Q2 2019 Earnings Call
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The conference Archive you first of all I think please.
Yes, Potter's C O L O R Mcdaid M.C.D.A.D.
Well.
Well company do you work for.
Era.
Era.
And you're calling in for preferred bank.
Correct the FCC.
You're right I'll January through September .
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Preferred bank second quarter, 2019 conference call and webcast, all participants will be in listen only mode.
So you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After todays presentation, there will be an opportunity to ask questions to ask a question. You May Press Star then one on a touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I will now turn the conference over to Tony Rossi.
From financial profiles.
Investor Relations for preferred Bank. Please go ahead.
Thanks Chuck.
Hello, everyone and thank you for joining us to discuss preferred banks financial results for the second quarter ended June Thirtyth 2019.
With me today from management are chairman and CEO , Li Yu, President and Chief Operating Officer, Wellington, Chen Chief Financial Officer, Edward Czajka, and Chief Credit Officer, Nick Pi.
Management will provide a brief summary of the results and then we will open up the call to your questions.
During the course of this conference call statements made by management May include forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Such forward looking statements are based upon specific assumptions that may or may not prove correct.
Forward looking statements are also subject to known and unknown risks uncertainties and other factors relating to preferred 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.
Thank you good morning.
[noise] I'm pleased to report for the quarter.
The bank earned $20 million or dollar 31 cents.
Share which compares.
Quite well with previous quarters.
[noise] this quarter would have had a.
Extraordinarily large for us.
Extraordinarily large loan production.
Long increase.
Over 21% for the quarter.
Although some of the increases.
Is related to a very unusual.
Heavy draw down.
Hi, mainly about commercialized quest customized was balances.
Oh, well some of them was balanced solutions.
Yeah, I mean I mean.
Reversed the case.
And also it is also due to some out of the patent fluctuation in payoff activities, but even without these two factors.
All loan origination is one of the best in recent periods.
Deposits however.
Decreased $43 million.
One of the reason.
Is that we witnessed a very heavy drawdown of the bank balances by our customers in the last 10 days of June .
Some of these balances as it has been since rebuke okay.
Another.
Maybe perhaps another reason is that.
During the quarter.
We will.
Correct Ghibli correctly.
Predicted the.
You'd move when you Cook movement.
And then we made some rather early deposit rate adjustments.
Which in retrospect.
Is probably ahead of the competition.
But the good news is.
In the third quarter.
There will be a $340 million all times certificate of deposits maturing.
These deposits Kerry.
The same interest or slightly higher interest cost.
Interest rate average interest rate than what we're presenting the pay.
Well the cause quarter be maturing.
Time certificates carries even larger.
Interest costs than what we're prone currently paying.
For the quarter net interest margin coming in at 4.07%.
Which is pretty much as.
Internally expected.
Efficiency ratio was 31.7%.
And we're very comfortable with.
Our Aro AE of 1.9% and our OE is 18 and a half.
Percent.
We recognize we have a very.
Ray sensitive.
Loan portfolio.
But roughly I want to point out roughly.
Two thirds of.
At a very large portion of our loans.
Carries a higher interest rate floors.
These floors will be serving as protective mechanism.
Doing a rate reduction environment.
Especially.
Where can when we are continually making new loans at the current market rate in this fall.
And it was all loans being continuously being paid off which carries lower floor rate.
This protection seems to be.
Improving as time goes on.
To reiterate.
We have announced.
A $30 million.
Capital stock buyback recently.
Which would definitely serve.
As will give us the opportunity to manage our capital.
More efficiently.
Thank you and I'm ready for your questions.
We will now begin the question and answer session.
To ask a question you May press Star then one on a touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressing you will like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
The first question comes from Aaron Deer of Sandler O'neill and partners. Please go ahead.
Hi, good morning, everyone.
Hi, how are you.
Good thank you.
We the CNR growth this quarter really was very impressive I was hoping maybe you can give us a little bit more color behind the that the types of customers and what it caused that that growth and maybe the draws that you mentioned that were more kind of temporary in nature and then what.
That means for your expectations for overall loan growth here in the third and fourth quarters of the year.
Okay, well this seemed like rose this quarter coming from two different areas. One is a new loans, we're making which is also.
One of the best in recent quarters, the new rules that were making during the quarter.
Who did the.
Some of the you know four Oh, so for use in those couple of long time customers. We usually have a small battles as all of you on loans. They suddenly is coming to us to make make a big see in my long for them.
And also was with several new customers in the fields of distribution and financial services, Okay, So and in a wide variety of small loans.
So the draw downs coming from the I mean, the unusually drown down something we think is quoted in there seem to be that the three different type of people. One type of people is that they have emergency need such as a very good customer of ours have suddenly have a acquisition. So they use their own cash and I'll I'll quit aligned to close at the start of quarter. Okay. So there is also a number of customers existing to the buying property was down on cash and all credit line. Okay. And also also they are people as Louis relative small amount of people.
In view of Street.
Tension in the trade that terrorists trade war is start to bring up the inventory a little bit before that Jeff Taylor become really become effective effective you know so it's all this fact as you know that's happening in the quarter in some of these drawdown has been.
Okay has been repay backing them.
And the.
As as you as you.
As usual it is almost impossible for us to predict the cnine projection in the third and fourth quarter see Atlanta is a continuous and relentless effort that you just work on the walk on it some time it all happens such as this quarter.
Sometime very little what happens in one quarter, but overall all production going into third and fourth quarter I have little visibility about fourth quarter, but third quarter looks like our normal production.
Well be.
Would be would be the same in other way that's pretty much tracking second quarter's loan production okay.
However.
As second quarter include it.
Those those quarter end drawdowns for special purpose them since been repaid repay back in may and negative negatively affect effect year third quarter in term of what the loan growth say is concerned yes.
So I don't know what I may disagree on that anybody and anybody with a better ways of explaining for me.
Okay, well I, that's that's helpful in the.
Looking at the other side of the balance sheet just given that.
You had the strong loan growth and the kind of weak deposit flows.
Ed maybe you can give us some color I know you guys had a fair bit of excess liquidity at March 31 to work with and you got that deployed brought up the loan to deposit ratio quite a bit. If you now that you are where you are if you were to have another.
Strong quarter of growth as you had.
What.
How do you feel about your positioning on the deposit side, and where rates are going to be able to fund that and and at what cost or do you think that with with the rates coming back down now.
That.
You can you can come up with a funding that you need for to support future growth without having to really ratchet up your deposit rates.
Well.
One indication that seems to be the third quarter deposits, just duration would be able to beat up something positive volumes as of today, our deposit balances of $100 million higher than the quarter here. Okay. So we have internally, making a whole lot of sort of even try to continuously that event of the deposits are creating positive rate is very competitive.
Okay without without competitors okay.
And.
Second quarter seems to be.
Seems to be a bit that's a little bit the alba.
They did about.
Our usual for us.
Because seems to be at the end of as I said at the last 10 days of June everybody's drawdown that balances many of them has draw it down because dan, especially at the year to be down close it and this is Dan that user sign a new resource refinanced or do other things with it. Okay. So that's part of the reason our deposits back up so.
We.
We'll put out initiated and tried to review the deposit side to reestablish throughout times.
Our excess liquidity situation will always be very comfortable to have the deposit flows and the loan afterwards.
So I guess that's a.
Definite answer but definitely.
Okay terrific. Thanks, very much for taking my questions appreciate it.
The next question comes from Gary Tenner of D.A. Davidson. Please go ahead.
Thank you good morning.
[noise] excuse me I'm, just hoping you could tell us what the.
Loan origination yield was for the.
Second quarter.
Well okay.
Let me, let me I haven't we haven't hang on AG and long okay. Okay.
All right.
Okay.
Oh, okay.
We have two loan originations for years about in the 5.9% average.
But a lot of time, depending on the usage that the usage of that which you can see people fortunes things.
Okay.
Okay and then.
Can you give us any color on kind of the sequential increase in service charges and other income is there anything in there that was that was unusual or how should we be thinking about that.
For the back half.
Want to pick that up and Gary and service charges. There was about $50000 of what we would term a somewhat nonrecurring item.
With respect to L.C. fee income and other income that looks pretty much standard.
Okay.
And then you know you you address the spike in loan growth very very well.
I'm just wondering as we get into the back half of the year and what you generally see a little bit of benefit on the trade finance side do you have any sense from your customers.
ER, how things May play out there in the back half of the year compared to previous years, given given the trade situation.
Most of our customers did not sizable enough to really be able to tell it in there was any kind of insight information and many of them. We just.
Optimistically, hoping that it will get resolved soon because if if not they have to readjust their operations quite significantly.
But we don't see anything we just like we just in fact, we're looking to wall Street inflammation for leadership, while these kinda inflammation. So we just tried to state.
Stay alert to whatever is coming up.
Okay. Thank you for the questions.
The next question comes from Tyler Stafford of Stephens. Please go ahead.
Hey, this is actually Andrew Terrill on for Tom This morning, Good morning, guys.
Hi, Andrew.
Hey, maybe just to start on the on the net.
Just from a high level, how do you how do you guys see the NIM trending throughout the year and then kind of into 2020, if we if we do get a couple of rate cuts in the fab.
Well.
Obviously the rate cuts every one of them will issue revenues reached to reduce it.
And with that asset sensitive loans are rate sensitive portfolio I'll floating rate would be we will be reducing but if you have a couple of week cuts I expect the first cut what effect.
More than second cuts because a flaw came into play.
And as our TCV, we're continuously maturing and being repriced into lower cost to pay only their cost is already going to be repriced at the lower level, but was rate cuts I expect well every one of us will pay less for P.C.D.'s. Okay.
That that the benefit was still be increasing so somewhere along the line that will be across that that it will not hurt us anymore. So.
Great Thanks for that.
Maybe just a little bit more on the on the floors on the loans, you're referencing can can you give any kind of color around maybe where the average floor rates are.
Every floor rates you still have made through the all throughout the throughout the past 576 seven years. They are they are they are loans that was a very long senior already is that carrier real low rates. They are they are they are down rates that they are loans being made recently is kerry.
The recent floor rate, but.
You know Steve.
Current for already situation as we as we said as we said you know and then a good portion of our loans you know may be 15% our loans.
Carry a flow rate.
Okay at the current effective rate, Dave so the rate cuts would not be affecting us but was each cuts as they going on there will be more rates more loans being not affected.
All right that's good color. Thank you.
Maybe last one for me just on now that we have the share repurchase plan approved just wanted your thoughts on how you guys are thinking about utilizing repurchases moving forward.
Got it isn't a question [laughter].
Yes, well, obviously, we announced that we have to wait until the blackout period is over with but our goal is to start with the repurchase.
And then see what happens.
With respect to the share price and with respect to interest rates as well and then we will be able to obviously adjust it as we need to going forward, but at this at this point, we're planning on a tenbfive one plan.
To go ahead and start systematically repurchasing small amounts of shares.
Good morning, so shabby everyday.
All right that's it from me thanks for taking my questions.
Again, if you have a question. Please press Star then one our next question comes from Don Worthington of Raymond James. Please go ahead.
Oh, Thank you good morning, everyone.
I go.
I wanted to get back to the deposit flows to did you have any.
Customers move deposits from transaction accounts into Cds to get higher rates.
But there is.
<unk> is actually a small moving them all day, especially among business customers, Okay see moving from from the from the.
From the D A's or excess da's, our money market car, which carry a lower rate to dcbs. Okay. In fact every time there's a.
Right.
Increasing environment.
We all expect.
This thing to happen.
And that in fact, our regulators even told us way back when the rate is increasing sales.
You have to have you guys to interest rate risk when you manage it wasn't much of a deposit will be taken into the higher rate deposit state, which you what has been happening but.
As we continue to do what we are developing as we continuously developing is out our business accounts, so our rate of increases.
A movement of the second thing is kind of a kind of a.
Moderate.
Okay.
And then in terms of.
Lending sectors are there any that you are becoming more cautious about.
The current environment.
We have internally obviously have made the review.
Of all our all our our loans, especially with with the heavy trade terror related debt.
Items, Okay and from time to time that we are reviewing our real estate portfolio based on the various categories. We have but one of the things that most of our real estate, let's say 80, some percent Maria stays in the Los Angeles area and most other real stays in the.
Phew area.
Heavily is downtown West and based on the many of the current reports from many of your colleagues.
Affirms data is reporting that they'll they'll check with the real estate industry is in San Francisco, Los Angeles do vary.
Very hot we have made a review on the New York Real estate regarding the new rent control initiated we have very little exposure there.
I'm not taking was audio massive basis, Nick could you could you put some color on that.
Yes, New York multifamily segment is not substantial in our portfolio.
And also.
Just like this year I mentioned.
The turf effect in losses by minimal now are back.
Because our business model.
And we have enough closely monitoring all those loans now with you.
Really notice any kind of an active severe negative impact to our.
So far hopefully so from.
Okay, great. Thank you and then one last question did did you purchase any loans this quarter were they all originations.
No well towards close.
In fact, we will participate out several lower soda.
Okay, great. Thank you.
Our next question comes from Aaron Deer of Sandler O'neill and partners. Please go ahead.
Hi, guys. Just a couple of quick housekeeping questions on expenses and I was surprised to see the occupancy cost drift lower given that you guys have the new new headquarter space is this a good run rate for that line item.
It it's going to be a little bit higher than what you see errand, because we implemented as C 842, the lease accounting standards that right on cost a little bit in the near term, but that will be coming back up.
As as we go forward. So I would look for that to tick back up I know, we're at a million to 70 I would look for something probably north of a million three.
Okay and then.
Hi, I'm guessing you guys are through the the data expenses on your.
On your systems conversion is this now a good run rate for the professional services line or is that maybe running a little lower this past quarter as well.
[laughter], it's a good question Eric.
For the most part of the day to day three items with respect to the ITC conversion or are already baked did.
But what we saw this quarter was a legal fees were extraordinarily low as well as we received a legal fee recovery.
From an old item. So it was quite low this quarter, you're absolutely right I would not look for it to be this low in future quarters.
Okay terrific. Thanks for taking my questions.
This concludes our and our question and answer session I would like to turn the conference back over to management for any closing remarks.
Well. Thank you so much okay. We.
No well I would just hope that sector. We continue to operate was whizzy with our current the matrix scale it seems to be that.
That it's working right now and then that will obviously it would be very keenly observing the.
The rate environment. Thank you.
The cost.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[noise].