Preferred Bank (PFBC) 2009 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Preferred Bank fourth quarter 2009 results conference call. (Operator Instructions.) This conference is being recorded today, Wednesday, January 27, 2010.

At this time, I would like to turn the conference over to Lasse Glassen from Financial Relations Board. Please go ahead, sir.

Thank you. Good day, everyone, and thanks for joining us to discuss Preferred Bank's preliminary results for the fourth quarter and full year ended December 31st, 2009.

With us today from management are Mr. Li Yu, Chairman, President and Chief Executive Officer, and Ed Czajka, Chief Financial Officer. Management will provide a brief summary of the quarter and then we'll open the call up to your questions.

During the course of this conference call, statements made by Management may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based upon specific assumptions that may or may not prove correct. Forward-looking statements are also subject to known and unknown risks, uncertainties, and other factors relating to Preferred Bank's operations and business environment, all of which are difficult to predict and many of which are beyond the control of Preferred Bank.

For a detailed description of these risks and uncertainties, please refer to the documents the Company files with the Federal Deposit Insurance Corporation, or FDIC. If any of these uncertainties materialize or any of these assumptions prove incorrect, Preferred Bank's results could differ materially from its expectations as set forth in these statements. Preferred Bank assumes no obligation to update such forward-looking statements.

At this time, I'd now like to turn the call over to Mr. Li Yu. Mr. Yu?

Thank you, Lasse. Good afternoon, ladies and gentlemen.

I'm happy to report that for a long time we finally reported a small, modest profit for fourth quarter 2009. Although modest, it is very precious to me and our staff. And I attribute the reason of this improvement on the following reasons.

First of all, it's a firming up of the housing market, especially in Southern California in the past six months we have continued to see price going up and then volume going up, latest as December, which publish today also shows that transactions going -- or pricing is firming and going up. And as roughly 75% of our MPAs are all housing related product, construction loans and land. We feel that the firming of the housing trend is really a big contributor to our stability.

The next reason I attribute it to is that we think we're very well reserved right now. Aside from the fact we feel that we were quite diligent in providing adequate reserve to each of impaired assets. And just for instance, on the so-called General Reserve, that is a reserve that was established to the past loan or good loans. The reserve on the good loans now stands almost -- in fact, it's 2.67% of all the good loan, reserve on the good loan is 2.67%. I believe that exceeds probably the total reserve of many other institutions, good or bad.

The third thing is that the continuous improvement in the trend of delinquent loans. It is continuously getting smaller. When the delinquents are reducing, the pressure migration into non-performing assets is less and the pressure making reserves, of providing reserves or provision on these loans are gradually easing. And although fourth quarter December 31st already look pretty good compared to a long period of time, but we hope that the trend will still continue into the first quarter.

And these actually are the three reasons for the -- for our improvement. And looking forward in 2010, we have reason to start to be more optimistic now. And we think our problem assets resolution process will continue and probably will accelerate in the first quarter as I outlined in some of the write-ups in our press release. And we hope on the operations side with the reduced reserve requirement or provision requirement, that we'll be providing a reasonable operating results.

Having said that, then I'm ready for your questions.

Thank you, sir. Ladies and gentlemen, we'll now begin the question-and answer-session. (Operator Instructions.) And our first question comes from the line of Aaron Deer with Sandler O'Neill & Partners. Please go ahead.

Hi. It's actually Sandler O'Neill & Partners, just to clarify. And Li, is Ed with you there?

Yes.

I am.

Okay. Hey, guys. A question starting on the comments in the press release regarding the DTA benefits. It sounds like you guys are still working out what the tax number could be for the quarter. I'm curious, is there some kind of estimate already built into the equity line? I guess what I'm getting at is if the 8.5% TCE ratio is likely to climb from that level once the tax impact is calculated.

No. Right now it could actually go down if we're deemed to need a valuation allowance in the DTA. So, that's the piece, Aaron, that's still being worked out.

So, the delta could actually be to the down side.

Yes.

Oh, okay.

We don't believe that's going to be the case, but certainly we have to wait until the decision is in.

Okay. And then of the $75 million in land loans still on the books, I'm curious. Are those all been marked appropriately based on recent appraisals? And how does the book value on those loans compare with kind of their aggregate origination values?

Well, roughly about -- well, in this particular question, I'd like for [Lou] to answer that because he's got the most statistics. But being Chairman, I will say we have portion of these good loans, okay? And with the ones that is currently sitting either classified or non-performing, it has all been marked to the book value, to the appraisal value or less. So Lou, would you--? This is [Lou Carter], who's our Senior Vice President, and I'd like him to give insight -- input on that.

Yes. Generally speaking, we've been aggressive at getting appraisals and marking our land and our construction projects down to what we believe will be estimated sales proceeds. On an aggregate basis, our land portfolio is carried under 20% of the original appraised value associated with the collateral in each one of those land loans. Some of them are actually quite a bit under that but, in aggregate, when the average is calculated, it's a little bit under 20% of original--.

Low NOI yield.

Low NOI. That's correct.

Okay, great. Thank you. I'll step back.

Thank you. Our next question's from the line of Joe Morford with RBC Capital Markets. Please go ahead.

Actually, this is Dave King for Joe. Good afternoon, Li, Ed.

Hi, Dave.

I guess I was kind of encouraged to see that you were able to resolve about $50 million of last quarter's MPAs. Given that you intend to resolve a lot more of these going forward, what are you guys thinking in terms of likely losses and provisions as we progress through 2010, etc.?

We actually, at this point in time, obviously the situation -- there's two sides of the resolution. One side is the loan size. Some of them will be -- either become charged off or become a good loan where the problem is being resolved. In some cases it will be sold. The (inaudible) has a liquidation side of it.

At the present time we do not see a significant difference between the price that we think we could get on the resolution of that if we are disposing that as compared to the carrying amount of the loan. So, at this point in time we are not -- our visibility is that all these loans has marked down to pretty much to the bone. I mean, low NOI yield. So, we think that we are not highly exposed on these things.

Fair enough. And then also, I guess just a follow-up on Aaron's question. Knowing that you still need to finalize your capitalized ratios, or your capital ratios, but that it's likely you'll be in the adequately capitalized status. What are your kind of plans or general thoughts going forward on how to address this?

We will probably -- our Board has been reviewing capital ratio, even way back in September and in October and December. We are constantly reviewing that. And it is just, from my own personal situation here, as a -- it is more likely than not, we'll be probably raising additional capital.

Okay. Fair enough. Thanks, guys.

Thank you. Our next question comes from the line of David Rochester with FBR Capital Markets. Please go ahead.

Hey, guys. Thanks for taking my questions. Just to follow up on the last answer you gave in terms of raising capital. Excluding valuation allowance and the DTA, do you have some kind of rough sense for what level of capital raise you would need to satisfy the regulators at this point?

We don't have the actual number at this point in time. We have no -- generally speaking, what the regulator will expect and we're guessing on that. And also, we are also planning into our future. Building into our model, there will be some loan pay-downs. There'll be some asset reduction. There'll be some total -- how should I put it, asset reduction. We have to go through all those things.

And also, from a regulator's side, the DTA calculation, they have automatic disallowance to certain amount over whatever it is as a percentage of capital. That's also -- they automatically disallow it.

So, as we look forward, we'll have to also look at the DTA side how much DTA was in the year that will be reducing through the normal course of the action. That -- by reducing that, that actually increases our (inaudible) increase our capital, or decrease the capital requirement. So, we don't have exact number yet at this point in time.

Okay. And just one quick follow-up. Can you talk about the loan restructuring activity during the quarter and maybe what your total restructuring loans was in 4Q versus 3Q?

Well, in the fourth quarter we have actually sold about $18.8 million of loans and (inaudible). In the fourth quarter, okay? And we have a number of loans being resolved, being turned back into a performing status. And we have charge-off the number situation on that.

Lou, you have actual numbers, or you can do that or--?

--I think generally speaking, as Mr. Yu pointed out earlier, we've noticed a firming up in real estate values. And I think largely we've been more successful at working with our borrowers perhaps because they also, since the firming up of the values and the feasibilities of the projects that they were engaged in.

So I'll say, generally speaking, although I don't have the numbers in front of me, we have seen a lot more activity as far as borrowers and guarantors stepping up to the plate and working with us to come up with a reasonable work-out strategy which is mutually beneficial.

Okay. So, I guess it sounds like there's a little bit more restructuring activity and restructured loans are probably higher this quarter versus last quarter?

That's true.

We actually, in last quarter, the actual sales of assets is almost higher -- much higher than this quarter. The reason is, in the fourth quarter, aside from the fact we have a holiday season actually affected the -- I mean, since -- I mean, Thanksgiving Day, sort of (inaudible) things stopped.

Aside from that situation, just that 100% effort is being invested into examination of these kind of situations. So, the normal effort will be returned to an accelerated basis in the first quarter in terms of resolving the assets through sales, restructure and otherwise.

Okay. And one last one. Should we read into anything in the OREO expense trend? It bumped up in the third quarter. That I'm sure had something to do with the exam. It's down in the fourth quarter. Should we expect to see a bump up in the first quarter? Is that related to the scheduling of appraisals and your updating those every six months?

I let Ed answer that question first, okay, then I supplement it.

Yes. Actually, a couple of things were at play in the fourth quarter, Dave. First off, we had a number of properties with delinquent property taxes. And so, a very large component of total OREO expense in the fourth quarter was catching up on property taxes. Now, obviously we don't expect that to be a recurring event, only to the extent we take properties over and foreclose. But this was on probably about six or seven different properties, what happened in the fourth quarter.

In addition to that, in terms of going forward -- so, we will see some more property tax, we'll see legal expense and those types of things you normally see. But the one thing -- and we called it out in the highlights of the quarter that we were very positive about is we actually had a gain on one of our properties that we sold, and then another property that we sold was basically at a breakeven during the quarter.

So, as Lou had indicated, we're starting to see some firming up of real estate values around Southern California. And to the extent that continues, or at least remains flat at this point, we don't expect to take kind of the same levels of valuation charges we took in 2009 going on into 2010.

Okay. Alright. Thank you very much, guys.

Thank you. Our next question comes from the line of Julianna Balicka with KBW. Please go ahead.

Good afternoon.

Hi.

Thank you for taking my questions. How are you?

Oh, we're fine, thank you.

I have a few follow-up questions on some of the topics that were already brought up. On the DTAs, the $32 million that you have as of December 31st, when you're talking about evaluation allowance, what size of allowance are we talking about? Partial or entire, or can you just talk a little bit more about that?

It would be nearly the whole thing, yes.

And is the whole thing already disallowed on a regulatory basis?

Well, that was what I was alluding to earlier. We're not complete with that calculation yet. So, we -- I would definitely say, I definitely know that the disallowed portion will not be anywhere near the $32 million in terms of our regulatory capital ratio, barring evaluation allowance on the DTA.

Right. Okay. Now, when you say you expect to be in the adequately capitalized levels, is that -- that's at the current -- that's using the current $800,000 income or is that kind of also -- has a cushion for some valuation allowance?

No, that's at the current levels right now.

Okay. And in terms of our capital planning, do you have any deadlines or timing by which you have to submit--.

--Hey, Julianna--.

--Julianna, hang on, okay?

Yes. The adequately capitalized reference that was made does take into account some disallowed DTA for our regulatory capital ratios. I want to clarify that.

Oh, right, right, right.

It's already taken into consideration. We use pretty much the same guideline that was done at September 30th as a regulator examination year. The same guideline was applied as of December 31st and we will be adequately capitalized.

Right. But barring evaluation allowance in the GAAP which would then take away the income and move that whole thing down, right?

Yes, that's correct.

Okay.

And obviously we'll hope that would not happen.

Of course. And then, when thinking about restoring your capital levels and essential capital raising, do you have any timelines, deadlines, any--?

No, we don't have any deadline at this point in time, okay? But the Board and I is constantly reviewing them. Our desire is to do this as soon as practical.

Right. Of course.

In fact, we're already starting -- start to talk to certain parties, certain firms. Some of them is your other side that was -- of your firm, okay? We already started talking to them about these kind of things. We're trying to be proactive on the matter. These things usually take a little time.

Of course. No, that's good to hear. And then a final question then I'll step back and let some others ask questions. On the -- there was a nice increase in CRE loans. Where did those come from? And also, as you decrease your -- as your construction projects mature and are finished, do you roll those over into CRE loans for commercial construction properties? Or can you talk a little bit about that?

Yes. Actually, we roll into the construction -- we roll into CRE only if the (inaudible) meets the CRE criteria and deadline. In other words, if there are services and this kind of situation and only when it becomes a so-called bona fide CRE loan.

Okay. Very good. Thank you very much. I'll step back now.

thank you. Our next question comes from the line of Joe Gladue with B. Riley & Company. Please go ahead.

Good afternoon.

Hi, Joe.

Hi. Just wondering if you could I guess touch on your expectations for the net interest margin going forward.

Well, I let Ed say that, but it is my felling that as we go -- fourth quarter had a lot of noise in it. And the noise including some of the regulatory adjustment and these kind of situations. And so, the actual number is kind of [murked]. But based on our own calculation, based on the budget that Ed prepared, which is actually item by item, including what our situation here is and figure out what the (inaudible) level will be in each month. So, he has I think the actual budgeted number is higher than that. But I don't want to words into his mouth, so why don't you say it (inaudible).

Hi, Joe. I think it's going to come in -- obviously, a lot of this depends on what happens with nonaccruals. That's obviously the biggest moving part in the whole calculation. But it was nonaccruals -- nonaccrual interest reversals accounted for about 10 basis points of the narrowing of the margin for the fourth quarter, so it would have been about 268 versus the reported 258. Obviously, with the much heightened level of nonaccruals, that pinches the margin.

But going forward in terms of 2010, we have essentially done a forecast in terms of every single nonaccrual loan, what new potential nonaccrual loans may come up, the resolution of existing nonaccruals. And so, the margin for 2010, as we have it, is right about -- right around 330 to 340.

Okay. And just wondering, I guess, as far as the tax rate and I guess the taking of the -- I guess the longer carry-back. Did that move back into the third quarter and I guess what's a good tax rate to use going forward?

Well, a lot of it is going to depend, Joe, on whether we need to book a valuation allowance as of the year-end. If we do, then you would basically use a zero tax rate going forward for 2010. If we don't, you would use somewhere around the statutory rate of about 42%.

Okay. Alright.

I think it's a little bit less than that because income would have been smaller, the portion of it will be in the lower category basis. Perhaps somewhat less than that. But let's just use 40% as a guideline would be pretty good.

Okay. Alright. Thank you.

Thank you.

Thanks.

Thank you. Our next question comes from the line of ChrisStulpin with D.A. Davidson & Company. Please go ahead.

Hi. What is the carrying value of the CDOs and what is the associated fair value?

Okay.

Hi, Chris.

Hey. Hi, Ed.

Right now the book value, the carrying value on the four CDOs, $4.9 million. The current market value, $2.2 million. And the par value in aggregate is about $7.8 million.

Okay. That's all I had. The rest of my questions have been asked. Thank you.

Okay.

Thank you. Our next question comes from the line of John Deysher with Pinnacle. Please go ahead.

Good afternoon, everyone.

Hi, John.

Is there anything happening in the C&I portfolio at this point in terms of how the economy is impacting your customer base on that side of the loan portfolio?

We like to say amount -- the entire portfolio of C&I is one that performs the best in our portfolio. There are some small things here and there as usual situation. Generally, they are very small. Generally they are a lot less -- I mean, in nature more benign than others.

Okay. So, that's still okay.

Yes.

Okay. And a second question on the liquidation proceeds for the first quarter. What do you think that might be at this point?

I don't know I would dare to make a forecast on that in the liquidation proceeds we're seeing, because sometimes you got into a deal with people that they just drag along. And they drag along and pass the quarter-end and change the numbers. And sometimes that's -- you have a deal, the people got -- retreated and after a while they come back to the table or new people step up. So, many of these things is very, very -- how should I say -- very, very fluid.

So, this is one area I wouldn't be able to greatly forecast. But I can say that of the current level of (inaudible) there was some reasonable reduction in the first -- fourth quarter. And obviously, we're already indicated our write-up what the likely range of reduction will be in our non-performing loans, and also a number of other loans we also indicated we'll be resolving. These basically are the interest-paying loans that basically are loans that just was a temporary value, not even impaired, but is close to -- I mean, higher than our normal standard. So, but all those things are (inaudible) resolved.

Okay. That's the $25 million to $40 million that you just referred to.

No, $25 million to $40 million is the one thing. Another portion of it. If you look at it, Lou, you want to identify them, where they are?

What Li was talking about was that, of our previously reported amount, we expect $25 million to $40 million of that $62 million to actually resolve in the first quarter. Also, in another table, we referred to the fact that, of our $142 million of nonaccrual, actually about $65.5 million, or nearly half, the loans are current, which certainly is an improvement from what it would have been in a prior period.

And so again, given that, as Li was pointing out, that in a lot of those cases there's actually not impairment but just that the loan-to-value is higher than our normal underwriting. And so, given that and given the stabilization of values otherwise, that would tend to lead us to believe that our expectations for some resolutions in future periods is more likely than not.

Okay. I'm sorry. If they're current, why are they still embedded in nonaccrual?

Well, I would rather just put it this way, that we would have to refer back to the September 30th press release. Would you just forgive me for not coming out and say it, okay? But also, the reason we put it out together, and also, these loans are -- how should I say, compared to many other institutions that I chatted with, it seems to be other institutions may or may not put this type of loan as a nonaccrual. But we're putting them in nonaccrual.

So therefore, we want to make sure that you know that they are interest-paying in nature and that, within the next period of time, maybe three months, maybe six months, they all have a better than 60% chance to be reversed back to accrual status.

Okay. Got it. Thank you.

Thank you.

Thank you. (Operator Instructions.) And our next question comes from the line of Ariel Warszawski with Firefly Value Partners. Please go ahead.

Gentlemen, thanks a lot for taking my call. I just have a few follow-ups. I think that you -- about the $142 million of MPLs, you make a wonderful statement that you expect the majority of those, I believe, to be resolved one way or another by the end of the third quarter of this year. Is that correct?

We hope. That is not counting the new migration into it, okay? But there will be some that, as we say, in the early year because of the ever reducing delinquents, the trend of new migration will be much less than the past and less significant.

Right. And you -- I think you also said you don't really expect to take any losses on the resolution of those 142?

I didn't say we don't expect any. We hope we don't take any losses. But we hope -- wheat we were hoping, if there's loss to be taken, it'll be very mild.

Mild is less than 10%, say?

Sometimes as we're going forward that we have to see individual losses. I hope as a group we can achieve that. Let me give you -- quote you one statist, okay, in our OREO, our historical OREO sales today that the ones that we have sold, we will be able -- we are able to realize 90.6% of our carrying value. So, on the loan side, certainly that since it's already been written down to quite a big degree, we hope that we can achieve the same thing.

Understood. And then the REO you said is pretty well marked right now and you could sell the whole thing without taking a loss, right?

We have been getting 90.6%.

Why wouldn't you just get rid of that now and eliminate that problem today?

Well, it takes a willing buyer. There's some of them -- I mean, asset disposition is that -- it's probably one of the most time consuming and most challenging part of ours.

Yes. I understand. So, it's a bit theoretical. It's -- based on the trends that you're seeing, you're optimistic that both the 142 and the 60 should resolve themselves without too many extra losses if all goes well.

Yes. This is Lou speaking. One of the -- I could refer you to the table of the previously reported. And as of 9/30, we reported $95.5 million of nonaccruals. And within that category, during the fourth quarter we resolved $51.5 million.

No, that's a terrific, terrific number.

So, you can kind of see that. The other -- the reason also--.

--And those resolutions did not involve restructurings with losses taken, they were just restructurings without any losses. Is that right?

Or other movement, that's correct. And the other things as far as the $0.906 that we're getting on ORE, just to provide some color to that, one of the -- or the reason we've been able to do that is because we are not bulk selling our properties as you might have implied why not just get rid of it all. The reason we can achieve $0.906 is because we are doing discrete sales to local individuals who want to purchase and see value in that specific parcel or piece of ORE. That takes a little bit more time and certainly a lot more diligence on our part.

No, that makes sense. No, I appreciate that -- no, that's why I was surprised to see you optimistically state that you might get rid of all 140 by the end of the third quarter. So, I Just wanted to clarify that. But I mean, what you're saying makes a lot of sense.

And then just on the capital, which I was kind of confused about. And forgive me, because maybe I haven't read enough detail. You had something like $136 million of tangible common at the end of the third quarter and I understand that got restated down a little bit. Is that right?

It got restated down pretty significantly, yes.

Well, what did it get restated down to?

$115 million.

$115 million. Yeah. No, so -- and right now you report about $113 million, right?

Yes. Yes.

Yes.

And that's all tangible common.

Yes.

Yes.

But somehow the regulators are calling you undercapitalized and maybe now adequately, even though you have 8.5% tangible common to total assets. What am I missing?

They don't necessarily look at tangible common equity. They look at their three regulatory capital ratios. And in those calculations for those regulatory capital ratios, there are instances where we have to deduct a certain portion of our deferred tax assets, straight-up capital.

Right. That's the $32 million.

Yes.

If you take that out you have 6% tangible. That doesn't seem undercapitalized. So, what else are we missing?

Well, their requirements to be well capitalized under the three ratios are 5%, 6% and 10% for tier one leverage, tier one risk-based and total risk-based, respectively. To be adequately capitalized, I believe they're 4%, 4% and 8%. To be adequately capitalized under those same regulatory ratios. So--.

You're just missing on the 8%.

Yes. We're missing on the very highest one, that's correct. As of September 30th.

We're now -- we believe we now adequately capitalized. We're over 8%.

Yes.

Right, right. Now you are somewhere between 8% and 10% based -- pending the results of your -- this allowance.

That's right.

Absolutely. Yes.

And then you're going to raise capital. I presume you're going to raise about 30-plus million then, just to make it clear that you're clearing the (inaudible) and not having any issues?

Well, I cannot tell you the number of the whole situation. And it is something that our Board's still studying, the whole situation. We have to come up with a whole complete study in terms of modeling our assets, total assets in the future and earnings and--.

No, no. I appreciate that. But you don't want to do this more than once, right?

Yes--.

--You kind of want to do it right?

We will be also -- we certainly want to do it right.

And you have language in the 8K that you put out on the 13th that sure seems to strongly imply you're going to get a cease and desist very shortly. Is that the case?

We cannot comment on that. Whatever the 8K is stating that our official position is looked at by our lawyers, okay?

And well, the regulators are probably concerned about the 15% nonperformings and things such as that, but do they -- have they already put you on a schedule to reduce those? Is that inline with--?

--Well, they have been telling us we need to reduce that, for sure.

Okay.

Our regulators are very diligent. So, we are actually working very hard in reducing that. As you can see what we have done in the fourth quarter, as you can see what we intend to do in our first quarter, you know that we are working very hard on that.

But they haven't put any restrictions at all on your ability to restructure the loans and make new loans to those same barrowers, have they?

Well, I don't think so. As long as it represents proper underwriting and proper structuring, they have -- they will not be disagreeing with that. To the extent if they disagree, they just tell you it's either (inaudible) restructure or doesn't call it -- they still call it as a nonaccrual. Whatever restructure, it doesn't count. But they leave it to Management's decision to do a job that is compliant to the regulations.

No, the only reason I'm asking is sometimes when a cease and desist happens part of the language is that you are not allowed to make new loans to people who haven't paid you in the past. So, if you're not expecting that, that's a good thing.

If I can address that. I think in general our interest and the regulators' interests are mutually aligned. At the end of the day, everyone is trying to ensure that the bank is on a good solid footing.

In respect to your question, generally what the regulators will say is that you cannot make additional advances to a customer unless the Board determines that it protects the best interest of the bank. And that is where that analysis has to be done. And so, if it does, you can. But in fact, we are not under a cease and desist order. Clearly, given our restatement, some type of enforcement action is expected and we will work with our regulators jointly to craft something that's in all of our interests.

Listen, guys, thank you very much for taking my questions. I appreciate it.

Thank you. Our next question is a follow-up from the line of Aaron Deer with Sandler, O'Neill & Partners. Please go ahead.

Hey, my apologies for dragging this call out, but I just wanted to follow up on the DTA issue again. For the regulatory capital purposes, I think the -- it's pretty clear how the disallowance works. But I would have thought that, given the change in the tax code, that you guys would now have the 4.5 year look-back period against to work your losses in 2009. So what is it, I guess, that's being hung up on that's wondering whether or not there's going to be an allowance taken against that and why would it then cause you to not be able to have -- to use the tax benefit going forward?

Well, first off, Aaron, we have to assert that we do not believe that a valuation allowance is required on a deferred tax asset and we have to put together documentation supporting such assertion. At that point, it then goes on to our external auditors, our independent accountants, who review that and then essentially opine on whether they agree with Management or not relative to the valuation allowance. So, that's really the big piece that's hanging out there.

In terms of the disallowed deferred tax asset for regulatory capital purposes, clearly the disallowed portion is going to be reduced greatly between Q3 and Q4 in terms of our regulatory capital, barring a valuation allowance. Now, if we have a valuation allowance, you throw that in and it changes the whole mix. But our disallowed portion of the DTA at 9/30 was about $21 million and we expect that to be reduced significantly, excluding a valuation allowance.

Okay, that's great. Thank you very much.

Thank you. Our next question is also a follow up from the line of Julianna Balicka with KBW. Please go ahead.

Hello?

Julianna?

Oh, sorry. Hello. Can you hear me? Apologies. I just wanted to ask a couple of quick recaps. On the $65.5 million nonaccruals that are current, you said, just to confirm, that that $65 million is on nonaccrual status because the LTV is out of line, right?

The LTV is higher than our normal standard. And let me just quote you approximate situation, okay? These situations probably have anywhere between 70% to 80% LTV based on so-called the market value. And sometimes when -- I mean, the appraiser uses something called the bulk value. Then these things will be approached to bulk value and close to the bulk value. Therefore, we put it on nonaccrual.

And what's the LTV on bulk value?

We don't have individual situation. I mean, I think it ranges from -- I mean, 85% to 98%, something like that.

Okay. And then--.

--And the bulk value -- and one thing is that -- let me use this opportunity to do some advertisement for the entire banking industry. What is bulk value? Bulk value is some appraisal using some mathematical formula calculated at. When you have a construction project, it's about to finish and the current appraisal right away the price is burning up. Current appraisal show the loan to valuation is 72%.

You think that borrower will be so stupid in selling it as a bulk or forcing us to foreclose it as a bulk rather than selling in the marketplace, to not only pay us off but recoup some of his investment? But because some appraisal coming with some kind of funny bulk value and then we have to go by that. So, sorry about it, but that's not only my feeling. Maybe I'm a little more vocal than 95% of the other bank presidents.

That's true. Everybody says that. And then the second quick recap. On the $74 million of loans that you resolved in this quarter, right? Can you break that down as to what kind of resolutions were applied?

We don't have that directly in front of us. Generally, in most cases, it was projects that -- about two-thirds were construction, about a third were CRE. And in most cases it was ultimate resolution through moving down the stage of disposition.

Now there is just moving down the disposition. There's a portion of the loan after it got sold.

That's correct.

There's about -- the loans get sold. Then some of tem get returned to the -- because borrowers step up with their collateral, additional collateral, additional payment and bring the situation current where the loan is -- it fits all the underwriting standard and then another portion is charge-offs. It's combination of these four items.

: Okay. Very good. Thank you very much for allowing me to follow up.

Thank you. (Operator Instructions.) We do have another follow-up question from the line of David Rochester with FBR Capital Markets. Please go ahead.

Hey, guys. Just one quick follow-up on the CRE portfolio. I was wondering if you had any details on the maturity schedule of that? Perhaps how much of that portfolio's maturing in 2010 and 2011?

No, we -- unfortunately, this is some information we cannot -- we don't have at this point in time. We probably -- could you enlighten me so I can learn something? With a maturity 2010, 2011, the significance of that?

Sure. Basically, if the loans mature and you have to re-underwrite them, you're redoing appraisals on those and the valuations, as you said, may be firming but they may be different from when you had underwritten the loan originally.

Alright. Yes.

And so, that could have an impact on reserving and MPAs, that kind of thing.

Yes. So, fine. But we probably were looking at this. That's already in one of our internal stress tests. We perform stress tests on each of the piece of property over $2 million. We already one it. And now we're extending loans to the less than $1 million. And the stress test is also reviewed by the entire Board. And plus, between our system formed by our external auditors or between them and our examiners, our regulators, they have penetrated 50% of our good portfolio, even a good portfolio of our CRE already and the C&I already.

I think one of the things to keep in mind is that our 30 to 89, our past due, was reported at $13 million. So, although you bring up a good point of some potential as far as values, the thing to keep in mind is that, from a debt coverage, these loans are performing and are current. And that is something that we will have to obviously work through, as every other bank will. Fortunately, in our case the loans have been able to maintain themselves current, even through the last couple of years.

Okay. I have one last one. Are you -- as you're selling these loans, are you actually funding those sales, meaning are you lending out money to borrowers who are then buying them from you? And if so, what are the LTVs that you're underwriting those loans at?

Well, we're doing combination. Some of are outright cash sales. Some of them were bank financed. The LTV generally will be conforming to what our normal underwriting standard, which we -- I mean, it ranges from different situation. Some people are able to put more downpayment and some people put as little as 25% downpayment or, in some cases, having to put additional collateral or a combination.

But certainly, underwriting a loan to values in 2009 or 2010 is a lot more secure than underwriting a loan to 2007 values.

Alright, great. Thanks, guys.

Thank you. Management, at this time there are no additional questions. I'll turn it back to you for any closing remarks.

Before closing (inaudible) there's one other item I'd like to clarify on the -- on our page number five regarding 90-day-plus still accruing and $7.5 million. I want everybody to have a clear understanding. Majority of that is one loan; over $7 million, one loan.

That particular borrower supposed to sign the extension and pay the interest as of December the 31st, but -- or December the 30th. But unfortunately, he went into the hospital December 28th and then (inaudible) hospital and was able to return to town in two or three working days after the new year and then forwarded the payment and extension documents. So, we just want you to know, even though a technicality, you might consider it's MPA. It is really of that particular nature.

Now, having said that, obviously thank you for all the interest you have. And we -- I think it is our collective feeling that, being that we have more concentration in the land and constriction loan that in the past we got hit pretty hard. And right now when they are stabilized and our exposure is continually reducing, that we will be -- going forward, we'll be concentrating in resolving all those so-called troubled assets. And hopefully that producing more optimistic operating results.

And with that, I wish you a good new year and a prosperous new year for everyone. Thank you very much.

Thank you. Ladies and gentlemen, if you'd like to listen to a replay of today's conference, please dial 1-800-406-7325 or 303-590-3030, using the access code of 4204732, followed by the pound key. This does conclude the Preferred Bank fourth quarter 2009 results conference call. Thank you very much for your participation and for using ACT. You may now disconnect.