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

Q1 2019 Preferred Bank Earnings Call

LOS ANGELES Oct 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Preferred Bank earnings conference call or presentation Thursday, April 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

* 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

* Stephen M. Moss

B. Riley FBR, Inc., Research Division - Analyst

* Timothy Norton Coffey

FIG Partners, LLC, Research Division - Former VP & Research Analyst

* Tyler Stafford

Stephens Inc., Research Division - MD

* Tony Rossi

Financial Profiles, Inc. - SVP

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Presentation

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Operator [1]

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Hello, and welcome to the Preferred Bank First Quarter Corp. 2019 Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to your host today Tony Rossi of Financial Profiles. Please, go ahead sir.

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

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Thank you, Keith. Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the first quarter ended March 31, 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.

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

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Thank you. Good morning, ladies and gentlemen. I'm very pleased to report that during this quarter, we're able to dispose 3 of the 4 nonperforming assets, which is previously mentioned as New York loans. With these resolutions, we're now having our assets quality getting closer to the pristine level. Even though, we're not terribly excited with the $1.4 million loss we have to take, but then last quarter, we had a $2 million-plus gain. I guess it's a shame that we do not have the ability to make it happen in the same accounting period.

For the quarter, the company earned $18.7 million or $1.23 per share including the loss mentioned above, slightly better than last quarter, about 14%, 15% better than last year. And overall, we are pleased with the operating results. Loans and deposits continue to grow at the 9% level.

Loan continue to be played by the heavy payoff activities. However, deposits seems to be -- the market rate competition for the deposits has subsided a bit. We have not made much change on our deposit rate, principally because that we had a $600 million-plus cash on our balance sheet.

I'm also pleased to note that early indication in April seems to be that the loan payoff activity has slowed down a bit. We are holding our breath, hope that's going to be continuing.

For the quarter, net interest margin was steady and our efficiency ratio was 36%. Without the loss, efficiency ratio would have been on the 33% level.

Everyone knows that Preferred Bank had to have a very asset-sensitive loan portfolio. 90% of our loans are floating rate loans, most of them prime related. However, we have been building over the years protective mechanism into it. 70% of these floating rate loans have a floor, okay? And we are continuing -- we will continue to prepare ourselves to operate under various rate scenarios. Thank you. 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) And the first question comes from Tyler Stafford with Stephens.

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Tyler Stafford, Stephens Inc., Research Division - MD [2]

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Congrats on getting out of the New York properties. Hey, I just wanted to start on the loan growth. It looks like good growth to start the year. And Mr. Yu, I know, you mentioned the 9% pace. Is that effectively how you're thinking about loan growth for the remainder of the year, for the full balance of the year considering the good start to the first quarter?

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

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Well, if we have a payoff activity slowdown, I'm actually looking for better than 9% loan growth there. And historically, our staff have been able to initiate lot more loans than the current results. So we are holding our breath and hopefully that payoff activity will be slowing down.

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Tyler Stafford, Stephens Inc., Research Division - MD [4]

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Good. Okay. Got it. Ed, can you talk about the rate for the new and renewed CDs at this point? And what the cost of the time deposits that are maturing rolling off? Just kind of basically the front book versus back book on the CD side?

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

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I would have Ed answer first and then I will add on to it, okay?

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Edward J. Czajka, Preferred Bank - Executive VP & CFO [6]

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Hopefully, it's along those same lines. Yes, so we have -- primarily, what's been coming off is between the 6-month and 1-year terms, Tyler, and so those were taken on anywhere from September of last year to March of last year. And so they're rolling off in the mid- to high ones. The new stuff we're putting on is anywhere typically still from 6 months to a year, and that's coming on anywhere from 2.20% to 2.50% at this point. Ed, but -- however because of the overall duration of that when you look at the overall CD book, more than half of that now has already been repriced and is baked into the cost of funds.

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Tyler Stafford, Stephens Inc., Research Division - MD [7]

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Okay. Then just lastly from me, with that said, Ed, just can you talk about how you see then the margin trending from here given the current yield curve and the Fed seemingly on pause? How does the, I guess, cadence of the margin progress throughout the year given that funding?

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

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I think going forward, there will be some compression as the -- as CDs getting repriced, okay, and renewed and repriced. However, that there are number of mitigating forces. One of them being that the resolution of the troubled assets has created a new earning asset for the bank and obviously that growth is adding a whole lot of margin, should I say, benefits in certain trends. And with all that, we are internally prepared for some mitigation, but we're doing everything we can try to tweak and mitigate that.

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Operator [9]

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And the next question comes from Steve Moss with B. Riley FBR.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [10]

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I guess on -- with regard to the cash position and obviously, Mr. Yu, you mentioned that deposit competition has slowed. Should we expect deposit growth may slow or -- and/or will you consider remixing some of your cash into securities given a more dovish Fed?

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [11]

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For your information, we're starting to do it gradually, but we'd like to take small steps forward. Nobody really can tell me how the rate's going to be. Yes.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [12]

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Okay. And I guess the other thing here on -- your capital position continues to grow given the slower loan growth. Any update with regard to potential repurchases or what you're thinking about capital deployment these days?

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [13]

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We -- I guess it's no secret by now that we're making our proxy statement, seeking for shareholder approval -- preapproval, not that the Board has not finalized it, preapproval for us to buy back some stock. The reason here that previously we have sent in the application to the State of California, which is our governing body, and they have required us to have preapproval by the shareholders. So building in our proxy statement and waiting for them to reply to give it okay to go ahead, building that.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [14]

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Okay. That's helpful. And I guess one more question for me just on expenses here. Well controlled, again, I'm just wondering what your expense -- expectations are for the second quarter?

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Edward J. Czajka, Preferred Bank - Executive VP & CFO [15]

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Well, I think minus the loss on sales, Steve, I think we could probably look for something similar to what was in Q1. Although, there's some things in Q1 typically that we hit -- that hit every year, one of which is payroll taxes because the bonus payouts occur in the first quarter. So we won't have that headwind. So I would look for noninterest expense to be relatively flat minus the loss on sale in Q1.

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Operator [16]

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And the next question comes from Aaron Deer with Sandler O'Neill.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [17]

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Just following up on that last question. The -- I think you guys should be finishing up on I think what you're referring as your day 2 and expenses related to the conversion. And I'm just wondering what kind of cost saves we might see in the back half of the year with those wrapping up?

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Edward J. Czajka, Preferred Bank - Executive VP & CFO [18]

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Well, we will see a little bit in cost saves on the IT and professional services line item, Aaron. But I think the growth in other areas such as personnel expense and occupancy might overtake those savings. So on a net-net basis, we'll still be looking at some growth in noninterest expense on a year-over-year.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [19]

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Okay. And related to that occupancy that -- with the headquarters adding on to that, is that in the first quarter run rate or we are going to see that in the second quarter? Is that when that hits?

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Edward J. Czajka, Preferred Bank - Executive VP & CFO [20]

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It's going to be in the second quarter. We moved up here in March. So we'll be seeing that in the second quarter. The other thing to keep in mind in Q1 is we implemented ASC 842, which is the new lease accounting standard. So that had a small adjustment on our lease expense to the good for us for Q1. Obviously, that won't be repeated in Q2.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [21]

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Okay. And then going back to the discussion on the CDs. It sounds like you have continued to keep your -- the CD portfolio, if you will, pretty short. So should we see rates start to drift back down? Presumably, your funding cost, one that shouldn't have been lockstep with your prime-based stuff, but at least the lag there won't be too severe. Is that right?

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

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We could see the rates come down. Because early indication that rates started to level off a bit and we didn't -- we don't see the daily increase putting on the paper by almost everybody. And certainly, we hope that will be the case because, frankly speaking, and I don't know how -- if rates continue to escalate like the last 6 months, how our brothers and sisters in the industry can live then on.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [23]

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Sure. And I guess related to that, the mitigation efforts that you mentioned, I know that you discussed the floors that are in place. What other strategies beyond kind of the points on the cash might you have that might also help protect that margin?

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

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Well, there's a number of things we really can do. First of all, it is that there -- put some of the floating -- nonfloat assets -- nonfloat loans into fixed rate or into floors, okay? That is one strategy we can do and try to use that cash balances we have and provided we feel safe about the growth rate we've been going into, okay? And obviously, that over the long term, everybody will seek to reduce the TCD level to move into DDA, MMA. But obviously, on the rate-rising environment, everybody in the world is trying to earn more on their money. So the trend is, everybody was moving to CDD -- CDs. Whether they would be moving backward to the MMA and DDA or not, we hope so. We're working on it, but we don't know what the result would be.

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Operator [25]

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And the next question comes from Gary Tenner with D.A. Davidson.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [26]

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I'm just wondering that if you could update us on the amount and rate of your maturing CDs 2Q and 3Q?

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

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Ed, you want to try that?

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Edward J. Czajka, Preferred Bank - Executive VP & CFO [28]

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The ones coming up in the next 2 quarters, Gary?

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [29]

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Yes.

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Edward J. Czajka, Preferred Bank - Executive VP & CFO [30]

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I believe the number is around $600 million to $700 million would be maturing or at least the number is around $900 million that's already ran at the new higher rate -- rolled as the new higher rates. So we're more than halfway through the portfolio I think is -- to your point.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [31]

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Okay. So you said the $600 million to $700 million is over the course of the next 2 quarters combined?

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [32]

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Could be 3 quarters.

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Edward J. Czajka, Preferred Bank - Executive VP & CFO [33]

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Yes. Around there. Yes. Give or take. Obviously, there's outliers and so forth, so...

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [34]

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Okay. And the rate that they're rolling off, is that the same as that mid- to high ones rate that you noted earlier?

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Edward J. Czajka, Preferred Bank - Executive VP & CFO [35]

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Yes. I think likely though as we go through the next 2 quarters, Gary, we could obviously look for the runoff rates to be a little bit higher. And so the gap you're looking at between running off and new rollover will get smaller and smaller, I think, is what we'll look for.

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Operator [36]

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(Operator Instructions) And the next question comes from Tim Coffey with FIG Partners.

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Timothy Norton Coffey, FIG Partners, LLC, Research Division - Former VP & Research Analyst [37]

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As we look at the tax rate, are we teeing up for a higher tax rate this year relative to last year?

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Edward J. Czajka, Preferred Bank - Executive VP & CFO [38]

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Well, I would venture to say, as we put in the release, it does fluctuate from quarter-to-quarter because of taxable events that have not occurred yet within the year. And so -- but on an overall basis, I would look for the Q1 ETR to be pretty indicative of the next 3 quarters, Tim.

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Timothy Norton Coffey, FIG Partners, LLC, Research Division - Former VP & Research Analyst [39]

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Okay. Okay. That's kind of what I was after. And then although it's early in the earnings season, this quarter, we've had at least another bank in your local area talked about the outlook on credit quality and how we might be out of the cyclical turn in terms of overall credit quality. I'm wondering, are you of the same opinion or do you still see kind of the progression of the book, progression of what you're looking at in terms of kind of underlying credit quality still no different than we've seen in previous quarters.

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [40]

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What is that bank talking about? Could you let me know how they described the credit trends -- their credit trends?

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Timothy Norton Coffey, FIG Partners, LLC, Research Division - Former VP & Research Analyst [41]

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They said that they were seeing items in different parts of their book start to experience some levels of stress and they were -- made a number of references to that. They were well prepared for the coming downturn.

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [42]

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Okay. Nick, do you share the same thoughts? Or what do you see?

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Nick Pi, Preferred Bank - Executive VP & Chief Credit Officer [43]

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The only thing I see is that the construction side during the recession period or during the downturn, maybe a little bit concerned, and we're trying to control the whole construction side because we can see 12 to 18 months but we cannot see over that long period of time.

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

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Do you see -- the question was specific, do you see a deteriorating trend in your portfolio -- in this other portfolio?

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Nick Pi, Preferred Bank - Executive VP & Chief Credit Officer [45]

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Not at all at this time...

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [46]

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Okay. All right.

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Nick Pi, Preferred Bank - Executive VP & Chief Credit Officer [47]

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Because of -- the previous relationship with New York property, that's totally isolated and other than that, our cost side loan and our credit side loan now is under the normal situation. And I do not see any deteriorating at all.

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Operator [48]

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And the next question comes from Don Worthington with Raymond James.

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Donald Allen Worthington, Raymond James & Associates, Inc., Research Division - Research Analyst [49]

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I think you may have touched or really addressed this, Mr. Yu, with your previous comment. But have you seen, I'll call it cannibalization of some of your deposits into CDs with your comment that maybe they can move back to where they were?

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [50]

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Well, I don't think it's going to happen in the next 1 or 2 quarters, okay, not by much. And I think as the rates start to stabilize or even is falling, I can predict that may be happening. But in ensuing 3 to 6 months, I don't see much hope of that happening.

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Donald Allen Worthington, Raymond James & Associates, Inc., Research Division - Research Analyst [51]

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Okay. And then do you still have one of the New York properties outstanding, single family?

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [52]

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Yes. That carries on the book for $2.9 million -- $2.99 million. Still with the most recent appraisal value much higher than that, it is going through a foreclosure sale through the normal bidding procedure by the court in May, right? Is that May?

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Edward J. Czajka, Preferred Bank - Executive VP & CFO [53]

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In June.

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [54]

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In June. Right.

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Donald Allen Worthington, Raymond James & Associates, Inc., Research Division - Research Analyst [55]

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Okay. Great. I think that maybe what you said last quarter, so no real change there, it's still progressing according to plan.

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Operator [56]

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And as there are no more questions at the present time, I would like to return the floor to management for any closing comments.

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Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [57]

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Well, thank you very much. I know that there's a little bit noise in this quarter, but I guess, to us, it's a good noise, okay? So with that -- even though with the -- much of our deposit portfolio is going to be -- shouldn't say much, some of deposit portfolio should be repricing forward, but we're still very comfortable with the various estimates that various friends and analysts of ours is putting -- published right now. So hopefully, that loan growth would be better, and we can even continue to operate at a better condition. Thank you very much.

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Operator [58]

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