President's Message from the 2011 Annual Report

March 28, 2012 

Dear Shareholders:

The year 2011 was an important transitional year for Preferred Bank and although it may not have been a highly profitable year, it will definitely be remembered as one of the most accomplished years of our 20 year history.  Under very challenging external and internal operating conditions, we made very significant progress in addressing our legacy challenges while positioning the organization for future sustainable growth and profitability.

First and foremost, we turned the Bank’s operating results around from a 2010 loss of $16.8 million (net of conversion expenses) to a profit of $12.2 million in 2011.  Even though the Bank was burdened with a significant amount of legacy non-performing assets during most of the year, our margin income was more than enough to cover our normal overhead expense and very high (but declining) credit-related costs.

Throughout the year, management’s top priority was to reduce non-performing and classified assets without going through a “fire sale” approach in order to help preserve shareholder equity.  By employing this approach, the resolution process becomes longer and more labor intensive but the payoff is a higher resolution price for the assets.  Nevertheless, we were able to reduce the non-performing assets and classified assets by $69.5 million and $135.2 million, respectively from the prior year.

In addition to addressing the remaining problem credits, our loan staff was also busy acquiring new lending and deposit relationships.  At the end of the year, not only have we replaced the non-performing loans and classified loans discussed above with good quality new credits, we ended up growing the total loan portfolio by $38.2 million.  What this means is that interest-earning loans actually grew by $107.7 million during 2011.  While accomplishing this, we also worked strategically to improve the overall risk profile of our loan portfolio.  Today, commercial and industrial loans account for more than 30% of the total loan portfolio and the level of non-owner occupied CRE loans are now below the regulatory guideline of less than 300% of total capital.  These steps may seem like subtle changes, but they are highly difficult to execute in this environment, especially concurrently.

Due to our account officer’s efforts in cultivating new banking relationships, deposit levels also improved.  The total increase for the year was $36.7 million or 3.4% net of the maturities of $60.4 million in brokered deposits.  Although deposit growth was tepid, our improvement in the deposit mix was our biggest success in this area.  Demand deposits and savings accounts increased 36% from December 31, 2010, representing the biggest one year improvement in our corporate history. 

Continued management stability contributed significantly to the many accomplishments made in 2011.  Between 2009 and 2010, the Bank conducted very few lay-offs and retained all senior officers with the rank of Senior Vice President and above.  In 2011, these officers were all ready to either manage problem credits or engaging in new business activities.  By mid-year, we added Mr. Wellington Chen as Chief Operating Officer and hired several other senior-level business development and loan officers to further strengthen our ranks.

We are pleased that our progress has also been recognized by the market. From the end of 2010 through March 21, 2012 our stock price appreciated by over 61% from $7.45 per share to $12.00 per share. We believe that this validates our efforts and is perhaps also reflective of an overall improved outlook for the economy.

Looking ahead, we are keenly aware that there are remaining troubled assets to be resolved in an economy that remains fragile.  We are also aware that we need to further improve our profitability to gradually return to our historical levels. We are confident that the steps taken over the past year will position the Bank for future success. On behalf of the Board of Directors and our staff, we thank you for your continued support.

Very truly yours,

 

Li Yu

Chairman of the Board

Chief Executive Officer