April 4, 2023
I am pleased to report that fiscal 2022 was a record year for Preferred Bank, both in terms of earnings and total assets. Unfortunately, the events of early March, 2023 have proved to create a brand new challenge. We in the banking industry have been truly humbled by the events of early March when two mid-sized banks failed within days of each other. We have learned a great deal in the weeks following these failures and the following are my observations:
- The definition for transactional accounts should be revised. True, they are “core deposits” by definition, but we now know that only holds true in good Conversely, they are the source of a deposit “run” in more stressful conditions. I now appreciate our TCD (time certificate of deposit) portfolio even more. Aside from knowing the duration of our funding at a known cost, we did not experience even one TCD withdrawal during the second week of March.
- The golden rule of not borrowing short to lend or invest long, still In doing this however, we are going against the grain, so to speak. I cannot count how many times we have seen the disappointment in the faces of our loan officers when their floating rate loan gets paid-off by a low fixed rate long-term loan. The events of early March only confirm my belief that it is well worth the agony in order to have a short duration balance sheet.
- We must respect the fact that government policy change is always one of our biggest risks that we face in the industry. Back in 2021, we were all convinced that inflation was ‘transitory’ by certain public officials. I highly doubt that anyone was preparing for a 500 basis point rate increase in
- Us, managers of publicly traded banks will continue to be confronted by “beat” or “miss” of our quarterly financial results. But it is very clear to me that we must place more weight in longer- term balance sheet I do hope our shareholders will also do so.
Going forward, Preferred Bank will continue to maintain its balance sheet flexibility, keeping our asset duration relatively short, maintain outsized liquidity, control our overhead, and operate a simple business model.
I am very proud of the performance of our Bank and of our employees during 2022 and especially in the first part of 2023. I would like to thank our faithful clients, employees and shareholders for your continued support.
Very truly yours,
Chairman of the Board
Chief Executive Officer