The largest publicly traded banks headquartered in Orange County collectively breathed a sigh of relief when reporting second-quarter results in recent weeks.
“We were able to beat on every metric,” First Foundation Inc. Chief Executive Scott Kavanaugh told the Business Journal. “We do better when interest rates are really low.”
In April, the banks reported a significant number of clients requesting modifications on loans due to the coronavirus pandemic. The banks began building up their accounts for potential loan losses, anticipating the worst to come.
However, the three publicly traded banks reported that clients with deferments seem to have hit a peak. And they’re attracting new customers by offering the federal government’s Paycheck Protection Program, also known as PPP.
“We have a number of portfolios, where the need for an additional extension of the deferral is limited,” Pacific Premier Bancorp Inc. Chief Executive Steve Gardner told analysts last week on a conference call. “The area we’re seeing the greatest distress is within the hotel portfolio. This is not a surprise given the significant impact the pandemic has had on the hospitality sector overall.”
After the coronavirus struck in March, shares of these banks fell anywhere from 42% to 55% from Feb. 20 to March 23 as investors feared massive amounts of loan defaults. While the shares have generally risen since March, they are still down year-to-date from 10% to 36%.
Here’s a quick rundown of how the three banks performed.
FFWM
First Foundation (Nasdaq: FFWM) reported second-quarter earnings of 40 cents, topping the average analyst consensus of 36 cents.
“First Foundation delivered a solid quarter given it has minimal exposure to COVID impacted areas,” Wedbush analyst David Chiaverini wrote in a note to investors.
Most importantly, the bank added relatively small $1.4 million to its provision for credit losses in the second quarter. The bank hasn’t seen “any significant need for forbearances” in its multifamily and single-family portfolios where about 85% of its lending is based.
“I don’t think you’ll see a lot of credit issues” at First Foundation, Kavanaugh said.
“We will continue to shine in this environment as long as the Federal Reserve keeps interest rates at a low level.”
Kavanaugh said Orange County’s real estate market “is still red hot,” especially for multifamily apartment complexes that offer lower rents.
Many First Foundation employees have worked from their homes during the pandemic and his company, like others, is evaluating whether they’ll need as much office space going forward.
“That doesn’t bode well for office space,” he said. “I’m very concerned about the office space market.”
The company issued about 600 PPP loans totaling $171 million, 98% of which was for its client base. First Foundation isn’t participating in the federal government’s Main Street Lending program because its client base doesn’t fall into that category, Kavanaugh said.
As for a Barron’s May article that suggested First Foundation might be in play as an acquisition target, Kavanaugh said he’s unaware of any such offer.
He’d like to make an acquisition himself, maybe expanding into Arizona or the Pacific Northwest.
“Our stock is performing better than our peers,” he said. “It took a crisis to figure out that we’re in a pretty good space.”
Its shares climbed 5% to $15.61 and a $696 million market cap in the week after the announcement.
BANC
Requests for loan deferrals at Santa Ana-based Banc of California Inc. (NYSE: BANC) steadily dropped from 205 in March and April to 87 in May and just six in June.
“We’re obviously very encouraged by the trend, and we’re not seeing an uptick in requests,” Chief Executive Jared Wolff told investors on an analyst call. “We’re on top of it, but I’m nervous that at the last minute, people could just say, ‘Look, we’re not ready yet, we need another deferral.’”
It ended the quarter with deferments, which typically lasted 90 days, on $604 million of loans, which is 11% of the bank’s $5.6 billion loan portfolio.
Banc of California boosted its Current Expected Credit Losses (CECL) to $27.6 million on June 30 from $15 million on March 31.
While the bank reported a second-quarter loss of $21.9 million, or 44 cents a share, the loss wasn’t as bad as indicated.
The bank took a one-time charge of $26.8 million to get rid of an albatross—the naming rights to the Banc of California Stadium, which is used by the Los Angeles Football Club. That original deal, which dates to 2016, called for the bank to pay $100 million over 15 years for the rights to the name of a stadium that cost $350 million to build.
Under the new deal, the bank will save $7 million a year on marketing costs, or about $89 million in the next 12.5 years. Last year, Banc of California spent $8.4 million on advertising, including $6.7 million on the LAFC naming rights deal, according to its annual report. The bank will retain its role as the soccer club’s primary banking partner and other collaborations.
“Our second-quarter performance reflects both the conservative, well capitalized bank we have built that is well positioned to manage through the impact of COVID-19 pandemic, as well as a bank that has reached an inflection point in its transformation from restructuring to growth,” Wolff said.
KBW analyst Jacquelynne Bohlen estimated the bank’s loss at 1 cent, which topped her prediction for a 13-cent loss. As a result of the bank’s report, she boosted her annual forecast for the bank for 2020, 2021 and 2022.
The PPP proved a nifty way to get 300 new clients as the bank approved 1,106 loans with $262 million that helped save 25,000 jobs.
“We viewed PPP loans as an opportunity to reinforce the high-touch client experience that we offer at the bank,” Wolff said. “So rather than opening up an online portal to take applications, we had our relationship managers guide our clients through the entire process to ensure a successful application and timely funding.”
In the four trading sessions after the report, its shares rose 7.8% to $10.99 and a $552 million market cap.
PPBI
Irvine-based Pacific Premier (Nasdaq: PPBI) reported a second-quarter loss of $99.1 million, which looked much worse than it was.
For one reason, on June 1 it completed the acquisition of crosstown rival Opus Bank, resulting in an acquisition cost of $39.3 million.
Then it recorded $160.6 million for its Current Expected Credit Losses, which included $84.4 million from Opus. Ominously, it said the remaining $76.2 million was related to “the deteriorating economic forecast utilized by the company in its CECL model.”
“A noisy quarter given the closing of the Opus Bank deal, where core operations were generally better than expected,” Raymond James analyst David P. Feaster Jr. told investors.
During the second quarter, the bank initiated a program to help clients impacted by the pandemic. By the end of the quarter, about $2.25 billion, or 14.9%, of its loans were under some form of temporary modification. By July 24th, it had contacted 63% of the approximately 1,400 customers with loan modifications, and 87% have stated they intend to resume regularly scheduled payments when the modification period expires.
Its PPP lending soared from nothing to $1.14 billion. The bank last week was planning to sell its entire PPP portfolio, which should result in a $19 million gain.
In buying Opus, the bank’s assets jumped to $20.5 billion on June 30 from $12 billion on March 31. Another sign of confidence was reiterating its 25-cent quarterly dividend, which meant a 4.7% yield.
“Notwithstanding the impact of the merger and COVID-19 related items, we accomplished a great deal during the second quarter,” Gardner said.
“In a very short period of time, we launched our SBA PPP program and funded more than $1 billion in loans, designed a thoughtful loan modification program to assist our borrowers through the crisis, completed the largest acquisition in our history, and quickly executed on our post-merger integration plan,” he said.
In the two trading sessions after the announcement, its shares dropped 1.7% to $20.72 and a $2 billion market cap.
