Q2 2023 Preferred Bank Earnings Call
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Good morning, and welcome to the preferred bank second quarter 2023 earnings call. All participants will be in listen only mode should 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 your Touchtone phone. 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.
Thank you Alan.
Hello, everyone and thank you for joining us to discuss preferred bank financial results for the second quarter ended June 30th 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 to manage that 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 S. E. C 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 for a 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.
I am very pleased to report.
In the second quarter.
Net income of preferred bank.
$37.9 million or $2.61 a share.
For the quarter, our deposit has increased $181 million.
Under very very challenging.
<unk>.
Yes.
During the quarter, we are seeing strong movement.
Deposits from lower cost deposits to higher cost deposits.
And thankfully.
As of June 30th.
The smooth and seems to have moderated.
Our banks uninsured deposit.
Is 39, 9%.
At June 30th.
Liquidity coverage was 41, 2%.
Since early March we've been working very hard to help the customer to <unk>.
Restructure their deposits could be under.
Thank you.
The IC insurance limit by using a theater using Ics.
We will continue to do so during the quarter, we have learned a lot.
Comments that.
Quite how warming.
Loan growth.
For the quarter was $61 million the high interest rate environment is obviously depressed loan.
Okay.
And the further increase in the interest rate will.
We're likely to have further depressed.
Amen.
Yeah.
Credit quality is stable.
At June 30th.
Total.
Nonperforming loans are less than a mailing dollars.
Total nonperforming assets is.
33.
Our 33 basis points.
Classified assets.
Is pretty stable compared to previous quarter.
No charge offs.
In the quarter.
Well made.
Additional.
Provisions to increase.
Reserve ratio to one 4%.
And during the quarter, we also written down Oh, Oh assets, but 1.9.
In dollars.
Yeah.
Recently, we have already received a lot of inquiries.
Regarding our exposure in the city of San Fran Cisco.
Which we have a total exposure of.
$114 million in the city.
As you all know.
San Francisco is a tale of two cities.
You have trouble downtown commercial area.
Connected.
Financial District, and Thats, good and alloy.
A little bit area is in trouble with the other party city is yes.
At least business as usual.
Our total exposure in those troubled area is.
$34 million.
As of June 30.
Yes.
Yeah.
It's a bank a very asset sensitive loan.
Okay.
Therefore, our net interest income has been resilient these quarters.
We have always operate with a simple business model.
We've always kept.
Module reasonable.
And.
Our operating costs low.
With a strong.
Operating cash flow.
We will begin to buyback stock.
At June 30th total stock repurchase was 281000 shares.
As of yesterday.
No.
The total repurchase of data over a five on 500000 shares.
Thank you very much I'm ready for your questions.
We will now begin the question and answer session.
I ask a question you May press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question comes from Matthew Clark from Piper Sandler go ahead.
Hey, good morning, Thanks for the questions.
Hmm.
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.
Okay.
Ed do you want to sure seems like it'd be a total cost of deposits for June Matthew was a three point to four.
And the margin was just below 4.5.
Okay and that three to four is the month of June or as at the end of June .
That's the month.
Okay.
Okay.
And then.
Thinking through.
The funding side of the equation.
And assuming you still have some loan growth, even though it is 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 you're willing to poll if necessary if deposit growth doesn't.
Materialize you are you willing to take down cash to fund loans.
Well, we probably do not need to borrow from federal home loan Bank Reserve base.
But you know our cash flow is over.
All right all right.
So.
That should be more than enough.
To handle any loan growth, which is good.
I don't really expect to be.
The significant if at all yeah, we have one of the highest cash to deposits and cash to assets ratio in our peer group. So I think we would be comfortable funding some incremental loan growth with our out of our cash.
Okay great.
And then.
Just on expenses I mean, you had the Oreo write down but that that's unlikely going forward from here.
So you know what are your thoughts on the expense run rate in the second half.
Okay.
You take a stab at that.
And looking at the first blush I'm looking at a run rate going forward or probably around $19 million a quarter.
X X Oreo costs.
Yep.
Okay, great. Thank you.
Our next question comes from Andrew <unk> with Stephens go.
Go ahead.
Hey, good morning.
Good morning, enabling.
I wanted to ask on the the $34 million of loans in downtown San Francisco that are mention what what types of properties are these how many make up that $34 million as it is it one or two or a handful of credits and then any color on that the LTV amounts are operating staff.
That's as well as the reserve against that $34 million.
Okay.
Have seven loans comprised of the $34 million of the seven loans, mostly they are residential properties.
One office property.
On a dollar amount is a little less than $900000.
With these seven loans, we have just reviewed.
Pesified criticized.
Mostly they are residential.
Okay understand.
And then on the on the classified assets Oh, it looks like those are pretty stable quarter on quarter any any changes in special mentions that occurred in the second quarter.
Well, Nick do you want to answer that special mention loans are at the size of that is pretty similar as Q1.
Is around.
60 million at this time.
Okay.
Got it.
And then.
Just a clarification point, maybe on the buyback.
I know that 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 on the buyback front, even coming into the third quarter.
I'm just curious is there any kind of incremental authorization you need to.
To utilize the remaining 100 or the further 100 in the plan or can you utilize the full $150 million of the shareholder approved buyback.
We I don't think we need any further augusta, because all regulatory approvals for $150 million, yes, more so it is our directors our board of directors determination of when to use our cash flow.
Okay.
Okay.
I appreciate it congrats on your quarter.
Thank you.
Our next question comes from Gary Tenner with D. D. A Davidson go ahead.
Thanks, Good morning.
Excuse me I'm.
On the buyback question.
I don't think I saw it in a in the press release I apologize if I missed it but of the acuity one purchased any or repurchased in the second quarter, what was the average purchase price.
It was around $55 and just to bring everyone up to speed currently we've repurchased about 501000 shares for about $28 million.
Through today through yesterday so.
Okay. Thank you Ed and then just any additional color you can provide it you made the comment that the deposit migration has slowed.
Your noninterest bearing deposits are I think then around 16% or so 15.
16% of period end balances you know the ABA.
Any any level of confidence that you can maintain that level or is there still some movement that you think pushes that number lower.
For the months of June and that migration.
The level of.
Non interest bearing deposit has good reasonably stable, okay, well, what I was mentioning about the your delta or other cost increases because we do have a large T.
T C D portfolio, Okay, and then the portfolio that would be.
No.
It's a mature.
Reprice I'll replace that total amount is a little bit over one $2 billion.
In the in the third quarter was of course, a replacement probably between one to one 5% of that.
Higher interest cost that is assumed that we only have one bonds. Indeed.
In the July quarter, so likely that costs will increase in the third quarter, but relatively minor okay.
And if we do have one.
Rate increases in the third quarter I think the effect too.
To the net interest margin will be quite quite mild.
Thank you for that and since you mentioned the amount of time deposits that are going up.
Mature in the third quarter, you could you could you give us the number for the fourth quarter as well.
Yeah.
Not good.
Comparable for that.
I guess next quarter Gary.
[laughter] alright, guys. Thank you.
Sure.
Again, if you have a question. Please press Star then one our next question comes from David Feaster with Raymond James Go ahead.
Hey, good morning, everybody.
David maybe just touching on the loan side I you know in the press release, you talked about higher rates impacting demand, but you know in the past you've also you've got you've been pretty conservative I I'm just curious how much of the slowdown in growth do you think truly is going to.
Man versus less of an appetite for credit and then just kind of what's the pulse of your borrowers across your footprint, where you are seeing good risk adjusted returns at this point and where new loan yields coming in.
Well okay.
Why don't you add something that I tell you what they are.
David This is Wellington.
I think that.
I mean, you hit the nail on that use both the man and whilst the appetite.
Okay.
Okay.
And if so where where are you still seeing good opportunities today I mean are there any markets or segments that are still you know look good from your standpoint.
David David Right now you know what.
Correct.
Environment, you're almost all loans.
At least 10% debt yield in order to qualify there's just no I mean, if there's not a whole lot of it either loans that quantify that for those kind of things. So naturally there'll be less apt Africans and while we are still due to one of the things is we have a.
Group of very loyal customers when they wanted to do something they come to us and we try our very best and try to do to work with them to try to fulfill their needs and how does not just say next quarter wasn't necessarily planning well.
So to be clear logos, because this time I doubt.
How many.
Of all of our industry.
Fellow Central Bank is accurate.
Crystal ball regarding.
But the actual increase in the third.
The fourth quarter Okay.
So.
Unclear as far as Lucas.
Okay that makes sense and then maybe just going back to the funding side. I know you guys said you had talked last quarter about it.
Really going in and trying to get some of the the depositors that you know, we're diversifying and and you know moving out after the failures that just you know kind of panicked where are you at in bringing some of those guys back or have you had success, bringing them back in and I guess could that be a tailwind for core deposit growth going forward.
We're actually seeing that.
I mean, a lot of the customer that has either reduce or less to us shouldnt say left is quite reduced.
The plan is still low numbers.
With us, Okay, and we have not been going as.
As you know and tried to get whole lot of new customers.
Number one it doesn't seem to be there's a whole lot more opportunity in the marketplace and number two.
Can you imagine the competition.
Yeah.
Oh, it's a 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 you don't look at timing timing of that could be pretty good and just you know just curious where we are there and whether you're still planning to sell or any appetite to retain.
Johnny you want to answer that.
On SBA Department all we are currently in applications are.
Currently submitted our application for the delegated authority.
So we anticipate ramping up the SBA business.
And of our business second half of this year.
Going forward and we're still yes, we are still looking to sell what we originate.
And our approach in that department.
Okay. That's helpful. All right. Thanks, everybody.
Our next question comes from Tim Coffey from Janney.
Ahead.
Thank you morning, everybody.
A question on the provision relative to you know the credit metrics are inside the inside the portfolio and actual charge offs are not existing charge offs net charge offs in the quarter. It seemed to be fairly large if credit trends remained consistent do you see reserve you're not quite at.
At the same level going forward.
[laughter].
Well personally I mean, the Guru all that is robin knipp mixing them personally.
He is on the very very.
I mean caution side regarding this matter okay.
Nick do you want to keep a little bit more color on that yeah. Tim are there still a lot of things are lying ahead of us still I believe that monetary.
Policies rate increases or Q teas in a lot of things like a you know a high interest causal pulling back consumer <unk>.
Spending or maybe a commercial investment a lot of things going on there. So a lot of people talking about you know probably we're going to have a soft landing, but we really don't know until what happens. So during the second half of this year. So we try still tried to maintaining a more like a moderate risk posture at this time so.
You know I also see our you crisis or something like that everybody's expecting for that up to an hour I still okay. However to be a conservative side are we try to allocate a little bit more on that Q side to cover to see saw limitations.
Sure. Okay makes sense I appreciate that color.
And then Ed Yeah do you have any you know how should we be thinking about margin going forward is June reflective of kind of what you would expect to see the rest of the quarter.
That's a great question, Tim obviously some of it is going to depend on what the fed ends up doing.
If 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 444 Q3 somewhere around there.
Okay.
Very very right in predicting that.
Is there a leverage factor.
How much new deposits.
Do you see yes, a lot of other factors too.
Yeah.
Did you say you just speaking of deposits and during <unk> to the extent you did see some volatility was the biggest downside volatility earlier in the quarter or was it spread out across quarter.
Volatility on in terms of deposit pricing or balances or balances.
I think a lot of that growth happened towards the end of the quarter on the deposit side.
Okay.
Yeah.
And then.
As for you as you you mentioned you have a very asset sensitive balance sheet a lot of your loans repriced in a fairly short amount of time too.
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.
Yeah, we we obviously that we have we have cut I mean in order to get the right sensitivity agency floating rates customers. It is challenged, especially if you remember and I like to joke about a little bit that we love so much business as opposed to first Republic.
Perfect.
Difference is that we have been.
Some of the system and tried to follow a model in doing floating rate loans were just rule.
<unk> is for downside protection, what we're doing.
By that and.
And I think that I've mentioned many times before.
Many times, we just have to capex.
Face, losing losing loans opportune to Oh My God.
Competitors okay.
This is a role we choose.
Choose to be.
Match assets and liabilities.
Yeah.
Just stick with that okay.
Mhm, Okay well.
Thank you those are all my questions I appreciate your time.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Li Yu for any closing remarks.
Well. Thank you. This is truly one of the most challenging quarters, we have been not histories.
And then going into the quarter was.
<unk> was a was a cloud over our head okay. So we're close.
The Big picture.
The better we hope that.
Okay.
The increase and assumed debt.
Inflation will be more in case it seems to be we'll start to see the light at the end of the tunnel okay.
That's the case.
Obviously happy for everybody.
Industry that would be able to do things in a more normal ways. Okay.
To do that.
We are happy so far.
I think we're doing fine thank you.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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