It was a terrible week on Wall Street for Orange County’s biggest banks.
Irvine-based Opus Bank (Nasdaq: OPB) saw shares fall 22% on the day it released third-quarter results.
Cross-town rival Pacific Premier Bancorp Inc. (Nasdaq: PPBI), dropped 16% in the two trading sessions following its Oct. 23 announcement.
A key reason is that local banks, similar to national banks, are facing higher interest costs on deposits as the Federal Reserve continues to increase its benchmark rate. Customers are debating whether to leave deposits in accounts that pay no or little interest.
“Clients are waking up and realizing that zero is not good,” First Foundation Inc. Chief Executive Scott Kavanaugh said. “Deposits are always going to remain a challenge for every bank. Some banks have had their cost of funds at extremely low levels.”
First Foundation (Nasdaq: FFWM) was the only one out of OC’s five biggest banks to see its shares rise in the session following the release of its Q3 results. Here’s a snapshot of their quarterly reports:
Opus
The bank on Oct. 22 reported third-quarter earnings of 25 cents a share, missing the Zacks consensus estimate by two analysts of 36 cents.
“Another disappointing quarter may increase the likelihood that investors look to shake things up,” wrote JMP analyst Christopher York, who has a “market perform” rating.
Shareholders may agitate for a sale of “this underperforming asset to a strategic buyer,” York added.
Keefe, Bruyette & Woods analyst Jacquelynne Bohlen forecasted the net interest margin, a key metric of profitability, increasing to 3.13%. Instead, that profit margin fell 9 basis points to 2.98%, driven by an increase in the costs of deposits, she said.
The bank reduced its NIM forecast from 3.2% to 3.25% by year-end to 3.05% to 3.10%. It also cut its loan funding originations forecast from $2 billion to $1.7 billion this year.
“We continue to battle through the industry-wide headwinds of elevated loan prepayments and rising costs of deposits, which negatively impacted our net interest margin,” Chief Executive Stephen Gordon said in a statement.
Last week’s wipeout erased a 19-month steady climb when Opus shares rose from about $19 in April 2017 to over $29.45 on Sept. 20. Since then the shares have fallen 36%; the bank had a $682 million market cap last week.
Pacific Premier
The bank on Oct. 23 reported third-quarter core profit of 62 cents a share, missing the 64-cent analyst consensus, according to FIG Partners LLC analyst Timothy Coffey, who had a 66 cent estimate.
In the following two trading sessions, shares shrank 16% to $26.71.
Results “were impacted by a lower core margin, lower fee-based income and higher operating costs,” wrote Coffey.
While he said the decline was “overdone,” Coffey still cut his target price from $47 to $35. Bohlen also reduced her target price from $47 to $42 and slashed her profit predictions for the bank in the next three years, citing lower loan and deposit growth and higher expenses.
“We are seeing the impact of higher interest rates on the demand for SBA loans and an increase in prepayment rates, which is leading to reduced premiums,” Chief Executive Steve Gardner said on a conference call, referring to loans backed by the Small Business Administration.
The bank’s shares are down 39% from a 52-week high of $45.10 in March; last week, it had a $1.7 billion market cap, which is still twice as high as its nearest OC competitor.
First Foundation
The Irvine-based company reported third-quarter earnings of 33 cents a share, topping the 27 cents expected by analysts.
“We’re really proud of the quarter,” Kavanaugh said in an interview. “We felt like we beat everywhere we could have; it’s different than last quarter.”
The company missed analysts’ profit expectations in the second quarter, when it was among the first to report rising deposit costs. After its third-quarter results were issued, shares climbed 8.9% to $15.38 in that day’s session.
“First Foundation produced solid 3Q 2018 results as the company generated strong growth in net loans, along with margin expansion and relatively strong core profitability metrics,” Raymond James analyst Donald Worthington wrote in a report.
The restructuring of some operations and remixing its balance sheet helped the results, Kavanaugh said. The bank had “modest” increases in deposit costs during the third quarter, he said.
The company expanded its NIM from 2.83% in the second quarter to 3.12% in the third.
“I am hoping to maintain it above 3%,” he said.
The bank reduced its loan origination goal of $2 billion this year to $1.8 billion to $2 billion.
“Our pipeline is super strong right now,” Kavanaugh said, adding that it’s had “great success” in commercial and industrial lending as well as multifamily units.
The company’s shares climbed 11% in the four trading sessions after the report. They were still down about 22% from a 52-week high of $20.23 in June; it had a $698 million market cap last week.
Banc of California
The Santa Ana-based bank (NYSE: BANC) reported adjusted profit of 22 cents on Oct. 25, topping the 21 cent average estimate of seven analysts surveyed by Zacks.
“We continue to execute on our strategic plan and the third quarter saw yet more progress,” Chief Executive Doug Bowers said in a statement.
Shares fell at a relatively modest 4.3% after the report.
Analysts pointed to its NIM decreasing 8 basis points from the prior quarter to 2.93%, which was below their estimates.
“Results reflected lower than expected spread income and margin driven by higher deposit costs as well as higher than forecasted operating costs,” Coffey told investors.
Shares had fallen 24% since Sept. 4; the bank had a market cap of $780 million last week.
Pacific Mercantile
Net income at the Costa Mesa-based bank (Nasdaq: PMBC) ticked up to $3.9 million, or 17 cents a share, compared with $3.8 million, or 17 cents, in the same period a year earlier.
“Our success in reducing our reliance on higher-cost funding sources has helped us effectively manage our deposit costs and generate favorable trends in our core net interest margin,” Chief Executive Tom Vertin said in a statement.
The reluctance of the bank to meet market interest rates meant deposits contracted as two large depositors shifted funds, Bohlen said in her report.
In the four days following the announcement, shares were flat around $8.23. Shares have been declining from a high of $10.25 since Sept. 14 when Irvine-based Carpenter & Co., its largest shareholder, announced it would sell its 7.42 million shares in a block trade for $8.25 each. The bank had a $180 million market cap last week.
