Pacific Premier Bancorp Inc
NASDAQ:PPBI
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
20.83
29.94
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Pacific Premier Bancorp Inc
Earnings Call Analysis
Q3-2024 Analysis
Pacific Premier Bancorp Inc
In the third quarter of 2024, Pacific Premier Bancorp reported a net income of $36 million, equating to $0.37 per share. Despite strong earnings, there was a notable reduction in total revenue, which fell to $149.8 million, driven primarily by a decrease in net interest income due to increased funding costs and lower loan balances. The net interest margin also compressed, narrowing by 10 basis points to 3.16%.
The increased cost of funds rose to 1.97%, while nonmaturity deposit costs also went up by 10 basis points to 1.27%. The company expressed cautious optimism, suggesting that they may have hit a peak in deposit costs during the third quarter, anticipating a stabilization or slight drop in the fourth quarter.
During the quarter, total loans held for investment shrank by $454.9 million, reflecting a trend of early payoffs, particularly in the Commercial and Industrial (C&I) sector. For the upcoming fourth quarter, management projects loan balances to end between $11.75 billion to $12 billion, suggesting a potential rebound in lending activity as borrower sentiment improves due to favorable interest rate expectations.
The bank's capital ratios showed positive trends, with the tangible common equity ratio increasing by 42 basis points to 11.83%. Strong capital levels, along with improved deposit trends, position the bank favorably for strategic growth opportunities as they approach 2025. Management highlighted their intention to utilize these solid capital ratios to drive loan production and enhance shareholder value.
Looking ahead, the bank expects net interest income for the fourth quarter to be in the range of $120 million to $125 million, with noninterest income anticipated to approximate $19 million. This guidance reflects an optimistic outlook on stabilizing deposit costs and renewed loan production efforts. Notably, they foresee a potential 125 basis point rate cut which they believe will positively influence borrowing activity.
Pacific Premier's leadership emphasized an aggressive approach towards capturing market share in the upcoming year, fueled by enhanced client relationships and new hires in their loan production capability. With ongoing interest in potential mergers and acquisitions, management is open to strategic transactions that would further bolster the bank's long-term value for shareholders.
The bank reported solid asset quality, with nonperforming loans down by $13 million to $39 million. The ratio of nonperforming assets stood at a healthy 0.22% of total assets. This reflects a consistent commitment to proactive credit management, which has historically positioned them favorably against industry averages.
You don't have any saved screeners yet
Good day, and welcome to the Pacific Premier Bancorp Third Quarter 2024 Conference Call. [Operator Instructions]. Please note today's event is recorded.
I would now like to turn the conference over to Steve Gardner, Chairman and CEO. Please go ahead, sir.
Very good. Thank you, Rocco. Good morning, everyone. I appreciate you joining us today. As you are all aware, we released our earnings report for the third quarter of 2024 earlier this morning. We have also published an updated investor presentation with additional information and disclosures on our financial results. If you have not done so already, we encourage you to visit our Investor Relations website to download a copy of the presentation and related materials. I note that our earnings release and investor presentation include a safe harbor statement relative to the forward-looking comments, I encourage each of you to carefully read that statement.
On today's call, I'll walk through some of the notable items related to our third quarter performance. Ron Nicolas, our CFO, will also review a few of the details surrounding our financial results, and then we will open up the call to questions.
We delivered solid results in the third quarter as we generated earnings of $36 million $0.37 per share. As a result of our business development team's consistent efforts to generate new business while deepening existing client relationships. Noninterest-bearing deposits increased during the quarter and comprised 32% of total deposits at quarter end. We leverage these positive core deposit trends to further reduce higher cost wholesale funding sources by decreasing brokered deposits by $184 million and repaying a $200 million FHLB term advance.
The prolonged higher interest rate environment impacted our average cost of deposits, which increased to 1.84%. However, our spot deposit cost at quarter end were 1.80%. Overall, our funding costs remain low on a relative basis compared to our peers, and we are confident in our ability to reprice deposits downward assuming further decreases in interest rates. Our loan portfolio during the quarter as we saw elevated loan payoffs in particular in the C&I portfolio as our clients utilized excess liquidity to reduce debt. This factor reflects in part the high-quality nature of the businesses we attract to the franchise. This dynamic has impacted both sides of the balance sheet for the past few quarters. However, we expect this pressure to diminish as we move through the rest of 2024 and into next year.
During the third quarter, our capital ratios increased meaningfully from June 30 as the tangible common equity ratio increased 42 basis points to 11.83%. Our CET1 ratio increased to 16.83%, and our total risk-based capital ratio ended the quarter at 20.05%. On a year-over-year basis, our total risk-based capital ratio increased 231 basis points, and all of our capital ratio is ranked near the top of the industry. As we enter 2025, the strength of our capital levels leaves us well positioned to take a more aggressive approach in pursuing opportunities to prudently gain market share and drive new business to the bank.
Deposit trends during the third quarter improved, and we do not expect significant volatility in deposit flows for the remainder of the year. We saw nice increases in important deposit categories in the third quarter, and it appears that pressure from clients seeking higher returns for excess liquidity is easing. Today, as we look at our level of core deposits, we are optimistic we have reached an inflection point where balances can grow from a year, which gives us confidence to pursue attractive risk-adjusted loan origination opportunities that will further diversify our portfolio.
As of September 30, our loan-to-deposit ratio stood at 83.1%. And together with nearly $1 billion of cash on hand, we have significant capacity to bring new credits onto the balance sheet. In regard to pricing, we believe that deposit costs may have peaked during the third quarter, and Ron will provide some additional detail in his comments regarding our fourth quarter outlook.
Our long-standing philosophy has been that franchise value is created through deep client relationships, which is reflected in our strong deposit base. And to that end, it is important to note that the average length of our client relationships is over 13 years. It is a testament to the level of service our bankers provide to our clients and the trust our customers have and Pacific Premier that we have been able to increase average client tenure while maintaining pricing discipline.
In our specialty business lines, we continue to enjoy success generating new client relationships in HOA and Trust. And with the prospect of lower interest rates, we anticipate increased activity in our Escrow and Exchange division as the volume of commercial real estate transactions increases.
Although our loan portfolio attracted during the quarter, recent client conversations have provided optimism for increased loan demand beginning in the fourth quarter. Borrower sentiment has modestly improved as the interest rate outlook has become more favorable, with more clients considering potential capital investments.
Recently, we have taken -- making a number of steps to positively impact our loan portfolio through new originations and loan retention. And as such, our loan pipeline has continued to expand as we have moved through this month. First, in mid-summer, we made strategic pricing adjustments to improve our competitive position in the market. Second, we have added new relationship managers to drive commercial loan production. Third, we dedicated additional resources and improved processes around production and loan retention. Lastly, our bankers are continuing to proactively reach out to existing customers to deepen relationships and manage portfolio balances.
In advance of scheduled loan maturities and interest rate resets. As we look to the fourth quarter of 2024 and beyond, we've adopted a more constructive posture focused on deploying our excess liquidity and capital toward gaining market share and growing the loan portfolio. I'll note our perspective is predicated on macroeconomic factors that have fueled lingering uncertainty will continue to subside, namely interest rate volatility in the upcoming election.
Asset quality was solid as nonperforming loans decreased $13 million from the prior quarter to $39 million. The favorable third quarter results were a continuation of our long history of outperforming industry averages as nonperforming assets decreased to 0.22% of total assets and delinquencies fell to 0.08% of loans.
To be successful in our approach, we must maintain open lines of communication with our clients regarding their financial status, liquidity and market dynamics, all of which inform our process for managing individual credits. Our proactive approach to credit risk management continues to serve us and our stakeholders well as our asset quality measures are some of the strongest in the industry.
With that, I'll turn the call over to Ron to provide a few more details on our third quarter financial results.
Thanks, Steve, and good morning. For comparison purposes, unless otherwise noted, my remarks are on a linked-quarter basis. Let's start with the quarter's financial highlights. Third quarter net income totaled $36 million or $0.37 per share, and our return on average assets and average tangible common equity were 0.79% and 7.63% respectively. Notably, our return on average tangible common equity continues to be adversely impacted by our high levels of capital. Total revenue was $149.8 million and noninterest expense was $101.6 million, resulting in an efficiency ratio of 66.1% and pre-provision net revenue as a percentage of average assets of 1.06%.
The quarter's results were influenced by a smaller balance sheet as well as narrowing of the net interest margin largely attributable to rising funding cost momentum from earlier in the quarter. Taking a closer look at the income statement, net interest income decreased to $130.9 million primarily as a result of higher cost of funds as well as lower loan balances.
On the funding side, cost of funds increased to 1.97%, while earning asset yields remained flat, which resulted in a third quarter net interest margin narrowing 10 basis points to 3.16%. Our average nonmaturity deposit costs rose 10 basis points to 1.27%. However, the spot cost of nonmaturity deposits was 1.26% lower than the quarterly average.
Notably, we are cautiously optimistic that the third quarter represents a peak in deposit costs, and we see fourth quarter deposit costs holding flat to down slightly. On the earning asset side, we saw a 1 basis point increase in average loan yields to 5.31% and overall earning asset yields were 4.96% compared with 4.97% in the prior quarter.
Our swap portfolio contributed 16 basis points to the net interest margin consistent with the prior quarter. As of September 30, we have $800 million of notional swaps remaining with $500 million maturing during the fourth quarter. With our current rate expectations, we anticipate approximately $3 million to $4 million of swap income for the fourth quarter. We are actively monitoring market interest rates and anticipate 125 basis point rate cut in our fourth quarter guidance. We anticipate the fourth quarter net interest -- toward repricing of variable rate loans, a lower SOFR-based swap income contribution as well as lower average loan balances. As a result, and highlighted in our investor presentation, we anticipate net interest income to be in the $120 million to $125 million range. We will also provide updated guidance for the full year 2025 during the January earnings call.
Noninterest income of $18.9 million increased $645,000 from the prior quarter driven by a $748,000 increase in other income attributable to higher CRA investment income and a $203,000 gain on debt extinguishment resulting from the early redemption of the $200 million FHLB term advance as we continue to pay down higher-cost funding. For the fourth quarter, we expect our total noninterest income to approximate $19 million.
Noninterest expense was $101.6 million, representing an increase of $4.1 million compared to the prior quarter, which included a $4 million legal loss recovery. Personnel costs remained relatively flat as we ended the quarter with headcount of 1,328 compared with 1,348 as of June 30. Our expectations for the fourth quarter are for noninterest expense to be flat in the range of $101 million to $102 million as we continue to tightly manage our expense base. Our provision for credit losses of $486,000 decrease compared to the prior quarter, commensurate with the smaller loan portfolio and our current asset quality profile. While we have not seen any meaningful deterioration in asset quality, we continue to actively monitor our portfolio risk concentrations.
Turning now to the balance sheet. We finished the quarter at $17.9 billion in total assets as the reduction in wholesale funding sources were effectively matched by lower loan balances during the quarter. Total loans held for investment declined $454.9 million, driven principally by early payoffs and lower loan production of $104 million. Our C&I line of credit balances at September 30 were $743.1 million and the utilization rate was 40.2%, compared with $896.4 million outstanding and a 39.4% utilization rate at June 30.
The loan runoff experienced in the third quarter has continued early into the fourth quarter. Consistent with our proactive approach to credit risk management, we exited our single largest client relationship early in the fourth quarter. However, as Steve noted, we continue to build the loan pipeline, and our optimistic loan balances will end the year between $11.75 billion and $12 billion.
Total deposits at September 30 were $14.5 billion, a decrease of $146.7 million from the prior quarter, primarily as a result of maturity and payoff of higher-cost broker deposits. Non-maturity deposits remained relatively flat as growth in noninterest-bearing deposits of $23 million offset some of the decrease in interest-bearing nonmaturity deposits of $52 million. Of our remaining $300 million of broker deposits, $200 million matures in the second half of 2025 and the remaining $100 million in March of 2026.
From a liquidity perspective, we saw our cash position increase to $983.5 million at September 30, reflecting the stability in nonmaturity deposit balances compared to June 30. We would anticipate our cash position coming down some as we begin to ramp up lending and reinvest excess cash into securities. Our cash position as well as strong cash flow from our securities portfolio and the almost $9 billion of unused borrowing capacity provides us a total of $10 billion of contingent liquidity.
The securities portfolio remained flat at $3.1 billion, and the average yield on our investment portfolio was 3.67%. During the quarter, we reinvested $100 million of proceeds into 3-month treasuries with a weighted average yield of 5.05% and the duration on the AFS portfolio remained less than 1 year at September 30.
In the fourth quarter, we anticipate continued reinvestment of our cash flow from maturing securities and our overall position to increase slightly. We also anticipate some minor duration extension to take advantage of recent higher long-term rates while maintaining relatively overall a short position in our AFS portfolio in anticipation of loan growth. The combination of solid earnings and a smaller balance sheet further strengthened our capital ratios this quarter with all ratios increasing significantly from June 30. The tangible common equity ratio increased 42 basis points to 11.83% and our tangible book value increased $0.23 to $20.81.
Lastly, from an asset quality standpoint, Nonperforming loans to total loans were 0.32%, a decrease of 10 basis points from the prior quarter. Total delinquency also decreased to 0.08% and our classified loan levels decreased $63.3 million or 47 basis points to 1.0% of total loans. Our allowance for credit loss balance of $181.2 million reflected the smaller loan portfolio and resulted in a 4 basis point increase in the allowance coverage to 1.51%. Our total loss absorption, which includes a fair value discount on loans acquired through acquisition finished the quarter at 1.80%.
With that, I will turn the call back over to Steve.
Great. Thanks, Ron. I'll wrap up with a few comments about our outlook. As I mentioned, we've recently added new loan producers who we expect will capitalize on market disruption within our footprint and will positively impact our loan production capabilities. In terms of capital allocation, in the near term, our focus is to redeploy excess liquidity into more loans to drive earnings and tangible book value growth in future periods. Additionally, given our high levels of capital, we have substantive optionality relative to capital management and are committed to returning capital to shareholders. As always, we are considering the full spectrum for capital deployment options in order to maximize value for our shareholders.
On the M&A front, we remain open to a broad range of strategic transactions that will maximize long-term value for our shareholders. As we look to 2025, we are encouraged by improving borrower sentiment and are in the right position to move to a more offensive posture as we continue to build our loan pipelines. In short, our peer-leading capital ratios and strong deposit and liquidity position creates significant optionality for our organization to pursue organic and strategic growth opportunities that will enhance long-term franchise value.
On behalf of the Board of Directors and our entire executive leadership team, I want to thank every one of our team members for their dedication to Pacific Premier and I'm excited about our prospects for future success.
That concludes our prepared remarks, and we would be happy to answer any questions. Rocco, we please open up the call for questions.
[Operator Instructions]. Today's first question comes from David Feaster with Raymond James.
I wanted to start out with the loan growth side. It sounds like things are starting to stabilize here. You talked about some -- a big relationship that you exited here in the fourth quarter, but your demand starting to improve and you're being a bit more competitive with pricing to drive growth. I'm just curious how do you think about the growth trajectory as we look forward into 2025? Where do you see the most opportunity for growth? And given the more competitive pricing that you alluded to, where are you seeing new loan yields?
It's predominantly in the C&I. We're also seeing a couple of opportunities on the construction front, we're starting to ramp up a little bit in the SBA side. And so it's broad based, but it's generally away from, call it, the multifamily, even though that asset class has performed exceedingly well for 2 to 3 decades here. Just given the yields on those loans and our overall concentration, we're really not looking to expand that area greatly, but we're not looking to reduce it materially either. So it's really in the various areas, but our core focus remains in the C&I space.
And then additionally, earlier in the year, we made some modifications to become a bit more competitive on the consumer front, at least in our HELOC offering. I think as everybody is well aware, we do not offer nor do any kind of mortgage banking activities. But we do see some opportunities to grow that HELOC area as well as loan purchases. So I think collectively, all of those areas and given that incrementally improved environment with our borrowers and existing clients, we're pretty encouraged about the outlook, and that's been reinforced by some very nice growth in the loan portfolio over the last couple of months.
Okay. That's great.
I meant the pipeline, excuse me.
Yes. No, I know, it's great. And then just broadly, you just -- you talked about the peer-leading capital that you've got and that providing you a ton of optionality just from a strategic standpoint. I'm curious if you could touch on some of those opportunities and the time line to potentially act on some of those. You just touched on some fill purchases I'm just curious maybe what's most attractive to you at this point from a priority perspective and what maybe the time line to potentially start out on some of those?
Sure. I think that first and foremost is maintaining the current dividend, something that the board reassesses of course, every quarter and taken -- we think through where we're going from an earnings standpoint. And we think that, that begins to inflect as we move into early 2025, obviously, earnings have declined here over the past several quarters as we've taken a relatively conservative posture towards growth in the balance sheet.
But certainly, as deposits have stabilized, that's allowed us to virtually eliminate all of the wholesale funding, something that we utilize defensively since 2022 from managing interest rate risk as well as the disruptions that occurred last year in building liquidity. But historically, we haven't used wholesale funding to ever grow the balance sheet. And I think we're much more constructive today given the fact that we've virtually paid off all of that wholesale funding, which, of course, is very expensive.
And so we're looking at the dividend, looking to really grow the balance sheet, drive the earnings from here going forward, in particular, redeploying that excess liquidity we have in cash in the securities portfolio. into loans. And those remain our priority. Of course, the Board is consistently reassessing other options for the use of capital. We've talked about it in the past some tactical areas of potential balance sheet repositioning. We continue to assess and analyze those and think about the pros and cons on each side certainly, interest rates play a big impact there. And given the outlook from the FOMC of declining interest rates here or at least on the [ HELOC ] side over the next several quarters, that influences how we think about any of those options, but we'll continue to reassess them.
And then lastly, of course, we have a sizable repurchase plan in place. which we have not executed on for a couple of years. I think as we gain greater clarity, it's certainly something that the Board is going to be taking a closer look at going forward.
That's great. And then just last one for me. You talked about some new hires. I'm curious your appetite for new hires currently, where you're seeing the opportunities? And where you're focused on, both, I guess, by geography? Is there a specific segment that you're focused on. Just kind of curious what you're seeing there?
I think, David, always we've thought about consistently upgrading talent where we can and where we can bring individuals on that have significant relationships with quality small businesses, middle market clients or in particular, specialty areas, be it construction, SBA or other areas, we're going to consider those individuals. And so we're regularly reassessing the strength of the team, which I think is overall very solid but there's always opportunities to upgrade and we're continually assess those.
I would generally say it's not specifically focused on geographic. It's really just bringing on talented individuals that can have a meaningfully positive impact on the organization.
And our next question today comes from Matthew Clark at Piper Sandler. Please go ahead.
Good morning. Maybe first one for Ron on the swap revenue this quarter. Could you give us that amount?
Yes. It's going to be in the range of $3 million to $4 million level, Matt.
For next quarter, but what was it this quarter?
This quarter, it was just under $7 million.
Okay. And then any appetite to buyer in some more swaps to help mitigate that downdraft here in 4Q?
Well, unfortunately, I think the interest rate bias is going in the other direction. So the likelihood that you'll be able to do anything to mitigate in terms of swaps, sulfur-based swaps is somewhat limited at best. And however, I will tell you that we have -- of the remaining swaps, we have 3 long positions, long in terms of time that are what I would consider to be fairly profitable, the weighted average cost of those 3 positions is under 1 point strike price. So we're going to be seeing still some decent revenues on a relative basis with those 3 positions going forward.
Okay. And then, Steve, why didn't you do a large kind of loss trade this quarter? Did you have to wait a year after doing one in last year's fourth quarter? Was that part of the -- maybe part of the reason why you didn't trigger one?
No, not necessarily, but that's -- we look at the broad spectrum of factors and take into consideration what we're thinking about there. So and you're balancing it between the impact to tangible book value upfront, what that potential payback period is. And then how interest rates play into that, where you could redeploy that cash? What are the other options. So we're continuing to think about it but it's obviously very dynamic as we consider the current environment.
Okay. And then just on the dividend, you have a ton of capital. It sounds like you want to maintain the dividend here. Do you have to earn the dividend necessarily? Or do you think because you have all that capital even if you don't earn it in the upcoming quarter, still should be okay?
Yes. I think, of course, that will be a decision for the Board, but the way I think about it is that if earnings were rather the dividend payout ratio was above 100%, just given the very strong levels of capital we have, our asset quality, all of those factors I'd certainly be confident in continuing to maintain that dividend at its current level.
Okay. And then just on C&I loans, I think if you look at the peak to trough there, they're down about 43%, just kind of the true C&I, not the franchise stuff. I know a lot of liquidity downs have been part of that. But can you maybe slice and dice how much you would attribute to just borrowers using excess liquidity to pay down? How much of it might have been deliberate? And then how much might have been just maybe losing some market share? And then just as a follow-on, some of the hires you made, can you give us a sense for how many and whether or not those are all C&I lenders or some -- most of them in kind of the books of business they have coming from the prior banks that they were at?
Sure. I don't have the exact number in front of me here. We can see if we've got that available and get back to you. But I would tell you that a substantial portion of the payoffs and pay downs we've seen are from borrowers pulling liquidity out of the capacity. And when you think about it, it's pretty straightforward. We don't pay a high rate on money market and noninterest-bearing have been very high for a long period of time. They've come down somewhat, but from the other side of the balance sheet, which has certainly negatively impacted us on both sides because those C&I credits along with other adjustable rate loans that we've seen pay off and pay down are our highest yielding. And that's a bit frustrating. But at the same time, it really owes to the high-quality nature of who we bank.
I would say that very little of it is attributable to clients moving to other organizations. We haven't seen -- we had seen following the disruptions last year with Silicon Valley, First Republic to a lesser extent, signature in the ongoing turmoil clients that had substantial balances move some of that out into treasuries, money market accounts for higher yields and even to some of the larger banks, which again is a bit frustrating, but was just part and parcel with what was going on.
Again, as we talk to those clients and then what they're thinking was, how many of them told us, look, I'm not moving my relationship to any of the largest banks. In fact, that's where I came from. And I love the service. I'm going to maintain it, but I've got to -- for peace of mind, I'm going to diversify for higher yield, I'm going to move some of the money out.
So I think that over time, that money will be returning. The producers are across the board. I think I mentioned some folks that are focused specifically on the SBA sector, construction and then some of the C&I folks, we're always looking for experienced relationship managers that do have a book of business. And are going to positively impact the institution, and that's exactly the kind of folks that we've hired here over the last few months.
And our next question today comes from Gary Tenner at D.A. Davidson.
I appreciate the additional outlook commentary for the fourth quarter. And Steve, I know you've talked about an earnings inflection in, say, early 2025. Given the commentary on kind of where you think your end loans finish up and what I assume is at least a partial quarter carryover of the slight maturity impact. Does NII -- is there a way do you think of stabilizing NII in the first quarter? Or is that likely a 2Q event or beyond?
Ron, why don't you go ahead and take it.
Sure. Sure. Yes, Gary. Yes, what we've seen, I think what we've tried to highlight here is we've seen the liability costs, which is largely driving the squeeze. Steve talked a lot already about the loan balances, and we do believe that we're somewhat optimistic that this quarter is going to be the trough for -- this being the fourth quarter, the trough for the loan balances. On the NII, we're also cautiously optimistic that we're going to be able to manage down that cost of deposits. It will be a little bit slower, but we think we're going to be able to deal with that and hopefully stabilize that NIM, the net interest margin, if not this quarter is certainly in the early part, first quarter of 2025 and then obviously, build back from there with the momentum that we've talked about already on the loan pipeline and continuing to deploy the excess liquidity and capital we have available to us.
So that's the plan. We see the trends we're seeing, as we've talked about, are certainly favorable in that direction. Obviously, we're going to have to execute against it. We're going to have to see how it plays itself out. As you would well know, there's a fine art between the managing that deposit costs down and managing and retaining those balances and growing those balances. So we'll see how that plays itself out. But we're, again, cautiously optimistic we can execute.
Yes. I think also too, Gary, as we think about just the trough on the net interest income, and part of that is really just the timing here. The pipeline has built nicely and it's a matter of moving that through and getting the team really back in their groove to move these loans through to the appropriate underwriting and analysis but get them to the point of closed and funded so that we're earning on those balances, and that just takes time. So depending upon when and how much that production pulls through here in the fourth quarter is naturally going to impact that net interest income.
Got it. And Steve, you did provide a kind of thoughts around kind of the phenomenon of the C&I customer kind of deleveraging their balance sheets and impacting both sides of the PPBI balance sheet. Just going back to kind of your commentary, I think, back over the summer as it relates to kind of balance sheet stabilization over the back half of the year. Is that the only factor that do you think push out that stabilization a little further than you maybe otherwise expected?
I think we were a bit surprised at the strength and level of payoffs in the third quarter. As we said, we had this large credit that we managed out and it's disclosed in our K., that commitment was close to $400 million on outstandings we're in the neighborhood of about $200 million, and that paid off here in early October.
So I think just the level of payoffs and then a bit of the muted demand, we thought that demand might be a bit stronger, but we really started to see some a bit more optimism from clients. Once the Fed dropped the Fed funds by 50 basis points, then indicated that they were really looking to remove the level of tightness it exists in monetary policy. And so I think all of those things and then maybe once we get through the election, just to get that behind us as we're talking to clients, I think, are all a catalyst here and that we're encouraged by.
And our next question today comes from Andrew Terrell with Stephens.
Steve, I wanted to go back to -- you made a comment in discussing some of the potential for balance sheet repositioning efforts just around the Fed and the outlook they have for declining interest rates over call it, the next several quarters? I think you said that influences how you think about the options that you have to restructure. How exactly does it influence it? Does it influence it? Does it make you more likely or less likely to reposition?
I think it's -- I don't know that it influences it one way or another. We're constantly assessing what is the cost upfront, the impact in essence, the loss that you would take and the impact of tangible book value. And then what is that earn-back period of time. What other kind of optionality might give you to redeploy that into really what our core business is, which is lending. It's not in managing securities book. And frankly, if you take that strategy, to an extent, making a bet on future rates.
So it's taking it all into consideration as well as our capital level options that we may have. And how do they play into any kind of strategic things that we might be pursuing and I think as everyone is well aware. The Board and management are open to any type of transactions that are going to -- that is going to maximize long-term shareholder value. So it's weighing all of those differing dynamics and aspects to whether you pursue one thing or another.
Yes. Okay. Makes sense. If I just look at kind of the 4Q guidance kind of at the midpoint and maybe a little step-up in provision would imply that you are -- you would earn kind of less than the quarterly dividend, totally understand the comfortability with the dividend, especially given how robust the capital position is. But is being above 100% payout ratio even for a short time frame, does that preclude you from potentially buying back stock until you kind of get back to a sub-100 payout ratio?
Not that I'm aware of. I don't believe there are any regulations in that regard. Again, there's a number of factors that play into buying back stock from the Board's perspective in the outlook, but I don't believe there's any regulatory limitations.
Yes. I was just working up philosophically.
I think philosophically, what you're looking at is a whole host of things. What's your outlook from an asset quality standpoint, from an earnings standpoint, how quickly are you going to get back to earning that dividend and exceeding it, a number of factors are taken into consideration. But again, when you look at really the strength of our asset quality, kind of maybe a bit of an improving outlook at least removing some levels of the uncertainty here, things that we've talked about around the election, Fed funds coming down, all of these things, we're pretty comfortable with where we are and are committed to the dividend. But again, that's something that the Board will consider and think through and ultimately make the decision on.
Yes. Okay. Makes sense. I appreciate it. And if I could sneak one in for Ron, maybe I'm looking at Page 15 of the investor presentation. You guys called out the spot yield on the securities portfolio of 3.55%, 12 basis points or so below the quarterly average despite some decently high yielding purchases during the quarter. I'm just curious, is there any noise in that number? Or is that reflective of maybe the move down? And so far, we saw throughout the quarter. And I think you might have some unloading grade bonds. If you could just remind us the exposure you have to floating rate securities?
Yes. There is probably a little bit of noise in that spot rate versus the average there. We've got a few led dividends that have a tendency spike the realized rate, it will -- the realized yield versus the spot yield on that. As far as the floating rate, I'm trying to recall off the top of my head, I'll get back to you on that. It's a smaller percentage of the overall portfolio. But I think of the AFS portfolio, it's obviously well, it's a smaller percentage of the overall portfolio. Let me leave it at that, and I'll get back to you on the percentage in particular.
And our next question comes from Chris McGratty at KBW.
Real quick, I guess, Steve, Ron, on the potential loan purchase, if there was appetite for purchases. But what kind of assets are out there. Are they complementary to existing portfolios, niche portfolios? Just in kind of who the seller of the assets might be?
There's a wide variety of portfolios that are out there, Chris, you could talk to some of your colleagues, I think, in the firm. And they are from a broad spectrum of entities from traditional commercial banks more consumer-oriented banks and then a lot from the fintechs that we can't quite figure out the decision-making on how they're doing that. So that doesn't seem to fit with our philosophy.
But it's a pretty broad spectrum. Whether it's single-family HELOC on the consumer front, there's various C&I portfolios out there. There's commercial real estate, multifamily and the like. But as I said, we're really not looking to expand the multifamily segment much there's participations, there's shared national credits. All of them have a diverse level of risk and return and always we would do very thorough and complete diligence to ensure it meets our risk-adjusted return thresholds.
Thank you and that concludes our question-and-answer session. I'd like to turn the conference back over to Steve Gardner for closing remarks.
Great. Thank you, Rocco, and thank you, everyone, for joining the call today.
Thank you, everyone. That concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.