Preferred Bank : Form 8-K~Current Report

FEDERAL DEPOSIT INSURANCE CORPORATION

Washington, D.C. 20429

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported) October 17, 2023

Preferred Bank

(Exact name of registrant as specified in its charter)

California	33539	95-4340199
(State or other jurisdiction	(FDIC Certificate No.)	(I.R.S. Employee
of incorporation or organization)		Identification No.)
601 S. Figueroa Street, 48th Floor, Los Angeles, California	90017
(Address of principal executive offices)	(Zip code)

[phone]

(Registrant's telephone number including area code)

Not applicable

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligations of the registrant under any of the following provisions:

 Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

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Item 2.02 Results of Operations and Financial Condition

On October 17, 2023, Preferred Bank issued a press release announcing earnings results for the quarter ended September 30, 2023.

Press release dated October 17, 2023 is hereby attached.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Preferred Bank

Dated: October 23, 2023	By: /s/ Edward J. Czajka
	Edward J. Czajka
	Executive Vice President
	Chief Financial Officer

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AT THE COMPANY:	AT FINANCIAL PROFILES:
Edward J. Czajka	Jeffrey Haas
Executive Vice President	General Information
Chief Financial Officer	[phone]
[phone]	[e-mail]

FOR IMMEDIATE RELEASE

October 17, 2023

PREFERRED BANK REPORTS QUARTERLY EARNINGS

LOS ANGELES, CALIFORNIA, October 17, 2023 - Preferred Bank (NASDAQ: PFBC), one of the larger independent California banks, today reported results for the quarter ended September 30, 2023. Preferred Bank ("the Bank") reported net income of $38.2 million or $2.71 per diluted share for the third quarter of 2023. This represents an increase in net income of $3.0 million or 8.5% over the same quarter last year and up slightly compared to the second quarter of 2023. The primary driver of the increase over the prior year quarter was net interest income which increased by $6.2 million or 9.2% over the same period last year partially offset by higher noninterest expense. When compared to the prior quarter, net interest income was down slightly, as was noninterest income and noninterest expense.

Overall, results were very strong and the Bank also provided for $3.5 million in provision for credit losses which has driven the allowance for credit losses to total loans up to 1.46%.

Highlights for the Quarter:

• Return on average assets was 2.25%
• Return on beginning equity of 22.66%
• Net interest margin was 4.39%
• Total deposits increased $94.3 million or 6.7% annually for the quarter
• Efficiency ratio was 25.0%
• Quarter-endcash and equivalents continues to be strong at $1.02 billion or 18.0% of total deposits

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Li Yu, Chairman and CEO, commented, "We are pleased to report another quarter of record profit. Earnings per diluted share for the third quarter was $2.71.

"For the quarter, loans practically stayed even and deposits grew modestly, which is the reflection of the cautiousness of both the Bank and its clients under the current environment. The margin decreased moderately from 4.58% in Q2 to 4.39% for Q3, largely because interest cost increases have slowed down.

"Credit quality remained relatively stable in the quarter. As of September 30, 2023, loans 30-89 days past due were negligible and total criticized loans increased slightly from the previous quarter. For the quarter, we have made a provision for credit losses in the amount of $3.5 million. Allowance for credit losses at September 30, 2023 now increased to 1.46% of total loans. We have been diligently identifying any credit loss exposures and fully reserving any potential exposure so that loan resolutions will not negatively affect the future operating income.

"Our operating expenses remain under control and were within our expectations. The Bank's efficiency ratio for the quarter was 25.0% Since the second quarter of this year, we have been continuously buying back our own stock due to our strong tangible capital position and the market price of the stock. Through September 30, 2023, total shares repurchased were 730,044. Even with the buyback, our tangible capital equity ratio was a strong 10.1%.

"Based upon public information, Preferred Bank is the most profitable independent Bank in California measured by return on equity metrics and we hope this trend will continue. However, the market price of our stock does not reflect our ability to consistently deliver top-of-peer earnings over many years. We will not be discouraged by the market reception and pledge to continue our devotion to operate the Bank efficiently and prudently."

Results of Operations

Net Interest Income and Net Interest Margin. Net interest income before provision for credit losses was $73.0 million for the third quarter of 2023. This was a significant increase from the $66.8 million recorded in the same quarter last year but down just slightly from the $73.3 million posted in the second 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. Due mainly to increasing deposit rates, the Bank's taxable

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equivalent net interest margin declined by 19 basis points to 4.39% from 4.58% last quarter. Comparing to the same quarter last year, the margin was up by 2 basis points over the 4.37% posted this quarter last year.

Noninterest Income. For the third quarter of 2023, noninterest income was $3.0 million compared with $2.2 million for the same quarter last year and compared to 3.1 million for the second 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 decrease from the second quarter of 2023 was due to lower gain on SBA loan sales as well as lower LC fee income.

Noninterest Expense. Total noninterest expense was $19.0 million for the third quarter of 2023 compared to $20.9 million for the second quarter of 2023 and compared to the $17.4 million recorded in the same period last year. Comparing this quarter to the third quarter of last year, the major variances were; personnel expense increased by $682,000 or 5.5%, other professional services increased by $262,000 due mainly to legal fees and consulting fees and other expense increased by $810,000 due mainly to higher FDIC premiums as well as a one time $150,000 penalty for payroll tax which we believe will be at least partially recovered. In comparing the third quarter of 2023 to the prior quarter; personnel expense increased by $488,000 or 3.9% and there was no OREO valuation adjustment in the current quarter which means that OREO costs decreased by $2.7 million. For the quarter ended September 30, 2023, the Bank's efficiency ratio was 25.0%, besting the 27.3% posted last quarter and slightly better than the 25.2% posted this quarter last year.

Income Taxes. The Bank recorded a provision for income taxes of $15.2 million for the third quarter of 2023. This represents an effective tax rate ("ETR") of 28.5% and the same as the 28.5% ETR for the second quarter of 2023 but up from the 28.0% ETR recorded in the third 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 September 30, 2023 were $5.13 billion, an increase of $53.4 million from the total of $5.07 billion as of December 31, 2022. Total deposits increased to $5.68 billion from the $5.56 billion as of December 31, 2022, an increase of $126.3 million. Total assets were $6.63 billion, an increase of $207.2 million over the total of $6.43 billion as of December 31, 2022.

Uninsured Deposits

As of September 30, 2023, total uninsured deposits represented approximately 41.8 % of total deposits. Since mid-March, we have been diligently working with our larger deposit clients to enroll them in various reciprocal

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deposit programs to ensure that all of their deposits are FDIC insured. It should be noted that included in the uninsured deposits figure is $187 million of deposits that are collateralized so these would not otherwise necessitate FDIC insurance. Finally, there are also a number of accounts totalling $166 million that are enrolled in one of our reciprocal deposit programs but have yet to participate in the program; these are also included in uninsured deposits.

Balance Sheet Fair Market Values from June 30, 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 June 30, 2023. As can be clearly seen, the rise in interest rates has not hurt the fair market value of our loan portfolio, unlike mst other banks.

Assets:

Cash and cash equivalents Securities held-to-maturity Securities available-for-sale Loans receivable, net Customers' liability on acceptances Accrued interest receivable Federal Home Loan Bank stock

Liabilities:

Demand deposits and savings: Noninterest-bearingInterest-bearing

Time deposits Subordinated debt issuance Acceptances Outstanding Accrued interest payable

June 30, 2023

Fair Value	Carrying	Estimated
Measurement
Amount	Fair Value
Using
(Dollars in thousands)
Level 1	$ 1,049,745	$ 1,049,745
Level 2	21,818	19,865
Level 2/3	352,548	352,548
Level 3	5,036,618	5,102,339
Level 2	448	448
Level 2/3	28,184	28,184
Level 2	15,000	N/A

Level 2	$ 870,282	$	870,282
Level 2	2,037,387		2,037,387
Level 2	2,681,322		2,665,195
Level 2	148,114		169,134
Level 2	448		448
Level 2	6,998		6,998

Liquidity

As of September 30, 2023, the Bank had $1.02 billion in cash and fed funds on the balance sheet representing 18.0% of total deposits. In addition, the Bank had $1.11 billion in FHLB borrowing availability, $85.42 million in available funds from the FRB Discount window and $156.2 million in available for sale securities that were unpledged. All summed, this totals $2.39 billion of total liquidity or 42.1% of total deposits.

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(in 000's)

Asset Quality

As of September 30, 2023, nonaccrual loans increased to $19.4 million, from $423,000 reported as of June 30, 2023 and up from the $6.2 million reported as of September 30, 2022. Although a marked increase, we are confident in the expedient and low cost resolution of these loans. In addition, OREO and repossessed assets totaled $16.7 million as of September 30, 2023. In addition to that, the Bank's total criticized and classified assets assets remained fairly constant at $115.3 million compared to $105.1 million as of June 30, 2023. Total net charge-offs were $80,000 for the third quarter of 2023 as compared to net charge offs of $0 last quarter and compared to net recoveries of ($2.4 million) 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, 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 September 30, 2023, the Bank has the following office loans;

Medical Office	$	14,184
Mixed Use (Office & Retail)		170,590
Pure Office		177,322
Reposition for Multi-Family		105,731
Total	$	467,827

Substantially 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 third quarter of 2023 was $3.5 million compared to $2.5 million last quarter and compared to $2.7 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 1.46% of total loans.

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Capitalization

As of September 30, 2023, the Bank's leverage ratio was 10.46%, the common equity tier 1 capital ratio was 11.63% and the total capital ratio stood at 15.32%. 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, October 18, 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 November 1, 2023; the passcode is 6410410.

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.

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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.

Financial Tables to Follow

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PREFERRED BANK

Condensed Consolidated Statements of Operations

(unaudited)

(in thousands, except for net income per share and shares)

			For the Quarter Ended
	September 30,			June 30,		September 30,
		2023			2023			2022
Interest income:
Loans, including fees	$	106,695	$	102,220	$	71,192
Investment securities		18,556			15,919			7,111
Fed funds sold		278			272			117
Total interest income		125,529			118,411			78,420
Interest expense:
Interest-bearing demand		20,257			16,406			6,436
Savings		67			47			19
Time certificates		29,369			25,436			3,850
FHLB borrow ings		1,557			1,888			-
Subordinated debt		1,325			1,325			1,325
Total interest expense		52,575			45,102			11,630
Net interest income		72,954			73,309			66,790
Provision for credit losses		3,500			2,500			2,700
Net interest income after provision for
credit losses		69,454			70,809			64,090
Noninterest income:
Fees & service charges on deposit accounts		939			844			703
Letters of credit fee income		1,412			1,576			956
BOLI income		103			103			100
Net gain on sale of loans		21			186			-
Other income		497			392			428
Total noninterest income		2,972			3,101			2,187
Noninterest expense:
Salary and employee benefits		13,008			12,520			12,326
Net occupancy expense		1,563			1,476			1,452
Business development and promotion expense		193			200			214
Professional services		1,423			1,343			1,161
Office supplies and equipment expense		395			398			456
Loss on sale of OREO, valuation allow ance and related expense		140			2,838			314
Other		2,287			2,077			1,477
Total noninterest expense		19,009			20,852			17,400
Income before provision for income taxes		53,417			53,058			48,877
Income tax expense		15,225			15,122			13,688
Net income	$	38,192	$	37,936	$	35,189
Income per share available to common shareholders
Basic	$	2.74	$	2.63	$	2.44
Diluted	$	2.71	$	2.61	$	2.40
Weighted-average common shares outstanding
Basic		13,925,994			14,419,959			14,792,298
Diluted		14,105,915			14,560,693			15,006,801
Cash dividends per common share	$	0.55	$	0.55	$	0.43

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