Good morning, 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 0. After today's 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, Allan. Hello, everyone, and thank you for joining us to discuss Preferred Bank's 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 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 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.
Thank you. Good morning. I'm 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 are seeing strong movement of deposits from lower cost deposits to higher cost deposits. Thankfully, as of June 30th 2023, this movement seems to have moderated. Our bank's uninsured deposit is 39.9% at June 30 th, while 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 the FDIC insurance limit by using CDARS and using ICS.
We'll continue to do so, but during the quarter, we have learned a lot of comments that, quite heartwarming. Loan growth for the quarter was $61 million. The high interest rate environment has obviously depressed loan demand, okay? 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 our total non-performing assets is 0.33 or 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%. During the quarter, we also written down our OREO assets for $1.9 million.
Recently, we have received a lot of inquiries regarding our exposure in the city of San Francisco, 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 Tenderloin, a little area is in trouble, the other part of the city is at least business as usual. Our total exposure in those trouble areas is $34 million as of June 30th. Preferred Bank has a very asset-sensitive loan portfolio. Our net interest income has been resilient these quarters. 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 have begun to buy back our own stock.
At June 30 th, total stock repurchase was 281,000 shares. As of yesterday afternoon, the total repurchase, a little over 500,000 shares then. Thank you very much. I'm ready for your questions.
We will now begin the question and answer session. To ask a question, you may press Star, then One on your touch-tone phone. If you're 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. 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?
Ed, do you want to?
Sure. Yeah, the total cost of deposits for June, Matthew , was 3.24%, and the margin was just below 4.5%.
Okay. That 3.24% is the month of June, or is that the end of June?
That's the month.
O Okay. 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? I f deposit growth doesn't materialize, are you willing to take down cash to fund loans?
We probably do not need to borrow from Federal Home Loan Bank of Federal Reserve Bank anymore. You know, our cash flow is over $1 billion June 30th. That should be more than enough to handle any loan growth, which I don't really expect to be any significant amount, if at all.
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 out of our cash.
Okay, great. Just on expenses, I mean, you had the OREO write-down, but that's unlikely going forward from here. You know, what are your thoughts on the expense run rate in the second half?
You W ant to take a stab at that?
Yeah. I n looking at the first blush, I'm looking at a run rate going forward of probably around $19 million a quarter, ex-OREO costs.
Yep. Okay, great. Thank you.
Our next question comes from Andrew Terrell with Stephens Inc. Go ahead.
Hey, good morning.
Morning.
Hi. Good morning.
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? Any color on the LTV amounts or operating stats, as well as the reserve against that $34 million?
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 little less than $900,000. With these seven loans, we have just reviewed, and they are not classified or criticized. Mostly, they're residentials.
Okay, understood. Then on the classified assets, looks like those are pretty stable quarter-on-quarter. Any changes in special mentions that occurred in the second quarter?
Well, Nick, you want to answer that?
Special mention loans, the size of that is pretty similar as Q1. Is around $60 million at this time.
Okay. Got it. 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. Sounds like you guys are pretty active on the buyback front, even coming into the third quarter. I'm just curious, is there any kind of incremental authorization you need to utilize the remaining $100 or the further $100 in the plan? Can you utilize the full $150 million of the shareholder-approved buyback?
I don't think we need any further, August, because our regulatory approval is for $150 million.
Yes.
More so, it is our directors, our board of directors' determination of when to use our cash flow, to again, now.
Okay, understood. I appreciate it. Congrats on a great quarter.
Thank you.
Our next question comes from Gary Tenner with D.A. Davidson. Go ahead.
Thanks. Good morning. Excuse me. On that buyback question, I don't think I saw it in the, in the press release. I apologize if I missed it, but of the 281 purchased in the or repurchased in the second quarter, what was the average purchase price?
It was, around $55. Just to bring everyone up to speed, currently, we've repurchased about 501,000 shares for about $28 million, through today or through yesterday.
Okay. Thank you, Edward. Then just any additional color you can provide. You made the comment that, you know, the deposit migration has slowed. Your non-interest-bearing deposits are, I think, been around 16% or so, 15, yeah, 16% of period end balances. You know, do you have a 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 month of June, that migration at that level of non-interest-bearing deposit has been reasonably stable, okay. What I was mentioning about the other cost increases, because we do have a large TCD portfolio, okay. The portfolio that will be mature and repriced or replaced, the total amount is a little bit over $1.2 billion in the third quarter, with a cost of replacement probably between 1%-1.25% of that, a higher interest cost. That is assumed that we only have one bounce in the July quarter. Likely that cost will increase in the third quarter, but relatively mild, okay.
If we do have a one rate increase in the third quarter, I think the effect to the net interest margin will be quite mild.
Thank you for that. Since you mentioned the amount of time deposits that are gonna mature in the third quarter, could you give us the number for the fourth quarter as well?
Yeah, we have not done a compare for that all the time.
Next quarter, Gary.
All right, 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.
Good morning, David.
Maybe just touching on the loan side. You know, in the press release, you talked about higher rates impacting demand. You know, in the past, 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 of an appetite for credit? 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? Where are new loan yields coming in?
Well, okay. Well, Wellington, you add something, I add to you, whatever your comment is.
Hello, David, this is Wellington. I think that, you I mean, you hit the nail on that. It's both demand and as well as the appetite.
Okay. Okay. 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, right now, you know, with current environment, you almost all loan need to have at least 10% debt yield, okay, in order to qualify. I mean, if there's not a whole lot of it, either loans that qualify that for those kind of things. Naturally, there'll be less applicants.
What we are still doing things is we have a group of very loyal customers, where they want to do something, they come to us, we try our very best and try to work with them, to try to fulfill their needs. That is not to say next quarter, we're necessarily planning to a certain degree of loan goals, because this time I doubt how many of our industry, I mean, our fellow bankers can have accurate crystal ball regarding what the actual loan increase in the third or fourth quarter. Okay. It's so unclear as far as we're concerned now.
Okay. That makes sense. 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, you know, were diversifying 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? Have you had success bringing them back? I guess could that be a tailwind for core deposit growth going forward?
We're actually seeing that, I mean, a lot of the customers that has either reduced or left us, shouldn't say left us, quite reduced, has been replenished their numbers, I mean, with us, okay? We have not been going on, as you know, and try to get a whole lot of new customers, okay? Number one, it's doesn't seem to be there's a whole lot opportunity in the marketplace. Number two, can you imagine the competition?
Yeah.
Okay.
No, good point. 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 know, look, the timing of that could be pretty good. 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?
Yeah. On, David, on the SBA department, we're currently submitted our application for the delegate authority. We anticipate ramping up the SBA section of our business second half of this year and going forward. Yes, we are still looking to sell what we originally are, in our port, in that department.
Yeah, that's helpful. All right. Thanks, everybody.
Our next question comes from Tim Coffey, from Janney. Go ahead.
Thank you. Morning, everybody. I had a question on the provision relative to, you know, the credit metrics inside the portfolio and actual charge-offs or nonexistent charge-off, net charge-offs in the quarter. It seemed to be fairly large. If credit trends remain consistent, do you see reserving at the same level going forward?
Well, personally, I mean, the guru of that is Nick. Now, personally, I think he is on the very, I mean, caution side regarding this matter, okay? Nick, you want to give a little more color on that?
Yeah, Tim , there's a lot of things lie ahead of us. Still, I believe, monetary policies, rate increases or QTs and a lot of things like, you know, high interest costs or pulling back consumer spending or maybe a commercial investment. A lot of things going on there. A lot of people talking about, you know, probably we're gonna have a soft landing, but we really don't know until what happens, so during the second half of this year. We try to maintaining a more like a moderately risk posture at this time. You know, also a CRE crisis or something like that, everybody is expecting for that. Up to now, we're still okay.
To be a conservative side, we try to allocate a little bit more on the Q side to cover the CSA limitations.
Sure. Okay, makes sense. I appreciate that color. Ed, do you have any, you know, how should we think about margin going forward? Is June reflective of kind of what you, we would expect to see the rest of the quarter?
That's a great question, Tim. Obviously, some of it is gonna depend on what the Fed ends up doing at their upcoming meeting. If we get a quarter point hike, I think it would sustain and kinda 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 4.40% for Q3, somewhere around there.
Okay.
You very brave in predicting that, Edward. There's a leverage factor on how much new deposit, how much you loan.
Yes. Yeah, obviously, yes. A lot of other factors, too. Yeah.
Yeah. Do you see speaking of deposits in during Q2, 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 toward the end of the quarter on the deposit side.
Okay. Mr. Yu, as you mentioned, you have a very asset-sensitive balance sheet. A lot of your loans reprice 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?
Yeah, we obviously that, we have, I mean, in order to get the rate sensitive, should I say, floating rate customers, it is challenging, especially if you remember, and I like to joke about a little bit, that we lose so much business before First Republic Bank. That's for a fact, because difference is that we have been kind of the persistent in trying to follow our model and doing floating rate loans with the floor. 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 hit by the face, losing loans opportunity to our competitors, okay? This is a role we choose.
We choose to be, you know, to match assets and liability better, so we just stick with that, okay?
Okay. Well, great. 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 in our history, you know, in going to the quarter with a cloud over our head, okay? We hope the big picture will get better, and we hope that the rate increase will end soon, that inflation will be more in place. It seems to be we start to see the light at the end of the tunnel, okay? If that's the case, I'm, you know, 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. We, I think we're doing fine. Thank you.
The conference is now concluded. Thank you for attending today's presentation. You may disconnect.