Preferred Bank Reports Quarterly Earnings

LOS ANGELES, July 21, 2020 (GLOBE NEWSWIRE) — Preferred Bank (NASDAQ: PFBC), an independent commercial bank, today reported results for the quarter ended June 30, 2020. Preferred Bank (“the Bank”) reported net income of $15.3 million or $1.03 per diluted share for the second quarter of 2020. This is down from net income of $20.0 million or $1.31 per diluted share for the second quarter of 2019 and also down from net income of $16.2 million or $1.08 per diluted share for the first quarter of 2020. The primary reason for the decrease compared to both periods is the provision for credit losses, which totaled $7.5 million for the second quarter of 2020, as compared to $1.6 million in the second quarter of 2019 and compared to $5.3 million in the first quarter of 2020. The higher provision for this quarter is primarily due to the ongoing uncertainty of the impact of the economic shutdown due to the COVID-19 pandemic.Li Yu, Chairman and CEO, commented, “I am pleased to report second quarter net income of $15.3 million or $1.03 per diluted share.  Given the economic backdrop, the Bank recorded an outsized provision for credit losses of $7.5 million, or nearly five times the $1.6 million provision recorded in the same period last year. In spite of that, we achieved an ROA of 1.26% and an ROE of 12.65%. This is evidence of Preferred Bank’s earnings power and I believe positions us well in this economic environment.“We’ll be receiving approximately $1.94 million of fee income on originations of $74.8 million of Paycheck Protection Program or “PPP” loans and these fees will be accreted into income over the life of the loans which will either be when forgiveness is granted or, if forgiveness is not granted, over an approximate 2 year period.  The origination of PPP loans has increased total loans for the quarter but has had a negative impact on the net interest margin due to the contractual rate of 1%.  It has also affected return on assets and our capital ratios, although not as significantly.
“This quarter deposits grew at a very strong pace of $263.8 million and loans grew by $70.3 million, inclusive of PPP.  The outpacing of deposit growth relative to loan growth has also negatively affected the net interest margin.“The Bank’s net interest margin contracted 13 basis points from the first quarter to 3.57% for the second quarter.  An interest reversal from downgrading of certain loans to nonaccrual status also contributed to the decrease.  Between quarters, our loan yield decreased 47 basis points and deposit costs decreased 43 basis points.  Going forward, we expect deposit costs to continue to improve through the maturity and repricing of TCD’s.“Loan modification activity has moderated considerably toward the end of the quarter.  Until recently, we have been granting three months of deferment only.  At June 30, 2020, there were $467.1 million in loans under some type of payment deferment. Although many loans are now returning to normal payment schedule, some loans (notably hospitality industry) may require further deferment.“Due to the uncertainty surrounding the economy, we continue to record elevated credit loss provisions. This quarter we set aside $7.5 million compared to $5.3 million last quarter.  We will continue to build up our reserves based upon developments taking place regarding the economy, our loan portfolio and the pandemic.“As of June 30, 2020, Preferred Bank became a $5 billion Bank, a milestone for our staff and the Board of Directors.  The large deposit increase has enhanced liquidity at the expense of reducing our ROA and capital ratios.  Regardless, our operating metrics and profitability profile remain very favorable.”Results of OperationsNet Interest Income and Net Interest Margin. Net interest income before provision for credit losses was $42.2 million for the second quarter of 2020. This is slightly above the $41.8 million recorded in the second quarter of 2019 and the $41.8 million recorded in the first quarter of 2020. The increase over both periods is due to loan growth as well as declining deposit costs. The Bank’s taxable equivalent net interest margin was 3.57% for the second quarter of 2020, a 50 basis point decrease from the 4.07% achieved in the second quarter of 2019 and a 13 basis point decrease from the 3.70% posted in the first quarter of 2020. The decrease to 3.57% this quarter was due to a number of factors which included a $521,000 interest reversal on loans placed into nonaccrual status during the quarter. In addition, the growth in loans was far outpaced by deposit growth which essentially de-levers the balance sheet during the quarter, adding to the margin compression.Noninterest Income. For the second quarter of 2020, noninterest income was $1,430,000 compared with $1,985,000 for the same quarter last year and compared to $1,672,000 for the first quarter of 2020. The decrease from the second quarter of 2019 was due mainly to letter of credit fee income which decreased by $329,000. The decrease from the first quarter of 2020 was primarily due to a $113,000 loss on sale of securities.Noninterest Expense. Total noninterest expense was $14.3 million for the second quarter of 2020. This represents an increase of $449,000 from the same quarter last year and a decrease of $850,000 from the first quarter of 2020. Salaries and benefits expense totaled $10.1 million for the second quarter of 2020, an increase of $616,000 over the second quarter of 2019 and a decrease of $807,000 from the first quarter of 2020. The decrease from the prior quarter is mostly to a decrease in payroll taxes and bonus expense. The increase over the prior year is due mainly to reduced loan origination volume in the current period as capitalized loan origination salary expense was lower off of lower volume. Occupancy expense totaled $1.3 million for the quarter and was flat compared to the same period last year and was down $100,000 from the first quarter of 2020. Professional services expense was $1.0 million for the second quarter of 2020 and was relatively flat compared to the $1.1 million recorded in the same quarter of 2019 and the $1.0 million recorded in the first quarter of 2020.  Other expenses were $1.4 million for the second quarter of 2020, flat compared to the same period last year but up by $132,000 over the first quarter of 2020. This was due to an increase in FDIC insurance premiums.Income Taxes. The Bank recorded a provision for income taxes of $6.5 million for the second quarter of 2020. This represents an effective tax rate (“ETR”) of 29.7% and a slight increase from the ETR of 29.5% for the same quarter last year but flat compared to the 29.7% recorded in the first quarter of 2020. 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, 2020 were $3.96 billion, an increase of $238.7 million or 6.4% over the total of $3.72 billion as of December 31, 2019. Total deposits increased to $4.35 billion, an increase of $366.9 million or 9.2% over the $3.98 billion as of December 31, 2019. Total assets eclipsed $5 billion to end at $5.004 billion, an increase of $376.0 million or 8.1% over the total of $4.63 billion as of December 31, 2019.Below is a breakdown of the Bank’s loan portfolio by segment as of June 30, 2020: