Q4 2015 Preferred Bank Earnings Call
Jan 22, 2016 AM EST
PFBC - Preferred Bank
Q4 2015 Preferred Bank Earnings Call
Jan 22, 2016 / 07:00PM GMT
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Corporate Participants
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* Kristen Papke
Financial Profiles, Inc. - IR
* Li Yu
Preferred Bank - Chairman and CEO
* Edward Czajka
Preferred Bank - EVP, CFO
* Wellington Chen
Preferred Bank - President and COO
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Conference Call Participants
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* Aaron Deer
Sandler O'Neill & Partners - Analyst
* Gary Tenner
D.A. Davidson & Company - Analyst
* Tim Coffey
FIG Partners - Analyst
* Don Worthington
Raymond James & Associates, Inc. - Analyst
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Presentation
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Operator [1]
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Good day, and welcome to the Preferred Bank fourth-quarter 2015 conference call. (Operator Instructions). Please note, this event is being recorded.
I would now like to turn the conference over to Kristen Papke, Investor Relations. Please go ahead.
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Kristen Papke, Financial Profiles, Inc. - IR [2]
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Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the fourth quarter and year ended December 31, 2015. With me today from management are Chairman and CEO, Li Yu; President and Chief Operating Officer, Wellington Chen; and Chief Financial Officer, Edward Czajka.
Management will provide a brief summary of the results (technical difficulty) 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'd like to turn the call over to Mr. Li Yu. Please go ahead.
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Li Yu, Preferred Bank - Chairman and CEO [3]
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Thank you. Good morning, ladies and gentlemen. Thank you for joining our conference call. 2015 has been a good year for Preferred Bank. Our total net income increased [maybe] over 20%, largely due to the growth in loans and deposits. For the year, loan and deposit growth -- a significant amount. However, this amount included the balances of the United International Bank, which we completed acquisition on November 20.
The acquisition has given us $154 million in deposits and $149 million in loans. Ignoring that or excluding that, our annual organic growth in loan was 19.1%, and was 19.9% for deposits. Likewise, if we ignore that, the balance of United International, the fourth quarter -- linked quarter growth in loans was 4% and deposits was 7.2%.
Annual net income is $2.14. Quarterly net income was $0.54, also on a per-share basis. However, these numbers included an acquisition cost of roughly $800,000 related to the United International of New York acquisition. Without that, our efficiency ratio would have been just in line with the annual number, or just over 40%. The New York acquisition has given us a vital new market, especially for loans.
We are highly hopeful the market will be bring us good, vibrant results in the future; and, in time, will bring the profitability of New York region into about the same as our California region.
With the recent stock market correction activities or meltdown activities, we are keeping our eyes wide open. Previously we are well aware of the Chinese stock market meltdown, and we have gone through an internal review of our portfolios. Luckily, more than 75% of businesses was mainstream community. We have negligible activity with the Chinese market related activities.
We have -- we are in the process of reviewing our portfolio in New York region. And early indication is that, because their size and because their locality, the involvement there is also negligible. Although the market [look good], we still believe the majority of economic forecasts that our economy will continue to grow on a steady basis, and is more than likely that Federal Reserve will increase interest rates. If so, then we are one of the biggest beneficiary of the increase.
90% of our loan portfolio is asset-sensitive, or fully floating. 80% or 90% is fully floating with prime rate on a daily basis. 10% of the 90% was fully floating on the LIBOR basis, which is a little bit longer, but relatively short. With that and with the various activities we are seeing with our loan pipeline, we are highly confident or hopeful about 2016 year.
Thank you. Now I'm opening for questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions). Aaron Deer, Sandler O'Neill.
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Aaron Deer, Sandler O'Neill & Partners - Analyst [2]
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Congratulations on getting the deal completed, and on a very strong organic quarter, as well.
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Li Yu, Preferred Bank - Chairman and CEO [3]
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Thank you.
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Aaron Deer, Sandler O'Neill & Partners - Analyst [4]
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With respect to UIB, can you talk a little bit about the timing of the systems integration there? And what kind of activities you are taking in terms of any additional hiring in New York, or training? And how you would expect to see that impact the growth in the market?
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Li Yu, Preferred Bank - Chairman and CEO [5]
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Okay. I will let [Ed] get started with the integration.
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Edward Czajka, Preferred Bank - EVP, CFO [6]
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Hi, Aaron. We are currently set to convert their systems on the weekend of February 5. So the integration activity -- we closed on November 20. We expect to be more or less fully integrated by the end of that weekend; so, a fairly quick time line. Everything is a go right now, and everything looks really good. As a matter of fact, we just completed our mock testing, and everything went great. We're on track.
And I'll let Wellington discuss the personnel question.
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Wellington Chen, Preferred Bank - President and COO [7]
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Hi, Aaron. We have a group of experienced bankers out there. I think that the -- I was just out there last week and working with them. So, working with the existing customer and going after the customer that they couldn't bank previously due to the bank's size, I think that there's a -- we are very bullish in getting our share of business.
Now in terms of additional talents, that's always our focus. We are always looking for good talents out there, whether it's West Coast or the East Coast.
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Li Yu, Preferred Bank - Chairman and CEO [8]
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Aaron, I would like to add a little color on the New York thing. To me, one of the biggest attraction of New York is the people. Granted, because they were previously under a difficult situation and that they have assets per employees kind of low. But given time we will make these people create more activity which, in my opinion, they are fully capable of.
We are also looking for branching out in the greater New York area. So that make the total [ranking] more economically -- size of economy work better.
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Aaron Deer, Sandler O'Neill & Partners - Analyst [9]
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That's great. I appreciate that. I was also curious if you could touch on the commercial real estate guidance that the regulators had reiterated at year-end, and what your thoughts are on that, and how that might affect your appetite for various loan types in the year ahead.
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Li Yu, Preferred Bank - Chairman and CEO [10]
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We -- previous to the acquisition, as at based on September 30 number -- we had a total -- I mean a so-called investment CRE number. By the way, I'd like to reiterate that the government's guideline is that investment commercial real estate guideline is roughly 300% of total risk-based capital. It is a guideline. Over that number, they are expecting the banks to intensify their underwriting procedure or monitoring procedure.
And from top to bottom in the hierarchy, you actually say, well, as long as you do the right job, we're okay with it. Having said that, we are very mindful of keeping the number a little bit lower. September 30, we had a number of roughly 350% without UIB. With the UIB, it goes to a little over 380%.
Now, since October 1, we've been working on it very hard, the various situations, whereby not matching some of the maturing CRE loans was the rates that other people is offering. By concentrating on -- I mean generating, originating other type of loan, by selling off some of the loans to participation, we have managed to bring down this number to 338%, estimated, as of December 31, 2015.
And also, including in the 338% number was 58% in multifamily, which mean apartments. So, the real nonresidential type of CRE is about 280%. And our underwriting procedure is that we think we are keeping our underwriting procedure without relaxing on that. And for instance, none of the new origination in the fourth quarter was over 70%. Effective maybe one old 70% that is related to a long-time customer -- has a proven record and substantial net worth.
Our average originated CRE loans in the fourth quarter is LTV is right around 60%. And we were very, very conscientious about the location of the property. We generally do all our CRE, including apartments, in highly populated infill areas. So this is my summary report to you.
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Aaron Deer, Sandler O'Neill & Partners - Analyst [11]
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That's great. Thank you very much, Mr. Yu. I'll step back.
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Operator [12]
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Gary Tenner, D.A. Davidson.
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Gary Tenner, D.A. Davidson & Company - Analyst [13]
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Just a couple questions. On the margin, the core margin in the third quarter was around 3.80%, I believe, so nice expansion in this quarter. Could you attribute for us how much of that expansion was the impact of the Fed move in mid-December? And talk about if there would be any competitive dynamics on the pricing side that may limit some of that follow-through coming to the first quarter.
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Li Yu, Preferred Bank - Chairman and CEO [14]
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Ed, do you want to talk about the first (multiple speakers)?
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Edward Czajka, Preferred Bank - EVP, CFO [15]
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Sure. Hi, Gary. In terms of the core net interest margin expansion, I would say probably only maybe a couple of basis points, at most, attributed to that. Obviously we only got a half a month of benefit there. We expect to -- the loans that reset, as well as Fed funds. In terms of going forward, and in terms of pricing, what we're seeing in deposits is, as you know, the middle end and the long end of the curve have actually moved down since the Fed tightened in the middle of December.
So what we're seeing in the market on deposits is really not a lot of movement upward. We are seeing some -- a lot of CD promotions. But in terms of the core deposit pricing, money market, and those types of things, we're really not seeing a lot of movement there at all. So I think that could potentially benefit us in the upcoming year, if it remains that way.
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Gary Tenner, D.A. Davidson & Company - Analyst [16]
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Okay. So it sounds like a full quarter of higher yields without a lot of upward pressure on funding costs. Is that accurate?
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Li Yu, Preferred Bank - Chairman and CEO [17]
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We would like to think if there was any pressure at all, it would be very limited. However, I'm constantly contemplating: is it a time to [get] a longer-term deposits, such as three-year deposits? Three-year deposit will prove to be, long-term, very, very profitable for us. So this is something that we're contemplating. Certainly those are strategic moves, rather than a pressure or anything like that.
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Gary Tenner, D.A. Davidson & Company - Analyst [18]
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Great. And then just on the credit side, obviously you guys have really had a great run in terms of consistently lowering non-accruals. Right now, just one small non-accrual loan and the OREO property led itself to a pretty small provision again this quarter. With your reserve now down closer to 1%, can you talk about your expectations for the provision levels maybe for 2016, given the expectations for strong loan growth?
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Li Yu, Preferred Bank - Chairman and CEO [19]
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Okay. There's two type of situation I'll talk about. Number one, the reserve is low. One of them is related to the mark on the UIB loans, which they don't carry reserve for what was really was marked with the full value. Another situation is the portion of the -- and the very small portion of the mortgage loan portfolio has traditionally supposed to carry a very low reserve number.
The others -- CRE portion and the C&I portion of reserve -- is approximately the same as before. And we are under heavy, heavy advisers from our CPAs, with their newly acquired information, how to properly do a reserve. We are also fixing the immediate release of the CECLs. A big story about it is that we're not so sure, but I just want to tell you that whatever we are doing right now is meeting what is the current accounting standard.
Now, looking in the first quarter, I guess probably the -- if we have the same amount of production, our provision will be a little bit elevated, but I just don't know how much.
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Gary Tenner, D.A. Davidson & Company - Analyst [20]
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Okay. And what is the credit discount on the UIB portfolio at year-end?
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Edward Czajka, Preferred Bank - EVP, CFO [21]
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Right now -- it's not finalized, Gary -- still working through it. But the current draft right now, it's about 1.3% was the mark on the whole loan portfolio.
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Gary Tenner, D.A. Davidson & Company - Analyst [22]
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Okay. Great. Thanks, guys.
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Operator [23]
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Tim Coffey, FIG Partners.
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Tim Coffey, FIG Partners - Analyst [24]
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As we look out to loan yields the next four or six quarters, how confident are you guys that you can hold them above 5%?
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Wellington Chen, Preferred Bank - President and COO [25]
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Boy. (laughter) Mr. Coffey.
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Tim Coffey, FIG Partners - Analyst [26]
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Yes, just pull up the crystal ball (laughter).
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Li Yu, Preferred Bank - Chairman and CEO [27]
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Mr. Coffey, that's a $1 million question. (laughter) Put it this way, that are certainly that we will be -- we try very hard to hold over that. But being that if in the next six months, if we have another rate increases, which is 25 basis points, some of our floating rate loan would be floating upwards. So the likelihood of keeping it over 5% with that particular increase looks, let's say, 50.1%.
So, certainly if [there's an interest] as our corporate history has always been tried to manage our net interest margin in a level that is probably higher than our peer group.
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Tim Coffey, FIG Partners - Analyst [28]
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Okay. And then have you built any prepayment penalties in -- sorry. Were there any prepayment penalties in the interest income line item this quarter?
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Li Yu, Preferred Bank - Chairman and CEO [29]
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In the marketplace, if you have a floating rate loan, fully floating rate loan, any prepayment penalty is unusual. Whenever possible, we will build it in. However, our customer -- basically, our customer are putting -- more experienced customer, they certainly will fight back. We have very little few loans that have a prepayment penalty related to that. So, the short answer is, not much.
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Tim Coffey, FIG Partners - Analyst [30]
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Okay. And then given the weakness that we're seeing in the Chinese stock market, as you mentioned earlier, is that having any kind of impact on customer liquidity -- whether it be in your core market in Southern California, or in the EB-5 program?
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Li Yu, Preferred Bank - Chairman and CEO [31]
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The EB-5, we're able to do -- it's already approved. Its fund is already in that and meets all the BSA requirement. So far, we haven't seen anything, and based on our discussion with our customer, and it seems to be whatever projects are already going on, it will be continue to go on.
As far as the other type of loans, we just don't have many loans that sort of -- the so-called really China-related. To certainly there may be some distributors or maybe some related people of a Chinese factory having operations in the United States, but basically are locally capitalized. And we're lending to them based on local operations. And the number is very, very small.
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Tim Coffey, FIG Partners - Analyst [32]
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Right. Speaking of the EB-5 program, there is a significant backlog on applications, and I'm sure on projects that are coming forward. So, are we talking about -- if the problems in China extended a year, would that start to pose a problem for you on the EB-5 business side?
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Li Yu, Preferred Bank - Chairman and CEO [33]
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I'm going to be purely speculating and give you one man's opinion. The net effect is going to be reducing, but not that much. While there is a lot of people having problems getting the fund out, or their fund just dried up; there's also many other people have a bigger [propensity] or bigger desire to get their money out and diversify themself. Just like the recent -- our stock market, United States stock market correction.
Some of my customers talking about stopping their other investment project in real estate. But, yet, there are some people saying they need to switch to real estate, because that seems to be safer for the long-term. So it's a two-way type of thing.
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Tim Coffey, FIG Partners - Analyst [34]
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Okay. And then just one final question. As you look to build up the operations on the East Coast, does M&A factor into that?
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Li Yu, Preferred Bank - Chairman and CEO [35]
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We are -- right now, we are -- we have been less with that. People start to bring us with more and more opportunity, now that we've done the first one. And we're looking at it. Basically that -- like I said, we're kind of picky on the price we pay, and also the market opportunity that would be given to us. So, we are continuously looking, but, only will be doing what we think is absolutely beneficial to us. We're not looking just for -- looking for adding the balance sheet numbers.
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Tim Coffey, FIG Partners - Analyst [36]
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Okay. Understood. All right. Well, thank you very much. Those were my questions.
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Operator [37]
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Don Worthington, Raymond James.
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Don Worthington, Raymond James & Associates, Inc. - Analyst [38]
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Do you expect any more, in the way of merger costs, in the first quarter that would be nonrecurring?
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Li Yu, Preferred Bank - Chairman and CEO [39]
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Ed?
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Edward Czajka, Preferred Bank - EVP, CFO [40]
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To the extent we could help it, no, Don. We think everything is pretty much in the fourth quarter, at this point. There may be a few things, but they will be relatively small.
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Don Worthington, Raymond James & Associates, Inc. - Analyst [41]
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Okay. And then in terms of -- I guess getting back to the interest rate risk issue -- how much do you have in the way of loans that are -- have floors, where you'd need another move or two by the Fed in order to adjust the yield on the loans?
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Edward Czajka, Preferred Bank - EVP, CFO [42]
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Well, Don, I don't -- I'll present the answer to you in a different form. How about that?
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Don Worthington, Raymond James & Associates, Inc. - Analyst [43]
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Okay.
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Edward Czajka, Preferred Bank - EVP, CFO [44]
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When we do our IRR analytics, we take into account the -- it's on an account level basis. So we take into account every floor in every loan, and where it sits at, relative to the index. So that's all factored in.
What I can tell you is that right around 75 basis points of a Fed hike -- and 25 of which has already taken place now -- at about 75 basis points is where almost the entire portfolio starts to lift off the floors. At 25 basis points, last I recall, at a 25 basis point move, we generate about $2 million more in additional net interest income annually.
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Li Yu, Preferred Bank - Chairman and CEO [45]
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We estimate.
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Edward Czajka, Preferred Bank - EVP, CFO [46]
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We estimate. And then that starts to accelerate as you go higher and higher.
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Don Worthington, Raymond James & Associates, Inc. - Analyst [47]
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Okay, great. That's good color. And then in terms of the REO property, any prognosis on how long that will take to resolve?
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Li Yu, Preferred Bank - Chairman and CEO [48]
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It probably takes all little bit longer than normal other REO, because we still are involved with the -- we inherited the borrower's lawsuit with the party as a people, so we're still a party being named in it. So it probably is another six months to a year before we can start marketing the property, and not being hurt by the value.
We think we already written down to whatever the current market value is, but we'd like to think we'd like to resolve all those issues before we market them.
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Don Worthington, Raymond James & Associates, Inc. - Analyst [49]
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Okay, great. Thank you, Mr. Yu.
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Operator [50]
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Gary Tenner, D.A. Davidson.
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Gary Tenner, D.A. Davidson & Company - Analyst [51]
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I just had one more question on trade finance. We'd heard from one of the other banks that there was some pressure on their trade finance in the fourth quarter, with some paydowns and loan and finance availability in China. Your fee income was up in the fourth quarter on trade finance, but wondering if you were seeing any impacts.
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Li Yu, Preferred Bank - Chairman and CEO [52]
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Our trade finance portfolio is very limited. We have total of about $50 million -- less than $50 million total trade finance loans in the California operation. I have not really tried to see -- finalize what the New York trade finance loans that trust -- with their total portfolio of $150 million in total loans, it is very small. So we have not noticed any pressure in that yet, in terms of the paydown activities on that.
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Gary Tenner, D.A. Davidson & Company - Analyst [53]
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All right. Thanks again.
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Operator [54]
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This concludes our question-and-answer session.
I would like to turn the conference back over to Mr. Li Yu, Chairman and CEO, for any closing remarks.
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Li Yu, Preferred Bank - Chairman and CEO [55]
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Well, thank you very much for attending the conference. We are pleased and with the year. And it was certainly that -- hopefully that we can do equally as good now, if not better, in 2016. And with that, Happy New Year, and hope everything is health and happiness for everybody who is in this conference phone call. Thank you.
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Operator [56]
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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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