Pacific Premier Bancorp Inc (PPBI) 2015 Q3 法說會逐字稿

Good day and welcome to the Pacific Premier Bancorp third-quarter 2015 conference call and webcast.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Mr. Steve Gardner, President and CEO. Please go ahead.

Thank you, Kerri. Good morning everyone. I appreciate you joining us today.

As you are all aware earlier this morning we released our earnings report for the third quarter of 2015. I'm going to walk through some of the notable items. Allen Nicholson, our CFO, is going to review a few of the financial details and then we will open up the call to questions.

I will also note that in our earnings release this morning we have the Safe Harbor statement relative to the forward-looking comments. And I'd encourage all of you to take a look and read through those.

From an overall perspective we delivered another solid quarter with $7.8 million in net income and $0.36 per diluted share, which equals last quarter's as our most profitable in our history. On a core basis, though, this quarter was even stronger than last quarter. Our second-quarter results were positively impacted by a one-time $500,000 FHLB special dividend while our third-quarter results were negatively impacted by $400,000 of merger-related expense.

When you exclude these one-time items, we had a nice improvement in profitability relative to last quarter which is a attributable to the positive trends we're seeing in loan production, core deposit gathering, expense management and asset quality. We continue to see fairly healthy economic conditions in our markets and good loan demand. We had $236 million in originations during the third quarter and the loan production continues to be well balanced across a broad variety of lending products which is producing the diversified lower risk portfolio that we are targeting.

Our primary areas of focus continue to be C&I, construction and SBA lending which produce higher risk adjusted yields and drive higher levels of fee income. We had $72 million in new C&I loan production in the third quarter with the franchise lending group contributing $47 million of this production. We continue to take market share in franchise lending and the group has done an outstanding job of developing relationships with franchisees of new brands that we hadn't worked with prior to joining Pacific Premier.

Our construction lending team had another strong quarter with $51 million in new loan production. Additionally, we had $48 million in SBA loan production which is the largest quarter in our history. Over the past couple of years, we have steadily strengthened our SBA lending group by adding experienced producers and they are doing a great job of delivering the results we were expecting.

We're not expecting this level of SBA production every quarter but compared to our past history, we should continue to generate strong levels of new loans and gain on sale income. Our end-of-period loans were up by 2.3% during the quarter but average loans were lower than in the second quarter. The lower level of average loans was due to lower utilization rates on our warehouse lines of credit which was approximately $66 million lower on an average basis than in the second quarter.

As you are aware, the warehouse lending business is inherently volatile and extremely competitive. As a secondary or tertiary recredit provider to most of our mortgage banking clients, we see a great deal of fluctuation in utilization rates from quarter to quarter. It's not an area that we're looking to actively grow and as our other portfolios continue to increase the impact of the volatility in this line of business should be reduced.

With our aggressive, consistent approach to customer acquisition we haven't needed to compromise on pricing to win new business with our core lending products. The average yield on our loan originations in the third quarter was 4.99%, up from 4.81% last quarter. The strong yield we had on new loan originations helped us to keep our overall yield on the loan portfolio at 5.24% unchanged from last quarter.

With our focus on higher-margin areas like franchise, construction and SBA lending we've been able to mitigate some of the pressure on loan yields resulting from the lower interest rate environment. Looking ahead to the fourth quarter we continue to have a very healthy loan pipeline. We're expecting to deliver another quarter of strong loan production.

Looking at deposits, we had another solid quarter of deposit gathering and improvement in our overall deposit mix. We had very strong growth in non-interest-bearing deposits which were up by approximately $45 million from the end of the prior quarter. We're seeing good inflows of non-interest-bearing deposits from the new commercial relationships we're developing as well as a continued strong performance of our HOA business.

This inflow has allowed us to be more conservative in our CD pricing which resulted in some run-off of time deposits during the quarter. With the positive shift we're seeing in the deposit mix time deposits have been reduced to 23.6% of total deposits compared with 27.4% a year ago.

Of course the most significant recent development was the announcement of our acquisition of Security California Bancorp, the holding company of Security Bank of California. We're well underway with the approval process as we filed our bank merger application on October 5 just two business days after the announcement of the transaction. We fully expect the transaction to close in early 2016.

Since the merger was announced we've had a chance to meet with a number of Security Bank's largest customers and two things are very clear. One, they have strong long-term relationships with Security Bank that they highly value and two, many of these companies are experiencing strong growth and need larger credit facilities to support that growth. They are starting to push up against the legal lending limit that Security Bank has.

With the larger lending limits that we will be able to provide there's a very good opportunity for us to expand the number of banking relationships after the merger is completed. These customers are also very interested in utilizing the broader suite of cash management and treasury products that we will be able to offer them.

We've also met with every one of the relationships bankers at Security Bank and made it known to them how they were a key part of what attracted us to the company. This is an experienced group of commercial bankers and senior managers that will significantly strengthen our overall C&I banking capabilities as well as our management team. We think we'll have excellent growth opportunities both from expanding relationships with Security Bank's existing customers and also winning new business as we indoctrinate the Security Bank team in our sales culture and lead development process.

The more time we spend with the Security Bank team and their customers the more bullish we are on this acquisition. As we capture the synergies that we project for this merger we believe the addition of Security Bank's talent, customer base and branch network will significantly enhance the value of our franchise in years to come.

As we've mentioned numerous times M&A is an ongoing line of business. We've consistently been able to identify and complete transactions that create value for shareholders.

We have a well-honed integration process and we've been able to consistently achieve smooth, disruption-free integrations while continuing to evaluate and pursue other M&A possibilities. While we proceed with the completion of the Security Bank transaction we remain open to additional M&A opportunities and we don't see any obstacles that would prevent us from pursuing an attractive deal in the near term if one becomes available.

With that I'm going to turn the call over to Allen to provide a little more detail on our third-quarter results.

Thanks Steve. We've provided a fair amount of detail in our earnings release today so I'm just going to review some of the more significant items in the quarter. I'm going to start with our income statement.

Our net interest income declined by $712,000 from last quarter which was attributable to a combination of lower average loan balance that Steve mentioned and a 12 basis point drop in our net interest margin. The margin compression from the second quarter was due to the positive bump we had last quarter from the one-time FHLB dividend which contributed 8 basis points to our net interest margin that quarter.

The remainder of the compression came from an unfavorable shift in the mix of earning assets due to the lower average loan balances as line utilization on warehouse mortgage lines declined on average from the second quarter. And our level of funds at the Fed increased by approximately $20 million on average.

Although we had NIM compression on a quarter-to-quarter basis, on a year-over-year basis our margin was unchanged at 4.14% as we expanded our earning interest asset yield by 4 basis points and decreased our cost of deposits by 3 basis points which in combination offset the higher cost of borrowings from the last year. Given the persistent low interest rate environment we are very pleased that we have been able to maintain stability on our net interest margin over the past year. Our ability to keep our net interest margin in a low 4% range is due to our focus on growing higher-yielding areas of the loan portfolio as well as our growth in non-interest-bearing deposits.

Our non-interest income increased by $313,000 from the prior quarter, although our gain on sale from loans declined by $177,000. The lower gain on sale loans was driven by a lower volume of sold loans as the second quarter included $68 million in non-SBA loan sales that resulted in a gain on sale of $700,000 in that quarter. The gain on sale related to SBA loans increased by $500,000 over the prior quarter as the volume of loans is old increased by approximately $7 million while the growth premium had a modest decline from the second quarter.

We had a good quarter of expense management. When the $400,000 of merger-related expenses are excluded our non-interest expense declined by $240,000 from the prior quarter. All the line items were well within small variances on a quarter-to-quarter basis.

Regarding the balance sheet, our total loans increased by approximately $49 million from the end of the prior quarter. The increase was spread across a number of portfolios with the largest increases coming from the SBA, franchise and construction lending areas. The growth in the loan portfolio came despite a $54 million decline in warehouse facility borrowings on a period-end to period-end basis.

Although the balance on the warehouse facilities was lower compared to June 30, we did see higher utilization on these lines towards the end of the quarter compared to the average throughout the quarter. Our total deposits increased $43 million from the end of the prior quarter with growth in non-interest-bearing deposits and other non-maturity deposits offsetting a decline in time deposits.

Finally, looking at asset quality, we continue to see positive trends within the portfolio. Our nonperforming assets ticked down to 18 basis points of total assets from 19 basis points at the end of the prior quarter. We continue to have a very loss experience with net charge-offs of just $17,000 in this quarter.

We recorded a provision for loan losses of $1.1 million in the quarter which covered the growth we had in the portfolio, particularly in segments that require a higher level of reserve. This brought our allowance to total loans ratio up to 74 basis points from 71 basis points at the end of the prior quarter. Although when the fair market value discounts related to acquired loans are included in the total power ratio increases to 93 basis points.

We continue to have a very strong coverage of our nonaccrual loans with an allowance that represents 394% of our non-accruals at the end of the quarter.

With that, we'd be happy to answer any questions you may have. Operator, please open up the call.

(Operator Instructions) Brian Zabora, KBW.

Thanks, good morning. I have a question on the warehouse.

Not surprising to see the decline. Any thoughts of what it might look like in the fourth quarter out into 2016 as far as balances?

No.

Okay. I know it's hard to predict.

I'd like to tell you I have some insight, Brian, but it's very difficult. And as we said the business is highly volatile.

And on the deposit side you mentioned HOA. Was that a source of growth as far as your non-interest-bearing deposits this quarter? And is that maybe smoothing out or should we still expect first quarter to be generally where you see most of the growth from the HOA business?

During the third quarter most of that non-interest-bearing was through commercial C&I relationships that we have business banking here in Southern California. The first quarter has historically been stronger and it's just a seasonal difference with the HOA line of business. And we don't see anything on the horizon that would change that seasonality and we would expect the first quarter to generally be one of the strongest from a growth standpoint.

Thanks for taking my questions.

Andrew Liesch, Sandler O'Neill & Partners. I'm sorry. We're actually going to take our next question from Tim Coffey, FIG Partners.

Good morning, Steve. I noticed that the tables for loans this quarter are a little bit different than we've seen in the past. What is the historical breakdown in the franchise lending business between C&I and owner occupied commercial real estate?

It's fluctuated quarter over quarter. Roughly 65% to 70%, maybe as high as 75% C&I, 25%, 30% owner occupied CRE.

And in this most recent quarter I think it was probably 80% to 90% C&I with the growth from franchise.

Correct.

Okay. That's positive. And then just looking at the overall portfolio absent the success you saw this quarter, in the forward quarters where do you see the strongest product type that you have available right now?

I think that the areas that we're concentrating on that we talked about C&I and both in our primary markets of Southern California as well as the franchise lending business, construction and SBA they're higher-yielding risk-adjusted loans and from that standpoint it's really what our focus will continue to be.

Then you layer in some of the owner-occupied CRE and investors CRE and each quarter we manage that level of growth, occasionally utilizing loan sales. And as you know we felt it was appropriate to break out the franchise loans on the loan table just given the growth levels and some of the questions we fielded over the past quarter.

No, I think it's absolutely helpful. Thank you for doing that.

And then Steve when you see new loans come into the bank for review, where is the most competition coming from? Is it on price or structure?

We just don't compete on either one, Tim. And given our disciplined sales calling process and that active outreach to business owners it's frequently those business owners are looking for a bank that is going to provide them with a fairly priced loan. And we tell them right up front we're not the lowest price lender in the market.

But what you get is superior service and quick response times and flexibility and a business banker that is going to be there when they need questions answered, consultation or additional credit. And so in many ways we just don't compete on either the price or the structure.

Okay. Well those are my questions. Thank you very much.

Andrew Liesch, Sandler or Neil & Partners

Hey guys. Steve, can you just talk more about the SBA business a little bit?

It looked like gain on sale was pretty good but then you kept some of the portfolio. What is the driving decision on what you retain versus what you sell?

We talked about it in the first quarter of this year, Andrew. When we had done an analysis over the fourth quarter about how to maximize the IRR on those loans and we found that if we hold those loans for 60, maybe 90 days and benefit from the interest income from those loans, we can still generate the same gain on sale as if we were to sell those immediately after we originated them.

So earlier this year if you recall we didn't do any loan sales during the first quarter and it was because of that analysis we had done in the fourth quarter and so that's continued to hold true here in the third quarter. Some of that production that came on in the latter part of the third quarter we just chose to hold onto and we will likely sell that product in the fourth quarter and that maximizes the IRR.

Got you. I remember that. Thanks.

Then just I guess a follow-up on your comments on M&A, it sounds like there's nothing that would be preventing you from doing another deal. And would you expect something before the end of this year or next year more likely?

As I mentioned we're open to discussions. We continue, I continue to actively reach out to other CEOs to see if we might sit down and have a cup of coffee and chat about where it might make sense to partner. And if there's something that comes along we'll have something to announce.

Great. Thanks a lot.

Gary Tenner, D.A. Davidson.

Thanks, good morning. Just a couple of questions.

One, regarding SBA in terms of the premiums you mentioned they were down a little this quarter. Were they down at all given the mix of loans you were selling or is it generally secondary market premiums were down and appetite is maybe less than it was?

It was very modest, Gary. And as I was looking back at prior quarters there is not necessarily a consistent pattern in terms of what that gross premium has been. Some of it just comes down to where we priced some of those loans.

The pricing on the loans might have been a little bit lower than some of the ones we had sold in the prior quarter. I don't know if we're seeing necessarily a pattern per se. It just was a little bit lower.

Okay, thanks. And then Steve I was just wondering if you could comment on the pending acquisition. Given your sales process and Security's more traditional C&I process, how do you incorporate those two and put them together?

We've done it in the past and we will be taking the same similar approach here. As I mentioned we've met with all of the relationship managers.

I think that they're equally excited about the process and what we're able to bring to the table. And we're just seeing a maturation in our business model and the way that we approach bringing in those relationships and then managing the larger, more complex businesses that we're banking today and that Security brings to the table.

Okay, thanks, guys.

(Operator Instructions) Don Worthington, Raymond James.

Good morning. Steve, in terms of the gain on sale this quarter, was that all SBA or was there anything else in there?

Yes, it was all SBA.

And then any loan purchases this quarter?

Minimal. $11 million.

What type of loans were those?

Owner occupied CRE.

And then my last one is looks like the balance of borrowings went up a bit in the quarter. Was that of the overnight variety or did you do any term borrowing there?

No, just overnight. And most of that came towards the end of the quarter and is in connection with that volatility with the warehouse lending business. And so we carry a little bit more cash as well.

And then those lines, both the warehouse lines get paid down in the early part of the following quarter. And we do the same with the FHLB advances as well.

Okay great. Thank you.

The question-and-answer session has now concluded. I would like to turn the conference back over to Steve Gardner for any closing remarks.

Thank you, Kerri. Thanks again for joining us this morning.

If you have any additional questions please feel free to give either Allen or myself call and we'd be happy to talk with you. Have a great day.

The conference has now concluded. Thank you for attending today's presentation.

You may now disconnect your lines. Have a great day.