LOS ANGELES, Oct. 23 /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, 2008. Preferred Bank reported a net loss of $3.4 million or $0.35 per diluted share compared to net income of $7.2 million or $0.67 per diluted share for the same period in 2007. Results for the quarter were negatively impacted by a charge of $4.4 million for an other than temporary impairment ('OTTI') charge on FHLMC preferred stock, an OTTI charge of $1.6 million on other securities and a provision for loan losses of $3.7 million. Net income excluding the OTTI charges was $2.0 million or $0.21 per diluted share for the quarter ended September 30, 2008.

Mr. Li Yu, Chairman and President of Preferred Bank commented, 'Under an unprecedented challenging environment for financial firms, we concluded the Third Quarter 2008 with an improvement in our tier 1 leverage capital ratio from 9.81% as of June 30, 2008 to 10.01% as of September 30, 2008.

'Although the Emergency Economic Stabilization Act ('EESA') provides that losses on FNMA and FHLMC preferred stock are now to be treated as an ordinary loss for tax purposes which would allow a tax benefit for us, the EESA was not enacted until October 3, 2008 and thus we have to treat the FHLMC charge as a capital item and record no tax benefit on the writedown in the third quarter. In the fourth quarter of 2008, we will be able to record a tax benefit of $2.6 million for the change in the tax treatment of the FHLMC writedowns that we took in the third quarter ($4.4 million) and that we took in the second quarter ($1.9 million).

'Non-performing loans (past due more than 90 days) and delinquent loans (past due for 30 to 89 days) decreased moderately during the quarter but was offset by increases in other real estate owned ('OREO'). I personally consider the trend to be slightly encouraging. For the second quarter in a row, the migration into delinquent loan status has slowed down and there are more non-performing assets now in the position to be disposed of. A non-performing real estate loan usually takes at least 120 days to foreclose on after the work out process. The timetable is even longer with bankruptcy proceedings or litigation. There are also unpredictable delays during the disposition process which we have also experienced in this quarter.

'Appropriate loan losses were provided on all classified loans based upon recent appraisals/valuations. We also have a large reserve (0.84%) on our pass portfolio which we believe is one of the largest among our peer group. Our total provision for loan loss plus writedowns on OREO in the third quarter of 2008 remained large, but less than that of the second quarter of 2008.

'During the quarter we have also reduced the Bank's exposure in for-sale housing construction loans and residential use land loans by $34.2 million or 13.7% and by $13.3 million or 13.9% from June 30, 2008, respectively.

'The State of California Department of Financial Institutions has just concluded examination field work of Preferred Bank on October 2, 2008.'

Net Interest Income and Net Interest Margin. Net interest income before provision for loan and lease losses decreased to $12.0 million, compared to $17.7 million for the third quarter of 2007. The 32.3% decrease was due primarily to the 300 basis points decrease in the Fed Funds rate and Prime rate and the higher level of non-accrual loans in 2008. The Company's net interest margin was 3.40% for the third quarter of 2008, down from the 5.11% achieved in the third quarter of 2007 and down from the 3.64% for the second quarter of 2008. Of the 24 basis points decrease in the margin on a linked quarter basis, 22 basis points of this was due to non accrual loans.

Noninterest Income. For the third quarter of 2008 noninterest income was $762,000 compared with $753,000 for the same quarter last year and $995,000 for the second quarter of 2008. The decrease in noninterest income this quarter compared to the second quarter of 2008 was due mainly to a decrease in service charges to $370,000 from $470,000 and due to a $75,000 gain on the sale of equipment associated with a capitalized lease during the second quarter.

Noninterest Expense. Total noninterest expense was $12.0 million for the third quarter of 2008, compared to $5.5 million for the same period in 2007 and $6.6 million for the second quarter of 2008. Salaries and benefits decreased by $1.17 million from the third quarter of 2007 due primarily 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 increased due to an increase in legal costs associated with non-performing loans. Noninterest expense is up over the same quarter of last year due to the OTTI charges of $6.0 million as well as OREO expenses of $777,000 ($527,000 of which was a valuation writedown) in the third quarter of 2008 compared to none in the third quarter of 2007.

Operating Efficiency Ratio. For the quarter, the operating efficiency ratio was 94.2% as compared to 29.9% for the same quarter in 2007 and 46.4% recorded in the second quarter of 2008. The deterioration in the efficiency ratio is primarily attributable to the $6.0 million charge recorded for OTTI. Excluding the FHLMC preferred stock OTTI charge and the OREO writedown of $527,000, the efficiency ratio for the third quarter of 2008 was 55.8%.

Balance Sheet Summary

Total gross loans and leases at September 30, 2008 were $1.197 billion, a $36.5 million or 3.0% decrease from the $1.23 billion at December 31, 2007. Commercial real estate loans were up from $518.3 million as of December 31, 2007 to $538.8 million at September 30, 2008 while construction loans decreased $33.2 million from December 31, 2007 and commercial & industrial and international loans decreased $23.8 million from December 31, 2007.

Total deposits as of September 30, 2008 were $1.226 billion, a decrease of $27.5 million or 2.2% from the $1.253 billion at December 31, 2007. As of September 30, 2008 compared to December 31, 2007; noninterest-bearing demand deposits decreased by $32.3 million or 14.0%, interest-bearing demand and savings deposits decreased by $39.5 million or 17.1% and time deposits increased by $44.3 million or 5.6%. During the third quarter, the Bank decreased its total collateralized governmental agency deposits by approximately $123 million and also sold approximately $114 million in securities that were securing those deposits. Total assets were $1.447 billion, a $95.2 million or 6.2% 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 $63 million as of September 30, 2008 as the Bank worked to restructure the balance sheet to increase liquidity. The loan-to-deposit ratio as of September 30, 2008 was 97.6% compared to 98.4% as of December 31, 2007.

Asset Quality

As of September 30, 2008 total nonaccrual loans were $61.8 million compared to $8.9 million as of September 30, 2007 and $20.9 million as of December 31, 2007. Total loans 90 days past due and still accruing decreased to $0 as compared to $23.8 million as of June 30, 2008. Total loans 30-89 days past due decreased from $18.7 million as of June 30, 2008 to $11.9 million as of September 30, 2008. Total net charge-offs for the third quarter of 2008 were $8.4 million compared to $7.2 million for the second quarter of 2008. 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 $3.7 million as compared to $7.2 million in the second quarter of 2008 and $750,000 for the third quarter of 2007.