Preferred Bank Reports Second Quarter Results

LOS ANGELES, July 18, 2017 (GLOBE NEWSWIRE) -- Preferred Bank (NASDAQ:PFBC), an independent commercial bank, today reported results for the quarter ended June 30, 2017. Preferred Bank (“the Bank”) reported net income of $11.7 million or $0.80 per diluted share for the second quarter of 2017. This compares to net income of $8.6 million or $0.61 per diluted share for the second quarter of 2016 and compares to net income of $10.3 million or $0.71 per diluted share for the first quarter of 2017. The increase over the same period last year was primarily due to an increase in net interest income of $5.5 million and the increase over the first quarter was due to an increase in net interest income as well as a decrease in non-interest expense.

Highlights from the second quarter of 2017:

Li Yu, Chairman and CEO commented, “I am pleased to report second quarter 2017 net income of $11.7 million or $0.80 per diluted share which is 37% and 33% higher than the same quarter last year, respectively.

“Loans and deposits continued to grow this quarter.  On a linked-quarter basis, loans increased $102 million or 3.8% and deposits increased $171 million or 5.8%.  Compared to the balances at the end of 2016, loans have  increased  by $246 million or 9.7% and deposits have grown by $358 million or 12.9%.  We are delighted with the strong deposit growth which enhances our liquidity and long term franchise value, although in the short term, it can have the effect of reducing capital ratios, return on average assets and net interest margin (“NIM”).

“Net interest margin for the second quarter was 3.75%, an 8 basis point increase from the first quarter 2017.  Given the rate increases in March and June of 2017, the margin increase was less than expected largely due to the significant deposit growth which reduced the Bank’s leverage during the quarter.  Asset pricing competition also had the effect of dampening NIM growth.  The deposit growth, however, has little impact on the net income and earnings per share of the Bank.

“Since mid-2016, we have been continuously reviewing the loan portfolio, paying particular attention to those borrowers who may be affected by e-commerce disruption or by an increasing minimum wage in California and New York.  We have also been closely monitoring our non-owner occupied commercial real estate (“CRE”) concentration ratio which currently stands at 331% of total capital as of June 30, 2017, unchanged from the ratio as of March 31, 2017.  Included in this reported non-owner occupied CRE was approximately $93 million (22% of total capital) of revolving commercial lines of credit secured by real estate.  In some cases, the real estate collateral was discretionary and taken as additional collateral.

“With the strong deposit growth in the latest twelve months, our tangible common capital ratio dropped below 9% for the first time since 2009.  In our capital planning process, we must assume our asset growth will continue and therefore we must be proactive.  In this regard, we have obtained a negotiating permit from the State of California which allows us to offer to sell our common stock. We plan to increase our capital by $50 million in this transaction and plan to use an At The Market (“ATM”) transaction to raise the capital in installments, which will more accurately match with the Bank’s growth.

“In June, our Board declared a dividend of $0.20 per share which is an increase of 11% from the $0.18 per share previously declared.  The increase reflects our strong earnings performance and our confidence in the future.”

Net Interest Income and Net Interest Margin. Net interest income before provision for loan and lease losses was $31.3 million for the second quarter of 2017. This compares favorably to the $25.7 million recorded in the second quarter of 2016 and to the $28.4 million recorded in the first quarter of 2017. The increase over both comparable periods is due primarily to loan growth as well as increases in the fed funds and Prime rates. The Bank’s taxable equivalent net interest margin was 3.75% for the second quarter of 2017, an 8 basis point increase over the 3.67% achieved in the first quarter of 2017 but a 20 basis point decrease from the 3.87% achieved in the second quarter of 2016. The increase over the first quarter of 2017 would have been higher; however the Bank’s average loan to deposit ratio dropped to 89.7% for the second quarter as compared to the 92.3% average loan to deposit ratio posted in the first quarter of 2017. This ‘de-leveraging’ of the balance sheet during the second quarter had the effect of muting the increase in average asset yields.

Noninterest Income. For the second quarter of 2017, noninterest income was $1,275,000 compared with $1,660,000 for the same quarter last year and compared to $2,090,000 for the first quarter of 2017. Service charges on deposits decreased by $34,000 this quarter when compared to the same quarter last year and by $49,000 when compared to the first quarter of 2017. Letter of Credit fee income was $581,000 for the second quarter of 2017, a decrease of $254,000 compared to the same period last year and a decrease of $214,000 compared to the first quarter of 2017 as LC activity declined. Other income was $303,000, a decrease from the $398,000 recorded in the same period last year and from the $856,000 recorded in the first quarter of 2017. In the first quarter of 2017, Other income was bolstered by $345,000 of OREO income.

Noninterest Expense. Total noninterest expense was $12.4 million for the second quarter of 2017, an increase of $1.6 million over the same period last year and a decrease of $764,000 from the first quarter of 2017. Salaries and benefits expense totaled $7.7 million for the second quarter of 2017 compared to $6.1 million recorded for the same period last year and compared to the $7.5 million recorded in the first quarter of 2017. The increase over the same period last year and the prior quarter was due primarily to staffing/merit increases, a larger bonus accrual and a reduction in capitalized loan origination costs. Occupancy expense totaled $1.2 million for the second quarter of 2017 and was down slightly from the $1.3 million recorded in the same period last year but was flat when compared to the first quarter of 2017. Professional services expense was $1.0 million for the second quarter of 2017 compared to $1.4 million for the same quarter of 2016 and also down from the $1.2 million recorded in the first quarter of 2017. The decrease compared to both was due to a reduction in legal fees. The Bank incurred $118,000 in costs related to its one OREO property and this compares to OREO expense of $243,000 in the second quarter of 2016 and $108,000 in the first quarter of 2017. Other expenses were $1.8 million for the second quarter of 2017, an increase of $594,000 over the second quarter of 2016 but a decrease of $751,000 from the $2.6 million recorded in the first quarter of 2017. The decrease from the first quarter was mainly due to the legal settlement reserve of $1.6 million recorded in the first quarter of 2017. The Bank’s efficiency ratio came in at 38.1% for the quarter.

Income Taxes

The Bank recorded a provision for income taxes of $7.2 million for the second quarter of 2017. This represents an effective tax rate (“ETR”) of 38.1% for the quarter. This is down from the ETR of 40.0% for the second quarter of 2016 and up from the 35.2% ETR recorded in the first quarter of 2017. The relatively low ETR in the first quarter of 2017 was due to the adoption of Accounting Standards Update (ASU) 2016-09 which resulted in an excess tax benefit from share-based compensation and a $768,000 net tax benefit on the income statement. The ETR recorded this quarter was lower than the Bank’s statutory rate due mainly to a $154,000 reversal of ASC 740-10 expense recognized in earlier years for uncertain tax positions related to its California Net Interest Deduction for Lenders as well as an excess tax benefit recognized from share-based compensation of $398,000.

Balance Sheet Summary

Total gross loans and leases at June 30, 2017 were $2.79 billion, an increase of $246.5 million or 9.7% over the total of $2.54 billion as of December 31, 2016. Total deposits as of June 30, 2017 were $3.12 billion, an increase of $357.6 million or 12.9% over the $2.76 billion at December 31, 2016. Total assets as of  June 30, 2017 were $3.58 billion, an increase of $357.8 million or 11.1% over the $3.22 billion as of December 31, 2016.

Asset Quality
As of June 30, 2017 nonaccrual loans totaled $6.5 million, down slightly from the $7.8 million as of March 31, 2017 and also down from the $7.6 million total as of December 31, 2016. Total net charge-offs for the second quarter of 2017 were $1.2 million as compared to $121,000 in the first quarter of 2017 and compared to $2.0 million in the second quarter of 2016. The Bank recorded a provision for loan losses of $1.2 million for the second quarter of 2017, down from the $2.3 million provision recorded in the same quarter and down from the $1.5 million provision recorded in the first quarter of 2017. The allowance for loan loss at June 30, 2017 was $27.9 million or 1.00% of total loans compared to $26.5 million or 1.04% of total loans at December 31, 2016.

OREO

As of June 30, 2017 and December 31, 2016, the Bank held one OREO property, a $4.1 million multi-family property located outside of California.

Capitalization
As of June 30, 2017, the Bank’s leverage ratio was 8.69%, the common equity tier 1 capital ratio was 9.13% and the total capital ratio was 13.04%. As of December 31, 2016, the Bank’s leverage ratio was 9.43%, the common equity tier 1 ratio was 9.83% and the total risk based capital ratio was 14.09%.

Conference Call and Webcast
A conference call with simultaneous webcast to discuss Preferred Bank’s second quarter 2017 financial results will be held tomorrow, July 19th 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 CEO Li Yu,  President and COO 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, 2017; the passcode is 10110443.

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 ten 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, 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 2016 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

AT THE COMPANY: Edward J. Czajka Executive Vice President Chief Financial Officer (213) 891-1188 AT FINANCIAL PROFILES: Kristen Papke General Information (310) 663-8007 kpapke@finprofiles.com