The coronavirus pandemic caused Pacific Premier Bancorp, the largest bank headquartered in Orange County, to do something it rarely does—modify existing loans.
“We typically do not do loan modifications or loan workouts,” Chief Executive Steve Gardner told analysts after reporting first-quarter results.
“As the crisis unfolded, we understood that approach would need to change.”
The stocks of six publicly traded banks based in Orange County lost anywhere from a third to a half of their market value during March on investor fears that the coronavirus would cause massive defaults in loans.
Shares for most have partially rebounded since then, although stock prices for all remain below where they were at the onset of the year.
Thus far, the banks say they are managing requests for deferments from their customers, and are not yet reporting massive defaults.
However, they are preparing for bad times by reporting a new metric called current expected credit losses (CECL).
The new accounting standard, which some banks are beginning to implement, is to estimate debt unlikely to be recovered; it aims to fill a gap in financial reporting that was not available during the 2008 financial crisis.
All six banks increased their expected credit or loan losses by at least 10%.
The banks also reported they are heavily involved in the federal government’s Paycheck Protection Program (PPP), which provided almost interest free loans to small businesses.
Here is a summary of what the six banks said during their most recent first-quarter reports.
PPBI
Irvine-based Pacific Premier (Nasdaq: PPBI) suspended its share buyback program and moved about three-quarters of its 737 employees to work remotely.
The biggest change was agreeing to modify loans, which could be as high as 20% of its $8.65 billion portfolio of loans.
Gardner also made clear that assistance comes with a caveat.
“We are sharing our expectation that our full banking relationship needs to be with Pacific Premier so that we can better help them in the future,” he said.
Gardner also reinforced his reputation for both foresightedness and telling weaker customers to look elsewhere for loans.
“While the emergence of a global pandemic to this extent has little precedence and is truly a black swan event, recessions are not,” he said. “They are a normal part of the business cycle, and we have been expressing our concern about the length of the economic expansion for the past two years.
“For the past several years, we were able to exit credits that we felt have the potential for deterioration in a weakening economy. We did this through a number of steps, including loan sales and encouraging borrowers to seek refinancing elsewhere.”
The bank estimated its total allowance for credit losses rose to $127 million, up 226% from $39 million on Dec. 31.
In the PPP program, the bank processed 2,090 loans, representing $809 million during the first round of funding. It has another approximately 1,736 requests in its queue.
Pacific Premier’s report was good enough for Keefe, Bruyette & Woods analyst Jacquelynne Bohlen to increase her annual guidance to $1.38 a share this year from a prior estimate of 95 cents.
In the two trading sessions after its April 28 report, its shares rose 8.2% to $21.48. Last week, they traded around $19.75 and a $1.2 billion market cap. Its shares are off about a third from their 2020 peak.
OPB
Despite the pandemic, Pacific Premier is still working to acquire Opus Bank (Nasdaq: OPB), a deal slated to be completed on June 1. Last week, the shareholders of both companies approved the acquisition.
Opus reported a first-quarter loss of $84.8 million, which looks worse than it actually was—as do most companies before they are acquired—because Opus recorded a variety of charges such as a $96.2 million noncash goodwill impairment charge to reduce its goodwill by 29%.
Excluding the charges, Opus reported net income rose 8.9% to $13.4 million.
“Despite the rapidly evolving COVID-19 pandemic that has affected us all, we were pleased with our first quarter performance,” CEO Paul Taylor said in a statement.
Shares of Opus, which trade in a range linked to the pending acquisition by Pacific Premier, rose 8.2% to $19.28. As of press time, they were around $17.64 and a $641 million market cap. Its stock price is off by about a third from the start of the year.
BANC
Citing charges for the pandemic, the Santa Ana-based Banc of California Inc. (NYSE: BANC) reported an adjusted loss of 16 cents a share, well below the 5-cents profit expected by analysts.
“The timing of the pandemic is unfortunate, as Banc is just starting to hit stride,” Raymond James analyst David P. Feaster Jr. wrote in a report. He reduced his 2020 forecast to a loss of 15 cents per share from a prior prediction of a 38-cents per share profit.
Like other banks, executives saw a surge in requests for deferments.
“We want to be careful in not granting more deferrals than we needed to, just because people ask for it,” Chief Executive Jared Wolff told analysts.
“I think there are a lot of people who would take advantage and get a deferment if they could. But we’re happy to give a deferment to our borrowers if they need it.”
He also added that the bank’s decision to shrink and de-risk its balance sheet last year “could not have come at a better time.
“As a result of these efforts, we enter this period of uncertainty with high levels of capital and a well-underwritten credit portfolio, predominantly secured by Southern California real estate with relatively low loan to values,” he said.
The bank participated in the PPP, where it estimated helping clients save over 8,500 jobs through pending applications or approvals for more than $270 million in funds. The bank said it expects to earn fees of just under 3% on the total amount of the loans.
In the week after its April 29 report, its shares fell about 9.7% to $9.73 and a $489 million market cap. Its stock is down by 40% since the start of the year.
FFWM
Irvine-based First Foundation Inc. (Nasdaq: FFWM) reported an adjusted profit of 32 cents share, a topping the 29-cents consensus. The bank also maintained its 7 cents a share quarterly dividend.
“We had a strong start to the year and remain confident in the long-term strength and stability of our company as we navigate the current conditions,” CEO Scott Kavanaugh said in a statement.
As of April 23, the bank processed over 200 PPP loans with a balance in excess of $110 million and predicted it would fund an additional 200 additional loans with a balance in excess of $50 million.
In the week following its April 22 announcement, its shares climbed as much as 33% to $14.36; last week they traded around $12.83 and a $573 million market cap.
PMBC
Pacific Mercantile Bancorp (Nasdaq: PMBC) reported a 10 cents per share loss as its non-performing loans increased 27% to $20 million in the quarter ended March 31.
One indicator of pending trouble: its 90-day past due loans climbed sevenfold to $3.8 million from Dec. 31.
It funded $243 million in PPP loans for 431 companies representing over 28,000 employees in aggregate. It also obtained approval for another $43 million in PPP loans for 192 companies representing over 4,200 employees.
“The efficiency of our PPP process has also resulted in new commercial clients coming to Pacific Mercantile Bank when their previous bank was unable to assist them in applying for these loans,” CEO Brad Dinsmore said in a statement.
Its shares fell about 15% after its April 30 report to about $3.40 and an $80 million market cap. Its stock price has fallen in half over the course of 2020.
CWBK
CommerceWest Bank (OTC: CWBK) reported first quarter net income fell 39% to $1.1 million. The big reason was a provision of $2.1 million for loan losses, a 16-fold increase from $130,000 in the same period a year earlier.
“The current global pandemic has impacted our economy and due to the uncertainty, we believe it is prudent to increase provision levels now,” founder and CEO Ivo Tjan said.
