Improvement in Tangible Common Equity Ratio Despite Quarterly Loss
LOS ANGELES, July 30 /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 June 30, 2009. Preferred Bank reported a net loss of $5.8 million or $0.59 per diluted share for the quarter compared to net income of $18,000 or $0.00 per diluted share for the second quarter of 2008 and compared to a net loss of $1.3 million or $0.13 per diluted share for the first quarter of 2009.
- The quarterly loss was due to:
- Provision for credit losses of $15.5 million
- Special FDIC assessment of $617,000
- OREO valuation charge of $1.2 million
- Other-than-temporary-impairment charge (credit-related) of $351,000
- Tangible common equity ratio improved to 9.60% at June 30, 2009 compared to 9.21% at March 31, 2009
- Total non-performing assets remained relatively flat from March 31, 2009
- Continued decrease of exposure in housing, construction and land development loans as most construction loans are now near completion.
- Net interest margin increased to 3.33% in the second quarter of 2009 compared to 2.88% in the first quarter of 2009
Li Yu, Chairman, President and CEO commented, "In light of the continued soft economy we decided to significantly increase our allowance for loan losses this quarter which resulted in the larger than expected quarterly loss.
"In spite of the loss, our capital ratio actually improved from the previous quarter because of our efforts to decrease total assets and due to a recovery in the fair value of our investment securities which led to an increase in tangible common equity. The reduction in total assets was in line with our goal to continue to reduce the bank's exposure in housing related construction and land development loans. As of June 30, 2009, most of the ongoing housing projects are near finishing stage with limited amount ($19.6 million) of undisbursed commitments.
"Most of the in-fill metropolitan Los Angeles areas saw housing prices firm up during this quarter. In fact, many areas reported price and sales volume increases for properties $500,000 and below. We are closely watching the trend and hoping this will not be seriously affected by the widely speculated next round of foreclosures. However, as exposure in this area continues to decline and as we have been proactive in re-appraising and continually evaluating collateral value, our level of concern for this group of assets is gradually reducing.
"Early weakness of commercial real estate (i.e. retail, office and industrial properties) in the greater Los Angeles area seems a little more evident now. As the health of these assets are more closely related to employment trends, it will be difficult to predict the time of stabilization of commercial real estate. Our exposure to these loans amounted to less than $300 million. The average loan-to-value ratio at origination in this portfolio was right at 58%. We hope our loss exposure for this group of assets will be relatively moderate.
"We have also further increased our efforts to monitor our loan portfolio. For example, after the news of CIT's precarious financial position, we immediately performed a review of our commercial & industrial (C & I) portfolio. We concluded that we have two customers who have borrowing relationships with CIT. These credits total $1.8 million and are adequately protected by real estate collateral.
"We have performed many capital stress tests including the most well known method used by our government for the largest 19 U.S. Banks. All of them indicated we will be capital compliant under various stress conditions including the most adverse scenario. Nevertheless our Board initiated a rights offering for up to $10 million in common stock to provide additional cushion and comfort against future potential credit losses. We are confident the offering will be reasonably successful even under the current environment."
Operating Results for the Quarter
Net Interest Income and Net Interest Margin. Net interest income before provision for loan and lease losses decreased to $10.6 million, compared to $13.3 million for the second quarter of 2008. The 20.8% decrease was due primarily to the lower interest rate environment and lower loan totals as well as a significant increase in nonaccrual loans in 2009. The Company's taxable equivalent net interest margin was 3.33% for the second quarter of 2009, down from the 3.64% achieved in the second quarter of 2008 but up sharply from the 2.88% for the first quarter of 2009.
Noninterest Income. For the second quarter of 2009 noninterest income was $925,000 compared with $995,000 for the same quarter last year and $1,278,000 for the first quarter of 2009. The decrease in noninterest income this quarter compared to the second quarter of 2008 was due mainly to a decrease in trade finance income of $110,000 and a decrease in other income of $43,000 partially offset by an increase in service charges of $94,000. The decrease in noninterest income in the second quarter of 2009 compared to the first quarter of 2009 was due to a gain on sale of investment securities of $460,000 recorded in the first quarter of 2009.
Noninterest Expense. Total noninterest expense was $8.2 million for the second quarter of 2009, compared to $6.6 million for the same period in 2008 and $6.6 million for the first quarter of 2009. Salaries and benefits decreased by $180,000 from the second quarter of 2008 due to staff reductions and to an increase in deferred costs on loans renewed. Occupancy expense increased by $94,000 over the second quarter of 2008 due to the two new branches opened in the fourth quarter of 2008 located in Anaheim and Pico Rivera, California and to normal lease expense increases. Professional services expense increased by $452,000 due primarily to an increase in legal costs associated with non-performing loans and OREO. Credit-related other-than-temporary-impairment charges were $351,000 for the second quarter of 2009 and were related to two trust preferred collateralized debt obligations ("CDO's"). This compares to $1.9 million in the same period of 2008 and $425,000 in the first quarter of 2009. OREO related expenses totaled $1,841,000 for the second quarter of 2009 compared to $154,000 in the same period last year and $613,000 in the first quarter of 2009. OREO expense in the second quarter of 2009 consisted of $1,232,000 in OREO valuation charges and other OREO related charges of $609,000. Other expenses were $2,009,000 in the second quarter of 2009, an increase of $1,166,000 over the same period in 2008 and an increase of $671,000 over the first quarter of 2009. The increase this quarter over both comparable periods is due to increased loan collection costs as well as the one-time FDIC assessment which came to $617,000.
Balance Sheet Summary
Total gross loans and leases at June 30, 2009 were $1.15 billion, down from the $1.23 billion as of December 31, 2008. Mini-perm real estate loans were up from $592.7 million as of December 31, 2008 to $597.8 million at June 30, 2009 while construction loans decreased from $290.8 million at December 31, 2008 to $254.3 million and commercial & industrial and international loans decreased from $347.7 million at December 31, 2008 to $293.9 million at June 30, 2009.
Total deposits as of June 30, 2009 were $1.14 billion, a decrease of $117.5 million from the $1.26 billion at December 31, 2008. As of June 30, 2009 compared to December 31, 2008; noninterest-bearing demand deposits decreased by $1.3 million or 0.6%, interest-bearing demand and savings deposits decreased by $27.5 million or 14.5% and time deposits decreased by $88.7 million or 10.2%. Total assets were $1.37 billion, a $117.2 million or 7.9% decrease from the total of $1.48 billion as of December 31, 2008. Total borrowings increased from $58 million as of December 31, 2008 to $84 million as of June 30, 2009 as the Bank issued $26.0 million in senior unsecured debt utilizing the U.S. Treasury's Temporary Liquidity Guarantee Program during the first quarter of 2009. The proceeds of this debt issuance have been used to reduce the Bank's more expensive deposits. The net loan-to-deposit ratio as of June 30, 2009 was 97.9% compared to 95.8% as of December 31, 2008.
Asset Quality
As of June 30, 2009 total nonaccrual loans were $80.9 million compared to $66.6 million as of December 31, 2008 and $85.8 million as of March 31, 2009. Total net charge-offs for the second quarter of 2009 were $18.3 million compared to $2.6 million for the first quarter of 2009. 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 $15.5 million as compared to $7.2 million in the second quarter of 2008 and $6.5 million for the first quarter of 2009. The allowance for loan loss at June 30, 2009 was $30.6 million or 2.67% of total loans compared to $26.9 million or 2.19% of total loans at December 31, 2008 and compared to $20.0 million and 1.65%, respectively at June 30, 2008.
The table below summarizes loans and leases, average loans and leases, non-performing loans and leases and changes in the allowance for credit losses arising from loan and lease charge-offs and recoveries, and additions to the allowance from provisions charged to operating expense:
Allowance for Credit Losses & Loss Histories
Six Months Year Six Months
Ended Ended Ended
June 30, December 31, June 30,
2009 2008 2008
(Dollars in thousands)
Allowance for credit losses:
Balance at beginning of period $26,935 $14,896 $14,896
Actual charge-offs:
Commercial 1,031 4,686 3,092
Construction 5,324 8,636 -
Real estate (mini-perm) 12,005 5,206 4,124
Trade finance - - -
Other - - -
Total charge-offs 18,360 18,528 7,216
Less recoveries:
Commercial 37 - -
Real estate (mini-perm) - 7 -
Trade finance - - -
Other - - -
Total recoveries 37 7 -
Net loans charged-off 18,324 18,521 7,216
Provision for credit losses 22,000 30,560 12,280
Balance at end of period $30,611 $26,935 $19,960
Total gross loans and leases at end
of period $1,146,095 $1,231,232 $1,208,430
Average total loans and leases $1,210,689 $1,220,348 $1,227,150
Non-performing loans and leases $80,875 $66,785 $77,981
During the second quarter of 2009, the Bank made further enhancements to its methodology for determining the adequacy of the allowance for loan losses specifically the allowance as required by FAS 5.
