Preferred Bank Reports Quarterly Results

LOS ANGELES, July 25, 2024 (GLOBE NEWSWIRE) -- Preferred Bank (NASDAQ: PFBC), one of the larger independent California banks, today reported results for the quarter ended June 30, 2024. Preferred Bank (“the Bank”) reported net income of $33.6 million or $2.48 per diluted share for the second quarter of 2024. This represents a slight increase in net income of $126,000 over the prior quarter but down by $4.3 million from the same quarter last year. The decrease in net income from the prior year was due to lower net interest income because of rising deposit costs. Despite the decrease in net income, Preferred Bank continues to deliver top-of-peer group profitability metrics and long term shareholder returns.

Highlights for the Quarter:

• Return on average assets was 1.97%
• Return on beginning equity of 19.44%
• Net interest margin (NIM) was 3.96%
• Total loans increased by $103 million or 1.9% for the quarter
• Total deposits increased $77 million or 1.3% for the quarter
• Efficiency ratio was 28.3%

Li Yu, Chairman and CEO, commented, “I am pleased to report Preferred Bank’s second quarter net income of $33.6 million or $2.48 per fully diluted share. For the quarter, total loans grew $103 million or 1.95% on a linked quarter basis. Deposits also grew $77 million or 1.33% linked quarter.

“This quarter, total non-performing loans (NPL’s) increased $22.2 million to $40.6 million as several previously criticized loans have changed from performing status to non-accrual status. This migration is typical in the process of problem loan resolution. We are confident that these NPL’s are either fully-reserved or well-protected by collateral and cash flow. It is not likely that the resolution of these loans will present any significant impact to the Bank’s future earnings. Criticized loans at June 30, 2024, decreased $13.0 million from the previous quarter-end and in-migration into this category seems to have slowed down. There was only one loan newly classified/criticized in the quarter. The loan was supported by adequate collateral value and cash flow with no loss exposure identified.

“During the quarter, we have charged-off $9.0 million of loans that were fully reserved for at the end of the previous quarter. Provision expense for the quarter was $2.5 million. The allowance for credit losses now stands at 1.34% of total loans at June 30, 2024.

“We continue to work on our balance sheet in order to reduce the asset sensitivity in the balance sheet. We are confident that with this work, when interest rates ease the impact on our earnings will be quite modest. Meanwhile, lower interest rates will typically give way to better organic growth which will positively impact earnings.

“The regulatory approval for our $150 million stock buyback plan from 2023 has expired with $72.5 million worth of stock repurchased thus far. We are seeking regulatory approval to extend or renew the plan. We are also pleased to report that with the $72.5 million buyback, the Bank 's tangible common equity (TCE) ratio actually improved from 10.02% as of June 30, 2023 to 10.55% as of June 30, 2024. We attribute this to the Bank’s top echelon earnings capability.

Results of Operations

Net Interest Income and Net Interest Margin. Net interest income before provision for credit losses was $66.1 million for the second quarter of 2024. This was a decrease from the $73.3 million recorded in the same quarter last year and down slightly from the $68.5 million posted in the first quarter of 2024. A rising cost of deposits was partially to blame for the decrease in net interest income but so was the addition of new nonaccrual loans whose accrued interest totaled $1.4 million which had to be reversed out of loan interest income. This helped to drive the Bank’s net interest margin down to 3.96% for the quarter. This compares to a margin of 4.19% in the prior quarter and down from 4.58% one year ago. The interest reversals on the nonaccrual loans had the effect of reducing the Bank’s NIM by 8 basis points for the quarter.

Noninterest Income. For the second quarter of 2024, noninterest income was $3.4 million compared with $3.1 million for the same quarter last year and compared to $3.1 million for the first quarter of 2024. The increase over the prior quarter was primarily due to letter of credit (LC) fees which increased by $246,000 and gains on sales of SBA loans which increased by $250,000 partially offset by a decrease in other income of $131,000. In comparing to the same quarter last year; LC fee income was up by $173,000 and gains on SBA loan sales were up by $167,000.

Noninterest Expense. Total noninterest expense was $19.7 million for the second quarter of 2024 compared to $20.0 million for the first quarter of 2024 and compared to the $20.9 million recorded in the same period last year. The primary reason for the decrease from the prior year is the $2.8 million valuation allowance recorded in the second quarter of last year on the Bank’s other real estate owned (OREO) property. Partially offsetting that is an increase in professional services; mainly legal fees for loan resolutions. In comparing this quarter to the first quarter of 2024; personnel expenses decreased by $956,000 and other professional services increased by $375,000, again due mainly to legal fees. For the quarter ended June 30, 2024, the Bank’s efficiency ratio was 28.3%, a tick higher than the 28.0% recorded last quarter and up off the 27.3% posted this quarter last year.

Income Taxes. The Bank recorded a provision for income taxes of $13.7 million for the second quarter of 2024. This represents an effective tax rate (“ETR”) of 29.0% which is identical to the ETR for last quarter and up from the 28.5% ETR recorded in the same period last year. The Bank’s ETR will fluctuate slightly from quarter to quarter within a fairly small range due to the timing of taxable events throughout the year.

Balance Sheet Summary

Total gross loans at June 30, 2024 were $5.43 billion, an increase of $155.1 million from the total of $5.27 billion as of December 31, 2023. Total deposits increased to $5.88 billion, up $169.4 million from the $5.71 billion as of December 31, 2023. Total assets were $6.85 billion, an increase of $187.3 million over the total of $6.66 billion as of December 31, 2023.

Asset Quality

As of June 30, 2024, nonaccrual loans increased to $40.6 million, up from the $18.3 million reported as of March 31, 2024 and also up from the $28.7 million as of December 31, 2023. The increase was primarily due to the addition of an $18 million loan secured by a hotel and the addition of two C&I loans totaling $13.5 million as well as a $6.1 million loan also secured by a hotel. These additions were partially offset by the sale of a non-performing note during the quarter which totaled $12.3 million. OREO and repossessed assets totaled $16.7 million as of June 30, 2024, no change from the prior quarter or from December 31, 2023. Criticized loans decreased from $86.6 million as of March 31, 2024 to $73.7 million as of June 30, 2024. Total net charge-offs (recoveries) were $9.0 million for the second quarter of 2024 as compared to $3.4 million last quarter and compared to $0 for the second quarter last year. Below is more detail of our loan quality:

Loan Quality

Non-performing loans (non-accrual status) includes the following:

1. A hotel loan of $18.0 million, in a very populated area of Los Angeles, with cash flow sufficient to service the debt and loan-to-value ratio (LTV) of 51%.
2. Two commercial and industrial (C&I) loans totaling $13.5 million. The estimated net exposure is fully reserved.
3. A $6.1 million loan in San Francisco collateralized by a motel with LTV of 71%. This note was sold in July at par, so that credit is already resolved.
4. Two real estate loans totaling $1.8 million, which are now paying as agreed. These loans will be reinstated to performing status in the third quarter of 2024.

Allowance for Credit Losses

The provision for credit losses for the second quarter of 2024 was $2.5 million compared to $4.4 million last quarter and compared to $2.5 million in the same quarter last year. The aforementioned charge-offs recorded during the quarter as well as loan growth were the primary drivers of the provision for the quarter. The Bank’s allowance coverage ratio is 1.34% of total loans as compared to 1.49% last quarter.

Capitalization

As of June 30, 2024, the Bank’s leverage ratio was 10.89%, the common equity tier 1 capital ratio was 11.52% and the total capital ratio stood at 14.93%. As of December 31, 2023, the Bank’s leverage ratio was 10.85%, the common equity tier 1 ratio was 11.57% and the total capital ratio was 15.18%.

Conference Call and Webcast

A conference call with simultaneous webcast to discuss Preferred Bank’s second quarter 2024 financial results will be held tomorrow, July 26, 2024 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.

Preferred Bank's Chairman and CEO Li Yu, President and Chief Operating Officer Wellington Chen, Chief Financial Officer Edward J. Czajka, Chief Credit Officer Nick Pi and Deputy Chief Operating Officer Johnny Hsu will discuss Preferred Bank's financial results, business highlights and outlook. After the live webcast, a replay will be available at 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 9, 2024; the passcode is 7823115.

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 twelve full-service branch banking offices in California (Alhambra, Century City, City of Industry, Torrance, Arcadia, Irvine (2), Diamond Bar, Pico Rivera, Tarzana and San Francisco (2)), one branch in Flushing, New York and a branch office in the Houston, Texas suburb of Sugar Land. In addition, the Bank also operates a loan production office in Sunnyvale, California. 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 2023 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