Market Overview

Preferred Bank Reports Quarterly Earnings

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LOS ANGELES, July 17, 2019 (GLOBE NEWSWIRE) -- Preferred Bank (NASDAQ:PFBC), an independent commercial bank, today reported results for the quarter ended June 30, 2019. Preferred Bank ("the Bank") reported net income of $20.0 million or $1.31 per diluted share for the second quarter of 2019. This compares favorably to net income of $17.4 million or $1.14 per diluted share for the second quarter of 2018 and also favorably to net income of $18.7 million or $1.23 per diluted share for the first quarter of 2019.

Highlights from the second quarter of 2019:

    • Year-over-Year Earnings Growth         14.8%
    • Year-over-Year EPS Growth         15.0%
    • Return on Assets         1.89%
    • Return on Beginning Equity         18.54%
    • Efficiency Ratio         31.68%
    • Net Interest Margin         4.07%
    • Loan Growth – LQ, Non-annualized         5.31%

Li Yu, Chairman and CEO, commented, "This quarter's highlight was our loan production.  Sequentially, total loans increased $181 million or 5.3%.  Fluctuations in credit line usage and loan pay-off activity accounted for some of the increase, but organic loan originations was one of the best in recent periods.

"Conversely, our total deposits decreased $43 million or 1.2% sequentially.  One of the reasons for the decrease was higher drawdowns on bank accounts by our commercial customers, which is echoed by the higher credit line usage discussed above.  During the quarter, we pro-actively reduced interest rates on deposits ahead of much of our competition, which also may have also cost us some opportunities. 

"We are pleased with the quarterly net income of $20.0 or $1.31 per share.  This number compares well with the prior quarter and with the same quarter last year.  Our net interest margin came in at 4.07%, which met our expectations.  The Bank's efficiency ratio for the quarter was 31.7%, so costs remain well under control and credit quality remains stable. Our ROA and ROE (beginning) for the quarter were 1.89% and 18.54%, respectively.

"As has always been the case, we remain focused on managing the Bank's interest rate risk.  As of June 30, 2019, roughly two-thirds of our loan portfolio are floating rate loans (mostly Prime indexed) with a floor.  With new production at current market rates and pay-offs of old loans and their associated lower floor rates, the overall floors are being continuously updated. Also important for interest rate risk, third quarter CD maturities will now be renewing at approximately our current average cost.

"We recently announced the approval of a $30 million stock repurchase plan, which will allow us the opportunity to return more capital to our shareholders and manage our capital more effectively."

Income Statement Summary

Net Interest Income and Net Interest Margin. Net interest income before provision for loan and lease losses was $41.8 million for the second quarter of 2019. This is up 11.9% over the $37.4 million recorded in the second quarter of 2018 and up over the $40.9 million recorded in the first quarter of 2019. The increase over the same period last year is due primarily to loan and overall asset growth.  In comparing to the first quarter of 2019, strong loan growth mainly fueled the increase in net interest income. The Bank's taxable equivalent net interest margin was 4.07% for the second quarter of 2019, flat compared to the second quarter of 2018 and a 5 basis point decrease from the 4.12% posted in the first quarter of 2019. The decline in the margin was due to total deposit costs which rose by 12 basis points partially offset by an increase in earning asset yields of 4 basis points.

Noninterest Income. For the second quarter of 2019, noninterest income was $1,985,000 compared with $1,756,000 for the same quarter last year and compared to $1,861,000 for the first quarter of 2019. The increase over last year is primarily due to service charges on deposits and LC fee income which were both up fairly sharply, partially offset by a gain on the call of investment securities of $112,000 which occurred in the second quarter of 2018. The increase over the prior quarter is mainly due to service charges on deposits and other income which were both up over last quarter.

Noninterest Expense. Total noninterest expense was $13.9 million for the second quarter of 2019, an increase of around $80,000 over the same period last year but a sharp decrease from $15.7 million recorded in the first quarter of 2019. The primary reason for the linked quarter decrease was the $1.4 million loss on sale of the New York OREO properties in the first quarter of 2019. Salaries and benefits expense totaled $9.5 million for the second quarter of 2019, an increase of $672,000 over the $8.8 million recorded in the second quarter of 2018 and a decrease from the $9.8 million recorded in the first quarter of 2019. The increase over last year is due mainly to normal merit increases and additional relationship officers, while the decrease from the prior quarter is due mainly to payroll taxes, which spike in the first quarter as annual incentive awards are paid out. Occupancy expense totaled $1.3 million for the quarter and was essentially flat from the $1.3 million recorded in the second quarter of 2018 but was up by $122,000 over the prior quarter. In the first quarter of 2019, the Bank recorded a small benefit of $229,000 due to the implementation of the new Lease Accounting Standard, ASC 842. Professional services expense was $1.1 million for the second quarter of 2019 compared to $1.7 million for the same quarter of 2018 and $1.3 million recorded in the first quarter of 2019. The decrease from the prior year is due primarily to lower information technology costs as the Bank converted to a new core I.T. system last year. The decrease from the prior quarter is mainly due to a decrease in legal fees as the Bank's previously-owned OREO properties have all been divested, thus incurring no more fees. Other expenses were $1.4 million for the second quarter of 2019 compared to $1.3 million for both the second quarter of 2018 and the first quarter of 2019.

Balance Sheet Summary

Total gross loans and leases at June 30, 2019 were $3.59 billion, an increase of $252.3 million or 7.6% over the total of $3.33 billion as of December 31, 2018. On a linked-quarter basis, total loans grew by $180.7 million or 5.3%. Total deposits increased by $37.3 million or 1.0% over the $3.64 billion as of December 31, 2018. Total deposits for the second quarter declined by $42.8 million on a linked quarter basis. Total assets reached $4.29 billion as of June 30, 2019, an increase of $78.0 million or 1.9% over the total of $4.22 billion as of December 31, 2018.

Income Taxes

The Bank recorded a provision for income taxes of $8.4 million for the second quarter of 2019. This represents an effective tax rate ("ETR") of 29.5% and consistent with the ETR of 29.5% for the first quarter of 2019. This is up, however from the 28.0% ETR recorded in the second quarter of 2018. The Bank's ETR may fluctuate slightly from quarter to quarter within a fairly small range due to the timing of taxable events throughout the year.

Asset Quality
As of June 30, 2019, nonaccrual loans totaled $3.4 million, a decrease from the $3.6 million as of March 31, 2019 and down significantly from the total of $44.8 million as of December 31, 2018 due to the sale of the New York NPA's in the first quarter of 2019. As of June 30, 2019, total classified loans stood at $7.4 million compared to $46.2 million as of December 31, 2018.

Total net recoveries for the second quarter of 2019 were $315,000 compared to $330,000 in the first quarter of 2019 and compared to $2,000 for the second quarter of 2018. The Bank recorded a provision for loan loss of $1.6 million for the second quarter of 2019, compared to $1.2 million in the second quarter of 2018 and compared to $500,000 recorded in the first quarter of 2019. The allowance for loan loss at June 30, 2019 was $33.8 million or 0.94% of total loans compared to $31.1 million or 0.93% of total loans at December 31, 2018.

Capitalization
As of June 30, 2019, the Bank's leverage ratio was 10.50%, the common equity tier 1 capital ratio was 10.53% and the total capital ratio was 13.74%. As of December 31, 2018, the Bank's leverage ratio was 10.16%, the common equity tier 1 ratio was 10.43% and the total risk based capital ratio was 13.77%.

Conference Call and Webcast
A conference call with simultaneous webcast to discuss Preferred Bank's second quarter 2019 financial results will be held tomorrow, July 18, 2019 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 1, 2019; the passcode is 10130589.

About Preferred Bank

Preferred Bank is one of the larger independent commercial banks headquartered 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 Bank conducts its banking business from its main office in Los Angeles, California, and through eleven full-service branch banking offices in California (Alhambra, Century City, City of Industry, Torrance, Arcadia, Irvine, Diamond Bar, Pico Rivera, Tarzana and San Francisco (2)) and one branch 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 2018 Annual Report on Form 10-K filed with the Federal Deposit Insurance Corporation which can also 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,
    2019
  2019
  2018
Interest income:            
Loans, including fees   $ 52,844     $ 50,460     $ 42,970  
Investment securities     4,707       4,691       3,301  
Fed funds sold     271       306       477  
Total interest income     57,822       55,457       46,748  
             
Interest expense:            
Interest-bearing demand     4,819       4,743       3,343  
Savings     13       12       16  
Time certificates     9,612       8,248       4,432  
FHLB borrowings     7       12       20  
Subordinated debit     1,530       1,532    
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