Good day, welcome to the Preferred Bank first quarter 2023 earnings conference call. All participants will be in a listen-only mode for the duration of the call. Should you need any assistance at this time, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there'll be an opportunity to ask questions. To ask a question, you may press Star then 1 on your telephone keypad. To withdraw a question, please press Star then 2. 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. Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the first quarter ended March 31st, 2023. With me today from management, our 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. Thank you. Good morning. I'm very pleased to report the first quarter net income of $38.1 million or $2.61 a 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 two good-sized bank went away in just a matter of hours, especially when both these banks have certain expertise in certain sizable industries, and they have been servicing or serving these industries faithfully, diligently in the past 20 to 30 years, only to see those customer are the first one to run, okay. In any event, the whole matter taught us a lot. Personally, I have the following observations. The textbook definition of transactional accounts being a core deposits need to be revisited. True, they are core deposits, but only during the good time. In stressed environment, they seem to be the first to run. I'm so very pleased with our TCD portfolio, not because we know exactly how much it costs us and how long we can have them. During this difficult period, we have not seen one TCD that ran us or that run on us, okay. The golden rule of not borrowing short and lend long or investing long, I guess, still stands. 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 officers knowing their loans will be taken out or lost to the low fixed rate mortgages. Now, as we look back, it seems to worth all the agony in order to have a better balance sheet. We now must respect the regulator or government risk even more as a banker. If you recall in 2021, when we are 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 2022? Now, as managers of a public traded bank, we will face each quarter, like now, with the earnings beat or miss, okay. I can't help but think sometimes the things that may be good for a short-term fix 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 put more weight into the bank's balance sheet consistency and the long-term operation more. Having expressed my personal opinion, I now must report to you our deposit situation. During the three days in March ninth, March eleventh, and March twelve, and March thirteenth, okay, the three working days, Preferred Bank also experienced deposits outflow. The good news is we have a total of less than 10 accounts that pulled the money out. The bad news is that three of them is very good sized. For the quarter, our deposit reduced or decreased by 2.7%. As of yesterday evening, which is April the eighteenth, 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 have a borrowing relationship with us. I do want to tell you that during the process, we have received many, many heartwarming phone calls from our from our depositors, from our customers, telling us they have faith in banking industry, telling us they have faith in us, telling us that we have a good balance sheet, and we have good capital, and especially we have good earnings. With their confidence, with their 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'll continue to control our overhead like we always do. We will continue to operate Preferred Bank with a simple business model. 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 telephone keypad. 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 just momentarily to assemble our roster. Our first question here will come from Matthew Clark with Piper Sandler. Please go ahead. Hey, good morning. Good morning. First one for me, just on the available liquidity, the cash and, you know, the borrowings that are available of $1.5 billion, you know, relative to the uninsured amount of deposits, I think roughly, you know, half of your deposits are 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? Are you looking at, you know. It sounds like you're looking to pledge more loans, but is there something to be done on the security side too, knowing it's only about 6% of assets to be able to pledge those? Thank you. Thank you very much. It is two-way approach we're doing it. Scheduled to be converted to, I mean, what is that? I see. Enhanced insurance coverage products. Yeah, I mean, ICS, okay, and the what? CD, CDARS. CDARS, okay. We have scheduled for the second quarter now is right around $600 million of customers will be converting them to CDARS and converting them to ICS. That should reduce our so-called uninsured deposits number to right around about 35%-36%. Okay. Assuming the same amount of total deposits. In the meantime, that we have roughly estimated about $600 million additional borrowing capacity from Fed, a Federal Home Loan Bank as of now, okay? With that will also bring up our so-called the total capacity or liquidity to $2.7 billion or $2.5 billion, $2.6 billion. To 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 your off-balance sheet liquidity. I do think the most important thing is you have to have a good operation to earn your customers' trust. We will be getting. On June 30th, two numbers will be converged to each other. Okay, great. Just kind of a related question, in terms of your the incremental kind of balance sheet composition going forward, is, you know, 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, you know, borrowings were up in the quarter. Is that... Do borrowings continue to increase from here with, some potential deposit pressure or. I guess it somewhat also depends on your loan growth outlook. I mean, balances were slightly lower. I'm just trying to get a sense for the moving parts of the balance sheet going forward. Well, based on what I understand from the industry today, okay, and based on whatever I'm reading, especially from you guys and all the other information, I see that the country's 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. I think the uncertain of deposit will last for a period of time. We at Preferred Bank will be closely watching the trend in the second quarter. Okay. We're now in no hurry in putting up whole lot of loans just to earn us extra dollars, okay, for, I mean, as compared to the as adversity, maintain a good liquidity and safety. Frankly, if let me be little bit funny that I think we're making enough money to weather this. Clearly. Yeah, no doubt. Just on the cost of deposits or spot rate on deposits at the end of March, I don't know if you have that, Ed, or even the monthly average for the month of March on deposit costs as well as the average NIM in the month of March? The net interest margin in March was 4.67%. Cost of deposits was 2.63%. Okay. Great. Last one for me, just some cautionary commentary on office commercial real estate in the, in the press release. Not a surprise since, you know, everybody's talking about it. Can you size up your exposure there and also give us some additional details and characteristics, you know, owner versus non-owner, average loan size, you know, what's downtown kind of considered metro downtown or more at risk, and, you know, how LTVs are, you know, at origination versus maybe some new appraisals you're getting in, rent rolls, you know, what your plans are for borrowers that, you know, renew, that want less space? I could go on. Any granularity there would be helpful. We have roughly 10% of our total loan portfolio in office property loans. Of this amount, roughly $8 million is in the downtown area. We have faithfully been trying to avoid, especially Los Angeles downtown area for the past 20 years. Most of our office property is in the urban-suburban area. That, you know, in California, especially in Los Angeles, it's a big, really suburban, urban town. There's little communities everywhere, and basically, the property there is a lot more stable than the downtown area. We will have the $8 million in downtown area is really in San Francisco. That was a lease. Had a long-term lease to, I think, one of the famous university over there. Yes, sir. It is very, very, how should I say, underwritten quite well. It's Loan-to-Value ratio probably less than 40% or less in event. I will have Nick to bring you up to date with some of our underwriting features that we do that on these types of property. Yeah. Thank you, Mr. Yu. Our entire portfolio at this time, our asset quality is pretty stable up to date and also resilient. The key thing that we use to underwrite our loans a little bit different as other banks, a little bit different as those regional banks, we request for two major areas to be considering. The first is the location. Just like Li Yu mentioned that we avoid metro L.A. downtown area. We try to do a more office loans near the residential needs or some other urban area. The other thing is that we need to have strong sponsorship behind it. That's always our credit underwriting major two areas other than the normal underwriting process. 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. We do not see any immediate threat to our office product or some other CRE site. To further on that, we don't have any non-accrual or classified or even 30 to 89 days that have been loans, okay, in the office sector. Okay. Thank you. Our next question will come from Andrew Terrell with Stephens. Please go ahead. Hey, good morning. Maybe just following up on the last point. I think it's pretty reassuring to hear that only $8 million or so that would be considered true kind of downtown type office. 10% of total loans are office properties. Can you size up maybe the chunkiness within that? What's the size of the largest one, two, or three type loans in the office category? Well, the largest two or three of them average about $40 million, okay? Three of them. Four, I mean. Our average total average loan is $4.1 million in our office properties, okay? With average LTV of 61%, okay, at the entry place. Many of them is coming in, I mean, in the early days. Each one is underwritten with a complete underwriting process individually, especially those larger loans. The office building 'cause one of the office building in the $50 million range is in one of the hottest areas in Los Angeles called the Culver City, which you have the creative and entertainment combination. The first floor are all upscale, I mean, not upscale, the good restaurants that is bustling business. The second and third floor is rented out to a near credit type of company with LC support from a major bank. That's one. Also that we have a very rational, very reasonable sponsorship behind them. The next largest one is one of the buildings called Korean Town, where the owner of that has rearranged his office building, make that office building near fully occupied and underwritten. The owner of the office building is very substantial, very successful. His credit in Los Angeles is top-notch, okay? His cash flow is huge, okay? These are the top two, as you have wanted to know, okay? I might as well explain the third one is in a very rich area, Newport Beach, okay? Where a group of people bought an office building. Mind you, that group of people had dealt with us for many, many, many years with many projects there. A substantial group of people bought the office building and vacated everything and is going to demolish it and convert into apartments, okay? It is in the process of getting doing that. It's right now, it's really empty. Because nature, when they come into us, it's an office building, we put in the office building category. Also the fourth one is in the same category. Okay. These are the larger ones. Predominantly, our building, majority of our loan is smaller ones, let's say in San Francisco downtown or, I mean, San Francisco area, or the Flushing and the Brooklyn. If you know these area, the lifestyle and the things in those area are all small commercial office unit. Sometimes has a retail downstairs, sometimes upstairs. If you know them, the real estate over there is really good. It's not like Manhattan. Yep. Okay. Very good. I really appreciate all the extra color there. I want to go back to the deposit flows for the quarter. I was wondering if anything specifically was. Or I guess if you could quantify maybe the drop in the interest-bearing demand deposits, I think down $540 million or so quarter-on-quarter. Was any of that a move to time deposits, or were those just exits out of the bank? Like I'm just trying to get a sense of how much was more kind of geography across the deposit segments versus maybe relationships lost for those that left the bank. Ed, you want to answer that first? Okay. Maybe I'll add to it. The, from what we know and what we've looked at, Andrew, it's not so much relationships as it is paring down balances. To Mr. Yu's point earlier, a lot of those were really centered in just a very few accounts. These depositors or clients that we call them, have some form of fiduciary obligations with respect to their funds. In what they felt was their best interest, they moved them out, following what happened with Signature and Silicon Valley. We have been in constant contact with all of them and are working to either get them into a reciprocal deposit program to bring them back or going through very diligently with their senior leadership and our senior leadership and going over what we're doing as a bank to mitigate all the risks that have been brought forth through these two bank failures. We feel very good about that process and what we're going through. Also to Mr. Yu's point, a number of them have credit relationships with us, and so we fully expect to have a lot of that back. Yep. Okay. Very good. To the point, I think it was mentioned at the start of the call, deposits quarter to date up 1%. I guess, within that, should we expect that the bulk of that's just driven by time deposits? What I was specifically getting at is the NIB flows since quarter end. Does it feel like there's been any kind of deceleration in the drawdown of NIBs? Most definitely since the end of the quarter, Andrew, and that's a good question. What we've seen since the end of the quarter is really more of a business as usual, I would say. That's why we see the tick up of 1% from the end of the quarter. Obviously, you know, I think we'll have much better news to report at June 30th with respect to this subject. Johnny, You want to add to that? I mean, as far as nature deposits increase, I mean, the flow in the first half, I mean, of the quarter. First half of the month. Yeah. I think the nature of deposit inflows is just like Ed said, business as usual for a lot of our clients. We're working on regaining back some of the deposits we lost, like Ed has said. This is business as usual for clients coming in. Okay. Very good. I appreciate you guys taking the questions today. Thanks. Our next question will come from Gary Tenner with D.A. Davidson. Please go ahead. Hi there. This is Clark Wright on for Gary Tenner. quickly, if I could, you previously indicated you had asked regulators for approval with regard to a $150 million stock buyback. Could you provide any color on how you were thinking about capital in the buyback right now, given your valuation near tangible book value and the potential for getting that buyback approved by regulators? Let me first of all, I mean, describe the process. In order to get the regulators approval, they require us shareholder approval for the buyback. Okay. That's the state of California. We're a state bank. We have completed our proxy statement, which has just been released, and they're asking our shareholders approval for a $150 million buyback authorization. Our board will decide when, how much amount will be the buyback happening. When they decide they want to do that, we will ask the board regulatory approval. Usually it takes about 2 weeks. In the past, 2 months to approve it. Okay? In any event, that's a process. We are getting ourselves ready to do that. In the meantime, that's from the legality aspect. From the operation aspect is that I must tell you that in the last phone call, I'm fully confident we're going to buy back the stock, okay? Because it's so cheap in our opinion now. You must know we're sitting in 5.2x of 2023 earnings, okay? That's obviously, I mean, advantage for us to buy back. We would. Right now we have a bigger picture of the liquidity issue and the so-called unstableness in the public's vision about the banks. Most likely, in second quarter, we will be looking very carefully and make sure that the liquidity issue is done. We don't need any additional liquidity to do that. Okay? Long term, that will happen. One thing will not happen if our stock price double, maybe we don't do that. We hope that's the case. Yeah. Most likes it looks like with our trajectory of our stock value is concerned, it will be very beneficial to our shareholders. Got it. Thank you for that. Then just in terms of loan growth for the full year, how are you thinking about it, just given the economic uncertainty and about first quarter contraction balances? Well, loan growth has a three-dimensional situation. I mean, again, I cannot give you any guidance other than that because I truly do not know. On the micro side, you have a reduced loan demand, especially right after this meltdown on the I mean crisis, so-called crisis. It changed a lot of people's investment priorities. You see the things slow down somewhat, okay? Although the payoffs still continue, and by those familiar name, you wonder why they still want to do that, but they're still paying us off with a 5% ten-year mortgage or five-year mortgage. Maybe it's because they I mean, I mean, they committed a long time ago. Again, that's something as we stand as a corporate strategy, we won't match that, okay? That's a micro situation. We really don't know after May when the Federal Reserve has indicating if they are holding the rate stable, versus what, whether that will spur up the investment, I mean activity of our customers, okay? That's one thing in the situation. The macro side is again under the current liquidity environment, will we be able to get substantially more deposit like we used to do? Okay. The question is also how much you have to pay for it. Right now, everybody is competing for these deposits furiously. Okay? These are the things we're facing. If you ask me in May, I will tell you I'll vision better. Right now, I have no clarity on this point. Hey, in terms of. I'm sorry. Oh, sorry about that. You were saying? No, I'm just sorry about that. I can't think of any definition. Oh, no worries. No No worries. Understood. Lastly, SBA production and demand trends, it looks like you had a gain on sale of SBA and resumed selling. Maybe if you could just point to some of the demand trends that are going on and as well as the gain on sale premiums. Okay. One of you want to answer the SBA? Oh, SBA, definitely. Again, as we mentioned earlier, that, you know, this is a new initiative. We are trending very carefully, methodically, and especially during the current situation. However, we are, you know, moving forward. We do have a pretty solid SBA pipeline, and we think that, you know, for small business, and it's something that we will continue to move forward. Got it. Thank you. Our next question will come from David Feaster with Raymond James. Please go ahead. Hey, good morning, everybody. Good morning. Maybe just following up on. I know you don't. The loan question is hard to answer, but maybe just asking it a little bit different way. I mean, you've done a phenomenal job actually pricing loans and getting paid for the risk that you're taking. And I get you not having as much of an appetite for credit here, but where and demand, especially, you know, given the structure and the standards and pricing that you have. Where are you still seeing good risk-adjusted returns? What segments are still able to make projects pencil? Is it a market or geography? I'm just curious, where are you still seeing good opportunities at this point? Well, what we are seeing right now is really not so-called categorically type of situation. We're seeing the individuals. We still have customers that they have, individual customers that they have projects they want to continue to do, okay? Right now seems to be. By the way, I want you guys telling the C&I side. Right now, we don't see C&I being the big growth factor as of right now because the interest rate situation, okay? Mm-hmm. On the real estate side, we're seeing there are still projects going on, people needs to be get it, get it purchased or get it developed or get it what. These are the individual cases. They will be subject to much intense individual underwriting of the loan. These are the risk-return opportunity. Unless there's a good return, we won't do it. We'd rather just keep a good liquidity in doing the situation right now. long term, as you all know, there's so many zillion dollars or $1 billion, billions dollars of so-called the CMBS falloffs from the current maturities, okay? It is the report of everyone, including you, that many of them will be, or would be either remargined or foreclosed or whatever, rearranged, okay? Traditionally, if past is any experience to the future, once every few years, we face situation like that. There's a lot of value changes, and these things become valuable. We're ready to pick a few of the remargining items now. That makes sense. Some of those CRE projects that you're talking about, How is pricing in those types of deals? Where are you able to price those types of things at right now? It's still based on prime base, prime-based lenders. It usually is prime plus, you know, you know, I mean, we go up and down from prime plus half, you know? That's what we've done now. Okay. You know, you guys have been one of the most rate sensitive banks around. You guys have done a phenomenal job. Ed, you and I have talked about it before. I'm just curious how you think about managing your rate sensitivity at this point in the cycle, you know, and potentially taking some rate sensitivity off the table, and how do you think about doing that? We have several initiatives we're doing. One of them is that if some customer wants to convert their loans into fixed rate, we will now start to consider it, but the rate has to be, I mean, acceptable to us. Okay? There are a number of them has been started to thinking about converting. That's one of them. Second of them, almost all of our floating rate loans, and you know that, with a floor. Currently, the floor is averaging over 6%. Averaging. There are some older loans that is in the 4% range. There are newer loans in the 7% range, right? Maybe 5% and 6%. Eric, give the number. We can. That serve as a so-called a management tool during a rate decreasing environment. That's why I think Ed has provided you previously with a chart, shows you during the rate reduction time, Preferred Bank's earning actually increases. That makes sense. I guess, I guess just last one from me. You know, maybe just given some potential revenue headwinds, just, you know, given the rate environment, rising deposit costs and those types of things. Obviously, you guys run an incredibly efficient institution. But there are some, you know, headwinds, right? I mean, you got inflationary pressures, rising FDIC costs. You guys are continuing to invest in the future with, you know, Texas expansion and the SBA build-out and all those types of things. I'm just curious, how you think about expenses in the near term, and any commentary on that front. We are continuously looking at opportunistically, you know. We have previously committed to a couple new branches. One of them is just signed the lease. We'll get into that. Basically, the growth really have to come from the adding of the personnel, okay, and which is a continuous and laborious task. Now we will continue to do that. As long as any opportunity for the expansion in a sort of like, you know, a big office or big operation type of thing, we hope that it will fall on that. I didn't see anything right now. Okay. We kinda talked about like an eighteen and a half million to $20 million kind of quarterly run rate. Is that still pretty reasonable? Yeah. Probably going to be just, 20, maybe just slightly north of 20, David. Okay. All right. Thanks, everybody. Appreciate the time. Thank you. Our next question will come from Tim Coffey with Janney. Please go ahead. Hey, Ed, I was wondering, can you kind of talk a little bit about the brokered CD market right now and how that, if that has any kind of interest at this point? I mean, given, you know, the stuff that you've already done, you know, conference call to date. I'm sorry, what's the question again, Tim? Specifically on brokered? Yeah. Are you looking to add more or do you feel like you've done enough? No, no, we're not looking at more. We've done what we're going to do. Yeah, to Mr. Yu's point, we took out the FHLB advance as well. I don't envision us replacing that once that matures, obviously we don't know the future. Given everything we know right now, if things progress out the way we expect to, we won't renew that one. Okay. The brokered market has actually calmed down since the crisis. Yeah, it has, hasn't it? If we start to see kind of rates roll over back half of this year, do you think that you'll start seeing a bigger pipeline, in terms of loans? Yes. Our company is kind of a rate sensitive situation. Under lower rate situation, our production is really jumping up. Great. Okay. All right. Those are my questions. I appreciate the time. Thank you. Thank you. Our next question will be a follow-up from Matthew Clark with Piper Sandler. Please go ahead. Hey, thanks. Just wanted to get an update on kind of the health of your variable rate borrowers, given that you got 80-85% of your loans variable rate. They've seen loan yields up 300 basis points from the lows. Just wanted to get an update on how debt service coverage ratios look and how you might be working with certain segment of those borrowers to kind of deal with the increased debt service? At present time, not that I know of, okay, we are not having any risk. I'd rather have Nick answer that, you know. just like Mr. Yu mentioned that we do not see anything happening at this time. No, I don't have any information on that. Okay, thank you. Maybe just go ahead. Go ahead, Ed. Matthew, I think that's a good question, and it actually leads me to another point I'd like to bring up. It's interesting as Mr. Yu talked about the CMBS debt cliff that's coming due $1.5 trillion or whatever it is over the next 3 years. With those assets repricing up, the debt repricing up, I think it's very notable that our portfolio has already gone through that as opposed to most banks' portfolios are still waiting for that cliff. Ours, because we're 80% prime base, have already seen that. To the fact that delinquencies are almost 0, non-accruals are almost 0, I think bodes well for the fact of our credit quality and our underwriting and for the fact that this cliff that everyone talks about may not be as devastating as it originally is thought. Great. Yep, good color. Then just last one from me, some clarification on the non-interest expense run rate outlook. Ed, I think you mentioned maybe 20, slightly above $20 million run rate. I assume that's the high end of the range you're anticipating this year. I would call that the middle part of the range, Matthew. as mentioned. Okay. You know, there's inflation and wage inflation continues as well, so. Okay. Do you want to reset that range or? No, I'm good. I'm good with it. Okay. Okay, fair enough. Thank you. Again, if you would like to ask a question, you may press star then one on your telephone keypad. This concludes our question and answer session today. I would like to turn the conference back over to Mr. Li Yu for any closing remarks. Thank you for your interest. You know, it is interesting to have everybody asking about the upcoming CRE crisis, especially in this office building area. I want to recall my personal experience. Seems to be last four years. First started was retail, okay? That big problem that we will have in the electronic, I mean, you know, merchandising. Then, of course, pandemic and the hospitality situation comes along, playing big and so on. Then probably combination of something. Now obviously it's office building, you know. Although it sounds funny, it looks like a flavor of the year, you know. In any event, you know, last two, we are fortunate that our underwriting standard and underwriting procedure, as we previously explained to you, how do we underwrite our hotels, underwrite our retails. Basically, we avoided the mall situation. We emphasize on the neighborhood center, you know, so on. Okay, that everybody needs every day, you know. I hope this time, you know, knock on wood, we'll be equally, okay, equally as fortunate with office portfolio. Okay. Thank you very much, and, okay, it should be a very, very eventful quarter, and thank you for your attention. The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.