Preferred Bank (NASDAQ:PFBC) Q2 2023 Earnings Call Transcript

Preferred Bank (NASDAQ:PFBC) Q2 2023 Earnings Call Transcript July 20, 2023

Operator: Good morning. And welcome to the Preferred Bank’s Second Quarter 2023 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask question. [Operator Instructions] Please note, this event is being recorded. I would like now to turn the conference over to Jeff Haas of Financial Profiles. Please go ahead.

Jeff Haas: Thank you, Allan. Hello, everyone. And thank you for joining us to discuss Preferred Bank’s financial results for the second quarter ended June 30, 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 that 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 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 am very pleased to report that the second quarter net income of Preferred Bank was $37.9 million or $2.61 a share, okay. For the quarter, our deposit has increased $181 million under a very, very challenging environment. During the quarter, we have seen strong movement of deposits from lower cost deposits to higher cost deposits, and thankfully, as of June 30th, this movement seems to have moderated. Our bank’s uninsured deposits is 39.9% at June 30th, while liquidity coverage was 41.2%. Since early March, we have been working very hard to help the customer to restructure their deposits to be under the schedule FDIC insurance limit by using CEDAR and using ICS, okay. And we will continue to do so, but during the quarter, we have learned a lot of comments that are quite heartwarming.

Loan growth for the quarter was $61 million. The high interest rate environment has obviously depressed loan demand, okay? And the further increase in interest rate will likely to further depress demand. Our credit quality was stable. At June 30th, our total non-performing loans is less than $1 million, where the total non-performing assets is 0.33 basis points, okay. 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%, and during the quarter, we also written down our OREO assets for $1.9 million. Recently, we have received a lot of increase regarding our exposure in the city of San Francisco, okay, which we have a total loan exposure of $114 million in the city.

As you all know, San Francisco is a tale of two cities, where you have trouble downtown commercial area, connected financial district, connected underlying a little bay area is in trouble, while the other part of the city is at least business as usual. Our total exposure in those trouble area is $34 million as of June 30th. Preferred Bank has a very asset sensitive loan portfolio. Therefore, our net interest income has been resilient these quarters. We have always operated with a simple business model. We have always kept our margin reasonable and our operating costs low. With our strong operating cash flow, we will begin to buy back our own stock. At June 30th, total stock repurchase was 281,000 shares. As of yesterday afternoon, the total repurchase a little over 500,000 shares, okay.

Thank you very much. I am ready for your questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Matthew Clark from Piper Sandler. Go ahead.

Matthew Clark: 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?

Li Yu: Ed, do you want to…

Edward Czajka: Sure.

Li Yu: Okay.

Edward Czajka: Yeah. The total cost of deposits for June, Matthew, was 3.24, and the margin was just below 4.5.

Matthew Clark: Okay. And that 3.24 is the month of June or is that the end of June?

Edward Czajka: That’s the month.

Matthew Clark: Okay. Okay. 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 are willing to pull, if necessary, if deposit growth doesn’t materialize, are you willing to take down cash to fund loans?

Li Yu: Well, we probably do not need to borrow from Federal Home Loan Bank as other reserve bank anymore. But our cash flow is over $1 billion, right, by June 30th. So that should be more than enough to handle any loan growth, which I don’t really expect to be any significant life [ph] at all?

Edward Czajka: Yeah. We have one of the highest cash to deposit and cash to assets ratio in our peer group. So I think we would be comfortable funding some incremental loan growth with — out of our cash.

Matthew Clark: Okay. Great. And then just on expenses, I mean, you had the OREO write-down, but that’s unlikely going forward from here. So what are your thoughts on the expense run rate in the second half?

Li Yu: You…

Edward Czajka: Yeah.

Li Yu: … take a stab at that?

Edward Czajka: Yeah. I — and looking at the first blush, I am looking at a run rate going forward of probably around $19 million a quarter ex-OREO costs.

Matthew Clark: Yeah. Okay. Great. Thank you.

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

Andrew Terrell: Hey. Good morning.

Edward Czajka: Good morning.

Li Yu: Hi.

Wellington Chen: Good morning.

Andrew Terrell: I wanted to ask on the $34 million of loans in Downtown San Francisco that are mentioned. What types of properties are these? How many make up that $34 million? Is it one or two or a handful of credits and then any color on the LTV amounts or operating stats, as well as the reserve against that $34 million?

Li Yu: Okay. We have seven loans comprised of $34 million. Of these seven 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 residentials.

Andrew Terrell: 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 second quarter?

Li Yu: Well, Nick, do you want to answer that?

Nick Pi: Special mention loans, the size of that is pretty similar as Q1 is around $60 million at this time.

Andrew Terrell: Okay. Got it. And then just a clarification point maybe on the buyback, I know the full authorization was for $150 million, 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 million. It sounds like you guys are pretty active on the buyback front even coming into the third quarter. I am just curious, is there any kind of incremental authorization you need to utilize the remaining $100 million or the further $100 million in the plan or can you utilize the full $150 million of the shareholder approved buyback?