Market Overview

Preferred Bank Reports Quarterly Earnings

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LOS ANGELES, Oct. 17, 2018 (GLOBE NEWSWIRE) -- Preferred Bank (NASDAQ:PFBC), an independent commercial bank, today reported results for the quarter ended September 30, 2018. Preferred Bank ("the Bank") reported net income of $18.3 million or $1.20 per diluted share for the third quarter of 2018. This compares favorably to net income of $13.7 million or $0.94 per diluted share for the third quarter of 2017 and to net income of $17.4 million or $1.14 per diluted share for the second quarter of 2018. Net income for the nine months ended September 30, 2018 was $52.3 million or $3.42 per diluted share compared to net income of $35.7 million or $2.45 per diluted share for the same period last year. This represents a YTD increase in net income of $16.7 million or 46.7%, 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 $14.1 million or 24.3%.

Highlights from the third quarter of 2018:

•   Return on Assets 1.84 %
•   Return on Beginning Equity 18.87 %
•   Linked quarter deposit growth 3.18 %
•   Linked quarter loan growth 2.81 %
•   Efficiency ratio 33.2 %
•   Net interest margin 4.04 %
     

Li Yu, Chairman and CEO, commented, "Our Bank continues to grow in the third quarter.  We reached $4.1 billion in total assets, and net interest income, net income and earnings per share have all reached new highs.  For the quarter, net income was $18.3 million or $1.20 per fully diluted share, which compares favorably with prior periods.

Our quarterly growth rate of deposits and loans was a little less than prior years but we are comfortable with this rate of growth, considering the current environment.  On the loan side we continue to experience heavy pay-offs especially to lenders offering fixed rate, long-term credit facilities.  Nevertheless, we have stepped up our origination effort and for the quarter our loans have increased $­89.6 million, or 2.8% on a linked-quarter basis.

The magnitude and frequency of market deposit rate adjustments has been unprecedented in our markets.  Many money-center banks and major financial institutions are now leading the rate parade, which is quite unusual.  Preferred Bank has been carefully balancing its effort, constantly weighing cost and growth.  Deposits in the quarter increased $108.5 million or 3.2% on a linked-quarter basis.

Our very asset sensitive balance sheet is the beneficiary of Federal Reserve Bank rate increases.  However, in this quarter, the benefit was offset by deposit rate increases and loan yield pressure.  The Bank's net interest margin for the quarter decreased slightly to 4.04%.

The upgrading of our operating system is now largely completed.  Continued development of our digital capabilities will be an ongoing effort.  Operating expenses remain under control."

Net Interest Income and Net Interest Margin. Net interest income before provision for loan and lease losses was $39.2 million for the third quarter of 2018. This compares favorably to the $35.4 million recorded in the third quarter of 2017 and to the $37.4 million recorded in the second 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 4.04% for the third quarter of 2018, a nine basis point increase over the 3.95% achieved in the third quarter of 2017 and a three basis point decrease from the 4.07% posted in the second quarter of 2018. The margin compressed slightly this quarter compared to the second quarter of 2018 mainly due to deposit growth, which is being repriced quite rapidly in the marketplace. Partially offsetting these items is a full quarter's benefit of the June 2018 rate hike,  however there has obviously been no benefit yet from the late September rate hike which will move yields on loans higher.

Noninterest Income. For the third quarter of 2018, noninterest income was $1,676,000 compared with $1,243,000 for the same quarter last year and compared to $1,756,000 for the second quarter of 2018. The increase from the third quarter of 2017 is primarily due to an increase in letter of credit ("LC") fees of $459,000 over that period. The decrease from the second quarter of 2018 was mainly due to the gain on investment securities of $112,000 in that quarter.

Noninterest Expense. Total noninterest expense was $13.6 million for the third quarter of 2018, an increase of $1.4 million over the third quarter of 2017 but a decrease of $221,000 from the $13.8 million recorded in the second quarter of 2018. Salaries and benefits expense totaled $8.7 million for the third quarter of 2018, an increase of $788,000 over the $7.9 million recorded in the third quarter of 2017 and a slight decrease of $141,000 from the $8.8 million recorded in the second quarter of 2018. The increase the prior year is due mainly to staffing increases and additional administrative personnel. The decrease from last quarter is due to a small decrease in bonus expense as well as employees using accrued vacation this quarter, leading to an overall reversal of accrued vacation expense. Occupancy expense totaled $1.3 million for the quarter and was fairly even with the prior quarter as well as the same period last year,  the small increases over both periods due to regular rental rate increases on the Bank's branch premises. Professional services expense was $1.3 million for the third quarter of 2018 compared to $1.0 million for the same quarter of 2017 and $1.7 million recorded in the second quarter of 2018. The decrease from the prior quarter is due to core system conversion costs, most of which were incurred in the first and second quarters of 2018. The increase over the prior year is primarily due to an increase in consulting and miscellaneous services expense. Other expenses were $1.5 million for the third quarter of 2018 compared to $1.3 million for the third quarter of 2017 and the second quarter of 2018.

Income Taxes

The Bank recorded a provision for income taxes of $7.1 million for the third quarter of 2018. This represents an effective tax rate ("ETR") of 28.0% and flat from the ETR of 28.0% for the second quarter of 2018 but down significantly from the 41.0% recorded in the third 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 September 30, 2018 were $3.28 billion, an increase of $89.6 million or 2.8% over the total of $3.14 billion as of June 30, 2018. Total deposits increased by $108.5 million over the $3.41 billion as of June 30, 2018. Total assets reached $4.08 billion as of September 30, 2018, an increase of $117.4 million or 3.0% over the total of $3.96 billion as of June 30, 2018.

Asset Quality

Loans
At the end of the quarter, the Bank elected to move the four New York nonaccrual loans ($47.3 million) back to the held-for-investment status. The Bank is moving forward with foreclosure proceedings with the goal to gain ownership of the properties and thus a sale of the notes is not likely at this point.

As of September 30, 2018, nonaccrual loans totaled $50.4 million, up from the total of $6.5 million as of December 31, 2017 and down slightly from the $50.5 million as of June 30, 2018. The increase over year end 2017 is due to the addition of the four aforementioned New York loans, which total $47.3 million. Total net recoveries for the third quarter of 2018 were $314,000 compared to net recoveries of $2,000 in the second quarter of 2018 and compared to net charge-offs of $407,000 for the third quarter of 2017. The Bank recorded a provision for loan loss of $1.88 million for the third quarter of 2018, compared to $1.3 million in the third quarter of 2017 and compared to $1.2 million recorded in the second quarter of 2018. The allowance for loan loss at September 30, 2018 was $32.0 million or 0.98% of total loans compared to $29.9 million or 1.02% of total loans at December 31, 2017.

OREO

As of September 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 September 30, 2018, the Bank's leverage ratio was 10.07%, the common equity tier 1 capital ratio was 10.23% and the total capital ratio was 13.65%. 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 third quarter 2018 financial results will be held tomorrow, October 18, 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 November 1, 2018; the passcode is 10125401.

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 
        September 30,   June 30,   September 30,
        2018   2018   2017
Interest income:            
  Loans, including fees   $ 46,130     $ 42,970     $ 39,362  
  Investment securities     3,734       3,301       3,172  
  Fed funds sold     528    
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