Good day everyone and welcome to Preferred Bank's Third Quarter 2014 Earnings Conference Call. All participants will be in listen-only mode. (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 Ms. Kristen Papke with Financial Profiles, Investor Relations for Preferred Bank. Please go ahead.

Thank you. Hello, everyone, and thank you for joining us to discuss Preferred Bank’s financial results for the third quarter ended September 30, 2014. With me today from management are Chairman and CEO, Li Yu; President and COO, Wellington Chen; Chief Financial Officer, Edward Czajka; and Chief Credit Officer, Louie Couto. Management will provide a brief summary of the results, and then we will open up the call 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 SEC required documents the Bank 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 like to turn the call over to Mr. Li Yu. Please go ahead.

Good day, ladies and gentlemen. I'm happy to report our third quarter operating results. This is a quarter of good news. First of all, in July, we were fortunate enough to have a $4.6 million loan loss recovery. Then in mid-September we received official notice from our regulators that they have terminated the MOU that we entered into, which led to the later Board announcement of resumption of payment of dividends in October. Now we are reporting to you one of our best quarters ever. For the quarter, we earned $0.46 in fully diluted earnings per share. This is even with higher than expected tax provisions. On the business side, it is one of our best quarters of growth, loan grown $82 million or 5.7% in linked quarter basis, deposit growth $71 million or 4.3% on the linked quarter basis. On the loan side, our pipeline is looking strong at this point in time, and fourth quarter as we all know is a quarter of hotter days. So the growth in fourth quarter is pretty hard to predict as the hotter day may produce different kind of results than we anticipate. But our San Francisco office after 1.5 years of operation has been performing well. Total loan has reached $90 million by September 30th. Our Orange County office, which we started up the loan operation there in about a year ago has now become a $60 million loan office, progress as we expected. Loans market looks pretty open to us and we are continuing looking for new opportunities and new personnel to further penetrate these markets. In December this year, we'll be opening up our new San Fernando office. The most major hiring or the staffing has already been completed for that office. On the deposit side, I'd like to…

(Operator Instructions) Our first question will come from Aaron Deer of Sandler O'Neill. Please go ahead.

I guess kind of a few questions, kind of starting reverse from your discussion. Li, on this nonperformer that went through the bankruptcy process in October, is that transitioned from NPAs into OREO, was there any sort of mark on that one direction or the other?

It's already fully marked at the appraised value, just completed about a few days ago. Louie, you want to add some color to that?

Aaron, I just want to make it clear on Mr. Yu's comments. The bankruptcy court has approved us foreclosing, we have actually not foreclosed yet, but there is a trustee's date scheduled in October, and we carry all of our nonperforming at fair value less cost of sales and so whether it's an OREO or a nonperforming loan, it would already be marked at that value.

Okay. So you wouldn't expect any sort of change in that at this point?

Unless there is an updated appraisal, we would not.

No, the updated appraisal will be six months from now. We'll be carrying it over minus the sales cost from the appraisal value and minus the contingencies, as we always do.

Right.

I'm not clear that it's about to be moved to OREO.

Okay. And then, Li, notwithstanding your comments and I recognize that you can oftentimes see a slowdown in activities right until year-end, but you did sound like you paused up on the pipeline. Can you talk about where the pipeline stands today versus three months ago?

The pipeline today in total dollar amount, if you want to look at the dollar amount, it's always in different stages of development, okay, and those dollar amount is a little bit higher than as of September 30. I mean as of September 30 – than June 30, okay. So, Wellington, you want to add some color to that?

We always try to plan ahead on our production. So we do have 60 people altogether, about 60 people in our frontline production team. So I think that when Mr. Yu mentioned that it is robust, it is very healthy, so we just have to focus and execute.

Okay, thanks Wellington. And I guess lastly, Ed, if you can talk a little bit about the liquidity build that we had this quarter, I guess I'm just curious because it seems to weight on the margin some, can you talk a little bit about what type of level you like to see cash balances as well as investment securities, what kind of desired mix and level is for those?

I will let Ed correct me what I have to say, he always does that [indiscernible]. Anyway, the weight on the margin actually, you would know that actually deposit growth is less than the loan growth, but weight on the margin is that because for the quarter average deposit is $150 million more than last quarter and average loan is only $60 million, $70 million more than last quarter. So with that, it puts the weight on the margin along with the production side of the loan that we have 75% of the loan increases in C&I loan which carries a little less of a coupon rate than the CRE loans, okay. So basically that's the thing that [indiscernible] the margin a little bit. Last quarter we had a surprising increase in margin compared to the first quarter. So it's sort of likely now that this kind of loan come in, we cannot really determine which [indiscernible] C&I we'll book every quarter. So it will have to base on the natural effect. Now, Ed, you have anything about this that you have been planning?

I'm not going to contradict you. In terms of where we want to be from a liquidity standpoint, Aaron, and from an investment security standpoint, I think it was the question, certainly less than we have now on the balance sheet and obviously we'll try to work through that as loan growth continues. I don't think we would expect deposit growth to continue perhaps on the same pace that it was in Q3, although that remains to be seen especially with the recent move down in interest rates on the treasury curve. But certainly we'd like to have cash well under 10% of total assets and probably be moving the bulk of that back into the investment portfolio and still keeping the loan to deposit ratio at a pretty constant where it is right now.

Okay. And you guys haven't started – I know you've been first to go back and use the state time deposits, but you haven't had the need to go back to that at this point, right?

No, certainly not the need but it's certainly from a long-term planning standpoint certainly something we are pursuing.

Sure, okay. Alright, that's it for me. Thank you very much.

The next question will come from Gary Tenner of D.A. Davidson. Please go ahead.

Couple of questions. First on the bonus accruals that drove up the personnel line this quarter. Do you think that this – was there any true up in there that went back to previous quarters or should the fourth quarter run rate represent what the third quarter was?

Okay, do you want to answer that?

Sure. Gary, in terms of the run rate on the bonus accrual, it's probably going to be very similar. Q4 will be probably pretty similar to Q3 in terms of where we're going to go.

Q2 was a little bit of a true up, but we would expect it to be pretty similar, and as a matter of fact the overall salary and benefit run rate to be pretty similar in Q4.

Okay, thank you. And then just a follow-up on the NPA. So the total NPAs as of September 30 which were pretty close to $11 million I think, what was the size of that OREO that you guys…?

It's about $8 million.

$8 million, okay. That's what I thought you said earlier, I just wanted to confirm. And then do you have any sense, just given the property, what original timeline might be once you take possession of it to dispose off?

No, we certainly will try to see whether we can get a good price out of that. I think I'm greedy if I can make a profit on that, we would do that, especially when this thing will be carrying some income anyway, okay. It is not an earning asset even though it's OREO.

Okay, thank you.

Our next question will come from Don Worthington of Raymond James. Please go ahead.

In terms of the loan activity in the quarter, were there any whole loan purchases or any participations in the third quarter?

We purchased a few loans in the third quarter, okay, we purchased participation, but most of our purchases are really across [payback] (ph). We do club these with three other, four other banks together in local loans, we decided to join forces to spread out the risk which several of the large loans we are as close as customer, so called the lead bank, okay. But however, we have, as we earlier indicated, we have started the entertainment department. Most of the loan from that department is because the size of that is resulting from participation from other major banks such as some of the largest banks on the earth.

Okay, thanks. And then in terms of, you've just gone through the effort to shore up ESA compliance, do you have a number that in terms of maybe the increase to your cost base that that resulted from that effort?

Cost increases already are in the expenses increase. I think we are fully staffed and we don't staff right now. And if you notice that in the last one year, we have done a lot of catch-up work. So I think our staff is sufficient to handle the growth other than some minor adding because we recently had [what was] (ph) a replacement of the compliance officer who had left us, but it's just one replacing the other.

Don, on that, the majority of the cost this year that what we would consider to be more or less one time or nonrecurring were for consulting fees. The staffing that we did, the staffing increase we did in that area was all primarily done in 2013. So what you see in 2014 is pretty much all in. And again we had additional consulting cost in 2014 but those have now abated, as you can see in other professional services that cost going down.

Okay, great. Thank you.

The next question will come from Tim Coffey of FIG Partners. Please go ahead.

I was wondering if I could get some color on the construction loan growth in the quarter, how much of those was organic versus participations and whether a lot of those loans or just a few big ones?

Majority of our construction loans is really originations, okay, on originations. There are one or two loans we are doing at the request of very friendly partners in our banking community, that we help each other out just by also reducing the – to make it more granular for everyone of us. Wellington, you want to add something on that?

On average I think on the construction, yes, we are all self originated as Mr. Yu mentioned, but no, there is also a lot of [indiscernible]. We have a common customer that we originate a loan, we still offer fees to other bank and likewise the other way around. So it was pretty much self-originated [indiscernible] this relationship customer.

Louie, have you any average number for the size of construction loans?

Generally around $5 million range. But again these are all, as Wellington and Mr. Yu pointed out, these are mutual customers. Generally when we do…

No, the total average of all the construction loans that we…

It's about $5 million.

We originated in this quarter. I thought we had a lot of $1 million, $2 million [indiscernible] originated.

We have originated quite a few of $1 million and $2 million and some in the $8 million to $10 million. On average it's about $5 million.

Alright. Okay?

Okay, yes, that's great. And would you expect the same type of growth going forward or is it…?

In construction loan? Construction is one of the heavily managed area in the Bank. As you know, the regulators at this point in time have, how should I say, eyeglasses on the construction loan. So they have, FDIC has a guideline [indiscernible], they'd like to see the Bank's construction not to exceed 10% of the risk-based capital, so whatever total capital is, the capital plus reserve. So we not only were projecting, our only numbers are lower than that, not only are we projecting construction loan out, we have to projecting one year out to see what the outstanding is. We'll be managing within the level.

Okay. And then, Mr. Yu, do you have any kind of targeted dividend payment ratio?

We historically, I can only quote you historically, that we have been paying between 20% to 30% of our dividends, and of course our first dividend was a payment based on whatever we have earned in the last quarter, a little bit exceed 20%, okay. So we like to think that we'll be within the foreseeable future that will be the guideline we are going through, and obviously by the end of this year or by first quarter next year, we'll be reviewing the dividend rate again.

Okay. Will that kind of forward payment ratio also include a kind of normalized provision expense, the provision could be low for a couple of more quarters there?

We look at the provision as we continue looking at the situation right now as well as looking at the number of factors including from the ever-improving asset quality and we decide on how much we want to reduce from our excess reserve that we have. And along from the situation we have to consider the FASB, the new method of current estimated loss model, whatever it is, the number model they have. So with that, we're keeping close eye on that, but within the foreseeable future we can see we are probably doing based on the current level in the provision.

Okay, got it. Thank you. Those were all of my questions.

The next question will come from John Deysher of Pinnacle. Please go ahead.

A couple of questions. When does the San Fernando Valley office open and specifically what town will that be in?

December in the town of Tarzana.

It's in Tarzana, okay.

That's on Ventura Boulevard.

Okay, fine. Secondly did I hear you correctly that there's been an entertainment department that was started up? I'm not clear exactly what you were referring to there?

We started the entertainment loan department last year.

Fine. I'm not familiar with that, what is that specifically?

That's basically movie and TV studios, major companies such as the largest being the Fox, Dreamworks, MGMs, all these big names, the Millennium, Legendary, these kind of all big names.

And what type of assets specifically are you lending against there?

Lending basically against – majority of the lending against the library.

The film library?

The film library, yes.

And what type of loan to value?

It ranges between some of it as low as 20%.

20% loan-to-value?

Some of them as low as 20%.

I'm sorry, maybe I'm not being clear. What would you say is the average loan-to-value for that group of loans?

Between 30% to 35%.

Okay, and what is the total loans right now?

You have entertainment department total loans?

I think it's around $30 million at this point.

Okay, so still fairly small. Alright, good. The other question is, we're reading in the press about non-traditional lenders who are coming into the smaller property market, loan to $5 million to $10 million, non-bank type lenders, perhaps you've seen some of these as well. Are you seeing any pressure in terms of rates from these new entrants?

Number one that people always report on things later than actually happens, they've been there a long time and we've been facing competition from a long time. But no, rates – usually these non-traditional bank managers lend at a higher rate. That is not our competition in terms of loans.

Okay, so you're not seeing any pressure at all from new lenders, new non-traditional lenders in your markets?

Not like the old days when you had GECC and GMAC and these kind of a nature that they come in big real estate loans at real low rate coupon.

No, these players are much smaller and I think much more nimble than those bigger players.

We have not been affected by them.

Okay, good. And finally on the construction loan total, I think it's what 125 million or so, how fast you think that's going to grow over the next couple of years or so?

Louie, have you any estimate? I know we keep out tap [indiscernible] when you – do you want to quote exactly without amount, just a rough estimate?

Right. John, as Mr. Yu pointed out, this is something that we monitor and evaluate very closely and aside from the regulatory guidelines, our Board and our senior management team has a very close eye on this. We'd hate to speculate because we're constantly having payoffs and draw requests. At this point we're well within the regulatory limits and our internal guidance limits. I think what we've seen and I don't think we should see a big change from what we've seen in the past as far as fundings.

John, I can tell you is that I will not quote you the exact amount and I'm not able to and I don't want to. And the thing is that I will say that we would definitely keep ourselves way below the regulatory limits.

Okay. It's just it's double than the last year or so and I guess that raises some red flags with us.

If you are in [Manhattan] (ph), which you are, you should see the activity over there, you should see how the Bank is doing business over there, and we are not going to only chase the business which pays low returns and no [activities] (ph).

Alright, good luck to you.

Ladies and gentlemen, that will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Yu for his closing remarks.

Thank you very much for your attention in our Bank. As you know that we had a pretty good quarter and we think we will in soon future even the next quarter we hope our activity or our performance will be about the same level, and for all these years we thank you for your interest and support. And that said, any additional questions you may have, you can call Ed Czajka on the phone. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.