LOS ANGELES, July 19, 2023 (GLOBE NEWSWIRE) -- Preferred Bank ( PFBC), one of the larger independent California banks, today reported results for the quarter ended June 30, 2023. Preferred Bank (“the Bank”) reported net income of $37.9 million or $2.61 per diluted share for the second quarter of 2023. This represents an increase in net income of $9.9 million or 35.2% over the same quarter last year and nearly flat compared to the first quarter of 2023. The primary driver of the increase over the prior year quarter was net interest income which increased by $16.9 million or 29.9% over the same period last year partially offset by higher noninterest expenses as OREO valuation charges and expenses totaled $2.8 million this quarter.
The challenging operating environment created by the failures of Silicon Valley Bank, Signature Bank (“SBNY”) and First Republic Bank as well as the continued interest rate hikes by the Federal Open Market Committee (“FOMC”) continue to make deposit growth challenging. With that, we were extremely pleased at our deposit growth this quarter of $181 million. Loan totals remained relatively flat as loan growth came in at just $61 million in growth for the quarter.
Highlights for the Quarter:
- Return of average assets was 2.32%
- Return on beginning equity of 23.18%
- Net interest margin was 4.58%
- Total deposits increased $181 million or 13.4% annually for the quarter
- Total loans increased $61 million for the quarter
- Efficiency ratio was 27.3%
- Quarter-end cash on hand was $1.05 billion or 18.8% of total deposits
- Total available liquidity to total deposits was 41.2%
- The allowance for credit losses to total loans increased to 1.40%
Li Yu, Chairman and CEO, commented, “We are delighted to report second quarter 2023 net income of $38 million or $2.61 per diluted share. This quarter we have increased deposits by $181 million or 3.4% under a most challenging environment. During the quarter we have also witnessed strong movement of deposits from DDA/money market to certificates of deposit. This movement seemed to have substantially moderated toward the end of quarter.
“The Bank’s uninsured deposits was 39.9% of total deposits at June 30, 2023. Since March 9, 2023, we have been diligently converting our larger deposits to deposit reciprocation platforms also helping other customer to restructure their deposits. Total available liquidity on June 30, 2023 represented 41.2% of total deposits. We believe that the industry’s ability to earn money will be jeopardized if banks are expected to maintain liquidity equal to all of its uninsured deposits on any given day.
“Loan growth for the second quarter of 2023 was $61 million. Loan demand has definitely been impacted by the current interest rate environment. Further increases in interest rates will likely further depress loan demand. Our credit quality remains stable with all metrics consistent with the previous quarter. During the quarter, we have written down the value of OREO by $1.9 million.
“Recently, the business media has been reporting on the exodus of businesses from the area of downtown San Francisco as several large owner/operators have turned their properties back over to their lenders. Preferred Bank’s total real estate loans in the city of San Francisco were $114 million. More specifically, loans in the troubled downtown area of San Francisco totaled $34 million as of June 30, 2023.
“Thanks to our very rate sensitive loan portfolio, Preferred Bank’s net interest income is quite resilient. Our tested formula of a strong margin and low overheard has produced consistently superior returns to our shareholders. To utilize some of our large cash base and excess capital, we have begun to buyback our stock. Total stock repurchased through June 30, 2023 was 281,000 shares.”
Results of Operations
Net Interest Income and Net Interest Margin. Net interest income before provision for credit losses was $73.3 million for the second quarter of 2023. This was a significant increase from the $56.4 million recorded in the same quarter last year but down slightly from the $73.7 million posted in the first quarter of 2023. The FOMC rate hikes throughout 2022 and into 2023 drove loan portfolio yields higher, as most of the Bank’s loans are tied to the Prime rate. Interest expense increased this quarter slightly more than did interest income as deposit rates continued to climb during most of the quarter. Despite the increasing deposit rates, the Bank’s taxable equivalent net interest margin declined by 19 basis points to 4.58% from 4.77% last quarter. Comparing to the same quarter last year, the margin was up by 81 basis points over the 3.77% posted this quarter last year.
Noninterest Income. For the second quarter of 2023, noninterest income was $3.1 million compared with $2.6 million for the same quarter last year and compared to ($1.1 million) for the first quarter of 2023. The increase compared to the second quarter of 2022 was due to an increase in both service charges on deposits as well as Letter of Credit (“LC”) fee income. The increase over the first quarter of 2023 was due to the $4.1 million loss on the sale of the SBNY corporate note which was sold in the days following the Bank’s failure. In addition, service charges on deposits and LC fees were both up over first quarter levels. Gains on sales of SBA loans were $186,000 compared to $0 in the same quarter of last year and compared to $340,000 in the first quarter of 2023.
Noninterest Expense. Total noninterest expense was $20.9 million for the second quarter of 2023 compared to $18.9 million for the first quarter of 2023 and compared to the $17.1 million recorded in the same period last year. Comparing this quarter to the second quarter of last year, the major variances were; personnel expense increased by $832,000 or 7.1% and OREO expense/valuation allowance increased by $2.5 million. The personnel expense increase was mainly due to merit increases and an increase in incentive compensation. The increase in OREO expense was mainly due to a valuation adjustment of $1.9 million on the Bank’s one OREO property in addition to other OREO expenses. In comparing the second quarter of 2023 to the prior quarter; personnel expense was down by $1.2 million or 8.8%, other professional services increased by $194,000 or 16.9% and OREO expense increased by $2.8 million. The decrease in salaries and benefits expense was due to a decrease in payroll taxes as well as incentive compensation. For the quarter ended June 30, 2023, the Bank’s efficiency ratio was 27.3% slightly higher than the 26.0% posted last quarter but surpassing the 29.0% posted this quarter last year.
Income Taxes. The Bank recorded a provision for income taxes of $15.1 million for the second quarter of 2023. This represents an effective tax rate (“ETR”) of 28.5% and the same as the 28.5% ETR for the first quarter of 2023 but up from the 28.0% ETR recorded in the second quarter of 2022. 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, 2023 were $5.12 billion, an increase of $43.7 million from the total of $5.07 billion as of December 31, 2022. Total deposits increased to $5.59 billion from the $5.56 billion as of December 31, 2022. Total assets were $6.67 billion, an increase of $243 million over the total of $6.43 billion as of December 31, 2022.
Uninsured Deposits
As of June 30, 2023, total uninsured deposits represented approximately 39.9 % of total deposits. Since mid-March, we have been diligently working with our larger deposit clients to enroll them in various reciprocal deposit programs to ensure that all of their deposits are FDIC insured. These programs have allowed the Bank to bring back some of the depositor balances that left the Bank in the aftermath of the bank failures in March of 2023.
Balance Sheet Fair Market Values from March 31, 2023
With so much focus recently on ASC Topic 825, Financial Instruments, formerly known as FASB 107, we felt it would be beneficial for shareholders to view the Bank’s disclosure in its recently filed Quarterly Report on Form 10-Q for March 31, 2023.
March 31, 2023 Fair ValueMeasurement
UsingCarrying
AmountEstimated
Fair Value (Dollars in thousands) Assets: Cash and cash equivalentsLevel 1$885,691$885,691 Securities held-to-maturityLevel 2 22,155 20,563 Securities available-for-saleLevel 2/3 367,492 367,492 Loans receivable, netLevel 3 4,978,513 5,005,857 Customers' liability on acceptancesLevel 2 107 107 Accrued interest receivableLevel 2/3 26,532 26,532 Federal Home Loan Bank stockLevel 2 15,000N/A Liabilities: Demand deposits and savings: Noninterest-bearingLevel 2$1,050,992$1,050,992 Interest-bearingLevel 2 1,785,300 1,785,300 Time depositsLevel 2 2,571,474 2,554,788 Subordinated debt issuanceLevel 2 148,055 171,858 Acceptances OutstandingLevel 2 107 107 Accrued interest payableLevel 2 4,529 4,529
Liquidity
As of June 30, 2023, the Bank had $1.05 billion in cash and fed funds on the balance sheet representing 18.8% of total deposits. In addition, the Bank had $828 million in FHLB borrowing availability, $90 million in available funds from the FRB Discount window and $161 million in available for sale securities that were unpledged. All summed, this totals $2.15 billion of total liquidity or 41.2% of total deposits.
Asset Quality
As of June 30, 2023, nonaccrual loans totaled just $423,000, up slightly from the $271,000 reported as of March 31, 2023 and down markedly from the $10.6 million reported as of June 30, 2022. In addition, OREO and repossessed assets totaled $16.7 million as of June 30, 2023, down from the $18.6 million as of March 31, 2023 as the Bank wrote down the value of its large Santa Barbara area OREO by $1.9 million. In addition to that, the Bank’s total classified assets remained fairly constant at $43.3 million compared to $43.1 million as of both March 31, 2023 and as of December 31, 2022. Total net charge-offs were $0 for the second quarter of 2023 as compared to net charge offs of $43,000 last quarter and compared to $0 in the same quarter last year. Management is acutely aware that commercial real estate is under some pressure given the change in interest rates over the past year, especially office properties. However in reviewing the portfolio, with delinquencies and nonaccrual loans down and classified assets flat, this weakness has yet to appear. We will be vigilant going forward.
Office Building Loans
As a result of the pandemic and working from home, office occupancy has suffered and there has been a corresponding decline in the value of office properties, especially in city centers. As of June 30, 2023, the Bank has the following office loans; (in 000’s)
Medical Office$3,430 Mixed Use (Office & Retail) 168,643 Pure Office 176,416 Reposition for Multi-Family 105,522 Total$454,011Substantially all of the office building loans are secured by properties located in more suburban areas. There are only $9.0 million of office building loans in downtown areas.
Allowance for Credit Losses
The provision for credit losses for the second quarter of 2023 was $2.5 million compared to $500,000 last quarter and compared to $2.9 million in the same quarter last year. Macro economic conditions as well as more stress in the commercial real estate sector lead to the increase in the provision from last quarter. The Bank’s allowance coverage ratio now stands at 1.40% of total loans.
Capitalization
As of June 30, 2023, the Bank’s leverage ratio was 10.61%, the common equity tier 1 capital ratio was 11.51% and the total capital ratio stood at 15.14%. As of December 31, 2022, the Bank’s leverage ratio was 10.30%, the common equity tier 1 ratio was 10.81% and the total risk-based capital ratio was 14.39%.
Conference Call and Webcast
A conference call with simultaneous webcast to discuss Preferred Bank’s second quarter 2023 financial results will be held tomorrow, July 20, 2023 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.
Preferred Bank's Chairman and CEO 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 discuss Preferred Bank's financial results, business highlights and outlook. After the live webcast, a replay will be available at 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 August 3, 2023; the passcode is 4793135.
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)), one branch in Flushing, New York and a branch 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 2022 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.
Executive Vice President
Chief Financial Officer
(213) 891-1188
Jeffrey Haas
General Information
(310) 622-8240
[email protected]
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 June 30, March 31, June 30, 2023 2023 2022 Interest income: Loans, including fees $102,220 $95,881 $58,541 Investment securities 15,919 12,979 3,972 Fed funds sold 272 224 46 Total interest income 118,411 109,084 62,559 Interest expense: Interest-bearing demand 16,406 17,038 2,448 Savings 47 39 20 Time certificates 25,436 16,593 2,342 FHLB borrowings 1,888 374 - Subordinated debt 1,325 1,325 1,325 Total interest expense 45,102 35,369 6,135 Net interest income 73,309 73,715 56,424 Provision for credit losses 2,500 500 2,900 Net interest income after provision for credit losses 70,809 73,215 53,524 Noninterest income: Fees & service charges on deposit accounts 844 694 723 Letters of credit fee income 1,576 1,324 1,329 BOLI income 103 101 100 Net loss on called and sale of investment securities - (4,117) - Net gain on sale of loans 186 340 - Other income 392 592 449 Total noninterest income 3,101 (1,066) 2,601 Noninterest expense: Salary and employee benefits 12,520 13,728 11,688 Net occupancy expense 1,476 1,474 1,441 Business development and promotion expense 200 105 176 Professional services 1,343 1,149 1,460 Office supplies and equipment expense 398 404 459 Loss on sale of OREO, valuation allowance and related expense 2,838 72 385 Other 2,077 1,968 1,531 Total noninterest expense 20,852 18,900 17,140 Income before provision for income taxes 53,058 53,249 38,985 Income tax expense 15,122 15,176 10,916 Net income $37,936 $38,073 $28,069 Dividend and earnings allocated to participating securities - - - Net income available to common shareholders $37,936 $38,073 $28,069 Income per share available to common shareholders Basic $2.63 $2.64 $1.90 Diluted $2.61 $2.61 $1.87 Weighted-average common shares outstanding Basic 14,419,959 14,430,606 14,792,298 Diluted 14,560,693 14,602,149 15,006,801 Cash dividends per common share $0.55 $0.55 $0.43Condensed Consolidated Statements of Operations
(unaudited)
(in thousands, except for net income per share and shares)
For the Six Months Ended June 30, June 30, Change 2023 2022 % Interest income: Loans, including fees $198,101 $110,660 79.0% Investment securities 28,898 6,858 321.4% Fed funds sold 496 65 659.0% Total interest income 227,495 117,583 93.5% Interest expense: Interest-bearing demand 33,444 3,880 762.1% Savings 86 39 120.0% Time certificates 42,029 4,559 821.9% FHLB borrowings 2,262 - 100.0% Subordinated debt 2,650 2,650 0.0% Total interest expense 80,471 11,127 623.2% Net interest income 147,024 106,456 38.1%Provision for credit losses 3,000 2,650 13.2% Net interest income after provision for credit losses 144,024 103,806 38.7% Noninterest income: Fees & service charges on deposit accounts 1,538 1,395 10.3% Letters of credit fee income 2,900 2,261 28.3% BOLI income 204 199 2.7% Net loss on called and sale of investment securities (4,117) - -100.0% Net gain on sale of loans 526 - 100.0% Other income 984 1,012 -2.8% Total noninterest income 2,035 4,867 -58.2% Noninterest expense: Salary and employee benefits 26,248 23,328 12.5% Net occupancy expense 2,950 2,863 3.0% Business development and promotion expense 305 277 10.1% Professional services 2,492 2,703 -7.8% Office supplies and equipment expense 802 948 -15.4% Loss on sale of OREO, valuation allowance and related expense 2,910 401 625.7% Other 4,045 2,777 45.7% Total noninterest expense 39,752 33,297 19.4% Income before provision for income taxes 106,307 75,376 41.0%Income tax expense 30,298 21,280 42.4% Net income $76,009 $54,096 40.5% Dividend and earnings allocated to participating securities $- $(2) 100.0%Net income available to common shareholders $76,009 $54,094 40.5% Income per share available to common shareholders Basic $5.27 $3.66 44.0% Diluted $5.21 $3.61 44.4% Weighted-average common shares outstanding Basic 14,425,253 14,778,892 -2.4% Diluted 14,581,458 14,990,989 -2.7% Dividends per share $1.10 $0.86 27.9%
June 30,
2023 2022 Interest income$227,495 $117,583 Interest expense 80,471 11,127 Interest income before provision for credit losses 147,024 106,456 Provision for credit losses 3,000 2,650 Non-interest income 2,035 4,867 Non-interest expense 39,752 33,297 Income tax expense 30,298 21,280 Net income$76,009 $54,096 Earnings per share Basic$5.27 $3.66 Diluted$5.21 $3.61 Ratios for the period: Return on average assets 2.37% 1.78% Return on beginning equity 24.31% 18.59% Net interest margin (Fully-taxable equivalent) 4.67% 3.58% Non-interest expense to average assets 1.24% 1.09% Efficiency ratio 26.67% 29.91% Net charge-off (recoveries) to average loans 0.00% 0.05% Average balances: Total securities$420,254 $430,203 Total loans 5,028,520 4,777,353 Total earning assets 6,355,222 6,007,841 Total assets 6,480,186 6,133,703 Total time certificate of deposits 2,414,750 1,810,886 Total interest-bearing deposits 4,501,301 3,982,888 Total deposits 5,480,705 5,301,370 Total interest-bearing liabilities 4,740,508 4,130,729 Total equity 664,207 606,260
