Q4 2016 Preferred Bank Earnings Call
Jan 20, 2017 AM EST
PFBC - Preferred Bank
Q4 2016 Preferred Bank Earnings Call
Jan 20, 2017 / 07:00PM GMT
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Corporate Participants
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* Kristen Papke
Financial Profiles - IR
* Li Yu
Preferred Bank - Chairman and CEO
* Edward Czajka
Preferred Bank - CFO
* Wellington Chen
Preferred Bank - President and COO
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Conference Call Participants
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* Bob Ramsey
FBR Capital Markets - Analyst
* Aaron Deer
Sandler O'Neill & Partners - Analyst
* Gary Tenner
D.A. Davidson & Company - Analyst
* Tim Coffey
FIG Partners, LLC - 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 2016 earnings conference call.
(Operator Instructions)
Please also note that this event is being recorded. I would now like to turn the conference over to Ms. Kristen Papke, Financial Profiles, Investor Relations. Please go ahead.
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Kristen Papke, Financial Profiles - 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, 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 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 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 very much. Good morning, ladies and gentlemen. We are very pleased to report that 2016 has been a great year for Preferred Bank. We have record earnings and we had a record fourth quarter for our Bank's history. Most importantly, we are very pleased that we're able to deliver a very handsome total shareholder return to our investors.
The Bank's total assets for the loans, total deposits all grow, in the 20% range for the year, and for the fourth quarter, they all grow in the mid- to high-teens level. Net interest margin began to stabilize after the issuance of the $100 million sub-debt in the third quarter.
This particularly large high interest cost resources has caused the third-quarter net interest margin to decrease. As their weight becomes less and less going forward, we expect interest costs, along with the rate changes, will continue to -- interest margin to continue to improve.
We have been and diligently control the Bank's overhead in line with the growth that we have had. We also have to be mindful about our growth require added personnel and added expertise, and we're making investments along the way and sometimes ahead of time.
At the year end, our loan pipeline appeared to be stable, and we're anticipating that going into the future that the business activity of the Bank will continue to be in the reasonable consistent manner. And we have been, as we always have been, maintaining a very asset-sensitive balance sheet. Should there be any further rate increases, we will take advantage of that. I purposely keep our remarks very short this time in anticipation there will be a lot of questions by you people. So thank you very much, we're ready for your questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions)
The first question comes from Bob Ramsey of FBR.
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Bob Ramsey, FBR Capital Markets - Analyst [2]
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Hi, good afternoon, guys.
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Li Yu, Preferred Bank - Chairman and CEO [3]
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Hi, Bob.
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Bob Ramsey, FBR Capital Markets - Analyst [4]
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I was hoping that we could maybe first talk a little bit about the net interest margin and the trajectory into 2017. I know your release highlighted that over 90% of your loans are variable or floating rate. I'm just curious if the Fed increase in December, if there was any benefit from that in the fourth quarter and how you're thinking about the margin headed into the first year?
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Li Yu, Preferred Bank - Chairman and CEO [5]
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We believe the fourth-quarter increase is because it happened on February 14, and has about 1/6 of our quarterly normal activities in terms of rate effect. And going into the first quarter, this should take the full effect of the $0.25. Please remember, some of our loans are still at the floor range, okay, so not every loan will be adjusted upward but we do expect margin to expand.
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Bob Ramsey, FBR Capital Markets - Analyst [6]
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Okay, maybe could you share how much of the loans are below floors and maybe how much of a benefit you expect in the first quarter?
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Li Yu, Preferred Bank - Chairman and CEO [7]
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We will probably -- have you got it?
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Edward Czajka, Preferred Bank - CFO [8]
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I don't have that exact number, but I can answer it in a different way.
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Li Yu, Preferred Bank - Chairman and CEO [9]
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Could you answer in ranges?
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Edward Czajka, Preferred Bank - CFO [10]
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Hi, Bob, this is Ed.
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Bob Ramsey, FBR Capital Markets - Analyst [11]
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Hi.
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Edward Czajka, Preferred Bank - CFO [12]
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As we look at our interest rate risk, we'd like to run these at 25-basis-point increments out into the future to see exactly what the impact is. So at last run, it was about just over $3 million on a pre-tax annual basis just for the first 25-basis-point increase.
As you get to 50 and 75 basis points in terms of increases, you start to, at around 75 basis points you really start to get pretty much all of the loans off of their floors. And then you really start kicking in, basically, the entire floating rate portfolio starting to move with prime.
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Li Yu, Preferred Bank - Chairman and CEO [13]
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Bob, I need to also supplement Ed's comment, because every quarter we add a lot of loans. The new loans are basically being made at the floor level. So for the new loan made, it's always taking a delayed time, okay? Time effect on the whole situation, so it is real hard to calculate it. We can only range it going forward.
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Bob Ramsey, FBR Capital Markets - Analyst [14]
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Okay, and if I heard you right, you said that you had about 1/6 of the benefit in the December quarter. And so, if you get 5/6 in the March quarter, I guess 5/6 of $3 million would be something a little bit north of $2 million of benefit, is that fair? That's annualized, obviously, I have to -- you have to break it out by the quarter.
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Edward Czajka, Preferred Bank - CFO [15]
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Yes, mathematically that's correct, Bob. Obviously, there's a lot of variables and a lot of assumptions we use when we do that, and one of which obviously is the pace at which deposit rate increases will grow. We have been somewhat reluctant thus far to start raising deposit rates, but obviously competition in deposits gets a little bit hotter as rates start to rise.
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Li Yu, Preferred Bank - Chairman and CEO [16]
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So I'd also like to remind you although that we may be pleased with the additional interest income we will have, but also recognize the first quarter, there's only 90 days, as compared to the fourth quarter of 92 days. That usually eats a lot of net interest income in the first quarter.
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Bob Ramsey, FBR Capital Markets - Analyst [17]
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Got it, no, seasonality does matter, so it's fair. Okay, and then shifting gears a little bit to expenses, expenses looked good. I know you all highlighted in the release that there was a one-time termination charge for a deferred comp plan. Just wondering how you're thinking about, one, does that have any ongoing impact on your expenses with the plan now being terminated? And how should we think about, with seasonality and everything else, the expense trajectory into the first quarter?
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Li Yu, Preferred Bank - Chairman and CEO [18]
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Well, there will not be any additional expenses related to that. Let me report to you, in the past the deferred income trend that also did not have too much expense impact because most of the deferred income is invested in the capital stock of Preferred Bank and, therefore, has not been causing any carrying costs of that particular plan.
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Bob Ramsey, FBR Capital Markets - Analyst [19]
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Okay, and so with that one-time charge coming out and seasonal factors coming on, should we be thinking about modest growth from 4Q to 1Q?
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Li Yu, Preferred Bank - Chairman and CEO [20]
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In terms of the earnings?
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Bob Ramsey, FBR Capital Markets - Analyst [21]
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In terms of the dollar amount of expenses. Sorry, I should have clarified, the dollar amount of expenses.
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Li Yu, Preferred Bank - Chairman and CEO [22]
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We think it would be moderate, although there will be additional costs that relate -- usually we distribute a bonus pool in January. And that created [a use for] (inaudible) portion of the payroll taxes, okay? And Ed has the number, something about in the $300,000 range, right?
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Edward Czajka, Preferred Bank - CFO [23]
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It was $350,000 for the deferred comp, but it will be close to [$500,000].
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Li Yu, Preferred Bank - Chairman and CEO [24]
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For the first quarter.
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Edward Czajka, Preferred Bank - CFO [25]
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Yes, an extra [$500,000].
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Li Yu, Preferred Bank - Chairman and CEO [26]
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So there will be additional one-time, first-quarter expenses that will not be repeating in the following quarters.
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Bob Ramsey, FBR Capital Markets - Analyst [27]
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Got it, okay, so it's the seasonal factor to keep in mind. Okay, that's helpful, thank you, guys, for taking the questions, nice quarter.
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Li Yu, Preferred Bank - Chairman and CEO [28]
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Thank you.
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Operator [29]
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Our next question comes from Aaron Deer of Sandler O'Neill.
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Aaron Deer, Sandler O'Neill & Partners - Analyst [30]
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Hi, good morning, everyone.
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Li Yu, Preferred Bank - Chairman and CEO [31]
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Hi, Aaron.
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Aaron Deer, Sandler O'Neill & Partners - Analyst [32]
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Li, I was hoping just to get some additional insight on the exceptional C&I growth that you had in the quarter, particularly in terms of if you can give some scale around the average size of the loans that were put under in the quarter, as well as the types of borrowers that were taken down to new financing?
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Li Yu, Preferred Bank - Chairman and CEO [33]
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Okay, well, I think that I want Wellington to answer that and I'll supplement his answer.
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Wellington Chen, Preferred Bank - President and COO [34]
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Hi, Aaron, this is Wellington. For the quarter, as you can see, our C&I loan growth, average loan size about just under $2 million. There are a few loans, though, we've been focusing on C&I with our C&I team and some of these loans that take a while. But I think through our hard work and focus, and I think the fourth quarter came to fruition on some of the relationships that we've been working on.
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Aaron Deer, Sandler O'Neill & Partners - Analyst [35]
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Okay, and (multiple speakers) any color on the types of borrowers and how much of this might have stemmed from borrowers taking up line utilization versus new commitments?
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Wellington Chen, Preferred Bank - President and COO [36]
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I think the new commitment is about $40 million, the new commitment. And also during the latter half of the year, we recruited three additional C&I officers, and they have been working hard. So during the last quarter, they were able to fund books on loans for the Bank, bringing in some relationships.
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Aaron Deer, Sandler O'Neill & Partners - Analyst [37]
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Great, (multiple speakers) and then, [finish] in the industry?
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Wellington Chen, Preferred Bank - President and COO [38]
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The industry will be, we have some in medical servicing industry, doctors, dentists, working capital to some investment company. We also have a, landed a very valuable relationship as a Mainland China company. It's a large conglomerate. We have a corporate line of credit facility to them. They have presence in LA, San Francisco, and New York.
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Aaron Deer, Sandler O'Neill & Partners - Analyst [39]
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That's helpful. And then, how about on the commercial construction pool? Can you talk about the size of those credits that came on during the quarter and if there's anything you can share with us on geography or the types of properties?
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Wellington Chen, Preferred Bank - President and COO [40]
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Hi, Aaron, the average size about $2.2 million. I think it's pretty well even spread in Los Angeles, San Francisco, as well as our New York team. We have a couple projects on the upper East Side of Manhattan, in Brooklyn, as well as some industrial property here in the Los Angeles area.
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Li Yu, Preferred Bank - Chairman and CEO [41]
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Aaron, actually for the fourth quarter, we only made about $20 million in new construction loans, but it was $14 million or $16 million payoff. The net increase on this activity is only $4 million. All of the others really represent the drawdown of the ongoing construction loans. And it is pretty common for the fourth quarter to draw down to be a fast-paced drawdown because most companies, the subcontractors company need the funds to close out the year.
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Aaron Deer, Sandler O'Neill & Partners - Analyst [42]
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Sure, that's good color, thank you, Li. Okay, I'll step back, thank you.
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Operator [43]
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Our next question comes from Gary Tenner from D.A. Davidson.
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Gary Tenner, D.A. Davidson & Company - Analyst [44]
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Thanks, good afternoon.
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Li Yu, Preferred Bank - Chairman and CEO [45]
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Hi.
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Gary Tenner, D.A. Davidson & Company - Analyst [46]
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Couple of questions, a follow-up question on the margin: Ed, I wonder if you could provide a 12/31 spot margin to give us an idea where things were right at year end?
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Edward Czajka, Preferred Bank - CFO [47]
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Right at year end, we were in the, right around the 3.70% mark, Gary, and we came in at 3.67% for the quarter. So, as you know, a lot of the margin depends on the mix of assets during the quarter, and more importantly, the average mix of assets during the quarter. And as we have the ebb and flow of deposit and loan growth, sometimes there's variations there that aren't necessarily related to the level of loans we're booking or deposits that we're putting on. So, as Mr. Yu said, we anticipate some slight expansion in the margin going forward.
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Gary Tenner, D.A. Davidson & Company - Analyst [48]
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Okay, thank you for that. And then hoping that you could provide a little bit of an update. There were just smart detail on that C&I credit that moved to non-accrual in the quarter. Maybe a little background on the business, and that $2 million payment was scheduled and then there was an additional payment. Maybe talk about some of the discussions around that.
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Li Yu, Preferred Bank - Chairman and CEO [49]
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Well, that is a normal C&I company. I mean, devoted into the, how should I say, seasonal bid and mostly do a lot of (inaudible). But usually their receivable in inventory build up in the third quarter and require a whole lot of financing. And beginning in the late fourth quarter and early January, they will start to pay down.
And so that is the type of the company. The company has been in existence for about 20-some years, has been banking with us for about eight years. And other than one time, they have slipped a little bit in payment and dates, they have always been paying on the schedule.
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Gary Tenner, D.A. Davidson & Company - Analyst [50]
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Okay. Thank you for that. And just one last quick question, just on expenses, a follow-up to, I think, Bob's question. Looking for some increase in the first quarter, obviously a lot of upward power to revenue from higher rates.
As you think about the margin, obviously, below 40% today. If we get, call it, two rate hikes in 2017, how far do you think that the efficiency ratio gets pushed down trying to balance the revenue pick-up against the need to invest, whether it's for just growth or back office?
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Li Yu, Preferred Bank - Chairman and CEO [51]
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We do have our so-called plan for the [growth of personnel], okay, and it starts with pre-investing. But these people not necessarily coming on as the timetable that we are looking for. And sometime, opportunity in hiring is there, but we have to react immediately.
So even if all directors cannot get the answer from us as to exactly what happened in a more finite number. But generally speaking, we are -- if you are anticipating two more rate increases, then I will say that net interest margin should continue to improve, even with our pre-investment. Any of you in disagreement?
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Edward Czajka, Preferred Bank - CFO [52]
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No, not at all. We're very, very pleased with the efficiency ratio in the fourth quarter and for the year. It would be hard to imagine it getting much lower than that though, going forward, Gary, simply because, as Mr. Yu says, there is a lot of investments that we continually make.
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Gary Tenner, D.A. Davidson & Company - Analyst [53]
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Okay, thank you.
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Operator [54]
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(Operator Instructions)
Our next question comes from Tim Coffey of FIG Partners.
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Tim Coffey, FIG Partners, LLC - Analyst [55]
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Thank you, good morning, gentlemen.
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Li Yu, Preferred Bank - Chairman and CEO [56]
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Hi.
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Tim Coffey, FIG Partners, LLC - Analyst [57]
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Do you have any, as we look at 2017, do you have any new initiatives planned for this year?
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Li Yu, Preferred Bank - Chairman and CEO [58]
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In terms of --?
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Tim Coffey, FIG Partners, LLC - Analyst [59]
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Growth. I believe in 2016 you did the mortgage business.
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Li Yu, Preferred Bank - Chairman and CEO [60]
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Well, 2017, our preliminary situation is that we're looking at expansion of branch in certain locations, [all of the notable] places we probably will be having a additional branch in the Northern California area. We also will be looking for new locations in the New York area and the California area. Southern California area, but no definite sites for that yet.
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Tim Coffey, FIG Partners, LLC - Analyst [61]
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Okay, do you have an idea in mind on how many branches you'd like to do this year?
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Li Yu, Preferred Bank - Chairman and CEO [62]
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Well, for the year, I think ranging from 1 to 3.
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Tim Coffey, FIG Partners, LLC - Analyst [63]
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1 to 3, okay. And in terms of the prospects for your existing business, I think you said the pipeline looks stable coming into this quarter. How do you feel about the opportunities in 2017 for growth versus what you just experienced in 2016?
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Li Yu, Preferred Bank - Chairman and CEO [64]
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We like to be optimistic. It seems like we can be optimistic, but we always have to worry about one thing is that our deposits growth capability. In 25 years, we've grown $3 billion out of $3.2 billion assets through organic growth. And we always have a philosophy growing the deposits first and then grow the loans.
So, our growing into the future, we know the loan is there. Probably we can do anywhere in the same growth rate in the fourth quarter going forward, we hope. But the question is that it depends on the capability of [growing] our deposits, and the entire Bank is devoted in that direction.
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Tim Coffey, FIG Partners, LLC - Analyst [65]
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Okay, well, thank you. Those are my questions.
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Operator [66]
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Our next question comes from Don Worthington of Raymond James.
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Don Worthington, Raymond James & Associates, Inc. - Analyst [67]
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Thank you. Good morning, everyone.
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Li Yu, Preferred Bank - Chairman and CEO [68]
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Hi, Don.
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Don Worthington, Raymond James & Associates, Inc. - Analyst [69]
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Was there anything, say, non-recurring in the margin this quarter in terms of either recoveries, or did you have a special FHLB dividend that shows up somewhere?
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Edward Czajka, Preferred Bank - CFO [70]
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Yes, we actually had a few things. The placement of that loan on non-accrual was the reversal of about $200,000 of interest. And then there was a special FHLB dividend, which was a few hundred thousand dollars as well. So offsetting, but I think to the net it was up a couple hundred thousand dollars, but very small in the grand scheme of things.
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Don Worthington, Raymond James & Associates, Inc. - Analyst [71]
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Okay, great, thanks. And then, are you continuing to look for lenders in terms of expanding the staff?
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Li Yu, Preferred Bank - Chairman and CEO [72]
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We have been growing by growing our personnel. The whole Bank's past history has been always being able to attract talent, and most importantly, retain the talent. So this will be a continuous effort going at least for the next several years.
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Don Worthington, Raymond James & Associates, Inc. - Analyst [73]
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Okay, thank you.
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Operator [74]
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Our next question comes from Bob Ramsey of FBR.
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Bob Ramsey, FBR Capital Markets - Analyst [75]
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Hi, thanks for taking the follow-up. Sounds like it's reasonable to expect a similar amount of loan growth in 2017 as 2016. Just wondering if the mix is any different. If how much you expect maybe the new resi business to contribute, and where you're thinking that growth is going to come from?
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Li Yu, Preferred Bank - Chairman and CEO [76]
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Number one is that, first of all, we have a policy, we never give guidance in such a manner. But having said that, as I said, if given the deposits there, we think we are capable to keep our loan growth at the same pace.
As far as the components is concerned, it is rather difficult to predict at this point in time. (Inaudible) depend on how many new relationships were able to develop during the year. But on the CRE side, it had a lot to do with the market, movement of the market.
And as you probably are well aware of, today it seems to be everybody is worried about the retail property, given the eCommerce and its effect to the national brand retailers. And to date, it seems to be nationwide that the office buildings suddenly become a favorite product. And in California, in our trade area in New York, investment property has always been a very favorite product, but it's very hard to get. And aside from that, we do not know how the valuation of multi-family housing, rental multi-family housing will be.
So we will adjust ourselves in terms of what the market movement is, along with the availability that's made available to us. So if I give you a wishy-washy answer, please forgive me, because we really don't know or understand what the proportion will be.
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Bob Ramsey, FBR Capital Markets - Analyst [77]
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Okay, fair enough. Last technical question, I'll hop out, but is there any difference in the way that the prime base loans reprice and the LIBOR base rounds? I just don't know if there's any lag or whether all of it reprices relatively immediately.
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Li Yu, Preferred Bank - Chairman and CEO [78]
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Base loan will be floating on a daily basis. As long as the Wall Street Journal changes prime rate, let's say upward, we go upward the same amount. Most others are primary loans [exchange-based] prime rate. LIBOR, number of different LIBOR, one month, three months, and six months. So theoretically, there's a lag between one months or three months and six months.
And as far as mortgage loans, many of them are adjustable on a one-year period. But since the mortgage loan is on a very small portion of business, so far. So we still think that with the primary move upwards, we are very sensitive to that.
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Bob Ramsey, FBR Capital Markets - Analyst [79]
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Great, thank you again.
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Operator [80]
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This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Yu for any closing remarks.
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Li Yu, Preferred Bank - Chairman and CEO [81]
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Thank you so much for joining the conference. It's funny, I just look at myself and look at the stock prices before I come in. Sounds like our shareholders likes the report of this quarter and this year. And the entire Bank, we have a lot of people in our ballroom listening to this conference phone call, and I think the entire Bank will be pledging ourself to continue to do the work that we had been doing in the past to deliver the best we can for shareholder returns for our shareholders. Thank you very much.
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Operator [82]
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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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