KBRA Affirms Ratings for Preferred Bank

19 Apr 2024   |   New York


KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for Los Angeles, California-based Preferred Bank (NASDAQ: PFBC) (“Preferred” or “the bank”). The Outlook for all long-term ratings is Stable.

Key Credit Considerations

Preferred Bank’s ratings are underpinned by its solid bottom line profitability, primarily as the result of a robust NIM (4.46% for FY23) supported by a high-yielding loan portfolio, and its well-managed expense base (total overhead expense was 1.13% of average assets for FY23), partly as a function of its branch-lite banking model. With the average loan yield increasing to 8.14% for 2023 (223 bps above the peer average), compared with 5.65% in the prior year, PFBC’s largely floating-and adjustable-rate loan portfolio has enabled the bank to mostly offset higher funding costs, which are primarily driven by its higher reliance on time deposits as a source of funding (49% of total deposits). However, the bank’s revenue profile is comparably less diversified, with noninterest income comprising 4% of total revenue for FY23.

The ratings are counterbalanced by the bank’s relatively more capital-intensive balance sheet, as evidenced by a risk-weighted asset density of 94% as of YE23. Investor CRE portfolio comprises 56% of total loans and currently amounts to 312% of total risk-based capital, which we recognize is above average compared to the rated peer group. PFBC’s regulatory CET1 ratio (11.6% as of 4Q23) increased 80 bps during 2023 to a level more aligned with peer average (12.8%) and is currently viewed as adequate, considering the bank’s strong profitability, on a pre-provision basis, which could absorb rising credit costs if they were to emerge from the loan portfolio. Still, given the loan book’s above-peer risk profile, which includes exposure to potentially volatile segments, specifically office (8% of total loans) and hotel (10%), KBRA believes that the maintenance of regulatory capital ratios at levels more closely aligned with peers is paramount to the ratings. With that said, we acknowledge that credit performance has remained sound in recent years and despite the higher-than-peer concentration in the troubled office sector, and it appears that risks are well contained as most of the properties are situated in suburban markets and reflect conservative LTVs.

Starting in 1Q23, management’s actions in utilizing CDARS & ICS products have significantly reduced the bank’s concentration in uninsured deposits, with uninsured deposits to total declining from 80% as of YE22 to 46% as of YE23. Cash & cash equivalents and total investment securities currently amount to 14% and 5% of total assets, respectively. Total on- and off-balance sheet liquidity sources, including remaining borrowing capacity of ~$1.1 billion from FHLB and FRB, cover 90% of total uninsured deposits, which we view as adequate, given the bank’s less encumbered balance sheet (43% of total loans are pledged).

Rating Sensitivities

Barring an exogenous event, a rating upgrade is unlikely. Conversely, rating pressure would most likely develop if loan quality deterioration emanated such that earnings performance becomes highly variable, including episodes of net losses, or if consolidated regulatory capital ratios were to decline to (and likely be maintained at) levels below the current range.

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A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.

Doc ID: 1003981

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