Q3 2019 Earnings Call
2019 earnings conference call.
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Now I'd like to turn the conference over to Tony Rafi.
Profiles. Please go ahead.
Thank you operator, Hello, everyone and thank you for joining us to discuss preferred banks financial results for the third quarter ended September Thirtyth 2019.
With me today for management, our chairman and CEO , Li Yu, President Chief Operating Officer, Wellington, Chen Chief Financial Officer, Edward Czajka, and Chief Credit Officer Nikpai.
Management will provide a brief summary of the results and then we'll open up the called or your question.
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 Nike 95.
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 thanks operations and business environment, all which are difficult to predict and many of which are beyond the control the preferred bank.
For a detailed description of these risks and uncertainties. Please refer to the FCC required documents the bank files with the federal deposit Insurance Corporation, where FDIC.
If any of these uncertainties materialize or any of these assumptions prove incorrect preferred thanks results could differ materially from its expectations et cetera as set forth in these statements.
For Bank assumes no obligation to update such forward looking statements.
At this time I'd like to turn call over to Mr. Li Yu. Please go ahead.
Thank you.
Good day, ladies and gentlemen, my needs to you.
I'm pleased to report.
Third quarter net income of $20 million.
Oh Dollarsthirty two censorship.
Although the Saudi is slightly better.
And the second quarter.
We have had too.
But rate cuts in the quarter.
We have a very strong quarterly loan.
That's true.
Although the final results, so long only increased $89 million, all roughly 10% annualized target.
But this was accomplished by the last quarter's activity.
If you recall that as June 30 earnings call I reported to you that had been a lot usage right or the quota in Oh customer.
We.
See a nice quite a lot.
Which was paid off immediately.
Early July .
That has benefited the production results.
Second quarter by her to third quarter.
As a matter of fact.
We had one of the largest lake production corridor.
And not corporate history.
During the quarter.
We have originated.
$511 million either new commitments.
Which had an outstanding balance of $349 million on new loans.
Well this quarter.
A true.
Highlights is our deposits production.
Oh deposits increased $192 million all 40%.
Oh the annual basis.
We have had a number of orders.
Deposits was trailing.
The.
Gross rate of the loan.
The loan.
So pleased to see this.
Increasingly deposits I have added additional liquidity.
To fund future growth.
At quarter end.
We had.
416, meaning what your second $5 million cash on hand.
Although.
It's a large increase in deposits.
Change somewhat.
Leverage.
Which affected.
Net interest margin.
Which reduced.
23 basis points from last quarter.
The decrease.
Well, there's a lot study.
So I mean related to.
Fed rate cuts.
We had passed some.
Interest cost reduction.
Our transactional.
Accounts interest costs has reduced.
I mean reasonably but oh.
Do you see the deposit interest it not reduce.
Much.
Yes is it about your because the maturity schedule.
And market competition.
Well we'll.
Okay, you focus on deposit cost.
Loan quality alone are being up quite as posture.
It's stable.
We've had a $435 million low charge off.
Net charge off in the quarter, but that was related to all the auto was a previously fully reserved non accrual loans.
You today.
We had a 200.
$15000 Matt.
Recovery.
We have today Oh September 30 years, we've bought back 200, and I mean do at night 9000 shares of common stock.
And the buyback tends to be is ongoing.
The bank has always been.
Trying to.
Okay.
No.
Operating expense.
Hi profitability.
And we'll certainly continue.
Do so.
Thank you I'm ready for your question.
Thank you.
Well now begin the question answer session to ask a question you mean press Star then one honor Touchtone phone, if you're using a speakerphone. Please pick up your handset before passing the keys.
Your question. Please press Star then too.
First question comes from Aaron Deer of Sandler O'neill and partners. Please go ahead.
Hi, good morning, everyone.
Hi, good morning I.
I Oh.
It wasn't pressed by de a the deposit inflows this quarter and I was hoping to understand maybe the dynamics behind that a little better can you talk about what you know where where those were coming from and if it was through the branches or through some of your your deposit gathering team, specifically and what kinda costs those new deposits.
Came on out I'm, just I'm curious now if you were leg and others in the market who were were dropping the cost and so that helped to you know brings more inflows your way or or what was the what were the dynamics there.
We we were getting lot deposits in several different sources, but the big increases.
And obviously the number one is the.
We're gaining certain customers as I reported earlier, we had originally to $511 million a newly married many new loan customers well over a very meaningful positive okay.
Secondly is that actually relate to our customers last quarter and heavy usage of the fund.
Always report also reported last quarter and.
This has reversed a normal situation so they'll babcock has increased with that.
Other than that Oh gathering team over the Barry.
As having the at the moment worlds.
I guess three factors, adding to a increase in our deposits.
So if you tested the market in terms of work, where where are your deposit cost stand today versus three months ago and you know how do you <unk> you know do you expect to be able to continue reducing deposit costs, if you're moving them in that direction and how do you expect your deposit flows to react but.
We would the I was it.
Reply to your but with that but on the general deposit.
Somebody said to lead is that the <unk> be transactional costs will be price based along.
That movement, and certainly market competition competition, what effect that the TCV, we'll continue to pricing.
We know a Christian to lower cost, but it depends on maturity schedule.
Now I'll walk you see de can change causal, although not its old as average to reduce wouldn't call.
Each month and do you want to.
Yes, yeah in terms of you know looking at month over month and this is nothing that's public but since we're on a public speaker the average cost of deposits its come down 14 basis points and just the last two months alone. So worse, we are starting to see some traction. We just did not see a lot of traction from a quarter over quarter basis.
When you look at the average costs as we look at the C.D. maturity schedule out six months, you know, there's going to be a a pretty decent deferential differential between what's maturing and whats coming on and renewing and that's only going to get more noticeable as we get toward the end of the year.
In the beginning part of 20, the differentials are going to be very large if we remain in this current interest rate environment.
So if we see that's presume that we get no additional rate cuts just for simplicity sake.
But there, but the rate environment in the carb stays as it is today, obviously, the <unk> that with those initial rate cuts you did it hit the margin pretty hard with the <unk>. The secondary effect of deposit costs now coming down as a result.
Where with with that set up where would you expect a margin to trend from here.
[noise] that's a that's the 64000 dollar question Aaron.
Given the fact that rates are going to if we're if we're assuming rates are going to stay the same I would expect to see a little more compression in the current margin and then I would expect to see margin expansion.
We currently have nearly half the floating rate book protected in terms of to a two for the rate cuts. So the floors are certainly kicking in and we'll start to make a difference if we get anymore.
Okay that that actually goes my next question away from the nature of the floors can you talk about kind of where those floors were layered in as rates were going up and what that means for your loan yields on his would come back down again.
Well as they were going up obviously, they weren't as much as the other concern although we kept them in place as rates were going up but as you can imagine the difference between what we're actually getting yields versus the floors and enough rate environment is fairly meaningless because it's so wide.
Those are those things start to narrow as rates start to come down and what our goal has been has to try to as each loan renewals is to try to pick up the floor a little bit on these prime based loans. If we can if we have the leverage to.
Right now we have a you know roughly over $900 million of floating rate prime based loans that are already out there floors.
And that's exactly what I was looking for as well what can you break out. The you know of the you know the <unk> three and a half billion of of loans are so what you know how much of that is protected by floors on kind of at what rates below where the prevailing rate is today.
Before.
And we applied to you on that okay.
Actually the mathematically is one thing that's who are the dynamics.
In the real life that do have to Oh boy it.
Oh, all Ben I think is for many other bank there will be continuously.
You long being made.
And only being paid off.
Oh long usually carry it fall is much lower.
So the so called the layaway change.
On the monthly basis.
Second the things many new Olos gets renewed.
And the window renewed generally update into a higher level floor if not.
For all.
All these factors is depending also the movement of de <unk> portion also as how much being paid off how much is the new loans, that's being being being being being originated right. So these are the some children. We have seen is very income.
Rejiggering curve.
Moving up the falls to the situation so even hi.
With all this information on M. barely I came I estimate what the results.
Yeah I appreciate that thank you.
Yeah, Yeah. So I guess just to add to that as I said, we have about you at roughly 940 million of floating rate prime based loans that are out there floor they will not move.
In addition to that in the portfolio, we have over 500 million a fixed rate loans, which will not move obviously, so we're protected on on those components of loans and that as Mr. Yu says this number.
In terms of our fully indexed rates that are out there floor below their floor is really a dynamic number.
And to give you. An example, the dollar amount of loans that were at or below floor.
Doubled.
From August or September .
So some of that as result of the rate cut but also a lot of that as result of what our officers are doing in terms of these loan renewals sure. Okay well good I appreciate the color. Thank you.
Our next question comes from Steve a B. Riley FBR. Please go ahead.
Hi, good morning.
I wanted to follow up on the.
Oh the loan floor question, if we get another rate cut here, whether its October December no. How many additional loans will be at third floor with one more we cut.
Oh sequel.
Oh, let's see.
You want a rough estimate.
I would say probably 20% about loves great.
Well be update upgraded to to the floor yeah.
The protected level yeah.
Oh no.
I was beaten that dynamics I was talking about and then lead the current rate that is only 25 basis points below the below the low default not be lobby.
Whatever below that.
Below does index yeah.
Okay. That's that's helpful. And then also wanted to have it maybe a little bit further on the spread between.
The roll off one on a new CD money dynamic [laughter], a ed what is the spread now between the CD rates, you're putting on today versus what's maturing.
[laughter] today, Steve is around 30 basis points.
Okay.
However, as as I said as I was telling Aaron as we get closer to the end of this year and into the beginning of next year that spread widened significantly upwards of 60 basis points plus.
And that's before if we had before any additional rate cuts.
Yes, Sir that's before any additional rate cuts if we get more rate cuts, that's obviously going to get bigger.
Right, Okay, that's helpful and.
And then just wondering on a balloon pipeline you know, obviously metro good quarter for originations.
How is customer activity and what's what's the outlook on that front.
Well.
[laughter] third quarter is is historically, what about better quarters or even a situation in the fourth quarter is historically one of the I'm <unk> predictable quarter thought history.
We have seen that was a weight reduction many.
Many oh.
I hear.
I'd become little bit more active on the marketplace on their real estate and many more.
Making them anymore you projects wanted to be started so I would say the general environment.
It's trending toward Oh.
Little bit in term of real estate activity Cie is concerned.
On the ceiling outside.
We see and maybe more usage, although quite a lot of many because the cost reduction.
Did you really thing is that wanting to give you what color into a whole situation.
Well I think the real color is that screen as Mr., you mentioned that live side or the pipeline as a exactly.
We.
It's hard to predict I think the does the bogey is the payoff.
Because of payoffs always lingering out there so while our loan pipeline, that's pretty robust right now we have.
We do have some loans that are carried over from third quarter as well.
So as I mentioned again.
The payoff is the.
<unk>.
Okay. That's helpful.
Then one last question for me just you know, obviously, a more challenging rate environment, but the fourth going forward definitely help.
Do we think about expenses going forward.
I know you guys want to maintain a oh.
Although efficiency ratio, but it is there possibly that expenses could come down I mean, there was obviously very good cost control this quarter.
Well so.
One thing is that somebody will we all will want to controlling costs.
I've been control cost to the level is probably one of the Moore's in the industry.
So going forward I think.
But the cost as a percentage wise speaking well maintain the crown level, because total assets will be growing our loan portfolio.
But the pure number expenses it always increases I'm not going to go tell my staff you guys are gonna take I think a cut next year.
So.
In fact, it was the laser market [laughter] suicide recruiting.
People is it.
I never has had to such a different.
In the P. renewed recruiting new staff, so actually in I mean human costs is two thirds of me an east coast Libya over two thirds of a total cost structure. So that's the biggest element and Iran has its beating increases.
Right and Oh other cost seems to be all ticked up a little bit we don't see any decrease in let's say a lawyer is always tried you more by by debate right. So.
We I hope is that our practice has been to broaden our bank just keep up costs and control.
Alright, Thank you very much I appreciate that.
Thank you.
Our next question comes from Gary Tenner D.A. Davidson. Please go ahead.
Good morning, Oh, I'm, just wondering had if you could tell us what the average loan yields were in me a quarter versus the second quarter.
Average loan yield for a third quarter, Gary was 593 versus an average of 614 for Q2.
Thank you and just to clarify in and we use prepared remarks be production and new loans was where those year to date numbers.
No those work for the quarter. It was a very robust quarter for loan production over 500 million.
Okay. What are you running your what those numbers again, it's really quick.
Well, we had a net loan is long and organizational Bobby and 511 daily So what's your best that's a commitment the outstanding amount of new loan.
That was originated in the third quarter $349 million.
Well the differential would be the payoff.
Okay. Thank you.
I feel bill.
Excuse me.
Once again.
Question. Please press Star then one our next question comes from Tim Coffey of Janney. Please go ahead.
Hi, good morning, everybody.
Hey.
We went to the regulator for preferred a as of the second quarter. It indicated that 70% of a CD book would mature by the middle of next year I'm a quarters since that data has things have picked up as a percentage materially changed.
Hmm I wouldn't say so no that's sounds about right nobody is 70% in nine months is that that's the time frame you're talking about Tim yes.
Okay that sounds about right okay.
And where are you on on the buyback authorization how much more can do you have the ability to buy back we have spent as of a as of September 30 is roughly one third of our money.
So we're intending that that can it continues scale.
Okay, all right well. Thank you the rest of my questions have been answered.
Thank you.
Our next question comes from Tyler Stafford Stevens. Please go ahead.
Hey, good afternoon, guys just one more follow up for me I apologize if you've touched on this already I just curious what a if you can speak to what a initial tariff impacts you've seen across the portfolio a if if at all yet.
And if you guys have been completed any kind of review on potential impacts. Thanks, Oh, we we had we had a.
Tariff in fact in general.
Only affects a very small portion of our total portfolio, Okay, and we haven't seen anything affecting us at this point in time, we have completed review included sometime during the year I'm a pair of effect.
Account by account analysis, Hey.
In terms of telling situation.
And in fact.
Roughly maybe.
40, 50, <unk> investor doing the conferences and the head they have been.
Discussing in detail was at every one of these accounts and how do you happen we've spend a substantial management.
In doing so.
No.
Our next question comes from Aaron Deer Sandler O'neil. Please go ahead.
Hey, guys, just a quick follow up and on the the 400000 FDIC assessments credit.
I'm guessing, there's probably a similar amount that show benefit from in the fourth quarter and then maybe some more in the first quarter is that am I thinking about that writers are going up is it can extend for a longer period.
You might be thinking about that correct, yes there.
Okay. Thank you.
<unk> not necessarily a mild.
Right.
Our next question comes from Don Worthington Raymond James. Please go ahead.
Thank you.
Just had one a question in terms of of credit.
Credit still pretty benign.
But just curious as to what you might be thinking in terms of provisioning going forward.
Well.
Does it just things on the next quarter, we'll be providing based on current methodology.
In January we will be providing.
In the first quarter would be providing based on the news c. So [laughter]. The early indication is that the increase is not not be okay.
We're happy with that the hit to our capital is gonna be very very little but when we providing nowadays.
I have to make us.
Okay people think that the we have started and liberty in implementing our our Oh loan loss reserve actually the losses basis based on rigid formula. Okay that was really by our compton's, okay that going sort of can store.
Cool factor and that in the so called in the historical loss estimate all those a model that Buda. So right now every every quarter that we're doing it based on whatever whatever is needed.
Having said that we have 40 in well reserved at this time, which as indicated in our.
<unk> reporting all the players including.
Including all the external.
People as a report can.
But going forward.
Well it based on new loan production.
Unless those new.
We can assist okay, Oh, if there's some really changes and upgrading grading that will be affecting that our loan loss provision on the positive side.
So having said that I don't know, whether you want more color from and Nick on knocked okay.
I'd be happy to take it if he has some.
[laughter], it's just like the mystery mentioned earlier Todd.
We have conducted barely a detail long review with each.
Team lending unit two goes through their RCR use Shanghai loan portfolios and at this moment, we still consider that our loan portfolio is pretty hot obviously, yeah without any sit there are concerned at this time.
Okay, great. Thank you.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to the management team for any closing remarks.
Okay.
I guess, there's no further question huh.
Okay. Thank you very much okay. Thank you for your your attention today, Okay and the you know, although that's a in a in a very dominant market. Okay. But we are we feel pretty good resolved without production would be a pretty good [laughter] was our profitability and.
We feel pretty good about.
Ill return for our shareholders. Thank you so much.
The conference has now concluded thank you for attending today's presentation.
Disconnect.