Preferred Bank Reports Preliminary Fourth Quarter Results

LOS ANGELES, Jan. 31, 2011 /PRNewswire/ -- Preferred Bank (Nasdaq: PFBC), an independent commercial bank focusing on the Chinese-American and diversified Southern California mainstream market, today reported results for the quarter ended December 31, 2010. Preferred Bank reported a net loss of $10.4 million or $0.16 per diluted share for the fourth quarter of 2010 compared to a net loss of $28.4 million or $1.80 per diluted share for the fourth quarter of 2009 and compared to a net loss of $5.5 million or $0.78 per diluted share for the third quarter of 2010. The loss for the quarter was mainly attributable to a $7.25 million provision for loan losses, OREO expenses and valuation allowance on OREO of $3.6 million and a loss on sales of investment securities of $726,000.

Li Yu, Chairman, President and CEO commented, "We decided to record a provision for loan losses of $7.25 million for the fourth quarter of 2010.  The amount was determined based on the Bank's credit review process and was developed subsequent to the joint examination by the California Department of Financial Institutions (DFI)  and FDIC.  Together with the loss on sales of loans of $1.1 million, loss on sale of OREO of $155,000, valuation allowance on OREO of $1.5 million, and other OREO expenses of $2.0 million, total credit costs for the quarter were $12.0 million.  We believe the ALLL is adequate as of December 31, 2010 to absorb the inherent losses in the Bank's credit portfolio.

"Our troubled asset resolution process continues to be vibrant.  For the quarter, we sold $25.5 million of nonaccrual loans (of which $15.7 million were held for sale), sold $3.6 million of OREO, restored $3.3 million of loans back to performing status and recorded net charge-offs of $7.5 million.  We will devote the necessary resources in 2011 to continue or improve the pace of problem asset resolution.

"For the quarter, we also placed a total of $57.2 million of loans on non-accrual status.  Of this amount $17.4 was placed on nonaccrual due to delinquency status and $39.8 million was placed on nonaccrual status at year-end for other reasons.  A narrative of each of these loans in the latter category follows later in this press release.

"We are pleased with the passing of 2010.  The Board, management and staff are optimistic and enthusiastic for the year 2011."

Operating Results for the Quarter

Net Interest Income and Net Interest Margin. Net interest income before provision for loan and lease losses decreased to $8.6 million from the $8.7 million recorded in the fourth quarter of 2009 and decreased from $9.9 million for the third quarter of 2010.  The Company's taxable equivalent net interest margin was 2.73% for the fourth quarter of 2010, an increase from the 2.58% achieved in the fourth quarter of 2009 and a decrease from the 3.09% for the third quarter of 2010.

Noninterest Income. For the fourth quarter of 2010 noninterest income (loss) was ($97,000) compared with $918,000 for the same quarter last year and $1.5 million for the third quarter of 2010. The noninterest loss was due to losses on sales of investment securities of $726,000 driven by the sale of one of the Bank's trust preferred collateralized debt obligations (CDO's). Service charges on deposits decreased by $98,000 for the fourth quarter of 2010 compared to the same period in 2009 and were relatively flat when compared to the third quarter of 2010.

Noninterest Expense. Total noninterest expense was $12.3 million for the fourth quarter of 2010, compared to $11.0 million for the same period in 2009 and $7.6 million for the third quarter of 2010.  Salaries and benefits expense increased by $765,000 from the fourth quarter of 2009 and increased $68,000 from the third quarter of 2010. The increase from last year was due to a decrease in capitalized loan origination costs. Occupancy expense decreased to $809,000 from $902,000 for the same period in 2009 and was relatively flat compared to the $799,000 posted for the third quarter of 2010. Although still at elevated levels, professional services expense decreased to $786,000 compared to $1.0 million for the fourth quarter of 2009 and decreased from the $894,000 recorded in the third quarter of 2010. This was due primarily to a decrease in legal costs associated with non-performing loans and OREO. Credit-related other-than-temporary-impairment charges were $188,000 for the fourth quarter of 2010 compared to $2.1 million for the same period last year and $224,000 in the third quarter of 2010. OREO related expenses totaled $3.6 million for the fourth quarter of 2010 (consisting of $1.5 million in valuation charges, $155,000 loss on sale and $2.0 million in OREO operating expenses) and this represented an increase of $1.1 million from the $2.5 million in OREO expense posted in the same period last year and an increase from the $998,000 in OREO expense posted in the third quarter of 2010. Other expenses were $3.9 million in the fourth quarter of 2010, an increase of $1.7 million from the same period in 2009 and an increase of $2.2 million from the third quarter of 2010.  The increases mainly resulted from the loss on sales of nonaccrual loans of $1.1 million in the fourth quarter of 2010 and an increase in loan collection expense.

Balance Sheet Summary

Total gross loans and leases (including loans held for sale) at December 31, 2010 were $912.9 million, down from $1.04 billion as of December 31, 2009.  Comparing balances as of December 31, 2010 to December 31, 2009: Residential real estate loans decreased from $164.9 million to $139.5 million; total land loans decreased from $74.8 million to $44.7 million; commercial real estate loans increased from $325.7 million to $347.5 million; for-sale housing construction loans decreased from $147.9 million to $90.2 million; other construction loans decreased from $58.3 million to $33.2 million and total commercial loans decreased from $277.6 million to $260.4 million. Total investment securities increased by $68.8 million or 60.1% over December 31, 2009 as the Bank has put the high level of excess cash to work in interest earning assets.

Total deposits as of December 31, 2010 were $1.08 billion, a decrease of $79.1 million from the $1.16 billion at December 31, 2009. As of December 31, 2010 compared to December 31, 2009; noninterest-bearing demand deposits increased by $17.4 million or 8.5%, interest-bearing demand and savings deposits decreased by $6.5 million or 4.0% and time deposits decreased by $90.0 million or 11.4%. The decrease in time deposits is primarily due to maturities of brokered deposits that are not being renewed. Total borrowings decreased by $23.0 million or 46.9% to $26.0 million compared to $49.0 million as of December 31, 2009. Total assets were $1.26 billion, a $50.0 million or 3.8% decrease from the total of $1.31 billion as of December 31, 2009. The Bank's loan-to-deposit ratio as of December 31, 2010 was 84.8% compared to 89.9% as of December 31, 2009.

Capitalization

As of December 31, 2010, the Bank's tier 1 leverage ratio was 11.23% and total risk-based capital ratio was 15.10%. This compares to 11.36% and 15.53% as of September 30, 2010, respectively. The table below sets forth the Bank's capital ratios as of December 31, 2010 as well as the required ratios pursuant to the Consent Order entered into with the CDFI and FDIC on March 22, 2010:

Asset Quality

As of December 31, 2010 total nonaccrual loans were $99.3 million compared to $73.0 million as of September 30, 2010 and total loans 90 days past due and still accruing were $7,000 compared to $0 as of September 30, 2010. Total net charge-offs for the fourth quarter of 2010 were $7.5 million compared to net charge-offs of $8.7 million for the third quarter of 2010. Based on a detailed analysis of all impaired and classified loans, as well as an analysis of other qualitative factors, the Bank recorded a provision for loan loss of $7.25 million for the fourth quarter of 2010 compared to $9.3 million in the third quarter of 2010 and $1.0 million in the fourth quarter of 2009. The allowance for loan loss at December 31, 2010 was $32.9 million or 3.60% of total loans compared to $33.1 million or 3.55% of total loans at September 30, 2010.

NPA Migration

Nonaccrual Loans

Of the $99.3 million in total nonaccrual loans, $39 million are current via borrower cash payments and an additional $17 million are current via a bank-funded interest reserve associated with construction projects that based on current sales activity and appraisal reports should generate sufficient proceeds upon ultimate sale of the units to fully repay all outstanding principal and interest.

During the quarter, the Bank placed $17.4 million of loans on nonaccrual status due primarily to their delinquency status. At year end, the Bank placed an additional $39.8 million of loans on nonaccrual status due to reasons other than payment delinquency. A discussion of the latter loans follows below:

Loan A is a current $6.7 million interest-only bridge loan made in March 2010, to an entity which acquired a broken condo project for which the Bank had previously made a construction loan.  Since origination, the loan has paid as agreed and all payments have come from the borrower.  The project is 100% occupied and produces a debt coverage ratio (DCR) of 1.23x based on the loan's mutually agreed upon interest-only terms.  The public entity's 2009 audited financial statements indicate a net worth in excess of $30 million, with no debt except for the subject loan. The loan was placed on nonaccrual because of the high loan to value, which is in excess of 100%, based on a January 2011 appraisal report and the fact that current property's DCR based on a 25-year amortizing loan would be 0.95x.  However, management expects that the borrower will continue to make regular payments as agreed upon and will have the ability to refinance the property at maturity (2013) based, in part, on the overall financial strength on the entity and thus the Bank does not expect to sustain a loss of interest or principal on this credit.

Loan B is a current $7.1 million interest-only loan which converts to principal and interest payments in October 2011.  The loan is a bridge/term out of a loan used to construct a property which is completing its stabilization phase.  Borrower-provided projections for 2011 based on actual bookings for the year, result in a projected DCR of 1.2x based on the loan's contractual terms.  The five guarantors on this credit report substantial outside financial strength based on current financial statements and pre-paid four months of payments upon loan origination.  The loan remains fully current from the borrower's out of pocket cash payments.  The loan was placed on nonaccrual because of the loan's interest-only terms and the fact that the business operations have not had a sustained period of stabilization.  However, the Bank expects that the borrower will continue to make regular payments as agreed and will be able to fully stabilize the property's business operations in 2011 and thus the Bank does not expect to sustain a loss of interest or principal on this credit.

Relationship C is the combined balances of three loans totaling $5.8 million to a customer who has been fully current on all bank loans since becoming a Bank customer in 1998.  During 2010, the Bank granted the customer a principal payment deferment for 12 months due to the customer's short term cash flow challenges and therefore we have since reported the loans as troubled debt restructurings (TDR's).  The customer has maintained the interest-only payments fully current out of pocket since the restructuring and continues to report substantial outside net worth.  At the time of the restructuring, the Bank obtained additional collateral and the relationship loan to value (LTV) ratio on a global basis is roughly 90% (excluding membership and partnership interests which also have value and secure this loan).  The loans were placed on nonaccrual because of the high LTV ratio and the customer's request for a principal payment deferment.  However, the Bank expects that the borrower will continue to make regular payments as agreed and may have the ability to resume principal payments during 2011 based on the borrower's overall financial strength and thus the Bank does not expect to sustain a loss of interest or principal on this relationship.

Relationship D is the combined balances of three loans totaling $7.9 million to a customer who has six loans at the Bank, all of which are fully current since origination.  Four of the loans are amortizing loans and the other two loans are on interest-only payments.  The loans on interest-only are bridge loans secured by a commercial property which was constructed in 2009 and leased up throughout 2010.  Even during the lease-up period in 2010, the borrower maintained all loans current from borrower cash payments.  In 2010, the Bank reported the loans as TDRs due, in part, to a concessionary interest rate offered to the customer on one of these loans.  Since the restructuring, the customer has maintained the payments fully current and the composite LTV ratio on a global basis is roughly 85%.  The loans were placed on nonaccrual because of the concessionary terms offered to the customer and the high LTV ratio.  However, the Bank expects that the borrower will continue to make regular payments as agreed and may have the ability to service all amortizing loans by late 2011/early 2012 based on projections provided by the borrower. The Bank does not expect to sustain a loss of interest or principal on this relationship.

Loan E is a $16 million construction loan (of which $11.6 million has been disbursed) used, in part, to acquire Bank OREO in March 2009, and to finish remaining construction on a "for sale" condominium project.  This property was previously a Bank-owned OREO property and the subject loan was made to facilitate the sale of the OREO. An August 2010 appraisal report indicates a property value of $23.4 million upon completion. The guarantor's financial statements indicate outside financial ability due to cash flow derived from non-real estate related business operations owned by the guarantor.  The loan remains fully current; however, payments are being funded via an interest reserve which is included in the construction commitment amount noted above.  The loan was placed on nonaccrual/cost recovery status because of some uncertainty regarding sale treatment of this property under Accounting Statement Codification (ASC) 360-20-40. Because of this uncertainty and in an abundance of caution, we have elected to place the loan on nonaccrual status; however, our review of this transaction is still ongoing and may change depending on our findings. Notwithstanding the nonaccual determination,  the Bank expects that the project will be completed by summer 2011, and that the ultimate sale of the units will yield more than sufficient proceeds to fully retire all principal and interest due on this credit. Accrued interest income that was reversed in the fourth quarter on this loan was $588,000.

Loans Past Due 30-89 Days

Loans 30-89 days past due at December 31, 2010 were $5.5 million compared to $5.0 million at September 30, 2010.

Real Estate Owned

Total OREO increased to $53.6 million compared to $48.5 million as of September 30, 2010. During the fourth quarter of 2010, the Bank sold two OREO properties with a book value of $3.6 million.

Conference Call and Webcast

A conference call with simultaneous webcast to discuss Preferred Bank's fourth quarter 2010 financial results will be held today, January 31, at 5:00 p.m. Eastern / 2:00 p.m. Pacific.  Interested participants and investors may access the conference call by dialing 800-762-8795 (domestic) or 480-629-9773 (international).  There will also be a live webcast of the call available at the Investor Relations section of Preferred Bank's web site at www.preferredbank.com.  Web participants are encouraged to go to the web site at least 15 minutes prior to the start of the call to register, download and install any necessary audio software.

Preferred Bank's Chairman, President and CEO Li Yu, Chief Financial Officer Edward Czajka, and Executive Vice President Louie Couto 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 web site.  A replay of the call will also be available at 800-406-7325 (domestic) or 303-590-3030 (international) through February 7, 2011; the pass code is 4405559.

About Preferred Bank

Preferred Bank is one of the largest independent commercial banks in California focusing on the Chinese-American market. 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 Company conducts its banking business from its main office in Los Angeles, California, and through nine full-service branch banking offices in Alhambra, Century City,  City of Industry, Torrance, Arcadia, Irvine, Diamond Bar, Anaheim and Pico Rivera, 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.  Preferred Bank continues to benefit from the significant migration to Southern California of ethnic Chinese from China and other areas of East Asia.  While its business is not solely dependent on the Chinese-American market, it represents an important element of the bank's operating strategy, especially for its branch network and deposit products and services. Preferred Bank believes it is well positioned to compete effectively with the smaller Chinese-American community banks, the larger commercial banks and other major banks operating in Southern California by offering a high degree of personal service and responsiveness, experienced multi-lingual staff and substantial lending limits.

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, including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations promulgated thereunder; 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 2009 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.

Financial Tables to Follow

SOURCE Preferred Bank

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