Pacific Premier Bancorp Inc (PPBI) 2017 Q2 法說會逐字稿

Good morning, and welcome to the Pacific Premier Bancorp Second Quarter 2017 Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Steve Gardner, Chairman and CEO. Please go ahead.

Thank you, Anita. Good morning, everyone. I appreciate you joining us today. As you're all aware, earlier this morning we released our earnings report for the second quarter of 2017. I'm going to walk through some of the notable items. Ron Nicolas is going to review a few of the financial details. And then we'll open up the call to questions. I'll 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.

Overall, I thought our team performed very well in the second quarter. We reported net income of $14.2 million or $0.35 per diluted share in the quarter, which includes $10.1 million in merger-related expenses. Excluding those expenses, we generated $20.8 million in net income or 52 -- $0.52 per diluted share. That equates to an adjusted return-on-average assets of 1.31% and a return on average tangible common equity of 16.21%.

There was a substantial amount of activity during the quarter that could easily distract some organizations, but I'm proud of how our team was able to quickly come together early in the process and accomplish a great deal. It is reflective of how our bankers are able to execute on organizational integrations, manage complex system conversions, while also staying focused on generating quality new banking relationships. Our culture is built on continuous improvement, along with a focus on doing the basics, exceedingly well every day. That has led to our experience of extracting value from our acquisitions, while simultaneously delivering strong results.

That is what we expect as we move through the final stages of integration on Heritage Oaks and lay the foundation for the combined companies growth going forward.

We had another strong quarter of loan production, with the company generating $492 million in new loan commitments. With the experienced group of bankers we have attracted to the organization, along with a high-performing sales culture we continue to develop, we have built a strong loan origination platform. Importantly, this platform produces a high quality, well diversified loan portfolio that generates attractive yields.

Our second quarter results are another example of the diversity of our lending businesses. During the quarter, we originated $146 million in commercial real estate loans, $92 million in franchise loans, $87 million in new C&I loan commitments, $74 million in construction loans and $35 million in SBA loans. Given the type and mix of our loan production, we are seeing some benefit from the rate increases from the Fed, both in our existing loan portfolio and in our new loan production.

In the second quarter, the average rate on our new loan commitments was 4.99%, which was 11 basis points higher than the prior quarter.

On the liability side of the balance sheet, despite the Fed rate increases, we've been able to keep our deposit cost fairly stable during the first half of the year and were actually able to decrease the cost of funds to 40 basis points in the second quarter, a 3 basis point decrease over the first quarter. With short-term interest rates continuing to increase, it is likely we will start to see some uptick in our deposit costs going forward. However, we are optimistic that the increase in our asset yields will outpace the deposit cost pressures we may experience in the coming quarters.

Turning to Heritage Oaks. We made good progress on the integration of the 2 organizations during the second quarter and completed the system conversion earlier this month. We've been impressed with the quality of bankers we've been able to add to the team, and we're excited about the opportunities to grow our market share in the Central Coast region of California. As we implement our unique sales and service culture in these new markets and take advantage of our larger lending capacity over the coming quarters, we expect to accelerate our business development activities in these attractive markets.

We remain on track to capture the cost savings we projected for the Heritage Oaks transaction. And as we have done with other acquisitions, we are reinvesting a portion of those cost savings into our infrastructure and personnel.

As a high-growth bank in the current environment, we need to ensure that we exceed the higher regulatory expectations that our prudential regulators expect. And our investments in the organization also support our overall risk management of the business. Even with these investments, we expect we can continue to operate with an efficiency ratio in the low-50% range, which we believe is appropriate for a bank with our growth profile, size and business mix.

With much of the heavily lifting behind us on the Heritage Oaks acquisition, it is becoming clear that the combined organization is much stronger than either of us would have been on a stand-alone basis.

Looking ahead to the second half of the year, we are generally seeing continued growth in most of our markets. Business owners are cautiously optimistic regarding the prospects for growing their businesses, and we believe that loan demand will support quality loan growth.

We remain focused on deploying our leading-edge technology that allows us to develop new commercial banking relationships that result in stable, low-cost core deposits and a well diversified, high-quality loan portfolio that generates attractive risk-adjusted yields. Along with our organic growth, we continue to actively explore additional M&A transactions that can provide strategic and economic benefits that further enhance the value of our franchise.

Given our current footprint, we now have a larger universe of institutions that we can evaluate that could create value for the company. From smaller acquisitions that fill in areas of our footprint to larger transformational transactions. And as always, we remain open to all strategic alternatives to maximize shareholder value.

In summary, we are excited about the opportunities we have available to us both from an organic growth standpoint and through continued M&A.

With that, I'm going to turn the call over to Ron, to provide a little bit more detail on our second quarter results. Ron?

Thanks, Steve, and good morning, everyone. As is customary, I will be reviewing some of the more significant items in the quarter, focusing primarily on the linked-quarter comparison.

As highlighted in our earnings release, reported net income was $14.2 million for the quarter, and we earned $0.35 per diluted share compared with net income of $9.5 million and $0.34 per diluted share in the first quarter of 2017.

Major items impacting the quarter included: revenues of $72 million; merger-related costs of $10.1 million; operating expenses of $38.4 million, excluding the merger-related costs; total assets of $6.4 billion; and total average earning assets of $5.8 billion. Total revenue was driven by higher net interest income of $63.3 million, which included $4.2 million of total accretion. Accretion related to the Heritage Oaks acquisition was $3.3 million, including $500,000 that was accelerated.

Our net interest margin increased to 4.40% compared to -- with 4.39% in the prior quarter, with total accretion contributing 30 basis points for the quarter.

The favorable impact of our variable-rate loan portfolio repricing, resulting from the recent Fed rate increases, partially offset the impact of the lower yield on the Heritage Oaks loan portfolio.

Going forward, we anticipate accretion will contribute between 20 and 30 basis points over the next few quarters. In addition, we expect our core net interest margin to remain fairly consistent at 4.10%.

Lastly, our overall cost of deposits fell 2 basis points to 0.25% with the inclusion of Heritage Oaks.

The company recorded a provision for loan loss of $1.9 million compared with $2.5 million in the prior quarter. Our provision this quarter was driven principally by on balance sheet organic loan growth and to a lesser extent, the amortizing discount on acquired loans. Our provisioning for the quarter excluded the Heritage Oaks loan portfolio, but did include a $20.5 million incremental fair value mark on that portfolio. We expect our loan loss provision to remain in the $2 million to $2.5 million range per quarter.

Noninterest income of $8.8 million increased $4.1 million from the prior quarter and included $2 million in security gains realized with the sale of $213 million of Heritage Oaks securities. Additionally, we sold $30 million of SBA loans during the quarter, achieving a cash gain of $2.9 million. We expect our SBA sales to remain in the $30 million to $35 million range per quarter.

Our noninterest expense came in at $48.5 million and included $10.1 million of merger-related costs. Excluding the merger-related costs, noninterest expense was $38.4 million and included a $1.3 million increase in our CDI amortization expense to $1.8 million total.

The company remains on track to achieve the Heritage Oaks cost savings previously disclosed. We also continue to hire key management and staff positions to strengthen our skills and capabilities. We anticipate staffing growing modestly over the next couple of quarters from our current 707 full-time equivalents, inclusive of the remaining staff reductions associated with the Heritage Oaks acquisition. As a result, we see noninterest expense coming in at $38 million to $40 million for the next couple of quarters, with modestly higher personnel expense, higher loan and deposit expense associated with increasing business volumes and the higher CD (sic) [CDI] amortization cost.

Our effective tax rate was 34.7% in the second quarter, reflecting a larger municipal securities portfolio and lower stock equity expense contributing to the lower-than-normal rate.

As we move through the year, our tax rate will continue to rise to more normalized levels of approximately 37% to 38%, driven principally by higher pretax income and the diminishing impact of these items.

Turning now to our balance sheet highlights. Total assets came in at $6.4 billion, with gross loans of $4.86 billion, which included the $20.5 million incremental fair value mark associated with the acquisition of the Heritage Oaks loan portfolio.

Total new loan commitments increased to $492 million for the quarter, fifth consecutive quarterly increase, and new loan origination yields grew by 11 basis points to 4.99% for the quarter. The loan portfolio weighted average interest rate at period end, fell to 4.79% from 4.87% with the addition of Heritage Oaks, whose loan portfolio yield was 4.44% at acquisition.

Our investment portfolio finished the quarter at approximately $700 million, after selling $213 million of Heritage Oaks securities during the quarter. We continue to review the investment mix and profile acquired with Heritage Oaks as well as our own liquidity needs. As a result, we intend to grow our investment portfolio to roughly $750 million or about 12% of total assets.

We see the average yield on our investment portfolio remaining fairly consistent, with this quarter at roughly 2.4%.

Total deposits came in at $4.95 billion, with nonmaturity deposits at $4.1 billion, 84% of total deposits. As a result, our loan-to-deposit ratio fell to 98% from 103% in the prior quarter. And we continue to target a loan-to-deposit ratio of 100%. Although, our weighted average deposits came down at 0.25%, down from 0.27% in the first quarter, we do anticipate our deposit costs rising over the next couple of quarters, as competition continues to respond to the recent Fed rate increases.

Lastly, taking a look at asset quality. Our loans-for-loan losses ended the quarter at $25.1 million, an increase of $2 million from the prior quarter. As a result of the acquisition, our allowance to loans coverage ratio fell to 0.52%, as approximately 40% of our loan portfolio is now fair valued under acquisition accounting. Our fair value discount now totals over $25 million on a combined basis, effectively doubling our allowance for loan loss.

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

(Operator Instructions) The first question comes from Matthew Clark with Piper Jaffray.

Curious how much in the way of loans and deposits HEOP contributed in the quarter? Just trying to isolate that acquisition, if we could?

Sure. Ron, you've got those numbers?

Sure, sure do. So HEOP contributed on the loan side, $1.368 billion; and on the deposit side, $1.668 billion. Those were the HEOP numbers as of March 31 or April 1, if you will.

April 1.

Got it, okay. And then can you quantify the pipeline at the end of the second quarter? And as a follow-on to that, just curious with your commentary around accelerating the business development in the Central Coast, does that still suggest that low double-digit loan growth on an organic basis is still what you're targeting? Or you think you could step it up from there?

The pipeline is just a little over $700 million. We've seen continued nice growth. Over the last few years though, the third quarter seems to slow down just a little bit. It -- we experienced some of that seasonality with business owners and clients on vacation, and just folks not seeming to operate with quite the sense of urgency that we like to, to get loans through. But we're encouraged with where we stand in the pipeline, and moving it through. We still think, given the larger balance sheet, larger loan portfolio and the like, that low double-digits is probably where the growth will come in. Certainly, that's dependent upon the level of paydowns that we see as well as the line utilizations on our business loans.

Great. And then switching to the margin, just curious how much prepaid fees contributed to the margin this quarter? I think it was 8 basis points last?

Yes. That was -- it was 4 basis points this quarter.

Okay. And then, just a last one on the margin. The outlook for the core margin remaining relatively consistent at 4.10% but yet, you're putting -- you've got a weighted average rate on new production at 4.99%, above the 4.79%, you've got a loan-to-deposit ratio that's creeping back up, and you talked about how you expect asset yields to increase, inch up faster than liability cost? Just -- I'm just trying to match up that commentary.

We like 4.10%. We like to, when we can, underpromise and overdeliver. But 4.10% seems like from a core standpoint, a reasonable number.

The next question comes from Andrew Liesch with Sandler O'Neill.

Just a few questions along the expense guidance. So still, $13 million of cost saves, is that what you were expecting from Heritage Oaks?

27% is what we had announced.

I think, somewhere in that $12 million range, Andrew.

Okay. So then, are these expenses going to, pretty much all of that be reinvested into the franchise? And I'm just curious, how long -- the pace of that, is it going to be more slowly this quarter, and then ramp up in 2018?

Well, we think, as we had indicated, we expect for at least the second half of the year, that quarterly expenses are going to come in somewhere in the neighborhood of $38 million to $40 million. And there's a number of items that are driving that. And that's where we expect to go. Look at -- we are a dynamic institution. We are constantly seeking to upgrade the talent that we have to add strong bankers, executive, senior managers, as we continue to grow and push towards the $10 billion threshold. And we think it's appropriate to invest in those folks. And we're investing in technology across the organization, whether it be from the sales force platform that we've deployed in a number of areas to help us manage the business to give us better visibility and insight into our portfolios, both loan and deposit side as well as our pipeline and to manage the sales process as well as the some of the technology around our cash management, in connection with HOA Banking. So it's in a variety of areas.

Okay. And look, I certainly understand investing in the franchise for growth. But you are still a ways from crossing $10 billion. So just trying to get a sense of the expense ramp? And how quickly it might come? Just curious, do you need to do all this investing right now? Or could you maybe wait some time?

We are always investing in the business, and we don't see any reason to wait.

The next question comes from Jackie Bohlen with KBW.

Ron, the numbers that you gave for HEOPs loan and deposits, were those book value or were those fair value?

Those were book value.

Do you happen to have the fair value numbers? If not, I can get them from the queue.

Jackie, those were fair value. Excuse me, those are fair value.

Those are the fair value? Okay.

That's correct.

And then, in terms of the cost savings expectations, what amount has already come out of 3Q, and what was the timing of that, just generally?

Out of 2Q?

I'm sorry, 2Q. I'm fast forwarding us. 2Q.

Sure, sure. Look, we look at second quarter as ancient history as well, Jackie. Go ahead, Ron.

So Jackie, we've captured, I think, the bulk of the personnel. Although we still have some personnel. I think you're probably aware, we just completed the conversion, very successfully, I might add. So we still have a wind down of some staff for this quarter. We'll also start with the conversion. We'll start to see some data processing saves start to bleed in, in the third quarter. And really, quite frankly, by the fourth quarter, we should have a pretty good handle on our, if you will, our core run rate for the merged companies. So all of the savings will be baked in at that point in time.

Okay. So maybe more towards the higher end of the range you gave in 3Q, and then trending, perhaps, towards the lower end in 4Q as you get some more cost -- as the 3Q cost saves are all pulled out?

I think from a timing standpoint, that makes sense to me.

Okay. And then just lastly, if you could update us on your plans. You have the 2 new line items from HEOP of agriculture and farm land portfolios. Just your plans for growth there? And what you intend to do with those?

We're still evaluating both of those lines of business and -- to see whether we want to ramp the growth rate. At this point, we're looking to keep it relatively steady and continue to assess where there may be opportunities over the coming quarters to potentially grow that at a more typical Pacific Premier pace.

The next question comes from Gary Tenner with D.A. Davidson.

Couple of questions just to clarify the expectations for the margin in -- the core margin, that 4.10%, that also, as kind of the expenses did, relates to the back half of this year and doesn't assume any changes at the short end of the curve, is that right?

That's correct.

Okay. And the ramp of the securities portfolio to 750, do you expect that to be done, basically, during the -- over the course of the third quarter? Or is it already done post-June 30?

It really -- over the course of the second half of the year; a good portion will come in the third quarter. We don't need to -- we're thoughtful on our approach to analyzing and selecting securities. There's probably still anywhere from $75 million to $100 million in the portfolio that we acquired from Heritage Oaks that we'll want to reposition. But we've done a lot of that work already in the second quarter. But there's a little bit more to come, and we expect, as I said, by the end of the year, that we should be near that 700 -- the 12% range of total assets.

Okay. And then, just last question. I think in the press release, you highlighted about $1.1 million of fees associated with Heritage Oaks. Is there anything in there that you would think over time would run off in terms of any benefit? Were there any fees that they were charging that might change? How would that play out?

We don't -- so we don't see anything unusual there. Maybe there's some opportunity to grow that over time. But we think of it as very consistent with the products and services that we offer and don't expect there to be a great level of volatility there.

(Operator Instructions) The next question comes from Tim Coffey with FIG Partners.

As you go to grow out the business with Heritage Oaks now in the fold, do you need to add on to your loan production capabilities, do you need to add loan production offices, make more hires and what you do to grow the loan business?

We don't think, Tim -- We don't think we need loan production offices. We picked up some real good quality bankers through the Heritage Oaks acquisition. And then as I said earlier in my response to Andrew, we continue to add good quality bankers in the organization and upgrade existing bankers. And so that's in part, what's driving some of the investments in personnel. And so we believe we'll benefit from that by growing the production overtime. And at the same time, we have opportunities to do, somewhat, larger credits to move up market to bank larger businesses. And as such, we've made investments and continue to make investments. As I said earlier, in the systems and the folks, whether it's in our treasury management function, cash management products and in good quality middle-market bankers, that can bring larger relationships to the organization. And through all of those measures, we're comfortable with our ability to grow the loan production overtime.

Okay. And then on that last point, Steve. Have you increased the house limit? Or is there a new kind of size of relationship that you can go after now?

I mean, certainly our legal lending limit has grown substantially over the last couple of years. But our house limits have not changed. We have plenty of opportunity to do larger credits within our own house limit to grow the average loan size that we have. One of the things that we have historically done very well is originate small business loans, and we want to move that average loan size up over time. Certainly, continuing to do what we do well. And then just adding to that through the middle-market bankers, middle-market credits that we think will benefit us.

Okay. And then at the beginning of your comments, you were talking about the different segments of the new origination this past quarter. But I didn't hear anything about the residential mortgages or HELOCs. Is it your intention to kind of have that portfolio -- balance of that part of the books stay the same, or decline through attrition?

Well, as you're aware, Heritage Oaks had ceased doing mortgage banking, originations, just prior to the closing of our acquisition. And that is something that we appreciated. It's not a line of business that we're interested in. We don't see growing the residential book, if anything, potentially looking at strategic sales down the road, as it's just not a core line of business that were in.

And so then the loan growth targets that you're looking at, low double-digits, does that account for attrition in that part of the portfolio?

It does.

The next question comes from Don Worthington with Raymond James.

In terms of -- it was a small dollar amount but there was an uptick in delinquencies in the quarter, was that -- were those acquired loans? Or any color on that?

That came with the Heritage Oaks acquisition, Don. It was a small uptick, but yes, that was acquired with the acquisition.

Okay. And then, in terms of loan purchase activity, were there any purchases this quarter or would you plan on that from time to time in the future?

Certainly, purchases as well as sales is a tool that we have a lot of experience with doing it ourselves, and we have deployed that strategy over the years and a number of different times. And continues to be something we would consider. Any of the loan -- any loan purchases during the quarter were immaterial. And so we'll continue to look at that, and where we can either supplement our own growth to remix the portfolio, to sell loans, to manage our growth rates. We look at both sides of that coin on a regular basis.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Gardner, for any closing remarks.

Thank you, Anita, and thank you all for joining us this morning. If any of you have further questions, please feel free to give Ron or myself a call. We'd be happy to talk with you and provide you any additional color that you may be seeking and answer your questions. Have a great day.

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.