LOS ANGELES, Oct 19, 2020 (GLOBE NEWSWIRE via COMTEX) -- Preferred Bank /zigman2/quotes/210374414/composite PFBC -0.10% , 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 % of Loan Average LTV Average (000's) Balance 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%
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 Curr Qtr % of Total Weighted Quarterly Decrease Total in Deferral Total in Deferral Portfolio Average LTV 30-Jun-20 30-Sept-20 $ % 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.