Preferred Bank Discloses $8.1 Million Adjustment to Fourth Quarter Expenses Due to Lease Accounting Error

Preferred Bank reports $8.1 million occupancy expense adjustment due to lease accounting error, impacting earnings per share by $0.43.

Quiver AI Summary

Preferred Bank announced it found an unreconciled difference in its calculation of right of use asset and lease liabilities, leading to an $8.1 million pre-tax occupancy expense for Q4 2024. This will reduce diluted earnings per share by about $0.43 after tax. The discrepancy stems from the Bank’s adoption of ASC 842 in 2019, which incorrectly capitalized leases and understated occupancy expenses from 2019 to 2024, with an average annual understatement of $1.35 million pre-tax. Future calculations are expected to increase occupancy expenses by approximately $1.6 million annually. The Bank concluded that these adjustments will not materially affect its overall financial results.

Potential Positives

• The Bank has proactively disclosed an error in its financial reporting, demonstrating transparency and commitment to accurate financial disclosures.
• Preferred Bank confirmed that the prior years' understatement of occupancy expense is not material to its overall results, indicating the stability and robustness of its financial health.
• The correction process reflects the Bank's adherence to ASC 842 regulations, showcasing compliance with accounting standards and attention to detail in financial operations.
• Preferred Bank continues to expand its customer base beyond its original demographic, diversifying its market presence which could lead to future growth opportunities.

Potential Negatives

• The discovery of an unreconciled difference in the calculation of the right of use asset and lease liabilities suggests a potential lack of internal controls and oversight regarding financial reporting.
• The need to record an $8.1 million pre-tax occupancy expense and the resultant decrease in earnings per share may negatively impact investor sentiment and stock valuation.
• The cumulative understatement of lease expenses over multiple years raises concerns about the accuracy of the Bank's financial reporting during that period, potentially affecting stakeholder trust.

FAQ

What is the recent accounting error by Preferred Bank about?

Preferred Bank discovered an unreconciled difference in its right of use asset and lease liabilities, leading to an $8.1 million occupancy expense.

How will the accounting error affect Preferred Bank's earnings?

The error will reduce fourth quarter diluted earnings per share by approximately $0.43 on an after-tax basis.

What changes did ASC 842 introduce for Preferred Bank?

ASC 842 requires capitalizing leases longer than one year, thereby spreading lease expenses evenly over the lease term.

Is the impact of the accounting error material to Preferred Bank?

The bank assessed the understated expenses and found they are not material to its overall operations or balance sheet.

What is the expected annual increase in occupancy expense moving forward?

Preferred Bank expects a $1.6 million annual increase in occupancy expense due to correct lease expense calculations in future years.

Disclaimer: This is an AI-generated summary of a press release distributed by GlobeNewswire. The model used to summarize this release may make mistakes. See the full release here.

$PFBC Hedge Fund Activity

We have seen 103 institutional investors add shares of $PFBC stock to their portfolio, and 110 decrease their positions in their most recent quarter.

Here are some of the largest recent moves:

• OBERWEIS ASSET MANAGEMENT INC/ removed 95,000 shares (-100.0%) from their portfolio in Q3 2024
• PROSHARE ADVISORS LLC added 91,279 shares (+inf%) to their portfolio in Q3 2024
• BOSTON PARTNERS added 74,897 shares (+16.9%) to their portfolio in Q3 2024
• AMERICAN CENTURY COMPANIES INC removed 66,492 shares (-32.5%) from their portfolio in Q3 2024
• GOLDMAN SACHS GROUP INC added 65,718 shares (+29.2%) to their portfolio in Q3 2024
• DANA INVESTMENT ADVISORS, INC. added 62,958 shares (+238.5%) to their portfolio in Q3 2024
• STIEVEN CAPITAL ADVISORS, L.P. removed 59,814 shares (-33.7%) from their portfolio in Q3 2024

To track hedge funds' stock portfolios, check out Quiver Quantitative's institutional holdings dashboard.

Full Release

LOS ANGELES, Dec. 19, 2024 (GLOBE NEWSWIRE) --

Preferred Bank (NASDAQ: PFBC)

, (“the Bank”), an independent commercial bank, today announced that the Bank had uncovered an unreconciled difference in its calculation of its right of use asset (“ROU”) and lease liabilities. As a result of this error, the Bank will record $8.1 million on a pre-tax basis of occupancy expense in the fourth quarter of 2024. On an after-tax basis, this will reduce fourth quarter diluted earnings per share by approximately $0.43.

In January of 2019, the Bank adopted ASC 842, Accounting for Leases. This accounting statement requires entities capitalize leases that are longer than one year. The effect being that lease expense is recognized more evenly over the life of the lease, rather than recording lease expense as incurred. When the Bank adopted ASC 842, a number of the Bank’s leases were analyzed and capitalized based on an incorrect term, resulting in an understatement of occupancy expense for the years 2019 – YTD 2024. The understatement of expense in each year impacted was no more than $1.4 million on a pre-tax basis and the average was $1.35 million per year, pre-tax.

As for the impact of ASC 842 in future years, it is expected that the correct calculation of lease expense will increase occupancy expense by approximately $1.6 million per year on a pre-tax basis.

We have evaluated the impact to income for each of the periods involved as well as the cumulative impact to 2024’s results and have determined the understatement in the prior years as well as the impact to the results for 2024 are not material to the Bank’s results of operations or its balance sheet.

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 twelve full-service branch banking offices in California (Alhambra, Century City, City of Industry, Torrance, Arcadia, Irvine (2), Diamond Bar, Pico Rivera, Tarzana and San Francisco (2)). The Bank also operates a branch in Flushing, New York and in the Houston suburb of Sugar Land, Texas as well as a Loan Production Office in Sunnyvale, California. 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 2023 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

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