Good afternoon and welcome to the Preferred Bank first quarter 2021 earnings conference call. All participants will be in a 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 Jeff Haas of Financial Profiles. Please go ahead.

Thank you Betsy. Hello everyone and thank you for joining us to discuss Preferred Bank's financial results for the first quarter ended March 31, 2021. With me today from management are Chairman and CEO, Li Yu, President and Chief Operating Officer, Wellington Chen, Chief Financial Officer, Edward Czajka, Chief Credit Officer, Nick Pi and Deputy Chief Operating Officer, Johnny Hsu. 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 that 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 would like to turn the call over to Mr. Li Yu. Please go ahead.

Thank you. Good morning Preferred Bank's first quarter income was a bank record of $21.2 million or $1.42 per share, compared to prior quarter quite favorably because this quarter we have only 90 days as compared to the fourth quarter of 92 days. In addition, in this quarter we have a quarterly specific payroll taxes on bonus distribution payout. This quarter featured strong deposit growth on an annualized basis 25%-plus. We are thrilled to have these additional deposits because it gives us more opportunities to grow and to do many things. But we have also noticed the excess cash flow as being moderately compressing our capital ratios, return on assets, net interest income and net interest margin. First quarter loan growth was $104 million or 10.4% on annualized basis. We have noticed through our various contact with our customer and generally they are more optimistic about the future of our economy and now they are planning or already taking action to commit to more business expansion transactions or investment transactions. Some of them even went as far as feeling about the potential inflation and then wants to commit their resources to assets at this point in time. To meet this increased demand, we have one, added a team of four relationship officers and total team of six in Houston, Texas. In California, we have so far added five relationship officers and will continue to look for new talents throughout the year. We are working on areas in New York and other places for new relationship officers. Internally, we are convinced that the next set interesting move will be going up rather than coming down. So with that, we are actively and we have been always been preparing ourselves to have our balance sheet become very assets sensitive. As of March 31, credit matrix seems stable. The total deferred COVID-19 related loans was down to $25.8 million, which is quite moderate. Operating expense was slightly higher, but considering the quarter-specific payroll taxes, it is not much different as compared to previous quarters. And as you are well aware of, our business model is that we have one-on-one high-touch service relationship with our customers and we eagerly waiting for the economy to open up so we can reach out to our customer more actively. Thank you very much. I am ready for your questions.

[Operator Instructions].

No questions there?

Our first question comes from Matthew Clark from Piper Jaffray. Please go ahead.

Hi. Good morning everyone.

Hi.

Good morning.

If we could just first start on the margin and the contribution from PPP. I don't know, I don't think it's that material. But I was trying to hone in on the core margin, excluding PPP, if you have the contribution in interest income this quarter?

The best answer by Ed, okay.

Yes. I would say, Matthew, due to the fact that PPP totals about $94 million, the rate including fees was about 2% in the most recent months. So it's pretty negligible against a $4 billion portfolio. So I would say probably maybe a basis point on the margin.

Okay. No worries. It's fine. Okay. And then on the outlook for the margin, you guys put up some pretty good growth. And maybe you can speak to the rate on new originations? And I know you have a lot of floors on your existing portfolio, but given the growth, is it fair to assume that we should see some incremental pressure on the margin, just from the new business?

Okay. Matt, margin prediction has become a situation that we watch all the time. For instance, just to be statistically mentioning, for the first quarter we have a payoff rate is 90 basis points higher than the rate of new loan being done, okay. This has widened up from previous quarter of 32 basis points, okay. And it's a growing trend when you have a low interest rate environment, for loan extended period of time people sort of kind of pricing their loans lower on the competition side. And also that you mentioned that we have nearly a large portion of our loans has a floor, yes. And many of the floor was mainly, about two, three years ago was quite high and all the customers are coming back and renegotiating on those floors. And in many cases, we have to agree to the changes they want. So these two factors going forward is that we will have additional negative pressure to the margin NIM, okay, not net interest income. But what the positive force is, it continues reducing of the interest cost plus the potential interest cost reduction, the refinance of the sub debt and also our pools, okay. So if we have strong growth, it will balance out some of the margin compression situation, okay.

Yes. That's great. Yes. NII is clearly the focus. And then just on the C&I growth, this quarter also very strong. Could just give us a sense for where that came from, maybe by the industry type or business type this quarter?

Okay. You want to mention that? And I have some specifics but do you want to mention that first?

Yes. Sure. Hi Matt. This is Wellington. Again, as Mr. Yu mentioned that our clients are bullish and very happy and they see opportunity. Some existing client relationship is through business expansion and also taking over some new relationship that have to the base of our industry, okay. We have, for example, there were produce packaging, healthcare professionals, data centers, communication. These are some of the example, also like the building material like pipes, fastener, et cetera.

Just to also tell you, the new clients represents most of the growth but they are about additional usage. Our interest usage by our existing client in the neighborhood of $40 million.

Okay. That's helpful. Thank you. And then just on the non-interest expense side of things, maybe for Ed. In terms of the run rate, it sounds like you guys have hired some additional relationship officers that probably put a little bit of upward pressure on that comp line. I guess how should we think about the overall run rate and the potential for additional hires for the rest of the year?

So yes, we don't have the Houston LPO, for instance, personnel. That's not a full baked quarter in there. That's about half the quarter. So in addition to that, the payroll tax expense was fairly high in Q1, as it is every year because we pay our incentive compensation every February of every year. So that's a bump of about $500,000 to $600,000 on the run rate. So I would say going forward, we were 6.65 in this quarter. I would say going forward will be probably right around 15 would be my guess.

Okay. Great. And then maybe just lastly on the loans that were sold. Can you just give us some color there in terms of what exactly was in the amount that was sold and the property type and situation in general?

Okay. We have one SNC loan was downgraded substandard, okay. And we don't want to keep this loan in our portfolio because it's been substandard, okay. So we sold it.

Got it. Thank you.

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

Thanks. Good morning. I wanted to get just to get a little bit of color in terms of your comments about working to be more asset sensitive. I mean you talked about floors a little bit. But would love to get an update on today, the amount of your portfolio that's floating? How much of the portfolio is subject to floors? And how in the money the floors are? But any commentary on what you are doing to become more asset sensitive as you noted in the press release would be appreciated.

Ed, you have it handy.

Yes. Hi Gary. Of the total book and again this is as of year-end, I apologize, we didn't quite get it updated in time for 3/31 because it requires a lot of data work. But of the total book, 82% floating rate, 18% either fixed rate or tied to CDs and secured by CDs. Of the floating rate, over 99% have floors, okay. In terms of where we move going upward, Gary and I think that's where you are headed in terms of interest rate increases, the first 25 basis points only moves about $50 million of the portfolio. The next $50 million moves another $42 million. The next 25 basis points moves another $12 million. And then after we get to 75 basis points, we really start to see a majority of the portfolio start to reprice. So you can assume that we are roughly 50 to 75 basis points in terms of upside down on the floors.

That's great. I appreciate the color. And then in terms of loan growth for the year, obviously you talked about the new hires, good quarter ex-PPP this quarter. Expectations for growth for the remainder of the year based on pipeline and what you are seeing here from customers right now?

Well, here's the situation that I have always been saying that, our crystal ball is kind of not that clear, okay. So I like to think that the sentiment among all our staff is that business is increasing. People is more active. But to quantify it on a percentage is difficult. And as you know that historically we have always been in the reasonable organic growth. And obviously that we have dedicated ourselves to continue at least the historical level. But again, there is a lot of variables in economy, when it's open, what time it pick up speed and those other things, okay. So I really cannot answer to quantify it but I just say that we feel that the growth will continue in the next few quarters.

Okay. And just with regards to the Houston LPO and the hires there, what's the focus in terms of lending there? Is it C&Is? Is it across real estate? What's the target?

Yes. Okay. Outside of California, we are obviously that we started off with CRE and gradually as we move into the community then we are more gradually getting more C&I. In the California new hires, the two new loan officers are or five new loan officers, four of them is C&I.

Okay. So Houston initially will be more commercial real estate focused. That makes sense.

Yes.

Okay. Great. All right. Thank you for taking my questions.

Our next question comes from David Feaster from Raymond James.

Hi. Good afternoon everybody.

Hi David

I would just like to get an update on the Houston LPO. That's pretty exciting. Just curious to hear maybe how the contribution was in the quarter? How the pipeline is trending? And just I guess kind of the early read on that.

Well, do you want to answer or you want me to answer that?

Well, we can both answer that. I think that our pipeline, our initial first pipeline meeting was about weeks ago, they presented over, I would say, 10 real doable deals. So now it's just a matter of getting their back-office people in place and start putting the deals together. And just after this meeting, we have a weekly pipeline meeting with them. And so it looks like so far, the officer that we have here, they know the market. They have customer base and seems like a customer are portable. Mr. Yu?

Okay. David, number-wise speaking, there is no contribution from Houston in the first quarter, okay. And as of today, we have not booked any loan yet. But a couple of them are ready to be closed.

Okay. That's encouraging. The growth is going to clearly be there. But just maybe more probably, just given some of the recent consolidation and disruption in Texas and across the country, does that create an opportunity for maybe some more of these de novo type expansions? And what markets are kind of at the top of your priority list?

Well, you know that we have people-specific type of expansion. In other words, we always find the banker and the team. Then we go to the area where he or his, hers expertise is in those areas, have a relationship in the area. So I am not sure which area that will come up first. We are working on several areas right now, okay. So we are not sure which one will end up the first, okay, meaning the available talents that can be hired. But there are about three or four reviews we are currently looking at, okay. And other regions will be just, maybe by the good grace of God, will follow on that, okay.

Yes. Okay. And then maybe just following up on your commentary on new loan yields. How are new loan yields trending? You talked about 90 basis point spread. Was that more of a function of the mix or continued pressure on pricing? And has the peaking of the curve at all allowed you guys to maybe have better pricing in your conversations?

I hate to quantify my answers. I just got the information couple days ago and I have not dived enough into that. But my first reading of the situation is that this quarter that the mix is one of the issue, okay. And that it shouldn't be as big as 90 basis points because last quarter was 32 basis point and with the so-called day in, day out, it means there are other deals coming in, okay. So it should be less than 90 basis point. But we cannot really quantify that much yet. But the trend is, it probably will continue to compress a bit in terms of year discounts. So just because once thing competition, okay. And people are pricing their loans on a 10-year fixed rate below our net interest margin, okay. So unless there is one or two very specific cases that we would get them for because other reasons, we cannot compete with what.

Yes. Where do you see the most competition? Do you find it from the larger banks? Or is it the smaller community banks that are being the most competitive?

Larger banks.

Okay. All right. Thanks everybody.

Our next question comes from Tim Coffey from Janney.

Great. Thank you. Good morning everybody.

Hello Tim.

Mr. Li Yu, I wanted to ask you about commentary on the deposit growth in the quarter. Would be any different than what Wellington was describing in terms of the loan growth that you saw more activity by clients as well as introduction of new clients to the bank?

Well, the process inflows actually, most of them coming from our existing clients. We are not taking any new clients in the quarter that represent a huge deposit basis, okay. And it can be more than one or two, okay. But it come basically from our existing customers, okay. So it grows, that means you know, generally, we feel our customer base financial condition is getting better, okay. So this is what we observed.

Okay. With the tax filing date being pushed back, do you anticipate any kind of outflow in deposits that's well above the seasonal type that you would see in 2Q?

Well, I hope, it is my selfish hope that the deposits, we will lose a couple hundred million dollars deposit during the tax date, okay, because that would improve our net interest income.

Yes. That would definitely help.

It should be reducing, likely to be reducing a bit.

Okay. And then, Ed, as we look at the time deposits maturing this next quarter, do you have any idea like, can you share what the volume might be and what the price differential could be?

I do. I can.

Great.

Tim, it's just under $500 million be maturing over the second quarter at an average rate of 95 basis points to be replaced somewhere around 50 basis points. We have actually just recently lowered again our offered CD rates. So that's the beta for the quarter.

Great. Thanks Ed. And then Mr. Yu, the Houston LPO, I mean obviously you have got a really experienced team leader out there and the goal that you set of loan origination of $150 million by the middle of next year, are you getting a sense that you could do better than that or is it too early?

Well, so far this is a goal that our Houston leader has set for us, okay. So obviously we have the psychology of our staff to be worried about because if you set too high to push a goal, people get negative reaction out of that. But obviously, we will do everything, okay. If they can produce $500 million deals in the first year, we in Los Angeles can be sitting on our hands. But judging from the prior experience we have to starting with a new office, we think that is close to reasonable and we hope it's going to be better.

Okay. All right. Great. Thank you very much for that. Those were all my questions.

Our next question comes from Andrew Terrell from Stephens.

Hi. Thanks. Good morning.

Hi Andrew.

Good morning.

So trend was pretty positive this quarter and it was nice to see the negative charge-off number. Can you just remind us what the outlook is for the loan loss reserve moving forward as we go throughout this year?

Well, let me just, first of all, it's a seasonal calculation, okay. So I want to say something first and then Nick expert in seasonal to talk about that. And first of all, let me recall your memory, okay. In 2020, we provided loan loss provision of $26 million. We had a charge off of $5.4 million. So the $21 million must have one, two areas. One is the general macroeconomic situation. The second of all is what we called reserve for proactive downgrades, okay. And we like to think some of them is quite proactive, okay. Now whereas after we made those provisions, these credits did not deteriorate. So somewhere along in the future periods, it will be upgraded, okay, together with the general improvement in the macro situation. So it is conceivable that we may have some releases in next year, okay, in this latest year around mid this year. I would just don't know because it depend on the calculation. But I want to tell you, personally I am very happy that we don't have to use up the receive in the first quarter. It's kind of nice to retain the availability. So Nick, you have anything to add?

Tim, just like Mr. Yu mentioned that for this year's projection, I believe, Andrew, it's not as last year because the quality of our loan portfolio is quite stable at this time in terms of declining in the volume of deferment request and the volume of downgrade changes and nonperforming assets as well as past due 30 days loans are quite limited. So for this year, we believe that it is supposed not to be like last year. We try to make, just like Mr. Yu mentioned, we will make a reserve to prepare ourselves during the pandemic time. So this year or next year, probably we don’t need that much of a reserve and will be have some revision. That’s the picture at this time.

Okay. That’s extremely helpful color. I appreciate it. Just thinking about some of the liquidity on the balance sheet, obviously a lot of liquidity and you guys are not alone and it maybe kind of if deposits flows in, it can sway this near term. But can you just remind us over the longer term where you like to manage the cash balances, just as a percentage of total earning assets?

Okay. It's a two edge sword in a situation. There are times we are fighting for deposits like crazy, okay because the loan growth and generally the tighter deposit market. And this happened to be the countries are flush with cash. And I was reading the other reports, other banks, it all seems to be everybody is flush with cash, okay. but as an operator, I can only speaking as an operator and not a financial engineer, okay. As an operator, deposit is just like capable staff. You need to get it when you see it. And even though it is a short term negative but long term it's productive. What we just hope to see is, we get deposit gradually reducing our costs and we slowly grow into it and will hit the differences in so-called a negative number because once we turn away certain deposit, we turn away such a relationship. Would it come back when we need them. So as an operator, our consideration is slightly different.

Okay. Understood. Thank you guys for taking my questions and congrats on a great quarter.

Thank you.

[Operator Instructions]. Our next question comes from Steve Moss with B. Riley Securities.

Hi. Good morning guys.

Hi Steve.

Hi. I had just one question here.. Most of my questions have been asked and answered. In terms of just the other half of the deposit base here, your interest-bearing savings and checking deposit was basically stable quarter-over-quarter in terms of cost. Just wondering if those were repriced lower here with CDs?

The majority of the repricing within that category, Steve, took place in 2020 when rates were coming down quite precipitously. So there has not been any repricing in the money market or now or savings account categories.

Going forward, the repricing, if anything, is going to be very, very moderate because we already we are already close to the low of our peer group.

Got it. Okay. Well, that’s my only remaining question. Great quarter. Thank you very much.

Thank you.

Thanks Steve.

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

Thank you very much. You know, I hope we are really in the last leg of this pandemic. So I pray that everyone stay safe and we get back in which I hope is a new boom cycle for our economy. Thank you very much.

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