Good day and welcome to the Preferred Bank Fourth 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 Kristen Papke, 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, 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 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.

Thank you. Good morning. With President signing the new tax law, we are required to re-evaluate or revalue certain assets which included deferred tax assets and the market rate [indiscernible] low income housing market assets. The result is that there will be a $6.65 million charge in this quarter or $0.45 per share. Without this charge, net income for the quarter would have been $14.3 million or $0.97 per share, which is a all-time high for the Bank. Expansion of net interest margin, expense control, and lower tax rate, all contributed this better than expected performance. Deposits for the quarter grew 2.1%, which is lower than the past quarters. One of the reason is that we chose not to renew a $45 million rate listing service deposits. In fact, since the beginning of the year we have been conscientiously reducing this segment of the deposits. As of December 31, we have $550 million cash on hand, which should be sufficient to meet any loan funding needs. Loan growth for the quarter was 2.2%, which is also lower than the previous quarters. We're still experiencing an increased level of payoffs. But then the holiday season sluggishness also contributed to this lower growth rate. At December 31, we have raised $33.5 million of new capital through the at-the-market mechanism. This has greatly improved our capital ratio. We do expect to raise another $16.5 million in the first quarter, which will be with the new capital should be sufficient to meet the future needs. During the year, we have also increased our labor force, our work force by 11%, mostly in the area of compliance, BSA, digital banking and other administrative area. Together with the staff increase in 2016, we believe we now are well situated or well prepared for 2018. 2017 has been a very good year for Preferred Bank. Loan grew 16%, deposits grew 18%, and the pre-tax income grew 39%, which is much better than what we had internally expected and also much better than the market consensus. With good profit metrics and highly asset-sensitive assets, the prospect of [indiscernible] and a lower tax rate, we are very optimistic for 2018. Thank you. I'm ready for your questions.

[Operator Instructions] The first question comes from Aaron Deer with Sandler O'Neill and Partners. Please go ahead.

I guess to start with the ATM, obviously that's been a very successful tool for you guys to raise some funds and continuing that this quarter, given the payoffs that you had in commercial real estate, I'm just curious with the higher capital ratios that you have now, where does your CRE concentration number stand?

I know, but Nick, do you want to answer the concentration number?

For December 31, our concentration is 310%.

Okay, that's great. Okay, and then I was also – great to see you guys continue to see some good inflows on the non-interest-bearing deposits. Just given it sounds like you're pretty comfortable with your liquidity and your funding levels, is it your expectation that you can continue to see this good traction that you've had with the lower-cost deposits as we head into 2018, or are you starting to see customers demand more on the rate side there, or what are your thoughts on that front?

Second part is what we have always been expecting. So far it is not happening. Especially as of December 31, with the new tax law changes, many people are doing their tax planning. Some of them are switching their higher-rate deposits to lower-rate deposits ready for the disbursements in the New Year. Some of them are moving a large deposit in and so they distribute what would have been a bonus for 2018, they were distributed in 2017. There's a lot of activity in doing that. It's hard to tell at this point of time what the level of stability will be. Obviously, in our model of doing business, we will continue to work our offices to make them work to increase [indiscernible] deposits.

Okay. And then the commercial and industrial loan balances, this also saw some strong growth this quarter. Can you talk about what drove that in terms of any specific industries or if there was participations or anything that helped support that this quarter?

You want to answer it first, Wellington, then I add up to it?

Yes. We have very little participation activity, really flat with the fourth quarter. So the industry is really, we deal with some of the import/export trading as well as communication company. So, as you know, Aaron, that the C&I business takes a while to fill the relationship to bring them in. So, as this happened I think the fourth quarter, through the whole year, that we are able to book a few more deals on the book.

That's great.

Also a [indiscernible] increase to draw-downs, slight amount, because some of them [wants] [ph] to pay for more expenses at year-end.

Sure. Okay, so you could probably see maybe a little bit of pressure then in the first quarter as maybe some of those draws pull back to more normalized level on the utilization?

Yes, possibly it can. But in the meantime, we will have many loans that were dropped off from the fourth quarter into the first quarter. We are already booking them pretty much in the first 15 days.

Okay, that's great. I'll get back in queue. Thanks for taking my questions.

The next question comes from Steve Moss with B. Riley FBR. Please go ahead.

You kept expenses well-controlled here this quarter and throughout the year. Just wondering how we should think about investments in the franchise in 2018 and expense growth?

[Indiscernible] sense is that our earnings was ahead of the growth of our workforce. We hope it would continue that way in 2018, but we are planning to increase our production staff, which is relationship officer and supporting staff for the business, in 2018 to more than what we have done in 2017 or 2016.

Okay. In terms of how many loan officers are you looking to hire, is there any particular focus?

[Indiscernible] We would like to hire 100 people, only maybe sometime it will be three or five available. It is really a so-called opportunistic type of situation. The only thing is that we make it our conscientious effort this year to increase our recruiting activities, including our recruiting budget, increase our recruiting budget.

Okay, appreciate that. And with regard to your asset sensitivity here, I know you had loans that were at floors last quarter. I'm assuming the variable rate next year is higher. Just wondering what's the variable rate mix and how should we think about the margin for the first quarter?

[Do you want to take that] [ph], Ed?

Sure. As of right now, obviously the rate increase helped us in the month of December. We did see some yields on loans overall increase. In terms of where we stand now, there is approximately only 190 million of our total adjustable rate of about 2.7 billion that are below their floors. Of that, 74 million comes off the floor in the first 25 basis point hike. So, we are very close to having pretty much most of, if not all the portfolio, up off of its floor.

Okay. And so 79% to 80% of loans at this point are variable rate if I'm correct, right?

Yes, a little over 80%.

Okay, perfect. Thank you very much.

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

Just wanted to talk about the loan growth a little bit. Li, you mentioned [indiscernible] commercial real estate, obviously some high levels of paydowns in the fourth quarter, can you give us a sense of what the gross originations were in the fourth quarter, maybe compare that to the prior quarter or the year ago quarter?

I would like to report on several things. Number one, origination in the fourth quarter is really higher than origination of third quarter, but there is more pay-off in the fourth quarter. I do also want to clarify one thing. Because of holiday season, roughly $35 million roughly of that amount has been pushed into January, was scheduled to close in December. Therefore, as a result, if you take the pipeline at the beginning of January and at the beginning of September or October, we see increased pipeline by more than that number. So, it is sometimes kind of the [indiscernible] situation is out of our control because sometimes some people just went on a vacation suddenly and not signing the paper until January 2, whatever it is. I mean that just happens.

Okay, thanks. And then to go back to the expense discussion, I think you reported that the bonus accruals were lower here in the fourth quarter. So, certainly the run rate in the fourth quarter we should expect that to move higher beginning Q1, correct?

It was slightly higher in [indiscernible] because earning would have been higher in 2018. Our bonus fund is highly related to the income. We have a philosophy that all the employees and everyone, including frontline tellers, will have a bonus and it belongs to the bonus pool. So, everybody shares that particular bonus and the Company's profit rises, the bonus pool gets larger and hits to target range the Board of Directors preset in a situation when we start to look at moderating the accrual and [indiscernible]. So that happened in fourth quarter. The first quarter will be normal and probably will be higher bonus accrual than the first quarter of 2017.

It will be higher than it was in the first quarter of 2017?

Yes, because earnings will be higher.

Okay, great. And then just one last quick question on tax. I didn't see it in the press release in terms of guidance or indication as to where you expect your effective tax rate to shake out for 2018.

There is a reason you didn't see it, Gary. At this point, it's a little bit early to tell, but just clearly by doing the math from where we have been, we would expect it to be in the upper 20s, we would put it that way.

Okay. Thanks guys.

The next question comes from Tim Coffey with FIG Partners. Please go ahead.

Looking at the deposit portfolio, are there any other types of deposit rates such that you ran off this quarter that you can look to reduce again next quarter?

We think we have a pretty good situation right now. We think the rate listing service and the so-called broker deposits, which we like to keep it very short, combined together a little over 5% of the deposit total portfolio.

Okay, so really not much to go there, all right. And do you have an update on the OREO property located outside California?

It is still in escrow. It is almost twice the carrying cost. It is supposed to close in late January. I am holding my breath and hopefully it closes, but the market value of the property seems to increase all the time. So, if it happens, we would have an extraordinary income, a non-recurring income largely coming in the first quarter.

Okay. And then because I'm not [aware] [ph] exactly where the mechanics of your ATM, is that something you'd like to get completed early in the first quarter or something that you are willing to stretch out the entire quarter?

We are evaluating the situation right now to see whether we're going to start to do it right now or little later.

Okay, all right. Thank you. Those were all my questions.

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

Maybe a follow-on to the tax question, if you are taking a look at where you think you might deploy the benefits of lower tax rate in terms of deploying it in the business, increasing dividends, things of that nature?

First portion of the deployment is already being done, which is to the employees, and our employees will find that we have obviously a raised budget and we have [indiscernible] increased raised budget. In the second situation where we are viewing that insurance allowance to the employees, which is being announced to all the employees. Third of all, definitely as the income increases, employee will share bigger bonus pool through the year-end bonus pay. So, these are the three things to them. And earnings coming along, we will continuously evaluate with the growth, going straight, and then the requirement of capital for the [indiscernible]. Obviously, if there is plenty of leftover, we will certainly do the thing that is shareholder friendly.

Okay, great. Thank you. And then in terms of loan growth, would you expect to be able to achieve say a double-digit loan growth in 2018?

This sounds like a guidance, but can I say that it is my personal wish, my personal wish as we are working on trying to hire more people to join the Bank in the frontline production, my personal wish we should be going to [indiscernible] level. But as the Bank's assets continue to grow, I must also be realistic that the same loan strength rate cannot be maintained forever. So, it's a situation that we certainly like to keep it higher than the 10% level, okay. How high it is will really depend on market situation and our own expansion of the production force.

Okay, great. Thank you.

Our next question comes from Christopher Hillary with Roubaix Capital. Please go ahead.

Could you highlight to us where you see the best opportunities to grow loans, and then perhaps conversely, if there is any area of the market where you might say, you would expect to see slower growth or contraction?

Okay. We would like to see through next year that – we have very limited amount of growth in home mortgages, which is a department that we established in late 2016 or early 2017, but the dollar amount growth has been very, very limited. So certainly that's one area that probably have to see a little bit more growth. And our traditional strong points of C&I and CRE, obviously that we will have to make a loan in a [custom] [ph] manner and we would certainly like to continue to do that. But it just seems to be that, in recent activity that the competition for these loans are getting stronger because there are some of our friendly competitors thinking about deploying the tax saving into customer-friendly lower rates loans. So, something that's not a variable, we will see, but our business highly, one off, one customer many type of business, and it is very hard to predict how much percentage we would like the growth in which area. I'm sorry but I know that's not [indiscernible]

No problem. Thank you very much. Good luck with the rest of the year.

Our next question comes from Tyler Stafford with Stephens Inc. Please go ahead.

I hopped on late, so I just have a couple of questions that I don't think have been asked, and I apologize if they have been. Have you or did you provide the [FT] [ph] adjustment impact for the first quarter from the securities yield standpoint that will hit this municipal portfolio?

No, we have not disclosed that, Tyler. We haven't had effect that as of yet, but it's going to be rather small.

Okay. And then any thoughts just with the 10-year where it's at now in terms of putting some of this liquidity to work outside of the cash position into higher-yielding securities? Have you guys reached that point yet?

Could you [Indiscernible] give us the [indiscernible] how to get some high yielding security? I've been looking for three years and with the prospect of continuing rate rises. If you think, everything we are committing to and I'm losing the face value. So, we have been biting the bullet and keeping them in cash, and thank [indiscernible] that all the parts of the Bank is doing okay. So we still have an effective 17% return on equity. So, we'll wait for our chances to come up.

No question the returns have been impressive. I'm just curious if you guys have hit that pendulum yet. So I'll hop out. Thanks.

I'm seeing no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Li Yu for any closing remarks.

Thank you so much for joining the conference. As I said that we had good year 2017 but we think we are going to have a better year in 2018. Thank you.

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