Preferred Bank (NASDAQ:PFBC) Q1 2023 Earnings Call Transcript

Preferred Bank (NASDAQ:PFBC) Q1 2023 Earnings Call Transcript April 19, 2023

Preferred Bank beats earnings expectations. Reported EPS is $2.61, expectations were $2.56.

Operator Good day, and welcome to the Preferred Bank First Quarter 2023 Earnings Conference Call. [Operator Instructions]. Please do note that this event is being recorded today. I would now like to turn the conference over to Larry Clark of Financial Profiles. Please go ahead, sir.Larry Clark Hello, everyone, and thank you for joining us to discuss Preferred Bank’s financial results for the first quarter ended March 31, 2023. With me today from management are Chairman and CEO, Li Yu; President and Chief Operating Officer, Wellington Chen; Chief Financial Officer, Edward Czajka, Chief Credit Officer, Nick Pi; 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. 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 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 Thank you. Good morning. I’m very pleased to report the first quarter net income of $38.1 million or $2.61 per share. We are satisfied with the results that was achieved during this very stressful quarter. The events of March truly humbled all of us in the banking industry. Personally, I’m very sad to see 2 good-sized banks went away in just a matter of hours especially when both these bank have certain expertise in certain sizable industries, and they have been servicing or serving these industry ace fully diligently in the past 20 to 30 years, only to see those customers are the first one to run, okay?

In any event, the home matter taught us a lot. And personally, personally, I have the following observations, the text for definition of transactional accounts being a core deposits need to be revisited. True, the alcohol deposits, but only during the good time. But in stressed environment, they seem to be the first to run. I’m so very pleased with our PCD portfolio, not because we know exactly how much it cost us and how much — how long we can get them. But during this difficult period, we have not seen one TCD ramp us or the run almost okay? The golden rule of not borrowing short and lend long or investment loan ideals. But I want to tell you to do this, it is really a difficult process. Throughout the years, I don’t know how many times we have to face the disappointment of our offices, knowing their loans will be taking out a loss to a low fixed rate mortgages.

But now as we look back, it seems to worse all the agony in order to have a better barrel defense.We now must respect the regulator or government risk even more as a banker. If you recall in 2021, when we were all convinced, the country’s inflation was transitory. To be practical, how many of us, you and us, how many of us is preparing for a near 500 basis point interest rate increase in . And now as managers of a public traded bank, we will face each quarter like now with the earnings beat or miss. I can’t help us think sometimes the things that may be good for short-term fixed may or may not probably may not be necessarily good for the long-term health of the bank’s operation and the balance sheet. I wish all of our investing public will pull more weight into the banks balance sheet, consistency in the long-term operational goal.

Having expressed my personal opinion, I now must report to you on deposit situation. During the 3 days in March, March 9, March 11 and March 12 and March 13, okay? The 3 working days. Preferred Bank also experienced deposits outflow. The good news is we have a total of less than 10 accounts that pull the money out. The bad news is that 3 of them is very precised. For the quarter, our deposit reduced or decreased by 2.7%. As of yesterday evening, which is April 18, we have our deposits increased 1%, back increased 1%. We’re working very hard to gain back the deposits we lost because most of them having a borrowing relationship with us. But I do want to tell you that during the process we have received many, many heart warming phone calls from our deposits from our customers, telling us they face in banking industry.

Telling us that facing us, telling us that we have a good balance sheet, and we have good capital and especially we’ve good earnings. With their confidence without blessing and I also believe it’s our shareholders wish. We will continue to maintain a flexible balance sheet. We’ll continue to maintain good liquidity. We continue to control our overhead like we always do. And we will continue to operate Preferred Bank with a simple business model. Thank you very much. I’m ready for your questions.

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Question-and-Answer Session Operator [Operator Instructions].

And our first question here will come from Matthew Clark with Piper Sandler.Matthew Clark First one for me, just on the available liquidity, the cash and the borrowings that are available of $1.5 billion relative to the uninsured amount of deposits, I think roughly half of your deposits are about just under $2.7 billion.

I guess what’s the plan? Or what’s kind of the targeted coverage you’re looking to get to? Do you — are you looking at — it sounds like you’re looking to pledge more loans, but is there something to be done on the security side to knowing it’s only about 6% of assets to be able to pledge those.Li Yu Thank you very much. It is a 2-way to approach we’re doing it. Scheduled to be converted to — I mean what is that?Larry Clark Enhanced insurance coverage.Li Yu Yes, I mean, ICS, okay, and see this, okay? Do we have a schedule for the second quarter now is a little bit — right around $600 million of customers, we will be converting them to SEDAR and converting them to ICS. That should reduce our so-called uninsured deposits #2 right around about 35% to 36%.

Okay, assuming the same amount of total deposits. And in the meantime that we have roughly estimated about the $600 million additional borrowing capacity from Fed. Federal home loan bank as of now, okay. So will that also bring up our also called the total capacity or liquidity to $2.7 billion or $2.5 billion because expect — so two number is — will be very close. I don’t know whether there’s any importance as a bank. You have to cover every uninsured dollar with the — with so-called our off-balance sheet liquidity. But I do think the most important thing is you have to have a good operation to earn your customers’ trust. But we will be getting — on June 30, 2 numbers will be converged to each other.Matthew Clark Okay. Great. And then just kind of a related question.

In terms of your — the incremental kind of balance sheet composition, composition going forward, is this higher cash level likely to kind of stick around? I know it’s above average to begin with. But I guess what I’m also trying to get at is how do you think borrowings were up in the quarter. Is that — do we kind of — do borrowings continue to increase from here with some potential deposit pressure or — and I guess, it somewhat also depends on your loan growth outlook. I mean, balances were slightly lower. So I’m just trying to get a sense for the moving parts of the balance sheet going forward.Li Yu Well, based on what I understand from the industry today, okay? And based on what I’m reading, especially from you guys and all the other information I’ll see that the countries that deposit situation is probably more of a concern to everybody as compared to the loan area.

Okay? True. Loan demand is down as everybody has reported every paper, every service reported. But I think the uncertainty of deposits will last for a period of time. And we, at the Preferred Bank, we’ll be closely watching the trend in the second quarter, okay? We’re now in no hurry in putting up a whole lot of loans just to earn extra dollars, okay? For — as compared to the — as versus the — maintain the good liquidity and safety. And frankly, let me be a little bit funny that I think we’re making enough money to weather this.Edward Czajka Clearly.Matthew Clark Yes, no doubt. And then just on the cost of deposits or spot rate on deposits at the end of March. I don’t know if you have that ad or even the monthly average for the month of March on deposit costs as well as the average NIM in the month of March?Edward Czajka The net interest margin in March was $467 million.

Cost of deposits was $263 million.Matthew Clark Okay. Great. And then last 1 for me. Just some cautionary commentary on office commercial real estate in the press release, not a surprise. Since everybody is talking about it. But can you size up your exposure there and also give us some additional details and characteristics, owner versus nonowner, average loan size, what’s downtown kind of considered metro downtown or more at risk? And how LTVs are at origination versus maybe some new appraisals you’re getting in, rent rolls, what your plans are for borrowers that renew that want less space I could go on. But any granularity there would be helpful.Li Yu Okay. We have roughly about 10% of our total loan portfolio in office property, office loans, okay.

But — of this amount, roughly $8 million is in the downtown area. We have faithfully have been tried to avoid especially Los Angeles anti area for the past 20 years. And most of our office properties in the urban, suburban area that in California, especially in Los Angeles, it’s a big, really suburban So there’s little communities everywhere and basically the property there is a lot more stable than the downtown area. And when we have the $8 million in downtown area is really in San Francisco that was leased and in the long-term lease to, I think, one of the famous university over there. It is very, very, how should I say, underwritten quite well is loan-to-value ratio probably less than 40% in any event. But I would have as Nick to bring you up to date with some of our underwriting features that we do that on this sort of property.Nick Pi Yes.

Thank you, Mr. Yu. Matthew, our entire portfolio at this time, our asset quality is pretty stable up to date and also resilient. And the key thing that we used to underwrite our loans, a little bit different as other banks are bit of a different as those regional banks, we request for 2 major areas to be considerate, okay? The first is the location. Just like Mr. Yu mentioned that we avoid Metro LA, downtown area, and we try to do more office loans near the residential needs or some other urban area. And the other thing is that we need to have strong sponsorship behind it. That’s always our credit underwriting major 2 areas other than the normal underwriting process. So with all those strong sponsorship behind it. So even though the property has a little bit weak in the cash flow, however, their global cash flow, their liquidity is very strong at this time.