Preferred Bank Reports Quarterly Earnings

Rhea-AI Summary

Preferred Bank (NASDAQ: PFBC) reported a third-quarter 2020 net income of $17.1 million ($1.15 per diluted share), down from $20.0 million ($1.32 per diluted share) in Q3 2019. This improvement over Q2 2020's $15.3 million ($1.03 per diluted share) is attributed to increased net interest income and reduced noninterest expenses. The provision for credit losses rose to $9.0 million, significantly higher than $900,000 in Q3 2019, impacting profitability. Total deposits grew 10.8% to $4.41 billion year-over-year, despite loan balances decreasing by $14 million compared to Q2 2020.

Positive

• Net interest income increased to $44.1 million, up from $41.5 million year-over-year.
• Total deposits rose by $421.1 million or 10.8% compared to December 31, 2019.
• Efficiency ratio improved to 29.9%.

Negative

• Net income decreased from $20.0 million in Q3 2019 to $17.1 million.
• Provision for credit losses increased to $9.0 million from $900,000 year-over-year.
• Loan balances declined by $14 million compared to Q2 2020.

LOS ANGELES, Oct. 19, 2020 (GLOBE NEWSWIRE) -- Preferred Bank (NASDAQ: PFBC), an independent commercial bank, today reported results for the quarter ended September 30, 2020. Preferred Bank (“the Bank”) reported net income of $17.1 million or $1.15 per diluted share for the third quarter of 2020. This is down from net income of $20.0 million or $1.32 per diluted share for the third quarter of 2019 but easily surpasses net income of $15.3 million or $1.03 per diluted share for the second quarter of 2020. The primary reason for the decrease compared to the prior year is the provision for credit losses, which totaled $9.0 million for the third quarter of 2020, as compared to $900,000 in the third quarter of 2019. Compared to the second quarter of 2020, however, the provision for credit losses increased $1.5 million over the $7.5 million recorded in that period, yet net income increased $1.9 million or $0.12 per diluted share. This was due to an increase in net interest income, an increase in noninterest income coupled with a decrease in noninterest expense.

Li Yu, Chairman and CEO, commented, “We are pleased to report third quarter net income of $17.1 million or $1.15 per share. Our earnings compare favorably with the previous two quarters. In fact, on a pre-tax, pre-provision (PTPP) basis, our third quarter and YTD earnings reached a record high. The primary reasons for the performance was significantly reduced interest cost and effective overhead control. The Bank’s third quarter efficiency ratio clocked in at 29.88%. Our net interest margin, however, compressed slightly from the previous quarter due to a larger balance sheet and much higher level of cash. Under the current interest rate environment, excess cash reduces our profitability.

Deposits continued to grow in the third quarter as we saw a $64.2 million or 1.5% increase from June 30, 2020. However, our loan balances came in $14 million below the previous quarter. The prolonged shut down of our trade area has reduced the opportunities for new loans. The uncertainties further make many new opportunities proportionately less attractive.

Our main focus at present is credit management. We elected to charge-off portions of the two loans which were placed on nonaccrual status last quarter in addition to fully reserving for any amounts which may not be collectible. In addition, due to the ongoing economic disruption caused by the pandemic, our provision for credit losses is again elevated this quarter. The allowance for credit loss to total loans now stands at 1.58% (excluding PPP loans).

A great deal of the credit management effort was also spent on loans modified under the CARES Act. These loans totaled $199.5 million at September 30, 2020 which represented a $267.6 million or 57% reduction from the $467.1 million reported on June 30, 2020. We have also been in contact with substantially all of these borrowers inquiring about their plan of resumption of scheduled payments. We are encouraged to learn that loans under modification at December 31, 2020 could be a very modest amount.

The pandemic has resulted in unprecedented uncertainties for our citizens, our economy and the banking industry. Preferred Bank’s outstanding operating metrics and earnings power will provide an additional resource in meeting the challenges ahead.”

Results of Operations

Net Interest Income and Net Interest Margin. Net interest income before provision for credit losses was $44.1 million for the third quarter of 2020. This is an increase over the $41.5 million recorded in the third quarter of 2019 as well as the $42.2 million recorded in the second quarter of 2020. The increase over both periods is due to growth in average total loans as well as declining deposit costs. The Bank’s taxable equivalent net interest margin was 3.54% for the third quarter of 2020, a 30 basis point decrease from the 3.84% achieved in the third quarter of 2019 and a 3 basis point decrease from the 3.57% posted in the second quarter of 2020. During the third quarter, compared to the second quarter, average interest-earning assets increased by $207 million, of which $184 million was centered in cash, most of which earns interest at 0.10% per annum. This brought average asset yields down to 4.23% in the quarter from 4.41% the previous quarter. Fortunately, the Bank continues to benefit from lower deposit costs as the Bank’s total cost of deposits went from 0.81% in the second quarter down to 0.64% in the third quarter. Total deposit interest expense is down by more than half, or 52% from the same period last year.

Noninterest Income. For the third quarter of 2020, noninterest income was $1,605,000 compared with $1,737,000 for the same quarter last year and compared to $1,430,000 for the second quarter of 2020. The decrease from the third quarter of 2019 was due mainly to letter of credit fee income which decreased by $183,000. In addition, the Bank incurred a loss on sale of investment securities of $113,000 in the second quarter of 2020 compared to a gain of $15,000 in the third quarter of 2020.

Noninterest Expense. Total noninterest expense was $13.7 million for the third quarter of 2020. This is down from the $13.9 million recorded in the same quarter last year and is also down from the $14.3 million posted in the second quarter of 2020. Salaries and benefits expense totaled $9.1 million for the third quarter of 2020, a decrease of $675,000 from the third quarter of 2019 and a decrease of $1.0 million from the second quarter of 2020. The decrease from the prior quarter is mostly to an increase in capitalized loan origination costs related to higher overall loan production in the third quarter versus the second quarter. The decrease from the prior year is due mainly to reduced bonus expense as the Bank’s profitability is lower than in the prior year, which is the main driver of total incentive compensation. Occupancy expense totaled $1.5 million for the quarter and this represented an increase over the $1.3 million recorded in the third quarter of 2019 and the second quarter of 2020. Professional services expense was $1.0 million for the third quarter of 2020 and was down slightly from the $1.1 million recorded in the same quarter of 2019 and flat compared to the $1.0 million posted in the second quarter of 2020. Other expenses were $1.6 million for the third quarter of 2020, an increase of $414,000 over the same period last year and up by $207,000 over the second quarter of 2020. The increase over both periods was mainly due to FDIC insurance premiums of which there were none in the third quarter of 2019 and which were also lower in the second quarter of 2020 compared to the third quarter. For the quarter ended September 30, 2020, the Bank’s efficiency ratio was 29.9%.

Income Taxes. The Bank recorded a provision for income taxes of $5.9 million for the third quarter of 2020. This represents an effective tax rate (“ETR”) of 27.5% and a slight decrease from the ETR of 29.5% for the same quarter last year and also down from the 29.7% recorded in the second 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 September 30, 2020 were $3.95 billion, an increase of $224.8 million or 6.0% over the total of $3.72 billion as of December 31, 2019. Total deposits increased to $4.41 billion, an increase of $421.1 million or 10.8% over the $3.98 billion as of December 31, 2019. Total assets ended the quarter at $5.09 billion, an increase of $457.1 million or 9.9% 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 September 30, 2020:

Category	Loan  Count		Total Balance (000's)		% of Loan Balance	Average LTV	Average DCR
Cash Secured	79		34,241		0.87%	N/A	N/A
Commercial	1,741		1,094,872		27.72%	N/A	N/A
International	62		15,006		0.38%	N/A	N/A
Construction - 1-4 Residential	54		170,773		4.32%	48.8%	N/A
Construction - Commercial	41		223,706		5.66%	53.8%	N/A
Real Estate - 1-4 Residential	165		248,371		6.29%	55.5%	1.32
Real Estate - Industrial	99		243,130		6.16%	53.9%	1.71
Real Estate - Multifamily	68		282,188		7.14%	58.1%	1.24
Real Estate - Office	70		327,786		8.30%	55.5%	1.66
Real Estate - Retail	116		411,508		10.42%	59.0%	1.55
Real Estate - Special Purpose	75		542,561		13.74%	51.5%	1.51
Real Estate - Vacant Land	4		7,787		0.20%	49.4%	N/A
SBA	227		74,551		1.89%	N/A	N/A
HELOC	6		1,545		0.04%	42.4%	N/A
Residential Mortgage	422		271,695		6.88%	59.7%	% (DTI)
Total	3,229		3,949,721		100.00%

Asset Quality

As of September 30, 2020, nonaccrual loans totaled $25.2 million, down slightly from the $26.4 million reported as of June 30, 2020 and but an increase over the $2.1 million reported at December 31, 2019. Total net charge-offs for the third quarter of 2020 were $3.5 million compared to net recoveries of $133,000 in the second quarter of 2020 and compared to net charge-offs of $430,000 for the third quarter of 2019.

COVID – 19 Relief Modifications

Below is a breakdown of loans at September 30, 2020 that are in some form of payment deferment by segment as compared to June 30, 2020:

Loan Type	Prior Qtr Total in Deferral 30-Jun-20		Curr Qtr Total in Deferral 30-Sept-20		% of Total Portfolio	Weighted Average LTV	Quarterly Decrease
							$		%
Commercial and Industrial	$	39,518	$	5,865	0.6%	N/A	$	33,653	85.2%
Office	28,696		16,200		4.9%	55.5%	12,496		43.5%
Industrial	29,495		13,064		5.4%	53.9%	16,431		55.7%
Retail	88,319		64,169		15.6%	59.0%	24,150		27.3%
Multi-Family	17,593		17,200		6.1%	58.1%	393		2.2%
1-4 Family (Inv)	6,624		3,915		1.6%	55.6%	2,709		40.9%
Restaurant	6,149		4,212		19.2%	47.2%	1,937		31.5%
Special Purpose / Hotel	172,531		47,305		13.8%	54.9%	125,226		72.6%
Special Purpose / Other	51,232		12,720		6.4%	45.7%	38,512		75.2%
Construction / AD	-		-		0.0%		-		0.0%
Residential Mortgage	26,935		14,887		5.5%	-	12,048		44.7%
Grand Total	$	467,092	$	199,537	5.1%		$	267,555	57.3%

At September 30, 2020, total dollar amount of loans in deferral were equal to 5.1% of the Bank’s loan portfolio. Of the total modifications at present, 37% are for the deferral of interest only and 57% are for principal and interest deferral. As previously mentioned, based on communications with nearly all of those in deferral, the outlook for deferrals at year end appears modest.

Allowance for Credit Losses

Due primarily to the ongoing partial economic shutdown and uncertainty regarding future economic activity, the provision for credit losses continues to be elevated at $9.0 million for this quarter. This compares to the $7.5 million provision recorded in the second quarter of 2020 and is well ahead of the $900,000 recorded in the same quarter last year. In the first quarter of 2020, the Bank implemented the CECL methodology under Accounting Standards Codification ("ASC") 326, in which the allowance for credit losses now reflects expected credit losses over the life of loans and held-to-maturity debt securities, and incorporates macroeconomic forecasts as well as historical loss rates. Between the adoption of CECL in the first quarter, and the heightened provisions for credit losses to-date this year, the Bank’s allowance coverage ratio has increased from 0.94% of total loans as of December 31, 2019 to a coverage ratio now totaling 1.58% of total non-PPP loans.

Capitalization

As of September 30, 2020, the Bank’s leverage ratio was 9.75%, the common equity tier 1 capital ratio was 10.98% and the total capital ratio was 14.47%. As of December 31, 2019, the Bank’s leverage ratio was 10.32%, the common equity tier 1 ratio was 10.57% and the total risk based capital ratio was 13.70%.

Conference Call and Webcast

A conference call with simultaneous webcast to discuss Preferred Bank’s third quarter 2020 financial results will be held tomorrow, October 20, 2020 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, 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, 2020; the passcode is 10148872.

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. 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 2019 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.

AT THE COMPANY:	AT FINANCIAL PROFILES:
Edward J. Czajka	Jeffrey Haas
Executive Vice President	General Information
Chief Financial Officer	(310) 622-8240
(213) 891-1188	PFBC@finprofiles.com

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
				September 30,				June 30,				September 30,
				2020				2020				2019
Interest income:
Loans, including fees				$	50,417			$	49,813			$	52,862
Investment securities				2,335				2,320				4,875
Fed funds sold				30				31				222
	Total interest income			52,782				52,164				57,959
Interest expense:
Interest-bearing demand				1,432				1,462				4,904
Savings				20				17				13
Time certificates				5,681				6,973				10,034
Subordinated debit				1,530				1,531				1,531
	Total interest expense			8,663				9,983				16,482
	Net interest income			44,119				42,181				41,477
Provision for credit losses				9,000				7,500				900
	Net interest  income after provision for
		credit losses		35,119				34,681				40,577
Noninterest income:
Fees & service charges on deposit accounts				428				339				401
Letters of credit fee income				690				742				874
BOLI income				96				95				94
Net gain (loss) on called and sale of investment securities				15				(113		)		-
Other income				376				367				368
	Total noninterest income			1,605				1,430				1,737
Noninterest expense:
Salary and employee benefits				9,126				10,095				9,801
Net occupancy expense				1,455				1,296				1,329
Business development and promotion expense				95				114				109
Professional services				974				1,006				1,149
Office supplies and equipment expense				443				459				483
Net loss (gain) on sale of other real estate owned and expense				3				2				(129)
Other				1,567				1,362				1,156
	Total noninterest expense			13,663				14,334				13,898
	Income before provision for income taxes			23,061				21,777				28,416
Income tax expense				5,936				6,468				8,383
	Net income			$	17,125			$	15,309			$	20,033
Dividend and earnings allocated to participating securities				(53		)		(49		)		(168		)
Net income available to common shareholders				$	17,072			$	15,260			$	19,865
Income per share available to common shareholders
	Basic			$	1.15			$	1.03			$	1.32
	Diluted			$	1.15			$	1.03			$	1.32
Weighted-average common shares outstanding
	Basic			14,893,774				14,879,383				15,091,270
	Diluted			14,893,774				14,879,383				15,091,270
Cash dividends per common share				$	0.30			$	0.30			$	0.30

PREFERRED BANK
Condensed Consolidated Statements of Financial Condition
(unaudited)
(in thousands)
	September 30,				December 31,				September 30,
	2020				2019				2019
	(Unaudited)				(Audited)				(Unaudited)
Assets
Cash and due from banks	$	780,291			$	498,645			$	409,189
Fed funds sold	27,500				37,000				56,000
Cash and cash equivalents	807,791				535,645				465,189
Securities held to maturity, at amortized cost	6,727				7,310				7,545
Securities available-for-sale, at fair value	219,778				240,640				242,655
Loans	3,949,721				3,724,922				3,671,450
Less allowance for credit losses	(61,262		)		(34,830		)		(34,281		)
Amortized deferred loan fees, net	(4,411		)		(3,028		)		(2,518		)
Loans, net	3,884,048				3,687,064				3,634,651
Loans held for sale, at lower of cost or fair value	-				-				2,999
Customers' liability on acceptances	7,463				7,379				7,333
Bank furniture and fixtures, net	11,797				12,236				12,438
Bank-owned life insurance	9,764				9,571				9,507
Accrued interest receivable	24,353				14,961				14,505
Investment in affordable housing	47,917				53,142				39,780
Federal Home Loan Bank stock	15,000				13,101				13,101
Deferred tax assets	21,219				19,560				17,338
Income tax receivable	9,090				3,368				3,849
Operating lease right-of-use assets	16,384				17,103				17,362
Other assets	4,243				7,401				7,232
Total assets	$	5,085,574			$	4,628,481			$	4,495,484
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing demand deposits	$	926,166			$	835,790			$	774,869
Interest-bearing deposits:	1,620,495				1,328,863				1,435,144
Savings	32,830				23,784				21,985
Time certificates of $250,000 or more	977,821				976,727				849,574
Other time certificates	857,113				818,130				787,392
Total deposits	4,414,425				3,983,294				3,868,964
Acceptances outstanding	7,463				7,379				7,333
Subordinated debt issuance	99,304				99,211				99,180
Commitments to fund investment in affordable housing partnership	16,689				24,149				12,904
Operating lease liabilities	19,106				20,497				20,958
Accrued interest payable	2,940				3,324				6,117
Other liabilities	21,780				20,612				20,948
Total liabilities	4,581,707				4,158,466				4,036,404
Shareholders' equity	503,867				470,015				459,080
Total liabilities and shareholders' equity	$	5,085,574			$	4,628,481			$	4,495,484
Book value per common share	$	33.74			$	31.47			$	30.42
Number of common shares outstanding	14,933,307				14,933,768				15,091,657

PREFERRED BANK
Selected Consolidated Financial Information
(unaudited)
(in thousands, except for ratios)
	For the Quarter Ended
	September 30,		June 30,		Mars 31,		December 31,		September 30,
	2020		2020		2020		2019		2019
Unaudited historical quarterly operations data:
Interest income	$	52,782	$	52,164	$	55,667	$	55,483	$	57,959
Interest expense	8,663		9,983		13,876		15,074		16,482
Interest income before provision for credit losses	44,119		42,181		41,791		40,409		41,477
Provision for credit losses	9,000		7,500		5,300		450		900
Noninterest income	1,605		1,430		1,672		1,883		1,737
Noninterest expense	13,663		14,334		15,184		13,770		13,898
Income tax expense	5,936		6,468		6,825		8,456		8,383
Net income	$	17,125	$	15,309	$	16,154	$	19,616	$	20,033
Earnings per share
Basic	$	1.15	$	1.03	$	1.08	$	1.31	$	1.32
Diluted	$	1.15	$	1.03	$	1.08	$	1.31	$	1.32
Ratios for the period:
Return on average assets	1.34%		1.26%		1.40%		1.74%		1.81%
Return on beginning equity	13.94%		13.00%		13.82%		16.95%		17.61%
Net interest margin (Fully-taxable equivalent)	3.54%		3.57%		3.70%		3.67%		3.84%
Noninterest expense to average assets	1.07%		1.18%		1.31%		1.22%		1.25%
Efficiency ratio	29.88%		32.87%		34.93%		32.56%		32.16%
Net charge-offs (recoveries) to average loans (annualized)	0.35%		-0.01%		0.00%		-0.01%		0.05%
Ratios as of period end:
Tier 1 leverage capital ratio	9.75%		9.87%		10.05%		10.32%		10.27%
Common equity tier 1 risk-based capital ratio	10.98%		10.39%		10.80%		10.57%		10.40%
Tier 1 risk-based capital ratio	10.98%		10.39%		10.80%		10.57%		10.40%
Total risk-based capital ratio	14.47%		13.80%		14.26%		13.70%		13.53%
Allowances for credit losses to loans and leases at end of period	1.55%		1.41%		1.24%		0.94%		0.93%
Allowance for credit losses to non-performing loans and leases	243.56%		211.08%		2263.66%		1631.42%		895.30%
Average balances:
Total securities	$	237,801	$	250,134	$	247,689	$	248,904	$	249,060
Total loans	$	3,956,145	$	3,919,674	$	3,717,175	$	3,613,400	3,534,194
Total earning assets	$	4,975,005	$	4,768,537	$	4,548,512	$	4,381,206	$	4,298,523
Total assets	$	5,073,650	$	4,868,356	$	4,651,956	$	4,482,210	$	4,395,357
Total time certificate of deposits	$	1,841,901	$	1,757,531	$	1,765,816	$	1,756,480	$	1,650,965
Total interest bearing deposits	$	3,501,275	$	3,399,924	$	3,244,711	$	3,050,318	$	3,051,007
Total deposits	$	4,408,882	$	4,220,197	$	4,010,629	$	3,849,825	$	3,772,097
Total interest bearing liabilities	$	3,600,560	$	3,499,178	$	3,343,933	$	3,149,511	$	3,150,167
Total equity	$	503,515	$	486,931	$	475,409	$	463,849	$	460,451

PREFERRED BANK
Selected Consolidated Financial Information
(unaudited)
(in thousands, except for ratios)
				As of
				September 30,				June 30,				Mars 31,				December 31,				September 30,
				2020				2020				2020				2019				2019
Unaudited quarterly statement of financial position data:
Assets:
	Cash and cash equivalents			$	807,791			$	656,183			$	484,869			$	535,645			$	465,189
	Securities held-to-maturity, at amortized cost			6,727				6,922				7,077				7,310				7,545
	Securities available-for-sale, at fair value			219,778				270,667				235,097				240,640				242,655
	Loans:
		Real estate – Mortgage:
			Real estate—Residential	$	528,371			$	511,354			$	493,226			$	468,321			$	432,605
			Real estate—Commercial	1,808,200				1,781,660				1,730,017				1,731,017				1,751,735
			Total Real Estate – Mortgage	2,336,571				2,293,014				2,223,243				2,199,338				2,184,340
		Real estate – Construction:
			R/E Construction — Residential	170,773				187,083				177,364				173,951				179,651
			R/E Construction — Commercial	223,706				217,729				223,385				218,562				216,812
			Total real estate construction loans	394,480				404,812				400,749				392,513				396,463
		Commercial and industrial		1,144,051				1,192,056				1,269,242				1,132,629				1,090,230
		PPP		74,551				73,524				-				-				-
		Consumer and others		68				241				91				442				417
			Gross loans	3,949,721				3,963,647				3,893,325				3,724,922				3,671,450
	Allowance for credit  losses on loans			(61,262		)		(55,762		)		(48,130		)		(34,830		)		(34,281		)
	Net deferred loan fees			(4,411		)		(5,097		)		(3,084		)		(3,028		)		(2,518		)
		Net loans, excluding loans held for sale		$	3,884,048			$	3,902,788			$	3,842,111			$	3,687,064			$	3,634,651
	Loans held for sale			$	-			$	-			$	-			$	-			$	2,999
		Net loans		$	3,884,048			$	3,902,788			$	3,842,111			$	3,687,064			$	3,637,650
	Investment in affordable housing			47,917				49,658				51,400				53,142				39,780
	Federal Home Loan Bank stock			15,000				15,000				13,101				13,101				13,101
	Other assets			104,313				103,239				93,979				91,579				89,564
		Total assets		$	5,085,574			$	5,004,457			$	4,727,634			$	4,628,481			$	4,495,484
Liabilities:
	Deposits:
		Demand		$	926,166			$	934,764			$	753,750			$	835,790			$	774,869
		Interest-bearing demand		1,620,495				1,594,682				1,503,618				1,328,863				1,435,144
		Savings		32,830				27,737				23,035				23,784				21,985
		Time certificates of $250,000 or more		977,821				970,649				1,030,282				976,727				849,574
		Other time certificates		857,113				822,404				775,792				818,130				787,392
			Total deposits	$	4,414,425			$	4,350,236			$	4,086,477			$	3,983,294			$	3,868,964
	Acceptances outstanding			$	7,463			$	6,112			$	6,507			$	7,379			$	7,333
	Subordinated debt issuance			99,304				99,273				99,242				99,211				99,180
	Commitments to fund investment in affordable housing partnership			16,689				17,536				21,195				24,149				12,904
	Other liabilities			43,826				42,571				40,428				44,433				48,023
		Total liabilities		$	4,581,707			$	4,515,728			$	4,253,849			$	4,158,466			$	4,036,404
Equity:
	Net common stock, no par value			$	213,519			$	212,187			$	210,091			$	210,998			$	215,123
	Retained earnings			284,568				271,923				261,095				255,050				239,914
	Accumulated other comprehensive income			5,780				4,619				2,599				3,967				4,043
		Total shareholders' equity		$	503,867			$	488,729			$	473,785			$	470,015			$	459,080
		Total liabilities and shareholders' equity		$	5,085,574			$	5,004,457			$	4,727,634			$	4,628,481			$	4,495,484

PREFERRED BANK
QUARTER-TO-DATE AVERAGE BALANCES, YIELD AND RATES
(Unaudited)
			Three months ended September 30,						Three months ended June 30,						Three months ended September 30,
			2020						2020						2019
					Interest		Average				Interest		Average				Interest		Average
			Average		Income or		Yield/		Average		Income or		Yield/		Average		Income or		Yield/
			Balance		Expense		Rate		Balance		Expense		Rate		Balance		Expense		Rate
ASSETS			(Dollars in thousands)
Interest-earning assets:
	Loans (1,2)		$	3,956,145	$	50,417	5.07%		$	3,921,694	$	49,813	5.11%		$	3,534,283	$	52,862	5.93%
	Investment securities (3)		237,801		1,967		3.29%		250,134		2,098		3.37%		249,060		2,253		3.59%
	Federal funds sold		23,828		30		0.50%		24,324		31		0.52%		35,079		222		2.52%
	Other earning assets		757,231		474		0.25%		572,385		318		0.22%		480,101		2,737		2.26%
		Total interest-earning assets	4,975,005		52,888		4.23%		4,768,537		52,260		4.41%		4,298,523		58,074		5.36%
	Deferred loan fees, net		(4,713)						(3,182)						(1,742)
	Allowance for credit losses on loans		(55,724)						(48,247)						(33,717)
Noninterest earning assets:
	Cash and due from banks		7,355						8,274						4,935
	Bank furniture and fixtures		11,856						11,993						12,656
	Right of use assets		16,550						16,768						17,525
	Other assets		123,321						114,213						97,177
		Total assets	$	5,073,650					$	4,868,356					$	4,395,357
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
	Deposits:
		Interest-bearing demand and savings	1,659,374		$	1,452	0.35%		1,642,393		$	1,479	0.36%		$	1,400,042	$	4,917	1.39%
		TCD $250K or more	987,631		2,993		1.21%		945,043		3,624		1.54%		845,262		5,120		2.40%
		Other time certificates	854,270		2,688		1.25%		812,488		3,349		1.66%		805,703		4,914		2.42%
		Total interest-bearing deposits	3,501,275		7,133		0.81%		3,399,924		8,452		1.00%		3,051,007		14,951		1.94%
Subordinated debt			99,285		1,530		6.13%		99,254		1,531		6.20%		99,160		1,531		6.13%
		Total interest-bearing liabilities	3,600,560		8,663		0.96%		3,499,178		9,983		1.15%		3,150,167		16,482		2.08%
Non-interest bearing liabilities:
	Demand deposits		907,607						820,273						721,090
	Lease Liability		19,400						19,841						21,252
	Other liabilities		42,568						42,133						42,397
		Total liabilities	4,570,135						4,381,425						3,934,906
Shareholders’ equity			503,515						486,931						460,451
		Total liabilities and shareholders’ equity	$	5,073,650					$	4,868,356					$	4,395,357
Net interest income					$	44,225					$	42,277					$	41,592
Net interest spread							3.27%						3.26%						3.28%
Net interest margin							3.54%						3.57%						3.84%
Cost of Deposits:
	Noninterest bearing demand deposits		$	907,607					$	820,273					$	721,090
	Interest bearing deposits		3,501,275		7,133		0.81%		3,399,924		8,452		1.00%		3,051,007		14,951		1.94%
		Total Deposits	$	4,408,882	$	7,133	0.64%		$	4,220,197	$	8,452	0.81%		$	3,772,097	$	14,951	1.57%
(1)	Includes non-accrual loans and loans held for sale
(2)	Net loan fee income of $683,000 and $640,000 for the quarter ended September 30, 2020 and 2019, respectively, are included in the yield computations
(3)	Yields on securities have been adjusted to a tax-equivalent basis

PREFERRED BANK
YEAR-TO-DATE AVERAGE BALANCES, YIELD AND RATES
(Unaudited)
			Nine months ended September 30,
			2020						2019
					Interest		Average				Interest		Average
			Average		Income or		Yield/		Average		Income or		Yield/
			Balance		Expense		Rate		Balance		Expense		Rate
ASSETS			(Dollars in thousands)
Interest-earning assets:
	Loans (1,2)		$	3,865,350	$	151,794	5.25%		$	3,389,136	$	156,166	6.16%
	Investment securities (3)		245,181		6,193		3.37%		215,818		6,442		3.99%
	Federal funds sold		26,093		185		0.95%		42,720		799		2.50%
	Other earning assets		628,165		2,736		0.58%		436,906		8,143		7.41%
		Total interest-earning assets	4,764,789		160,908		4.51%		4,084,580		171,550		5.62%
	Deferred loan fees, net		(3,662)						(1,721)
	Allowance for credit losses on loans		(48,949)						(31,776)
Noninterest earning assets:
	Cash and due from banks		7,321						5,923
	Bank furniture and fixtures		12,039						10,201
	Right of use assets		16,774						11,852
	Other assets		117,105						110,456
		Total assets	$	4,865,417					$	4,189,515
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
	Deposits:
		Interest-bearing demand/ savings	1,593,793		$	6,313	0.53%		1,324,550		$	14,504	1.46%
		TCD $250K or more	967,413		11,469		1.58%		787,522		13,992		2.38%
		Other time certificates	821,199		10,148		1.65%		787,354		13,902		2.36%
		Total interest-bearing deposits	3,382,405		27,930		1.10%		2,899,426		42,398		1.96%
Subordinated debt			99,254		4,592		6.18%		99,108		4,593		6.20%
Long-term debt			-		-		0.00%		1,052		19		2.46%
		Total interest-bearing liabilities	3,481,659		32,522		1.25%		2,999,586		47,010		2.10%
Non-interest bearing liabilities:
	Demand deposits		831,545						691,266
	Lease Liability		19,850						14,546
	Other liabilities		43,690						47,452
		Total liabilities	4,376,744						3,752,850
Shareholders’ equity			488,673						436,665
		Total liabilities and shareholders’ equity	$	4,865,417					$	4,189,515
Net interest income					$	128,386					$	124,540
Net interest spread							3.26%						3.52%
Net interest margin							3.60%						4.08%
Cost of Deposits:
	Noninterest bearing demand deposits		$	831,545					$	691,266
	Interest bearing deposits		3,382,405		27,930		1.10%		2,899,426		42,398		1.96%
		Total Deposits	$	4,213,950	$	27,930	0.89%		$	3,590,692	$	42,398	1.58%
(1)	Includes non-accrual loans and loans held for sale
(2)	Net loan fee income of $1.9 million and $1.6 million for the nine months ended September 30, 2020 and 2019, respectively, are included in the yield computations
(3)	Yields on securities have been adjusted to a tax-equivalent basis

Preferred Bank
Loan and Credit Quality Information
Allowance For Credit Losses History
					Nine Months Ended				Year ended
					September 30, 2020				December 31, 2019
					(Dollars in 000's)
Allowance For Credit Losses
Balance at Beginning of Period					$	34,830			$	31,065
	Charge-Offs
		Commercial & Industrial			1,661				526
		Mini-perm Real Estate			1,900				101
		Total Charge-Offs			3,561				627
	Recoveries
		Commercial & Industrial			-				527
		Mini-perm Real Estate			-				415
		Construction - Commercial			193				-
		Total Recoveries			193				942
	Net Charge-Offs (Recoveries)				3,368				(315		)
	Provision for Credit Losses:
		CECL Cumulative Effect Adjustment			8,000				-
		Current Provision			21,800				3,450
Balance at End of Period					$	61,262			$	34,830
Average Loans Held for Investment					$	3,864,667			$	3,482,218
Loans Held for Investment at End of Period					$	3,949,721			$	3,724,922
Net Charge-Offs (Recoveries) to Average Loans					0.12		%		-0.01%
Allowances for Credit Losses to Loans at End of Period					1.55		%		0.94		%

FAQ

What was Preferred Bank's net income for Q3 2020?

Preferred Bank reported a net income of $17.1 million or $1.15 per diluted share for Q3 2020.

How does the Q3 2020 net income compare to Q2 2020?

The net income for Q3 2020 increased by $1.9 million from $15.3 million in Q2 2020.

What is the reason for the increase in provision for credit losses?

The provision for credit losses rose to $9.0 million due to ongoing economic disruptions related to the pandemic.

How much did total deposits increase year-over-year?

Total deposits grew by $421.1 million or 10.8% from $3.98 billion as of December 31, 2019.

What is the outlook for loans under modification at year-end?

Loans under modification are expected to be modest, based on communications with borrowers.