2 million recorded in the same period in 2017 and relatively flat from the $1.3 million posted in the first quarter of 2018. The increase over the same period last year is due mainly to increased lease rates at most offices. Professional services expense was $1.7 million for the second quarter of 2018 compared to $1.0 million for the same quarter of 2017 and $1.4 million recorded in the first quarter of 2018. The increase over both periods is for the partial cost ($480,000) for de-conversion files from the Bank's current core processor as the Bank prepares to convert its core processing systems in July of 2018 to a new core processor. In addition, the Bank incurred consulting expenses in association with this conversion project. The Bank expects to incur further costs for de-conversion files in the third quarter of 2018, albeit not to this level. Other expenses were $1.3 million for the second quarter of 2018 compared to $1.9 million for the second quarter of 2017 and $1.7 million for the first quarter of 2018. The decrease from the first quarter of 2018 was mainly due to the $300,000 off balance sheet reserve posted in that quarter and the decrease from the second quarter of 2017 was due mainly to a reduction in  FDIC premiums and to lower legal costs.

Income Taxes

The Bank recorded a provision for income taxes of $6.8 million for the second quarter of 2018. This represents an effective tax rate ("ETR") of 28.0% and is up slightly from the ETR of 26.1% for the first quarter of 2018 but down significantly from the 38.1% recorded in the second quarter of 2017. The large decrease from last year was due to the passage of the Tax Cuts and Jobs Act in December 2017.

Balance Sheet Summary

Total gross loans and leases (both held for sale and held for investment) at June 30, 2018 were $3.19 billion, an increase of $89.6 million or 2.9% over the total of $3.10 billion as of March 31, 2018. Total deposits increased by $148.6 over the $3.26 billion as of March 31, 2018. Total assets reached $3.96 billion as of June 30, 2018, an increase of $176.9 million or 4.68% over the total of $3.78 billion as of March 31, 2018.

Asset Quality

Loans
During the second quarter, the Bank disclosed the existence of four problem loans secured by real estate properties in New York totaling $47.3 million. During the quarter, the Bank has been working to resolve these but due to circumstances associated with the borrowing entities, the Bank has decided to sell the notes and therefore they have been moved into the "held for sale" category. In accordance with the change in classification and based upon the most recent information, the Bank determined that no writedown was required.

As of June 30, 2018, nonaccrual loans totaled $50.5 million, up from the total of $6.5 million as of December 31, 2017. The increase is primarily due to the addition of the four aforementioned New York loans, which total $47.3 million. Total net recoveries for the second quarter of 2018 were $2,000 compared to net charge-offs of $2.9 million in the first quarter of 2018 and compared to net charge-offs of $1.2 million for the second quarter of 2017. The Bank recorded a provision for loan loss of $1.2 million for the second quarter of 2018, compared to the same amount in the second quarter of 2017 and compared to $1.5 million recorded in the first quarter of 2018. The allowance for loan loss at June 30, 2018 was $29.7 million or 0.95% of loans held for investment compared to $29.9 million or 1.02% of total loans at December 31, 2017.

OREO

As of June 30, 2018 and December 31, 2017, the Bank held one OREO property, a $4.1 million multi-family property located outside of California.

Capitalization
As of June 30, 2018, the Bank's leverage ratio was 10.04%, the common equity tier 1 capital ratio was 10.03% and the total capital ratio was 13.48%. As of December 31, 2017, the Bank's leverage ratio was 9.52%, the common equity tier 1 ratio was 10.07% and the total risk based capital ratio was 13.83%.

Conference Call and Webcast
A conference call with simultaneous webcast to discuss Preferred Bank's second quarter 2018 financial results will be held tomorrow, July 19, 2018 at 2:00 p.m. Eastern / 11:00 a.m. Pacific. Interested participants and investors may access the conference call by dialing 844-826-3037 (domestic) or 412-317-5182 (international) and referencing "Preferred Bank." There will also be a live webcast of the call available at the Investor Relations section of Preferred Bank's website at www.preferredbank.com. Web participants are encouraged to go to the website at least 15 minutes prior to the start of the call to register, download and install any necessary audio software.

Preferred Bank's Chairman and Chief Executive Officer Li Yu,  President and Chief Operating Officer Wellington Chen, Chief Financial Officer Edward J. Czajka, and Chief Credit Officer Nick Pi will be present to discuss Preferred Bank's financial results, business highlights and outlook. After the live webcast, a replay will remain available in the Investor Relations section of Preferred Bank's website. A replay of the call will also be available at 877-344-7529 (domestic) or 412-317-0088 (international) through August 2, 2018; the passcode is 10122332.

About Preferred Bank  
Preferred Bank is one of the larger independent commercial banks in California. The bank is chartered by the State of California, and its deposits are insured by the Federal Deposit Insurance Corporation, or FDIC, to the maximum extent permitted by law. The Company conducts its banking business from its main office in Los Angeles, California, and through twelve full-service branch banking offices in the California cities of Alhambra, Century City,  City of Industry, Torrance, Arcadia, Irvine, Diamond Bar, Pico Rivera, Tarzana and San Francisco (2), and one office in Flushing New York. Preferred Bank offers a broad range of deposit and loan products and services to both commercial and consumer customers. The bank provides personalized deposit services as well as real estate finance, commercial loans and trade finance to small and mid-sized businesses, entrepreneurs, real estate developers, professionals and high net worth individuals. Although originally founded as a Chinese-American Bank, Preferred Bank now derives most of its customers from the diversified mainstream market but does continue to benefit from the significant migration to California of ethnic Chinese from China and other areas of East Asia.

Forward-Looking Statements
This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to, statements about the Bank's future financial and operating results, the Bank's plans, objectives, expectations and intentions and other statements that are not historical facts. Such statements are based upon the current beliefs and expectations of the Bank's management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. The following factors, among others, could cause actual results to differ from those set forth in the forward-looking statements: changes in economic conditions; changes in the California real estate market; the loss of senior management and other employees; natural disasters or recurring energy shortage; changes in interest rates; competition from other financial services companies; ineffective underwriting practices; inadequate allowance for loan and lease losses to cover actual losses; risks inherent in construction lending; adverse economic conditions in Asia; downturn in international trade; inability to attract deposits; inability to raise additional capital when needed or on favorable terms; inability to manage growth; inadequate communications, information, operating and financial control systems, technology from fourth party service providers; the U.S. government's monetary policies; government regulation; environmental liability with respect to properties to which the bank takes title; and the threat of terrorism. Additional factors that could cause the Bank's results to differ materially from those described in the forward-looking statements can be found in the Bank's 2017 Annual Report on Form 10-K filed with the Federal Deposit Insurance Corporation which can be found on Preferred Bank's website. The forward-looking statements in this press release speak only as of the date of the press release, and the Bank assumes no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those contained in the forward-looking statements. For additional information about Preferred Bank, please visit the Bank's website at www.preferredbank.com.

Financial Tables to Follow

 PREFERRED BANK 
 Condensed Consolidated Statements of Operations 
 (unaudited) 
 (in thousands, except for net income per share and shares) 
                 
                 
         For the Quarter Ended 
        June 30,   March 31,   June 30,
          2018       2018       2017  
 Interest income:             
   Loans, including fees    $   42,970     $   40,293     $   34,941  
   Investment securities        3,301         2,950         2,940  
   Fed funds sold        477         409         232  
     Total interest income        46,748         43,652         38,113  
                 
 Interest expense:             
   Interest-bearing demand        3,343         2,422         1,944  
   Savings        16         16         17  
   Time certificates        4,432         3,520         3,283  
   FHLB borrowings        20         19    
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