Preferred Bank Reports Third Quarter Results

LOS ANGELES, Oct. 28 /PRNewswire-FirstCall/ -- 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 September 30, 2010. Preferred Bank reported a net loss of $5.5 million for the third quarter of 2010  compared to a net loss of $36.0 million or $3.32 per diluted share for the third quarter of 2009 and compared to a net loss of $3.0 million or $0.05 per diluted share for the second quarter of 2010. The net loss available to common shareholders for the quarter was $0.78 per common share, and was increased by $0.64 per share due to the recognition of the intrinsic value of the beneficial conversion feature of Series A Convertible Preferred stock issued by the Company. The intrinsic value is the difference between the conversion price of $1.50 per share for the 73,846 preferred shares and the $2.02 per share market value of the company's common stock as of May 26, 2010, the commitment date.  This difference is treated as a discount on the Series A Preferred Stock under U.S. Generally Accepted Accounting Principles, and reduces the reported income available to common shareholders.  This is a one-time item and does not affect total capital, regulatory or common capital ratios of Preferred Bank nor does it represent a loss or outflow from operations.

• Highlights from the quarter include:
  • Approval and conversion of Series A preferred shares to common shares
  • A decrease in NPA's of $22.6 million from June 30, 2010
  • Continued decrease in housing, construction and land development loans
  • Loans 30-89 days past due further decreased to $5.0 million
  • Results for the quarter include a $710,000 charge for OREO valuation and a provision for loan losses of $9.3 million

Li Yu, Chairman, President and CEO commented, "During the third quarter, we received a Shared National Credit "SNC" report from one of the regulatory agencies which directed us to change the loan grade of certain participation loans, provide additional reserves, and to charge-off a portion of several previously classified loans. The report also identified these loans, totaling $17.7 million to be classified as non-accrual as well.

"Most of these loans are current and have been since inception; nevertheless, we adjusted our reporting as recommended. The SNC examination was performed in May 2010 using data from the March 31, 2010 reporting date including valuation data from that same time frame. More recent collateral value reports typically indicate improved valuations.

"In spite of the additional non-accrual classifications required on these SNC loans, total NPA's continued to decrease this quarter. Also, the level of loans 30-89 days past due has clearly stabilized and now is below our peer group average. Despite many disappointments, our troubled asset resolution activities remain effective and are progressing.

"Along with the gradual reduction of non-performing assets, we are hopeful of continuing improvement in our net interest margin, lower levels of legal expenses, loan collection expenses and OREO operating costs. Earnings will improve as credit costs subside."

Operating Results for the Quarter

Net Interest Income and Net Interest Margin. Net interest income before provision for loan and lease losses increased to $9.9 million from the $7.2 million recorded in the third quarter of 2009 and increased from $9.1 million for the second quarter of 2010.  The Company's taxable equivalent net interest margin was 3.09% for the third quarter of 2010, an increase from the 2.35% achieved in the third quarter of 2009 and a slight increase from the 3.01% for the second quarter of 2010.

Noninterest Income. For the third quarter of 2010 noninterest income was $1.5 million compared with $3.4 for the same quarter last year and $666,000 for the second quarter of 2010. The third quarter of 2010 included gains on sales of investment securities of $756,000 and the third quarter of 2009 included gains on securities sales of $2.6 million. Service charges on deposits decreased by $66,000 for the third quarter of 2010 compared to the same period in 2009 and was flat when compared to the second quarter of 2010.

Noninterest Expense. Total noninterest expense was $7.6 million for the third quarter of 2010, compared to $24.0 million for the same period in 2009 and $12.8 million for the second quarter of 2010.  Salaries and benefits expense increased by $749,000 from the third quarter of 2009 due to a decrease in capitalized loan origination costs as loan activities decreased. Occupancy expense decreased to $799,000 from $903,000 for the same period in 2009 and compared to $814,000 for the second quarter of 2010. Although still at elevated levels, professional services expense decreased to $894,000 compared to $1.0 million for the third quarter of 2009  and relatively flat with the $886,000 posted in the second 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 $224,000 for the third quarter of 2010 compared to $587,000 for the same period last year and $0 in the second quarter of 2010. OREO related expenses totaled $998,000 for the third quarter of 2010 (consisting of $710,000 in valuation charges and $288,000 in OREO operating expenses) and this represented a decrease of $15.0 million from the $16.0 million in OREO expense posted in the same period last year and a decrease from the $5.8 million in OREO expense posted in the second quarter of 2010. Other expenses were $1.8 million in the third quarter of 2010, a decrease of $1.5 million from the same period in 2009 and a decrease of $1.0 million from the second quarter of 2010.  The decreases mainly resulted from a decrease in FDIC premium expense as well as a decrease in loan collection expense.

Balance Sheet Summary

Total gross loans and leases (including loans held for sale) at September 30, 2010 were $950.1 million, down from $1.04 billion as of December 31, 2009.  Comparing balances as of September 30, 2010 to December 31, 2009: Residential real estate loans decreased from $164.9 million to $139.8 million; total land loans decreased from $74.6 million to $57.8 million; commercial real estate loans increased from $325.7 million to $340.9 million; for-sale housing construction loans decreased from $147.9 million to $102.3 million; other construction loans decreased from $58.3 million to $56.5 million and total commercial loans decreased from $277.6 million to $252.8 million.

Total deposits as of September 30, 2010 were $1.13 billion, a decrease of $27.8 million from the $1.16 billion at December 31, 2009. As of September 30, 2010 compared to December 31, 2009;  noninterest-bearing demand deposits increased by $26.1 million or 12.8%, interest-bearing demand and savings deposits decreased by $1.3 million or 0.8% and time deposits decreased by $52.6 million or 6.6%. Total borrowings decreased by $13.0 million or 26.5% to $36.0 million compared to $49.0 million as of December 31, 2009. Total assets were $1.34 billion, a $28.6 million or 2.2% increase from the total of $1.31 billion as of December 31, 2009. The Bank's loan-to-deposit ratio as of September 30, 2010 was 83.9% compared to 89.9% as of December 31, 2009.

Asset Quality

As of September 30, 2010 total nonaccrual loans were $73.0 million compared to $74.1 million as of June 30, 2010 and total loans 90 days past due and still accruing were $0 million compared to $7.3 million as of June 30, 2010. Total net charge-offs for the third quarter of 2010 were $8.7 million compared to net charge-offs of $4.5 million for the second 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 losses of $9.3 million for the third quarter of 2010 compared to $0 in the second quarter of 2010 and $48.3 million in the third quarter of 2009. The allowance for loan loss at September 30, 2010 was $33.1 million or 3.55% of total loans compared to $32.5 million or 3.41% of total loans at June 30, 2010.

NPA Migration

Loans Past Due 30-89 Days

Loans 30-89 days past due at September 30, 2010 were $5.0 million compared to $9.3 million at June 30, 2010.

Real Estate Owned

Total OREO decreased to $48.5 million compared to $62.8 million as of June 30, 2010. During the third quarter of 2010, the Bank sold two OREO properties with a book value of $17.6 million.

Capitalization

As of September 30, 2010, the Bank's tier 1 leverage ratio was 11.36% and total risk-based capital ratio was 15.53%. This compares to 12.05% and 15.56% as of June 30, 2010, respectively. Pursuant to the Consent Order entered into on March 22, 2010, the Bank is required to achieve the following capital ratios by the corresponding due dates listed below:

Conference Call and Webcast

A conference call with simultaneous webcast to discuss Preferred Bank's third quarter 2010 financial results will be held today, October 28, at 5:00 p.m. Eastern / 2:00 p.m. Pacific.  Interested participants and investors may access the conference call by dialing 877-941-6012 (domestic) or 480-248-5085 (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 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 November 4, 2010; the pass code is 4376121.

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; 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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