Q3 2019 Earnings Call
Good day and welcome to the Pacific Premier Bancorp third quarter, 2019 conference call and webcast all participants will be in listen only mode. So you need assistance. Please ignore conference specialist by pressing the Starkey followed by zero. After today's presentation, there will be an opportunity to X questions to actually question you May press.
Star then one on your Touchtone phone to withdraw your question. Please press Star then too. Please note that this you finished being recorded I would now like to turn the conference over to Mr., Steve Gardener, Chairman and CEO of Pacific Premier Bancorp. Please go ahead Sir.
Thank you Chuck good morning, everyone. I appreciate you joining us today.
As you're all aware earlier. This morning, we released our earnings report for the third quarter or 29 Chan.
I will walk through some of the notable items Ron Nicolas will review a few of the financial details and then we'll open up the called the questions I noted in our earnings release. This morning, we have the safe Harbor statement relative to the forward looking comments and I would encourage all of you to review those.
Our third quarter results reflect the continued transformation of our company following the acquisition and integration of Graham point last year.
As a larger company operating in an environment of economic uncertainty and slowing growth, we remain focused on growing prudently effectively managing risk.
Delivering consistently strong performance for our shareholders, while increasing the value of our franchise.
Similar to the prior quarter, we executed well on our strategic priorities for enhancing shareholder value.
Core deposit growth.
Proactive capital management.
The blend cost controls and solid asset quality.
This resulted in another quarter of strong profitability and attractive risk adjusted returns.
We generated $41.4 million, a net income and return on average assets of 1.44% and a return on average tangible common equity of 16.27%.
Strong profitability has enabled us to return approximately $140 million to shareholders. During the first nine months of the year through our quarterly dividend and stock repurchase program.
This significant return of capital is another reflection of the transformation and maturation of our company and how our strategies are creating shareholder value have evolved overtime.
As with the last quarter one of the highlights was our team's ability to generate strong core deposit growth.
Low cost deposits for the fundamental underpinning a franchise value and this year. We have continued to invest in the systems and technology to provide our bankers with the tools they need to attract and manage client relationships.
Across the board our team has executed well on on our business development strategies from our commercial relationship managers to our H. away bankers and our specialty deposit group all are achieving greater market penetration to drive new customer relationships while retaining.
Existing clients.
Our bankers worked very effectively across and deferring lines of business with their colleagues in credit administration Treasury management and operations to ensure we are consistently delivering the highest level of service.
Most importantly, we remain true to our business model and value proposition, we are winning and keeping business based on the expertise and customer service that we provide not the pricing we offer.
Given our high quality commercial client customer base that includes growing profitable businesses that are generating positive cash flow there will always be some volatility in our deposit balances.
But the investments we've made in technology and people to expand into track client relationships are producing tangible results and we expect they will continue to drive a steady inflow of lower cost transaction deposits in the future.
The success, we had in growing core deposits enabled us to reduce our balances of higher costs broker deposits and retail Cds and drive further improvement in our deposit mix.
Compared to the end of the prior quarter noninterest bearing deposits increased to 41%.
Total deposits and our non maturity deposits increased to 85% of total deposits.
The improvement in our deposit mix helped us to reach a key inflection point and managing our funding costs from a month to month perspective, our cost of deposits Pete in June at 74 basis points and they have come down each month since that with our cost of deposits dropping to six.
He eight basis points at the end of September and in the first few weeks of the quarter, we've seen further improvement in deposit costs.
Aside from the improvement in deposit mix, we have been able to pass through a portion of the fed rate cuts to our customers.
We have not made across the board cuts to deposit rates instead, we've taken a strategic approach by analyzing the totality of the relationship when making pricing decisions.
It is one of the benefits, we're deriving from our investments customization and use of salesforce, namely providing granularity into every clients relationship.
This approach has helped us to lower rates without it resulting and substantive deposit attrition.
We have more room to bring rates down overtime as we monitor the competitive environment and determining the degree and timing that we pass through additional rate cuts.
The reduction in our funding costs in the third quarter helped us to drive an expansion and our net interest margin both on a GAAP and core basis.
The decline in our average loan balances was largely due to an increase in pay offs and loan paydowns during the quarter.
Notably line utilization rates are at their lowest levels in our history.
Again this is reflective of the very strong cash flows many of our business clients are generating which is allowing them to reduce leverage.
We had a solid quarter of loan production with $537 million of new loan commitments.
Our new loan production continues to be well balanced and diversified.
Where we have competitive advantages, we are achieving higher risk adjusted yields in conjunction with generating attractive new banking relationships.
Third quarter loan production included $195 million in Cnine, an owner occupied CRT loan commitments $91 million and franchise loans $60 million of construction loans and $36 million of SPE loans.
As we've said throughout the year, we're very mindful of the longevity of the current economic expansion and we will remain disciplined in our approach to credit risk management.
Which includes passing on loans that represent unacceptable pricing structure and or term risk.
Throughout our markets, we continue to see more willingness on the part of both bank and non bank lenders to accept higher levels of risk. It is something we seek to avoid.
Our ability to bring in quality assets remains one of the strengths of our franchise.
But we do not do so by loosening our risk management standards.
If the current environment remains unchanged, then we're comfortable with and will accept a lower level of loan growth.
For the foreseeable future, we believe that we will deliver consistently strong earnings and enhances the value of our franchise through the further improvement of our deposit mix, maintaining disciplined expense control and effective risk management practices.
Our high level of profitability will continue to provide us with opportunities to return meaningful amounts of capital to our shareholders, while maintaining sufficient capital to support our organic and acquisitive growth strategies.
With that I'm going to turn the call over to Ron to provide a little more detail on our third quarter results.
Thanks, Steve and good morning, everyone.
As in the past I will be reviewing some of the more significant items in the quarter, focusing primarily on the linked quarter comparison.
Overall as highlighted in our earnings release, we reported net income of $41.4 million for the quarter and earned 69 cents per diluted share compared with net income of $38.5 million.62 per diluted share in the second quarter, our total revenue.
<unk> was $123.8 million for the quarter compared with $117 million in prior quarter.
We finished the quarter at $11.8 billion in total assets.
And $1.99 billion in total equity.
Return on average assets was 1.44% and return on average tangible common equity 16.27%.
And our tangible book value grew to $18 in 41 cents per share a 15% increase over September of 2018.
Taking a closer look at the income statement.
Net interest income of $112.3 million increased approximately $1.7 million from the prior quarter with our net interest margin, increasing eight basis points to 4.36%.
Accretion income totaled $6 million for the quarter compared with $5 million in the prior quarter, primarily as a result of accelerated accretion due to higher loan pay offs.
Excluding the impact of accretion income our core net interest margin increased four basis points to 4.12%.
The increase in our core margin reflects higher fees, resulting from higher loan prepayments.
And lower cost of funds during the quarter.
Loan yields excluding accretion fell two basis points on average for the quarter as both prime and LIBOR adjusted Justin Bill loans repriced lower with the federal reserves to rate cuts totaling 50 basis points during third quarter.
Lower interest expense of $1.5 million was driven primarily due to lower deposit in wholesale funding costs, which helped to offset the drop in loan rates.
Deposit growth in our noninterest bearing demand in money market accounts enhanced our mix and lowered our overall cost of deposits to 71 basis points.
This enabled us to lower our overall average cost of funds by six basis points for the quarter.
Going forward, we expect our core net interest margin to be in the range of 4% to 4.10% in the fourth quarter.
The company recorded provision for credit losses of $1.6 million in the quarter compared with $334000 in the prior quarter.
The increase is primarily attributable to net charges of $1.4 million for the quarter.
We anticipate our provision expense to be in the $1 million to $2 million range for the fourth quarter, depending on loan growth and the loan portfolios overall credit profile.
Noninterest income up $11.4 million increased $5.1 million from the prior quarter, primarily as a result of a $4.3 million gain on the sale of $187 million of investment securities.
In addition.
Loan gain on sale income increased $1.4 million as the company sold $26.3 million, the best BA loans, achieving a net gain of $2.3 million.
And a gain on sale rate of approximately 9%.
During the quarter the company was impacted by the Durbin impact Durbin Amendment.
Which limits interchange fee income for banks over the 10 billion dollar threshold.
As a result, our interchange income decreased by approximately $700000 from the prior quarter.
We expect our quarterly noninterest income to be in the range of six and a half to $7 million.
Based upon recurring income and normal business activities.
Total noninterest expense was $65.3 million compared with $63.9 million in the prior quarter.
Personnel cost were the primary driver for the increase its business related incentive costs were higher.
Staffing finished the quarter at 998 employees compared to 1041 as of June Thirtyth.
In addition, we incurred slightly higher costs in marketing CRM activities and charitable contributions as the company continued to invest in the communities. It serves.
Offsetting these increases.
It was lower FDIC expense related to the prior overpayments under the small institution assessment credits the banks remaining aggregate credit is approximately $2 million.
Yes.
We anticipate our fourth quarter expense run rate.
To be in the range of $65 million to $66 million.
Our third quarter tax rate came in at 27.2% compared with 26.9% for the second quarter.
We expect our full year tax rate to be in the 27% to 28% range.
Turning now to the balance sheet.
Total loans held for investment ended the quarter at 8.76 billion essentially flat to the prior quarter is higher prepayments and lower line utilization rates offset new originations and purchases.
For the quarter, we originated 537 million in new loan commitments at a weighted average rate of 5.28% compared with $568 million at a weighted average rate of 5.42% in the prior quarter.
Our investment portfolio finished the quarter at 1.3 billion.
Essentially unchanged compared to the prior quarter.
During the third quarter, we sold approximately $187 million of existing securities and purchased approximately $205 million of new securities.
The quarter also included an 11 million dollar mark to market fair value increase as well as $33 million in payments amortization and redemptions.
We expect the investment portfolio to remain at approximately 10% to 12% of total assets and the overall yield should be at a blended average rate of approximately 2.75% to 2.85%.
Deposits finished the quarter at 8.86 billion overall flat to the prior quarter with non maturity deposit growth, increasing by 214 million on a linked quarter basis.
And retail and broker Cds declining $217 million.
As a result, our noninterest bearing demand deposits of $3.6 billion increased to 41% of total deposits and our non maturity deposits increased 85% of total deposits.
Our loan to deposit ratio finished the quarter at 98.9% down slightly from the prior quarter of 99%.
Total shareholders equity ended the quarter 1.99 billion essentially flat to the prior quarter as the company repurchased an additional 1.15 million shares at an average cost of $29.68 per share and a total cost of approximately $34 million.
This brings our share repurchase program total to 3.4 million shares at an average cost of $29.69 per share for a total cost of $100 million.
In addition, during and subsequent to the quarter the company redeemed $18.6 million in three callable sub debt issues. Each of these issues had interest rates in excess of 5% at the time of redemption.
The company's tangible equity ratio finished the quarter at 10.01% in both the company and bank remain well capitalized across all regulatory risk based measures.
Finally, taking a look at asset quality.
Nonperforming assets of $8.2 million represented seven basis points of total assets.
And total loan delinquency was 0.13% at quarter end.
Our allowance for loan loss ended the quarter at $35 million and represented 432% of total nonperforming loans.
Our allowance to loans held for investment coverage ratio ended the quarter at 0.40% flat with the prior quarter.
We currently have 41% of our loan portfolio under fair value accounting with a total discount a $47 million. This puts our combined loss coverage ratio at 0.93%.
With that we would be happy to answer any questions you may have.
Operator, please open up the call for questions.
We will now begin the question and answer session to that question you May Press Star then one on your touched.
If you're using a speakerphone please pick up your handset before pressing.
If I anytime your question has been addressing you would like to withdraw your question. Please press Star then to at this time, we will pause momentarily to assemble roster.
The first question will come from Matthew Clark with Piper Jaffray. Please go ahead.
Hey, good morning.
Hi, Matthew.
Can you first quantify the prepaid Pete pretax.
Creeping fees this quarter and last $1 service points.
Go ahead.
Now we had about roughly about five basis points in higher prepay fees this quarter.
Then than in the prior quarter.
You have you have the total amount so I come back.
Yes, we had about 16 basis points of dollars in this.
In this quarter that the dollars I don't have.
Ryan could get back.
Dollar for dollar amount, yes, that's okay. The 16 11 perfect.
And then the organization this quarter, Ron I guess, how much of that was scheduled versus accelerated.
I'll get back to you on that.
Particular question here, Matthew I've got it.
Hi, stacked pay per se.
Hours and then just on the fee guidance of 6.5 to 7 million seems a little light to me.
Is there an expectation that SPJ kind of production and sales will will slow some from here or I mean, the margins up relative to.
I think what youre experiencing last quarter. So just wanted to get a better census, what's embedded in that six and a half the 7 million run rate.
It's.
And there isn't anything different than usual no real substantive change, that's where we expected to come out here in Q4.
Okay.
And then can you get.
Good.
I'm, sorry, Matthew I was going to just on that accelerated we had about 15 basis points.
In accelerated by eight basis points was our normal accretion for the quarter.
Okay. Thank you and then just the amount of payoffs in the corner dollar wise, if you had it.
And any way you can quantify the line utilization, whether or not the amount that a declined in dollars or percent.
The.
You said the prepayments for the line utilization.
Yes.
Both.
The prepayments Rand.
About 390 million I want to say I think those are on 16% or so right.
And which was up.
Got a little over 10% over the prior quarter.
The line utilization was down to the low fortys and may even be slightly below we'll get back to you on the exact number.
Okay.
And then just last one from me any update on the current term lending portfolio in terms of the underlying health I assume still strong but you.
Heard about some other quick service.
Type of restaurants are having.
More difficulty just wanted to get a sense for health and the appetite there.
We haven't seen any material change at least in the.
The clients that that we're.
Providing credit too and I think true with the entire portfolio I would expect overtime. It will it will add some charges, whether it's it's there or C and I are CRT.
We we wouldnt expect them to remain necessarily at the low levels. They are up but at the moment, we're not seeing any real degradation.
Okay. Thanks.
The next question will come from Gary Tenner with D.A. Davidson. Please go ahead.
Thanks, Good morning, guys.
Eric There hey, so you'll put the buyback to bed pretty quick over a couple of quarters stocks a bit higher than the average price that you would.
Repurchase that over that period of time, what are your thoughts in terms of authorizing is not being active at current levels.
Well the Gary the current program the 100 million that the board approved.
Last year, we've we've now fully utilized that the board.
Ongoing.
Look satin reviews, our capital management actions and certainly it's something that we're discussing and looking at there's certainly a potential that there would be another authorization at some point future.
Okay. Thank you and regarding the the fee income side on the bid a spike higher.
On servicing fee income is some of that.
Utilization fees of.
Or excuse me commitment fees for the unrealized volumes ended that lower line utilization increase that number or is it some no.
Hello servicing fees in a twist of irony of course, the SB eight portfolio the serviced SP a portfolio slowed down just slightly in this amortization. So we had a little less amortization.
In the quarter than we saw normally over the past three or four quarter. So low twist of irony, there given that the bigger picture.
Okay.
And then one last question I, just regarding Cecil didn't know Ron or Steve. If you have any sort of initial comments or thoughts there.
Yes, sure we at this point.
We are we're working on having the our models validated.
We are we will be fully prepared.
By by yearend.
We're having ongoing conversations with with our accountants with our lawyers with the board on all of it.
And in fact by the third quarter 10-Q.
We should have disclosure around it.
And then as well as a slide or two in our investor slide deck.
For an upcoming con French and give some further color around debt, we're very comfortable with where we are and the process.
So as you're well aware it's been.
Something we've been working on for a couple of years now.
So no no numbers today, but should be and the relative near term.
Yes, okay perfect. Thanks, guys.
Our next question will come from Andrew Lice with Sandler O'neil. Please go ahead.
Hi, everyone.
Hi.
A question around the margin outlook here I, certainly add some positive comments around the low cost deposits abroad, and paying down higher cost funding.
And.
Certain certainly with 41% of your deposit bases.
Non interest bearing but some other <unk> other funds are pretty high cost. If you still have opportunities to bring in more lower cost funds and why not more optimism around the margin is though are the yield pressures that substantial that are going to the offset the opportunity on the funding side.
That that just our best forecast and generally trying to.
Forecast, where yields are going to go where the.
The fed is going to go with interest rates and how that might impact it.
But we're encouraged by what we've seen here.
Through through three quarters of the year with the amount of quality relationships that our teams have have brought in and so we're hopeful.
We can be at the top end to that range.
Okay. Thank you.
And then just a clarification question on the expenses 65 to 66 million.
Does that include the credit from the FDIC small bank of just the credit.
Yes, yes, it does okay great.
My other questions. Thanks.
Again, if you have a question. Please press Star then one our next question will come from Jackie Bohlen of KBW. Please go ahead.
Hi, everyone.
What it does take a little bit with extensive and I know there with the FTC reduction that you had quarter on quarter I haven't I know since you had some summer interns I'm guessing that's a portion of the reduction but just if you had any other color on why that went down so much.
Yes, so Jackie you're absolutely right about 16 of.
Of that.
That drop was related to the summer intern program.
The rest is just kind of normal attrition I mean, it kind of ebbs and flows were recruiting or quite frankly around the around the clock, but at the same time, there's there's a pretty competitive marketplace out here in southern California, and we see.
A little bit of that in our in our numbers so nothing nothing other than the other than that.
I see us an open positions right now that's correct.
Okay, and I will more.
I guess what level would those positions the is it across the board or is it geared towards one segment or the other yes, it's a yes, it's across the board.
Oh.
And then.
In the press release comment.
The three pronged strategy you have right now one of them with disciplined expense control. If you could just expand a little bit Ahmad and Theres any I missed it has that you're thinking of I know you're always laser focused on expenses that just if there's anything.
We knew that you're focused on or if it's just kind of this paymode X sensitizing on looking at.
There's really nothing new we're always banking assessments around our branch network and.
If we have the right number in locations.
And where we might get savings there.
And then really every place across the bank, where we can more effectively manage expenses.
Okay.
And then I'll, just lastly, I know that.
Some of the redemption, that's all been at a higher interest rate are you looking at any of the other pieces that you could potentially redeem are you pretty satisfied with what you've done today.
Well, we are looking at all of them of course, no they're not all necessarily in a callable position.
Jackie at this point in time, but but there is theres, probably more coming up in the in the not too distant future that will take another look at in in next year, yes.
Okay. Thank you that's helpful.
Youre welcome.
Our next question will come from Don Worthington Raymond James. Please go ahead.
Thank you good morning, Steve Ron.
Hi, Don.
In terms of the loan purchases this quarter.
Maybe just a little color around.
How you come to decide when to do that is it based on.
The repayments and reinvestment of those cash flows and then you have opportunities to buy multifamily CRT.
To kind of hit where you'd like to loan portfolio to be yes. We are it. This is you know Don it's in our long standing.
Arrow in our quiver, our ability to to buy and or sell loans and we are regularly looking at.
Various portfolios and and we've got to look at a lot of product before we get comfortable with the credit metrics and the pricing.
And so that's just something that we.
We're in the market regularly and looking at and and just depending upon deposit flows prepayments.
What the line utilization.
And what we're going to fund if theres an opportunity to supplement our organic loan production, yeah, and again, if it meets our credit metrics and and pricing then it's something we'll take advantage of and then theres periods of time, where our own organic loan production.
And is is going to satisfy where we end up so it's a regular.
It tool that we utilize.
Okay Alright, great.
And then in terms of.
The gain on sale of Securities. This quarter was this just the situation because of rates, where you had a good opportunity to harvest gains.
There was a little bit adapted it was also the timing of cash flows and ability that early in the quarters due to pay down some of the wholesale funding and so part of that was a timing issue as well a number of factors went into it.
Okay.
All right. Thank you.
This concludes our question answer session I would like to turn the conference back over to Mr., Steve Gardner for any closing remarks. Please go ahead Sir.
Thank you again shock and thank you everyone for joining us if you have any additional questions. Please do not hesitate to call either run or myself and we'd be happy to chat with you on the phone.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.