PrivateBancorp's (PVTB) CEO Larry Richman on Q1 2016 Results - Earnings Call Transcript

| About: PrivateBancorp, Inc. (PVTB)

PrivateBancorp Incorporated (NASDAQ:PVTB)

Q1 2016 Earnings Conference Call

April 21, 2016 11:00 AM ET

Executives

Jeanette O'Loughlin - Head, IR

Larry Richman - President & CEO

Kevin Killips - Executive MD & CFO

Kevin Van Solkema - Executive MD & Chief Credit Risk Officer

Analysts

Chris McGratty - KBW

Stephen Alexopoulos - JPMorgan

Jon Arfstrom - RBC Capital

Terry McEvoy – Stephens Capital

David Long - Raymond James

Casey Haire - Jefferies

Brad Milsaps - Sandler O'Neill

Timur Braziler - Wells Fargo Securities

Kevin Reevey - D.A. Davidson

Operator

Good morning, and welcome to PrivateBancorp Inc.’s First Quarter 2016 Earnings Call. At this time, I would like to inform you that this conference is being recorded, and that all participants are in a listen-only mode. At the request of the Company, we will open the conference call for questions-and-answers after the presentation. Please note that the Company will be taking questions from individuals and companies that have been invited to attend the live portion of the conference call.

I will now turn the call over to Jeanette O'Loughlin, Head of Investor Relations.

Jeanette O'Loughlin

Good morning, and welcome to PrivateBancorp’s first quarter 2016 earnings conference call. Participating on the call today are Larry Richman, PrivateBancorp’s President and Chief Executive Officer and Kevin Killips, our Chief Financial Officer. Kevin Van Solkema, our Chief Credit Risk Officer will also be available for questions.

PrivateBancorp’s first quarter 2016 earnings press release was distributed this morning over the newswires. The release and the financial supplements with additional financial tables are available on our Web site at investor.theprivatebank.com.

Before we begin, I would like to read our Safe Harbor statement. Statements made during this conference call that are not historical facts may constitute forward-looking statements within the meaning of federal securities laws. Management’s ability to predict the results or the actual effects of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects are disclosed in the filings we make with the SEC, including our Form 8-K dated today, relating to today’s earnings release. You should consider these risks and uncertainties when evaluating any forward-looking statements and undue reliance should not be placed on such statements. The Company assumes no obligation to update any of these statements in light of future events.

Now, I will turn this call over to Larry Richman, President and CEO of PrivateBancorp.

Larry Richman

Thank you, Jeanette and good morning everyone. I’ll begin this morning with my views on our first quarter results. As Jeanette said, Kevin will go through our financial highlights, and Kevin Van Solkema is here and will join us for the Q&A. I will focus on two things this morning; first, how our success in any clients and doing more for existing clients is driving our results; second, I take on the economics and competitive environment, and how that shapes our views of our business and how we are positioned through 2016.

Let me start with our first quarter performance. I am pleased with the way our team continues to execute our differentiated banking strategy. Net income was up 19% versus a year ago at $49.6 million but down slightly from fourth quarter reflecting seasonally higher employee expenses in the first quarter. Earnings per share were $0.62 compared to $0.52 a year ago and $0.65 last quarter. We grew revenue from last quarter and a year ago by adding new clients, growing loans and deposits and increasing non-interest income to active cross-sell, as well as realizing a full quarter’s benefit of the December rate increase.

Net revenue was over $174 million in the first quarter an 11% increase from a year ago and up from $170 million last quarter. Revenue growth outpaced expense growth giving us important operating leverage in our business. We had another strong quarter of loan origination activity with about $400 million in new loans to new clients. Net loan growth was $191 million. Market volatility in January seemed to temper activity early in the quarter. We saw activity pick up as the quarter progressed.

Once again we had strong loan originations activity in our commercial and industrial portfolio with about 350 million of the $400 million in loans in our C&I book. We had a good mix of clients in a variety of industries and saw growth in our Chicago and regional middle markets, as well as our specialty businesses including commercial real-estate. At the same time, similar to Q4, we had a higher than normal payoff and pay down activity, driven by market opportunities for business and real estate property sales and refinancing in the long-term markets. Revolver usage was down 1% to just under 46%. Overall, the composition of our portfolio remains consistent at about two-thirds commercial and industrial and one-third commercial real estate and consumer. I am comfortable with the diversifications and mix.

The pipeline for new clients into the second quarter remains solid. We had a strong quarter of cross-sell activity with both new and existing clients. Syndication revenue was 5.4 million in the first quarter up quarter-on-quarter and year-over-year as we develop the number of loans in both C&I and commercial real estate that presented good syndication opportunities. As we think about developing client relationships, syndication is an important business for us as it allows us to meet our client’s needs while at the same time managing our risk.

Treasury management was up 12% from first quarter 2015 and 4% from fourth quarter. About 75% of our commercial clients have a treasury management relationship with us. These products generate steady fee income and allow us to secure client deposits which helps to deepen those relationships. Capital markets had a good first quarter as we saw number of our clients take advantage of rate movements and market opportunities for interest rate hedging.

Our wealth management and trust business continues to add clients working along with our commercial banking teams. We had a substantial increase in custody assets during the first quarter by leveraging existing commercial relationships, while $2 billion of those custody assets are expected to be disbursed throughout the year. This is an example of how our clients turn to us as a trusted provider for their overall banking needs. I like the level of activity and focus of our teams as they work together to generate cross sell activity and develop and deliver multiple product solutions for our clients.

Turning to deposits, total deposits were $14.5 billion, up a bit from year-end and a year ago. I am pleased with the non-interest bearing demand deposits helped steady 30% of our total. New deposits to new clients were almost $275 million as deposit gathering remains a critical part of our relationship approach and the raw material to fuel our loan growth.

Now let me turn to the economies and the environments in which we’re operating. After a rocky start and high volatility in the markets beginning in the beginning of the year, I believe our clients views on the economy and its impact on their businesses have returned to a place of measured optimism. Our clients generally feel good about their business outlooks. Geopolitical and macroeconomic events however continue to make them cautious and conservative in their planning. But overall our clients tell me they feel good about their businesses and also where they’re headed.

Certainly the banking landscape remains competitive, and I feel good about our ability to compete to build new quality relationships. Yet we will chose to not compete when we do not like the relationship returns or structure. We’ve been disciplined and selective in new business development and we remain committed to that approach. We will continue to compete and generate quality profitable clients with good cross sell business opportunities.

Our credit portfolio is in a good place, and credit quality remains a critical priority for our teams. We will continue to seize opportunities to be consistent in our approach and mindful of the need to maintain discipline on structure and pricing and generate appropriate relationship returns. Our teams continue to engage in active calling. We have a strong network of referral sources who connect us with prospects and we are committed to relationship development by cross selling the services to get billed specifically for our client’s best. We are confident that our differentiated business model allows us to be proactive in serving our clients and puts us in a position of strength as we seek to continue to build value for our shareholders.

Now I will ask Kevin to talk more about our key financial highlights. Kevin?

Kevin Van Solkema

Thank you, Larry. I wanted to add some color around this quarter’s results. We began the first quarter with higher short-term rates but also had the earnings headwind of one less day in the first quarter and seasonally higher FICA and 401(k) contributions.

Let’s start by talking about how the mid December interest rate moves were reflected in our results. Net interest income grew 2% compared to the fourth quarter primarily as a result of the increase in variable rate loan yields as well as growth in average loans and investment securities. On a comparative basis, loan yields increased 10 bps while NIM increased 5 bps to 3.3%.

Let’s walk through the key components. As we discussed last quarter, the increase in short rates during the period impacted loan yields by approximately 17 bps. Offsetting that increase we saw loan fees declined 4 bps. As Larry mentioned, we did see some elevated payoff again this quarter, however there will be some variability in fees depending on how earlier loan pays off. Also, given the aforementioned move in 30 day LIBOR, we saw the contribution from our hedging program reduce by approximately 2 bps as compared to Q4. To complete the walk across some loan yields, we continue to see 1 to 2 bps of overall price compression in the book.

We continue to be asset sensitive with 96% of our loans variable priced and approximately 72% of the variable book linked to 30 day LIBOR. The credit valuation adjustment in our capital markets business is also highly influenced by fluctuations in rates. As the five year moved lower in the first quarter, the CDA reduced capital market income by 2.9 million as compared to the fourth quarter.

Turning to deposits, we saw a 3 bp increase in our cost of interest bearing deposits from Q4, primarily related to the full quarter’s impact of approximately 1.5 billion in deposits linked to variable interest rates primarily Fed funds. Our deposit balances increased by approximately 120 million from year-end. At March 31, our loan to deposit ratio was 93% relatively consistent with last year excuse me, with year-end.

Moving to operating expenses, non-interest expense increased 7 million from the fourth quarter. The first quarter included about 6 million in seasonally higher payroll taxes and benefits, as well as one month’s impact from salary increases. The provision for unfunded commitments also increased on a comparative basis related to a release in the reserves in the fourth quarter. Our efficiency ratio was 52% for the quarter compared to 49% in the fourth quarter.

Turning to credit, our credit metrics are in a good place remaining at low levels. At quarter end, non-performing assets as a percentage of total assets were 42 bps. The provision for loan loss for Q1 was 6.4 million after a lower provision of 2.9 million in the fourth quarter. We will see movement in the provision from quarter-to-quarter at this point in the cycle with credit metrics at these low levels. Special mentioned and potential problem loans in total represent 1.9% of total loans consistent with year-end.

As we mentioned in the release, we had a lower effective tax rate compared to the fourth quarter of 2015, attributable to net tax benefits of 1.5 largely related to the early adoption of the new share based compensation accounting standard. We would expect our tax rate for the full year of 2016 to be in the range of 36% to 37% all things being equal.

Looking ahead, given our asset sensitivity like everyone else, we’re monitoring economic indicators and commentary from the Fed members for insights on future rate movements. In the meantime, we’ll continue to focus on serving and building our client base as building quality earning assets is just as important for net interest income growth. With that, back to Larry.

Larry Richman

Thank you, Kevin. I have just a few final thoughts, as we look to the future we believe we are well positioned to continue executing our differentiated and focused business strategy and client relationship approach. We have a strong Chicago base with geographic and industry specialties that gives us important portfolio diversification. We will remain disciplined in how we grow our overall book. We will continue to place strong emphasis on deposit gathering and cross selling to build deeper relationships with our clients. We will also continue to make appropriate investments in people, infrastructure and technology to support our business goals. At the same time, we will continue to seek operating leverage and efficiencies. We will serve our communities with pride and passion and ensure we create opportunities for our team members to grow. And finally, we will remain dedicated to carrying on our mission in a way that helps to create long-term shareholder value. Thank you.

Now, operator, could we please open the line for questions.

Question-and-Answer Session

Operator

Thank you, sir. The question-and-answer session will begin at this time. [Operator Instructions] Our first question comes from Chris McGratty from KBW.

Chris McGratty

Kevin a question for you, the 6 million of expenses you kind of talked to both seasonal FICA but also payroll for a month. How much of the 6 was seasonal that will abate in the second quarter?

Kevin Killips

Well, I think the way I would look at that Chris is this 6 I talked about was just the benefits, the FICA and the 401(k) included in our overall expense was just one month of the salary increases because our raises go into effect in March. So, that’s not part of that 6 I talked about. The 6 I talked about was really that kind of one timer even though there’ll be still some FICA bleed into next quarter.

Chris McGratty

Okay, so if I kind of balance the seasonality and then your growth of the business, I mean would you imagine absolute expenses like they did last -- first, second quarter, would they decline in the second as your expectation?

Larry Richman

Yes, I would think that all things being equal, you would take that 6 million and then if we think about what the full quarter’s impact of the comp ranges would be that would probably be somewhat a little bit over $1 million.

Chris McGratty

And maybe I could on credit your numbers obviously look really good. Interested in any notable changes in the SNC portfolio, and any kind of commentary about future provision rates? Thanks.

Kevin Van Solkema

Sure, good morning. This is Kevin Van Solkema. We had a lot of credits reviewed in the first quarter with the Shared National Credit exam as you guys probably know that’s a 2 times a year process now and first quarter and I believe the third quarter into the second half of that. But yes we had a really favorable exam, really had no meaningful impact coming out of that. So, I felt the results from that were really solid and felt good about it. And the provision, Chris there is -- I always talk about this in terms of what are the primary factors that drive it, and this quarter was -- looked a lot like the past many quarters really, where you look at loan growth in this case mostly in CRE this time that added about 1.5 million to our provision expense. Then, secondly, the portfolio migration and the change in the model factors of our loan loss reserve model where we refresh those based on the experiences that we’ve gotten behind us.

And it was a little bit higher criticized dollars that added probably 2.5 million there and then we had net charge-offs of 1.8 million when you’re coming off from such a low base of specifics and the requirement overall is higher, I think we ended at 165 up that’s 1 million from last quarter, you pay for that charge off as well. So roughly the math is like I’ve laid it out there and I think it totals under the low 6 and so -- it's going to move around a little bit in that range when you’ve got those driving factors there as I’ve explained them, but nothing really stands out to me here nothing really unusual.

Operator

Our next question is from Stephen Alexopoulos from JPMorgan.

Stephen Alexopoulos

I’ll have to start, on the commercial loan pay downs. Could you guys share what’s typical in a quarter, and how did 1Q compare to that?

Larry Richman

Sure, Steve I’ll take that one. The new loans that -- we had good activity in both new loans to new clients as well as we had I’ll call it a number of items of volatility. And let me maybe take a moment just to reflect a bit. As we -- as you know this because you followed us for a long time over the last 8.5 years we’ve really transformed ourself into a, we’ll call it a commercial bank and a wealth management bank as primarily. And so our goal is to build a stable consistent earnings power quality earnings and with that as a commercial bank we would expect to manage at a level of volatility or change that takes place quarter-to-quarter. So the pay off activity last quarter I believe was about $500 million. It was elevated and also elevated in Q4 which is a little bit over $500 million.

What happened there is we saw a number of events one was a short and intermediate term lender and we would expect a level of pay down because of refinancing in the multiple markets, companies being sold. We saw a few examples with C&I this quarter of valuations being higher of note in our healthcare business that was one area that we saw that. And what ended up happening was valuations were high, market liquidity was also high, and there was some really good execution, which really benefited our clients nicely.

These levels are probably I will call it $50 million to $100 million higher than what I would normally expect on an ongoing basis, but it is transactional and volatile and in a business like ours you’d expect to see it up you expect to see it down. But I look at the level of new loan activity and new clients being developed and we’re not losing business that we want to keep, we’re losing business that are good results for our clients, or in some cases structures that frankly we just aren’t comfortable continuing with that we chose to let leave. But I guess the short answer is 50 to 100, but it moves around a lot but the level of activity has been good.

Stephen Alexopoulos

Okay, that’s helpful Larry. On the capital markets business, it was very strong growth obviously in the quarter. I am curious has the volume of the business moderated back down to a more normal level here in the second quarter?

Larry Richman

Yes Steve I am speaking to the first quarter sort of trends of what we’re seeing. Capital markets and I’ve highlighted that capital markets this quarter was primarily driven by or the growth was primarily driven by new loan activity in our rates business. And what we saw this quarter were two events, one a little bit -- we've been talking to our clients actively and with the first rate move it triggered I think in my view a little bit of a positive reaction to need similarly what ended up happening within the first quarter we saw we will call it the mid-range the five year for example as we called out the impacting CDA had a positive impact on pricing. So with new business with rates rising one and the curve some flattening in the middle what we ended up seeing was some really good opportunities to execute. Our clients are looking to mitigate and manage their risk their interest rate exposure and we're providing them with a lot of good solutions. It was a really good quarter impacted by loan activity and a lot of good active cross sell by our teams.

Stephen Alexopoulos

Maybe one final one for Kevin Van Solkema, I appreciate the commentary before on provision, is there anything you can give up an idea on our radar which could place incremental pressure on negative credit migration? Thanks.

Kevin Van Solkema

Steve, the headlines coming through January and February caught me up a little bit at night, but those things seem to have settled down and to answer your question specifically not really, the activity we had on our non-performing this quarter a little bit higher slightly higher than the last couple of quarters really idiosyncratic I would say, I don't see any themes or trends there that I’d really draw anybody's attention to. We had a couple in the 10 million range that added with a lot of little cats and dogs kind of filled up to the 25 that came in this quarter. So no I don't think so I mean I get paid to worry I guess but I am not really bothered with what I am seeing.

Operator

Our next question is from Jon Arfstrom from RBC Capital?

Jon Arfstrom

Just maybe a follow-up on Steve's question not necessarily pay downs but the C&I growth for the quarter Larry you talked a little bit about some cautiousness and how that's recovered. 1% is a little slower for you maybe it's pay downs maybe it's not, but I guess help us understand that number and is it kind of say a new reality or is that just some of the uncertainty earlier in the quarter and that you think that's kind of fully recover and pop back up?

Larry Richman

Yes Jon, I feel really good about the business, the calling, the deal flow and I specifically said the pipeline is solid. So I guess with that a couple of things to place last quarter that -- again it's volatile so what we try to do on these calls is call out changes of things we're seeing and we're observing and with the backdrop being that coming out of we will call it the changes -- the impact of the January effect after that it started to improve and confidence level of our business clients because their performance has been generally good, has been positive. The quarter had an impact because of the level of pay downs most of those being really good news because clients benefited. And in many of those cases we retained the clients, we also had because of the level of liquidity that our clients had, we saw some pay downs and revolver reductions that also had an impact one from liquidity and two we had some clients that had bridge lines that they executed transactions called upon capital and those will move up and move down all the time. So I guess the short answer is we're doing what we do I feel like we are doing that with a good level of activity. Our opportunities in the market continue to remain strong but at the same time we're going to continue to be very selective and very disciplined around choosing the right ones to do. And the screens, the process and also the momentum of how our bankers feel and the clients feel it gives me a good feeling.

Jon Arfstrom

Kevin Killips, we don’t need a superfine point on this but if you had to estimate the -- excluding all the fees in the margin just the lift in the margin from the December rate hike all-in what would you say it is?

Kevin Killips

I think Jon all-in if we -- excuse me just the loan fees or the effect of the rate rise?

Jon Arfstrom

Takeout the loan fees just the effect of the rate rise?

Kevin Killips

The rate rise would be as I kind of talked about it here across the book it's about 17 on loans, I would take the 2 bps out on my hedging program because that's a rate rise issue. And then our deposits, the majority of that move in deposits 3 or 4 bps was related to the Fed fund effective. So if you add that altogether you've got 17 takeaway 2 that is 15 takeaway let’s call 3 or 4 and you are 10 or 11.

Jon Arfstrom

And then from here you're saying again taking out the volatility in the loan fees a couple of basis points a quarter and that's just natural price compression?

Kevin Killips

Yes, that's what we've been seeing and that’s probably the best way to portray it.

Jon Arfstrom

And then just on the syndicated fees, they continued to inch up, and I was just wondering if you feel like there are any limits on that business and I don't mean that question in a way like it is going to get outsized, but can that business just continue to plot along and get larger as your balance sheet gets larger or can it grow a little bit faster?

Kevin Killips

Yes Jon, we have really had a good quarter for loan syndication and it is driven by new client activity and also driven by the types of clients who we will call the mix. It moves around based upon what types of clients we develop and also our goal of managing hold positions which is as we talk about managing risk and so it has plenty of opportunities to it. But it can change quarter-to-quarter at times deal-versus-deal, but I feel really good about the team, the capabilities of that that if we are working together and we're coordinating risk and ability to syndicate along with the fact that would meet the client needs. And we're leading client needs in order to build relationships, which allows us the ability to not only do the loan and syndication but also importantly do the deposit and do the treasury and provide other services to them. So it fits the needs of the kinds of clients we take into our [Multiple Speakers].

Operator

Our next question comes from Terry McEvoy from Stephens Capital.

Terry McEvoy

Just a couple of questions on fee income, on the asset management revenue which was up year-over-year if I look at just the dollar amount of managed assets they were down but then there was a pretty big uptick in the custody assets, was that behind at all the uptick in asset management revenue?

Larry Richman

There were a couple of things that took place in asset management, the primary -- there were a couple of things. One, we had a price adjustment that allowed us some ability to drive on that help generally that is it allowed us some additional revenue. We also had a -- we had some new client activity coupled with probably some market adjustments that had an impact there. The custody business really drove the assets under management and administration materially up from call it 7 to 9, the majority of the fees impacted by that custody really because it came in at the end of the quarter really didn't have much of a driving affect on fee income that's in the quarter and that will be going forward.

Terry McEvoy

And then just a follow-up maybe on Jon's question, the syndication fees, is there a correlation at all between loans held for sale at the end of the quarter and the syndication fees booked in the quarter afterwards just eyeballing it over the last 10 minutes it seems to be some correlation but maybe it is a stretch?

Larry Richman

Yes, there is some but again when we syndicate, we syndicate loans that we generate that happened during the quarter, but sometimes there is some that are booked at the end of the quarter and carryover. So there is a little bit of that -- the loans held for sale includes some of the mortgages in our mortgage book that are in part of the price line as well as loans held for sale in syndication. But I feel good about our ability to execute and syndicate, but there is a pipeline into Q2 from Q1 activity in that held for sale loan.

Operator

Our next question is from David Long from Raymond James.

David Long

Most of my questions have been asked, but the one thing still on my mind is the capital structure and you guys continue to be able to grow and support the growth with your income, but you've got $70 million true ups outstanding about 10% and how are you thinking about that, is there -- at what point do you pay that off and reduce your cost of funds or is there an opportunity to refinance that?

Kevin Killips

David, this is Kevin. As we all know that was grandfathered in as Tier 1 a couple of years ago, as we all know we retired about half of that because that's how we felt we wanted to position the capital at that point in time and the way we repositioned that was by taking that out of the capital stack and refunding it or paying it off with their own cash. We will continue to look at that one of the options is to take capital down the another option would be if we chose to replace that with some other type of instrument. I think we still continue to study on that and look at it and moreover look at our capital base where we are and look at our forward look of client opportunities as we continue to build the business and build the balance sheet. So unfortunately kind of the same answer I have been giving that this is something we're struggling on, but those are pretty much our two or three options that we would take on that but we have no eminent plans at this moment.

Operator

Our next question is from Casey Haire from Jefferies.

Casey Haire

Kevin Killips, a question for you on the NIM outlook, the funding costs, any lingering pressure upwards on deposit cost going forward or have you kind of just reflected the December rate hike?

Kevin Killips

I think that we've totally taken into account this quarter the movement on rate especially as it relate to those index deposits. We're keeping our eye on rate movements, we're being careful on pricing pressure, trying to understand if there is any, but broadly speaking we're pretty comfortable where we are now. Now let's see what happens as we think about what the future could hold as Fed funds excuse me, as the Fed rate may move up, but we'll have to see on that Casey. But at the moment given the 25 move into December with the essence of the index, we're okay as it relates to funding cost. But it's really going to depend on how the market reacts and how there is some momentum on this going forward, and if I could predict that I'd have a different job than I have now so.

Casey Haire

Okay. And then switching to the asset side maybe a little bit more strategic, I know you guys don't have a lot of downside of yield pressure, Kevin you mentioned 1 to 2 bps a quarter, but we're looking at a potentially lower for longer environment and I was just wondering if you guys ever contemplated taking some of the assets sensitivity off the table and maybe swapping some of the floating rates loans into a higher yield fixed instrument?

Kevin Killips

As you know we don't really talk about it that much but I actually did mention it in the NIM calculation, we do have a balance sheet hedging program, we had it for about 4.5 years now notionally it's, right now it's 600 million, it's been as high as a 900 million, where we're synthetically at a cash flow basis swapping out that notional amount of our variable rate back into fix. So that's something we continue to look at from both a risk management perspective which is what we really use it for, but we also look at the pricing perspective. So we've been doing that for probably the last about 4.5 years. In this quarter for instance give or take $2 million of revenue came into the net interest income line from that program and that's been relatively consistent probably a little higher the last two years given that the rates were a little bit lower. So we have been doing that notionally, today it's at 600 it's been as high as 900.

Casey Haire

And just last one housekeeping the tax rate if I add back that 1.5 million comes in at 37%, is that good going forward?

Kevin Killips

Yes, I think that's probably not a bad way to look at it. We potentially could have a little bit of a volatility in the tax line because with the adoption of this new standard other activities whether it's our employees exercising options or some other vesting that will now come through that line versus in the past that went into retained earnings or more specifically for those keeping score it went into the a pick pool which we never get a chance to talk about. So I guess I'll use it now, but we'll see how that goes based on activity, but those are pretty good numbers based on everything we know now.

Operator

Our next question is from Brad Milsaps from Sandler O'Neill.

Brad Milsaps

I think you've addressed almost everything, but Larry just curious any commentary in the market from specifically Chicago, Illinois borrowers about worried about things going on at the state and local level in terms of pension government fiscal issues?

Larry Richman

The short answer is, yes, it is a capital conversation from anyone that is either reading the newspapers or aware of that there are these issues and there is lots of conversations going on related to how can we all figure out a way to help. It doesn't -- we're not seeing any materiality from the standpoint of what its effect us on credit quality and Kevin can answer that specifically. But we're all concerned and it's not to get better, but at the same time there is where -- this is a great market with lots of businesses and lots of activity and good momentum despite what are really clear challenges.

Operator

Our next question is from Jared Shaw from Wells Fargo.

Timur Braziler

It is actually Timur Braziler filling in for Jared. I guess my first question is in relation again to the pay downs, two consecutive quarters with generally elevated levels of pay down activity and it seems like the environment is still pretty conducive for your client base, should we be looking at this as a new norm at least for the next quarter or two, or is there something specific that happens around year-end that kind of facilitates that type of activity?

Larry Richman

Yes, I don't -- can't really suggest that it's the new norm, but I can suggest that the market conditions around higher valuations for clients that are doing well, the strength of liquidity and the competition for financing is sometimes allowing that to take place and maybe at higher levels than what we have seen, but again we're also finding opportunities to finance buyers at the same time the companies are being sold. And at the same time, we're also seeing that real estate values being high and the liquidity and once our market causing those properties in real estate loans to refinance that they normally have. So I guess these are conditions that cause levels of volatility, but our ability to both find those opportunities, have good clients and we continue to work with and new business opportunities allows us to -- it's just not stable, it's volatile, but it's something that we manage with and that this part of being a commercial bank and we're good with it and we clearly have visibility to it.

Timur Braziler

And then maybe if we can just circle back to credit for a second and the allowance ratio in specific with charge-offs coming down linked-quarter at a pretty de minimis level and overall non-performing loans pretty much flat on a linked-quarter basis allowance ratio ticked up a couple of basis points here, is that indicative of the 30 to 60 day bucket or is that purely formulated?

Kevin Van Solkema

Yes, I mean it is, this Kevin Van Solkema I would not at all link it our 30 to 59 day past dues, Jared, those numbers are so low they could move around. Within a range and it wouldn’t bother me at all just like these numbers didn’t bother me at all. So I would not make that connection at all. I think it's more of a model driven outcome certainly that's part of it dating down the factors in the model looking at our last experience in our deep well staffs that's something we do every quarter. And there is some qualitative judgment that I excise there as well. And when I look at the outcome of the model, I only step back and say does that make sense to me? And then in some cases I look at some of the broader macro indicators and decide to qualitatively overlay it a little bit, so that's what happened this quarter.

Operator

[Operator Instructions] Our next question is from Kevin Reevey from D.A. Davidson.

Kevin Reevey

Most of my questions have been answered, but I had a one question again related to credit quality I noticed that your 30 to 59 day past due jumped up substantially, sequentially and it's been up I think the last two quarters, could you give us some color on that kind of where is that coming from as far as which loan categories and then in geographically speaking?

Kevin Van Solkema

Kevin, this Kevin Van Solkema. I really have a hard time identifying anything to call out about a number $15 million that's past due on a portfolio of 8 billion. So I really, I don't have a good explanation for the geographic or the type of loan that we have there. These are very idiosyncratic events that either as matured loan it didn't quite get renewed in time maybe there is a person out of the country didn’t make the payment. I mean I have no idea what to say that way, but I will offer that I really have no concerns over the level of past due occurring assets that we have so.

Operator

As there are no further questions, I now turn the conference back to Mr. Richman.

Larry Richman

Thank you. I really appreciate everyone’s call in and listened and we very much appreciate a relationship and thank you and we look forward to speaking to you again next quarter, if not before. Thank you.

Operator

This concludes the conference call for today. A digital rebroadcast of the call will be available beginning approximately two hours after the call until Midnight Eastern Time on May 05, 2016 by calling 855-859-2056 in the U.S. and Canada or 404-537-3406 for international callers and entering pass code 72434311. All participants may now disconnect and have a great day.

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