Preferred Bank Reports Record Quarterly Earnings

LOS ANGELES, Jan. 22, 2018 (GLOBE NEWSWIRE) -- Preferred Bank (NASDAQ:PFBC), an independent commercial bank, today reported results for the quarter and year ended December 31, 2017. Preferred Bank (“the Bank”) reported net income of $7.7 million or $0.52 per diluted share for the fourth quarter of 2017. The results included a one-time, after tax charge totaling $6.7 million due to the passage of the Tax Cuts and Jobs Act of 2017.  The charge consisted of a $6.04 million charge to the carrying value of the Bank’s deferred tax asset (“DTA”) and a $615,000 charge to reflect a depreciation adjustment related to the Bank’s investments in low income housing tax credit (“LIHTC”) funds.  These were both necessitated as a result of the reduction in the corporate income tax rates from 35% to 21% due to the December 22, 2017 passage of the Tax Cuts and Jobs Act of 2017.  These adjustments had the effect of reducing diluted EPS by $0.45 per diluted share for the quarter and the year.  The reported net income for the fourth quarter of 2017 compares to net income of $10.1 million or $0.70 per diluted share for the fourth quarter of 2016 and compares to net income of $13.7 million or $0.94 per diluted share for the third quarter of 2017. Net income for the full year 2017 was $43.4 million or $2.96 per diluted share, an increase in net income of $7.0 million or 19.3% over 2016.

Highlights from the fourth quarter of 2017:

Highlights from the year 2017:

Li Yu, Chairman and CEO commented, “We had a good quarter.  Net income was $7.7 million or $0.52 per diluted share.  This was after non-recurring charges of $6.7 million or $0.45 per diluted share for impairment of our DTA ($6.04 million) and a depreciation adjustment on our LIHTC investment ($615,000) resulting from the new tax law signed on December 22, 2017.  Without these charges, we estimate that net income would have been $14.3 million or $0.97 per diluted share, an all-time record for our Bank.

“Deposit growth in the fourth quarter was $68 million or 2.1% growth on a linked quarter basis.  This growth rate is lower than prior quarters and one of the reasons is that we chose not to renew approximately $45 million of rate listing service deposits.  We believe the Bank has more than sufficient liquidity to meet upcoming funding needs for lending activities.

“Loan growth for the quarter was $62.0 million or 2.2% on a linked quarter basis, which was also much lower than in recent prior quarters.  During the quarter, pay-off activities were greater than in past quarters which contributed to the lower growth totals.

“The net interest margin for the quarter was 3.86%, an improvement of 7 basis points from the estimated adjusted NIM of 3.79% in the third quarter  (adjusted due to exclude a one-time interest recovery). Increased leverage during the quarter, the rate hike in December and discipline on deposit interest all contributed to the improvement.

“As of year-end 2017, we have raised $33.5 million of capital using the 'at-the market' (ATM) method.  The Bank’s Tier 1 leverage ratio at year-end was 9.52% an improvement from the 8.54% as of September 30, 2017.  We plan to issue another $16.5 million in the first quarter of 2018, and that would complete the entire $50 million in new capital as specified in our Stock Permit granted by the California Department of Business Oversight.  Our capital levels should be sufficient to meet future growth.

“2017 has been a good year for Preferred Bank.  For the year, total assets grew 17%, loans grew 16% and deposits grew by 18%. On a pre-tax basis, income increased by approximately 39% from 2016 and is more indicative of our performance against 2016 and previous years.  All of these numbers substantially exceeded our internal expectations as well as market consensus.  During the year, we also increased our work force by 11% largely in administrative areas such as compliance, electronic banking and BSA to prepare ourselves for 2018 and beyond.

"With good profit metrics, a highly asset-sensitive balance sheet and a lower corporate tax rate, we are quite optimistic for the year 2018.”

Net Interest Income and Net Interest Margin. Net interest income before provision for loan and lease losses was $34.6 million for the fourth quarter of 2017. This compares favorably to the $28.1 million recorded in the fourth quarter of 2016 but is slightly below the $35.4 million recorded in the third quarter of 2017 as that quarter was aided by a $1.4 million interest recovery on a previously charged-off loan. The increase over last year is due primarily to growth in interest income on loans partially offset by an increase in interest expense on deposits. The Bank’s taxable equivalent net interest margin was 3.86% for the fourth quarter of 2017, a 19 basis point increase over the 3.67% achieved in the fourth quarter of 2016. This was primarily due to an increase in overall loan yields as the Prime rate increased three times over the course of 2017. Last quarter, the Bank recorded a 3.95% margin but that was aided by the aforementioned loan interest recovery. Excluding that recovery, the margin would have been 3.79% in the third quarter of 2017 and would have meant a 7 basis point increase in the net interest margin in the fourth quarter of 2017.

Noninterest Income. For the fourth quarter of 2017, noninterest income was $1,215,000 compared with $1,286,000 for the same quarter last year and compared to $1,243,000 for the third quarter of 2017. The decrease from the fourth quarter of 2016 is primarily due to a gain on a called security of $133,000 in the fourth quarter of 2016. Service charges on deposits and letter of credit income both increased over the fourth quarter of 2016 but were relatively flat when compared to the third quarter of 2017.

Noninterest Expense. Total noninterest expense was $11.8 million for the fourth quarter of 2017, an increase of $553,000 over the same period last year and a decrease of $403,000 from the $12.2 million recorded in the third quarter of 2017. Salaries and benefits expense totaled $7.0 million for the fourth quarter of 2017, an increase of $321,000 over the $6.7 million recorded for the same period last year but a decrease of $897,000 from the $7.9 million recorded in the third quarter of 2017. The increase over the same period last year is due to staffing increases,  growth of the Bank, as well as regular merit increases. The decrease from the third quarter of 2017 is primarily due to a decrease in the accrual of our bonus expense. Occupancy expense totaled $1.3 million for the quarter, an increase of $90,000 over the $1.2 million recorded in the same period in 2016 and relatively flat when compared to the third quarter of 2017. The increase over the prior year was due to normal rent increases as well as the new administrative offices the Bank opened in November 2016 in El Monte, California. Professional services expense was $1.2 million for the fourth quarter of 2017 compared to $1.5 million for the same quarter of 2016 and $963,000 recorded in the third quarter of 2017. The increase over the third quarter of 2017 was due to increased legal fees and the decrease from the same period last year was also due to legal fees. The Bank incurred $169,000 in costs related to its one OREO property. This compares to $187,000 in the fourth quarter of 2016 and $168,000 in the third quarter of 2017. Other expenses were $1.6 million for the fourth quarter of 2017 compared to $1.1 million for the same period last year and $1.3 million for the third quarter of 2017. The increase over last year was mainly due to an increase in FDIC assessments of $325,000 and the increase over the third quarter of 2017 was due to a recovery in the third quarter of $250,000 on a loan which was previously charged down as a loan held for sale and subsequently sold. In addition, the Bank recorded an off balance sheet reserve for unfunded loans of $120,000 during the fourth quarter of 2017.

Income Taxes

The Bank recorded a provision for income taxes of $8.1 million for the fourth quarter of 2017. In addition to that, the Bank also recorded a charge to its DTA of $6.04 million and also recorded a tax charge related to its investments in LIHTC funds of $615,000. These charges were both necessitated by the signing of the Federal Tax Act on December 22, 2017 which lowered the Federal corporate tax rate from 35% to 21%.  Excluding these charges, the Bank’s effective tax rate (“ETR”) would have been 35.7% for the quarter. This is down from the ETR of 38.0% for the fourth quarter of 2016 and down from the 41% ETR recorded in the third quarter of 2017. The decrease from both periods is due to the recognition this quarter, of certain past compensation costs not being subject to Internal Revenue Code (“IRC”) Section 162(m).

Balance Sheet Summary

Total gross loans and leases at December 31, 2017 were $2.94 billion, an increase of $397.5 million or 15.6% over the total of $2.54 billion as of December 31, 2016. Total deposits reached $3.26 billion, an increase of $499 million or 18.1% over the total of $2.76 billion as of December 31, 2016. Total assets reached $3.77 billion as of December 31, 2017, an increase of $548.3 million or 17.0% over the total of $3.22 billion as of December 31, 2016.

Asset Quality

Loans

As of December 31, 2017 nonaccrual loans totaled $6.5 million, a decrease of $1.1 million over the $7.6 million total as of December 31, 2016. Total net charge-offs for the fourth quarter of 2017 were $334,000 compared to net charge-offs of $408,000 in the third quarter of 2017 and compared to net recoveries of $22,000 for the fourth quarter of 2016. The Bank recorded a provision for loan loss of $1.5 million for the fourth quarter of 2017, compared to a provision of $1.9 million recorded in the same quarter last year and compared to the $1.3 million provision recorded in the third quarter of 2017. The allowance for loan loss at December 31, 2017 was $29.9 million or 1.02% of total loans compared to $26.5 million or 1.04% of total loans at December 31, 2016.

OREO

As of December 31, 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 December 31, 2017, the Bank’s leverage ratio was 9.52%, the common equity tier 1 capital ratio was 10.07% and the total capital ratio was 13.83%. 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 fourth quarter and full year 2017 financial results will be held tomorrow, January 23, 2018 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 February 6, 2018; the passcode is 10115802.

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 eleven 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 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.

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

Financial Tables to Follow