Q2 2020 Preferred Bank Earnings Call
[music].
Good day, everyone and welcome to the preferred Bank second quarter 2020 earnings Conference call.
All participants will be in listen only mode.
She need assistance. Please you know conference specialist I personally the Starkey followed by zero.
After today's presentation, there will be an opportunity to ask questions. Please note that today's event is being recorded.
At this time I'd like to turn the conference call over to Mr. Jackpots financial profiles. Sir. Please go ahead.
Thank you Jamie Hello, everyone and thank you for joining us to discuss preferred banks financial results for the second quarter ended June Thirtyth 2020, with me today from management, our chairman and CEO, Li Yu, President and Chief Operating Officer, Wellington, Chen Chief Financial Officer, Edward Czajka, Chief credit or.
Officer, Nick Pie and Deputy Chief Operating Officer, John issue management will provide a brief summary of the results and then we will open up the call to 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 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 banks 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 FCC 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 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 Mr. Li Yu. Please go ahead.
Good morning, Thank you for taking account those.
[noise] for the second quarter 2020.
We assume banks net income was $15.3 million, all dollar and three cents, but yes.
Well to last quarter in the same period of last year.
This quarter as early as litter light.
That was mainly due to a large sutherland have moved all those loan loss provision that we recorded during the quarter.
On the.
Pre provision net revenue basis.
Pre provision.
The tax net income basis, we all do limited little better then goes comparison periods.
Even though.
It was a lot.
Even under the current interest rate environment.
For the quarter.
Return on assets was 1.26%.
Return on equity loan.
12.65%.
At June 30 years.
Total p. people made was $74 million.
We have earned approximately $1.94 million in the fees.
The fees will be amortized over the life or the people competing goals.
These loans does carry a inches trade up 1%.
Obviously, PPP loans will be negative.
All have a negative effect to the name.
Second quarter deposit growth was $264 million.
The loan growth was $17 million.
Most number.
Is inclusive of the PPP laws.
Actually.
We have a.
Matt.
Organic origination.
Loans.
We made.
$211 million that fuels.
And have $161 million I'll pay offs.
Which netted that Oh.
Organic origination of $50 million.
On the financial statement that was wiped out.
I did reduction in revolvers.
[noise] dislodge disposed to between loan and deposit growth as creative.
That de leveraging leveraging of our balance sheet, which also had a negative effect on net interest margin.
Net interest margin for the second quarter was 3.53%.
On a 70 basis points lower than the first quarter.
Other than the P to P factor and the de leveraging effect I mentioned above.
I was a little bit over $500000 Oh.
Interest income reversal.
The also effect.
The margin.
[noise] compared to the first quarter.
Our loan yield decreased 47 basis points.
And not be posits costs.
Decreased 43 basis points.
We expect going forward [noise].
The pauses.
Who can be part of the cost to continue.
True decline.
Because of the maturity and the repricing.
Of all.
Hi statistic of deposit portfolio.
At June 30 years.
Total modify loans amounted to $467 million.
Toward the latter part.
Of the corridor.
Activities for new modification has greatly slowed down our moderated.
In fact as of June Thirtyth.
Only $4 million more you request in progress already in process.
And during the quarter many has.
Reaching our would be released real estate it too.
Almost status and between July the first it was July to put to use does another $25 million being reinstated.
Uh-huh Beeferman Ahmad if the key is generally slow three most.
40% of the modification loans modify loan offloading partial modification, which is for interest only all principal only.
60% is for the full P. and I.
Modification.
Modification generally is slow.
The month period.
For the second quarter as Weve reported earlier that we had.
A seven and a half million dollars all.
Loan loss provision.
Quite certainly going forward.
The reserve Butte will continue.
But the new provision to extend our the magnitude of the new provisional will be depend a quarter by quarter evaluation of the economic condition the status the virus and.
Development evolve.
Loan portfolio.
The large the positive increases has push.
Our total assets to exceed.
$5 billion.
The number is.
Poverty very meaningless, except.
To the morale of the staff a preferred bank.
The increase of deposit gave us great liquidity.
The also.
Penalized.
Oh, a and capital ratio.
Okay.
With.
Our current.
Efficiency ratio less than 33%.
Yeah.
Be pod becomes declining trend of a deposit cost.
And that.
All of all floating rate loans with floors are operating at full.
We feel very comfortable.
Was our operating matrix.
Thank you very much.
Oh I'm.
Im ready for your question.
Ladies and gentlemen at this time will begin the question and answer session.
You asked a question please press star and one using a touched on telephone to withdraw your questions you made press star into.
If you are using a speaker phone, we do ask that you. Please pick up your handset for precedent numbers to ensure the best sound quality.
Once again that is star and then one to join the question Q.
Well pause momentarily to assemble the roster.
And our first question comes from Timothy Coffey from Janney. Please go ahead with your question.
<unk>.
Great. Thank you want everybody.
Hello.
Hi, I think I just want to start first with the nonaccrual loans in the quarter can you provide some color on on those.
Okay, I would obviously S. Good new pipe to give you more details about that.
Yes.
Then unclassifiable a mountain cost by a couple of the loans, which we have recently downgraded to.
Classifying them across that's fine.
The first long actually.
It's fully secured by real estate.
And that during the past couple of months is the bar trying to sell to dispose the properties same pay back along.
However, the so it's not so sex spoke because of the Colombian I'd seen pandemic. He has been delayed where us continuous working with.
The borrower try we solved the problem.
The second one Oh, we have enough water downgrade it because of the bar filed chapter 11 recently.
And.
The cash flow a snack there'll be a pipe affected by a clogging acting a pandemic at the very beginning.
And also to serve one is related to a one of our smart all around 1.4 million in our New York area and the long so so far to secure and the borrowers working was the bank for refinancing and provide additional collateral to cover the risk.
Okay. What were the a book values are the first two loans.
Are you seeing a alley.
The book that book value added dollar amount.
The first one is 16 point yeah.
Hey meal in the second one 6.3 to you.
The third one is 1.13 meals.
Okay.
And and the the first one is you see it was in Los Angeles area.
Yes, okay.
Okay, and what was the second one.
The second one is also a in L. area.
Are you expecting additional write downs on these.
I'm sorry.
Are you expecting to write down the values of these loans.
Yeah.
We have a why did the sufficiently you have for my doesn't yes to that right. Yes for the second though the first one doesn't lead any the first and third along with his own SB 114 acknowledged is there a fully secure and we don't have Ah.
Why don't you spec any.
Loss for those tools.
Okay. Okay. I was I was kind of wondering if that the commentary that you had it right earlier on provisions were <unk> are related to these loans okay.
What was the a spot rate on your deposits in the quarter.
[noise], a when you say spot rates, Tim do you mean, the ending rate as the as of June thirtyth or during the quarter.
As of June 30.
As of June 30, the cost of deposits was some down to 74 basis points.
And in the comp line item <unk> did you include any deferrals of loan origination expenses.
Yes, yes, that's always in there, but that was one of the reasons for the actually for salary expense going up over last years levels. Tim is one of the reasons is the salary loan origination.
Activity as Mr., you talked about was there, but it was significantly down from where we were a year ago. So those credits to salary.
<unk> expense that we defer over the life will know those were way down as well.
Okay. Okay, and then just mr. yu the they don't pay off of 161 million, Yeah, where those would those properties or were those loans refinanced the other institutions.
Our willingness on the wireless the elevated.
Some of them is is a construction loan payoffs. Okay. Some of the is being refinanced by other institutional in a rather low rate some of them outright sales custom just sort of property.
Okay I'm talking if that's okay.
The <unk> and just kind of current environment do you expect that number that's just stay the same or or change either way on quarters. I give you I will give you my thoughts apps true.
Well I can give me his thoughts about the well he expect because a we each you know we think sometimes slightly different you know.
I can't just willing to.
For the third quarter to pay off no.
There's no really because it's so many moving parts as I mentioned in the past you know every quarter, we have projection though.
The pipeline.
Was in the pipeline and also talking project as accurately as possible on the payoff.
And really.
So I don't know factor right now.
Okay.
Well, Okay. My my thought is that we will be seeing in a third order on the our origination level on the pay off the boast reduced.
No one of the situation is judging from the activity of appeal in the second quarter. The does another situation is that was this virus going on maybe the people just making no movement.
Right no the that makes a lot of though.
Yes.
Okay. Those are my questions I appreciate your time thank you.
You're welcome.
Our next question comes from Nick Taco Raleigh from Piper Sandler. Please go ahead with your question.
Good day gentlemen.
And then.
So just a follow up on the NPL is the first when you mentioned you have to $16.8 million alone.
You mentioned that does the Doe lead sale processes that were looking optimistic at that point it sounds like it could cure in short order just stuff you know given the fact that a sale it for sale were to occur in short order.
[noise] actually you know this this is a this is this question is kind of a hot drifted from home a normal says point of view okay.
It should happen that way back long time ago, but.
But we have a custom is kind of.
Somewhat oh.
Hang up came up to a bit did the things they pay onto the things. They want to have every time when a deal is being made okay.
Either backed off somehow it's not recur.
You see this property.
It's really qualified as a from them, but since it was laid out before the di di di guidelines. It was issue, we really cannot give them, but for a month.
Going forward. So this thing is also they hang up down there. So we obviously if the using the up most of our energy try to.
Try to encourage him to get rid of the property.
That's very helpful. I know there were a few moving pieces with respect to the NIM. This quarter I was hoping you could help us think about the forward trajectory in light of PPP forgiveness on the asset side and not continued repricing on the liability side.
Yeah. It can do that Ed as you know you've got to already for [laughter], well I don't have a crystal ball I don't have a crystal ball mill, but.
Just a few things you know it you mentioned the moving parts and then in this quarter and as Mr. you talked about there was a pretty significant do what we call. It de leveraging of the balance sheet during the quarter role taking on a lot of deposits, taking a lot of cash with the earning 10 basis points and loans are not growing that's certainly has oh, rather negative effect during the quarter.
The reversal of nonaccrual interest had an effect of about three basis points. So without that we would've been about 360.
From a from a NIM of 370, I think the quarter before so the compression wouldn't have been up as as severe.
Going forward or if we do get PPP forgiveness on the 74 million, obviously that will that will be helpful going really into 2021, because I don't know that we expect a lot of forgive me movement on that forgiveness piece prior to the ended the year or in the third quarter.
I think going forward.
We are gonna have as Mr., you mentioned as the Cds maturing, we have 426 million maturing during Q3 at an average rate of about 161 of those will come back on an average rate of about 70 to 75 basis points.
So that will certainly help going forward and as much you talked about the err on the asset side, we don't see too much more slippage in the way of yields because so many of our adjustable rate loans are already after floors. So I think from does this was kind of the muddier. If you will have the margin for the quarter, we'd like to think so.
That's very helpful. Thanks for taking my question.
Our next question comes from Steve Moss from B. Riley FBR. Please go ahead with your question.
Hi, good morning.
Hi, I guess just.
Just following up on the on the margin here in terms of incremental securities purchases in the quarter or what's your appetite at this point for anything or any structures out there.
In terms of the bond portfolio not much I mean, what we try to do there is you know there's no home runs and there's really not even basis I don't know there's half its a few well because we are trying to put some money to work, but this is a bad environment to do it as you know a there's a lot of yield chasing out there. So we have tried to.
To place a little more money with our correspondent banks that gets us more returns in our 10 basis points at the fed a and then Weve incrementally added here and there are two the bond portfolio as we see you know small glimmers of a of opportunity.
Okay.
And then in terms of Uh huh.
In terms of the going back in non accruals kind of curious on on the property types for the $16 million or 16.8 million dollar not formal and the ER and the third loan and those.
Just as a commercial real commercial real estate strip mall kind of curious as to any color there.
I wanted to answer that.
Yes, two law actually cover by a feel properties. This is more a high end was doing show you not desirable area.
Okay.
And then in terms of.
I would tell exposure just kind of curious to give any color around what you're seeing for occupancy at those hotels, where they may be located in <unk>.
You know what your thoughts arm with regard to whether it's you know how you're going approach restructuring those loans.
Give me a bit longer distance <unk> dissertation on banks, we have to Beijing. Okay. No hotel is basically used to be missed some of the hotel is close okay. They may is somehow the only beside a constant goal just just keep it up but the one that's opened the recent report that we're getting is that.
Anyone ranging from 35% to 50%, Oh, Oh occupancy they actually two hotels, because it was special location and because their contract with a couple of such as New York contract would be first respond as they are only I mean, I mean, I may go up basically well occupied.
Put it put it that way that's number one.
Situation and I will tell basically our two categories. One category is in the Metropolitan City.
Youre proper San Francisco proper and Los Angeles, basically speaking that basically flat hotel National fact hold true now putting back and then.
Other outlets second the hotel in the choice. Some beach site location, we had a boutique hotel you Newport Beach Otijikoto in Redondo Beach right on the water.
One of them is our most companies right on the said.
Well, one imaginable, it's very small right on the Sam.
So in Venice, All these hotel is property value. The best we know, it's holding up very well because the choice location.
And if there were seeing a bottom hole pressure is that the opposite.
See I mean, you let me traded that I gave you on that on the report is de leverage at the date at the time of origination some of them actually is as since I appreciate it Oh right before that.
Ben Pandemics, okay, but one of the situation I must point now is that.
Substantially all the hotel.
Has recourse.
Okay.
And where we'd like to think is adequate recalls oh. So we are.
Well for that.
When the situation gets better all these people have to resources restock wholesale moving forward.
Hi, I'm not obviously, there was a one or two sort of issue there, but we're not expecting have a.
She was problem over there at least as of today.
That's helpful. When it gets I guess, one more follow up to that is what's the mix. If you haven't between the metro hotels versus the boutique hotels on the beach.
Well in total value is concerned.
Oh yeah.
Well, you, probably if I up against what 80 Tony.
Okay.
That's helpful and then in terms of.
In terms of expenses for the quarter.
Just curious you know that they came in lower than I think expectations, just any update on the third quarter would be helpful.
[noise] well, yeah, we actually [laughter], the second quarter was pretty good and in terms of holding expenses down there's no question about it I.
I think going forward or Steve you can we can probably expect expenses to be somewhere between where they came in for Q2, which is roughly 14 and a half million to 15 million someone in that neighborhood I also like to add on that at a little bit okay enforce the or if that if you. If you notice that we have substantially.
He did all the forecast in terms of I mean, I mean pretax pre provision.
Income and pre tax provision revenue all the forecast I mean that was.
Put out by Hugo people halted okay. The second situation is my closing remarks, it you're going forward.
Okay, we have a low.
Efficiency ratio, but important things that deposit cost on the declining trends.
And we expect other than to read repricing I've said for loans, we expect the loan you to be relatively.
Okay stable okay. So it was these fees sectors okay.
I am confident <unk> was the operating matrix.
That's fair yes.
One more.
Circling back to kind of I meant to ask is.
In terms of or just the assumptions or first people here kind of curious as to what you guys. It's easy for GDP, a unemployment and if there any overlays this quarter.
Currently a way our forecast is time frame and raise surrounding 11% to 12%.
Definitely a this number can go.
Very very a large if some of the major employment center or after rail putting a definite they sell a tough and pandemic situation. If they re shut down. So we definitely out we will look for a much much higher numbers and also GDP.
Contraction, we forecast is around 5% to 6% this.
So oh, we closely watch these two numbers down the road and well make a adequate reserve.
Index, you start well Q4.
Great. Thank you very much appreciate that.
Thank you.
Our next question comes from David Feaster from Raymond James. Please go ahead with your question.
Oh, Hey, good afternoon everybody.
Hi, I'm.
Just wanted to start on deposit I mean 264 million of core gross or even just.
Just a modest benefit on.
The PDP side I mean, that's real strong organic growth just curious how much that you think is sticky it's gonna remain on the bought balance sheet, maybe how deposits have trended in the third quarter and just.
Any any thoughts on on the deposit front.
Well.
At this point of time, I can only deposit as Bobby harvesting cooked to forecast on our side of it because it really does know pipeline slate gay and ER and largely depend on the customers use it but what is their quota. We see continued slammed the increase as of July.
Plenti players today as compared to two to true true to the quarter and okay, and obviously that a you know.
We have to moderate increase if it is going any.
Any more than same magnitude that we have to moderate that's okay and balancing between paying less interest a day.
Slowdowns deposit <unk>, what do you see for every dollar would deposit taking any way after losing money and if it other than deviate, which we do have grown nothing. So so the question only that unlike the old days I know you'd like to gradually problems every way, which we can we'd like to grab it obviously.
Yes.
[laughter] with some caution.
So I don't know how best to answer that I [laughter], It's Kevin are really I mean, we've seen yeah.
Yeah, that's great. That's incredible and then I guess just taking the the the positive gross decreasing deposit cost and then or the floors that you've got in place on the loans offset by lower yielding new originations I mean, how effective do you think those floors is gonna be aware.
Deposits repriced faster then loans the legal actually see core NIM expansion from here or I mean should we expect.
Additional modest contracts.
Well.
The leverage factor aside okay.
Actually it was up 11 in fact that you can.
You can actually.
Really you know in a figure out that the circle the onetime item.
Okay, which is the interest reversal I less willing to near future that alone falls apart, we have more things like that which would we have nothing as of today. Okay. So unless is that we should we should just seeing.
Yeah.
Them to be.
Relatively stable as I've said, whom you stay we said I think the probably the cost with the improving long long you will be generally stable in alone. He is always the payment or the payoff at the rate is always higher loan being made that's number one but right now the interest rate is lower.
Second situation, there's always a group of customers coming in says well I would be offered by so and so back okay to do a good or lower later on do you want to match it and the selectivity Womack. Okay. So these two factors always doubt, bringing the you adopt a bit.
But there's a pandemics going Oh, we see.
It's gonna be Meyer.
Yeah.
Okay.
And then just following up on the conversations on on the deferral I mean, it's great to hear that you've already had about 25 million come off but.
You know what the two to four month term, where basically a lot of those should be coming up the expiration of the initial deferral really in the third quarter I guess, what are your expectations for re deferral rate as we go through the third quarter.
We ask as you said with the three months before okay, we'd be fairly well, we've seen basically either one to seriously affected.
Some of the Oh, we very small amount in the restaurant fomenting bout of those things if they come in with a request we know that they get to grant to their today I mean.
And the safety and soundness kind lack of course.
Next thing is that okay. There's number hotel does not opening.
So.
We granted that before for the hotel that's opening I mean operating and we're seeing some kind of I I Kinda Castro, we absolutely for only partial possibly maybe the interest only all.
Principal only okay. So for the ones the currently with.
Posh would be firmly into either interest O'neil all all principal only especially those interest only point, we expect to them to return to the to the reinstate it too.
In the third quarter.
Oh.
Thanks, Kevin will they have not seen too many new request.
It's literally facing is staying there we referral bases is staying in those obvious industries.
Okay.
Okay.
And then I guess the last one for me is more of a maybe more of a strategic question that will be you bring the mix is a club delinquencies changing not only customer behaviors, but you've got more employees working remotely I guess, how does your strategy changed if at all I mean is there additional opportunity for either.
<unk> expense rationalization or is there anything that you've seen maybe that you'd be doing investing further in order to keep up with evolving claim behaviors. Just curious on many changes in strategy or thoughts on board.
Well, we just said the board meeting yesterday, who started to start to think about that I think as a previous to that.
Oh, you know in one quarter you just remember.
End of second call. It first quarters, just wonder locked out as being started and we just had one quarter even bands.
And I think was in this one quota with a cultural PPPC beeferman, new alone and gone through closing up and certain brands to short term because testing positive. All these kind of thing so well plenty busy Chesapeake buckhead above.
Yes, so obviously.
Going forward, if anybody has to work home. They you know that stuff that the that that that the staff realignment, okay, we'll be something issues.
We'll be looking into it because obviously that you know in.
Yeah.
The appeal origination activity has to continue hey, and also there is activity maybe because anything because the fact that everybody is working with home change is somewhat in the situation, there's something for a small institution like us we'd have not gone are wrong.
And really have to luxury.
Looking to that yeah.
But sooner or later, it's going to tap into every week.
Well I guess.
Okay.
That's helpful.
Thank you.
And our next question comes from branded Zagg from and three funds. Please go ahead with your question.
Yeah.
So thats no current partial to 23 million in addition to that troubled debt restructurings in the multifamily typically.
Could you share without some details on these situation and what type of modification swimming and you want.
Coffee.
[noise], that's one of the loans that are in.
Ellie pretty Oh.
At this stage.
Kind of a real estate collateral.
Our loan to values less than 50% and because of they have some sort of cash flow issues at the very beginning Dan or their work was the bank Dan are way up under a a forbearance agreement they are running out of payments.
Bringing a additional interest payments.
However.
Because it does happen before Oh the agencies a timeline. So we couldn't provide them up for a payment deferrals. So we have to put it under a TDR at this time.
Oh, that's very helpful. Thank you.
Could you remind us how much of your loan portfolios in California versus New York area.
The New York is only a.
350 million around.
The rest are in a either or.
North, California, Southern California.
In summary.
Hey stuff right yeah.
Mhm.
Hello.
Well thank you.
Okay.
And our next question is a follow up from Timothy Coffey from Janney. Please go ahead with your question.
[laughter], Yeah prison, Paula I, just had a question about the Pvp loans.
Can you quantify what I'm now or percentage or a less than 150000.
Hey, I haven't Jami I answer that okay, you have readily available.
On under 150000, yeah.
I would say probably a good.
60% to 70%.
Yeah.
Okay did you hear that Jan I did 60% to 70%.
Yes.
Okay, and what just kind of I don't know if you're able to share. The so what are your internal expectations for a windows might be for again. This is the by year end or.
In the early next year, that's how you thought there.
Well.
I think our expectations would be that are certainly majority of them are forgiven, we obviously here things coming out of the fed and other places talking about forgive automatic forgiveness for those loans under a certain dollar threshold.
We're fortunate in that we'd have a majority under that threshold, but I think probably by year end or by the time we have.
More seats and final guidance.
He's a whole up.
Mostly they all our customers okay. So on a two I see basis.
That's a week, we have high confidence that the numbers they gave us would lead to.
Well given us.
For sure Okay.
It.
As my follow up questions. Thank you.
And our next question comes from Gary Tenner from D.A. Davidson. Please go ahead with your question.
Thanks, guys. Good morning, I appreciate all the public colors gave on the mph and otherwise I just wonder if you could.
Give us some thoughts on what you're seeing a in terms of just general credit risk rating migration in the portfolio you know separate from the beverage those loans out of previously been classified into economical.
Hi, Tim or.
Our then those couple of loans.
Well I don't see any deteriorating in our overall credit.
Quality at this time definitely a later on or after deferment payment hence.
Yeah that's for.
The Q3 or Q4 things, where we have to watch that closely by up to now we haven't seen any are you.
Issues our credit this.
Portfolio.
Okay, I'm, putting or putting a lot on on deferral or modification certainly doesn't.
Stop the process of kind of reviewing and.
Thinking about internal risk rating. So so you're just saying that you're you're kind of.
Yes, good no pun intended we will after that birds are.
I could not be friendless every one of them going through our internal can see good looking at they qualify but the Burma and also in the long position we about at the we've already started but we will continue of Citibank review of all the loans that you at each.
And that deferment in any additional loans that.
Any one of us for you that we need to have the for the dive into that okay. Yes, that's how I, possibly even when we also look at even those decay industry view, so well look at alone is that we'll see affected by the China trade because.
Alright, thank you.
And ladies and gentlemen at this time and showing no additional questions I'd like to turn the conference call back over to Mr. Yu for any closing remarks.
Well. Thank you very much four wheel, we are interest and I know that's a.
You know in this in this in this quarter that does asked as a for US is slated to be the bill moyers compared to the previous Florida is okay, but again.
Again.
All bass is staying here to hope that the virus we saw over.
The next and can be found soon we can get it back to a normalized because most.
Oh, My guess is facing situation, we all kinds of.
Oh good customers are people is that that they will be generally.
Other quite it would be good in the normal circumstances, we just don't hope that.
Yes.
This number all credit just be being become a problem because the virus all people lost their livelihood, Oh, Oh wells because update.
Because the virus and.
Cross selling them freight thank you.
Oh.
And then with that will conclude today's conference call. Thank you for joining.
You may now disconnect your lines.
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