Preferred Bank : Form 10-Q~Quarterly Report

FEDERAL DEPOSIT INSURANCE CORPORATION

Washington, D.C. 20429

FORM 10-Q

Mark One

 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2024

or

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period fromto

PREFERRED BANK

(Exact name of registrant as specified in its charter)

California	33539	95-4340119
(State or other jurisdiction of	(FDIC Certificate Number)	(I.R.S. Employer
incorporation or organization)		Identification No.)
601 S. Figueroa Street, 48th Floor, Los Angeles, California	90017
(Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: [phone]

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, no Par Value	PFBC	NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No 



Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of "large accelerated filer," "accelerated filer," "smaller reporting company," an "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large Accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes  No 

Number of shares of common stock of the Registrant outstanding as of May 8, 2024 was 13,392,737 shares.

PREFERRED BANK

TABLE OF CONTENTS

Page Number

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

	Consolidated Statements of Financial Condition as of March 31, 2024 and
	December 31, 2023	1
	Consolidated Income Statement and Comprehensive Income for the three
	months ended March 31, 2024 and 2023	2
	Consolidated Statements of Changes in Shareholders' Equity for the three
	months ended March 31, 2024 and 2023	3
	Consolidated Statements of Cash Flows for the three months ended March
	31, 2024 and 2023	4
	Notes to Consolidated Interim Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial
	Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures about Market
	Risk	49
Item 4.	Controls and Procedures	49
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	50
Item 1A.	Risk Factors	50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 5.	Other Information	50
Item 6.	Exhibits	51
SIGNATURES		52

Forward-Looking Statements

Certain matters discussed in this Quarterly Report on Form 10-Q (this "Report") may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and as such, may involve risks and uncertainties. We claim the protection of the safe harbor contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to, among other things, the Bank's financial condition, results of operations, plans, objectives, expectations of the environment in which we operate and projections of future performance or business. Such statements can generally be identified by the use of forward-looking language, such as "is expected to," "will likely result," "anticipated," "projected", "estimate," "forecast," "intends to," or may include other similar words, phrases, or future or conditional verbs such as "aims", "believes," "plans," "continue," "remain," "may," "might," "will," "would," "should," "could," "can," or similar language. Forward-looking statements by us are based on estimates, beliefs, projections and assumptions of management and are not guarantees of future performance. Our actual results, performance, or achievements may differ significantly from the results, performance, or achievements expected or implied in such forward-looking statements. When considering these statements, you should not place undue reliance on these statements, as they are subject to certain risks and uncertainties, as well as any cautionary statements made within this Quarterly Report, and should also note that these statements are made as of the date of this Quarterly Report and based only on information known to us at that time.

Factors causing risk and uncertainty, which could cause future results to be materially different from forward-looking statements contained in our 2023 Annual Report as well as from historical performance, include but are not limited to:

• Regulatory decisions regarding the Bank, and impact of future regulatory and governmental agency decisions including Basel III capital standards;
• Adequacy of allowance for credit loss estimates in comparison to actual future losses;
• Necessity of additional capital in the future, and possible unavailability of that capital on acceptable terms;
• Economic and market conditions that may adversely affect the Bank and our industry;
• Disruptions to the financial markets as a result of the current or anticipated impact of military conflict, including escalating military tension between Russia and Ukraine, terrorism or other geopolitical events;
• Possible loss of members of senior management or other key employees upon whom the Bank heavily relies;
• Changes in the interest rate environment, and levels of short- and long-term interest rates, may negatively affect the Bank's financial performance;
• Changes in governmental or bank-established interest rates or monetary policies, including the replacement of the LIBOR index on our loans which are tied to that index;
• Strong competition from other financial service entities;
• Possibility that the Bank's underwriting practices may prove to be ineffective;
• Changes in the commercial and residential real estate markets that could adversely affect the collateral value supporting our loans and increase charge-offs;
• Adverse economic conditions in Asia which could negatively impact the Bank's business;
• Catastrophic events, acts of war or terrorism, or natural disasters, such as earthquakes, drought, pandemic diseases (including the COVID-19 pandemic), climate change or extreme weather events, any of which may affect services we use, may affect our customers, employees or third parties with which we conduct business, or could negatively impact the Bank's business;
• Geographic concentration of our operations;
• The economic impact of Federal budgetary policies;
• Failure to attract deposits, inhibiting growth;
• Interruption or break in the communication, information, operating, and financial control systems upon which the Bank relies;
• Changes in federal and state laws or the regulatory environment including regulatory reform initiatives and policies of the U.S. Department of Treasury, the Board of Governors of the Federal Reserve Board System, the Federal Deposit Insurance Corporation, the Consumer Financial Protection Bureau and the California Department of Financial Protection and Innovation;
• Changes in accounting standards as may be required by the Financial Accounting Standards Board or other regulatory agencies and their impact on critical accounting policies and assumptions;
• Potential changes in the U.S. government's monetary policies;
• Environmental liability with respect to properties to which the Bank takes title;

• Negative publicity;
• Information technology and cyber security incidents, disruptions or attacks and the possible blocking, theft or loss of Bank or customer access, functionality, data, funding or money

As a result of the rapid rise in interest rates in 2022 and 2023, resulting reductions in the value of investment securities portfolios throughout the industry, and recent bank failures, our forward-looking statements are subject to the following risks, uncertainties and assumptions specifically related to these circumstances:

• Attraction and retention of uninsured deposits in the short-term may be challenged;
• Deterioration in depositor confidence could result in deposit outflows and strains on our liquidity;
• Failures of additional banks could further erode depositor confidence and deposit withdrawals that could require us to borrow funds or sell securities, which could adversely affect our operating results;
• Replacement of withdrawn deposits with funds borrowed from the Federal Home Loan Bank, Federal Reserve Bank, or other sources likely will increase our marginal interest expense and could reduce our net interest income and reduce our net income and the rate of our quarterly cash dividend;
• Changes in regulations and examination standards in response to the recent bank failures could result in increased compliance costs and possible restrictions on operations and strategic initiatives; and
• FDIC premiums may increase if the Deposit Insurance Fund experiences additional costs in the resolution of the recent and any future bank failures, which could reduce our net income.

These factors are further described in this report and in our 2023 Annual Report on Form 10-K as filed with the Federal Deposit Insurance Corporation ("FDIC") on March 14, 2024 under the heading "Item 1A. RISK FACTORS - Risk Factors That May Affect Future Results." We do not undertake, and we specifically disclaim any obligation to update any forward looking statements to reflect the occurrence of events or circumstances after the date of such statements except as required by law.

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PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

PREFERRED BANK

Consolidated Statements of Financial Condition

(In thousands except share data)

		March 31,			December 31,
		2024			2023
Assets		(Unaudited)
Cash and due from banks	$	916,600	$	890,852
Federal funds sold		20,000			20,000
Cash and cash equivalents		936,600			910,852
Securities held-to-maturity, at amortized cost (fair value of $19,097 and as of March 31, 2024
and $19,540 as of December 31, 2023)		20,904			21,171
Securities available-for-sale, at fair value		333,411			313,842
Loans		5,325,854			5,273,498
Less: allowance for credit losses on loans		(79,311)			(78,355)
Less: unamortized deferred loan fees, net		(10,460)			(11,079)
Net loans		5,236,083			5,184,064
Loans held for sale, at lower of cost or fair value		605			360
Other real estate owned and repossessed assets		16,716			16,716
Bank furniture and fixtures, net		9,962			9,694
Customers' liability on acceptances		-			315
Bank-owned life insurance ("BOLI")		10,702			10,632
Accrued interest receivable		35,592			33,892
Investment in affordable housing partnerships		62,854			65,276
Federal Home Loan Bank ("FHLB") stock, at cost		15,000			15,000
Net deferred tax assets		49,389			48,991
Income tax receivable		-			2,391
Operating lease right-of-use assets		23,068			22,050
Other assets		5,327			4,030
Total assets	$	6,756,213	$	6,659,276
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Demand	$	709,767	$	786,995
Interest-bearing demand		2,159,948			2,075,156
Savings		29,261			29,167
Time certificates of $250,000 or more		1,349,927			1,317,862
Other time certificates		1,552,805			1,500,162
Total deposits		5,801,708			5,709,342
Acceptances outstanding		-			315
Subordinated debt issuance, net of unamortized costs and premium of $1,708 and $1,768
at March 31, 2024 and December 31, 2023, respectively		148,292			148,232
Accrued interest payable		15,718			16,124
Commitments to fund investment in affordable housing partnerships		29,647			30,824
Operating lease liability		20,215			19,766
Other liabilities		41,075			39,568
Total liabilities		6,056,655			5,964,171
Commitments and Contingencies - Notes 6, 11 and 14
Shareholders' equity:
Preferred Stock, no par value. Authorized 25,000,000 shares; no issued or outstanding shares at
March 31, 2024 and December 31, 2023, resepectively		-			-
Common stock, no par value. Authorized 100,000,000 shares; outstanding 13,392,737
and 13,583,285 shares at March 31, 2024 and December 31, 2023, resepectively		210,882			210,882
Treasury stock, at cost; 2,903,957 and 2,597,759 shares at March 31, 2024 and
December 31,2023, resepectively		(185,004)			(163,175)
Additional paid-in capital		90,037			86,827
Retained earnings		616,417			592,325
Accumulated other comprehensive loss		(32,774)			(31,754)
Total shareholders' equity		699,558			695,105
Total liabilities and shareholders' equity	$	6,756,213		$	6,659,276

See accompanying notes to the unaudited consolidated interim financial statements.

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PREFERRED BANK

Consolidated Income Statement and Comprehensive Income

(In thousands, except share and per share data)

(Unaudited)

			Three months ended March 31,
			2024				2023
Interest income:	$	109,980	$	95,881
Loans and leases
Investment securities		16,257				12,979
Federal funds sold		283				224
Total interest income			126,520				109,084
Interest expense:			22,290				17,038
Interest-bearing demand
Savings		75				39
Time certificates of $250,000 or more		16,501				10,743
Other time certificates		17,829				5,850
FLHB borrowings		-				374
Subordinated debt		1,325				1,325
Total interest expense			58,020				35,369
Net interest income before provision for credit losses			68,500				73,715
Provision for credit losses			4,400				500
Net interest income after provision for credit losses		64,100				73,215
Noninterest income:			845				694
Fees and service charges on deposit accounts
Letter of credit fee income		1,503				1,324
BOLI income		105				101
Net gain on sale of Small Business Administration ("SBA") loans		103				340
Net loss on sale or call of investment securities		-				(4,117)
Other income			509				592
Total noninterest income		3,065				(1,066)
Noninterest expense:			13,900				13,728
Salaries and employee benefits
Net occupancy expense		1,711				1,474
Business development and promotion expense		266				105
Professional services		1,457				1,149
Office supplies and equipment expense		473				404
Other real estate owned related expense, net		135				72
Other		2,086				1,968
Total noninterest expense			20,028				18,900
Income before income taxes		47,137				53,249
Income tax expense		13,671				15,176
Net income		$	33,466		$	38,073
Income allocated to participating securities
	-				-
Net income available to common shareholders - basic and diluted		$	33,466		$	38,073
Unrealized net loss on securities available-for-sale		(1,418)				(5,881)
Less: reclassification adjustments included in net income		-				(4,117)
Income tax expense related to items of other comprehensive income		398				495
Other comprehensive loss			(1,020)				(1,269)
Comprehensive income		$	32,446			$	36,804
Net income per share	$	2.48	$	2.64
Basic
Diluted	$	2.44	$	2.61
Weighted-average common shares outstanding		13,508,878				14,430,606
Basic
Diluted		13,736,986				14,602,149

See accompanying notes to the unaudited consolidated interim financial statements. 2

PREFERRED BANK

Consolidated Statements of Changes in Shareholders' Equity

(In thousands, except for share and per-share amounts)

(Unaudited)

				Common Stock			Additional			Accumulated Other		Total
		Preferred			Treasury		Paid-In	Retained		Comprehensive	Shareholders'
		Stock		Shares		Stock		Stock		Capital	Earnings		Income (Loss)		Equity
Balance as of January 1, 2024	$	-	13,583,285	$	210,882	$	(163,175)	$	86,827	$	592,325	$	(31,754)	$	695,105
Issuance of shares upon vesting of share-based awards		-	115,650		-		-		-		-		-		-
Cash dividend declared ($0.70 per share)		-	-		-		-		-		(9,374)		-		(9,374)
Stock-based compensation		-	-		-		-		3,405		-		-		3,405
Stock surrendered due to employee tax liability		-	(49,212)		-		(3,595)		-		-		-		(3,595)
Stock repurchased		-	(256,986)		-		(18,234)		(195)		-		-		(18,429)
Net income		-	-		-		-		-		33,466		-		33,466
Other comprehensive loss, net			-	-		-		-		-		-		(1,020)		(1,020)
Balance as of March 31, 2024	$	-	13,392,737	$	210,882	$	(185,004)	$	90,037	$	616,417	$	(32,774)	$	699,558
Balance as of January 1, 2023	$	-	14,358,145	$	210,882	$	(108,482)	$	81,559	$	475,072	$	(28,605)	$	630,426
Issuance of shares upon vesting of share-based awards		-	128,375		-		-		-		-		-		-
Cash dividend declared ($0.55 per share)		-	-		-		-		-		(7,938)		-		(7,938)
Stock-based compensation		-	-		-		-		1,316		-		-		1,316
Stock surrendered due to employee tax liability		-	(54,398)		-		(4,067)		-		-		-		(4,067)
Net income		-	-		-		-		-		38,073		-		38,073
Other comprehensive loss, net			-	-		-		-		-		-		(1,269)		(1,269)
Balance as of March 31, 2023	$	-	14,432,122	$	210,882	$	(112,549)	$	82,875	$	505,207	$	(29,874)	$	656,541

See accompanying notes to the unaudited consolidated interim financial statements.

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PREFERRED BANK

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

			Three months ended March 31,
Cash flows from operating activities:		2024				2023
Net income	$	33,466	$	38,073
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses		4,400				500
Loss on sale and call of securities available for sale		-				4,117
Amortization of deferred loan fees, net		(1,135)				(1,183)
Amortization of investment securities discounts and premiums, net		144				(269)
Amortization of investment in affordable housing partnerships		2,422				2,164
Amortization of subordinated debt issuance costs		60				60
Loans originated for sale		(1,301)				(4,959)
Gain on sale of SBA loans		(103)				(340)
Proceeds from sale of loans held for sale		1,159				5,299
Depreciation and amortization		573				426
Share-based compensation expense		3,405				1,316
Income from bank owned life insurance, net		(70)				(68)
Changes in other assets and liabilities:
Income tax receivable		2,391				-
Accrued interest receivable and other assets		(4,015)				(3,792)
Accrued interest payable and other liabilities			1,716				11,599
Net cash provided by operating activities			43,112				52,943
Cash flows from investing activities:
Proceeds from maturities and redemptions of securities held-to-maturity		240				274
Proceeds from maturities and redemptions of securities available-for-sale		4,883				3,061
Proceeds from sale and calls of securities available for sale		1,530				52,160
Purchase of securities available-for-sale		(27,517)				-
Purchase of investments in affordable housing partnerships		(1,177)				(781)
Proceeds from sale of loans from LHFS previously classified as portfolio loans		9,376				-
Proceeds from recoveries of written off loans		1				1
Net (increase) decrease in loans		(64,661)				18,551
Payoff of liens in connection with foreclosure of assets		-				3,362
Purchase of bank premises and equipment		(841)				(211)
Net cash (used in) provided by investing activities			(78,166)				76,417
Cash flows from financing activities:
Increase (decrease) in deposits		92,366				(149,231)
Borrowings from FHLB		-				150,000
Increase in treasury shares		(22,024)				(4,067)
Payment of cash dividends		(9,540)				(7,897)
Net cash provided by (used in) financing activities			60,802				(11,195)
Net increase in cash and cash equivalents		25,748				118,165
Cash and cash equivalents at beginning of period			910,852				767,526
Cash and cash equivalents at end of period		$	936,600			$	885,691

See accompanying notes to the unaudited consolidated interim financial statements. 4

PREFERRED BANK

Consolidated Statements of Cash Flows - continued

(In thousands)

(Unaudited)

		Three months ended March 31,
		2024			2023
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest	$	58,426	$	33,448
Income taxes		1,085			665
Noncash activities:
Common stock dividends declared but not paid	$	9,374	$	7,938
Operating lease liabilities arising from right-of-use assets		1,421			1,057
Transfer of loans held for investment to loans held for sale		9,376			-

See accompanying notes to the unaudited consolidated interim financial statements.

5

PREFERRED BANK

Notes to Consolidated Interim Financial Statements

(Unaudited)

1. Business

Preferred Bank commenced operations in 1991 as a California state-chartered bank and offers a wide range of financial services. As of March 31, 2024, the Bank operates through twelve full-service branch banking offices in Los Angeles, Orange, and San Francisco Counties in California, one full-service branch in Queens County, New York, one full-service branch in the Houston suburb of Sugar Land, Texas, and a satellite office in Manhattan. As of March 31, 2024, approximately 89% of the total dollar amount of the Bank's gross loans were secured by real estate located in California and the Northeast Tri-State area (New York, New Jersey and Connecticut). The Bank is a member of the Federal Home Loan Bank system ("FHLB") and the Bank's deposits are insured by the Federal Deposit Insurance Corporation ("FDIC").

2. Principles of Consolidation and Basis of Presentation

The accompanying unaudited consolidated interim financial statements include the accounts of Preferred Bank and its wholly-owned, inactive subsidiary, PB Investment and Consulting, Inc. (herein referred to as the "Bank", "we", "us" or "our"). All intercompany transactions and accounts have been eliminated in consolidation.

The unaudited consolidated interim financial statements of the Bank have been prepared in conformity with generally accepted accounting principles generally accepted in the United States of America ("GAAP"). In the opinion of management, all adjustments, which consist of normally recurring adjustments necessary for a fair statement of the interim period results, have been made.

Through its branch network, the Bank provides a broad range of financial services to individuals and companies primarily located in Southern California, the Bay Area of California and the Greater New York City area. These services include demand, time and savings deposits and real estate, business and consumer lending. While the Bank's chief decision makers monitor the revenue streams of various products and services, operations are managed and financial performance is evaluated on a bank-wide basis. Accordingly, the Bank considers all operations aggregated in one reportable operating segment.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. The results of operations for the three months

ended March 31, 2024 are not necessarily indicative of results that may be expected for any other interim period or the entire fiscal year ending December 31, 2024. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the registrant's Annual Report on Form 10-K for the year ended December 31, 2023, which was filed with the FDIC on March 14, 2024. Subsequent events have been evaluated through the date of the issuance of the unaudited Consolidated Financial Statements. No significant subsequent events have occurred through this date requiring adjustment to the financial statements or disclosures.

The accounting and reporting policies of the Bank are based upon GAAP and conform to predominant practices within the banking industry. The Bank has not made any changes in its significant accounting policies from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2023 filed with the FDIC.

3. Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

ASU 2023-02, Investments-Equity Method and Joint Ventures (Topic 323) Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. In March 2023, the FASB issued ASU 2023-02which expands use of the proportional amortization method of accounting to equity investments in tax credit programs beyond those in low-income-housing tax credit ("LIHTC") programs. The ASU allows entities to elect the proportional amortization method, on a tax-credit-

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