Banc of California Inc (BANC) 2009 Q4 法說會逐字稿

Good day and welcome to the Pacific Mercantile Bancorp financial results full-year 2009, including the fourth-quarter and fiscal 2010 year operating results conference call. (Operator Instructions). After today's presentation there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Barbara Palermo. Ms. Palermo, the floor is yours, ma'am.

Thank you, Mike. I will be starting the meeting with the forward-looking statements, and then turn the meeting over to Raymond Dellerba, our President and CEO.

This morning's release contains statements regarding our expectations, beliefs, intentions and views about our future financial performance and our business and trends and expectations regarding the markets in which we operate. These statements, which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended can be identified by the facts if they do not relate strictly to historical or current events. Often they include words such as believes, expects, anticipates, intends, plans, estimates, projects or words of similar meaning or future conditional verbs such as will, would, should, could or may.

Forward-looking statements are based on current information available to us, and our assumptions about future events over which we do not have control. Moreover, our business and our markets are subject to a number of risks and uncertainties, which could cause our actual financial performance in the future and the future performance of our markets, which can affect both our financial performance and the market prices of our shares, to differ possibly significantly from our expectations as set forth in the forward-looking statements contained in this [news] release.

These risks and uncertainties include, but are not limited to the following, the risk that economic recession and current market conditions will continue in 2010, as a result of which we could incur additional loan and credit losses that would adversely affect our results of operations and cause us to incur a loss in 2010. The risk that economic activity in the United States will decline even further in 2010 as a result of the economic recession, which could lead to reductions in loan demand, and therefore cause our interest income, net interest income and margins to decline in 2010.

The possibility that the Federal Reserve Board will keep interest rates low in an effort to stimulate the economy, which could further reduce our net interest margins and net interest income, and therefore adversely affect our operating results. The prospect that government regulation of banking and other financial service organizations, or more specifically over us and operations, will increase or change in a manner that would increase our cost of doing business and restrict our ability to take advantage of business and growth opportunities, or even require us to raise additional capital, which could be dilutive to our existing shareholders. And the risks that the expenses of operating a new wholesale mortgage loan business, which recommenced in the second quarter of 2009, will more than offset the revenues that business operates -- generates, causing us to incur losses from that business.

Additional information regarding these and other risks and uncertainties to which our business is subject is contained in our annual report on Form 10-K for our fiscal year ended December 31, 2009, which we filed with the Securities and Exchange Commission on April 1, 2010. Due to those risks or uncertainties you are cautioned not to place undue reliance on forward-looking statements contained in this news release, which speak only as of this date, or to make predictions about our future financial performance based solely on our historical financial performance.

We also disclaim any obligation to update or revise any of the forward-looking statements as a result of new information, future events or otherwise, except as may be required by law or a NASDAQ rule. I will now turn the meeting over to Mr. Dellerba.

Barbara, thank you for that statement. And I wonder why you had to read it, because I know our attorney wrote that. Anyway, what I would like to do is introduce whose is here in the room with us, Barbara Palermo, who you just heard from, Robert Bartlett, our Chief Operating Officer, Michael Green, our Chief Credit Officer, [Andy Miranda], and Nancy Gray, our Chief Financial Officer, and myself.

I would really want to thank you for joining this conference call. And we're going to try and give you as much reliable information as we can, even though the statement says the opposite.

We were trying to keep you informed as always, and we did -- if you haven't looked online, we did release the fourth quarter as I promised just barely before this meeting to a few individuals. So please pull that down and you can take a look at the fourth quarter separated from the actual results for the year.

I am sorry for the delays in this, but we had to go through an examination -- during examination, and also have our auditors in at the same time.

With that, I would like to begin the presentation first by telling you that when you are reading headline news, this morning Citi -- former Citi exec warned Rubin about mortgage risk. Greenspan defends record at financial crisis probe. I mean, when you read these things you've got to wonder, did we miss the whole transaction that was taking place when the affordability index got to as low as 15% and we were still doing loans.

In December 17 of 2006, in an interview with Jonathan Lansner, a columnist with the Register, we had an in-depth discussion. Of course, I can never print everything you say, but he was very good at putting charts in to try and demonstrate what was happening with real estate. And it wasn't just the real estate and the residential loans, which has taken most of the blame for the problem, it was all the construction lending that was taking place.

And in a quote that came out during that article, "don't count on real estate in the new year", we really tried to follow that in the boardroom right down to the management level, maintaining a very low profile in the construction area, and attempting to get out of most of the construction, and of course eliminating the mortgage lending area, because we were highly dependent on who was buying those loans, and we do not want a conduit of loans that would have got us into problems, as has happened to the industry -- and it is worldwide.

Who would think during this period that you would see interest rates -- and if you look at prime, prime on 12/31 in 1980 hit 21.5%. I am sure a few of us remember those rates. Today prime is running at 3.25%. Very limited margins at 3.25%. If you look at Fed funds on 12/5 of '80, Fed funds hit 20%, and today they are currently at 25 basis points. The U.S. Treasury bill, the 10 year treasury, which is now the new benchmark, hit a high of 19/30 of '81 of 15.842%, and today it is running at somewhere between 3.85% and 3.86%.

$40 billion worth of funding are taking place this week right now. There is published data from the FDIC, and it is in our K, there is 152 commercial banks operating with their banking offices located in the counties of Los Angeles, orange, San Diego, Riverside, San Bernardino were considered Southern California. If you look at the size of those banks there has been a significant number of those banks which has exited the market, not by choice.

Of the failed banks that we looked at in 24 institutions in the Southern California markets -- and this is not by far all of them, there is a few eliminated -- there was approximately 262 branches of those institutions that have been spread out with other banks from here all the way to North Carolina. It is a very odd and peculiar business to have those type of branches being run in a multistate area, especially when the concentration is not out here in California.

What I'm going to cover just briefly -- I would like to go over what we are doing at the bank first, and that includes the holding company. You have probably seen a number of new directors brought onto the bank Board. Our committees and our consulting groups recommended that we expand our Board into a level to handle all levels of business for the size bank we are.

When we did that, we started that almost a year ago interviewing directors by our nominating committee chairman, which is Gary Williams, myself and our Chairman of the Board. With the Board's direction we have been able to identify, and I cannot tell you all the interviews because I can't remember them all, but some 35 individuals were met with. And I believe to date we have nominated three individuals on the Board and one individual on the holding company Board. We are still in the process of interviewing a few other people with acumen in the business areas that we are operating in or expanding into.

You cannot expect a bank that only makes loans to not be a mere reflection of the economy that we are in. When the economy turns down then the banks that are in that economy, or whether it is global or local, they will have to reflect what is going on in that economy.

Now lately, and I think I made a prediction in the Register again in March that we would probably see a turnaround in November, and that turnaround is evident, but it is very painfully slow.

Unemployment and housing is still hurting. Although we have seen upside in the various Southern California markets, I think that will continue.

Back to our reorganization. We not only restructured the Board to assist in areas where there is expertise specifically tied to the areas we are working in, but we also had to rightsize the bank and change the credit function of the bank substantially, especially over the last 24 months.

Particularly in -- when you have to reduce staff, you have made a mistake in your hiring. But if you look at the number of loans we are looking at today to do one loan, there is no way you can justify the staff that we have in the existing premises that we are located in.

In our restructure we looked at under the human resource, the commercial banking staff area, operations, mortgage. We looked at all of our benefits, including our 401(k) accrual, our bonus accrual and our salary adjustment. And I can tell you through this process and through the work of the Board of Directors not one area was not reduced, including all the people in this room.

If you look at the balance sheet next, we have -- the only way we can protect ourselves with longer-term loans is basically to tie into a structure that is laid out with the various funding sources we use to fund our loans. That is a Federal Home Loan Bank. That is also our time certificates of deposit and then our general accounts. We have identified all these areas, including all the way down to the improvement in the fee income area from the mortgage division, which is currently running at a spread on a sold loan at about 175 basis points.

We have also looked at all of our aggregate professional areas, including occupancy, equipment and insurance costs. We have looked at recapturing -- what our recapture rate would be on our TDR loans, which are troubled debt restructured, and those are significant numbers in the seven figures.

We have also revised our balance sheet and -- to coincide with what the Board's wishes were. And we also attempted to raise additional capital, which we are about two-thirds of the process complete. And we have raised about two-thirds of the commitment that we look to raise.

Also what we did is we went into our asset quality evaluation area and we spent a significant amount of time with a lot of new eyes looking at the area. We have divided our commercial lending between our north and south, appointed two senior lending personnel in that area. Under those areas we have also added a centralized credit disposition area. That is where our problem credits go once they should not be handled in the offices any longer. That area has been expanded and we have put approximately four new individuals and there, two in the separation of credit, which is fixed, a new Chief Credit Officer, which is Michael Green, and a Chief Operating Officer, Bob Bartlett.

So there has been a significant add to this area to work with troubled credit, of which we identified this structure almost 18 months ago to take effect of what was going to happen. We closed down our construction lending and have not made a construction loan in some time. The disposition of assets there are about 3% in construction loans. The remainder of the single-family construction, there is only three remaining loans in that portfolio, two of which we foreclosed on and we will be taking properties back.

The last thing we want to do is utilize legal movements to collect loans. We spent over $3 million last year having to sue various individuals that would not cooperate in a payback. Regardless of the transaction, we have not lost one of those suits to date. We have a few more going on, but I do not see our legal fees running in the $3 million plus level in the year of 2010.

So with that restructure and the acumen that we have put on the Boards we are looking to expand our fee income, expand our demand deposit range, which is up substantially, by the way -- I am not sure it is our marketing effort or the number of failed banks that have happened -- and decreased our dependence on higher cost time funds.

We are doing this very carefully and under a very liquid balance sheet of some $201 million in mortgage-backed securities and various other securities that are triple-A rated or agency direct or government direct. And we are also carrying some $150 million in cash, which at the Federal Reserve we are only receiving 25 basis points on average return on that money. But we feel the liquidity is more valuable than any other item on our balance sheet right now, except our spreads.

Our spreads now are finally expanding, and we have been moving from a low of about 169 basis points, and I'm not going to steal Nancy's talk, up to a little over 300 basis points currently. We still have a lot of work to do, but I think we have the team to do it, and I'm very pleased with the new Board members that have shown a lot of zest in investing in the bank, and also working with all of the employees to make a better institution for our shareholders and our employees.

With that, I would like to move into the financial part and we will be open for questions later.

We ended the year with total assets of $1.2 billion. That is up $36 million or 3.1%, excuse me, 3.1% from a year ago. Gross loans we ended at $844 million. That does exclude $7.5 million of mortgages held up for sale. And it is down $9 million from a year ago, and it is about a 1% decrease.

We increased our investments in securities by $10 million, and we increased our overnight fund by $37 million to $128 million from a year ago December. We no longer sell Fed funds, but we just leave our excess cash in our Federal Reserve account, which is currently paying the rate of 25 basis points.

At December 31 our other real estate owned totaled $10.7 million. That is down $3.3 million from December a year ago. Our total deposits increased by $138 million, or 17%, up to $960 million. And certificate of deposit increased by $80 million from a year ago. Our demand deposits also increased, and they increased by $32 million, or 21%, to $184 million at December 31, 2009 from $152 million at December 31, 2008.

Our book value did decline to $6.71 at December 31, 2009 from $8.08 at December 31, 2008. The bank does continue to be well-capitalized. We have a total capital to risk weighted assets of 11% at December 31.

Now moving on to the income statement, I will be focusing on the income statement. We did lose $17.4 million in 2009. The primary driver of the loss for the year was related to asset quality of the real estate portfolio and relates to the following. Nonperforming loans at December 30 was -- ended at $49.5 million. That is an increase from December of 2008 of $33 million, but it is down from the high in September of 2009, and that decreased by $10 million.

Also, the other affects on our loss has to do with the reduction in interest rates over the last 18 to 24 months. Our net interest margin was 1.90% in 2009, but we are now seeing an improvement where our net interest margin our fourth quarter we had a 2.33%, so we are seeing that gradual increase in our net interest margin. As Ray alluded to earlier, the first quarter looks like it is going to be around 3%, or a little bit over 3%, in that range.

Our noninterest income, we did increase our noninterest income by $2.9 million or 112%. The primary increases are service charges, they were up $335,000 or 29.1%. In our mortgage division we had $971,000 of revenue.

Moving onto the expenses. Our salaries and benefits increased by $3 million in 2009 over 2008. That represents our reentry into the mortgage business. It was a startup business during the second quarter of 2009. And an increase in credit administration to address our asset quality and manage the nonperforming and our various asset quality (inaudible).

On our provision fee, provision -- excuse me, our professional fees were up, as Ray had mentioned earlier, $3 million in 2009 compared to 2008. And that primarily relates to the collection of loans. Another item that was -- had a large increase in expenses was our FDIC expense increased by $1.8 million. That is up to $2.4 million for the year of 2009 as compared to 2008.

With that, Ray, I'm going to turn it back over to you.

Thank you very much, Nancy. Basically what we are attempting to do is we are concentrating on the nonperforming assets first. The nonperforming assets are our biggest problems because the NPLs, we are not collecting interest on at this time. So that is our first concentration. To a lesser amount we are working on our OREO, which is other real estate owned, and that number is currently about $10.7 million.

Bob, would you like to make any comments on the progress that we have made in this area?

Yes, I think relative to progress, if you [worded] the numbers and you go back to midyear, I think the problems with the bank peaked between June 30 and September 30, not only in the nonperforming loan area, but also in OREO. And so we have seen almost a 30% reduction from the peek at that point in time.

The other point I would like to make is that in the area of nonperforming loans roughly at the end of the year a little over $49 million, as Nancy mentioned. About $34 million of that $49 million are loans that are secured by first trustees on real estate that have had current appraisals where we don't expect any additional loss exposure.

In the $10 million in REO that we have, we have an aggregate appraised values on the REO that are about $12.5 million. So I think we made a lot of progress in correcting some of the problems that we have had in the portfolio during the last six -- specifically in the last six months.

Thank you, Bob. Mike, would you like to say something on our loan loss reserves we are currently running. This is probably the highest we had been in the history of the bank, and it has mainly taken place in the last two years.

Yes, the loan loss reserves we have been consistently slicing and dicing the portfolio, improving our migration loss analysis, looking at geocoding every real estate CRE asset. We are stress testing the portfolio to determine what type of maximum loss exposure we have on our CRE portfolio by product type, by location, by debt service coverage, and by changing capital cap rates. Those debt service -- that stress testing took place through 12/31/09. Using the stress testing which has been reviewed by the regulatory bodies, we have nominal exposure of any additional loss in our commercial real estate portfolio.

Again, those feed back right to our loan loss reserve analysis. Our specific reserves, we had not really taken any significant losses in CRE. Most of the losses and accountability for the migration loss has been in the C&I lending area, which is -- some of it is related to the real estate industries, some are non related to real estate industry in the normal course of business. It is a reflection of the general economy and decline in business incomes and revenues, as reflected by the general economy in Southern California.

Overall, I think we have adequate reserves that we have allocated to the various portfolios based upon our loss history and migration analysis.

Thank you, Mike. One thing I might comment is that in this bank we really -- the lawsuits that cost us the most amount of money were done by a very few individuals. Less than a half a dozen individuals were involved in the lawsuits. And if you take a look at the bulk of the restructured upgraded [chant] position, we have renegotiated with what I would call a very sound character customer base of some 25 individuals plus that have renegotiated at almost $66 million worth of debt. So that they have gone back into a re-margin position and they have gone back into a paying position.

Those assets, and please read about them in the K, we have to carry them for a certain period of time with a minimum of six months, although that can change by regulatory agency. But six months is the normal amount of time to show performance on those. So it is not like we sued everybody. We tried to renegotiate our transactions to meet the guidelines of sound banking practices.

Now with that, I am going to ask Nancy if she has any more to report.

I don't have anything else.

Bob, do you?

No.

Okay, with that we'll turn the meeting back to Barbara and we can open up the question-and-answer period.

At this time we are accepting questions from the dial-in participants. If you would state your name please and question.

(Operator Instructions). [Gary Cohe], PMP Securities Corporation.

Ray, when do you anticipate the newly formed mortgage division back in 2009 will turn to a level of profitability for the overall bank and its activities?

We anticipated with the number of people that they have onboard right now that they should turn profitable in this current quarter. Our anticipation was for that to happen with a minimum funding of somewhere between $21 million and $25 million per month. I think they are right around $18 million or $19 million, Nancy, currently?

Yes, that is correct.

That gives us a twofold thing. One is it allows us to have some asset liability match, because we are taking money out of Fed funds at 25 basis points and our average loan is somewhere between 4.87 and 5.25 depending on the type of loan.

So do I understand your breakeven point on those mortgages that are initiated through your bank is approximately $25 million a month?

It is between -- it always depends on the type of loan. Each loan pays a different amount of money in fees. So if it is a conventional loan, or it is a government loan, they all have different buy rates from the various larger institutions that buy these credits. So it depends on the mix, and that is very difficult to predict, although the number is probably around between $21 million and $25 million to earn a positive gain, depending on the mix.

[Bob Omehoni], [Paulson and Fosby].

I am calling -- I am just curious why the Company doesn't have a press release out detailing with more transparency the fourth quarter numbers that we can actually see. To the extent that you don't have one out, I would like to get a little more color on the breakouts in the fourth quarter.

I looked at the K, I looked back at the third quarter Q, and it appears I guess the major source of the loss, correct me if I'm wrong, is about a $10 million charge-off in the fourth quarter. That is just coming from me digging out the numbers on my own. But is there a reason why there is no press release out before the conference call? I mean, I have never heard of this before.

First of all, we did put a press release out. I mentioned that earlier. As I promised, the press release to go out on the wire. I think if you'll go out right now it is out there. But we can give you some color on --

I don't see it. I think you -- well --

Well, it went out. All I can tell you is we get a receipt when it goes out. It did go out. In fact, I just printed it offline on Yahoo right now.

Maybe it just came out. I am going to look right now.

It was out right at about one or two minutes to one, wasn't it, about 12.30?

About 12.30.

Bob, I'm sorry, Barbara put it out. What time did you put it out?

I think approximately 12.30 today.

Let me go to Yahoo right now and see it.

It should be out there. I told you I would get it out in an earlier phone call.

This is Nancy. In the very first paragraph it does talk about the $10 million charge-off.

It is still not on Money Yahoo, but whatever. I will have to take your word for it. Maybe it will show up.

I printed it off myself. So it is there on Yahoo right now. And if it isn't, it is on Bloomberg. I don't know if you (multiple speakers).

Let me get it on the Dow Jones and get it on the Business Wire. And do it maybe two, three days before the conference call in the future, because people want transparency. It is very important. (multiple speakers). You don't want to have the perception that you're hiding something.

So with that in mind, could you break that down for me, Nancy, because I don't have the benefit of having the -- to prepare for the phone call.

You're probably focused on the income statement.

I will e-mail it to you or Fed Ex it to you. I mean --.

I just want to know what happened in the fourth quarter, that is my question.

In the fourth quarter we lost $6.8 million. Out of that, we put a provision up for $9.8 million. Our provision is $9.8 million or approximately $10 million. So we charged-off $10 million worth of loans, and we put a provision up for $10 million. That would be the main driver in the $6.8 million loss.

The loans were, what? They were commercial loans? They were real estate loans, secured by owners of the property, or what type of loans are they?

I am going to let Mike address that. I think it is mainly the commercial, but let Mike --

Two-thirds of the losses were from C&I lending, one-third was from CRE. So the majority of the losses were in C&I lending. And then you would have real estate secured loans to businesses. And we wrote down part of the business loan to the real estate collateral value. But those are operating businesses. One was an auto dealership. And other industry, one was related to the real estate industries; the other was related to the jewelry industries in downtown Los Angeles. Those are C&I lending.

These are loans you deemed nonrecoverable or could there be future recoveries, that maybe (multiple speakers)?

We are in the process of recovery and litigation. So there will be recoveries and we are in negotiation and legal -- and litigation with these borrowers.

So you are forced to write them down by the regulators, and then if you do collect them pursuant to litigation than they go into the recovery mode?

Yes.

There should be -- I am e-mailing it to you right now. But it is out on the wire. It just went and pulled it up, and it is there.

Then, Nancy, I think the last time we spoke in the third quarter from what I heard there was $22 million, $23 million of these TDRs. And I realize there is a six-month process. And I believe some of them are kicking in now, becoming -- accurring loans again?

They should -- that is pretty will start occurring I believe in the second quarter. And I believe the total TDRs, Mike, was $20 million (multiple speakers) approximately $20 million. I think that is in our K.

So most of them are going to be starting (inaudible) in the second quarter, starting in April. In other words, you're going to get the benefit of the loans paying again?

Some of them, keep in mind, paid off in the first quarter. So some paid off, but the TDRs that are restructured, those are troubled debt restructured, it takes six months. So a payoff is different than a restructured debt, because the debt is still on our books, and we have maintained -- we are able to collect the interest and show it. It is still -- they are occurring. It is just they are not reflected in income. We are not allowed to put them through income per se. Bob, did you have --?

Yes, I was going to -- I made a comment on that. At the end of the year we had total troubled debt restructures of a little over $21 million. Out of that $20 million was in a nonperforming loan category until they went through the six-month period. So we are looking at a pretty good reduction in those as we get into the second quarter.

You can see the interest rates on those, and the average is going to return to profitability on those items -- per item somewhere in the area of about $1.2 million, Bob?

I was wondering can you differentiate between tax benefit and what -- I guess under this new rule with the IRS with the look backs -- you amended your return I read. Are you getting some money back from the government? Have you got the money back from the government?

That is disclosed in the K, I believe.

Yes, it is disclosed. We actually -- we amended our return. It had to do with increasing our provision expense in the third quarter. It was the primary -- what we amended the --

That was a $3.2 million increase in reserves. Then in the year-end when you look at the numbers, I believe the income tax benefit annualized, if I'm not correct, is $12.333 million for the year.

Correct.

You should have that e-mail.

I know that, but are you getting a check back from the IRS or is that just a tax benefit?

Well, we are getting -- we are refiling or amending our income tax return for the last probably five years. So we will -- we have a receivable. That portion will not actually affect our net income. We are just -- but we are getting cash back in, which means we can reinvest, so indirectly you can invest the cash into loans of some kind of a --

So you're going to receive some cash?

We will be receiving some cash. And that does improve our overall liquidity.

Right. Then there was something --

The press release is up on the iPhone. It is there.

I will look at it in a second here.

And we e-mailed it to you.

Right.

I am sorry for the delay. The problem is it has got to go through so many hands, and we are at our year-end, which is very difficult to get the year-end while we are under -- not only under audit, but we are under a review by the various regulatory agents. They just departed recently.

Yes, (inaudible). It is a regulatory issue in July of last year where they -- you had to sign this MOU. And is that basically -- these guys have put some shackles on you. Is that going to run its course or how does that work?

They had this requirement, and it is a fairly standard requirement that we have to maintain. And they are fairly mundane. They are very strict and you have to report every quarter to them on the results of the bank in more detail.

Now is there a business as usual thing that kicks in at some point? In other words, you have 2.44% of your loans reserved now, are they comfortable with that, is that something that is going to go up in your opinion?

I can never comment on that. I'm sorry. But the regulatory agencies say we absolutely cannot comment on it. But I can tell you that we are comfortable with the numbers that we have put together, and we cannot comment on any regulatory comment.

I can comment on, Bob, is you are referring to the allowance of 2.44%?

Right.

I think that goes back to what Mike had said earlier, where we go in and analyze our allowance for loan loss. We feel like that is adequate at 12/31. (inaudible).

Last question, just the status of your fundraising. You have the open-ended $15.5 million preferred offering. How much have you sold? When will it -- is it is going to close down by [NCI] date, or where do we stand with that?

There is $8,850,000. It is in the press release.

Okay, I don't see it in there.

And there are checks still in the mail. So we are allowed to accept those as soon as they come in.

I am going to go back in the queue here. The next question, I guess, I'm going to -- appreciate it. Thank you.

Jason Stock, M3 Funds.

I just had a quick question on the 10-K. You had a comment regarding the ineffectiveness of methodologies for determining the low marks. We were just curious if you could clarify what exactly that meant, and particularly the part that indicated that you weren't able to conclude that the disclosure controls and procedures were effective as of December 31. I am just trying to understand what exactly is going on with that in regards to the loan loss reserve.

Basically what that is, is because we had to restate, because of allowance for loan losses. And I think if you go back you look at the press release when we stated we did have our regulatory agencies requested that we go back in and look at our qualitative factors, which we did. So by so doing, that made our controls ineffective for 9/30. This came up in January. You have to go through two cycles before you can actually go back and say that your controls are effective.

So we have to go through March and our allowance, then we can go back in and we can then change that statement. But that is to do with SOX, and you have to have two cycles. And since we had to restate our 9/30, we have to -- evidently our controls were not effective at that period of time.

We were asked to increase our reserves by $3.2 million, and we did them. I wish loan loss reserves were a science. I really do. I've been doing this forty years, and you can bring forty people in here to review these reserves and everyone has a different opinion. Let alone when we bring it in the Board meeting and each Board member questions each transaction that we put reserved.

We do do appraisals. There is a lot of new laws and regulations that have come out. We appraise all these properties. When it comes to qualitative reserves that is supposed to be a shock absorber. That is supposed to be a number that maintains a certain industry indication or a geographic or a specific transaction where we break down these numbers by 11 different categories -- 11 different categories.

So loan loss reserves, I am sorry to say, at any bank I have ever been at -- and at the major banks when I went through my trainings some 40 years ago, that has never changed. And there is always more reserves required in a troubled economy, and always a lot less in a good economy. Not an exacting science I am sorry to say.

I just want to make sure everybody on the call understands qualitative is a subjective piece of the allowance. So you're looking at the current environment on the economy. And, Mike, in our K it describes everything. So it is more of a subjective piece. It is not a mathematical type of calculation. Did that answer your question?

Yes, that's helpful. Thank you.

Ron Tracy, the Paulson Investment Company.

Good afternoon. My question was on your business loans from what I understand, you don't own any strip malls or high-rises. Do you want to talk a little bit about your business, who actually you are doing the loans with?

Our loans are highly spread out between a number of categories right now. The concentrations, what we try to maintain is by capital. So in other words, as an example in our construction lending process we have a policy not to exceed 100% of our capital in unencumbered reserves in making those type of loans. That way the methodology behind that was that we were getting 25% to 30% down, depending on the project. And if we were to -- pardon me? If we were to take some type of a hit in this area, that one single area would not cause the bank to fail.

So where you can go higher advances against capital they are in more diverse [cit codes]. As an example, in a commercial industrial area that is highly diverse. There is thousands of cit codes In that area. Whereas in the construction area, you may have a very limited number of cit codes. The biggest problem that we saw in our construction tied back to the single-family area, where there was a conversion -- a lot of people were converting apartments to townhomes or condominiums.

Those that were in process we foreclosed on one in Chula Vista, 15 units. Those were sold as an apartment. They never completed as a condo. The project down in the La Costa, which is Carlsbad, 10 units, basically does work as a condominium complex. But those are the ones that failed. Anything that was in process that was under construction in most of them we found in our research after-the-fact is individuals put seconds on those properties, even though it is against our policy.

And secondarily the other problem is -- the highest problem that caused some failure was the lawsuits between the money investors and the general builder. Is that correct, Bob, our review of those loans that have the biggest problems (inaudible) -- is lawsuits between the partners that caused the largest losses in those transactions tied to single-family.

And then the secondary losses were a commercial where they made items for the housing industry. That stopped altogether, because building starts went down enormously. I think they are running somewhere around a little over 300,000 annualized right now.

But people are still buying 5.2 million homes every year. That it is the annualized rate in that area right now. That is why we thought the construction would be more conducive. I mean not more conducive because of the oversupply of single-family homes in the marketplace.

Okay. And the last question looking forward. It looks like you are expecting a better first quarter. When do you expect to report that, and when we would have another conference call?

I will look at my CFO over here who has been working diligently. We are trying to get it out by the middle of the month.

The one thing that we always want to be careful -- we want to be very careful of, or we want to make sure that our auditors have a chance to review our numbers. So they will go in and look at our allowance. There is other things besides just allowance that they review. So I would expect it would be the last week of April. And we're trying to get out as soon as we can.

Ron, we don't always have a conference call in our first quarter on there. We are attempting to get some coverage from some of the major houses out there right now.

All right, fine. Thank you.

Murray Coleman, Orange County Business Journal.

I just wanted to ask if I could get a copy of the press release as well?

Yes, sir. We will e-mail it to you maybe later.

Mr. Dellerba, ladies and gentlemen, we are currently showing no further questions at this time. Would you like me to give the instructions again or did you want to give any final comments?

Well, if there aren't any further comments, I think we would rather go back to work. Are there any other questions?

Actually, sir, we do have some that have appeared. We will proceed to the next one. The next one comes from Josh Iversen, LPL Financial.

I just wanted to ask about the REO owned. Are you in the process I would imagine of selling those properties at this point?

We have right now slightly over 50% of the OREO properties in escrow.

And the other 50% are on the market, I would imagine?

They are on the market, yes. We put them on the market immediately. We do not want to hold onto any properties.

I would imagine you benefit from being in the Southern California market, where the property has held up decently compared to some other areas?

Well, we have actually seen an increase in the San Diego market, as reported by the Case-Shiller people of about 4.8%. I might have this wrong. It might be 4.9% in San Diego and 4.8% in Orange County. And then the LA market had the biggest increase I think in the country.

Right. Now if I'm listening to the call, it seemed to me that the distress where the commercial real estate and the builders is pretty much behind you in terms of there is not much of that risk left on your balance sheet, is that correct?

Well if there is, they are reserved for according to standards we have to follow. And then anything that we have taken back, we have to follow the guidelines. You know, a lot of people like to use the Texas ratio. That Texas ratio was back in, what, 1985, 1988, and there has been so many accounting laws enacted since then. Before you could take it back on the gross amount. And you really didn't write it down until you actually sold it. Today, before you would take that property back, you have to take a disposition allowance. We use about 8% to sell it. And then you have to also market to market on a reasonable appraisal process.

One thing I think where you might want to make a comment to, we actually exited the construction business in -- January of 2007 we did exit. And I shouldn't say exit. We started cutting back on our construction back in 2007. So we were not a big player in building out the (multiple speakers).

Because by August of '08 this market was in extreme turmoil, and it still somewhat is. So you can still see boarded developments out in various areas. They are definitely under some stress. But we exited by dropping -- we turned down some $25 million in loans. And now we actually got paid off, believe it or not, on some $79 million worth of loans. So we were substantially down below the market for the average banks in areas that failed substantially. Some of them were 300% to 600% of their capital in construction, and there was no way to get out or survive that.

Yes, I think your balance sheet obviously reflects the fact that you were able to survive that and make some adjustments. What about these new Board members? Do you see any potential for any business coming in from them as opposed to just their general advice and all that, but from some of their contacts?

Well, the main reason, other than the law, to have Board members is we look at them as major influencers with their business and also with the individuals they know. They have been instrumental in making introductions for capital, also for new business for the bank. And we have seen a substantial increase in our demand deposit base. The highest the bank has ever seen, except in the first year when we started the bank. So we have had the largest increase in demand deposits we have experienced in the past 11 years, other than the first year this year.

I think it will continue through next year, although it is pushing our capital to the limits that we recently raised, and we will have to rectify that in the near future. But the Board is definitely an influence or Board across -- the new individuals and the existing, they have all contributed in many referrals to the bank. It is fair to say we don't do them all, but we try to.

You have certainly added some astute individuals. What have you done in terms of interest rate risk? If rates were to rise here, are you -- have you hedged yourself to deal with anything like that?

We are constantly living with an asset liability problem. We are anticipating a rate rise. I think it will be very gradual. Again, probably listening to the commentators on TV, more towards the end of the year than the current two quarters. It is very difficult to predict what the Fed is going to do unless you're on the inside, and I don't plan on being on the inside of the Fed.

Nor would you want to. My final question is what can you say briefly about the Southern County business climate? I am in this area myself. It seems to me that compared to the rest of the country it maybe is a little more dynamic. There seems to be a lot more businesses, and maybe because of all the Pacific Rim where people are coming here, it seems to keep the business vibrant. Do you see some of that in your results or in the businesses that you look at?

Well, the big indicator that I always look at is what are your checking account activity look like. To me that is the first indication. Forget the leading indicators and everything else, if people are writing checks again, so if your checking activity and your demand deposit, that is people writing checks either using debit cards or writing checks. But their utilization of their checking account, I can tell you in the last four months is substantially up from where it was all of last year.

The other thing is I recently was invited down to the ports of Long Beach and LA. And of course, now they are one major blend. And I have seen significant activity. And the one way to gauge that is to get on that 710 freeway and take your life in your hands driving between those tractor-trailers pulling those piggybacked vehicles. And that has increased substantially.

The other thing is is the car, the main bread-and-butter. We learned recently here, and a lot of them will be here, about 660 new dealerships are going to be reopened under the GM name. I know Toyota is having their problems, but there is a pent-up demand for all kinds of cars.

I noticed the cars are getting a lot newer on the freeway. So I would say the market is picking up substantially here. We did have a substantial jump in GDP growth, just to rebuild inventories. So you have had two consecutive quarters of positive GDP growth. But it is going to take another year or two to get back up to where we were, because we dropped 12%, and I think we have come back about 6.7% to 7%. That is a big comeback.

The problem is the unemployed and the underemployed, that is still a significant problem. But housing here is improving, which will mean all the industries will improve. It is a major part of GDP in California.

Absolutely, absolutely. Excellent. Hopefully we will see some of that reflected in your earnings reports over the next few quarters. And I will look forward to seeing how it develops. Thank you.

At this time, sir, we are showing no further questions.

30. I am not sure their timing on hitting the wire, but I was able to see it, so it should be out there.

Please continue to support us the way you have in referring business. And we appreciate the ownership in the stock, and we will continue to own it ourselves. Thank you very much and I will say goodbye for everyone.

Thank you sir for all of your comments. The conference is now concluded. At this time you may disconnect your lines. Thank you and have a good day.