Banc of California Inc (BANC) 2012 Q2 法說會逐字稿

Good afternoon. My name is Patrick and I will be your conference operator today. At this time, I would like to welcome everyone to the First PacTrust Bancorp, Inc. earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). I would now like to turn the conference call over to Mr. Richard Herrin, Chief Administrative Officer and Corporate Secretary for First PacTrust Bancorp. Please go ahead, sir.

Yes, thank you. Good morning, everyone and thank you for joining us for today's second-quarter 2012 earnings conference call. With me on the call today is First PacTrust Bancorp's Chief Executive Officer, Gregory Mitchell. Also on the call and available to answer questions later is our CFO. Marito Domingo.

Today's conference call is being recorded and a copy of the recording will be made available later on the Company's Investor Relations website. Before I turn it over to Greg, I want to remind everyone that, as always, elements of this presentation are forward-looking and based on our best view of the world and our businesses as we see them today. Those elements can change as the world changes. Please interpret them in that light.

The forward-looking statements in today's 8-K filing also apply to our comments today. That document is available on our First PacTrust Bancorp.com investor relations website as are other 8-Ks filed regarding investor presentation material and other matters. A PDF file of the investor presentation slideshow for this earnings conference call can be found on the Company Investor Relations website under the link entitled News and Market Data. Then click on either the Presentation or the Investor Conference Call link. We will have time for a Q&A at the end of the presentation and now I will turn it over to our CEO, Greg Mitchell.

Thank you very much, Richard and thank you all for joining us on the second-quarter 2012 earnings call for First PacTrust Bancorp. A lot of noise, a lot of activity this quarter. Following feedback from many of our shareholders and analysts, I am going to try to keep my formal comments brief and then open up more time during the call for specific questions.

Highlights were a $1.1 million loss to common, representing roughly $0.09 a share. The loss was due largely to the Company frontloading a number of expenses related to strategic initiatives, as well as frontloading some expenses related from a net interest margin perspective related to that acquisition. Excluding that, we were very comfortable with the level of earnings fundamentals coming out of the bank.

The bank grew for the quarter or the Company grew for the quarter by roughly $32 million to $1.12 billion, independent of our acquisitive growth, which represented just 3%. One of the things we have guided to in the past is that we are trying to constrain organic growth to 20% per annum. So if you recall, we had very strong growth in the first quarter, modest growth in the second quarter and based upon our pipelines, we are looking for strong organic growth in Q3 and Q4 as supplemented by solid acquisitive growth from a combination of Gateway and Beach Business Bank.

From an asset quality perspective, the Company continued to make very good progress in dealing with delinquencies, nonperforming loans, classified assets and OREO. I'm actually quite pleased with our status relative to most banks throughout the United States, both in the disposition of REOs, the gain on sales that we were able to take on the management of those assets, the extremely low level of delinquencies that exist within the portfolio and the overall quality of our collection effort.

So I feel very good about where we are in the credit cycle and where we are in the cleanup of the legacy portfolio of First PacTrust Bancorp and Pacific Trust Bank. Is it possible that things will happen in the future? Certainly, but I think we are well prepared for that.

On the deposit side, we continue to show very strong growth out of our de novo branches, strong growth in new checking accounts, which is the key focus for the institution. As we manage liquidity in the second quarter based upon the high level of available cash, we work to further reduce the level of CDs and extend maturities a little bit. So that if and when rates do rise, First PacTrust Bancorp will be better served from a net interest margin expansion perspective.

So overall, if you look at it, margin slammed by the high levels of cash frontloading the Gateway and Beach transaction. You will see in the third quarter that those levels of excess cash go to zero and we are in a much different profile for Q3. Non-interest income, slightly higher provisions, essentially neutral as a result of improved credit quality. Non-interest expense substantially higher than I am sure many of you planned as a result of frontloading of costs for Gateway, Beach, as well as some transaction expenses and that resulted in the miss from an earnings perspective.

As I reported on Friday, or excuse me, Thursday during our call, we are expecting to close the acquisition of Gateway Business Bank on the 17th. We announced during that call that we expect a bargain purchase gain on that transaction to exceed $5 million. Over the next several weeks, we will be providing some additional guidance as it relates to the cost saves and other details related to that merger.

And then finally I want to speak to the quality of the production franchise on both sides. Our loan group generated $60 million of organic production in the second quarter. I think it would be difficult for many to find community banks that are generating at those volumes, particularly with levels at about 4.8% and you're seeing our retail banking division bringing in deposits at a cost of funds of less than 60 bps. So when we talk about working towards that net interest margin of 400 basis points on a consistent basis, you saw some pretty good progress there.

So while I am disappointed in the earnings for the quarter, I continue to be pleased with the progress that we are making in building PacTrust and achieving our growth objectives. So operator, with that, I will turn it over to questions.

(Operator Instructions). Gary Tenner, D.A. Davidson.

Greg, I wonder if you can just go into the frontloaded expenses a little bit. You break out in the press release some detail, but maybe you could kind of give us a better sense of kind of what the core run rate would be and if we should truly expect a decline on a legacy basis at least in the third quarter on those expenses?

You will see -- let me try to break it out. We have some de novo branch expense in there. That would be ongoing. The drag from that de novo expense would be declining as the branches continue to ramp up. We also had staff and systems costs related to the planned integration of the Gateway, which will be largely offset by cost savings coming out of that transaction. And it is actually one of the reasons that I surfaced the comment on providing additional guidance on cost saves.

We also frontloaded a lot of facilities expense; our corporate office is here at Irvine. We have got about $125,000 a month in what I will characterize as wasted rent because once the Gateway transaction closes, the people will merge out of two different locations at Gateway and into PacTrust Bank. So that is, for the quarter, $375,000. It is really a handful of items like that. If you want, Gary, I think Marito can provide you with some additional detail to you and to the other analysts that are following the stock. Marito, do you want to comment on that?

No, I mean that is exactly right. Some of these expenses don't go away in terms of PacTrust, but will go away in terms of the cost saves that we have. So you'll see the combined run rate drop.

In terms of, for example, the temp expense, many of the individuals that were helping us with a couple of things are already off and so that will come down. I think what Greg was alluding to however was the fact that as we continue to open branches, temp expense will probably get replaced with permanent staff at the branch level.

So to try to give you a feeling for the run rate itself, we will probably have to walk a little more finely, but temp expense is going away; that is coming down. However it will be replaced with branch staff. Certainly the Gateway acquisition fee is one-time, although we will have other fees that will hit the quarter that are directly acquisition-related. The occupancy expense will not go away.

However, we will see that come in as a cost save from that perspective from Gateway primarily and then I think we also talk about sort of this benefit we got on the first quarter on REO, which was nonrecurring in the second quarter and will not be recurring or at least we can't tell you it will be recurring on the third quarter as well. So hopefully that will give you a roadmap, but we tried to give you some amounts so that you could understand what things were sort of normalized in Q2 where we stood from that perspective. But happy to, if they are very specific questions, to try to address those and to provide that guidance to everyone once we are able to in the next few weeks here provide better guidance on cost savings.

Okay, thanks. That is helpful. And then just on the sale of the single-family residential mortgages of about $23 million or so, what was the rationale on doing that? Was that just managing the growth?

It is managing the growth, but also trying to get ahead of Basel III. As most of you recall, PacTrust has had a green mortgage portfolio. It also has a substantially IO and alt doc single-family production. We want to make sure from a liquidity perspective and market perspective that if we choose to sell portions of that portfolio, we can do so. So we did a test portfolio within the market of 2012 production out of the single-family group. That trade went off quite effectively. We were generally pleased with the pricing and it put us in a position where we know that we can sell more and sell more at sort of nice gains to PacTrust.

So if you remember in our business strategy with Gateway Business Bank, we will be picking up an entity that is producing $90 million plus a month in production for sale into the secondary market. We also have a wholesale unit, which is originating mortgages now. Those are typically jumbos, IOs and nontraditional mortgages. We want to be in a position where we can sell those as needed consistent with a structured plan, so that we are not sort of mixing held to maturity and available-for-sale within our portfolios.

Okay, thank you.

Kevin Reynolds, Wunderlich Securities.

Good morning. How are you doing, Greg?

Good, yourself?

I'm doing all right, doing all right. The question I have is with two deals -- obviously these two acquisitions are nothing new. You have been working on them for a little while now. But with them both closing this quarter and sort of pulling it all together, integrating, converting and all that, do you think that -- is there any change in your commentary towards -- I think in the past you said sort of kind of two deals a year on average. Do you think that this will slow you down a little bit over the next several quarters or are there still plenty of opportunities out there and do you have enough dry powder to be able to go after those in the near term?

Well, I think it is -- we've continued to share with investors and on these calls that we receive a fair amount of reverse inquiry. We are actively in the market as acquirers. We have communicated to our regulators that we hope to do two transactions a year. Quite frankly, these were 2011 vintage transactions and it has taken a long time to get them over the transom.

I think your question is is it likely that we will see another announcement in 2012 or is this it for '12? And I would suggest that it is probably more likely than not that you would see another acquisition announced in '12. Whether it closes in '12 or not is debatable given the time of completing gestation for transactions and getting regulatory approvals. It could well be that the closing or closings would be in 2013 so that we would have longer lags. Is that responsive to your question?

Yes, yes, that gets it. And then I guess near term, do you think -- in your opinion, which do you think is the bigger driver of your results say over the next two quarters? Is it going to be the accretion from these two deals or will it be the ongoing mix shift and organic growth that you are putting on in the loan portfolio?

Well, I think Q3 will have a lot of benefits from the Gateway transaction, notably the bargain purchase gain. So you will see a lot of activity in there, but I think you will also see a lot of benefit from our efforts to transform the balance sheet. So there is going to be some very good, in my opinion, very good indicators coming out of what the consolidated balance sheet looks like at the end of Q3. But it will include a lot of stuff related to transaction expenses on the mergers, bargain purchase gain, some restructuring charges as we exit a couple of the locations from Gateway. But I think you will be able to walk away from the end of Q3 with a pretty good roadmap of what Q4 will be able to look like. Marito, do you want to amplify on that?

No, I mean I think as we have guided, Q4 will definitely be more what to look for in terms of a cleaner core earnings in that regard and I think that, as we have guided relative to the earnings power that Beach has, that Gateway is now capable of, those will add very nicely to the bottom line.

Having said that, as Greg is alluding to, we have done things this quarter that will also provide a boost on our standalone core to ensure that profitability returns and those temporary impacts are in fact eliminated. So we will see that, but clearly third quarter still noisy in the more positive sense, but still noisy and Q4 being the better predictor of sort of where the Company, at least as we initially put it together, now looks like.

Okay, thank you.

Andrew Liesch, Sandler O'Neill.

Good morning, everyone. I am just curious, can you give us an update on where I guess the PacTrust loan portfolio stands right now, as well as Beach and what it might stand at for Gateway for loans that you might keep on the portfolio?

Well, what do you mean stand at? From a size perspective?

Yes, like compared to like say three months ago or year-end.

While PacTrust portfolio grew quarter over quarter and we expect that to continue to happen. Gateway's portfolio is relatively flat. I want to say at June 30 and they have filed their call reports, so you need to turn to that, but I think at June 30, they had roughly $63 million in permanent loans. That is flat to a slight reduction from year-end numbers and they are continuing to generate in sort of three categories, which is rehab lending, small business and SBA -- excuse me -- rehab lending, small business and a little bit of factoring and then managing their legacy portfolio.

And then Beach has shown relatively flat activity in their loan portfolio. They have had sort of new production, keeping up with payoffs, but they are not showing the same level of growth that PacTrust is reporting. And if you recall, part of our strategy for doing all of these deals is that, as it relates to Gateway, we expect that we can better manage the margin at that institution and better manage the liquidity by using some of PacTrust's treasury functions, but also putting new loans into the consolidated company to enhance margin relative to the negative spread they have on cash.

And then as it relates to Beach, giving them the benefit of a larger legal lending limit, as well as giving Beach and PacTrust a broader product set, we think that we can stimulate net growth for both institutions. Is that responsive to your question, Andrew?

Yes, it does. Thank you very much. I will step back.

Bryce Rowe, Robert W. Baird.

Hi, Greg. I have a few questions here. You talked a little bit about the pipeline for organic growth heading into the second half of the year. Is there any way you can quantify it and do you have more plans to sell more of the legacy PacTrust portfolio?

I think we may -- I guess two things. Under Basel III, nontraditional mortgages are not particularly well regarded and greens fall in the category of a nontraditional mortgage as do IOs. So I think we will selectively look consistent with balance sheet management and capital management activities and risk management activities at selling the portion of the nontraditional mortgage where it makes sense. I think it is also possible that we will sell some of the new production coming out of our wholesale mortgage division into the secondary market. But we need to be careful in ensuring that we are not -- that we are segregating between available-for-sale and held to maturity on our portfolio because in a market that has this much volatility, we don't want to expose PacTrust to adverse accounting issues as a result of doing something that is clearly risk-focused and sort of risk management-oriented.

And then as it relates to the pipeline, we have guided towards 20% organic growth and I think we feel pretty comfortable that we will achieve that. For the first two quarters, we are roughly 15%. So if we are growing our CRE and other portfolios at pretty rapid rates, there is some logic to say that there would be some shrinkage in those other portfolios. Is that responsive to your question, Bryce?

It is and just a follow-up on the wholesale division. You mentioned $90 million a month that was coming out of I guess the non-wholesale channel from Gateway. What kind of production are they doing in that wholesale channel?

I am going to respond to that and then have Marito come back to the first question.

$8 million or $9 million a month.

In what?

Oh, so far what the wholesale group has been producing.

Yes, locally, it is $8 million to $9 million a month. That is sort of ramping up, but the Gateway's production, FHA, VA, it is all agency paper. Most of it are purchase money transactions and 99% plus of that is being sold into the secondary market at a gain on sale.

The only other comment that I wanted to add with regards to your original question is that the plan is to continue to grow the balance sheet at the 20% pace. So for the quarter, we sort of pared down growth a little bit, but expect that the second half will add that other 10%, which will include obviously a significant amount of growth in the loan portfolio. So you can expect that we will deliver on that growth.

Okay. And when you talk about this level of growth and the fact that both of these transactions ended up being or will end up being cash deals, with the thought of potential acquisitions coming as early or being announced as early as this year, how do you feel about the capital base and then how do you feel about maintaining this dividend here at a pretty high level?

I knew you would come to that dividend topic. Two things. One, the Gateway transaction was accretive to tangible book value, so we are picking up a lot more capital than we are paying out, which is a good thing. And the Beach transaction was only marginally dilutive to tangible book value as a result of the earnings that are coming out of that institution.

We have enough capital to support the growth for the Company while maintaining a pretty solid cushion. If you recall, there is a fair amount of available capital at the holding company. So if necessary, some of that could be downstreamed to PacTrust or Beach to support growth.

As it relates to future M&A transactions, I think if we, depending on the size of the transaction and where our currency is trading at the time and presently I believe our currency is cheap, that is my personal view, we would again look to do stock transactions, but if we end up doing a cash transaction, we would potentially explore some capital raise initiative either with extension of our senior note program or additional common. But we would do that in connection with an announcement of a transaction so that we would not expect to see dilution to our tangible book value as a result of that announcement. Is that responsive to your question and I think where you were going with the question?

It is, Greg. I appreciate it. I have one more question. Any guidance you can give us on the loan yield? I think we saw a little compression and given the comments about the new production coming on at a 480 yield and I think last quarter, it was even higher than that, can you talk about what your expectation is for where the loan yield -- where loan yields go?

Yes, it's about -- I mean here is what is -- the loan yield got smacked a little bit as a result of continued repricing of some of our adjustable rate mortgage portfolios. So that was offset by the production in our CRE yields that are pretty attractive. I would guess in the very short term, you would see it sort of maintaining constant levels with perhaps a small amount of lift.

The other thing that you need to consider is that Gateway, the NIM on Gateway's or the yield on Gateway's portfolio is higher than ours, so it will add and then on a consolidated basis, the yield on the loan portfolio at Beach is higher than PacTrust, so it will add. So you will see some volatility in ours, but lift as a result of the acquisition of those two other banks on a consolidated basis.

Okay, that's great. Thanks, Greg.

Joe Gladue, B. Riley.

Good morning. I think most of mine have been -- I guess the last one I had left is just could you remind us where the cost of the SBLF funds was in the second quarter and where you expect it to go third quarter and forward?

Well, I was hoping to have it down to have met the test of the whole $32 million and as you recall, this has a lag. So I think we are at about 370 now. We had more production coming in in the second quarter and we continue to expect it now to hit where we have a pay rate of 1% say by the end of the year, which means we would have pretty good volume of SBLF in Q3 and then get that recognized by treasury by the end of Q4.

All right, that was it. Thank you.

Jackie Chimera, KBW.

Hi, good morning, everyone. Most of my questions have also been answered. I was just wondering, as you transfer over the Gateway and the mortgage operations at Mission Hills, would you say the strong income they had in the second quarter, assuming that rates stay low and production continues as it has, would be directly transferable?

I think that is a fair assumption. Yes, that is a fair assumption.

Okay. And then the 4% NIM goal that you have, does that take into account any potential accretion income from the two deals and any perspective deals?

No.

Okay, so that would just be an added bump on top of that?

Yes, that is a goal. Obviously, the rate environment that we are in now is a little challenging to get a 4% NIM, but we are pleased with the direction.

Okay, great. Those are my questions. Thank you.

Brett Villaume, FIG Partners.

Good morning, Greg. I wanted to ask you just on looking at the fact that you had basically nil charge-offs this quarter, and looking at the specific evaluation reserves there, can you give us some guidance on what to expect maybe in the near term?

Well, I think there is a handful of things because there is a lot of sausage going through right now. With respect to Gateway, you will actually see the ALLL decline as we bring on those $63 million of additional loans with no provision going in, a pretty substantial discount that would be accreted into income over time and it is possible that as we continue to grow that will serve to build our ALLL again. I think the same thing that will happen on a consolidated basis with respect to Beach. So you will see some movement in that ALLL.

Gateway has made very substantial progress in addressing its asset quality issues and I need you to look at the public -- the call reports for that. But we would not expect to see significant charges from a credit perspective from Gateway, nor would we expect to see significant credit charges from Beach given those portfolios.

I think one of the things that we were pleased with in the first quarter and again in the second quarter is that we were able to sell pretty substantial volumes at OREO at levels that resulted in recoveries. And in large part, those recoveries covered the costs of operating the remaining OREO within our portfolio, which resulted in very limited credit costs. I would expect further reductions in OREO through the balance of the year and I am not anticipating losses on the disposition of those assets. Is that responsive to your question, Brett?

Yes, that's very helpful. Thanks, Greg. That's all for me.

At this time, there are no further questions in the audio queue.

All right, well, operator, thank you very much. To all the analysts and friends that are following First PacTrust, thank you. To our new family members from Beach Business Bank and Gateway Business Bank, we are delighted to have you part of the family and absolutely believe that we are going to do some great, great things together. And we look forward to continuing to share the journey with all who follow us now and certainly stand ready to respond to questions at any time. So we encourage shareholders, analysts or interested investors to contact Marito or myself at any time. So again, thank you for your time and have a great day.

This does conclude today's conference call. You may now disconnect.