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Preferred Bank Reports 2019 Fourth Quarter and Annual Earnings

Preferred Bank Reports 2019 Fourth Quarter and Annual Earnings

LOS ANGELES, Jan. 22, 2020 (GLOBE NEWSWIRE) -- Preferred Bank (PFBC), an independent commercial bank, today reported results for the quarter and year ended December 31, 2019. Preferred Bank (“the Bank”) reported net income of $19.6 million or $1.31 per diluted share for the fourth quarter of 2019. This is down slightly from last quarter’s net income of $20.0 million or $1.32 per diluted share but compares quite favorably to net income of $18.7 million or $1.22 per diluted share posted in the fourth quarter of 2018. The decrease from the prior quarter is due to net interest income which decreased mainly due to the Federal Open Market Committee (“FOMC”) rate cuts in September and late October of 2019, which impacted the Bank’s loan yields.

For the year ended December 31, 2019, Preferred Bank posted net income of $78.4 million or $5.16 per diluted share. This compares strongly to the $71.0 million or the $4.64 per diluted share recorded for 2018 and represents an increase in earnings per share of 11.3%. As of December 31, 2019, the Bank’s total assets stood at $4.6 billion.

Highlights from the fourth quarter of 2019:
 
  • Linked-quarter Deposit Growth
2.96%
  • Linked-quarter Loan Growth
1.46%
  • Return on Assets
1.74%
  • Return on Beginning Equity
16.95%
  • Efficiency Ratio
32.56%
   
Highlights from Year:
 
  • Annual Deposit Growth
9.44%
  • Annual Loan Growth
11.75%
  • Return on Assets
1.82%
  • Return on Beginning Equity
18.81%
  • Efficiency Ratio
33.26%

Li Yu, Chairman and CEO, commented, “Net income for the fourth quarter of 2019 was $19.6 million or $1.31 per diluted share. Net income for all of 2019 was $78.4 million or $5.16 per diluted share. Our quarterly and annual earnings exceeded our internal goals when considering the three rate cuts imposed by the FOMC during the third and fourth quarters.

Fourth quarter loan growth of $53 million, or 1.45% on a linked quarter basis likely reflects sluggish loan activities during the holiday season.  For the year 2019, our total loan growth was $392 million or 11.75% increase from the end of 2018.

Fourth quarter deposit growth was $114 million or 3.0%. For the year, total deposit growth was $344 million or 9.4% over year end 2018 totals.

Negatively affected by the FOMC rate cuts in late September and October, our net interest margin for the quarter declined to 3.67%. For the year, the margin came in at 3.92%, a 16 basis point reduction from the 4.08% posted in 2018. Assuming no more rate cuts, we expect the margin to stabilize and gradually expand in early 2020.

Our cost control remains effective, the Bank’s efficiency ratio came in at 32.6% for the fourth quarter and 33.3% for the year, which is among the top in the industry.”

Income Statement Summary

Net Interest Income and Net Interest Margin. Net interest income before provision for loan and lease losses was $40.4 million for the fourth quarter of 2019. This is down from the $41.5 million recorded in the third quarter of 2019 and down from the $41.4 million posted in the fourth quarter of 2018. This is due to the three rate cuts imposed by the FOMC in early August, September and late October of 2019. As Preferred Bank’s balance sheet is asset-sensitive, this had the impact of lowering loan yields faster than deposit costs could be lowered. The Bank’s taxable equivalent net interest margin was 3.67%, down from the 3.84% recorded in the third quarter of 2019 and down from the 4.13% posted in the fourth quarter of 2018. The decline in the margin was due to the decline in loan yields mentioned above as well as higher deposit costs than in 2018, although total deposit costs declined in the third quarter and fourth quarter of 2019 and that trend continues.

Noninterest Income. For the fourth quarter of 2019, noninterest income was $1,883,000 compared with $4,405,000 for the same quarter last year and compared to $1,737,000 for the third quarter of 2019. The decline from last year is primarily due to last year’s gain on sale of OREO of $2.04 million and a legal recovery of $610,000 recorded in that period.  The increase from the prior quarter is mainly due to other income which was up by $224,000 over the prior quarter due to various credit-related fees.

Noninterest Expense. Total noninterest expense was $13.8 million for the fourth quarter of 2019, flat when compared to the same period last year and down slightly from the $13.9 million posted in the third quarter of 2019. In comparing this quarter to last year, salary expense was up by $1.1 million but that was offset by a decline in professional services of $651,000, a decline in OREO expenses of $178,000 and a decline in other expense of $289,000. Salary expense increased due to a higher bonus accrual as well as a higher head count over last year. The decrease in professional services was due to lower legal fees and I.T. costs and the decrease in other expense was due to no FDIC premium expense recorded for the quarter when normally that cost would have been approximately $450,000. (As mentioned in the press release in the prior quarter, the FDIC’s Deposit Insurance Fund ratio exceeded its target of 1.35% of insured deposits and so refunds were issued). The decrease in total noninterest expense from the prior quarter was primarily due to professional services which were down by $315.000.  

Balance Sheet Summary

Total gross loans and leases (including loans held for sale) at December 31, 2019 were $3.72 billion, an increase of $391.2 million or 11.7% over the total of $3.33 billion as of December 31, 2018. On a linked-quarter basis, total loans grew by $53.5 million or 1.5%. Total deposits increased by $343.6 million or 9.4% over the $3.64 billion as of December 31, 2018. Total deposits for the third quarter increased by $114.3 million or 3.0% on a linked quarter basis. Total assets reached $4.63 billion as of December 31, 2019, an increase of $411.7 million or 9.8% over the total of $4.22 billion as of December 31, 2018.

Income Taxes

The Bank recorded a provision for income taxes of $8.5 million for the fourth quarter of 2019. This represents an effective tax rate (“ETR”) of 30.1% and slightly higher than the 29.5% ETR recorded in the third quarter of 2019. The Bank’s ETR may fluctuate slightly from quarter to quarter within a limited range due to the timing of taxable events throughout the year.

Asset Quality

As of December 31, 2019, nonaccrual loans totaled $2.1 million, a decrease from the $3.8 million as of September 30, 2019 and down significantly from the total of $44.8 million as of December 31, 2018 due to the sale of two large non-performing assets in New York in the second quarter of 2019.

Total net recoveries were $99,000 for the fourth quarter of 2019 compared to net charge-offs of $430,000 for the third quarter of 2019 and compared to net charge-offs of $6.5 million for the fourth quarter of 2018.  The Bank recorded a provision for loan loss of $450,000 for the fourth quarter of 2019, which is somewhat reflective of the overall loan growth for the quarter. This compares to $900,000 recorded in the third quarter of 2019 and compared to $5.55 million recorded in the fourth quarter of 2018. The allowance for loan loss at December 31, 2019 was $34.8 million or 0.94% of total loans compared to $31.1million or 0.93% of total loans at December 31, 2018.

Capitalization

As of December 31, 2019, the Bank’s tier 1 leverage ratio was 10.25%, the common equity tier 1 capital ratio was 10.51% and the total capital ratio was 13.63%. 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 13.72%. Tangible book value per share was $31.28 per share as of December 31, 2019 compared to $27.22 as of December 31, 2018, a 15.0% increase.

Conference Call and Webcast

A conference call with simultaneous webcast to discuss Preferred Bank’s fourth quarter 2019 financial results will be held tomorrow, January 23, 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 6, 2020; the passcode is 10138207.

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 third 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  
          December 31,   September 30,   December 31,  
           2019     2019     2018   
Interest income:              
  Loans, including fees   $ 51,052     $ 52,862     $ 49,027    
  Investment securities     4,269       4,875       4,892    
  Fed funds sold     162       222       454    
    Total interest income     55,483       57,959       54,373    
                     
Interest expense:              
  Interest-bearing demand     3,490       4,904       4,258    
  Savings     16       13       13    
  Time certificates     10,038       10,034       7,117    
  FHLB borrowings     -       -       12    
  Subordinated debit     1,530       1,531       1,531    
    Total interest expense     15,074       16,482       12,931    
    Net interest income     40,409       41,477       41,442    
Provision for loan losses     450       900       5,550    
    Net interest income after provision for              
      loan losses     39,959       40,577       35,892    
                     
Noninterest income:              
  Fees & service charges on deposit accounts     392       401       290    
  Letters of credit fee income     806       874       956    
  BOLI income     93       94       91    
  Net gain on sale of other real estate owned     -       -       2,038    
  Other income     592       368       1,030    
    Total noninterest income     1,883       1,737       4,405    
                     
Noninterest expense:              
  Salary and employee benefits     9,746       9,801       8,640    
  Net occupancy expense     1,374       1,329       1,326    
  Business development and promotion expense     258       109       282    
  Professional services     834       1,149       1,485    
  Office supplies and equipment expense     448       483       373    
  Net (gain) loss on sale of other real estate owned and expense     3       (129 )     181    
  Other       1,107       1,156       1,396    
    Total noninterest expense     13,770       13,898       13,683    
    Income before provision for income taxes     28,072       28,416       26,614    
Income tax expense     8,456       8,383       7,960    
    Net income   $ 19,616     $ 20,033     $ 18,654    
                     
Dividend and earnings allocated to participating securities     (164 )     (168 )     (304 )  
Net income available to common shareholders   $ 19,452     $ 19,865     $ 18,350    
                     
Income per share available to common shareholders              
    Basic   $ 1.31     $ 1.32     $ 1.22    
    Diluted   $ 1.31     $ 1.32     $ 1.22    
                     
Weighted-average common shares outstanding              
    Basic     14,836,374       15,091,270       15,064,875    
    Diluted     14,836,374       15,091,270       15,064,875    
                     
Dividends per share   $ 0.30     $ 0.30     $ 0.30    
                     



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
           2019     2018    %
Interest income:            
  Loans, including fees   $ 207,218     $ 178,420     16.1 %
  Investment securities     18,542       14,877     24.6 %
  Fed funds sold     961       1,868     -48.5 %
    Total interest income     226,721       195,165     16.2 %
                   
Interest expense:            
  Interest-bearing demand     17,956       13,934     28.9 %
  Savings     54       60     -10.7 %
  Time certificates     37,932       20,753     82.8 %
  FHLB borrowings     19       65     -70.3 %
  Subordinated debit     6,123       6,124     -0.0 %
    Total interest expense     62,084       40,936     51.7 %
    Net interest income     164,637       154,229     6.7 %
Provision for loan losses     3,450       10,130     -65.9 %
    Net interest income after provision for            
      loan losses     161,187       144,099     11.9 %
                   
Noninterest income:            
  Fees & service charges on deposit accounts     1,579       1,201     31.5 %
  Letters of credit fee income     3,821       3,927     -2.7 %
  BOLI income     370       361     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     -100.0 %
  Other income     1,696       1,762     -3.8 %
    Total noninterest income     7,466       9,401     -20.6 %
                   
Noninterest expense:            
  Salary and employee benefits     38,807       34,741     11.7 %
  Net occupancy expense     5,121       5,299     -3.4 %
  Business development and promotion expense     840       816     3.0 %
  Professional services     4,417       5,989     -26.2 %
  Office supplies and equipment expense     1,853       1,464     26.5 %
  Net loss on sale of other real estate owned and expense     1,220       615     98.4 %
  Other       4,989       5,879     -15.1 %
    Total noninterest expense     57,247       54,802     4.5 %
    Income before provision for income taxes     111,406       98,698     12.9 %
Income tax expense     33,035       27,705     19.2 %
    Net income   $ 78,371     $ 70,993     10.4 %
                   
Dividend and earnings allocated to participating securities     (666 )     (1,166 )   -42.9 %
Net income available to common shareholders   $ 77,705     $ 69,827     11.3 %
                   
Income per share available to common shareholders            
    Basic   $ 5.16     $ 4.64     11.3 %
    Diluted   $ 5.16     $ 4.64     11.3 %
                   
Weighted-average common shares outstanding            
    Basic     15,060,476       15,056,919     0.0 %
    Diluted     15,060,476       15,059,845     0.0 %
                   
Dividends per share   $ 1.20     $ 1.02     17.6 %
                   



PREFERRED BANK
Condensed Consolidated Statements of Financial Condition
(unaudited)
(in thousands)
             
             
        December 31,   December 31,
         2019     2018 
        (Unaudited)   (Audited)
Assets        
             
Cash and due from banks $ 498,645     $ 526,759  
Fed funds sold   37,000       76,000  
  Cash and cash equivalents   535,645       602,759  
             
Securities held to maturity, at amortized cost   7,310       8,007  
Securities available-for-sale, at fair value   240,640       182,413  
Loans and leases   3,724,922       3,333,377  
Less allowance for loan and lease losses   (34,830 )     (31,065 )
Less net deferred loan fees   (3,028 )     (2,323 )
  Net loans and leases   3,687,064       3,299,989  
             
Customers' liability on acceptances   7,379       10,074  
Bank furniture and fixtures, net   12,236       7,497  
Bank-owned life insurance   9,571       9,317  
Accrued interest receivable   14,961       14,266  
Investment in affordable housing   53,142       43,848  
Federal Home Loan Bank stock   13,101       11,933  
Deferred tax assets   17,368       19,640  
Income tax receivable   5,561       -  
Operating lease right-of-use assets   17,103       -  
Other assets   7,400       6,692  
  Total assets $ 4,628,481     $ 4,216,435  
             
             
Liabilities and Shareholders' Equity      
             
Liabilities:        
Deposits:        
  Demand $ 835,790     $ 730,096  
  Interest-bearing demand   1,328,863       1,397,006  
  Savings   23,784       20,369  
  Time certificates of $250,000 or more   976,727       738,626  
  Other time certificates   818,130       753,588  
    Total deposits   3,983,294       3,639,685  
  Acceptances outstanding   7,379       10,074  
  Advances from Federal Home Loan Bank   -       1,307  
  Subordinated debt issuance   99,211       99,087  
  Commitments to fund investment in affordable housing partnership   24,149       19,530  
  Operating lease liabilities   20,497       -  
  Accrued interest payable   3,324       6,839  
  Other liabilities   23,432       23,262  
    Total liabilities   4,161,286       3,799,784  
             
             
Shareholders' equity:      
  Common stock, no par value. Authorized 100,000,000 shares; issued and outstanding 14,933,768 at December 31, 2019 and 15,308,688 at December 31, 2018, respectively.   210,882       210,882  
  Treasury stock   (55,054 )     (34,529 )
  Additional paid-in-capital   52,350       47,425  
  Retained earnings   255,050       194,855  
  Accumulated other comprehensive income (loss):      
    Unrealized gain (loss) on securities, available-for-sale, net of tax of $1,546 and $(725) at December 31, 2019 and December 31, 2018, respectively   3,967       (1,982 )
    Total shareholders' equity   467,195       416,651  
  Total liabilities and shareholders' equity $ 4,628,481     $ 4,216,435  
             



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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,  
          2019     2019     2019     2019     2018    
Unaudited historical quarterly operations data:            
  Interest income $ 55,483   $ 57,959   $ 57,822   $ 55,457   $ 54,373    
  Interest expense   15,074     16,482     15,981     14,547     12,931    
    Interest income before provision for credit losses   40,409     41,477     41,841     40,910     41,442    
  Provision for credit losses   450     900     1,600     500     5,550    
  Noninterest income   1,883     1,737     1,985     1,861     4,405    
  Noninterest expense   13,770     13,898     13,885     15,694     13,683    
  Income tax expense   8,456     8,383     8,362     7,834     7,960    
    Net income $ 19,616   $ 20,033   $ 19,979   $ 18,743   $ 18,654    
                   
  Earnings per share            
    Basic $ 1.31   $