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Preferred Bank Reports Quarterly and Annual Earnings

Preferred Bank Reports Quarterly and Annual Earnings

LOS ANGELES, Jan. 17, 2019 (GLOBE NEWSWIRE) -- Preferred Bank ( PFBC ) , an independent commercial bank, today reported results for the quarter and year ended December 31, 2018. Preferred Bank (“the Bank”) reported net income of $18.7 million or $1.22 per diluted share for the fourth quarter of 2018. This compares favorably to net income of $7.7 million or $0.52 per diluted share for the fourth quarter of 2017 and to net income of $18.3 million or $1.20 per diluted share for the third quarter of 2018. The fourth quarter of 2017 was negatively impacted by a charge to the Bank’s deferred tax asset of $6.7 million due to the passage of the Tax Cut and Jobs Act in December of 2017. Net income for the year ended December 31, 2018 was $71.0 million or $4.64 per diluted share compared to net income of $43.4 million or $2.96 per diluted share for 2017. Again, the year 2017 was negatively impacted by the deferred tax asset charge.

Highlights from the fourth quarter of 2018:

  • Return on Assets
1.82%
  • Return on Beginning Equity
18.50%
  • Linked quarter deposit growth
3.44%
  • Linked quarter loan growth
1.77%
  • Efficiency ratio
29.84%
  • Net interest margin
4.13%

Li Yu, Chairman and CEO, commented, “For the fourth quarter, Preferred Bank’s net income was $18.7 million or $1.22 per diluted share.  We ended the year 2018 with net income of $71.0 million or $4.64 per diluted share which represented increases of 63.6% and 56.7% over 2017, respectively.”

Fourth quarter net income included the following extraordinary items:

  • We sold the OREO property in Las Vegas for a net gain of $2.04 million.
  • We made a sizeable provision for loan loss of $5,550,000. The increase is mostly related to our New York nonperforming loan relationship.

Through bankruptcy proceedings, we acquired the title to the above-mentioned New York multi-family properties on January 16, 2019.  As these properties had not been properly managed and stabilized, together with a recent New York condo market headwind, the appraisal value came in much less than the previous valuation.  Therefore, in December we recorded a charge-off on these loans to reflect the lower valuation, less estimated selling costs.  These loans were transferred to OREO on January 16, 2019.

During the quarter, we continued to experience elevated pay-off activity as evidenced by the slightly lower growth rate in loans.  Loan growth for the quarter was $58 million or 1.77% and for the year total loans grew by $392 million or 13.34%.

Deposits increased by $121 million or 3.44% on a linked quarter basis and for the year, total deposits grew by $377 million or 11.55%.

During the fourth quarter, the net interest margin (“NIM”) improved to 4.13%, a 9 basis point improvement over the third quarter of 2018.  Likewise, the Bank’s efficiency ratio also improved to 29.8%.  Our return on equity (“ROE”) and our efficiency ratio are among the top of our peer group, both locally and nationwide.

We are approaching 2019 with extreme caution.  There are a great diversity of forecasts with regard to a potential recession, a credit cycle, a trade war, interest rates and overall economic growth.  Our focus will be to keep our business model uncomplicated, maintain a low efficiency ratio and keep our margin healthy.”

Net Interest Income and Net Interest Margin. Net interest income before provision for loan and lease losses was $41.4 million for the fourth quarter of 2018. This compares favorably to the $34.6 million recorded in the fourth quarter of 2017 and to the $39.2 million recorded in the third quarter of 2018. The comparisons to both prior periods is favorable due to both loan growth and higher loan rates partially offset by an increase in interest expense on deposits. The Bank’s taxable equivalent net interest margin was 4.13% for the fourth quarter of 2018, a 9 basis point increase over the 4.04% achieved in the third quarter of 2018 and a 27 basis point increase from the 3.86% posted in the fourth quarter of 2017. The margin has benefitted greatly from the last few Fed rate hikes. With 78% of the loan portfolio tied to the Prime rate, and with the sizeable cash position, the margin expanded even in the face of higher deposit costs.

Noninterest Income. For the fourth quarter of 2018, noninterest income was $4,405,000 compared with $1,215,000 for the same quarter last year and compared to $1,676,000 for the third quarter of 2018. The increase over both periods is primarily due to the aforementioned gain on sale of OREO which was $2.04 million. In addition to that, the Bank received a legal fee recovery of $610,000 on a recession-era loan. Service charges on deposits were $290,000, an increase over the prior quarter but down from the fourth quarter of 2017. Letter of credit fees were $956,000 for the fourth quarter, a decrease from the $1,091,000 recorded in the third quarter of 2018 but up significantly over the $627,000 posted in the same quarter last year.

Noninterest Expense . Total noninterest expense was $13.7 million for the fourth quarter of 2018, an increase of $1.9 million over the fourth quarter of 2017 and an increase of $100,000 from the $13.6 million recorded in the third quarter of 2018. Salaries and benefits expense totaled $8.6 million for the fourth quarter of 2018, an increase of $1.66 million over the $7.0 million recorded in the fourth quarter of 2017 and down slightly compared to the $8.7 million recorded in the third quarter of 2018. The increase over the prior year is due mainly to staffing increases as well as an increase in bonus expense, commensurate with our higher profitability. Occupancy expense totaled $1.3 million for the quarter and was fairly even with the prior quarter and was up slightly over the same period last year. Professional services expense was $1.5 million for the fourth quarter of 2018 compared to $1.2 million for the same quarter of 2017 and $1.3 million recorded in the third quarter of 2018. The increase over the prior quarter and the prior year is due primarily to higher legal fees. Other expenses were $1.4 million for the fourth quarter of 2018 compared to $1.6 million for the fourth quarter of 2017 and $1.5 million in the third quarter of 2018.

Income Taxes

The Bank recorded a provision for income taxes of $8.0 million for the fourth quarter of 2018. This represents an effective tax rate (“ETR”) of 29.9% and an increase from the ETR of 28.0% for the third quarter of 2018 but down significantly from the 65.7% recorded in the fourth quarter of 2017. The fourth quarter of 2017 included a special charge to the Bank’s deferred tax asset of $6.7 million in connection with the passage of the Tax Cut and Jobs Act in December 2017. Aside from that charge, the Bank’s ETR would have been approximately 35.7% for the fourth quarter of 2017.

Balance Sheet Summary

Total gross loans and leases (both held for sale and held for investment) at December 31, 2018 were $3.33 billion, an increase of $58.0 million or 1.8% over the total of $3.28 billion as of September 30, 2018. Total deposits increased by $120.9 over the $3.52 billion as of September 30, 2018. Total assets reached $4.22 billion as of December 31, 2018, an increase of $139.3 million or 3.4% over the total of $4.08 billion as of September 30, 2018. For the year, total loans increased by $392.3 million of 13.3%, total deposits grew by $377.0 million or 11.6% and total assets grew by $445.6 million or 11.8%.

Asset Quality

As of December 31, 2018, nonaccrual loans totaled $44.8 million, up from the total of $6.5 million as of December 31, 2017 and down from the $50.4 million as of September 30, 2018. The increase over year end 2017 is due to the addition of the aforementioned New York loans. On January 16, 2019, the New York multi-family loans totaling $36.9 million were moved into OREO status.

Total net charge-offs for the fourth quarter of 2018 were $6.5 million compared to net recoveries of $314,000 in the third quarter of 2018 and compared to net charge-offs of $334,000 for the fourth quarter of 2017. The Bank recorded a provision for loan loss of $5.55 million for the fourth quarter of 2018, compared to $1.5 million in the fourth quarter of 2017 and compared to $1.88 million recorded in the third quarter of 2018. The allowance for loan loss at December 31, 2018 was $31.1 million or 0.93% of total loans compared to $29.9 million or 1.02% of total loans at December 31, 2017.

As of December 31, 2018 total classified loans stood at $46.2 million compared to $52.0 million as of September 30, 2018 and $9.0 million as of December 31, 2017. Upon the transfer of the N.Y. loans to OREO, the Bank’s total classified loans will drop back down to $9.3 million, comparable to year-end 2017 levels.

Capitalization

As of December 31, 2018, the Bank’s leverage ratio was 10.11%, the common equity tier 1 capital ratio was 10.38% and the total capital ratio was 13.72%. 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 fourth quarter 2018 financial results will be held tomorrow, January 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 February 1, 2019; the passcode is 10127745.

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
December 31, September 30, December 31,
2018 2018 2017
Interest income:
Loans, including fees $ 49,027 $ 46,130 $ 38,456
Investment securities 4,892 3,734 3,198
Fed funds sold 454 528 347
Total interest income 54,373 50,392 42,001
Interest expense:
Interest-bearing demand 4,258 3,911 2,229
Savings 13 15 17
Time certificates 7,117 5,684 3,641
Fed funds purchased 0 - 0
FHLB borrowings 12 14 21
Subordinated debit 1,531 1,531 1,531
Total interest expense 12,931 11,155 7,439
Net interest income 41,442 39,237 34,562
Provision for loan losses 5,550 1,880 1,500
Net interest income after provision for loan losses 35,892 37,357 33,062
Noninterest income:
Fees & service charges on deposit accounts 290 240 312
Letters of credit fee income 956 1,091 627
BOLI income 91 91 89
Net gain on sale of other real estate owned 2,038 - -
Net gain on called and sale of investment securities - - 4
Other income 1,030 254 183
Total noninterest income 4,405 1,676 1,215
Noninterest expense:
Salary and employee benefits 8,640 8,666 6,981
Net occupancy expense 1,326 1,340 1,289
Business development and promotion expense 282 203 204
Professional services 1,485 1,337 1,227
Office supplies and equipment expense 373 349 344
Other real estate owned related expense 181 221 169
Other 1,396 1,468 1,562
Total noninterest expense 13,683 13,584 11,776
Income before provision for income taxes 26,614 25,449 22,501
Income tax expense 7,960 7,126 14,775
Net income $ 18,654 $ 18,323 $ 7,726
Dividend and earnings allocated to participating securities (313 ) (312 ) (89 )
Net income available to common shareholders $ 18,341 $ 18,011 $ 7,637
Income per share available to common shareholders
Basic $ 1.22 $ 1.20 $ 0.52
Diluted $ 1.22 $ 1.20 $ 0.52
Weighted-average common shares outstanding
Basic 15,064,578 15,063,685 14,710,680
Diluted 15,064,578 15,063,685 14,751,056
Dividends per share $ 0.30 $ 0.25 $ 0.22

PREFERRED BANK
Condensed Consolidated Statements of Operations
(unaudited)
(in thousands, except for net income per share and shares)
For the Year Ended
December 31, December 31, Change
2018 2017 %
Interest income:
Loans, including fees $ 178,420 $ 144,678 23.3 %
Investment securities 14,877 11,792 26.2 %
Fed funds sold 1,868 1,130 65.3 %
Total interest income 195,165 157,600 23.8 %
Interest expense:
Interest-bearing demand 13,934 7,901 76.4 %
Savings 60 72 -16.5 %
Time certificates 20,753 13,633 52.2 %
FHLB borrowings 65 167 -61.0 %
Subordinated debit 6,124 6,123 100.0 %
Total interest expense 40,936 27,896 46.7 %
Net interest income 154,229 129,704 18.9 %
Provision for loan losses 10,130 5,500 84.2 %
Net interest income after provision for loan losses 144,099 124,204 16.0 %
Noninterest income:
Fees & service charges on deposit accounts 1,201 1,269 -5.4 %
Letters of credit fee income 3,927 2,635 49.0 %
BOLI income 361 351 2.7 %
Net gain on sale of other real estate owned 2,038 - 100.0 %
Net gain on called and sale of investment securities 112 4 100.0 %
Other income 1,762 1,565 12.6 %
Total noninterest income 9,401 5,824 61.4 %
Noninterest expense:
Salary and employee benefits 34,741 30,041 15.6 %
Net occupancy expense 5,299 4,942 7.2 %
Business development and promotion expense 816 883 -7.6 %
Professional services 5,989 4,390 36.4 %
Office supplies and equipment expense 1,464 1,340 9.3 %
Other real estate owned related expense 615 563 9.2 %
Other 5,878 7,389 -20.5 %
Total noninterest expense 54,802 49,548 10.6 %
Income before provision for income taxes 98,698 80,480 22.6 %
Income tax expense 27,705 37,086 -25.3 %
Net income $ 70,993 $ 43,394 63.6 %
Dividend and earnings allocated to participating securities (1,174 ) (499 ) 135.3 %
Net income available to common shareholders $ 69,819 $ 42,895 62.8 %
Income per share available to common shareholders
Basic $ 4.64 $ 2.97 56.1 %
Diluted $ 4.64 $ 2.96 56.7 %
Weighted-average common shares outstanding
Basic 15,056,844 14,438,964 4.3 %
Diluted 15,059,770 14,492,671 3.9 %
Dividends per share $ 1.02 $ 0.80 27.5 %

PREFERRED BANK
Condensed Consolidated Statements of Financial Condition
(unaudited)
(in thousands)
December 31, December 31,
2018 2017
(Unaudited) (Audited)
Assets
Cash and due from banks $ 526,759 $ 446,822
Fed funds sold 76,000 108,500
Cash and cash equivalents 602,759 555,322
Securities held to maturity, at amortized cost 8,007 8,780
Securities available-for-sale, at fair value 182,413 188,203
Loans and leases 3,333,377 2,941,093
Less allowance for loan and lease losses (31,065 ) (29,921 )
Less net deferred loan fees (2,323 ) (3,099 )
Net loans and leases 3,299,989 2,908,073
Loans held for sale, at lower of cost or fair value - 440
Other real estate owned - 4,112
Customers' liability on acceptances 10,074 7,272
Bank furniture and fixtures, net 7,497 5,684
Bank-owned life insurance 9,317 9,066
Accrued interest receivable 14,266 11,291
Investment in affordable housing 43,849 34,708
Federal Home Loan Bank stock 11,933 11,077
Deferred tax assets 18,706 17,476
Income tax receivable - 2,713
Other assets 6,692 5,642
Total assets $ 4,215,502 $ 3,769,859
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Demand $ 730,096 $ 659,487
Interest-bearing demand 1,397,006 1,353,974
Savings 20,369 24,429
Time certificates of $250,000 or more 738,626 621,648
Other time certificates 753,588 603,152
Total deposits 3,639,685 3,262,690
Acceptances outstanding 10,074 7,272
Advances from Federal Home Loan Bank 1,307 6,401
Subordinated debt issuance 99,087 98,963
Commitments to fund investment in affordable housing partnership 19,530 18,523
Accrued interest payable 6,839 3,833
Other liabilities 24,567 17,143
Total liabilities 3,801,089 3,414,825
Commitments and contingencies
Shareholders' equity:
Preferred stock. Authorized 25,000,000 shares; issued and no outstanding shares at December 31, 2018 and December 31, 2017 - -
Common stock, no par value. Authorized 100,000,000 shares; issued and outstanding 15,308,688 at December 31, 2018 and 15,122,313 at December 31, 2017, respectively. 210,882 207,948
Treasury stock (34,529 ) (33,233 )
Additional paid-in-capital 45,187 39,462
Accumulated income 194,855 139,684
Accumulated other comprehensive income (loss):
Unrealized gain (loss) on securities, available-for-sale, net of tax of $(725) and $504 at December 31, 2018 and December 31, 2017, respectively (1,982 ) 1,173
Total shareholders' equity 414,413 355,034
Total liabilities and shareholders' equity $ 4,215,502 $ 3,769,859

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PREFERRED BANK
Selected Consolidated Financial Information
(unaudited)
(in thousands, except for ratios)
For the Quarter Ended
December 31, September 30, June 30, March 31, December 31,
2018 2018 2018 2018 2017
Unaudited historical quarterly operations data:
Interest income $ 54,373 $ 50,392 $ 46,748 $ 43,652 $ 42,001
Interest expense 12,931 11,155 9,342 7,508 7,439
Interest income before provision for credit losses 41,442 39,237 37,406 36,144 34,562
Provision for credit losses 5,550 1,880 1,200 1,500 1,500
Noninterest income 4,405 1,676 1,756 1,564 1,215
Noninterest expense 13,683 13,584 13,805 13,730 11,776
Income tax expense 7,960 7,126