Q1 2020 Earnings Call

If any of these uncertainties materialize or any of these assumptions prevent correct preferred Banks 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 mister Lee you please go ahead.

Thank you very much. Good morning. Ladies and gentlemen.

The events and the first quarter 2020 is truly astonished.

But I am very pleased to report for the quarter prefer Bank net income was 16.2 million or $2.08 off push it although this seems to be a little less than the previous quarter, but that is really because we decided to build up our credit reserve and make a a big condition and 1/4 on the net interest income basis.

Interest income for the quarter is better than previous quarter and the same quarter last year.

For the quarter deposit group 103 million loan growth was 168,000 a big portion of the loan growth is coming from customers.

Increase drawdown of the unused credit line, which we estimated to be between hundred two hundred twenty million dollars a month.

Part of it this drawdown credit line to fund state with the bear. So which also helped that deposit growth?

A quarter and we estimated the available quite a line for customer draw down a little bit over four hundred million dollars, but many of those credit app is under a power of the base formula. So the actual amount is probably between 300 to 350 barely.

and at the

31st we have on balance sheet liquidity of $720 and we have off balance sheet liquidity another $600 so we can

satisfied

well the quarter.

Making interest margin actually improve a little bit from previous quarter. This is very welcome news as we all know that first-quarter had rather large budget cuts. These records has drastically changed the interest sensitivity of the bank as of March 31st, 14.9% of problems are fixed rate loans.

19.4% of the loans are fourteen floating rates without fault and 65.7% of the loan a floating razor with four off. All those floating rates was floor all but twenty million or 1%

race

Okay operating at the floor right now. So

What is the continuation of repricing of our tcd portfolio downwards with you that are met interest? Margin hit the bottom on March 18th and gradually improving from that point at all.

Recently first quarter efficiency ratio was 34.9%

recently S&P Global issued a study or ranking that for all the banks between 3 to 10 billion dollars off the rent Preferred Bank number one in the nation.

What efficiency ratio?

What is this cost control and the gradually improving that interest module We Fear operating make sure it's a favorable. Well, so whatever it is worse that S&P also radius as number one overall in the nation.

They are no sign of credit interior deterioration at this point of time, but we know the nation is currently entering into a recession stage.

And our lifestyle has changed at least for a extended period of time the recovery, maybe slow.

So was this in mind we decided to build up credit Reserve first step is to adopt a system which increase reserve for eight million dollars Next Step was providing 5.3 million month one last provision for the French Quarter.

At this point of time all thirteen branches of our bank is operating for business observing the stay-at-home order 45% of our staff is working from home.

What able to handle the customers needs through increase usage digital banking along activity was able to handle the mini month deferment request.

Customers and it was able to handle the first phase of the triple P programmer requests. We're clearing up today.

And going forward for the second phase of triple p and upcoming main tree lending program.

We just so pleased that the banking industry in US.

Become part of the solution this time.

the Dog Days of our nation

will be over soon. I hope.

And we are committed to be a factor contributed to our recovery.

Thank you very much. I'm ready for your questions.

Thank you, sir. We will now begin the question-and-answer session to ask a question. You may press star then one on your touch-tone phone appears in the speaker hon. Please pick up a couple for president keys. If any time request has been addressed the electric dryer question, please press * then two again. Let us * then 1 to ask a question at this time. We'll just pause momentarily to Assam our roster.

Our first question will come from David feaster of Raymond James, please go ahead.

Hey, good afternoon, guys. Just wanted to start on the provision. Could you maybe just talk a bit about some of the the factors in the model that drove the 5.3 million provision for the pandemic and then maybe you know as those as the you know, economic outlooks have seemingly deteriorated further in the second quarter. Maybe how you think about additional rebuild going forward? Well, we went to obviously ask to answer your first question for your second question you and I can join the incident. Sure. Yes bank debit. This is an expecting and our system model covers mailing straight portions. The first person is quantitative side. We use PD LG model to figure out the quantitative side. And also we use flags factor to provide reasonable and supportive forecast for the future.

12 months and also with the six months of revision.

Also, the second part is the qualitative side. We have nine different effectors definitely, uh, a few factors reflect the current MAC and the micro economic situation. So, uh, and also the third parties individual, uh evaluation on those, uh problem loans off so as of March 31st that we adjust up our qualitative side as well as Flags Factor on the car side to reflect the current and dynamic situation. So in the 5.3 million Reserve in q1 would like to see that around 71% is really a depend on MC situation related.

David to to answer your second question. You see that we we put most probably every quarter. I mean, we will review the situation and look at the economic condition and also obviously look at our loan portfolio and most probably will be continuous increase to our Reserve. You see with all those the firmaments. Okay, all the all the so-called affected lungs so far is deferred for six months that is generally in the early part of April October and still for that portfolio any weakness at all wage probably show up a late fourth-quarter early first quarter next year. So you wouldn't have a real reading on the situation. You can only judge by General situation dead.

Off the economy of all the activities by doing Prudence things, but we decided to continue continuously beef up our Reserve.

Okay, that was very helpful. Thank you. And then just on the margin, I mean you guys have done a phenomenal job managing the margin and appreciate the color on the the proportion of six thousand and variable rate loans and Floors, but just taking it out on into consideration and look in that just reading kind of in between the lines in your commentary and the press release it kind of sounds like there could be some pressure here in the second quarter and then maybe improve after that over the remainder of the Year. You'll see bout three other factors of Edward add on more details later than a doctor other than the few interest rate in margin first factor is payoffs loan payoffs are low-paid how long it's paid off. They usually don't carry a higher rate said after the new loan at the wait for the coupon rate of flow radius third factor is competition situation for deposits. There's only second Factor we can control

which is we control our margin for the new loans, which is and I I can say that it's it's an expansion situation compared to previously but the first and third Factor we cannot conjecture but seems to be

Need the payoff for the first quarter is slowing down. But so therefore we are generally more optimistic as compared to previously but the exact calculation that is is difficult if you want to add on to that. Yeah. No, I think I think you said it all I think with the slow down and the payoffs that's going to help keep the maintain a margin in addition to what you already talked about in terms of the CDs repricing, you know, when this thing first hit in mid-march, we saw kind of a considerable spike in CD rates across the board competition and every since then it's come down about forty to fifty basis points in the last month or so, so that certainly bodes well for us going forward with the CD portfolio continuing to reprice wage if we don't get pressure on the asset side, I think it's safe to say we'll probably see some expansion, uh, you know later in Q2 and Q3.

Okay, that's extremely helpful last one for me. You know loan growth is really strong even exclusive of the drawdown. I guess. What are you hearing from your clients? What's the pulse of your clients often? Do you think about or I guess how is he seeing I draw down then early in the second quarter in that, you know, the 350 million that you you mentioned that were remaining and just general thoughts on loan growth in your pipeline going forward.

I was trying to Wellington to answer the question is Wellington obviously looking at a loan pipeline are slow down and because no bars or a customer are more careful about what are they requiring and what type of project they want to take on at the same time internally Thursday. We are being due to covid-19 factor. We are taking an extra caution and being even more selective what type of the customer type of loan that we want to get into right. Now last thing we want to do is the data book a new loan and then have to you know, do the payment deferment.

So just to answer part of your question about the drawdown as I stated in the press release as of today the drawer ever since the beginning of April is just slow down.

Okay. Thanks.

And next we have Steve Moss would be rally fer.

Good morning.

Just want to follow up just in terms of the Cecil assumptions. Just wondering if in particular could give just colors to like what you were thinking for like the unemployment inputs and perhaps just GDP inputs. Well and how we how should we think about excuse me Reserve Lomas provision for the second quarter relative to the first.

Hi Steve, this is Nick. Again. We are all recused side qualitative side. We do linked with those wage economy situation, but we're not directly reflect to our Reserve because of some of the unemployment or whatever. We are not really have that many of Consumer loans were not directly impact maybe indirectly. However, we do have Flex Factor as well as Q.

So it's under the sternal economy situation. We based on those and we have different scale low moderate severe and extremely am I different levels to make our reserve requirements.

Okay, and then just as we think about your the provision here for the second quarter, I mean, you know likely to see obviously more reserved. We'll just kind of like do you think it's reasonable just to assume the the first quarter level just any any color around that would be helpful. Actually, it's very hot hot hot this point in time. But you can walk you can leave it at that. We have determined to be on the approval cycling forward today. I mean equally as this quarter including a big change in the economic assumptions, okay, next Friday with an economic or something will be so drastic change or not. We have to see what the what the situation care is, but we are not General such a we decided to be

Okay, and and then in terms of the just on the on the funding side and I think you said 40 basis points lower from for CD rates just wage what exactly that rate is. Have you just refresh my memory here before that. I'm just talking in generalities what we see in our in our Market Steve, you know, we saw one year CDs spiked up to age and 110-115 when this first broke when the lockdown first happened, I think that was around mid-march because I think there was a general sense that Banks were all banks were to go out and and get liquidity because all the lines were going to start getting drawn. Well that debate it that really didn't happen that whatever you want to call it Panic or whatever you want to call it a baited breath. And so now we're seeing one year at in the 65 to 70 basis point range. So, okay, that's helpful.

All right. Well, thank you very much. Appreciate that.

The next question we have will come from Gary tenant of d a Davidson.

Thanks. Good morning. What was it a try to get a better handle on the recorder workings in the margin and had to think about it going forward given the expansion in the quarter wage. Is it fair to assume that the margin actually expanded still more than that over the first couple of months of the year for then falling below that number towards the end of March. Yes, ma'am. Okay, that's the case and you want to you want to add on to it? Yeah, you know January February were you know, probably just Slightly North of the 370 number and then we didn't get the DraStic Cuts until a middle of March and then the final one. I believe on March 18th. And so the effect was certainly muted within the first quarter. But you know, we were in a situation where deposit costs were continuing to decline and then uh asset yields were holding steady and then of course middle of March asset yields fall down and so what we saw was the benefit of January and February as you

as you said with the

A decline in in March in terms of the overall margin.

Okay. So again to follow on that then the second quarter will see the full impact of the March cuts. And even though you had an extension for the full quarter in the first quarter. Second quarter should likely be the bottom and then beginning to get offset by lowering the cost. Is that fair. Yes. No Channel pattern. Is that way off? I'm sorry.

Okay.

And then I start serving the other question. I had I think had already been answered. So, thank you.

Thank you, sir. As a reminder. If you'd like to please play today's Q&A, please press * then 1 and a touch-tone phone again, not a star then one to ask a question next we have coffee.

6 morning gentlemen in the release you said that you were offering deferrals mostly to the hotel and restaurant portfolio through the end of March. I'm wondering to April. Did you expand the criteria who you might offer deferments to?

One of them called answer that Nick you want to answer that sure just give you a little bit more color regarding our total deferred payment request. As of today total. We have request from borrower in a number of loans $43 total amount is around two hundred three hundred thousand two hundred thirty nine million. So amount of those requests. Some of them is request for interest-only. Some of them requires four principal different also bought a portion of the request is for different bows principal and interest. Okay, and for the hotel portion, I would like to see a more specifically on the special-purpose hotel is part of them special purpose is hundred Forty-Eight around 28% of our hotel portfolio at this time.

Okay, and the deferments he said were six months terms. We offered 3 months to stock and we have provided another three months later on down Okay, so yesterday started to have some different other than the hotels namely in the in the I mean in in the retail area and we also see some apartments. Okay, smaller Apartments. Okay complex is having that started to have that before request demands. Usually I usually the capital mostly samples the New York area with the war mongers like one or two million dollars. They have few tenants that cannot pay, you know.

And remind me how much do the multi-family portfolio is in, New York?

We I don't know what's in New York. It is one that you have it. I don't have break down for that. I only have the total numbers. Okay. All right, not a problem. Thank you. And then Thursday, we're are you on the triple p a program? I know that you mentioned the press release that you know, you were starting to accept applications. I'm wonder if you you had any numbers on how many have been approved for funding before the funds ran out and how many you might have in the pipeline right now? Okay. All right, Jim just Willington as you know that we were not home SBA approved lender going into the first round. So because we we we have a obligation ready to take care of our customer. So we went ahead and contracted a third-party processor to take the application and process our customer and as well about over a week.

Little bit more than a week into the PPP program. We finally

Got FDA approval, uh after a PVP lender, so from there, we also started an internal processing. Unfortunately. We only had a month know little bit less than the day ready to take care of the application internally along so for the first so we all gear up for the second round and not the right now looking at a total app. We're looking at just under about $300 altogether total application between us and the third party and the question is how much is being so cocky approved for funding and how much is additional thing that likely approve the funding how much your proof of funding has 40 application and additional loans in the queue ready for second rounds about 250.

Okay, and do you have any dollar amounts on the 40 that were approved for funding? Yeah, it's about twenty million. Okay, would you think the average station on the other 250 would be about the same?

It'll be lower or okay the average because we have because of no forty application. So if you have a one big size loan approved kind of ask you to average, right? Yeah, and and then just on your appetite the whole these on the balance sheet. I can't imagine it's all that all that big given up their field is so would you kind of look to resolve them as quickly as you possibly can and we obviously that number one thing is that we like to would like to service our customer whenever request. I mean we immediately tried to process that that is why the reasoning that way you can take a third-party processor let them learn all the fees to process for our customers in the beginning, you know, so we think we can handle all that we don't have that many requests at this point. I'm although they're continually coming. I don't think the fee income will be dead.

Materially changing the second order picture that much and I don't think the net interest. Margin is that greatly affected in the second quarter? Okay, because their proportion okay, if it's all others only 1% That's that's the only effective management income him to add add on to that. Yeah to add on to that Tim. I think in terms of the size will probably hold them on the balance sheet and then try to get them work with our customer help our customer to get these all taken care of starting in June. Okay, and if I can what is the fee to the third-party processor? Is it Thursday? We are in 0

I'm sorry was that we have zero income all the income. Okay. Got it. Okay, I understand. All right. Well, those are my questions.

Next we have a follow-up from Gary tender of d a Davidson.

Hey, thanks actually had to follow up on the PPP question. I guess I was a little confused over the loans that the third-party processor went through the application process for when those still be on your balance sheet or those are going to be not even through Preferred Bank. Ultimately those will be on our balance sheet Gary. Okay. All right. Thank you.

Showing up further questions at this time. We will go ahead and conclude our question-and-answer session. I would like to turn a conference call back over to the management team for an occult or marks.

Well, thank you very much for joining are earning confiscate. This is truly a very very challenging quarter for every one day. So and wage right now. I'm showing everyone of you hoping everybody everyone staying healthy and safe and hope that the country gets better. So, thank you.

And we thank you, sir to the rest of the management team also for your time today again the conference calls. I've concluded. Thank you get everyone take care and have a great day at this time. You may disconnect your lines dead dead dead dead dead.

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