Hello, and welcome to the Preferred Bancorp First Quarter 2019 Conference Call and Webcast. All participants will be in listen-only mode [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions [Operator Instructions].

I would now like to turn the conference over to your host today, Tony Rossi of Financial Profiles. Please go ahead, sir..

Thank you, Keith. Hello everyone, and thank you for joining us to discuss Preferred Bank's financial results for the first quarter ended March 31st, 2019. 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'll 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, ladies and gentlemen. I'm very pleased to report that during this quarter, we were able to dispose three of the four non-performing assets, which is previously mentioned as New York loans. With these resolutions, we are now having our assets quality getting closer to the pristine level.

Even though we're not terribly excited with the $1.4 million loss we have to take but then last quarter, we had $2 million plus gain. I guess it's a shame that we do not have the ability to make it happen in the same accounting period.

For the quarter, the Company earned $18.7 million or $1.23 per share, including the loss mentioned above, slightly better than last quarter, about 14%, 15% better than last year. And overall, we are pleased with the operating results. Loans and deposits continued to grow at the 9% level. Loan continued to be played by the heavy payoff activities.

However, deposit seems to be -- the market rate competition for the deposits has subsided a bit. We have not made much change on our deposit rate, principally because that we have a $600 million plus cash on our balance sheet. I'm also pleased to note that early indication in April seems to be that the loan payoff activity has slowed down a bit.

We are holding our breath, hope that's going to be continuing. For the quarter, net interest margin was steady and our efficiency ratio was 36%. Without the loss, efficiency ratio would have been on the 33% level. Everyone knows that Preferred Bank had to have a very asset-sensitive loan portfolio.

90% of our loans are floating rate loans, most of them prime related. However, we have been building over the years a protective mechanism into it. 70% of these floating rate loans have a floor. And we are continuing -- we'll continue to prepare ourselves to operate under various rate scenarios. Thank you. I'm ready for your questions..

Thank you. We will now begin the question-and-answer session [Operator Instructions]. And the first question comes from Tyler Stafford with Stephens..

I just wanted to start on the loan growth. It looks like good growth at start the year and as you now mentioned the 9% pace.

Is that effectively how you're thinking about loan growth for the remainder of the year for the full balance of the year considering the good start to the first quarter?.

Well, if we have our payoff activities slowed down, I'm actually looking for better than 9% loan growth there. And historically, our staff has been able to initiate a lot more loans than the current results. So we are holding our breath and hopefully that payoff activity will be slowing down..

And just you or Ed, can you talk about the rate for new and renewed CDs at this point and what the cost of the time deposits that are maturing rolling off just kind of basically the front look or just back look on the CD side?.

I will have Ed answer first, and I'll add on to it..

Hopefully, it's along the same lines. So we have -- primarily what's been coming off is between the six-month and one-year terms, Tyler, and so those were taken on anywhere from September of last year to March of last year. And so, they're rolling off in the mid-to-high ones.

The new stuff we're putting on is anywhere typically still from six months to a year and that's coming on anywhere from 2.20% to 2.50% at this point. But however, because of the overall duration of that, when you look at the overall CD book, more than half of that now has already been re-priced and is baked into the cost of funds..

And just lastly from me with that said, Ed.

Just can you talk about how you see the margin trending from here given the current yield curve and the Fed seemingly on pause? How does the cadence of the margin progress throughout the year given that funding?.

I think going forward there will be some compression as the CD is getting re-priced today, renewed and repriced. However, that there are number of mitigating forces.

One of them being that the resolution of the troubled assets has created a new earnings assets for the bank and obviously that growth is adding a whole lot of margin, how should I say, benefits in certain trend. And with all that we are internally prepared for some mitigation but we're doing everything we can to try to tweak and mitigate that..

Thank you. And the next question comes from Steve Moss with B. Riley FBR..

I guess, with regard to the cash position and obviously Mr. Yu mentioned that deposit competition has slowed.

Should we expect deposit growth may slow and/or will you consider remixing some of your cash into securities given a more dovish Fed?.

We're starting to do it gradually but we'd like to take small steps forward. Nobody really can tell me how the rate is going to be..

And I guess the other thing here on your capital position continues to grow, given the slower loan growth.

Any update with regard to potential repurchases or what you are thinking about capital deployment these days?.

I guess it's no secret by now that we're making our proxy statement, seek for shareholder approval, pre-approval, not that a board has not finalized it, pre-approval for us to buy back some stock. The reason is that previously we have sent in the application to the state of California, which is our governing body.

And they have required us to have pre-approval by the shareholders. So we're building in our proxy statement and waiting for them to reply to give it okay to go ahead doing that..

And I guess one more question for me just on expenses here. Well controlled, again.

Just wondering what your expectations are for the second quarter?.

Well, I think minus the loss on sale, Steve, I think we could probably look for something similar to what was in Q1. Although, there are some things in Q1 typically that hit every year, one of which is payroll taxes, because the bonus payouts occur in the first quarter. So we won't have that headwind.

So I would look for non-interest expense to be relatively flat minus the loss on sale in Q1..

Thank you. And the next question comes from Aaron Deer with Sandler O'Neill..

Just following up on that last question, I think you guys should be finishing up on. I think what you're referring to is your day two expenses related to the conversion.

And just wondering what kind of cost saves we might see in the back half of the year with those wrapping up?.

Well, we will see a little bit in cost saves on the IT and professional services line item, Aaron. But I think the growth in other areas, such as personnel expense and occupancy might overtake those savings. So on a net-net basis, we'll still be looking at some growth in non-interest expense on a year-over-year..

And related to that occupancy, with the headquarters adding on to that.

Is that in the first quarter run rate or we are going to see that in the second quarter, is that when that hits?.

It's going to be in the second quarter, we moved up here in March. So we'll be seeing that in the second quarter. The other thing to keep in mind in Q1 is we implemented ASC 842, which is the new lease accounting standard. So that had a small adjustment on our lease expense to the good for us for Q1. Obviously, that won't be repeated in Q2..

And then going back to the discussion on the CDs, it sounds like you have continued to keep your -- the CD portfolio, if you will, pretty short. So should we see rates start to drift back down? Presumably your funding costs, one that certainly have been lock stepped with your prime-based stuff, but at least the lag they won't be too severe.

Is that right?.

We could see the rates come down, because early indication that rates started to level off a bit and we don't see the daily increase putting on a paper by almost everybody.

And certainly, we'll hope that will be the case, because frankly speaking -- and I don't know how if the rates continue to escalate like the last six months, how brother and sister in the industry can live now..

Sure. And I guess related to that, the mitigation efforts that you mentioned. I know that you've discussed the floors that are in place.

What other strategies beyond the points from the cash might you have that might also help protect that margin?.

Well, there are a number of things we really can do. First of all is that put somebody -- floating and then non-float assets, non-float loans into fixed rate or into floor space. That is one strategy we can do and try to use that cash balances we have and provided we feel safe about the gross rate we're going go into.

And obviously that over the long term everybody will seek to reduce the TCD level to move into DDA, MMA. But obviously, on the rate rising environment everybody in the world has tried to earn more of their money. So the trend is everybody was moving to CDs. Whether they will be moving backward to the MMA and DDA or not, we hope so.

We're working on it but don't know what the result will be from it..

Thank you. And the next question comes from Gary Tenner with D.A. Davidson..

I was just wondering, Ed, if you could update us on the amount and rate of your maturing CDs 2Q and 3Q?.

Ed, you want to try that?.

The ones coming up in the next two quarters, Gary?.

Yes..

I believe the number is around $600 million to $700 million will be maturing. I believe the figure is around $900 million it's already ran at the new higher rate, and rolled at the new higher rates. So we're more than halfway through the portfolio, I think to your point..

So the $600 million to $700 million is over the course of the next two quarters combined?.

It could be three quarters..

Around there, yes, give or take. Obviously, there's outliers and so forth..

And the rate that they're rolling off is at the same as that mid-to-high ones rate that you noted earlier?.

Yes, I think likely though as we go through the next two quarters, Gary, we could obviously look for the runoff rates to be a little bit higher. And so the gap you're looking at between running off and rollover will get smaller and smaller, I think is what we'll look for..

Thank you [Operator Instructions]. And the next question comes from Tim Coffey with FIG Partners..

As we look at the tax rate, are we teeing up for a higher tax rate this year relative to last year?.

Well, I would venture to say, as we put in the release, it does fluctuate from quarter-to-quarter because of taxable events that have not occurred yet within the year. And so -- but on an overall basis, I would look for the Q1 ETR to be pretty indicative of the next three quarters, Tim..

And then although it's early in the earnings season this quarter, we've had at least another bank in your local area talk about the outlook on credit quality and how we might be at a cyclical turn in terms of overall credit quality.

I'm wondering are you of the same opinion or do you still see the progression of the book, progression of what you're looking at in terms of underlying credit quality still no different than we've seen in previous quarters?.

What is that bank talking about.

Could you let me know how they describe the credit trends?.

They said that they were seeing items in different parts of their book start to experience some levels of stress, and they made a number of references to that. They were well prepared for the coming downturn..

Nick, do you share the same thoughts, or what do you see?.

The only thing I see is that the construction site during the recession period or during the downturn may be a little bit concerned that we try to control the whole construction site, because we can see 12 months to 18 months, but we cannot see over that level period of time..

Nick, do you see -- the question was specific, do you see the deteriorating trend in your portfolio less than other portfolio?.

Not at all at this time, because the previous relationship was New York property, that's totally isolated. And other than that, our classified loan and our criticized loan now is under the normal situation, and I do not see any deteriorating at all..

Thank you. And the next question comes from Don Worthington with Raymond James..

I think you may have touched or really addressed this Mr. Yu with your previous comment.

But have you seen, I'll call it, cannibalization of some of your deposits into CDs with your comment that maybe they can move back to where they were?.

Well, I don't think it's going to happen in the next one or two quarter, not by much. And I think as the rates start to stabilize all even its falling, I can predict that maybe happening. But in ensuing three months to six months, I don't see much hope of that happening..

And then do you still have one of the New York properties outstanding, single family….

Yes, that carries on the book for $2.9 million, $2.99 million.

Still with the most recent appraisal value much higher than that, it is going through a foreclosure sale through the normal bidding procedure by the court in May, right? Is that May?.

In June....

In June, right..

I think that maybe what you said last quarter, so no real change there. It's still progressing according to plan..

Thank you. And as there are no more questions the present time, I would like to return the floor to management for any closing comments..

Well, thank you very much. I know that there's a little bit noise in this quarter, but I guess to us, it's a good noise.

So with that even though much of our deposits portfolio is going to be -- shouldn't say much, some of the deposit portfolio is going be re-pricing forward, we are still very comfortable with the various estimates that various friends or analyst of ours is putting -- published right now.

So hopefully that loan growth will be better and we can be able to continue to operate under better conditions. Thank you very much..

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