PFBC Preferred Bank

LOS ANGELES, July 22 /PRNewswire-FirstCall/ -- Preferred Bank (NASDAQ:PFBC), an independent commercial bank focusing on the Chinese-American and diversified Southern California mainstream market, today reported net income for the quarter ended June 30, 2008. Net income totaled $449,000, an 93.6% decrease from net income of $7.0 million for the same period in 2007 while diluted earnings per share decreased 92.3% to $0.05 for the quarter compared to $0.65 for the second quarter of 2007. Net income for the quarter was negatively impacted by a provision for loan losses of $7.2 million, a pre-tax charge to earnings of $1.9 million for an other than temporary impairment on FHLMC preferred stock, and a decrease in net interest income of $4.0 million as compared to the second quarter of 2007. Mr. Li Yu, Chairman and President of Preferred Bank commented, "The housing market has shown little improvement during the second quarter, several loans that were 30 to 89 days past due as of March 31, 2008, have now been placed on non-accrual status. Together with the non-accrual balance of $36.2 million at March 31, 2008 total non-accrual loans are now $54.2 million at June 30, 2008. Appropriate reserves have been established based upon recent third party valuations. "Compared to March 31, 2008, the 30 - 89 days past due and loans 90+ days past due and still accruing decreased from $50.7 million to $42.5 million at June 30, 2008 which indicates that the migration into total past due category has slowed down or at least temporarily subsided. "More than 75% of the non-accrual loans are participation credits with another bank as the agent bank. Resolution of those loans typically takes a longer time as there is normally more than one bank involved. Resolution procedures include legal action, foreclosure or selling of the notes. We estimate at least $16 million of these loans will be resolved in early third quarter. "During the second quarter of 2008 we have also recorded an other-than-temporary impairment (OTTI) charge on FHLMC preferred stock of $1.9 million. Considering the large loan loss provision of $7.2 million and the OTTI charge, I am not totally disappointed with the second quarter net income of $449,000 under this most difficult environment. All other aspects of our operations remain stable, our tier 1 and total risk-based regulatory capital ratios increased from March 31, 2008 and we have worked to de-leverage the balance sheet. One unfortunate aspect of newer accounting rules, specifically Statement of Financial Accounting Standards Number 123R ("SFAS No. 123R"), requires that we continue to record the expense of stock options even though none of our existing granted stock options have any value in them. We urge the Financial Accounting Standards Board ("FASB") to modify SFAS 123R to address this situation. Like most other financial institutions, we are now recording this theoretical expense for which there is no corresponding benefit to our employees. "The dramatic drop in the stock price of Preferred Bank has led to a change in the ownership makeup of Preferred Bank. As institutional shareholders have sold shares, members of the Board of Directors of Preferred Bank and employees have been purchasing them. Insider ownership is now estimated to exceed 30%. "As of June 30, 2008, our tangible equity ratio is 9.70%. The bank's three regulatory capital ratios are substantially above the 'well capitalized' definition." Net Interest Income and Net Interest Margin. Net interest income before provision for loan and lease losses decreased to $13.3 million, compared to $17.3 million for the second quarter of 2007. The 22.9% decrease was due primarily to the 325 basis point decrease in the Fed Funds rate and the higher level of non-accrual loans in 2008. The Company's net interest margin was 3.63% for the second quarter of 2008, down from the 5.15% achieved in the second quarter of 2007 and down from the 4.11% for the first quarter of 2008. Noninterest Income. For the second quarter of 2008 noninterest income was $996,000 compared with $819,000 for the same quarter last year and $782,000 for the first quarter of 2008. The increase in noninterest income this quarter compared to last year was due mainly to an increase in service charges to $470,000 from $395,000 in the same period last year. Also, other income increased due to a $75,000 gain on the sale of equipment associated with a capitalized lease which matured during the quarter. Noninterest Expense. Total noninterest expense was $6,645,000 for the second quarter of 2008, compared to $5,483,000 for the same period in 2007 and $5,005,000 for the first quarter of 2008. Salaries and benefits decreased by $1,100,000 from the second quarter in 2007 due to a decrease in bonus expense which is based on overall profitability. Occupancy expense increased due to an adjustment of leased premises costs associated with leases which have pre-determined escalating costs. Professional services expense decreased due to lower costs associated with external audit as well as reduced costs associated with compliance with Sarbanes-Oxley Section 404. Other expense is up over the same quarter last year due to the OTTI charge of $1.9 million on the FHLMC Preferred Stock. Operating Efficiency Ratio. For the quarter, the operating efficiency ratio was 46.4% as compared to 30.3% for the same quarter in 2007 and 32.0% recorded in the first quarter of 2008. The deterioration is primarily attributable to the $1.9 million charge recorded for OTTI. Balance Sheet Summary Total gross loans and leases at June 30, 2008 were $1.21 billion, a $101.8 million or 9.2% increase over the $1.11 billion at June 30, 2007 and a $24.7million or 2.0% decrease over the $1.233 billion total as of December 31, 2007. Commercial real estate loans were up slightly from $518.3 million as of December 31, 2007 to $523.9 million at June 30, 2008 while construction loans decreased $10.1 million from December 31, 2007 and commercial & industrial and international loans decreased $20.0 million from December 31, 2007. Total deposits as of June 30, 2008 were $1.284 billion, an increase of $30.4 million or 2.4% over the $1.253 billion at December 31, 2007. Noninterest-bearing demand deposits decreased by $20.2 million or 8.8%, interest-bearing demand and savings deposits decreased by $4.1 million or 1.8% and time deposits increased by $54.7 million or 6.9%. Total assets were $1.525 billion, a 1.2% decrease from the total of $1.543 billion as of December 31, 2007. Total borrowings, both overnight and term borrowings decreased from $111 million as of December 31, 2007 to $77 million as of June 30, 2008 as the Bank worked to restructure the balance sheet to increase liquidity. The loan-to-deposit ratio as of June 30, 2008 was 92.7% compared to 97.2% as of December 31, 2007 Asset Quality As of June 30, 2008 total nonaccrual loans were $54.2 million compared to $230,000 as of June 30, 2007 and $20.9 million as of December 31, 2007. Total net charge-offs for the second quarter of 2008 were $7.2 million. Total loans 90 days past due and still accruing interest were $23.8 million as compared to $0 as of December 31, 2007. Because of the increase in non-performing loans and further deterioration in the construction and land loan portfolio during the second quarter of 2008, the Bank recorded a provision for loan losses of $7.2 million as compared to $5.1 million in the first quarter of 2008 and $650,000 for the second quarter of 2007. The allowance for loan loss at June 30, 2008 was $20.0 million or 1.65% of total loans compared to $11.2 million and 1.02%, respectively at June 30, 2007. Total non-performing loans as of June 30, 2008 were comprised of the following: Loan Type 90 + Days & Still Accruing Nonaccrual # $ # $ Commercial & Industrial - $ - 4 $ 3,528,000 Real Estate - - 2 1,535,000 Construction-Commercial - - - - Construction-Housing 1 2,704,000 1 15,857,000 Construction-Condo - - 4 22,125,000 Land-residential 3 15,350,000 2 11,147,000 Land-Commercial 1 5,735,000 - - 5 $23,789,000 13 $54,192,000 Preferred Bank's Inland Empire exposure as of June 30, 2008 consisted of the following: Loan Type Total Outstanding Total Nonaccrual & 90+ Still Accruing # $ # $ Commercial & Industrial - $ - - $ - Real Estate 9 15,558,000 - - Construction-Commercial 4 9,146,000 - - Construction-Housing 1 15,857,000 1 15,857,000 Construction-Condo - - - - Land-residential 11 15,638,000 2 11,270,000 Land-Commercial 4 15,723,000 1 5,735,000 29 $71,922,000 4 $32,862,000 Capitalization Preferred Bank continues to be "well capitalized" under all regulatory requirements, with a Tier 1 leverage ratio of 9.83% and a total risk based capital ratio of 12.19% at June 30, 2008. Conference Call and Webcast A conference call with simultaneous webcast to discuss Preferred Bank's second quarter 2008 financial results will be held today, July 22, at 5:00 p.m. Eastern / 2:00 p.m. Pacific. Interested participants and investors may access the conference call by dialing (800) 218-0713 (domestic) or (303) 262-2175 (international). There will also be a live webcast of the call available at the Investor Relations section of Preferred Bank's web site at http://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 Credit Officer Robert Kosof and Chief Financial Officer Edward Czajka 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 be available at 800-405-2236 (domestic) or 303-590-3000 (international) through July 29, 2008; the pass code is 11117331. 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 ten full-service branch banking offices in Alhambra, Century City, Chino Hills, City of Industry, Torrance, Arcadia, Irvine, Diamond Bar, Santa Monica and Valencia, 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 2007 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 http://www.preferredbank.com/. AT THE COMPANY: AT FINANCIAL RELATIONS BOARD: Edward J. Czajka Lasse Glassen Senior Vice President General Information Chief Financial Officer (213) 486-6546 (213) 891-1188 Financial Tables to Follow PREFERRED BANK Condensed Statements of Income (unaudited) (in thousands, except for net income per share and shares) For the Three Months Ended June 30, June 30, March 31, 2008 2007 2008 Interest income: Loans, including fees $18,924 $24,518 $21,972 Investment securities 3,169 2,765 3,304 Fed funds sold 4 998 12 Total interest income 22,097 28,281 25,288 Interest expense: Interest-bearing demand 383 727 438 Savings 349 893 554 Time certificates of $100,000 or more 5,489 8,122 6,784 Other time certificates 1,524 1,061 1,630 Fed funds purchased 231 2 793 FHLB borrowings 790 185 248 Total interest expense 8,766 10,990 10,447 Net interest income 13,331 17,291 14,841 Provision for loan losses 7,200 650 5,080 Net interest income after provision for loan losses 6,131 16,641 9,761 Noninterest income: Fees & service charges on deposit accounts 470 395 457 Trade finance income 219 262 141 BOLI income 91 86 88 Other income 216 76 96 Total noninterest income 996 819 782 Noninterest expense: Salary and employee benefits 1,997 3,097 2,638 Net occupancy expense 678 599 592 Business development and promotion expense 77 94 96 Professional services 655 793 632 Office supllies and equipment expense 313 240 294 Other than temporary impairment 1,928 - - Other 997 660 753 Total noninterest expense 6,645 5,483 5,005 Income before provision for income taxes 482 11,977 5,538 Provision for income taxes 33 4,998 2,160 Net income $449 $6,979 $3,378 Net income per share - basic $0.05 $0.67 $0.34 Net income per share - diluted $0.05 $0.65 $0.34 Weighted-average common shares outstanding Basic 9,755,207 10,421,794 9,898,204 Diluted 9,756,471 10,680,975 9,937,828 PREFERRED BANK Condensed Statements of Income (unaudited) (in thousands, except for net income per share and shares) For the Six Months Ended June 30, June 30, Change 2008 2007 % Interest income: Loans, including fees $40,896 $47,511 -13.9% Investment securities 6,473 5,492 17.9% Fed funds sold 16 1,792 -99.1% Total interest income 47,385 54,795 -13.5% Interest expense: Interest-bearing demand 821 1,394 -41.1% Savings 903 1,654 -45.4% Time certificates of $100,000 or more 12,273 15,699 -21.8% Other time certificates 3,154 2,121 48.7% Fed funds purchased 479 33 1351.4% FHLB borrowings 1,583 368 330.2% Total interest expense 19,213 21,269 -9.7% Net interest income 28,172 33,526 -16.0% Provision for credit losses 12,280 1,250 882.4% Net interest income after provision for loan losses 15,892 32,276 -50.8% Noninterest income: Fees & service charges on deposit accounts 927 816 13.6% Trade finance income 360 407 -11.6% BOLI income 178 170 4.9% Other income 312 189 65.0% Total noninterest income 1,777 1,582 12.3% Noninterest expense: Salary and employee benefits 4,635 6,698 -30.8% Net occupancy expense 1,270 1,190 6.7% Business development and promotion expense 173 140 23.6% Professional services 1,287 1,312 -1.9% Office supllies and equipment expense 607 428 41.9% Other than temporary impairment 1,928 - n/a Other 1,750 1,092 60.2% Total noninterest expense 11,650 10,860 7.3% Income before provision for income taxes 6,019 22,998 -73.8% Provision for income taxes 2,193 9,526 -77.0% Net income $3,826 $13,472 -71.6% Net income per share - basic $0.39 $1.30 -70.0% Net income per share - diluted $0.39 $1.26 -69.0% Weighted-average common shares outstanding Basic $9,800,251 $10,393,989 -5.7% Diluted $9,824,871 $10,682,186 -8.0% PREFERRED BANK Condensed Statements of Financial Condition (unaudited) (in thousands) June 30, December 31, June 30, 2008 2007 2007 Assets Cash and due from banks $25,639 $22,803 $38,097 Fed funds sold 2,500 - 59,000 Cash and cash equivalents 28,139 22,803 97,097 Securities available-for-sale, at fair value 250,385 245,268 206,648 Loans and leases 1,208,430 1,233,099 1,106,586 Less allowance for loan and lease losses (19,960) (14,896) (11,246) Less net deferred loan fees (123) (682) (1,327) Net loans and leases 1,188,347 1,217,521 1,094,013 Other real estate owned 8,441 8,444 - Customers' liability on acceptances 508 5,083 5,019 Bank furniture and fixtures, net 7,219 4,721 1,666 Bank-owned life insurance 8,309 8,168 8,031 Accrued interest receivable 8,853 10,165 9,196 Federal Home Loan Bank stock 4,828 4,700 4,277 Deferred tax assets 16,540 12,278 10,818 Other asset 3,390 3,459 579 Total assets $1,524,959 $1,542,610 $1,437,344 Liabilities and Stockholders' Equity Liabilities: Deposits: Demand 209,900 230,083 $247,822 Interest-bearing demand 156,755 137,220 124,951 Savings 69,759 93,398 100,731 Time certificates of $100,000 or more 646,826 639,455 620,677 Other time certificates 200,285 152,954 140,822 Total deposits $1,283,525 $1,253,110 $1,235,003 Acceptances outstanding 508 5,083 5,019 Advances from Federal Home Loan Bank 68,000 75,000 20,000 Fed funds purchased 9,000 36,000 - Accrued interest payable 4,096 5,493 5,418 Other liabilities 11,858 14,972 13,783 Total liabilities 1,376,987 1,389,658 1,279,223 Commitments and contingencies Stockholders' equity: Preferred stock. Authorized 5,000,000 shares; no share issued and outstanding at June 30, 2008, December 31, 2007 and June 30, 2007 - - - Common stock, no par value. Authorized 100,000,000 shares; issued and outstanding 9,755,207, 9,953,532 and 10,430,632 shares at June 30, 2008, December 31, 2007 and June 30, 2007, respectively 72,009 71,863 71,378 Treasury stock (19,115) (14,976) - Additional paid-in-capital 3,760 2,948 2,245 Retained earnings 95,667 94,595 85,151 Accumulated other comprehensive loss: Unrealized loss on securities available-for-sale, net of tax (4,349) (1,478) (653) Total stockholders' equity 147,972 152,952 158,121 Total liabilities and stockholders' equity $1,524,959 $1,542,610 $1,437,344 PREFERRED BANK Selected Financial Information (unaudited) (in thousands, except for ratios) For the Three Months Ended June 30, March 31, December 31, June 30, 2008 2008 2007 2007 For the period: Return on average assets 0.12% 0.89% 1.56% 2.01% Return on average equity 1.18% 8.77% 14.59% 17.96% Net interest margin (Fully-taxable equivalent) 3.63% 4.11% 4.82% 5.15% Noninterest expense to average assets 1.72% 1.31% 1.36% 1.58% Efficiency ratio 46.38% 32.04% 28.39% 30.28% Net charge-offs to average loans (annualized) 2.35% 0.00% 0.00% 0.02% Period end: Tier 1 leverage capital ratio 9.83% 9.84% 10.31% 11.61% Tier 1 risk-based capital ratio 10.94% 10.53% 10.54% 11.41% Total risk-based capital ratio 12.19% 11.93% 11.57% 12.44% Nonperforming assets to total assets 5.67% 2.88% 1.90% 0.02% Nonaccrual loans to total loans 4.48% 2.95% 1.69% 0.02% Allowance for loan and lease losses to total loans 1.65% 1.62% 1.21% 1.02% Allowance for loan and lease losses to nonaccrual loans 36.83% 55.12% 71.28% 4889.57% Average balances: Total loans and leases $1,235,756 $1,218,485 $1,195,870 $1,067,016 Earning assets 1,505,801 1,478,608 1,432,486 1,352,686 Total assets 1,549,392 1,531,723 1,481,506 1,392,552 Total deposits 1,265,510 1,251,993 1,205,911 1,193,701 Period end: Loans and Leases: Real estate - multifamily/ commercial $523,875 $543,767 $518,304 $438,418 Real estate - construction* 356,630 * 350,426 366,706 330,866 Commercial and industrial 242,982 253,852 255,912 226,191 Trade finance 84,535 81,592 91,565 110,463 Other 408 503 612 648 Total gross loans and leases 1,208,430 1,230,140 1,233,099 1,106,586 Allowance for loan and lease losses (19,960) (19,976) (14,896) (11,246) Net deferred loan fees (123) (1,154) (682) (1,327) Net loans and leases $1,188,347 $1,209,010 $1,217,521 $1,094,013 Deposits: Noninterest-bearing demand $209,900 $213,301 $230,083 $247,822 Interest-bearing demand and savings 226,514 230,403 230,618 225,682 Total core deposits 436,414 443,704 460,701 473,504 Time deposits 847,111 821,256 792,409 761,499 Total deposits $1,283,525 $1,264,960 $1,253,110 $1,235,003 * Real estate - construction of $356,630 Includes commercial real estate constuction loans totalling $93,250 DATASOURCE: Preferred Bank CONTACT: Edward J. Czajka, Senior Vice President, Chief Financial Officer of Preferred Bank, +1-213-891-1188; or General Information, Lasse Glassen of Financial Relations Board, +1-213-486-6546, , for Preferred Bank Web site: http://www.preferredbank.com/

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