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Wednesday, Aug 10, 2022

Lower Rates, Higher Expectations

New Opus Bank Chief Executive Paul Taylor gave Wall Street a big hint at what may happen with the third-largest bank based in Orange County.

During his first quarterly conference call last week, Taylor told investors and analysts about his prior job as chief executive at Denver’s Guaranty Bancorp.

“While at Guaranty, I managed the acquisition of six banks to approximately double the size of the bank and improved the company’s profitability, which had been struggling when I first took it over as CEO,” Taylor said.

Curiously, he omitted that he led the successful $1 billion sale of Guaranty last December to Independent Bank Group Inc.

Taylor’s remarks were some of the highlights by executives at six OC banks during the final days of July when they reported second-quarter results that were generally rewarded with increasing share prices.

The earnings also came just prior to the Federal Reserve’s first rate cut since 2008; a 25 basis point drop to 2.25%, announced last Wednesday.

While good news for borrowers, the rate cut adds another element of concern to the area’s banking industry, which is trying to limit the damage through the use of more no-interest accounts to corporate and individual borrowers.

Furthermore, shares of all six of the OC banks dropped anywhere from 1% to 6% after the Aug. 1 announcement that the U.S. planned to raise more tariffs on China.

Here’s a sampling of each bank’s latest earnings.


On July 29, Irvine-based Opus (Nasdaq: OPB) reported second-quarter adjusted profit of 35 cents a share, topping the Zacks consensus estimate of 32 cents.

Net interest margin, a key metric in the industry, dropped to 2.88% compared with 3.15% in the first quarter, because of higher costs for deposits. Expenses for deposits almost doubled to $16.4 million from the same quarter a year ago.

“If you look at our deposits, the cost is too high,” Taylor told analysts. “We don’t have enough non-interest-bearing deposits and we need to increase that. So we are working today on a new retail strategy in the company in order to try to generate more non-interest-bearing deposits.”

The bank reported loans increased to $5.8 billion, a 14% jump from a year ago, based on strength in its multifamily lending division. Deposits rose 5% to $6.2 billion.

About 62% of the bank’s loans fund investment in and development of apartments.

Taylor wants to increase the amount of commercial business loans, which are around 16% of total lending, saying that will help boost the stock.

“We’d love to talk with anyone who is in need of a commercial loan,” he told the Business Journal in an earlier interview.

During the second quarter, the bank reduced its workforce by 30 to 730. Taylor said the bank isn’t in the hiring mode, except for commercial lenders.

He doesn’t foresee a second half recession, as some have predicted. Taylor, who started on May 1, told the Business Journal that he’s excited about the local market.

“There is a massive market in Southern California,” he said.

Taylor declined to discuss rumors among investors and local bankers that Opus may be for sale, except to say that any material offer would have to be made publicly available to investors.

The bank has had a couple of problematic years, starting in 2016 when credit problems surfaced. Founder and Chief Executive Stephen Gordon departed last November, a month after the bank’s third quarter failed to meet expectations.

“Operations are now essentially normalized, and we expect a return to growth in 2019,” Keefe, Bruyette & Woods analyst Jacquelynne Bohlen wrote in a report to investors following the second-quarter results. “We expect shares to be largely impacted by credit performance, loan growth, and NIM performance over the coming quarters.”

Opus has $7.9 billion in assets, up from $7.2 billion a year ago.

Its shares were little changed in the four trading sessions after the announcement, ending around $21.76. Since Taylor became chief executive, its shares have been flat.


Jared Wolff, who began last March as chief executive of Banc of California Inc. (NYSE: BANC), made a favorable impression after his second quarterly appearance on July 25.

After the Santa Ana-based bank reported second-quarter earnings of 24 cents, which topped the 19 cents Zacks Consensus Estimate, its shares jumped 6% to $15.48; at press time, shares settled at $14.68 with a $747 million market cap.

KBW raised its 2019 profit prediction from 51 cents a share to 80 cents.

“We expect the earnings power at the bank to improve as a result of strategic initiatives and growth,” Bohlen wrote in her note.

Wolff told analysts the bank is taking steps to cut deposit costs, such as reducing rates on certificates of deposits.

“We executed on some very important initiatives these past three months and [are] making great progress in our business strategy,” he said. “Our focus on relationship banking is already showing positive results within our business.”

Until last year, Banc of California was the biggest bank based in OC by asset size. The bank reported assets fell $527 million from the first quarter to $9.4 billion.

Wolff told analysts to expect a continued decline in assets this year as it reduces lower margin products.


Irvine’s Pacific Premier Bancorp (Nasdaq: PPBI), the OC bank with the highest amount of assets at $11.8 billion, on July 23 reported second-quarter adjusted profit of 62 cents, missing the Zacks Consensus Estimate for 63 cents.

Chief Executive Steve Gardner, who has been unhappy with what he has termed a low share price, issued $125 million in subordinated debt and used a portion of the proceeds to buy back $66 million in shares. Altogether, it returned $79.8 million of capital to shareholders through dividends and a repurchase of 3.5% of its shares.

“Our high level of profitability and ongoing risk management discipline is enabling us to return significant amounts of capital to shareholders,” Gardner said in a statement.

In the week following the results, its shares rose about 5.3% to a $1.9 billion market cap, the highest of any bank based in Orange County.


First Foundation Inc. (Nasdaq: FFWM) on July 24 reported second-quarter profit of 28 cents, topping the 26 cent consensus analyst estimate. Its shares rose 10% in the week after the results were announced to about $15.18 and a $677 million market cap.

“All aspects of the business kicked in this quarter,” Chief Executive Scott Kavanaugh told the Business Journal. “It feels like everything is coming together.”

Earnings doubled to $12.4 million from the same period a year earlier when there were some charges. Its total assets rose 7.6% to $6.3 billion from $5.8 billion on Dec. 31.

Last week’s Fed rate cut will eventually result in lower payments for those with adjustable rates, he said. Deposit costs should be able to come down at a faster pace, he added. Like the other banks, First Foundation is attempting to attract more accounts that don’t pay interest, Kavanaugh said.

“We’re definitely trying—it’s hard,” he said.

The company is one of the cheapest in the western U.S. when based on a forward price to earnings ratio, Kavanaugh said. To boost its shares even higher, the company will have to convince the market of the synergy of its wealth management and trust department working alongside its bank unit, he said.

“Some investors don’t understand the power of the platform,” Kavanaugh said. “They tend to look at only the bank side.”


Costa Mesa’s Pacific Mercantile Bancorp (Nasdaq: PMBC) on July 22 reported net income dropped to $2.7 million from $15.4 million a year ago when it recorded the release of a tax valuation.

Chief Executive Tom Vertin is aiming to increase non-interest bearing checking accounts by telling small to medium-size businesses that if they use such accounts, the bank can provide market information on their industries that are typically available only to large corporations.

The bank reported such no-interest deposits rose to $378 million in the second quarter from $340 million on Dec. 31. It has $1.2 billion in total deposits.

Its total assets climbed 5.2% to $1.4 billion from $1.3 billion in December.

After the report, its shares were mostly unchanged with a market cap nearing $200 million. However, they did fall on news of the rate cut and the new tariffs on Chinese products.


CommerceWest Bank (OTC: CWBK), an Irvine-based bank that targets small to medium-size companies, reported second-quarter net income doubled to $2.2 million compared to the same period a year earlier.

“We had record second quarter and first half earnings, demonstrating again the strength of our business model,” Chief Executive Ivo Tjan said in a statement issued July 31. 

However, Tjan also warned of slowing loan growth as the bank’s clients are more reluctant to borrow.

Its total assets rose to $585.4 million, up 6% from a year ago.

Shares of the thinly traded company are up about 9% this year with an $82 million market cap.

Peter J. Brennan
Peter J. Brennan
Peter J. Brennan has been a journalist for 40 years. He spent a decade in Latin America covering wars, narcotic traffickers, earthquakes, and business. His resume includes 15 years at Bloomberg News where his headlines and articles sometimes moved the market caps of companies he covered by hundreds of millions of dollars. His articles have been published worldwide, including the New York Times and the Washington Post; he's appeared on CNN, CBC, BBC, and Bloomberg TV. He was awarded a Kiplinger Fellowship at The Ohio State University.

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