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Edited Transcript of PFBC earnings conference call or presentation 18-Jul-19 6:00pm GMT

Q2 2019 Preferred Bank Earnings Call

LOS ANGELES Oct 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Preferred Bank earnings conference call or presentation Thursday, July 18, 2019 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Edward J. Czajka

Preferred Bank - Executive VP & CFO

* Li Yu

Preferred Bank - Chairman, CEO & Corporate Secretary

* Nick Pi

Preferred Bank - Executive VP & Chief Credit Officer

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Conference Call Participants

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* Aaron James Deer

Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst

* Andrew Terrell

Stephens Inc., Research Division - Research Associate

* Donald Allen Worthington

Raymond James & Associates, Inc., Research Division - Research Analyst

* Gary Peter Tenner

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Tony Rossi

Financial Profiles, Inc. - SVP

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Presentation

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Operator [1]

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Good day, and welcome to the Preferred Bank Second Quarter 2019 Conference Call and Webcast. (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.

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Tony Rossi, Financial Profiles, Inc. - SVP [2]

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Thanks, Chuck. Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the second quarter ended June 30, 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 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.

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [3]

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Thank you. Good morning. I'm pleased to report 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 -- extraordinarily large loan production. Loan increased over 21% for the quarter. Although some of the increases is related to a very unusual heavy drawdown by many of our commercial line customers with balances -- with some of them with balances since -- I mean reversed, okay. And also, it is also due to some other pattern fluctuation in payoff activities. But even without these 2 factors, our loan origination is one of the best in recent periods.

Deposits, however, decreased $43 million. One of the reason is that we witnessed a very heavy drawdown of the bank balances by our customers in the last 10 days of June. Some of these balances have been since reviewed, okay. Another -- maybe perhaps another reason is that during the quarter, we -- well, correctively -- correctly predicted the yield movement -- 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 maturing. These deposits carry the same interest or slightly higher interest cost -- interest -- average interest rate than we are presently paying. For the first quarter, the maturing time certificate carries even larger interest cost than what we are currently paying.

For the quarter, net interest margin come in at 4.07%, which is pretty much as internally expected. 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 2/3 of a very large portion of our loans carry a interest rate floors. These floors will be serving as protective mechanism during a rate reduction environment, especially when we are continually making new loans at the current market rate in this floor and with all loans being -- continuously being paid off, which carries lower floor rate. This protection seems to be improving as time go on.

To reiterate, we have announced a $30 million capital stock buyback recently, which would definitely serve as a -- will give us the opportunity to manage our capital more efficiently.

Thank you. And I'm ready for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Aaron Deer of Sandler O'Neill + Partners.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [2]

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Li, the C&I growth this quarter really was very impressive. I was hoping maybe you could give us a little bit more color behind the types of customers and what caused that growth, and maybe the draws that you mentioned that were more kind of 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.

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [3]

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Okay. Well, the C&I growth this quarter come from 2 different area. One is the new loans we are making, which is also one of the best in our recent quarters. The new loans we're making during the quarter included some of the -- for instance, there's a couple of longtime customers who usually had a small balances of -- at 0 loans, they suddenly is starting to us to make a big C&I loan for them and also with several new customer in the fields of distributions, okay, and financial services, okay. So -- and a wide variety of small loans, okay.

So the drawdowns coming from the -- I mean the unusual drawdown comes, I think, this quarter end, because it seem to be that 3 different type of people, one type of people is that they have emergency needs such as a very good customer of ours have certainly have a acquisition. So they use their own cash and our credit line to close a deal for the quarter, okay. So there is also a number of customers existing with a buying property with their own cash and our credit line, okay. And also, there are people as -- very relative small amount of people in view of the tension in the trade tariff trade war has started building up the inventory a little bit before the tariff become -- really becomes effective now.

So it's all these factors that's happening at quarter end. Some of these drawdown 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 it, work on it. Sometime it all happens such as this quarter. Sometime very little happens in 1 quarter. But overall production going to third and fourth quarter, I have little visibility about fourth quarter. But third quarter looks like our normal production will be the same. In other way, it's pretty much tracking second quarter's loan production, okay. However, as second quarter included those quarter-end drawdowns for special purposes since being repaid back, it may negatively affect the third quarter in term of what the loan growth is.

So I don't know whether I made this clear or not. Anybody -- and anybody with a better ways of explaining for me?

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [4]

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Okay. Well, that's helpful. The -- looking at the other side of the balance sheet, just given that you had the strong loan growth and the kind of 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 you -- now that you are where you are, if you were to have another strong quarter of growth as you had, what -- 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 a funding that you need for -- to support future growth without having to really ratchet up your deposit rates?

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [5]

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Well, with the indication that seems to be the third quarter deposit situation would be able to build up some deposit. For instance, as of today, our deposit balances of $100 million is higher than the quarter end, okay. So we have internally making whole lot of effort and try to continuously that -- develop deposits. Our current deposit rate is very competitive, okay, with our competitors, okay.

And second quarter seems to be -- that's a little bit of unusual for us because seems to be at the end of -- as I said, in the last 10 days of June, everybody has drawdown their balances. Many of them has drawdown because they have a special deal to be done. They close it. And since then, they either find a new resource, refinance or do other things with it, okay. So that's part of the reason our deposit is back up. So we will put our initiatives and try to rebuild the deposits, try to reestablish through our times our excess liquidity situation. We will always be very comfortable to have the deposits first and the loan afterwards.

So I guess it's an indefinite answer but a definite effort.

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Operator [6]

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

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [7]

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

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [8]

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Well, okay. Let me -- I have it.

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Edward J. Czajka, Preferred Bank - Executive VP & CFO [9]

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We have it. Hang on.

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [10]

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Have it. Hang on. Okay. Okay. Hang on. Okay. We have here loan origination yields about in the 5.9% average. But a lot of time depend on the usage that -- the usage of that would change the proportion of things.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [11]

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Okay. Okay. And then could you give us any color on kind of the sequential increase in service charges and other income? Is there anything in there that was unusual? Or how should we be thinking about that for the back half of the year?

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [12]

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You want to pick that up?

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Edward J. Czajka, Preferred Bank - Executive VP & CFO [13]

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Yes. Gary, in service charges, there was about $50,000 of what we would term as somewhat nonrecurring item. With respect to LC fee income and other income, that looks very much standard.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [14]

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Okay. And then you addressed the spike in loan growth very, 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 in the back half of the year compared to previous years given the trade situation?

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [15]

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Most of our customers, they're not sizable enough to really be able to tell it in -- with any kind of 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. But we don't hear any -- we just like -- we just -- and in fact, we're looking at the Wall Street information for leadership of this kind of information. So we just try to stay alert to whatever is coming.

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Operator [16]

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The next question comes from Tyler Stafford of Stephens.

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Andrew Terrell, Stephens Inc., Research Division - Research Associate [17]

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This is actually Andrew Terrell on for Tyler this morning. Maybe just to start on the NIM. From -- just from a high level, how do you guys see the NIM trending throughout the year and then kind of into 2020 if we do get a couple of rate cuts from the Fed?

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [18]

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Well, obviously, in rate cuts, every one of us will see revenues reducing, okay. And with asset sensitive -- our loan -- rate-sensitive portfolio, our rate will be reducing. But if you have a couple of rate cuts, I expect the first cut will affect more than the second cuts because our floor came into play. And as our TCD were continually maturing and being repriced at a lower cost, okay. Currently, their cost is already going to be repriced at the lower level. But with rate cuts, I expect every one of us will pay less for TCDs, okay, that the benefit will still be increasing. So somewhere along the line, there will be a cost that it will not hurt us anymore. So...

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Andrew Terrell, Stephens Inc., Research Division - Research Associate [19]

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Great. Maybe just a little bit more on the floors, on the loans you were referencing. Can you give any kind of color around maybe where the average floor rates are?

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [20]

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Average floor rate is tough, made through the -- throughout the past 5, 7 and 6, 7 years. They are loans with very long seniorities that carry really low rates. They are rates that -- they are loans being made recently. It's carrying the recent floor rate. But the current floor rate situation, as we said, a good portion of our loans, maybe 15% of our loans, carry a floor rate, okay, at the current effective rate, okay. So the rate cuts will not be affecting us. But with each cut, as they go on, there will be more rates, more loans being now affected.

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Andrew Terrell, Stephens Inc., Research Division - Research Associate [21]

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All right. That's good color. Maybe last one for me. Just now that we have the share repurchase plan approved, just want to get your thoughts on how you guys are thinking about utilizing repurchases moving forward?

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [22]

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Do you want to answer the question?

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Edward J. Czajka, Preferred Bank - Executive VP & CFO [23]

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Yes. Well, obviously, we announced it. We have to wait until the blackout period is over with. But our goal is to start with the repurchase 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 systematically repurchasing small amounts of shares.

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [24]

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Small amounts of share every day. Yes.

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Operator [25]

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(Operator Instructions) Our next question comes from Don Worthington of Raymond James.

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Donald Allen Worthington, Raymond James & Associates, Inc., Research Division - Research Analyst [26]

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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?

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [27]

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There is actually a small movement around that, especially the nonbusiness customers, okay. They're moving from the DDAs or excess DDAs or money market account, which carry a lower rate to TCDs, okay. In fact, every time there is a rate increasing environment, we all expect this thing to happen. And in fact, our regulators even told us way back, says when the rate is increasing, says you have -- have you guys do the interest rate risk when you manage it and much of your deposit will be turned into the higher rate deposits, okay, which has been happening. But as we continue to -- what we developing -- as we're continuously developing our business accounts. So our rate of increases -- our movement of the segment is kind of a moderate.

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Donald Allen Worthington, Raymond James & Associates, Inc., Research Division - Research Analyst [28]

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

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [29]

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We have internally obviously have made the review of all our loans, especially with heavy trade tariff-related items, okay. 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 estates in the Los Angeles area, and most of our real estate in the infield area and heavily is downtown west. Based on the many of the current reports from many of your colleagues' firms, they are reporting that they'll check where the real estate industry is, in San Francisco, Los Angeles deal very, very high. We have made a review on the New York real estate regarding the new rent control initiative. We have very little exposures there. I'm not -- I'm taking words out of your mouth, okay. Nick, could you put some color on that, okay?

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Nick Pi, Preferred Bank - Executive VP & Chief Credit Officer [30]

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Yes. New York multifamily segment is not substantiating our portfolio at this time. And also, just like Mr. Yu mentioned, the tariff effective loans is quite minimum at our bank based on our business models. And we have been closely monitoring all those loans, and we didn't really notice any kind of an active -- severe negative impact to our borrow.

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [31]

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So far, hopefully.

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Nick Pi, Preferred Bank - Executive VP & Chief Credit Officer [32]

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So far.

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [33]

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Yes.

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Donald Allen Worthington, Raymond James & Associates, Inc., Research Division - Research Analyst [34]

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Okay. Great. And then one last question. Did you purchase any loans this quarter? Were they all originations?

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [35]

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No purchase.

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Nick Pi, Preferred Bank - Executive VP & Chief Credit Officer [36]

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No purchase.

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [37]

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In fact, we participate out several loans.

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Operator [38]

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Our next question comes from Aaron Deer of Sandler O'Neill + Partners.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [39]

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Just a couple of quick housekeeping questions on the expenses. Ed, I was surprised to see the occupancy cost drift lower given that you guys have the new headquarter space. Is this a good run rate for that line item?

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Edward J. Czajka, Preferred Bank - Executive VP & CFO [40]

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It's going to be a little bit higher than what you see, Aaron, because we implemented ASC 842, the lease accounting standard. And so 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 back up. I know we're at $1.270 million. I would look for something probably north of $1.3 million.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [41]

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Okay. And then I'm guessing you guys are through with 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?

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Edward J. Czajka, Preferred Bank - Executive VP & CFO [42]

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That's a good question, Aaron. For the most part, the day 2, day 3 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.

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Operator [43]

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

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [44]

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

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Operator [45]

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