Good day, and welcome to the Preferred Bank's Fourth Quarter 2018 Conference Call. [Operator Instructions]. Please note, this event is being recorded. At this time, I would like to turn the conference over to Tony Rossi of Financial Profiles. Please go ahead, sir.

Thanks, Denise. Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the fourth quarter ended December 31, 2018. 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 may be made by management that 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. For the fourth quarter, Preferred Bank earned net income of $18.7 million or $1.22 a share. For the full year, our total earning was $4.64 per share. Both of these number compare very favorably with prior years. And on the pretax basis, that -- our net come -- pretax net income was 43% better than the previous year. The fourth quarter earnings was affected by a rather large and unusual loan loss provision of $5.55 million. The reason is that we have decided to take back the New York multifamily loan properties through the bankruptcy proceedings, and then turned into a OREO, okay? The appraisal report coming back at a value much lower than the previous valuation, okay? So therefore, we made a rather large write-down to the loan. The appraisal reported coming was 2 different values, one of them is in the condominium, which was higher. One of them is as a apartment, which is lower. We took the lower valuation and made the write-down, okay? Excluding these loans, our total loan portfolio classified assets was less than $8 million, very little amount. During the quarter, our loan growth was only $58 million or 1.77%, which is lower than our previous quarters. And during the quarter, we had experienced very, very heavy payoff activities, which doubled the amount of previous quarters, okay? So even though it was a very vibrant origination, the loan only grew $58 million. For the quarter, deposit grew more comfortably at $121 million or 3.44% on a linked-quarter basis. The Bank now has over $600 million of cash on hand, which should be -- provide lot of flexibility for the future growth. During the quarter, the net interest margin improved, efficiency ratio improved and also the return on assets increased. At the end of the year, during the first quarter, myself, the entire team, our customers and many friends in the business, all concerned with the stock-market meltdown. The various economic forecasts, the shape of the yield curve, the trade tension, okay, et cetera, et cetera, et cetera, okay. Whereas, we have built up a profitable operation through a reasonable net interest margin, a good efficiency ratio and a very asset-sensitive loan portfolio. And if the economy didn't turn solid in 2019 and if the trade tension subsides, if our government does not close down for extended period of time and if the yield curve is somewhat rational and reasonable, we are prepared to take all the advantage and opportunity that will be given to us. Thank you very much. I'm ready for your questions.

[Operator Instructions]. And your first question will be from Aaron Deer of Sandler O'Neill.

I guess, I'd like to start with the New York credits. If maybe you could just give us a little bit more color on the -- how things have transpired with those credits and since their inception? In particular, the -- just maybe talk about your confidence in the validity of the original appraisals and then kind of what's happened within the marketplace or maybe the properties themselves that's caused the values to erode such that, that original 65% LTV ratio on those has been absorbed?

We have no way of commenting on the validity of the appraisal. And as of today though we have not find much holes of some of the assumption they have used at this point in time. And even so that will be water under the bridge because the appraisal does go on for several rounds and the value has been in reasonable trend and [indiscernible] until the foreclosure and then it will take back through the bankruptcy property. Until in the fourth quarter, New York reported a 5.8% -- Manhattan reported 5.8% downturn in real estate, okay. That was well documented in all the papers, okay. So -- and also the trend is that, those of us in business on those and when the Bank started to take over the property, the valuation have certainly become very conservative by the appraisal, okay. So we have two valuations. We have a common valuation of $44 million. Then we have a common valuation of $40.6 million. We decided to take that common valuation and knock it down 9% to carry on the book of the loan, which will be transferred to OREO, in fact, it is -- it will be today and tomorrow it will be transferred to OREO in the whole thing. Now if history is any guidance to us at all, and we hope this time is not exception, we have always been able to dispose off our OREO at a profit.

Okay, that's great, and I appreciate that additional color. The -- and any sense in terms of the timing, I know when we chatted back in December, there -- you had some interest buyers in at least one of those properties. Could you give us an update on any trends there?

Well, obviously, the deal not go through but the deal is still going on, okay. The buyer -- believe me or not, but any time the Bank wants to sell something, the buyer gets to be very, very careful in choosing, okay. So I mean that -- we see -- obviously we see a hope -- because these are very desirable property. And once stabilized, based on what we have from the brokerage information, even the appraisal, once stabilized, still will produce reasonable net interest -- net operating income. So -- it is not a so-called rundown type of property and so on, so -- and the other end is, we tend to be a little bit choosy too. We just don't want to give away the stock.

Sure. I understand. The -- and then in your opening commentary, you kind of laid out some different macroeconomic concerns. And if all these things go right, you'll be looking to take advantage of opportunities in the marketplace. And in the press release, you also noted -- I think you said the term extreme caution as you look out to the year. What -- is it kind of -- I guess, bridge of those 2 ideas of being cautioned, but seeing opportunities, what does that mean in your mind in terms of what kind of growth we might anticipate for 2019?

Okay. Please understand, number one thing is that we will -- we are managing other people's money, mostly I think positives and our shareholders. So it is constantly -- I have three management people sitting over here. And they're sort of like, every week, in fact, they tell me that we can be more careful, okay. And then you have customer and shareholders coming in and saying, well, the credit cycle is right on the corner and you guys have to be careful. But with all this market spooking and even with the recent economic forecast and what was a robust economy growing 3-point-some percent, 2018, okay, it's coming down to less than 2%, 2019 and so on. Various people come up with various forecast. Even among the six firms that's covering us, there are some positive, there are some negative regarding -- with the credit cycle here. Now we cannot afford to be erred, okay. So all we can do is be extremely cautious. And I guess, being extremely cautious has two meanings and one is build yourself stronger. And I think we hope -- hopefully did that. We have a good profitability, we've got good capital, we got a good earning margin, we have great efficiency. So we're ready to face the storm if there's a storm at all, okay. So if it is not, obviously, we'll move forward with the full speed ahead.

Okay, good stuff. And then just one for Ed, if I may. Ed, can you give me a sense of what kind of treaties you have in the CD buckets over the next couple of quarters? And kind of where those rates are relative to current deposit rates and what that might mean for your margin as you look out?

Well, the weighted average remaining life, I think, on the CD portfolio is a little over six months, Aaron, so you kind of parse that through. But what we've been seeing on the interest expense side, not only on CDs, but also on money markets and so forth, is we're seeing obviously an upward trend. But what we're also seeing, I think, it's important to point out is that we're seeing a little bit of a leveling off in terms of the overall deposit market rates. Now as it pertains to our own CD portfolio, that will continue to go -- to rise because we will have CDs maturing, as you pointed out, at lower rates and coming back on at higher rates. But we still also -- we really felt the full effect of the rate hike in the end of September, we felt that in Q4. And even though in the headwinds of higher deposit costs, you saw the margin expand by 9 basis points, which actually took us a little bit by surprise as well. We were very pleased with that. Now we're going to have the full effect of the December rate hike in Q1 of '19. So with the leveling off of the market rates on deposits and with the better loan yield and cash field, as Mr. Yu pointed out, we have $600 million in cash, that moves us well. And so I would expect that the margin should hold probably where it's at right now into Q1.

And the next question will be from Stephen Moss of B. Riley FBR.

I guess, just following up on being more cautious or conservative in 2019. Should we think about loan growth perhaps slowing down to, say, the high single digits? Or do you still a loan pipeline that's strong where you can be in the double digits?

Well, I think, origination effort is about the same. We have not -- cutting down our origination, in fact, we're going to continue to expand our loan production staff, okay. But I think what we don't know about is the payoff activities. Like, the first quarter, the payoff is so high, okay. And if -- let's say, if the yield curve become inverse, okay, which I think is -- your firm is predicting the credit cycle is on the corner, right, okay. If the loan yield is going to inverse and if credit quality is going to close, we just have to believe that, I think every one of us in our industry will be slowing down on the origination effort. But right now, we don't see anybody is doing that, and we're not either.

Got you. Okay. And I guess my second question, following up on the OREO property here. Should we think about that there'll be a rehab process, maybe even have it rent stabilized before the property is marketed? Or is it on the market?

I like to think -- sure that was produced by the bankruptcy court, okay, and it shows the property very well, okay? And there are lot of reason -- the things that we got from the bankruptcy trustee is that there is no deferred maintenance in this situation. So it's just -- it's not being leased out. It's not being fully leased out. We need to stabilize it. And maybe some very minor sort of pickup item in the balance, okay? Nick, do you want to add more color to that?

Stephen, this is Nick speaking. I was there during the bankruptcy today disposition time, and I make it sure of both properties entirely. I didn't notice any sort of maintenance behind, and some of the units definitely has been occupied and some of the units was vacant at that time and -- there was a doorman on those properties. It's a really good property though.

Okay, that's helpful. And I guess one last question on the expense front. Wondering how are we thinking about total expenses going forward? They were very well controlled this quarter. And if you have any planned investments in 2019?

Steve, this is Ed. So yes, we were very pleased about the expense control in Q4 coming in at $13.7 million. I think, I was probably guiding a little bit higher than that because we have a few unknowns, but a few things to discuss. First off, going into 2019, we're going to be moving our headquarters into a larger space. So our rental expense, occupancy expense is going to rise with it as well as our equipment expense because we're making some investments up there as well in the new headquarter space. Aside from that, on the expense side, we still have a few IT initiatives, what we call Day 2 Initiatives from the system conversion that we did this year, those are going to be taking place in the first and second quarter. So we'll see somewhat elevated professional services expense as we've seen in the last few quarters. We were at $1.45 million in Q4, which is a little bit high because we still had things going on there. And we had legal fees relating to some of these items we've talked about, especially the New York loan. So that helped to -- actually, noninterest expense would have even been a little bit better. So going forward, I would guide somewhere in the neighborhood of $14 million on a run rate, on a quarterly basis, maybe a little bit lower.

And the next question will be from Tim Coffey of FIG Partners.

Looking at the loan yields in the quarter, how much of that quarter-over-quarter increase was from prepayment penalties or prepayment fees?

We have very little prepayment income. Basically, all our loans are floating rate loans, which does not include prepayment fees, okay? So I will say, it's to the point negligible.

Okay. That's a great pickup [indiscernible]. The -- was the runoff, or -- the runoff in the loan portfolio that you did see, was that just tied primarily to rate hikes? Or was there -- were your competitors being more competitive during the quarter?

Both. Both. I guess, the rate hike has -- I don't know how to put it, maybe rate hike has caused the competitor being more aggressive. But there are more people willing to make lower rate loan deals these days than ever before, okay. Would you say, Wellington, that...

That's very correct. There are banks out there still willing to give out very low fixed-rate loan out here that doesn't make sense.

And we talked -- just to kind of follow up on that, when we talk about the threat of more prepays going into the first quarter, that's kind of what you're talking about? That's the main concern as competitive environment?

Well, the competitive side is the main situation. But also, we have to watch the economy and also the entire economy and all the activities going around. For instance, how many people is going to make the extension plan, given the trade tension levels there. So the loan demand will certainly be affected by these kind of things. And also, how many things that -- if government is going to shutdown for another period of time, TSA will be closed down, nobody travels. I mean, I'm just being extreme, okay? I mean, all these things will affect in the first quarter. If we started to put quarters by quarter, it's kind of limiting ourself, if we [indiscernible] year-by-year. We think in the year, whatever -- first quarter is lower will be picked up, or first quarter is higher will be moderated by over a year basis, okay. However, it's very hard to do it and I -- very hard to say exactly how much we think it will be.

Okay. And since we're on the subject of the government shutdown, is there any product or government program that Preferred Bank uses that's some -- that's currently not available because of the government shutdown that could potentially limit loan growth?

Okay. Just checking. Ed, will you...

None that I'm aware of. We don't have any SBA, so no, it does not.

Nick? Okay.

Yes. For USDA.

Yes, okay. I was just checking. And then, when we look at the additional cost of bringing in a dollar of deposits, these last couple of quarters it's been somewhere around 8 to 17 basis points. Is it kind of in that range? Or in the -- going so far -- in the leasing so far? Or is it, as you mentioned, starting to soften a little bit?

What was the first part of the question...

Ed, you want to answer that? But I guess, you wanted to clarify the question...

Yes. What was it, Tim, I'm sorry?

Sure. Yes, so as we're looking -- as we look towards adding the next dollar in deposits, is the incremental cost of that about what we've seen in the past couple of quarters, say, that 8 basis points to 17 basis points range?

Yes. I think -- yes, the incremental cost, obviously, is up, but again, it really depends, Tim. We're in a situation now where we're still trying to grow demand deposits and obviously, those at 0 interest rate, obviously, brings the cost down. But certainly on the CD side and the money market side, yes, the cost to acquire has gone up significantly. But I think if we just churn through our own portfolio, it's going to be a kind of a slow process. And then I think at some point, that'll start to reverse as well.

[Operator Instructions]. The next question will be from Don Worthington of Raymond James.

Getting back to the New York properties. When we first disclosed the issue with the one credit relationship, there were a couple of single-family properties in there too, what's the status of those?

Thank you. And let me just try to -- and Nick will add on to it, okay? The single-family one property is in the Hamptons, okay? The most recent valuation still stands around $5 million. We were owed $3 million, okay? The other property is in the Westchester County, okay? That was about -- the evaluation is a $4 million security, we're owed $2.6 million. Am I correct in that, Nick?

The most updated appraisal for dollar line has been dropped a little bit.

Okay, go ahead.

So two single-family loans, because the borrower didn't file bankruptcy, so we cannot pick it back through the bankruptcy proceeding. Currently, it's under a still level, just normal foreclosure process. So one of the loan, we -- for $2.6 million, which will be -- scheduled to be auctioned in April. And the other one is scheduled to be auctioned in June some time, if there's no delay.

Okay. So therefore, I mean, when you say the appraisal level has dropped a little bit, what's the most recent one?

The most recent one is $3.2 million for that property, but our loan is only $2.6 million. So there's still no loss at all. We have a solid buyer in line now for over $3 million.

Okay. Great. Thanks for the update. And then did you receive a special dividend from the FHLB this quarter?

Yes. Yes, we did.

How much was it? And then, where did you report it?

It was $193,000, and it's reported as part of investment income.

Okay. So that helped the margin a little bit this quarter then?

Yes. But those yields, those FHLB stocks, I shouldn't even say this on the call, have been very, very [indiscernible].

Yes, yes, okay. And then in terms of the net charge-offs of $6.5 million, was that entirely related to the New York properties? Or was there anything else in there?

No, actually that's very [indiscernible] New York property accounts for most of that. They are cleaning up all the old accrued loans on the properties -- on the loan being resolved, okay? That accounts for about $1 million or so, right?

Yes, $950,000. Around $1 million.

Around $1 million or so, okay? So they also complicate situation and that when you have a charge-off, the economy rules calls for you to calculate historical reserve to change based on the way of being calculated. So the reserve number will also change, the adds or subtracts on different things. So all in all is, I will say, most of the things are related to the New York thing.

Okay, great. Well, congratulations on disposing off that $4.1 million property that had been [indiscernible] quite a while.

Yes, that seemed to get lost in the conversation.

And ladies and gentlemen, this will conclude our question-and-answer session. I would like to hand the conference back to Mr. Yu for his closing remarks.

Thank you so much for your attention. That -- for -- as I said that we will approach with extreme -- well, I shouldn't say caution, extreme prudence, yes, with our new economy in 2019 and everything else. But again, that we hope everything is not as bad as the most recent stock-market meltdown that created all the conversation. Thank you so much. Thank you.

Thank you, Mr. Yu. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. At this time, you may disconnect your lines.