Preferred Bank (NASDAQ:PFBC)
Q1 2016 Earnings Conference Call
April 21, 2016 02:00 PM ET
Kristen Papke - IR
Li Yu - Chairman and CEO
Ed Czajka - CFO
Nick Pi - EVP, Chief Credit Officer
Aaron Deer - Sandler O'Neill
Good day. And welcome to the Preferred Bank First Quarter 2016 Conference Call. All participants will be in listen-only mode [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions [Operator Instructions].
Please note this event is being recorded. I would now like to turn the conference call over to Ms. Kristen Papke, Investor Relations. Ms. Papke, the floor is yours ma’am.
Thank you. Hello everyone. And thank you for joining us today to discuss Preferred Bank’s financial results for the first quarter ended March 31, 2016. With me today from Management are Chairman and CEO, Li Yu; President and Chief Operating Officer, Wellington Chen; Chief Financial Officer, Edward Czajka; and Chief Credit Officer, Nick Pi. Management will provide a brief summary of the results and then we will open 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 its expectations as set forth in these statements. Preferred Bank assumes no obligation to update such forward-looking statements.
At this time, I would like to turn the call over to Mr. Li Yu. Please go ahead.
Good morning. Thank you for joining our conference. I am happy to report that Preferred Bank’s first quarter that the net income was $7.8 million or $0.56 a share. This quarter included some one-time non-recurring items otherwise financing income would’ve been a bit higher.
The highlight of this quarter is really the growth of the Bank. For the quarter, loan has grown 4.4% from year-end and deposits grown 3.1% from year-end. The higher than expected loan growth is largely because of the subsiding pressure in our loan being refinanced by others. This has been reported to you in the last earnings conference about the subsiding pressure. This also caused our net interest margin to be stable or slightly improving in actual sense.
At this time, looking ahead, our second quarter loan pipeline or loan production looks quite strong. We feel we’ll be at least equal to the first quarter if not exceeding that. The Bank currently is continuing investing for the future. In early part of the year, we have added a number of professionals in the areas from appliances and BSA.
Beginning February and mid-April, we have added a number of experienced production personnel. In fact, a total of six new experienced relationship officers has shown the bank between late February and mid-April. We feel this is very important for our continued growth.
Now, I am ready for all your questions.
Thank you, sir. We will now begin the question-and-answer session [Operator Instructions]. We have a question that comes from Aaron Deer of Sandler O'Neill & Partners. Please go ahead.
The growth was pretty extraordinary this quarter, and it sounds like it's going to continue to be so. I guess given the strength this quarter, was there -- did you use loan purchases at all to augment that growth, or just to better diversify it, where some of it was coming from?
No, we did not purchase any loans this quarter. Everything is in the natural course, okay. In fact this quarter actually is stronger than expected as I indicated. We were paying certain higher level of pay-offs, but didn’t happen. The new production is slightly higher, not that much but slightly higher than our previous quarters.
And then I guess looking at the mix worth coming on, you have a descent amount of diversification in there. But obviously you have a good deal of commercial real-estate. I was wondering if you could give us your thoughts on where you stand relative to the regulatory thresholds, and how you’re managing the regular expectations for being able to maintain the higher level.
Actually if you recall that we concluded acquisition on November 20th of last year. With that added up close to $100 million of CREs a bit into our box, okay. One for that, our total CRE will be just slightly over 300%. As the CRE savings, we are consciously trying to manage that. But the management only happens after its incurring, otherwise with the staircase out of the way. When it grows, then we’ll look at it, see what we can do to mitigate it. So, we’ll continue to monitor that to meet the regulatory guideline.
But speaking about the guideline, we have, in our industry and in all our fellow bankers, numerous conversations with the regulators in almost all kind of gathering together, this question was asked. And we have answer, as high as from very-very senior office of the regulators, indicating it is a guideline. It is a government reminder of that if you exceed that you should intensify the procedure of your monetary and you’re in the process.
And by no means, government is trying to regulate as metrics the particular limitation. As you know, our urban banks that is in all standards and in the lot of CREs and we like many our fellow bankers is always conscious about that, try to live up to the regulatory expectations. Now, having said all that, we’ll continue try to monitor that and we have other things we’re looking at try to reduce our CRE consultation.
And then on the deposit side, there was a decline in the non-interest bearing deposits. I am just wondering if that was just normal seasonal outflows with business needs changing during the, or if there was anything else behind that?
Well, movement in our gross back and some kind of seasonality that’s easy to detect. But one thing the first quarter is always a quarter that we have lot of analysis as to pay income taxes. And naturally first thing that they draw their money from is the DDA accounts. So, that thing should be most of the outflow of the DDAs is because of, and we try to understand a bit more, but some of the -- most of the -- the biggest reason is really was paying the taxes.
And then just maybe one more and then I’ll step back, the reserve coverage ratio has been drifting lower. Obviously, your credits have been superb and so no good reason for you to go in the other direction. But just curious if as it drifts down here at what point might we get to lower on that?
Well, first of all, the 1.10 reserve ratio is really the result of, number one, that the acquisition we did on the $150 million of loans that was marked to present value, so that carries more reserve on that; although the loan was discounted. And then this Bank always have some large number of cash accrual loan is equal to above that in this quarter and it's about $67 million in cash accrued loan. If we add it together, the reserve would have been 10% higher in fact in 120 ranges after considering these two factors. But yes, reserve, as it slow down as you can see that in reality provided $1 million of provision in the first quarter, and likely where the future growth is strong our new provision will be above to represent a full growth of our loans.
[Operator Instructions] And we have a follow up question from Aaron Deer of Sandler O'Neill & Partners.
I’ll just maybe one or two more questions. With respect to the UID acquisition, any remaining cost saves that we might anticipate from that?
Well, Ed, do you want to take that?
Not really Aaron. There could be down the road, those are somewhat contingent on some of the things happening. But by enlarge the cost saves are more or less realized in the first quarter. We did incur a little bit of expense during the first quarter, but not really meaningful.
And then on the OREO, any expected timeline for a sale on that?
OREO, Nick, you want to take over that?
Yes, Aaron. For the only one OREO are booked, we’ll closely monitor the development. We are working with the [indiscernible] and try to see what’s the best solution we could get rid of this deal, but still I believe it’ll take a little bit longer, maybe six months to a year to find out a sure solution.
On Q2, we’ll update on that I guess we previously reported to you, just it is under litigation. We’ll see ahead on results but in the case the litigation was that related to the previous owner that the bank was dragged into it as we now are proud to talk to the owner. So, the lawsuits will probably will be settled or determined within the next few months. So from that point our marketing effort will start.
At this time, we have no further questions. We’ll go and conclude the question-and-answer session. I would now like to turn the conference back over to the management team for any closing remarks, gentlemen?
Thank you so much for attending our meeting today. And we are still very conscious in improving all aspects within calculation and we feel strongly that 2016 could be a very good year for us. Thank you very much.
And we think you sir to the rest of the management team also for your time today. The conference call is now concluded. At this time, you may disconnect your lines. Thank you. Take care, and have a great day everyone.
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