PFBC - Preferred Bank Reports Record Quarterly Earnings

LOS ANGELES, Oct. 19, 2022 (GLOBE NEWSWIRE) -- Preferred Bank (NASDAQ: PFBC) , one of the larger independent California banks, today reported results for the quarter ended September 30, 2022. Preferred Bank (“the Bank”) reported net income of $35.2 million or $2.40 per diluted share for the third quarter of 2022. This represents an increase of $9.0 million or 34.6% over the same quarter last year and also an impressive $7.1 million or 25.4% increase over the second quarter of 2022. The primary driver of the increase over both comparable periods was net interest income which increased by 39.9% over the same period last year and increased by 18.4% over the second quarter of 2022. Net income for the nine months ended September 30, 2022 was $89.3 million or $6.00 per diluted share compared to $68.8 million or $4.61 per diluted share for the same period last year. This represents an increase in net income of 29.7% and an increase in diluted earnings per share of 30.2%. The extraordinary interest rate hikes undertaken by the Federal Open Market Committee (“FOMC”) to fend off inflation has led to a significant increase in interest income as most of the Bank’s loans are tied to the Prime rate.

Third quarter 2022 highlights:

• Return on average assets (“ROA”) of 2.25%
• Return on beginning equity (“ROBE”) of 23.60%
• Pre-provision, pre-tax (“PPPT”) ROBE of 34.59% ¹
• Efficiency ratio of 25.23%
• Linked quarter loan growth (Ex-PPP) of 2.1%
  

Li Yu, Chairman and CEO, commented, “We have posted another record quarter aided by the Fed’s interest rate hikes onto our very asset-sensitive balance sheet. Third quarter 2022 earnings were $35.2 million or $2.40 per diluted share, which is substantially higher than the prior quarter and Q3 of the prior year.

Loan growth for the quarter (Ex-PPP) was $104.5 million or 8.5% (annualized). Our pace of loan growth has slowed under the current interest rate environment.

Deposits grew very moderately at a 3.5% annualized pace. The increase in our cost of deposits was significantly less than that of loan rates, which resulted in margin expansion. Deposit rates have accelerated since September, and are projected to continue to increase during the fourth quarter.

Our credit quality remained stable during the quarter with classified loans continuing to decline. For the quarter we have made a provision for credit losses of $2.7 million. Combined with a loan loss recovery of $2.4 million, our allowance for loan and credit losses has increased $5.1 million from the previous quarter to 1.33% of total loans (Ex-PPP).

Preferred Bank’s operating costs (non-interest expense) have increased due to growth and inflation. But, because of the interest margin expansion, our efficiency ratio actually improved to 25.2%.

We recognize the macro economy is very likely heading into a recession. There are many uncertainties ahead so our focus now is credit quality and deposit costs. We have done well so far in this uncharted economic territory and we will continue to stay alert.”

Results of Operations

Net Interest Income and Net Interest Margin. Net interest income before provision for credit losses was $66.8 million for the third quarter of 2022. This was a significant increase from the $47.8 million recorded in the same quarter last year and also up sharply over the $56.4 million posted in the second quarter of 2022. The FOMC rate hikes throughout the second and third quarters drove the Bank’s loan portfolio yield higher, as most of the Bank’s loans are tied to the Prime rate. Interest expense on deposits also rose significantly in terms of a percentage increase but in actual dollars, the increase was well behind that of interest income, leading to significant margin expansion. The taxable equivalent net interest margin rose 60 basis points on a linked quarter basis to 4.37% from the 3.77% last quarter. Comparing to the same quarter last year, the margin was up by 101 basis points over the 3.36% posted this quarter last year.

Noninterest Income. For the third quarter of 2022, noninterest income was $2.2 million compared with $2.6 million for the same quarter last year and compared to $2.8 million for the second quarter of 2022. The decrease compared to both periods is primarily due to lower LC fees. In comparison to the same quarter last year, service charges on deposits are up by $122,000 partially offsetting the decrease in LC fees.

Noninterest Expense . Total noninterest expense was $17.4 million for the third quarter of 2022. This is up compared to the $15.4 million recorded in the same quarter last year and an increase over the $17.1 million posted in the second quarter of 2022. Comparing this quarter to the third quarter of last year; personnel expense increased by $1.4 million or 12.9%, other real estate owned (“REO”) expense was $314,000 this quarter compared to $0 last year and business development and promotion increased by $116,000 this quarter. The personnel expense increase was mainly due to new hires and merit increases. Last year, the Bank did not own any OREO so this years’ expenses all were an increase. In comparing to the prior quarter; personnel expense was up by $638,000 or 5.5% from the second quarter of 2022, professional services was down by $299,000 due mainly to lower legal costs, and OREO expense decreased by $71,000 For the quarter ended September 30, 2022, the Bank’s efficiency ratio was 25.2%, easily beating the 29.0% posted last quarter and also down from the 30.4% recorded this quarter last year.

Income Taxes. The Bank recorded a provision for income taxes of $13.7 million for the third quarter of 2022. This represents an effective tax rate (“ETR”) of 28.0% and slightly below the ETR of 28.7% recorded in the same period last year and equal to the 28.0% ETR posted last quarter. 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 September 30, 2022 were $5.01 billion, an increase of $586 million or 13.2% over the total of $4.42 billion as of December 31, 2021. Total deposits increased to $5.46 billion, an increase of $230 million or 4.4% over the $5.23 billion as of December 31, 2021. Total assets ended the quarter at $6.29 billion, an increase of $247 million or 4.1% over the total of $6.05 billion as of December 31, 2021.

Asset Quality

As of September 30, 2022, nonaccrual loans totaled $6.2 million, down from the $10.6 million reported as of June 30, 2022 and down from the $14.8 million as of the end of 2021. In addition, OREO and repossessed assets totaled $26.1 million as of September 30, 2022, compared to $21.4 million as of June 30, 2022 and zero as of the end of 2021. Total net recoveries for the third quarter of 2022 were $2.4 million as compared to zero last quarter and compared to charge-offs of $1.0 million in the same quarter of 2021.

Allowance for Credit Losses

The provision for credit losses for the third quarter of 2022 was $2.7 million as compared to $2.9 million recorded last quarter and compared to a reversal of $1.5 million recorded in the third quarter of last year. Although credit quality remains very good, the prospects for a recession in the next 18 months necessitates a provision of $2.7 million this quarter. The Bank’s allowance coverage ratio now stands at 1.33% of total loans (excluding PPP loans).

Capitalization

As of September 30, 2022, the Bank’s leverage ratio was 9.95%, the common equity tier 1 capital ratio was 10.46% and the total capital ratio stood at 14.09%. As of December 31, 2021, the Bank’s leverage ratio was 9.54%, the common equity tier 1 ratio was 11.26% and the total risk-based capital ratio was 15.37%.

Conference Call and Webcast

A conference call with simultaneous webcast to discuss Preferred Bank’s third quarter 2022 financial results will be held tomorrow, October 20, 2022 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, Chief Credit Officer Nick Pi and Deputy Chief Operating Officer Johnny Hsu 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 November 3, 2022; the passcode is 5793025.

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. In addition, the Bank operates a Loan Production Office in the Houston, Texas suburb of Sugar Land. 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 2021 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 .