Image source: The Motley Fool.
Preferred Bank (PFBC 1.66%)
Q3Â 2019 Earnings Call
Oct 16, 2019, 2:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, and welcome to the Preferred Bank Third Quarter 2019 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Tony Rossi of Financial Profiles. Please go ahead.
Tony Rossi -- Investor Relations
Thank you, operator. Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the third quarter ended September 30th, 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 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 Bank's 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 SEC 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 Bank's 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.
Li Yu -- Chairman and Chief Executive Officer
Thank you. Good day, ladies and gentlemen. My name is Li Yu. I'm pleased to report our third quarter net income of $20 million or $1.32 a share; although this is only slightly better than the second quarter, but we have had two Fed rate cuts in the quarter. We have a very strong quarter in loan production. Although the final results for loan only increased $89 million or roughly 10% annualized, but this was tarnished by the last quarter's activities. If you recall that at June 30th earnings call, I reported to you that there had been a large usage right at the quarter end of customer of the C&I credit line, which was paid off immediately in early July. That has benefited production results of the second quarter prior to third quarter.
As a matter of fact, we had one of the largest loan products quarters in our corporate history. During the quarter, we have originated $511 million in the new commitments, which had an outstanding balance of $349 million of new loans this quarter. But to us, the real highlights is our deposits production. Our deposits increased $192 million or 20% on the annual basis. We have had a number of quarters that our deposits was trailing the growth rate of the loan. We're so pleased to see this increase in deposits that had added additional liquidity to fund our future growth. At quarter end, we had $465 million cash on hand. Although this large increase in deposits had changed some somewhat the leverage, which affected the net interest margin which reduced 23 basis points from last quarter, the decrease was largely resultant -- I mean, related to the Fed rate cuts.
We have had some interest cost reduction. Our transactional accounts interest cost has reduced reasonably, but our TCV deposit interest did not reduce by much. This is remarkable because of the maturity schedule and market competition. We will continue to focus on our deposit cost. Loan quality -- I mean, the credit's posture is stable. We had a $435 million loan charge-off in the quarter, but that was related to all those previously fully reserved non-accrual loans. Year-to-date, we had a $216,000 of net recovery. We have today -- on September 30th, we had bought back 209,000 shares of our common stock and the buyback activity is ongoing. The Bank has always been trying to maintain a low operating expense and a high profitability, and we'll certainly continue to do so.
Thank you. I'm ready for your questions.
Questions and Answers:
Operator
[Operator Instructions] Our first question comes from Aaron Deer of Sandler O'Neill & Partners. Please go ahead.
Aaron Deer -- Sandler O'Neill & Partners -- Analyst
Hi. Good morning, everyone.
Li Yu -- Chairman and Chief Executive Officer
Hi, Aaron. Good morning.
Aaron Deer -- Sandler O'Neill & Partners -- Analyst
I was impressed by the deposit inflows this quarter and was hoping to understand maybe the dynamics behind that a little better. Can you talk about where those were coming from and if it was through the branches or if it was through some of your deposit gathering team specifically and what kind of costs those new deposits came on at? I'm just -- I'm curious to know if you were lagging others in the market who are dropping the cost and so that helped to bring some more inflows your way or what were the dynamics there.
Li Yu -- Chairman and Chief Executive Officer
We were getting our deposits in several different sources, but the big increases. And obviously number one is the -- we are gaining certain customers. As I reported earlier, we had originated $511 million of new loans, many new loan customer were over a very meaningful deposits. Second is that, actually relate to our customers, last quarter, had heavy usage of their own fund. As I always report -- also reported last quarter end, this has reversed to a normal situation. So their bank account has increased with us. Other than that, our gathering team all over the Bank is heading at their normal growth. So this three factors adding to the increase in our deposits.
Aaron Deer -- Sandler O'Neill & Partners -- Analyst
So have you tested the market in terms of where do your deposit cost stand today versus three months ago? And how do you -- do you expect to be able to continue reducing deposit cost if you're moving them in that direction? And how do you expect your deposit flows to react?
Li Yu -- Chairman and Chief Executive Officer
We would -- I will have Ed reply to you, but we've, on the general deposit, reduction basis to lead is that, the transnational accounts will be price based along the Fed movement and certainly market competition will affect that. But the TCV will continue pricing -- I mean, pricing lower in our costs, but it depend on the maturity schedule. Now, our TCV can change cost overnight. It's over -- I mean, as average, it reduced one-twelfth each month. Ed, do you want to add to it?
Edward J. Czajka -- Executive Vice President and Chief Financial Officer
Sure. Yes, in terms of looking at month over month and this is nothing that's public, but since we are on a public speaker, the average cost of deposits has come down 14 basis points in just the last two months alone. So we are starting to see some traction. We just did not see a lot of traction from a quarter-over-quarter basis when you look at the average costs. As we look at the CD maturity schedule out six months, there is going to be a pretty decent differential between what's maturing and what's coming on and renewing, and that's only going to get more noticeable as we get toward the end of the year and the beginning part of '20. The differentials are going to be very large if we remain in this current interest rate environment.
Aaron Deer -- Sandler O'Neill & Partners -- Analyst
So if we see -- let's presume that we get no additional rate cuts just for simplicity sake, but the rate environment in the curve stays as it is today, obviously, that -- with those initial rate cuts, it hit the margin pretty hard with the secondary effect of deposit costs now coming down as a result. With that setup, where would you expect the margin to trend from here?
Edward J. Czajka -- Executive Vice President and Chief Financial Officer
That's the $64,000 question, Aaron. Given the fact that rates are going to -- if we're assuming rates are going to stay the same, I would expect to see a little more compression in the current margin and then I would expect to see margin expansion. We currently have nearly half the floating rate book protected in terms of two -- for the rate cuts. So the floors are certainly kicking in and we will start to make a difference if we get anymore.
Aaron Deer -- Sandler O'Neill & Partners -- Analyst
Okay. That actually goes to my next question was in the nature of the floors. Can you talk about kind of where those floors were layered in as rates were going up and what that means for your loan yields and as we come back down again?
Edward J. Czajka -- Executive Vice President and Chief Financial Officer
Well, as they were going up, obviously, there weren't as much as of a concern, although we kept them in place as rates were going up. But as you can imagine, the difference between what we're actually getting yields versus the floors in an up rate environment is fairly meaningless because it's so wide. Those things start to narrow as rates start to come down. And what our goal has been has to try to as each loan renews is to try to pick up the floor a little bit on these prime-based loans if we can, if we have the leverage to. Right now, we have roughly over $900 million of floating rate prime-based loans that are already at their floors.
Aaron Deer -- Sandler O'Neill & Partners -- Analyst
And that's exactly what I was looking for is, what -- can you break out -- of the $3.5 billion of loans or so, what -- how much of that is protected by floors and kind of at what rates below were the prevailing rate is today?
Li Yu -- Chairman and Chief Executive Officer
Before Ed reply to you on that, there actually mathematically is one thing. There is few other dynamics in the real life that we have to account for it, for our bank, I think is for many other banks, there will be continuously new loans being made, and old loan being paid off. Old loan usually carry a floor, is much lower. So the so-called the layer would change on the monthly basis. Second thing, many new old loans gets renewed, and when they are renewed, they're generally updated to a higher level floor, if not, the current floor. All these factors is depending on also the movement of the proportion also as how much being paid off, how much is the new loans that's being originated, right. So these are the -- some changing. We have seen a very encouraging curve of moving up the floors to the situation. So even I, with all these information I can't barely -- I cannot estimate what the result is.
Aaron Deer -- Sandler O'Neill & Partners -- Analyst
I appreciate that. Thank you.
Edward J. Czajka -- Executive Vice President and Chief Financial Officer
Yeah. So I guess just to add to that, as I said, we have about roughly $940 million of floating rate prime-based loans that are at their floor, they will not move. In addition to that, in the portfolio, we have over $500 million of fixed rate loans, which will not move obviously. So we're protected on those components of loans. And then, as Mr. Yu says, this number in terms of our fully indexed rates that are at their floor, below their floor, is really a dynamic number. And to give you an example, the dollar amount of loans that were at or below floor doubled from August to September. So some of that is a result of the rate cut, but also a lot of that is a result of what our officers are doing in terms of these loan renewals.
Aaron Deer -- Sandler O'Neill & Partners -- Analyst
Sure. Okay, well, good. I appreciate the color. Thank you.
Operator
Our next question comes from Steve Moss of B.Riley FBR. Please go ahead.
Steve Moss -- B. Riley FBR -- Analyst
Hi. Good morning. Wanted to follow up on the loan floor question. If we get another rate cut here whether it's October or December, how many additional loans will be at the floor with one more rate cut, all else equal?
Li Yu -- Chairman and Chief Executive Officer
Let's see. You want a rough estimate?
Steve Moss -- B. Riley FBR -- Analyst
Yes.
Li Yu -- Chairman and Chief Executive Officer
I would say probably 20% of our loans will be updated -- upgraded to the floor.
Edward J. Czajka -- Executive Vice President and Chief Financial Officer
Yes.
Li Yu -- Chairman and Chief Executive Officer
To the protected level.
Edward J. Czajka -- Executive Vice President and Chief Financial Officer
Yes.
Li Yu -- Chairman and Chief Executive Officer
That was between the dynamics I was talking about and then the current rate that is only 25 basis points below the floor -- below the whatever, below this index.
Edward J. Czajka -- Executive Vice President and Chief Financial Officer
Yeah. Index.
Steve Moss -- B. Riley FBR -- Analyst
Okay. That's helpful. And then also wanted to dive in maybe a little bit further on the spread between the roll-off on new CD money dynamic. Ed, what is the spread now between the CD rates you're putting on today versus what's maturing?
Edward J. Czajka -- Executive Vice President and Chief Financial Officer
Today, Steve, it is around 30 basis points.
Steve Moss -- B. Riley FBR -- Analyst
Okay.
Edward J. Czajka -- Executive Vice President and Chief Financial Officer
However, as I said -- as I was telling Aaron, as we get closer to the end of this year and into the beginning of next year that spread widens significantly upwards of 60 basis points plus.
Steve Moss -- B. Riley FBR -- Analyst
And that's before -- if we had -- before any additional rate cuts?
Edward J. Czajka -- Executive Vice President and Chief Financial Officer
Yes, sir. And that's before any additional rate cuts. If we get more rate cuts, that's obviously going to get bigger.
Steve Moss -- B. Riley FBR -- Analyst
Right. Okay, that's helpful. And then just wondering on the loan pipeline. Obviously, that was a good quarter for originations. How was customer activity and what's the outlook on that front?
Li Yu -- Chairman and Chief Executive Officer
Well, the third quarter is historically one of our better quarters in the situation. And first quarter is historically one of the unpredictable quarters for our history. We have seen that with a rate reduction, many buyers they become a little bit more active on the marketplace on the real estate and many more -- actually many more new projects wanted to be started. So I would say the general environment of loan production is trending toward up a little bit in term of real estate activity, CRE is concerned. On the CMS side, we see a little bit more usage of our credit line mainly because the cost reduction. But the real thing is that -- Wellington will give you more color in the whole situation.
Wellington Chen -- President and Chief Operating Officer
Well, I think the real color is that's, as Mr. Yu mentioned that, it looks like the pipeline is exactly -- it's hard to predict. I think the bogey is the pay-off because pay-off is always lingering out there. So while our loan pipeline is pretty robust right now, we have -- we do have some loans that carried over from the third quarter as well. So as I mentioned, again the pay-off is the bogey.
Steve Moss -- B. Riley FBR -- Analyst
Okay, that's helpful. Okay. And then one last question for me. Just -- obviously, a more challenging rate environment, but the floors going forward definitely help. How do we think about expenses going forward? I know you guys want to maintain a low efficiency ratio, but is there a possibility that expenses could come down, I mean, there is obviously very good cost control this quarter.
Li Yu -- Chairman and Chief Executive Officer
Well, so one thing is that -- so it's going to be -- we all want to control the cost, but we have been controlling the costs to the level is probably one of the lowest in the industry. So going forward, I think that the cost as a percentage wise speaking we'll maintain the current level, because our total assets will be growing, our loan portfolio deposits will be growing. But the pure number expenses, it always increases. I'm not going to go tell my staff, you guys are going to take a cut next year. So, in fact, with the labor market it is right now, we have -- recruiting people is -- I never had a such a difficult in the period recruiting new staff. So actually, I mean, human cost is two-thirds of -- nearly close, a little bit over two-thirds of our total cost structure. So that's the biggest element. And rent has [Indecipherable] increase, right. And all other costs seem to be all picked up a little bit. We don't see any decrease in the same. Lawyers always charge you more, by the way, OK. So our hope is that our practice has been to growing our bank to keep our costs in control.
Steve Moss -- B. Riley FBR -- Analyst
All right, thank you very much, I appreciate that.
Li Yu -- Chairman and Chief Executive Officer
Thank you.
Operator
Our next question comes from Gary Tenner of D.A. Davidson. Please go ahead.
Gary Tenner -- D.A. Davidson -- Analyst
Thanks, good morning. I am just wondering that if you could tell us what the average loan yields were in the quarter versus the second quarter.
Edward J. Czajka -- Executive Vice President and Chief Financial Officer
Average loan yield for third quarter, Gary, was 5.93% [Phonetic] versus an average of 6.14% [Phonetic] for Q2.
Gary Tenner -- D.A. Davidson -- Analyst
Thank you. And just to clarify in Li's prepared remarks, the production and new loans was -- were those year-to-date numbers?
Edward J. Czajka -- Executive Vice President and Chief Financial Officer
No, those were for the quarter, it was a very robust quarter for loan production, over $500 million.
Gary Tenner -- D.A. Davidson -- Analyst
Okay. Would you run us through what those numbers again, if you, really quick.
Li Yu -- Chairman and Chief Executive Officer
Well, we had a net loan origination of $511 million.
Edward J. Czajka -- Executive Vice President and Chief Financial Officer
$511 million.
Li Yu -- Chairman and Chief Executive Officer
Of which -- that's a commitment. The outstanding amount of new loan that was originated in the third quarter is $349 million.
Edward J. Czajka -- Executive Vice President and Chief Financial Officer
So, the differential would be the pay-off.
Gary Tenner -- D.A. Davidson -- Analyst
Yes. Okay, thank you.
Operator
[Operator Instructions] Our next question comes from Tim Coffey of Janney. Please go ahead.
Tim Coffey -- Janney -- Analyst
Thank you. Good morning, everybody.
Li Yu -- Chairman and Chief Executive Officer
Good morning.
Tim Coffey -- Janney -- Analyst
Ed, if we look to the reg data for Preferred as of the second quarter, it indicated that 70% of the CD book would mature by the middle of next year. A quarter since that data -- has things have that -- has that percentage materially changed?
Edward J. Czajka -- Executive Vice President and Chief Financial Officer
I wouldn't say so, no. That sounds about right, probably 70% in nine months, is that the time frame, you're talking about Tim?
Tim Coffey -- Janney -- Analyst
Yes.
Edward J. Czajka -- Executive Vice President and Chief Financial Officer
Okay. No, that sounds about right.
Tim Coffey -- Janney -- Analyst
Okay. And where are you on the buyback authorization. How much more do you have the ability to buy back?
Li Yu -- Chairman and Chief Executive Officer
We have spent as of September 30, roughly one-third of our money. So we are intending that it continue scale.
Tim Coffey -- Janney -- Analyst
Okay, all right. Well, thank you. The rest of my questions have been answered.
Li Yu -- Chairman and Chief Executive Officer
Thank you.
Operator
Our next question comes from Tyler Stafford of Stephens. Please go ahead.
Tyler Stafford -- Stephens -- Analyst
Hey, good afternoon, guys. Just one more follow-up from me. Apologize if you've touched on this already. I'm just curious what -- if you can speak to what initial tariff impacts you've seen across the portfolio, if at all yet. And if you guys have completed any kind of review on potential impacts. Thanks.
Li Yu -- Chairman and Chief Executive Officer
We had -- tariff impacts, in general, that only affects a very small portion of our total portfolio. And we haven't seen anything affecting us at this point in time. We have completed review in two different times during the year on the tariff affect we've account-by-account analysis, OK, in term of the tariff situation. And in fact, roughly maybe 40, 50 our investor during the conferences -- have been discussing in detail was at -- every one of these accounts and how they happen. We have spent a substantial management time in doing so.
Operator
Our next question comes from Aaron Deer of Sandler O'Neill. Please go ahead.
Aaron Deer -- Sandler O'Neill & Partners -- Analyst
Hey guys, just a quick follow-up. Ed, on the 400,000 [Phonetic] FDIC assessments credit, I'm guessing there is probably a similar amount that you will benefit from in the fourth quarter and then maybe some more in the first quarter. Is that -- am I thinking about that right or is it going to extend for a longer period?
Edward J. Czajka -- Executive Vice President and Chief Financial Officer
You might be thinking about that, correct, yes. Aaron.
Aaron Deer -- Sandler O'Neill & Partners -- Analyst
Okay, thank you.
Li Yu -- Chairman and Chief Executive Officer
Nonetheless, the same amount, though.
Aaron Deer -- Sandler O'Neill & Partners -- Analyst
Right.
Operator
Our next question comes from Don Worthington of Raymond James. Please go ahead.
Don Worthington -- Raymond James -- Analyst
Thank you. I just had one question in terms of credit. Credit still pretty benign, but just curious as to what you might be thinking in terms of provisioning going forward.
Li Yu -- Chairman and Chief Executive Officer
Well, there are two things. On the next quarter, we will be providing breakdown current methodology a bit. But in January, we will be providing -- I mean, in the first quarter, we'll be providing based on the new CECL. The early indication is that the increase is not big, OK. But we're happy with that. The hit to our capital is going to be very, very little. But when we providing nowadays, I have to make this -- people think that we have certain liberty in providing our loan loss reserve. Actually, the loan loss reserve is based on rigid formula, OK. That was really by our accountants, OK that going through the historical factor and the so-called historical loss estimate, all those model, they have built up. So right now, every quarter we're doing it based on whatever is needed. Having said that, we have fully and well reserved at this point of time, which is indicated in our -- I mean reporting all over the place including all the external people's report. But going forward, the provision will be based on new loan production unless there's new weaknesses or if there is some changes and upgrade in grading that will be affecting that our loan loss provision on the positive side. So, having said that, I don't know whether you want more color from Ed or not.
Don Worthington -- Raymond James -- Analyst
I'd be happy to take it, if we have some.
Edward J. Czajka -- Executive Vice President and Chief Financial Officer
Just like Mr. Yu mentioned earlier that, we have a conducted very detailed loan review with each team, lending unit to go through their CRE and C&I loan portfolios. And at this moment, we still consider that our loan portfolio is pretty healthy without any severe concern at this time.
Don Worthington -- Raymond James -- Analyst
Okay, great. Thank you.
Li Yu -- Chairman and Chief Executive Officer
Thank you.
Operator
This concludes our question-and-answer session. I would like to turn the conference over to the management team for any closing remarks.
Li Yu -- Chairman and Chief Executive Officer
Okay. I guess, there are no further questions. Okay, thank you very much. Thank you for your attention today. And you know, although that in a very down moving market, but we're -- we feel pretty good resolved with our production, we feel pretty good was our profitability and we feel pretty good about our return to our shareholders. Thank you so much.
Edward J. Czajka -- Executive Vice President and Chief Financial Officer
Thanks.
Operator
[Operator Closing Remarks]
Duration: 30 minutes
Call participants:
Tony Rossi -- Investor Relations
Li Yu -- Chairman and Chief Executive Officer
Edward J. Czajka -- Executive Vice President and Chief Financial Officer
Wellington Chen -- President and Chief Operating Officer
Aaron Deer -- Sandler O'Neill & Partners -- Analyst
Steve Moss -- B. Riley FBR -- Analyst
Gary Tenner -- D.A. Davidson -- Analyst
Tim Coffey -- Janney -- Analyst
Tyler Stafford -- Stephens -- Analyst
Don Worthington -- Raymond James -- Analyst
