Good day and welcome to the Preferred Bank Third Quarter 2017 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, Financial Profiles Investor Relations. Please go ahead.

Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the third quarter ended September 30, 2017. With me today from management are Chairman and CEO, Li Yu; President and Chief Operating Officer, Wellington Chen; Chief Financial Officer, Edward Czajka; and Chief Credit Officer, Nick Pi. Management will provide a 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.

Thank you. Good morning. I'm very pleased to report the third quarter of 2017 is a record for Preferred Bank. For the quarter, we earned net income of 13.7 million or $0.94 a share, which is substantially better than the last quarter and the quarter of last year. During this quarter, we also are fortunate enough to have a recovery of interest income, in the amount of $1.4 million. Without that, our earning would have been $0.88, but still is a record for Preferred Bank. All the operating metrics seems to be very favorable. NIM, net interest margin has expanded. On the going forward seems to be expanding 4 basis points to 3.79%. And we're still operating on a highly efficient level, approximately 35% efficiency ratio. During the quarter, our loan growth has slowed down a bit from the past - from past record - from past experiences, largely because this quarter we are facing with very heavy paydowns. And this quarter's loan growth is 13% on annualized basis. Deposits growth also slowed down to about 9% [ph] on the annualized basis. Loan pipeline however is stable, pretty consistent with previous quarters. As I reported in our press release, we are well under our way of our capital raising of $50 million. Until this time, we're told roughly about close to 200,000 shares has been issued as of this minute. Okay. We are confident and pleased with the report of the third quarter. And looking forward, we are also feeling optimistic and with the upcoming tax cut, which we think it's highly likely that as a full rate taxpayer Preferred Bank will reap very good benefit. And going forward, with our new capital increases, we should expand - continue to expand at a reasonable rate. Okay. More importantly at this time that we're sitting on about roughly $0.5 billion of cash in our balance sheet, which should be sufficient to handle any additional loan growth in case it is needed. Again, we are optimistic. Management team is happy about the results, so we're ready for your questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Tyler Stafford with Stephens. Please go ahead.

Hey, good afternoon, guys.

Hi.

Hi, Tyler.

Hey, I want to start on the margin. It looks like the core loan yields were up 9 bps or so, extra recovery. I guess, last quarter they were up 21 bps. I'm just wondering what you're seeing in terms of yield on the new production right now and if there is any current details you can share with us on how much of the portfolio is fully variable at this point.

On the new production, when you compare to the rest of the portfolio it's reasonable. But however compared to the payoffs, the amount - the loan payoff carries a higher rate than the new production rate in the amount about roughly 18 basis points for the last quarter. However, this number changes from quarter to quarter because of the mix of the production as far as the type of loan we're doing in any given quarter. For instance, generally speaking, C&I loans carry a lower yield than the CIE loans. So it is not necessarily happening, in the future, obviously happening this quarter, but last quarter it shows a 18 basis points difference.

And the second part of the question Tyler in terms of floating rate loans, I believe it was the question of the $2.88 billion in total loans, $2.1 billion are completely at or off their floor, so those are completely floating or adjustable rate right now. There is $263 million of the floating rate, still below its floor. However, two-thirds of that will come off at the next rate hike.

Okay, got it. Thank you for that. And maybe staying within the margin, it looks like - over on the deposit side, it looks like non-interest-bearing accounts were down at quarter end. Is there anything that's driving that that you can point to? And then, I guess, just stepping back bigger picture, what are you guys seeing from an overall deposit pricing standpoint and what are the expectations for deposit beta going forward over the near term?

We try to find out the reason why it is down. But after working on that, cannot give you answer. Probably the best guess is that as these interest rates start to go up, customers try to manage their money a bit better. Okay, that's maybe the only reason. Other than that, its movement is pretty natural. For the third quarter, there is a lot of people who is paying the taxes, okay, before the quarter end. So that may have something to do with that, but we're unable to find out any specific reason for that.

And, Tyler, as I look at the - this is Ed again, as I look at the progression of demand deposits over the last five quarters Q2 was a little bit of the spike in terms of what we saw in terms of our overall balances. So we're still on a good progression. If you take out Q2 and look at the quarters before that, we're still on good growth trajectory as it relates to demand deposits. As it relates to deposit betas and deposit rates, we're still not seeing a lot of pressure yet on deposit pricing. We do see competitors moving in the marketplace. But we certainly think betas have backed off quite a bit from what our earlier expectations were.

So at least looking to the fourth quarter or something similar to what we saw on the third quarter would be a reasonable expectation?

In terms of the margin or deposits…?

I'm sorry, yeah, in terms of the slight upward pressure on deposits, just up, I guess, a couple of basis points or so.

Well, there is - yeah, it could be that way. But again, all of us - all of our competitors are rewriting their PCB loans at a higher rate, okay? We are no exception compared to a year ago, okay. But however, most of our deposit rate still remains pretty competitive and we're not moving much out of that, okay. Not at this point in time. But market only tells, because we wouldn't dictate our competition.

And then just last one for me, just more housekeeping. Do you happen to have what the average security yield for this quarter?

I knew you would pull something like that out, wouldn't you? 3.61, Tyler.

Great. Congrats on a very nice quarter, guys, thanks.

Thank you, Tyler.

Thank you.

Our next question comes from Steve Moss with FBR. Please go ahead.

Good morning.

Hi.

Good quarter here. And I wanted to just follow-up in terms of - on the deposit side, you mentioned the reduction in broker deposits. Wondering how much decline was this quarter and where you stand on balances at September 30.

Wow.

Oh, gosh. I don't know if I got that one, that specific number in front of me. I think we let - I think let $20 million run off of the brokered money.

We also look, that's lot of national rate of the deposit. Shouldn't say lot of them, we don't have much. But we just let it expire with or renew it. One of the things that Steve we're sitting on as I said earlier $0.5 billion in cash, okay. There is simply no urgency for us to do any deposits, but on a higher rate earlier. Okay. So there has - something has to do with management decision on managing the total cost. Okay.

Okay. That's helpful. And then, in terms of the payoffs you saw this quarter, was that in commercial real estate or C&I, just a kind of curious there?

Wellington, you want to answer that?

We had $42 million in C&I payoff, and we had $67 million in CRE.

So I guess, based on that is pretty even.

Right. So I guess the bottom line here was production for the quarter must have - was really good in relative to last quarter kind of implies better growth in…

We're above the…

Above paying, yeah, we're above the…

Last quarter, it was about [indiscernible].

Okay. That's helpful. And then, in terms of expenses, just wondering about the outlook there for fourth quarter and beyond, how are you thinking about 2018?

Well, first of all, the fourth quarter, we'll probably have a little bit more expenses, because we have a new branch in San Francisco, just approved will be in operation in - target date is December 1, okay. The people operating the branch is already being hired in late third quarter, okay. But expect some of the cost will be there. And we're continuing adding personnel, which is our biggest cost. We're continuing to adding more BSA personnel like everybody else is doing, okay. Compliance people like everybody else doing. And we're continually upgrading our digital banking area, okay. So looking forward, there will be some natural growth in expenses, okay. But as I said, we'll try to manage it, okay.

Okay. Thank you very much. Good quarter.

Thank you.

Our next question comes from Aaron Deer with Sandler O'Neill. Please go ahead.

Hi, good morning, everyone.

Good morning.

Good morning, Aaron.

Just going back to the issued pay downs. It sounds like the - like pipeline continues to be pretty robust. But just curious to know kind of based on what you've seen quarter-to-date on pay downs, and what your anticipated maturities are? How do you see that affecting the growth here as we go into year-end?

Well, I don't know about going through the year-end. The general trend seems to be - from talking to many other people seems that we should expect that pay down to be a little heavier than before. The reason is that - I mean, as a continued interest cost increases, upcoming rate rises so on. It is very natural to have many of your customers start to looking for new financing. And some of the fixed rate financing and the higher rate start to make sense for them, too, okay. So this is a natural event. But I guess that, the question mainly is that whether we will be able to come up with more deals to look at it and more deals to do, okay. So all of this is - it's really being closely monitored on a day-to-day basis. We cannot really tell you what exactly this happening in the fourth quarter. But that's probably the general feeling.

Okay. And then, on the - I just curious to know where the - where your CRE concentration was at September 30, and how that is expected to change pro forma with the $50 million?

The concentration level is at $3.2 at this time as of September 30.

Okay. It will be with the new capital rate, as of today it's about $17 million, $18 million, okay. And it will be - I think it's going to be substantial amount of $15 million will be raised. We expect the concentration level will be below the guideline by the year-end, okay. If the whole amount has been raised, okay, and also our possibility, which is continually increasing also helps, okay. So this is what our forecast is.

Sure. Yeah, the internal capital generation has been terrific. The - and then just a little housekeeping question for Ed on the - what's your expectation for the full-year 2018 - well, the full-year 2017 as well as the anticipated tax rate for 2018, if we don't get any rate cuts?

Well, let's see on a year-to-date basis, I think, we're right around 40% - just under 40%. So I would expect us to maintain kind of 40% to 41% rate for Q4, you can back into the math for the full year. But we also may get - what also happens during the quarter - each quarter is, if we have a lot of stock options exercised over that particular quarter that will help to drive down the rate. So I would expect it to be where it at right now or slightly below for Q4.

Okay. That's kind of what I was getting at. Is there - as you look out to next year, is there a specific quarter, where you guys have a higher level of issuances or vesting that impacts it?

The vesting doesn't necessarily impact it, Aaron it's the - just the exercises do. But as we go forward, we have fewer and fewer options outstanding, because our practice most recently has been to issue restricted shares as opposed to options. So the benefit, we will get on a forward basis will add, if you will, as we go forward. And then, obviously, with respect to the change in corporate tax rate. I think, you and I've talked about that, we'll have - obviously, we'll get a big benefit out of that. But we'll also have a charge to the DTA once that occurs as well.

Right. And that's still - I guess, the impact of that with each passing quarter declines some. Where does that stands today? Is it still look roughly - well, let's answer the question, where does that stands for you?

Well, I think, it's still going to be pretty similar. The last time, I calculated - I've not looked at it recently, but the last time we look at it. The charge for the DTA more or less offsets the reduction in the tax rate. And I think that was right about at the 20% to 22% tax rate, if got down to there.

Right. Okay. Good stuff. Thanks, guys.

Obviously going forward, we've got a big benefit going forward, but we'll have that charge once the due changes, because we don't [bill our back] [ph].

Right. Of course, yeah. Okay, good. Thank you for taking my questions.

[Operator Instructions] Our next question comes from Tim Coffey with FIG Partners. Please go ahead.

Okay. Thank you. Good morning, everybody. Mr. Yu, in addition to the San Francisco branch this next quarter, do you have any other planned branch openings in 2018?

Well, we are always on the lookout. Nothing in plans being right now. We are always looking for new possibility as far as branching out is concerned. Under consideration with obvious expansion in Orange County area and in the New York area which is quite possible. And then, obviously, in the Greater Los Angeles area there's always so many other spot we can go to. We don't have anything specific yet, but it is ongoing exercise.

Okay. And then one of you have provided a little commentary on trends in the pipeline and follow the pipeline. Once the loan makes it into the pipeline, are you seeing any changes in whether or not that - the percentage of those loans will make it to the finish line?

Well, obviously, not 100% of the loan will make it to the pipeline will come to the finish line, but in the past generally speaking with the high reliable rate in a 70% to 80% level. And haven't seen that change, because - largely because our people are so experienced, they know exactly my management approval and they know exactly what customer will accept. So that has saved a whole lot of management time. It was because the professionalism of our frontline staff.

And so the competition then isn't doing things to disrupt that pipeline? In terms of relaxing the rate [indiscernible].

Competition is always tough. But in our experience, once it gets in the pipeline, the reliability is pretty high.

All right. Great. Thank you very much. Those are my questions.

Thank you.

Our next question comes from Don Worthington with Raymond James. Please go ahead.

Thank you. Good morning, everyone.

Hi.

Just wondering, if you have an update on the one piece of OREO, I think you said last quarter that you're finally able to get a hold of it and market it, just wondering if you have an update there.

Well, believe it or not, a PSA has been done. It's about to open escrow very soon at a price that is substantially higher on the carrying value. But again, I wouldn't venture to say anything, because in real estate only happens when it is sold off, okay. But we know the appraisal value of the piece of property have always been higher - much higher than of carrying that.

Okay. All right. And then, are there any lending sectors or geographies, where you're seeing any kind of weakening in credit conditions?

Not in the three area, we are operating it, basically in the Greater Los Angeles area, New York and then San Francisco. So far it's basically mostly in the city. We didn't see any weaknesses in these three areas. In Los Angeles basically, we are keeping substantially all, but the in-field area.

Okay. All right. Thank you. That's all I had.

Thank you.

This concludes our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

Thank you very much for your interest and for your support, okay. Once again, we'll certainly work with the same attitude before in the fourth quarter and in the New Year. Thank you.

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