Q3 2020 Preferred Bank Earnings Call
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Good day and welcome to the preferred Bank third cup 2020 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a 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 but now like to turn the conference over to Jeff of financial profiles, please go ahead. Thank you Jason. Hello everyone and thank you for joining us to discuss preferred bank's Financial results for the third quarter ended September 30th 2020 with me today from management our chairman and CEO liew president and Chief Operating Officer Wellington, Chen Chief Financial Officer Edward Chica and Deputy Chief Operating Officer. Johnny shoe 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 ma'am.
It 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 our control of Preferred Bank for a detailed description of these risks and uncertainties. Please refer to the SEC required documents that the bank files with the Federal Deposit Insurance Corporation or FDIC month, 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 assist 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. Ladies and gentlemen. Thank you for joining our earnings, this phone call.
I am very pleased to report prefer Bank third quarter that income was 17.1 million dollars or dollar fifteen cents per share of these numbers compare.
Favorably with the prior 2 quarters. In fact on the provision pre-tax basis third-quarter net income in a month's mailing was the record high for our bank.
The quarters Improvement is largely the the significant reduction in deposit costs and continued overhead control.
Many people have always considered Preferred Bank either assets sensitive back. But if you recall about two quarters of them, I have already reported to you in our press release that we have became a liability sensitive Bank. I'm just very pleased to have something to show you in this quarter.
Deposit costs will continue to decline in the fourth quarter, but not at the same magnitude in the same place at third quarter.
What a quarter our net interest margin was 3.54% 3 basis points reduction from previous quarter mainly due to a large balance sheet and much increased SS cash. I'm half. However on the x p p p basis letting them actually improve to 3.61% from 3.59%
What a quarter deposits continue to grow 1.5% or 64 dollars.
However, long has declined 14 million dollars. I guess prolonged don't know a lot, you know main straight area, which is Los Angeles New York and San Francisco and finally affected the deal flow of Pipeline and what opportunities of loan seems to be also seems to be less attractive under the current environment.
today
much of attention and focus is quite a matter of space.
Is it June 30th? We have some performing loans total a little less than fifty basis points. We have decided if you charged off a portion of them and we have also decided to
Reserve whatever exposure
what you'll see the full amount and on the very consistent basis.
meanwhile
for the quarter because of for the quarter rumput loss provision was a larger number of nine million dollars. So as a result credit bill continues total reserve two loans is not staying at 1.58%
on the deferment site
cold or long the receipt modification under the Cal's Act.
Was $610 balance at June 3rd of June Thirty is 67 million dollars and balance at September 30th most.
One night.
199 million dollars in the third quarter. We had a 53% reduction.
We've also reached out to practically all of our borrowers inquiring about their plans.
And we're very encouraged to learn a great majority of the indicated that they are planning to to resume a schedule payment very soon.
No.
At December 31st could be a very modest amount.
Well the third quarter I return on equity.
with 13.7%
we prefer bank is elated about this not because the number represents after the significant loss provision am not because it represents the culmination of all the windiest work to restructure and reposition our loan portfolio off my balance sheet.
I rather
We Believe
bigger earnings
will give us bigger muscles to fight the uncertainties ahead.
Thank you so much.
And I'm ready for your questions.
Okay, we will now begin the question-and-answer session. That's the question may press * then 1 on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press * then two first question comes from Nick cultural from Piper Sandler, please. Go ahead. Hi guys. How you doing today, ma'am?
So you mentioned the increase in capitalized origination costs due to higher Loan Production versus the second quarter. Can you quantify that impact in bigger picture? Can you share your outlook for operating expenses wage? Hi Nick. This is a double. I'll take that one on loan. Originations were relatively flat on a quarter-to-quarter basis when we look at my YouTube versus Q3, but what we really saw was, uh, the PPP, um loan fees that came in and that's why we had the outsized capitalized credit Club under salary expense and also that had a benefit slight benefit under loan fee income as well in terms of going forward, um, non-interest expense Wise Choice, you know, we really don't
make it a rule to to give any kind of forward guidance, but
So obviously I think we did an excellent job with respect to expense control in the current quarter. I would look for that to continue as you know, that's what we're all about. You know, we actually breached off 30% efficiency ratio in this quarter. So I thought that was pretty impressive but in terms of going forward, I think it's going to be fairly similar probably up a little bit from Q3.
Sounds great. And I agree with your assessment. So this was the second quarter. We saw see and I pay down stamp in the growth you achieved in the real estate book. You had the big draw on Commercial lines in the first quarter. Now, we're back towards the end of the 2019 level would expect the balances is your sense the actual pay Downs are in the final inning.
Well, I I didn't quite really get get the question. I'm asking really based on whether the cni balance is continuous shoes off. You see an imbalance in this quarter as a reduced about $67 million dollars K mostly is the customers pay down. Okay, so nip were actually we have a little bit of map production. Well new production versus the payoffs has it shows a balance of a forty million dollars, but because of the cni existing customers less usage of our our our lower Mark, so the quarterly pulled along balance reduced by $14.
okay, your total Capital ratio is up nearly 80 basis points from the end of the year you continue to have strong internal Capital generation as you pointed out even in spite of the big Reserve bill. Can you help us think about your Capital priorities and specifically if and when you may revisit a buyback
Good evening a lot compared to our peer group where the lower half of a capital ratio. We have a designated peer group amount of people. So and I just want a time. I'll attention really is focused upon the uncertainties ahead of us. We just want to be well prepared for any kind of things that can affect it. We were Revisited at providing that our loan growth did not restart, but we start the loan growth. There's no need to buy back stock. We can offer you a more income for our shareholders by growing the bank.
Okay, and then lastly the tax rate came down quite a bit. This quarter seems to be more a matter of timing rather than a structural change. How are you thinking about the tax rate going forward with Nick? I'll take that one. This is Ed. Yeah, the tax rate came down in Q3 and that was a true up to the 2019 tax returns. So we would look for a somewhat similar tax rates for I'll be at probably just a little bit uh, and then for 20 21, um, excluding what happens with respect to the upcoming election would expect to head back to the right around 2929. V e t r
Thanks so much for taking my question.
The next question comes from Gary Tanner from d a Davidson, please. Go ahead.
Hello, Gary, is your landlord needs?
Sorry about that morning a couple of questions for me. I just wonder if you could provide any details on the charge off in the quarter. I didn't quite catch any detail. We've provided we have two larger loans a bunch of little you know, little instigate converter larger number that was placed on them a crew in a second floor. And these phones are currently in the alarm collection process. Although indication is that wage the latest appraisal value, which is a wire ago is still well covered along but we believe the market value has slide on the end because it consists of the collection process of the miracle of it. We decided to go actively and and Reserve whatever exposure we can we can confine wage.
I hope it's a you know, sort of like proactive movie preparing for what 2021?
Okay, great. And and on the previous question in terms of of, I think you said that you had the benefit this quarter that down lower because the PPP fees came in this quarter, but the Deferred had been abducted in the second quarter from the PPP production. Well, actually a majority of it was a lot of the fees received and the bookings took place in Q3. So it was after after the end of June when a lot of that took place in addition to that page with respect to cop expense bonus expense was also lower this quarter as well. And as you know bonus expense incentive conference, but the expense is a component of the bank's overall profitability.
Thank you.
The next question comes from David feaster from Raymond James, please. Go ahead.
Hey, good morning, everybody. I miss you. I just wanted to follow up on your comments at the start. You would kind of made it sound like you're that new loan opportunities might be a bit less attractive in the current environment is that I understand that correctly and maybe just why is that is it structured wage is pricing is it just uncertainty in the market? Just curious your thoughts on you know loan demand and your appetite for new credit.
Mentioned just about every possibility but let me see it enough new opportunity for hotel room. You don't want to do it. Okay new opportunity for Life along the chances you want to do is less than 50% Okay, even in the old days seems to be fine and at new opportunity for some specialized products are often so long and to become it's you know, it's it's less about I mean attractive especially in some of the areas that we operating at and today was a prolong life straight, uh situation people also looking for loans at the price to the unreasonable level. Would you believe the Hmong pricing is Leslie Marmot meeting just Mom and so so so so that makes it eliminate a lot of the opportunities that we looked at David. I'm going to add to that wage.
Mr. You said um, you know, a lot of the economic activity going on in the United States is very regionalized right now and very localized. Um, if you look at what's going on in the South and economic activity there the Midwest far more than what's taking place in California. I mean, LA county is still in one of the strictest lockdowns in the in the entire country still wage as well as New York and so as we look at lending opportunities, we have to look at our local economy. And what's going on there as opposed to you know, what maybe more of a macro thing to look at home. That's a that's a good point. So probably I mean you guys are still you like you said origination have been flattish. So probably some exclusive of which is obviously going to decline probably some time to maybe modest contraction loan balances in the short run.
Well, actually, you know, because we are socialized one went off type of loan company on the special loans. They would come to us ke early indication the fourth quarter that we maybe have some
Seduction it is, you know, we don't know the payoff situation was coming on the later the quarter and so on. So look at life is we try our best but right now is the key situation as far as to manage our credit and took keep our profitability up. Yeah, and that's kind of along those same lines. You guys have done a tremendous job defending the margin and you know, all the tremendous jobs reducing deposit costs and x p p p was was actually up quarter of like you alluded to you know, but you had mentioned that the, you know, the uh, the incremental reduction and deposit cost is probably going to be less than uh near-term. Do you think that you can continue to support loan yields and outpace the the deposit Costco outpaced the decline in colonial that we could see, you know, barging flat to up or would you maybe explain
So further name compression just given the pricing challenges that you you'd mentioned. Okay, so lonely reduction in the
For third-quarter. Okay is in the neighborhood what the actually it is in the single-digit situation. So I like to I like to think in the first place order that probably that the reduction in interest cost will be would be would be upsetting the low gear reduction at least.
Okay. Okay, that's helpful. And then last name for me you guys have done a terrific job on the deferral front have you know, they're down significantly off but I guess how have deferrals trended since not that 9:30 level. Like where are they today? How much of the balances are second deferrals versus those that are still on Thursday and it kind of does that 27 million dollar deferral Target that you guys put out in your presentation. Is that still holding true?
well
Why don't you tell me you want to take on the question and add on to it? I think hi David. This is Wellington. I think that the the the pearls is all on the second already on the page. That's included. Okay, so this is it, okay.
Okay, so like after your conversations, there's nothing has really changed in that $27 kind of targeted too late out after all the conversations with your borrowers. You're still thinking minimal wage the end of the December actually, if you read a text of our press release the indicate, they are still four million dollars in requests for the federal wage is a the 30th. Okay. So the question is referral sometimes are coming. But the number is very do you see many of our customers has been paying out of their pocket loss or a period of time but since the last time is less than more than you and I will originally originally anticipated. Okay. So the question was some of them finding I mean starting to have difficulty in many cases that different new deferral with blending is only principle only a partial interest. Okay. So if you look at the pub
It's too far away from closets that 40% of our deferrals partially froze. Okay, so we look at everything study everyone and trying to see do you you know under the underwriting principles in granting of deferrals.
Okay, that's helpful. Appreciate all the color guys. Thank you.
The next question comes from Team coffee from Jenny, please go ahead and everybody and thanks for hosting the call today. Thank you. I guess I want to follow up a little bit on the the the loan demand from your clients, you know, so if the restrictions were lifted tomorrow, I mean, would you expect to see a resurgent in demand for credit from your borrowers or is it more that your borrowers? I'm kind of hesitant right now to make new Investments and and and things of that nature.
no my
Question is that my impression that is a lot of money on the side light? Okay, and the people are just waiting to to jump into it. Okay, I mean one of humor. Oh, I agree. I think that there are a lot of money on the sidelines. They are waiting for opportunities and it's looking a spiked up overnight. Probably not sure if we're going to be also be cautious too and they'll wrap it up gradually, but I think that there's definitely it's pandemics done tomorrow Thursday. Then we have to look at our computer as well to know how the market react and we have to look at what's the again as you've mentioned earlier the pricing of the loan
Sure. Okay. All right. That's helpful. Thank you. And this surfing back on the referrals, you know with the Positive trajectory of the deferrals are you reserving or is it a little too early to make that that call we have we have no I mean talk about Reserve is overall. Okay, and it's for the phone no future. Let me ask you answer you by doing this. Okay, you know I have reached out to several of our shareholders.
I said well.
Give me my situation doesn't look that bad. In fact reasonable reasonably good.
What do you want me to do?
Under the uncertainty because there may be a second wave on the vaccine and today. I mean the the the government officer come out in that all maybe six months before everything was happening. So what about if New York is locked out for another six months and will not let anything happen. So
Majority of my shareholder and tells me suddenly you're in the Long Gate.
You should manage the bank in the safest and most conservative basis under the current environment. So I guess
I mean we will make some additional further.
Further Reserve or credit? Okay, but again, we will open our eyes to see what I can condition you. I know we're in primary. Most of the bank is reporting back to provision and so on so forth but seems to be demanded of my shareholder is that they want us to play safe, especially.
I believe in the state was do you have a 13% return on my investment and seems to be they're happy with that.
Okay. Well that's helpful. And then just if I could on CDs that might be replacing this quarter if you know what the yield on those are our the coughing and where the market rate is right now.
I know the number 34 million dollars would be would be would be renewed in in the fourth quarter. Okay?
Okay. See on that is 160. Okay, and currently I'll I'll see you later in a 60 70 basis points right off. So there will be some savings but mind you the the $434 is not really even be renewed during the first quarter. Some of them I guess in a bigger portion would be in the December. Okay. All right. That's very helpful. Thank you very much.
The next question comes from Steve Moss from FBR, please go ahead. Good morning. Just to start with going back to credit here for a moment with with regard to you know, the provisions cords kind of curious. How much was the specific reserve for the two larger credits here? I think we reserve additional $6 also possibly six million dollars.
Okay, other than the charger.
Right. Okay. So then absent specific reserve your provision for the quarter. We've been close to three million just as we kind of think about economic impacts kind of a fair way to think about it off. I think the charge of really is. No you cannot Reserve is that has has has a really impact in other words in the off-season basis. If we make a reserve a five million dollars provision will be five million dollars. Okay, and the next quarter charge of is just a reduction of the reserve. That was previously Thursday.
Right. Just trying to think about the the just the driver of the provision going forward. If economic forecast remain relatively stable. The biggest driver going forward will be whatever you may have in terms of specific Reserves.
Could you be a little more specific about about that? Okay, so I mean, okay.
I guess you have hang on. I'm sorry. Let me Steve. I'm sorry. I want to correct what Mister you said earlier apologies, but um the specific Reserve assigned to those two specific credits was 3.3 million when we're looking at the overall provision of of nine million dollars something specific, uh was 3.3 and then the charge off on the two was 3.5 charge of his already done. Okay, so it's going to take so Edition 3 million dollars. Right? Right. So I just wanted to see if I want to clarify that. Yeah and so back to your question in charge of the three. Okay. So then just as I think about the drivers of your provision for lack of the permission going forward, if you know economic forecasts continued generally improved, you know, barring some exceptional specific reserves, you know wage.
Probably should see a meaningful.
And in the loan loss provision going forward. Well, yes, sir. If economic forecast is showing the Improvement we would definitely reduce the provision. Okay, and if the deferment works out to be like we projected to be and there are known knowns use surprises the whole situation with maybe some point 2041. Would you release the reserve right that in that given given the situation as of today? I don't think any Economist worth giving a definite answer the how economy is really is doing that well, and as I stated earlier is that the majority of the consistent issue is expecting us to play a safe.
Right. So okay, the short-term booting the property was you continue with a lot but we would definitely making the adjustment. I mean, I mean whenever whenever is I mean is indicating so
Okay, that's helpful. That was I just wanted to try to get down a little further into that. The rest of my questions have been asked and answered. I appreciate that. Thank you. Thank you.
The next question comes from Andrew Terrell from Stevens, please. Go ahead.
Hey, good morning, everyone.
Hi Andrew hates. Most of my questions have been asked and answered already. Maybe do you guys have the the balance of classified and criticized loans this quarter?
We we do we do. Hang on let me got a lot of paper here. Hang on.
There it is.
Classified is 59.
And then overall criticized would be the special mention plus the criticized and about $139.
Add it together. That's helpful. Thank you. So I'm looking at a table you guys provide and release that breaks down the the loan portfolio by bucket and gives them the loan-to-value and then debt service coverage. This is extremely awful breakdown. By the way. If I compare the court this quarter versus kind of last quarter, most of the real estate buckets saw an uptick in loan-to-value by about 3% on average. I'm curious is this more just an ebb and flow of the portfolios or are you getting updated appraisals on properties right now? And if so, how are those valuations casting to the the previous ones in place? You want to answer the first? Yeah, I would say at this point Andrew. It's really a combination of both there is certainly turned through there. Even though the Palm only moved fourteen million. There's you know, fairly a fairly decent amount of activity that goes in there with respect to pay off new origination as well as renewals. So on the renewals, uh,
depending on the the
In size appraisals are updated. Other than that it's as you said, it's the ebb and flow.
All right. Thank you. Just last one for me. Have you guys started submitting applications for the forgiveness? And do you have any kind of just ballpark estimate on when you anticipate recognizing the fees?
I mean you want to answer that. Yeah, we we did submit forgiveness applications already and if you have come in in early early October, so we expect that to be continuing throughout the fourth quarter.
And the fees are currently being advertised over the lights of these loans right now. So the the fee recognition at the end of this won't be that significant because we'll also have deferred cost to recognize an object in relative sense. It's you know,
it would not settle things down much.
Got it. Okay. Thank you for taking my questions.
Next question is a follow-up from Nick culturelle from Piper Sandler, please go ahead.
Because just just a quick follow-up on the name. So point-to-point you had a big increase in cash balance is September 30th relative to June 30th. We're only a few weeks into the third the fourth quarter here but has excess liquidity started to come down materially at this point.
No, I am no happy but not happy about that stuff upside down. That's what I'm saying.
This concludes our question-and-answer sessions. I would like to turn the conference back over to you for any closing remarks.
Well, thank you. So so very much for your for your for your attending the conference and we hope you know, we we hope we can continue operation underneath metric switch that give us a give us the kind of a possibility in the uh situation where like to have thank you so much money to compensate is now concluded. Thank you for attending today's presentation. You may now disconnect.
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