Kristen Papke - IR Li Yu - CEO Edward Czajka - CFO Wellington Chen - Chief Operating Officer Nick Pi - Chief Credit Officer.

Bob Ramsey - FBR Capital Markets Aaron Deer - Sandler O’Neill Gary Tenner - DA Davidson Tim Coffey - FIG Partners Don Worthington - Raymond James.

Good day and welcome to the Preferred Bank’s Fourth Quarter 2016 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 also note that 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 fourth quarter and year ended December 31, 2016. 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 brief summary of the results, and then we will open 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 very much. Good morning, ladies and gentlemen. We're really pleased to report that 2016 has been a great year for Preferred Bank. We had record earnings and we had record fourth quarter in our bank's history. Most importantly we are very pleased that we're able to deliver a very handsome total shareholder return to our investors.

The bank's total assets, total loans, total deposits, all grow in the 20% range for the year and for the fourth quarter they all grow in a mid to high teen level. Net interest margins begin to stabilize after the issuance of the $100 million sub-debt in the third quarter.

This particularly large high interest cost resources has caused the third quarter interest -- net interest margin to decrease. As their weight becomes less-and-less going forward, we expect interest cost along with the rate changes will continue to -- interest margins continue to improve.

We have been and diligently controlled the Bank’s overhead in line with the growth that we have had. We also have -- we will be mindful about our growth require added personnel and added expertise and we're making investments along the way and sometimes ahead of time.

At the yearend our loan pipeline appeared to be stable and we’re anticipating that going into the future that the business activity of the bank will continue to be in the reasonable consistent manner and we have been, as we always have been maintain a very assets sensitive balance sheet.

Should there be any further rate increases we will take advantage of that. I purposely keep our remarks very short this time in anticipating there would be lot of questions by you people. So, thank you very much. We’re ready for your questions..

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Bob Ramsey of FBR. Please go ahead..

I was hoping that we could maybe first talk a little bit about the net interest margin and the trajectory into 2017. I know your release highlighted that over 90% of your loans are variable or floating rate.

I'm just curious if the Fed increase in December, if there was any benefit from that in the fourth quarter and how you're thinking about the margin headed into the first year?.

We believe the fourth quarter increases is because it happened on February 14th and has about one-sixth of our quarterly normal activities in terms of rate effect. And going into first quarter, this should take the full effect of the $0.25.

Please remember some of our loans are still at the floor range, okay, so not every loan would be adjusted upward, but we do expect margin to expand..

Okay, maybe could you share how much of the loans are below floors and maybe how much of a benefit you expect in the first quarter?.

We will probably -- have you got it?.

I don’t have that exact number, but I can answer. [Multiple Speakers] Hi Bob. This is Ed. As we look at our interest rate risk, we'd like to run these at 25 basis points increments out into the future to see what -- exactly what the impact is.

So at last run it was about -- just over $3 million on a pretax annual basis just for the first 25 basis points increase. As we get to 50 basis points and 75 basis points in terms of increases you start to, at around 75 basis points you really start to get pretty much all of the loans off of their floors.

And then you really start ticking in basically the entire floating rate portfolio starting to move with prime..

I need to also supplement Ed’s comment there because every quarter we add a lot of loans, the new loans are basically been made at the floor levels. So on the new loan made it's always taking a delayed time, okay? Time, effect on the whole situation, so it is real hard to calculate it. We can only range it going forward..

Okay, and if I heard you right, you said that you had about 1/6 of the benefit in the December quarter. And so, if you get 5/6 in the March quarter, I guess 5/6 of $3 million would be something a little bit north of $2 million of benefit, is that fair? That's annualized, obviously, I have to -- you have to break it out by the quarter..

Mathematically that’s correct Bob. Obviously, there is a lot of variables, a lot of assumptions we use, when we do that and one of which obviously is the pace at which deposit rate increases will grow.

We have been somewhat reluctant thus far to start raising deposit rates, but obviously competition in deposits gets a little bit harder as rates start to rise..

So also, I’d like to remind you, although that maybe pleased with the additional interest income we will have, we also recognize, in the first quarter there is only 90 days as compared to the fourth quarter 92 days. That usually eats a lot of their interest income in the first quarter..

Got it, no, seasonality does matter, so it's fair. Okay, and then shifting gears a little bit to expenses, expenses looked good. I know you all highlighted in the release that there was a one-time termination charge for a deferred comp plan.

Just wondering how you're thinking about, one, does that have any ongoing impact on your expenses with the plan now being terminated? And how should we think about, with seasonality and everything else, the expense trajectory into the first quarter?.

There would not be any additional expenses related to that. Maybe we report to you in the past the deferred income trend that also did not have too much expense impact. Because most of the deferred income is invested in the capital stock of Preferred Bank, and therefore therefore, has not been causing any carrying costs of that particular plan..

Okay, and so with that one-time charge coming out and seasonal factors coming on, should we be thinking about modest growth from 4Q to 1Q?.

In terms of the earnings?.

In terms of the dollar amount of expenses. Sorry, I should have clarified, the dollar amount of expenses..

We think it would be moderate, although there will be additional costs that related -- usually, we distribute a bonus pool in January and that created and used for a huge portion of the payroll taxes, okay? And see, Ed has the number that -- something about in the $300,000 range right?.

It was $350,000 for the deferred comp, but it will be close to five --..

For the first quarter..

Yes. And that’s the five..

So there will be additional one-time first quarter expenses that it will not be repeating in the following quarters..

Got it, okay, so it's the seasonal factor to keep in mind. Okay, that's helpful, thank you, guys, for taking the questions, nice quarter..

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

Li, I was hoping just to get some additional insight on the exceptional C&I growth that you had in the quarter, particularly in terms of if you can give some scale around the average size of the loans that were put under in the quarter, as well as the types of borrowers that were taken down to new financing?.

Okay. Well, I think that I want Wellington to answer that, and I’ll supplement his answer..

Hi, Aaron this is Wellington. For the quarter, as you can see our C&I loan growth, average loan size was just under 2 million. There are few loans that we’ve been focusing on C&I, with our C&I team and these loans take a while.

But I think that through our hard work and focus and the fourth quarter came to fruition on some of the relationships that we've been working on. .

Okay, and [multiple speakers] any color on the types of borrowers and how much of this might have stemmed from borrowers taking up line utilization versus new commitments?.

I think the new commitment is about 40 million, the new commitment. And also during the latter half of the year we recruited three additional C&I officers and they have been working hard. So, during the last quarter they were able to fund books on loans for the Bank’s financial relationship..

For the industry? [Multiple speakers].

I finished, the industries?.

The industry would be, we have some in medical, servicing industry, authors, dentist, working capital to some investment company. We also have landed a very valuable relationships that’s the Mainland China Company, it’s a large conglomerate, we have a corporate line of credit facility to them. They have presence in LA, San Francisco and New York..

That's helpful.

And then, how about on the commercial construction pool? Can you talk about the size of those credits that came on during the quarter and if there's anything you can share with us on geography or the types of properties?.

Hi, Aaron, the average size about 2.2 million, I think is a pretty well even spread in the Los Angeles, San Francisco as well as our New York team. We have a couple of projects, I don’t know, upper east side, Manhattan and Brooklyn as well as some are industrial property here in Los Angeles area..

Aaron, actually for the first quarter, first quarter we only made about $20 million in new construction loans, okay. That was 14 million or 16 million pay-off, the net increase on these activity is only four. All the others really represent the drawdown of the ongoing construction loans.

And it is pretty common for the first quarter to drawdown to be a fast pace drawdown, because most companies, I mean the subcontractors Company need the funds to close out the year..

Sure, that's good color, thank you, Li. Okay, I'll step back, thank you..

Our next question comes from Gary Tenner from DA Davidson, please go ahead..

Ed, I wonder if you could provide a 12/31 spot margin to give us an idea where things were right at year end?.

Right at yearend we were in the, right around the 370 mark, Gary, as we came in at 367 for the quarter.

So as you know a lot of the margin depends on the mix of assets during the quarter and more importantly the average mix of assets during the quarter and as we have the ebb and flow of deposit and loan growth sometimes there is variations in there that aren't necessarily related to the level of loans we're booking or deposits that we're putting on.

So as Mr. Yu said we anticipate some slight expansion in the margin going forward..

Okay, thank you for that. And then hoping that you could provide a little bit of an update. There were just smart detail on that C&I credit that moved to non-accrual in the quarter. Maybe a little background on the business, and that $2 million payment was scheduled and then there was an additional payment.

Maybe talk about some of the discussions around that..

Well that is a normal C&I Company. I mean devoted into the, how should I say, seasonal bid and mostly do a lot of [indiscernible]. So usually their receivable and inventory buildup in the third quarter and require a whole lot of financing and beginning the fourth, late fourth quarter in early January they will start to pay down.

And so that is the type of the Company, the Company has been in existence for about 20-something years has been banking with us for about eight year and other than the one time they have slipped a little bit in payment dates, they have always been paying on the schedule..

Okay. Thank you for that. And just one last quick question, just on expenses, a follow-up to, I think, Bob's question. Looking for some increase in the first quarter, obviously a lot of upward power to revenue from higher rates. As you think about the margin, obviously, below 40% today.

If we get, call it, two rate hikes in 2017, how far do you think that the efficiency ratio gets pushed down trying to balance the revenue pick-up against the need to invest, whether it's for just growth or back office?.

We do have our so called plan for the growth of personnel, okay, and it starts with pre-investing, but these people not necessarily coming on as the timetable that we're looking for. And sometime, opportunity in hiring is there, but we have to react immediately.

So even if all directors cannot get the answer from us as to exactly what happened in a more finite number, but generally speaking we are -- if you are anticipating two more rate increases than I will say they should -- net interest margins should continue to improve with our pre-investment.

Any disagreement?.

No not at all I mean we're very-very pleased with the efficiency ratio in the fourth quarter and for the year. It was pretty hard to imagine it getting much lower than that, so going forward, Gary, simply because as Mr. Yu says, there is a lot of investments that we continually make..

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

Do you have any -- as we look at 2017, do you have any new initiatives planned for this year?.

In term of?.

Growth. I believe in 2016 you did the mortgage business..

No, 2017 preliminary situation is that we're looking at expansion of certain locations. One of the notable places, we probably will be having additional branches in the Northern California area. We also would be looking for new locations in the New York area and the California area..

And do you have a --..

Southern California area, but no definite sites for that yet..

Okay, do you have an idea in mind on how many branches you'd like to do this year?.

Well total year I think is ranging from one to three..

One to three, okay. And in terms of the prospects for your existing business, I think you said the pipeline looks stable coming into this quarter.

How do you feel about the opportunities in 2017 for growth versus what you just experienced in 2016?.

We'd like to be optimistic and it seems like we can be optimistic. But we always have to worry about one thing is that our deposits growth capability. In 25 years we grow 3 billion out of 3.2 billion assets through organic growth and we always had a philosophy, growing the deposits first, then grow the loans.

So going into the future, we know that loan is there. Probably we can do anywhere in the same growth rate in the fourth quarter going forward we hope. But the question is that it depends on the capability of growing [ph] our deposits and the entire Bank is devoted in that direction..

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

Was there anything, say, non-recurring in the margin this quarter in terms of either recoveries, or did you have a special FHLB dividend that shows up somewhere?.

Yes, we actually had a few things, The placement of that loan on nonaccrual was the reversal of about $200,000 of interest and then there was a special FHLB dividend which was a few hundred thousand as well, offsetting, but I think to the net it was up a couple of hundred thousand, but very, very small in the grand scheme of things..

Okay, great, thanks.

And then, are you continuing to look for lenders in terms of expanding the staff?.

We have been growing by growing our personnel. The whole Bank's past history has been always, always being able to attract talent and most importantly retaining the talent. So this will be a continuous effects at least for the next several years..

Okay, alright. Thank you. .

Our next question comes from the line of Bob Ramsey of FBR. Please go ahead..

Sounds like it's reasonable to expect a similar amount of loan growth in ’17 as ’16. Just wondering if the mix is any different.

If how much you expect maybe the new resi business to contribute, and where you're thinking that growth is going to come from?.

Number one is that, first of all we have a policy we never give guidance in such a manner. But having said that, I’ll say, if given the deposits there, we think we are capable to keep our loan growth at the same pace. As far as the components is concerned, it is rather difficult to predict at this point in time.

If you [indiscernible] depend on how many new relationships were able to develop during the year. But in the CRE side it had a lot to do with the market, the moving of the market.

As you’re probably are well aware of, today it seems to be everybody is worried about the retail property, even the e-commerce and its effect to the national brand retailers.

And today it seems to be nationwide that office buildings suddenly become a favorite product and in California, in our trade area in New York industry property has always been a very favorite product, but it's very hard to get. And aside from that we do not know how the valuation of multifamily housing rental or multifamily housing would be.

So we will adjust ourselves in terms of what the market movements is, along with the availability that’s made available to us. So, if I give you a wishy-washy answer, please forgive me, because we really don't know or understand what the proportion will be..

Okay, fair enough. Last technical question, I'll hop out, but is there any difference in the way that the prime base loans reprice and the LIBOR base rounds? I just don't know if there's any lag or whether all of it reprices relatively immediately..

Base loan will be floating on a daily basis. As long as the Wall Street Journal changes prime rate, let’s say upward, we go upward the same amount. Most of our -- almost all of loans exchange based [ph] prime rate. LIBOR, there are a number of different LIBOR one month, three months and the six months.

So theoretically there is a lag between one month or three months and six months. And as far as the mortgage loans, many of them are adjustable on the one year period, but since the mortgage loan is on a very small portion of our business so far, so we're thinking that with the primary move upwards we are very sensitive to that..

Great, thank you again..

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Yu for any closing remarks..

Thank you so much for joining the conference. It’s funny, I just look at myself and look at the stock prices before I came in, it sounds like our shareholders likes the report of this quarter and this year.

And the entire Bank, we have a lot of people in our ballroom that are listening to this conference phone call and I think the entire bank will be pledging our self to continue to do the work that we have been doing in the past, to deliver the best we can, shareholder returns to our shareholders. Thank you very much..

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