Preferred Bank Q2 2023 Earnings Call Transcript

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July 20, 2023

There are 10 speakers on the call.

Operator

Morning, and welcome to the Preferred Bank Second Quarter 2023 Earnings Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would like now to turn the conference over to Jeff Haas of Financial Profiles.

Operator

Please go ahead.

Speaker 1

Thank you, Alan. Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the Q2 ended June 30, 2023. With me today from management are Chairman and CEO, Lee Yu President and Chief Operating Officer, Wellington Shen Chief Financial Officer, Edward Cieca Chief Credit Officer, Nick Pye And Deputy Chief Operating Officer, Johnny Hsu. 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.

Speaker 1

Such forward looking statements are based upon specific assumptions that may or may not prove correct. Forward looking statements 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 their expectations as set forth in these statements. Preferred Bank At this time, I'd like to turn the call over to Mr.

Speaker 1

Li Yu. Please go ahead.

Speaker 2

Thank you. Good morning. I'm very pleased to report that the 2nd quarter Net income of preferred bank was $37,900,000 or $2.61 a share. For the quarter, our deposit has increased $181,000,000 Under a very, very challenging environment. During the quarter, we are seeing strong movement of deposits from lower cost deposit to higher cost deposits.

Speaker 2

And thankfully, As of June 30, this movement seems to have moderated. Our bank's uninsured deposit is 39.9% at June 30, Wallet's liquidity coverage was 41.2%. Since early March, We've been working very hard to help the customer to restructure their deposits to be under We schedule FDIC insurance limit by using SEDAR and using ICS. We'll continue to do so. But during the quarter, we have learned a lot of Comments that are quite heartwarming.

Speaker 2

Loan growth for the quarter was $61,000,000 The high interest rate environment has obviously depressed Loan demand, okay. And the further increase in interest rate will likely to further depress Our credit quality was stable. At June 30, our total non performing loans is less than $1,000,000 Well, our total nonperforming assets is 0.33 I'll turn the 3 basis points. Classified assets is Pretty stable compared to previous quarter and there were no charge offs during the quarter. We made Additional provisions to increase our reserve ratio to 1.4%.

Speaker 2

And during the quarter, we also written down our OREO assets for $1,900,000 Recently, we have still received a lot of increase regarding our exposure in the city of San Francisco, which we have a total loan exposure of $114,000,000 In the city, as you all know, San Francisco is a tale of 2 city, We have troubled downtown commercial area, connected financial district, connected to tenderloin A little bit area is in trouble. Well, the other part of the city is It leads business as usual. Our total exposure in those troubled area is $34,000,000 as of June 30. Truckee Bank has a very asset sensitive Loan portfolio. Therefore, our net interest income has been resilient these quarters.

Speaker 2

We have always operate with a simple business model. We've always kept Margin reasonable and our operating cost low. With our strong operating cash flow, we'll begin to buyback our own stock. At June 30, total stock repurchase was 281,000 shares. As of yesterday afternoon, the total repurchase is a little over 500,000 shares, ma'am.

Speaker 2

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

Speaker 3

We will

Operator

Our first question comes from Matthew Clark from Piper Sandler. Go ahead.

Speaker 4

Hey, good morning. Thanks for the questions. Maybe just starting with the margin. Can you give us the spot rate on deposits at the end of June and then maybe the average margin in the month of June as well?

Speaker 2

Ed, do you want to Sure.

Speaker 5

Yes, the total cost of deposits for June, Matthew, was 3.24 And the margin was just below 4.5.

Speaker 4

Okay. And that 324 is the month of June or is that the end of June?

Speaker 5

That's the month. Okay.

Speaker 4

And then thinking through the funding side of the equation And assuming you still have some loan growth even though it's likely to slow, It seems like you don't need to borrow given all the cash on the balance sheet. I mean, is that the lever you're willing to pull If necessary, if deposit growth doesn't materialize, are you willing to take down cash to fund loans?

Speaker 2

Well, we probably do not need to borrow from Federal Home Loan Bank or Executive Reserve Bank Any more, but our cash flow is over $1,000,000,000 right on, right at June 30. So That should be more than enough to handle any loan growth, which I don't really expect to be any significant in mind if at all. Yes,

Speaker 5

we have one of the highest cash to deposits and cash to assets ratio in So I think we would be comfortable funding some incremental loan growth with out of our cash.

Speaker 4

Okay, great. And then just on expenses, I mean, you had the OREO write down, That's unlikely going forward from here. So what are your thoughts on the expense run rate in the second half?

Speaker 2

You want to take a stab at that?

Speaker 5

Yes. I'm looking at the first blush. I'm looking at a run rate going forward of probably around $19,000,000 a quarter, ex OREO costs.

Speaker 4

Yes. Okay, great. Thank you.

Operator

Our next question comes from Andrew Terrell with Stephens. Go ahead.

Speaker 6

Hey, good morning.

Speaker 3

Good morning, Mike. Good morning.

Speaker 6

I wanted to ask on the $34,000,000 of loans in Downtown San Francisco that are mentioned. What types of properties are these? How many make up that $34,000,000 Is it 1 or 2 or A handful of credits and then any color on the LPV amounts or operating stats, as well as the reserve against that 34,000,000

Speaker 2

Okay. We have 7 loans comprised of the $34,000,000 Of these 7 loans, mostly they are residential properties. There is one office property. The dollar amount is a little less than $900,000 With these seven loans, we have just reviewed and they are not classified or criticized. Mostly the residential.

Speaker 6

Okay, understood. And then on the classified assets, it looks like those are pretty stable quarter on quarter. Any changes in special mentions that occurred in the Q2?

Speaker 7

Nick, you want to answer that? Special mention loans, the size of that is pretty similar as Q1 is around $60,000,000 at this time.

Speaker 6

Okay, got it. And then Just a clarification point maybe on the buyback. I know that the full authorization was $150,000,000 but if I recall, I think the initial release said that there was kind of the first leg of the repurchase program was for $50,000,000 It Sounds like you guys are pretty active on the buyback front even coming into the Q3. I'm just curious, is there any kind of incremental authorization you need To utilize the remaining $100,000,000 or the further $100,000,000 in the plan, or can you utilize the full $150,000,000 of the shareholder approved buyback?

Speaker 2

We I don't think we need any further, August, because our regulatory approval is $450,000,000 More so, it is Our Board of Directors' determination of when to use our cash flow to Again,

Speaker 6

no. Okay, understood. I appreciate it. Congrats on your quarter.

Speaker 3

Thank you.

Operator

Our next question comes from Gary Tenner with D. A. Davidson. Go ahead.

Speaker 6

Thanks. Good morning. Excuse me.

Speaker 8

On that buyback question, I don't think I saw it in the Press release, I apologize if I missed it, but of the $2.81 purchased in the or repurchased in the second quarter, what was the average purchase price?

Speaker 5

It was around $55 And just to bring everyone up to speed, currently, we've repurchased about 501,000 shares for about $28,000,000 through today or through yesterday.

Speaker 8

Okay. Thank you, Ed. And then just any additional color you can provide? You made the comment that the deposit migration has slowed. Your non interest bearing deposits are, I think then around 16% or so, 15% yes, 16% Okay.

Speaker 8

And balances, do you have any level of confidence that you can maintain that level? Or is there still Some movement that you think pushes that number lower?

Speaker 2

For the month of June, that migration at that Level of non interest bearing deposits has been reasonably stable, okay. What I was mentioning about the other cost increases We do have a large TCD portfolio, okay? And then a portfolio that will be The mature and reprice or replace, the total amount is a little bit over $1,200,000,000 In the Q3, with the cost of replacement probably between 1% to 1.25% Higher interest costs, that is assumed that we only have one bounce in the July quarter. So likely that the cost will increase in the Q3, but relatively mild, okay? And if we do have one rate increase in the Q3, I think the effect The net interest margin will be quite mild.

Speaker 8

Thank you for that. And since you mentioned the amount of time deposits that are going to mature in the Q3, could Could you give us the number for the Q4 as well?

Speaker 2

Yes. We have not prepared for that. We did just look at that.

Speaker 3

Next quarter, Gary.

Speaker 8

All right, guys. Thank

Speaker 2

you. Sure.

Operator

Our next question comes from David Feaster with Raymond James. Go ahead.

Speaker 9

Hey, good morning, everybody.

Speaker 5

Good morning, David.

Speaker 9

Maybe just touching on the loan Sai, in the press release, you talked about higher rates impacting demand. But in the past, you've also You've been pretty conservative. I'm just curious how much of the slowdown in growth do you think truly is slowing demand versus less And then just kind of what's the pulse of your borrowers across your footprint? Where are you seeing good risk adjusted returns at this point? And where are new loan yields coming in?

Speaker 2

Well, okay. Wellington, you add something, I'll add to whatever comment is.

Speaker 1

Hello, David. This is Wellington. I think that,

Speaker 3

I

Speaker 1

mean, you hit the nail on that. It's Both demand in at Plaza Apotage.

Speaker 4

Okay.

Speaker 9

And so where are you still seeing good opportunities today? I mean, are there any markets or segments that are still look good from your standpoint?

Speaker 2

David, right now, with current environment, you almost all loan need to have at least 10% debt yield, In order to qualify, there's just no I mean, there's not a whole lot of either loans that qualify For those kind of things. So naturally, there will be less applicants. And what we are still doing things is we have a Group are very loyal customers. When they want to do something, they come to us and we try our very best and try to work with them to try to fulfill their needs. And that is not to say next quarter when necessary planning to Certain degree of loan growth because this time, I doubt how many of our industry, Yes.

Speaker 2

I mean, our fellow bankers can have accurate crystal ball regarding what the actual loan increase in the 3rd or 4th Quarter, okay. It's so unclear as smart workers. Okay.

Speaker 9

That makes sense. And then maybe just going back to the funding side. I know you guys you talked last quarter about really going and trying to get Some of the depositors that were diversifying and moving out after the failures that just kind of panicked. Where are you at in bringing some of those guys back? Or have you had success bringing them back?

Speaker 9

And I guess could that be a tailwind for core deposit growth going forward?

Speaker 2

We're actually seeing that I mean, lot of the customer that has either reduced or left us, Shouldn't say left is quite reduced as being replenished their numbers, I mean, with us, okay? And we have not been going on, as you know, and tried to get a whole lot of new customers, okay, because number 1, it Doesn't seem to be there's a whole lot of opportunity in the marketplace. And number 2, Can you imagine the competition?

Speaker 9

Yes. Okay. Good point. And then the last one, I just wanted to touch on the SBA department and kind of where we are with the build out and the early read on that and just Look, the timing of that could be pretty good. Just curious where we are there and whether you're still planning to sell or any appetite to

Speaker 2

Johnny, you want to answer that?

Speaker 1

Yes. David, on the SDA department, we are currently in application for Currently submitted our application for the delegate authority. So we anticipate ramping up the SBA section of our business 2nd half of this year and going forward. And we still yes, we are still looking to sell what we originate in our in that department.

Speaker 9

That's helpful. All right. Thanks everybody.

Operator

Our next question comes from Tim Coffey from Janney. Go ahead.

Speaker 3

Thank you. Good morning, everybody. I had a question on the provision. Relative to the credit metrics Inside the portfolio and actual charge offs or non existent charge offs net charge offs in the quarter, it seemed to be fairly large. If credit trends can remain consistent, do you see reserving at the same level going forward?

Speaker 2

Well, personally, I mean, the guru of that is our mix. Personally, I think he is on the very, very, I mean, caution side regarding this matter, okay? Nick, you want to give a little more color on that?

Speaker 7

Yes. Tim, there's a lot of things ahead of us. Still, I believe, Monitoring policies, rate increases or acuity and a lot of things like High interest costs or pulling back consumer spending or maybe a commercial A lot of things going on there. So a lot of people talking about probably we're going to have a soft landing, but we really don't know until What happens during the second half of this year? So we try to maintaining a more like a moderate risk posture at this time.

Speaker 7

So also a CRE crisis or something like that, everybody is expecting for that. Up to now, we are still okay. However, To be conservative side, we try to allocate a little bit more on the Q side to cover the CECL limitations.

Speaker 3

Sure. Okay. Makes sense. I appreciate that color. And then Ed, do

Speaker 6

you have

Speaker 3

any how should we think about margin going forward? Is June reflective of kind of what you would expect to see the rest of the quarter?

Speaker 5

That's a great question, Tim. Obviously, some of it is going to depend on what the Fed ends up doing at their upcoming meeting. So if we get a quarter point hike, I think it would sustain and kind of hold the margin relatively flat For another month or so, otherwise, I would see some further compression. I would say probably in the neighborhood of 440 For Q3, somewhere around there.

Speaker 8

Okay.

Speaker 2

You are very, very ready in predicting that. And there's a leverage factor, how much new deposit, how

Speaker 5

much new loan? Yes. Obviously, yes.

Speaker 9

A lot

Speaker 5

of other factors too.

Speaker 3

Yes. To the extent you did speaking of deposits during 2Q, to the extent you did see some volatility, was The biggest downside volatility earlier in the quarter or was it spread out across quarter?

Speaker 5

Volatility on in terms of deposit Pricing or balances or? Balances. I think a lot of that growth happened toward the end of the quarter on the deposit side. Okay.

Speaker 3

And then Mr. Yu, as You mentioned you have a very asset sensitive balance sheet. A lot of your loans repriced in a fairly short amount of time. I have to imagine the competition for those types of borrowers has gotten intense. Are you having to offer any concessions to retain those customers?

Speaker 3

Yes.

Speaker 2

We obviously that we have cut I mean, in order to get the rate sensitive, I should say, Folding rate customers, it is challenging, especially if you remember, and I'd like to joke about a little bit, that we know so much business for First Republic Bank, that's for a fact. The difference is that we have been kind of persistent And try to follow our model and doing floating rate loans with a floor. And floor is for downside protection. What we're doing by that and I think that I've mentioned many times before, Many times, we just have to get hits by the face of losing loans opportunity to I mean, competitors, okay? But this is a role we choose.

Speaker 2

We choose to be To match assets and liability better, we just stick with that, okay?

Speaker 3

Okay. Great. Thank you. Those are all my questions. I appreciate your time.

Speaker 2

Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Lee Yu for any closing remarks.

Speaker 2

Well, thank you. This is truly one of the most Challenging quarters we have in our history. And going through the quarter With a cloud over our head, okay. So we hope the big picture We'll get better. We hope that the rate increase and assume that Inflation will be more in place.

Speaker 2

It seems to be we start to see the light at the end of the tunnel, okay? If that's the case, I'm obviously happy for everybody in our industry that we'll be able to do things in a more normal ways, Okay. Having to do that, we're happy so far. I think we're doing fine. Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now

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Preferred Bank Q2 2023
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