Good day. And welcome to the Preferred Bank Second 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]. Please note this event is being recorded.

I would now like to turn the conference over to Tony Rossi from Financial Profiles, Investor Relations for Preferred Bank. Please go ahead..

Thank you, Chuck. Hello everyone. And thank you for joining us to discuss Preferred Bank's financial results for the second quarter ended June 30th, 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. I'm pleased to report, while for the quarter, the Bank earned $20 million or $1.31 a share, which compares quite well with previous quarters. This quarter, we have had a extraordinarily large, for us, an extraordinarily large loan production. Loan increased over 21% for the quarter.

Although, some of the increase is related to a very unusual heavy draw-down by many of our commercial customers with balances -- with some of them with balances since we've been -- I mean, reversed. And also, it is also due to some other pattern fluctuation in payoff activities.

But even without these two factors, our loan origination is one of the best in recent periods. Deposits, however, decreased $43 million. One of the reasons is that we witnessed a very heavy draw-down of the bank balances by our customers in the last 10 days of June. Some of these balances have been since reviewed.

Another, maybe perhaps another reason is that during the quarter, we correctly predicted the yield curve movement. And then we made some rather early deposit rate adjustments, which in retrospect, is probably ahead of competition. But the good news is, in the third quarter, there'll be $340 million of time certificate of deposits maturity.

These deposits carry the same interest or slightly higher interest cost interest rate -- average interest rate than what we are presently paying. For the fourth quarter, the maturing time certificate carrying even larger interest costs than what we're currently paying.

For the quarter, net interest margin come in at 4.07%, which is pretty much as internally expected. The efficiency ratio was 31.7%, and we're very comfortable with our ROA of 1.89% and our ROE is 18.5%. We recognize we have a very rate sensitive loan portfolio.

But roughly, I want to point out, roughly two-thirds of a very large portion of our loans carry interest rate floors. These flows will be serving as protective mechanism during a rate reduction environment.

Especially, we're continually making new loans at the current market rate in this floor, and with all loans being continuously being paid off, which carry lower floor rate. This protection seems to be improving as time go on.

To reiterate, we've announced $30 million capital stock buyback recently, which would definitely serve and will give us the opportunity to manage our capital more efficiently. Thank you. And I'm ready for your questions..

We will now begin the question-and-answer session [Operator Instructions]. The first question comes from Aaron Deer of Sandler O'Neill and Partners. Please go ahead. .

Li, the C&I growth this quarter really was very impressive.

I was hoping maybe you can give us a little bit more color behind the types of customers and what caused that growth, and maybe that draws that you mentioned that were more temporary in nature? And then what that means for your expectations for overall loan growth here in the third and fourth quarters of the year?.

Well, the C&I growth this quarter come from two different areas. One is the new loans we are making, which is also one of the best in recent quarters.

The new loans we're making during the quarter included some of the -- for use in this couple of longtime customers, we usually have small balances of zero loans certainly is turning to us to make a C&I loan further, and also with several new customer in the fields of distributions and financial services, and in a wide variety of small loans.

So the draw-downs coming from the -- I mean, the unusual draw-down comes, I think this quarter end, because it seem to be that three different type of people, one type of people is that their emergency needs, such as a very good customer of ours have suddenly have a acquisition.

So they use their own cash and our credit line to close the deal for the order. So there is also a number of customers existing to the buying property with their own cash and our credit line.

And also, there are people as relatively small amount of people in view of the tension in the trade tariff trade war has started to burning up the inventory a little bit before the tariff really become effective. So it's all this factors that's happening in the quarter and some of these draw-down has been repaid back.

And as usual, it is almost impossible for us to predict the C&I projection in the third and fourth quarter. C&I is a continuous and relentless effort that you just work on and work on it. Sometime it all happens such as this quarter. Sometime very little happens in one quarter.

But overall production going to third and first quarter, I have little visibility about first quarter. But third quarter looks like our normal production will be the same. In another way, there's pretty much tracking second quarter loan production.

However, as second quarter included those quarter end draw-downs for special purposes and since being repaid back, it may negatively affect the third quarter in term of what the loan growth is. So, I don't know I made this clear on that to anybody and anybody with a better ways of explaining it for me..

Okay, well that's helpful. Looking at the other side of the balance sheet, just given that you had the strong loan growth and the weak deposit flows. Ed, maybe you can give us some color. I know you guys had a fair bit of excess liquidity at March 31 to work with, and you got that deployed brought up the loan to deposit ratio quite a bit.

If now that you are where you are, if you were to have another strong quarter of growth as you had.

How do you feel about your positioning on the deposit side and where rates are going to be able to fund that, and at what cost? Or do you think that with the rates coming back down now that you can come up with the funding that you need for to support future growth without having to really ratchet up your deposit rates?.

Well, with the indication that seems to be the third quarter deposit situation, we'll be able to build up some deposits. For instance, as of today, our deposit balance is about $100 million higher than the quarter end. So, we have internally making a whole lot of effort and try to continuously develop deposits.

Our current deposit rate is very competitive as a result with our competitors. And second quarter seems to be -- that's a little bit of a usual for us, because seems to be at the end of -- as I said, at the last 10 days in June, everybody roll down their balances. Many of them draw it down, because they have a special deal to be done.

They close it and since then they either find new resource to refinance or do other things with it. So, that's part of reason our deposits backup. So we will put out initiatives and try to rebuild the deposit, try to reestablish through our times our excess liquidity situation.

We will always be very comfortable to have the deposit first and then loan afterwards. So I guess its indefinite answer but a definite effort..

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

I was hoping you could tell us what the loan origination yield was for the second quarter?.

We have loan origination about in the 5.9% average. But lot of it time depends on the usage that the usage of that would change the proportion of things..

And then if you could give us any color on the sequential increase in service charges and other income.

Is there anything in there that was unusual, or how should we be thinking about for the back half of the year?.

Gary, in service charges, there was about $50,000 of what we would term somewhat non-recurring item. With respect to LC fee income and other income that looks pretty much standard..

And then you've addressed the spike in loan growth very well. I'm just wondering as we get into the back half of the year and what you generally see a little bit of benefit on the trade finance side.

Do you have any sense from your customers how things may play out there the back half of the year compared to previous years given the trade situation?.

Most of our customers, they're not sizable enough to really be able to tell with any inside information. And many of them are just optimistically hoping that it will get resolved soon, because if not they have to readjust their operations quite significantly.

We don't hear anything, we just like -- and in fact, we're looking at the Wall Street information for leadership for this inflammation. So, we just try to stay alert to whatever is coming..

The next question comes from Tyler Stafford of Stephens. Please go ahead..

This is actually Andrew Terrell on for Tyler this morning. Good morning, guys. Maybe just to start on the NIM just from a high level.

How do you guys see the NIM trending throughout the year and then into 2020 if we do get a couple of rate cuts from the fed?.

Well, obviously, the rate cuts, every one of us will see revenues reducing. And it was asset sensitive -- our rate sensitive portfolio, our rate will be reducing. But if we have a couple of rate cuts, I expect the first cut will affect more than second cuts, because our flow came into play.

And as our TCV continually maturing and being re-priced at the lower cost. Currently, the cost is already going to be re-priced at the lower level. But with rate cuts, I expect every one of us will pay less for TCVs and that the benefit we'll see will be increasing. So somewhere along the line, there will be a cost that it will not hurt us anymore..

Maybe just a little bit more on the floors of the loans you were referencing.

Can you give any color around maybe where the average flow rates are?.

Average flow rate is tough, made through the past five, seven or six, seven years. There are loans with very long seniorities that carry real low rates. They are rates that loans being made recently, it's carried the recent flow rate.

But the current flow rate situation is, as we said, a good portion of our loans it will maybe 15% our loans carry a flow rate at the current effective rate. So the rate cuts would not be affecting us. But with each cut as they're going on, there will be more rates, more loans being now affected..

Maybe last one from me just not only we have the share repurchase plan through.

Just want to get the thoughts on how you guys are thinking about utilizing repurchases, moving forward?.

Well, obviously, we announced this. We have to wait until the blackout period is over with. But our goal is to start with the repurchases and then see what happens with respect to the share price and with respect to interest rates as well. And then we will be able to obviously adjust it as we need to, going forward.

But at this point, we're planning on a 10b5-1 plan to go ahead and start systemically repurchasing small amounts of shares..

[Operator Instructions] Our next question comes from Don Worthington of Raymond James. Please go ahead..

I wanted to get back to the deposit flows.

Did you have any customers move deposits from transaction accounts into CDs to get higher rates?.

There is actually a small movement around that, especially the non-business customers. Moving from the DDAs or excess DDA are money market comp, which carry lower rate to TCVs. In fact, every time there's a rate increasing environment, we all expect that this needs to happen.

And in fact, our regulators even told us way back, when the rate is increasing, you have any guys do the interest rate risk and you manage it when much of your deposit will return into the higher rate deposits, whichever has been happening. But as we continue to developing -- as we're continuously developing is our business accounts.

So, our rated increases -- our movement of the second is moderate..

And then in terms of lending sectors, are there any that you're becoming more cautious about in the current environment?.

We have internally, obviously, have made the review of all our loans, especially with heavy trade tariff related items. And from time-to-time that we are reviewing our real estate portfolio based on the various categories we have. But one of the things that most of our real estate, let's say, 80 some percent of real estate is in the Los Angeles area.

And most of our real estate is in the infield area, and heavily is downtown west. Based on many of the current reports from many of your colleagues affirm, they are reporting that they'll check with the real estate industries in San Francisco, Los Angeles doing very, very hot.

We have made a review on the New York real estate regarding the new rent control initiative. We have very little exposure there. And I'm not taking words out of your mouth. Nick, could you put some color on that..

Yes. New York multifamily segment is not substantiating our portfolio at this time. And also, just like Mr. Li mentioned, the tariff effective loans is quite minimum at our bank -- in our business model. And we're being closely monitoring all those loans. Now, we didn't really notice any an active -- severe and active impact to our borrow..

So far, hopefully….

And then one last question.

Did you purchase any loan this quarter, or were they all originations?.

No purchases..

In fact, we'll participate out several loans….

Our next question comes from Aaron Deer of Sandler O'Neill and Partners. Please go ahead..

Just a couple quick housekeeping questions on the expenses. I was surprised to see the occupancy costs drift lower, given that you guys have the new headquarter space.

Is this a good run rate for that line item?.

It's going to be a little bit higher than what you see, Aaron, because we implemented ASC 842, the lease accounting standard and that probably cost a little bit in the near term, but that will be coming back up as we go forward. So, I would look for that to tick backup. I know we're out $1.270 million.

I would look for some probably north of $1.3 million..

And then I'm guessing you guys are through the dates of expenses on your systems conversion.

Is this now a good run rate for the professional services line? Or is that maybe running a little low this past quarter as well?.

For the most part, the day-two, day-three items with respect to the IT conversion are already baked in. But what we saw this quarter was legal fees were extraordinarily low, as well as we received a legal fee recovery from an old item. So, it was quite low this quarter. You're absolutely right. I would not look for it to be this low in future quarters..

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

Well, thank you so much. We just hope that we continue to operate with our current metrics. And it seems to be that it's working right now and then we obviously will be very keenly observing the rate environment. Thank you..

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