Welcome to the Preferred Bank second quarter 2021 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. 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. Thanks, Chad. Hello everyone, and thank you for joining us to discuss Preferred Bank's financial results for the second quarter ended June 30th, 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 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 very much. Good morning, ladies and gentlemen. Preferred Bank's second quarter net income was $21.2 million or $1.44 a share. This quarter we have some non-recurring items. First of all is correcting a interest income item which related mostly to 2020 events. The second one is expensing the unamortized discount on a term loan on a sub-debt that was previously existing, which we called. The third one is a loss on a sale of a loan. Without these three items, on a normalized basis, our net income would be $1.58 or $1.59 a share. Our return on equity will be over 17%. On the same basis, net interest margin for the quarter was 3.47%, a 14 basis points drop from the previous quarter. Under the low interest rate environment, we continue witnessing that new loans being made at less of a rate than the old loans paid off. We also have many customer renegotiations on rates. For instance, seems to be whole lot of SNC loan rates has been renegotiated. The large excess liquidity also weighing on the net interest margin. Our loan, however, has grown 11% for the quarter. During the quarter, we are seeing a vibrant loan pipeline, but we also see increased payoff activities. Looking ahead, we believe the pipeline will continue to be reasonably satisfactory. This is especially true where many of our newly hired loan officers will be closing loans in the ensuing quarters. We also see a modest interest cost savings in the two quarters ahead. Our credit metrics has improved. Classified assets is down. Criticized assets is down. Deferment of loan as of June 30th is only $1.5 million. For all the interest and principal that we have granted deferment to our borrowers, we have collected back 67% already. This quarter, we have a little bit of charge-offs, but that was charging off the previously reserved loans. When there's a charge-off, it's a corresponding reduction in reserves. This quarter, we're recording zero loan loss provision. I must report to you at this time that a conversation I've had with one of our private shareholder yesterday, specifically, he is questioning me as to why we are not having a loan loss reserve release during the quarter, like most, almost every other banks. I told him, first of all, of course, the CECL's mathematics. I also told him from a personal point of view, in looking at the glass half full basis, that I'm kind of pleased that we didn't have any release this quarter. The most recent economic forecast that was reported by Wall Street Journal yesterday was a forecast by Morgan Stanley's Chief Economist, who indicated the economic expansion will continue at a reasonably good rate going well into 2022. We echo her sentiment. You see, there's not a whole lot we can do about the current low interest rate environment. There's not a whole lot we can do about the inflation pressure. We here will be dedicated to continue to provide top-tier profitability to our shareholders. Thank you very much. I'm ready for your questions. Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question will be from Matthew Clark with Piper Jaffray. Please go ahead. Hey, good morning. Hi, how are you? Good, thanks. First one, just on the loan yields and trying to get a sense for what kind of rates you're getting on new business. I think last quarter, you mentioned that new business is coming on about 90 basis points below the portfolio yield. I think your core loan yield this quarter was about [4.99%], if we exclude the PPP and the interest income reversal. Just what is the weighted average rate on new production this quarter? On the new production this quarter, it is really a sort of like an abnormal quarter. New production usually comes in 4.05%, where the payoff rate comes in about 60 basis points higher than that. That is because that we have some rather large SNC loans being repriced 50 to 75 basis points lower. It's kind of changed the mixture of the thing. Our own portfolio type of loan, we are doing basically right around about 4.3%, 4.4% level. Okay, great. Just on the growth in commercial real estate this quarter, that was most of your incremental growth. Can you give us a sense for the underlying property types that's driving that growth and your thoughts on your ability to maintain low double-digit loan growth into next year, given your pipeline? Who want to volunteer? You want to volunteer on that? Sure. Matthew, this is Wellington. Most of that, what we put out is multifamily, residential. We have the single, mixed-use warehouse type of properties. Lot of warehouse owners. Understood, great. The last one maybe for Ed on the expense run rate going forward and given the build-out of the LPO in Texas, can you give us your thoughts on the run rate going forward, whether or not that you might kind of remain at this level or might we see a little bit of growth? Well, I would venture to say, we did, I think, a really good job holding it under $15 million this quarter. As you recall, I probably guided a little higher than that in the previous call. I'm going to be consistent with that, Matthew, and say it's going to definitely go up north from here. I would say in the low to mid 15s, somewhere in that neighborhood, simply because we have a number of things that are going on. One of which is hiring that we've been doing. As we mentioned in the previous call, this has been so far, and Wellington should probably talk about that as well. It's been a pretty good year for recruiting this year. To the extent that happens, salary expense will increase, but we'll see better top line growth as well. Okay. Thank you. Thank you. The next question will come from Andrew Terrell with Stephens. Please go ahead. Hey, good morning. Hi, Andrew. Hey, I just wanted to ask, how much of the total portfolio today is considered syndicated or SNCs? Then any kind of specific industry concentration within that? It's about, I think it's right around 11% of the book, Matthew. There are no industry specific concentrations. These are typically credit type facilities for these larger organizations. We do have, as we've talked about in the past, we have about, I believe, $50 million or $60 million in the entertainment industry, but those are not production credits. Those are primarily library based. Perfect. Thank you. I did want to switch back over to kind of the new hire front, just briefly. Are there any specific geographies you're more focused on in hiring, or is it really coming out across the board? Any kind of incremental color on the type of institution you're hiring away from? Is it larger or smaller, similar size? Just any color on the hires. Andrew, we have previously talked about it. Our hiring is basically opportunistic. We have, whenever the several regions we have, whenever we found a qualified personnel that we try to get them, okay. If we're lucky enough, we then come into terms for them to join us. Okay. It is not specifically we have targeting any region at all, but rather than all the regions we have, we continuously cultivating people coming to us. Mostly our talents coming from bank about within the range of our size. Okay. In other words, a little bit smaller than we are, a little bigger than we are. Perfect. Thank you. Just last one from me. It looks like the end of period PPP loans were essentially flat to the prior quarter. Just any kind of updated thoughts or expectations on a timeline for forgiveness for the remainder of these loans? Andrew, this is Johnny. On the PPP loans, we're going through the forgiveness process right now. We haven't started on the second one yet, second batch, because that guideline hasn't come out yet. We still have around $50 million that we're expecting to be forgiven from the first batch. Okay. Perfect. Thanks for taking my questions. The next question will be from Steve Moss with B. Riley Securities. Please go ahead. Good morning. Hi, good morning. Starting off with maybe just the appetite to deploy excess liquidity here. Just kind of curious from the release there, what are you thinking in terms of securities purchases, if any, and just what yields you may be expecting there? In general, we just have too much liquidity. Okay. We have roughly 22% of total assets invested in cash on different type. Obviously, that's earning a grand less than 10 basis points. Okay. You know that our effort is to invest them, and obviously 1st choice is the loan. We are looking at the security side, and we actually did some in the late second quarter, started to do it. As you know, the choices has not been whole lot of them if you consider risk. Ed, you want to add in and put more on that? Yeah. No, Steve, as you know, it's a tough time in this rate environment. Spreads tighten in, you really don't get paid for going long at all. What we've been doing is we've been kind of mixing up between cash alternatives, very short monthly adjusters, agencies type stuff. We've put quite a bit into that, over $100 million into that. Then we've been picking off here and there munis and corporates as we find value here and there. As you know, it's a long slog. The mortgage product yields almost 5 x what the overnight IOER rate is, so that certainly helps. These are base hits. These aren't home runs, as you know. Okay. Right. No, that makes sense. Just on the other side of the balance sheet, deposit growth remains strong. Just kind of curious as to where you guys are pricing CDs these days and just that deposit environment. Well, I can talk about the pricing. I think Wellington can probably talk about the market maybe better. We're trying to keep our pricing as low as possible without impacting growth going forward. As you know, there's a lot of money in the system right now. The Fed has put a lot of money into the system, and so we do want to grow deposits because we'll eventually deploy them, but we've got to do it in a real cost-effective manner. We've been working very hard to try to bring those costs down. Yes, Steve, this is Wellington. We are very selective on our deposit gathering. Between our Deposit Officer who are focusing on individual deposit and our Commercial Lending Officer focusing on business DDA deposit. We just try to be very selective and continue to keep our pricing down or the cost down and all that. Having said that, we always out there looking for good opportunities to build our core deposit. Steve, this is Li. One of the things that I hold a slightly different view than they do now. I'm old person that always believe franchise value is in the deposits you build, and you build deposits first, even though it's short-term disadvantage that you have to bite the bullets in order to have the muscle there to help with the long-term growth. This institution will continue to cultivate deposits not just because it's not profitable right now, but rather for the long-term stability and the growth, the value of our franchise. Yeah. Right. No, absolutely. In terms of maybe just tying out your loan expectations here, Li spoke that things, pipeline and production should be satisfactory here. Do you think back-end loaded this quarter, do you think you hold the pace on loan growth? Maybe we could see a little bit of a step up in the second half of this year. We have previously been telling everybody, okay, we think this second half of the year will be a little bit more than the first half of the year. Okay? This business is after many years, it's really kind of hard to predict, especially in the early part of the quarter. Much of the situation will materialize in the mid-quarter and so on. The early indication is that our momentum is there, and I will say it, I will hope that the new officers will be the added muscle that we needed to bring to a higher level than the previous quarters. Of course, that we still have to probably be careful about the whole thing. I have a chief credit officer sitting right beside me. Who's sole job is that they don't do crazy things. All right. Well, thank you very much for all that. Next quarter. The next question is from Tim Coffey with Janney. Please go ahead. Yeah, thank you. Morning, everybody. Mr. Yu, I wonder if you can provide an update, or if you had an update on how the loan growth is going in the Texas operation? Well, Texas operation in general has been progressing just along the same line that we are previously forecasting. Okay? I guess previously we have reported to them how much they were expecting to produce for the year. We have expressed how much they are expecting, but last quarter, they contributed about 10% of our loan growth. Okay. In Texas operation, it's two-sided. Volume-wise speaking is obviously very satisfactory considering the processes to go through. We have to also started to be a little bit choosy about the pipe because of yield and these kind of things as we're going forward. Ed, just kind of... Yeah, sorry. They don't have to battle the payoffs. New portfolio. Yeah. That's true. Ed, just kind of circle back on the liquidity question. Just philosophically, how long do you think you're going to be carrying that excess liquidity? Wow. That's a great question. You know what I've always found? First thing, the one thing I've always found, Tim, is when liquidity is really strong is when rates are lowest. Liquidity starts to dry up, rates go up, and you know that always happens. It's ebbed and flowed over the last 10 years. We've really held excess liquidity for the last 10 years since the financial crisis ended, quite honestly. It's just built and built. We've never came to a situation where we felt yields were going to finally go down, or I guess we could have done it in February, March of last year if we were really brilliant. We've never felt comfortable to be in a situation where rates were going to fall pretty meaningfully and we could put some money to work pretty effectively and make use of that money. We're just going to keep putting money to work as we can, slowly chip away, but we're not going to make huge, meaningful inroads. I mean, our liquidity went up $150 million on average just in a linked quarter from quarter to quarter. When you look at that's a real de-leveraging impact on the margin. We'll continue to chip away at the money as we can, but we're not going to do anything really substantial. Great. Okay. No, that's great color, Ed. I appreciate it. Those were my questions. Thank you very much. Again, if you have a question, please press star then one. The next question will be from Gary Tenner with D.A. Davidson. Please go ahead. Thanks. Good morning. Just had a question, I think most have been answered, but regarding the loss on sale loans this quarter, I think [$261,000]. It was closer to [$400,000] last quarter. Just any color on that and any visibility as to additional sales as we go through the back half of the year? No. Actually it's really a strategic move on our side. Okay. We had a couple of SNC loans being downgraded. Okay. Heading into examination, we do not want to carry these kinds of loans. Okay. It's more also that strategic situation rather than financial related amount. As you know, looking at our back history, we sell these out in a long scale. Yeah. Okay, just something that kind of very specific to a couple of credits ahead of an exam. Just two SNC loans that we've been downgraded. All right, great. Thank you. The next question is from David Feaster with Raymond James. Please go ahead. Hey, good morning, everybody. Hi, David. I just wanted to get a sense of some of the puts and takes with loan growth, just to get a better understanding of some of the underlying trends. Payoffs and pay downs have been a significant headwind like we've talked about. Just curious if you could quantify how payoffs and pay downs have trended and maybe the underlying strength of your originations. Just some detail there would be helpful. Let me tell you what our origination effort is. I have the numbers right here. For the second quarter, we've originated a total of... Just after our bragging, where the number is. We've originated $428 million of commitment, with outstanding about $305 million. The payoff is nearly $200 million. Obviously, these number changes from time to time. You see, we are not a product type of a bank. We are relationship type of one-off type of bank. All of our loans, all of the deposits, really one-off type of thing. Sometime it's just certain customer, sold their property or they went public, they don't need us anymore. All these kind of things happens. Okay. That's helpful. In our recent meetings, we talked a lot about C&I growth being a major focus, and we did see some growth in the quarter. You guys have done a great job expanding C&I. Just curious, any updates on this segment, what you're hearing from your C&I clients, and just your strategy for continued C&I growth going forward? C&I growth is probably the hardest coming in. You have an officer who even work on the deal maybe as long 1 to 2 years before they can get to the C&I, customer transfer to us. Unlike a real estate transaction, is a little more transaction-based plus the relationship. C&I is purely relationship and has a lot to do with timing. One of the situation is that what we are facing right now is I'm trying to decide is, on a temporary basis, how should we control our C&I? You see, C&I is now being priced to a level that is, how should I say? Does not fit to our operating model that much. You talk about the regular customer type of C&I, it's basically they price much below the real estate loans. You talk about the C&I loans, not in the ones, in the low twos. That's the standard of the whole situation. Realize our net interest margin is right around 350. These things is just if you do few of them or if you do a whole lot of them on the situation, and then your financial performances will be coming down. We have to, from time to time, adjust our C&I appetite based on the relative yield and rates we can get. At this point of time is that I am not projecting to see a whole lot of gigantic C&I loans because it's uneconomical at this point of time. Okay. Then just any thoughts on the reserve? You touched on this in your prepared remarks, how do you think about provision expense going forward? Would you kind of expect It sounds like you'd prefer to grow into the reserve. Just any thoughts on kind of what a normalized- Yeah, it is not up to us. It is up to the CECL mathematics. You're well aware of, okay? If I have to make a prediction, because there's a lot of unknown factors. For instance, the Delta is coming stronger and stronger. If that's happening very strong, that puts Preferred Bank in a better position. We have more reserve compared to some of our peer group. If it is not goes up strong, I would say there's more than 50% chance that we will have some reserve going forward, reserve release going forward. Still have to go through the calculation of all the economic factor, all the Q factor, all the internal downgrading, grading of the loans, these all kind of complicated things there. Got it. Thank you. Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Li Yu for any closing remarks. Thank you very much. Although we had very noisy quarter. Okay. Looking at the normalized basis, we really have a record earning quarter. Okay. We like to think that all the operating metrics is still intact. We're still the bank who can produce or have been producing more than 10% loan growth and controlling our cost and have reasonable net interest margin compared to our peer group. Above all, we have probably a very favorably positioned profitability in our ROE. Okay. Certainly, we like to continue to do that.