Preferred Bank (PFBC) in Los Angeles is set to post its first loss since the fourth quarter of 2010 following unexpected write-downs on two loans.

The $1.4 billion-asset company announced Thursday it expects to swing to a loss of $5.5 million to $5.7 million for the quarter from a profit of $1.7 million a year earlier. The loss would be roughly 43 cents per share, compared to the earnings of 15 cents per share that analysts had projected, according to Thomson Reuters.

Although the loss was unexpected, the company is well-suited to absorb it. At March 31, its tangible common equity ratio was 13.4%, said Aaron James Deer, an analyst with Sandler O'Neill, in a research note. Analysts typically consider a ratio above 7% to be healthy. Still, the unexpected loss was upsetting given the company's progress in resolving its problem assets. At March 31, its nonperforming assets totaled $68.4 million, down 53% from a year earlier.

"We are disappointed to see this spike in loan losses at Preferred following such promising credit improvement over the last several quarters, but we believe overall asset quality continues to move in the right direction," Deer said. "While we view these chargeoffs as isolated events, they are a reminder of the risks inherent when nonperforming assets remain at elevated levels."

Deer lowered his rating on the bank from "buy" to "hold." He also reduced his 2012 estimates to 7 cents from 60 cents.

Investors were equally disappointed. In heavy trading, Preferred's shares were down more than 16% midday Friday, to $11.77.

The first loan is a $13.9 million piece of a $219 million shared national credit. The company said in a press release that the loan, which is administered by a "very large national bank," is current, but it matured on April 30 and the collateral value needed to be updated during the renewal process.

On July 2, the borrower pledged cash flows from a "separate, large and renowned commercial real estate property" to support the repayment of the loan. Deer said in a research note on Friday that the pledged support is from a premier mall.

Although Preferred said it believes the loan and interest will be paid in full, it placed the loan on nonaccrual status, wrote off 45% of it and shifted the remainder to held-for-sale status.

The bank has 10 other shared national credits totaling nearly $57 million. None of those had adverse ratings from the Shared National Credit Report.

The second write-down is related to $16.9 million of loans to a customer that recently has been displaying "significant irregular borrowing activity," Preferred Bank said in a press release. The bank has launched an investigation, but its initial estimates show a potential loan collateral shortfall of as much as $8 million. The relationship consists of four loans, including a line of credit backed by receivables that was already classified as substandard. Deer said in his note that it is the bank's largest commercial relationship and he believes it is with a regional auto parts distributor.

"Bank management is working aggressively with outside legal counsel in order to maximize the recovery of the loan workout," said Li Yu, chairman, president and chief executive of Preferred Bank, in a press release.

Preferred said in its press release that besides the unexpected write-downs, it expects to report positive trends in loan and deposit growth, net interest margin and liquidity for the second quarter.

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