Preferred Bank Reports Record Quarterly Earnings

LOS ANGELES, Jan. 19, 2017 -- Preferred Bank (NASDAQ:PFBC), an independent commercial bank, today reported results for the quarter and year ended December 31, 2016. Preferred Bank (“the Bank”) reported net income of $10.1 million or $0.71 per diluted share for the fourth quarter of 2016. This compares to net income of $7.6 million or $0.54 per diluted share for the fourth quarter of 2015 and compares to net income of $9.9 million or $0.69 per diluted share for the third quarter of 2016. Net income for the full year 2016 was $36.4 million, or $2.56 per diluted share, an increase in net income of $6.6 million or 22.3% over 2015.

Highlights from the fourth quarter of 2016:

Highlights from the year 2016:

Li Yu, Chairman and CEO commented, “2016 was one of the most successful years in Preferred Bank’s 25 year history. First and foremost, total shareholder return exceeded 60% for the year. Other financial highlights include year over year increases in total assets of 24.0%, total loans of 23.5% and total deposits of 20.9%. Of most importance was the 19.9% increase in diluted earnings per share. The Bank’s efficiency ratio also improved from 40.7% in 2015 to 39.7% in 2016. However, the net interest margin decreased to 3.72% in 2016 from 3.92% in 2015, the result of continuous loan pricing competition and the Bank’s issuance of $100 million in subordinated debt. For years now, we have been diligent in maintaining an asset sensitive balance sheet and as of 12/31/16, 80.3% of our loan portfolio is floating with the Prime rate and a further 13% is adjustable rate with LIBOR or other indices. We now sit in a most favorable position under a rising interest rate environment.

“For the fourth quarter of 2016, total loans increased $111 million or 4.6%, and total deposits increased $104 million or 3.9% on a linked quarter basis.

“End of the year loan funding and payoff activities seemed to be within our range of expectations. The loan pipeline appears to be consistent with prior quarters.

“The net interest margin improved from 3.59% for the third quarter to 3.67% for the fourth quarter, and is largely the result of change in leverage, or loan and deposit mix. The efficiency ratio, already among the industry’s best, ticked up slightly from 37.7% in the third quarter but still remains under 40%.

“Net income for the fourth quarter was $10.1 million or $0.71 per diluted share which was slightly higher than our expectations.

“2016 was a year in which we executed well but we also set in motion plans to prepare the Bank for the challenges ahead. We formed a new mortgage lending group which will enable us to diversify the loan portfolio and we expect this unit to be fully operational by the end of the first quarter of 2017. We also added $100 million of tier 2 capital in the form of subordinated debt which will allow the Bank to continue to grow the CRE portfolio.

“We were encouraged by the December FOMC rate increase. Entering the new year, we expect further growth and profitability, but remain always mindful of the many challenges that our industry faces.”

Net Interest Income and Net Interest Margin. Net interest income before provision for loan and lease losses was $28.1 million for the fourth quarter of 2016. This compares favorably to the $22.3 million recorded in the fourth quarter of 2015 and to the $26.5 million recorded in the third quarter of 2016. The increase over both comparable periods is due primarily to growth in interest income on loans partially offset by an increase in interest expense on deposits and borrowings. The Bank’s taxable equivalent net interest margin was 3.67% for the fourth quarter of 2016, a 21 basis point decrease from the 3.88% achieved in the fourth quarter of 2015 and  an 8 basis point increase from the 3.59% recorded in the third quarter of 2016. The decrease compared to the fourth quarter of 2015 is primarily due to the $100 million in subordinated debt issued in 2016 and the increase over the third quarter of 2016 was mainly due to loan growth and generally lower cash balances in the fourth quarter of 2016.

Noninterest Income. For the fourth quarter of 2016, noninterest income was $1,286,000 compared with $954,000 for the same quarter last year and compared to $1,350,000 for the third quarter of 2016. The increase over the fourth quarter of 2015 is primarily due to a gain on a called security of $133,000 in the fourth quarter of 2016. In addition, trade finance income, service charges on deposits and other income all posted modest increases over the third quarter of 2016.  The decrease from the third quarter of 2016 was due to lower service charges and trade finance income in the fourth quarter.

Noninterest Expense. Total noninterest expense was $11.2 million for the fourth quarter of 2016, an increase of $1.3 million over the same period last year and an increase of $737,000 over the $10.5 million recorded in the third quarter of 2016. Salaries and benefits expense totaled $6.7 million for the fourth quarter of 2016, an increase of $1.4 million over the $5.2 million recorded for the same period last year and $593,000 over the $6.1 million recorded in the third quarter of 2016. The increase over the same period last year is partly due to the mid-Q4 2015 acquisition of United International Bank (“UIB”),  growth of the Bank, as well as regular merit increases. In addition, the Bank recorded a one-time $350,000 charge for payroll taxes related to the termination and payout of the Bank’s Deferred Compensation Plan. Occupancy expense totaled $1.2 million for the quarter, an increase of $175,000 over the $1.0 million recorded in the same period in 2015 and flat compared to the third quarter of 2016. The increase over the prior year was due mainly to the addition of the New York office with the UIB acquisition as well as a new administrative office which the Bank opened in November 2015 in El Monte, California. Professional services expense was $1.5 million for the fourth quarter of 2016 compared to $1.4 million for the same quarter of 2015 and $1.4 million recorded in the third quarter of 2016. The Bank incurred $187,000 in costs related to its one OREO property. This compares to $1,000 in the fourth quarter of 2015 and $196,000 in the third quarter of 2016. Other expenses were $1.1 million for the fourth quarter of 2016 compared to $1.7 million for the same period last year and $1.1 million for the third quarter of 2016. The decrease from last year was mainly due to the recording of $415,000 in acquisition related costs in the fourth quarter of 2015.

Income Taxes

The Bank recorded a provision for income taxes of $6.2 million for the fourth quarter of 2016. This represents an effective tax rate (“ETR”) of 38.0% for the quarter. This is down from the ETR of 42.2% for the fourth quarter of 2015 and the same as the 38.1% ETR recorded in the third quarter of 2016. The decrease from both periods is due to adjustments made to the provision calculation as a result of the finalization and filing of the Bank’s 2015 tax returns. The Bank expects that the ETR will be slightly higher heading into 2017, closer to the Bank’s long-term historical average of just under 40%. Typically, the difference between the statutory rate (Federal and State combined) of 42.05% and the ETR is due to tax deductible items as well as the Bank’s investments in municipal bonds and various Low Income Housing Income Tax Credit (“LIHTC”) funds.

Balance Sheet Summary

Total gross loans and leases at December 31, 2016 were $2.54 billion, an increase of $484.2 million or 23.5% over the total of $2.06 billion as of December 31, 2015. Total deposits reached $2.76 billion, an increase of $477.2 million or 20.9% over the total of $2.29 billion as of December 31, 2015. Total assets reached $3.22 billion as of December 31, 2016, an increase of $622.8 million or 24.0% over the total of $2.60 billion as of December 31, 2015.

Asset Quality

As of December 31, 2016 nonaccrual loans totaled $7.6 million, an increase of $5.7 million over the $2.0 million total as of December 31, 2015. In October, it was determined that a C&I loan relationship of approximately $10 million be downgraded and placed on nonaccrual status. Accordingly, nonperforming loans have increased as of December 31, 2016 from the prior quarter. This relationship has been with the Bank for 8 years and has consistently paid as agreed. After the downgrade, the borrower has made approximately $2 million in scheduled paydowns and another $1.5 million in repayments just prior to year end. As the borrowing entity is operating with sufficient profitability, we anticipate the ultimate collection of all principal and interest.

Total net recoveries for the fourth quarter of 2016 were $22,000 compared to net charge-offs of $827,000 in the third quarter of 2016 and compared to net charge-offs of $1.7 million for the fourth quarter of 2015. The Bank recorded a provision for loan loss of $1.9 million for the fourth quarter of 2016, compared to a provision of $300,000 recorded in the same quarter last year and compared to the $1.4 million provision recorded in the third quarter of 2016. The allowance for loan loss at December 31, 2016 was $26.5 million or 1.04% of total loans compared to $22.7 million or 1.10% of total loans at December 31, 2015.

OREO

As of December 31, 2016 and December 31, 2015, the Bank held one OREO property, a $4.1 million multi-family property located outside of California.

Capitalization
As of December 31, 2016, the Bank’s leverage ratio was 9.43%, the common equity tier 1 capital ratio was 9.83% and the total capital ratio was 14.09%. As of December 31, 2015, the Bank’s leverage ratio was 10.46%, the common equity tier 1 ratio was 11.03% and the total risk based capital ratio was 12.00%.

Conference Call and Webcast
A conference call with simultaneous webcast to discuss Preferred Bank’s fourth quarter 2016 financial results will be held tomorrow, January 20^th  at 2:00 p.m. Eastern / 11:00 a.m. Pacific. Interested participants and investors may access the conference call by dialing 866-652-5200 (domestic) or 412-317-6060 (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 3, 2017; the passcode is 10099649.

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 ten 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, 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 2015 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.

Financial Tables to Follow

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
[email protected]