Q4 2020 Pacific Premier Bancorp Inc Earnings Call
Good day and welcome to the Pacific Premier Bancorp fourth quarter 2020 conference call all participants will be in listen only mode. Because you need assistance. Please signal a conference specialist by pressing the star Keith followed by day route.
After todays presentation, there will be and opportunity to ask questions.
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Please note this event is being recorded.
I would now like to turn the conference over to Steve Gardner Chairman President and CEO. Please go ahead.
Thank you Allie and good morning, everyone. I appreciate you joining us today.
And we're all aware earlier. This morning, we released our earnings for pork for the fourth quarter of 2020.
We have also published an updated investor presentation that we will be speaking to today.
If you have done and done so already we would encourage you to visit our investor relations website to download a copy of the presentation.
In terms of our call today, Ron and I will present, our prepared remarks, and then we will open up the call to questions.
I know you did.
And in our earnings release, and Investor presentation that we have our safe Harbor statement relative to the forward looking comments.
Which had been expanded and I would encourage all of you to read through those carefully.
Thank you Louis and like the current COVID-19 pandemic and.
And how it may impact our business financial condition and results of operations.
I'm going to start on slide six for the presentation.
Our fourth quarter performance capped and extremely productive year for the company.
Throughout 2020, while dealing with unprecedented challenges, we were able to accomplish a number of significant initiatives.
We completed our largest acquisition to date, including the integration system conversion and branch consolidations and a short timeframe.
We launched our PPP program and funded more than one $3 billion and loans.
And then eliminated the burden of managing the loan forgiveness process by selling the loans and accelerating the revenue recognition.
And we designed and implemented a thoughtful loan modification program that assist and borrowers impacted by the pandemic, while effectively protecting the bank's interests.
Our strong culture of performance and accountability and one that strives for continuous improvement has never been more important than it was in 'twenty and 'twenty.
Our team consistently over delivered for our clients communities, our stockholders and for all stakeholders.
On behalf of the board of directors and so I wanted to express our appreciation for the extraordinary efforts of our entire organization.
Turning to our fourth quarter results, we delivered strong performance that reflects our improved earnings power.
We generated a return on average assets and average tangible common equity.
Exclusive of merger related expenses of one point for 1% and 17, 2% respectively.
Which should improve further as economic conditions strengthen and we were able to drive more loan growth and operating leverage.
In October we completed the system conversion and consolidated 20 branches and made the final adjustments to staffing levels and our cost savings from the transaction continue to run ahead of expectations.
With these final integration items behind US, we were able to shift more of our focus towards business development.
During the fourth quarter, we saw a significant increase and business.
We originated $911 million and loan commitments that translated into $712 million and fundings and more than double what we produced and the prior quarter.
We are seeing attractive growth opportunities and most of our markets and from an on and anecdotal standpoint, we're seeing more clients starting to plan for increased economic activity and that's continuing to positively impact our loan pipeline.
So we're cautiously optimistic relative to our growth.
Obviously, there is still a great deal of uncertainty.
But we believe we are well positioned to perform regardless of the economic trajectory.
While we saw a significant increase in loan production and was not sufficient to offset elevated payoffs and a few strategic sales of lower rated credits.
As a result, our total loan balances declined by one 6% in the quarter.
While payoffs have been a headwind for loan growth, we do not expect loan sales to be as significant this year given the overall strong trends and our loan portfolio along with the greater clarity we have around future economic activity.
Our asset quality remains very strong.
And as stable to improving migration trends during the fourth quarter.
Our cost of deposits declined to 14 basis points during the quarter.
Which was primarily due to the repricing of higher cost deposits acquired through the Opus acquisition, along with growth in non interest bearing deposits.
Our ability to execute throughout the company as generate and greater amounts of capital.
And that has provided us with the opportunity to return increasing amounts of capital to our shareholders.
We recently announced a 50% increase and the size of our stock repurchase program.
And today, we announced we are raising our quarterly dividend of <unk> 30 cents per share.
On.
Seven and eight we highlight a comparison of the company to our Western bank peers on a number of important financial metrics.
And review our history of successful M&A.
We have consistently generated strong pre provision net revenue despite the pandemic.
Our organization has and expertise and track record of executing on all aspects of M&A to drive value for our shareholders and.
And it remains a core competency and a competitive advantage for the company.
We remain active and pursuing strategic transactions that will maximize long term shareholder value.
Slide nine summarizes our capital strength at both the bank and holding company.
All of our regulatory capital ratios exceed the well capitalized thresholds.
As an active acquirer and we have always been mindful to protect tangible book value and that is evident and the bar chart.
For tangible book value ended the year at $18 65, a share.
Higher than in the first quarter of 'twenty and 'twenty prior to the <unk> acquisition.
Our balanced approach to capital management provides us with a high degree of flexibility and positively impacts the total return that we generate for our stockholders.
On slides 10, and 11, we summarize our long standing approach to innovation and our ability to leverage technology as a key differentiator of Pacific Premier.
Our investments have positioned us well to handle the increased demand for digital banking solutions and are enabling us to meet the more complexity needs of larger commercial banking clients.
At this point I am going to turn the call over to Ron to provide some additional details on our fourth quarter financials.
Okay.
Thanks, Steve and good morning.
I'll pick up on slide 13, which illustrates the strength of our performance.
As illustrated here, we delivered a 48, 5% efficiency ratio.
And they pre provision net revenue return on average assets of 192%.
Our continued strong operating performance was demonstrated by the increase and net interest income.
And our lower noninterest expense excluding merger related costs.
Our pre provision net revenue continues to generate significant capital that supports our growth and capital management initiatives.
On slide 14.
We highlight the factors affecting our net interest margin, which was 361% in the fourth quarter of <unk>.
Seven basis point increase from the prior quarter and our core net interest margin came in at 332% up nine basis points.
As highlighted with our attribution waterfall chart.
The largest drivers of the increase were a lower cost of funds and higher fees due primarily to elevated loan prepayments.
And our cost of deposits decreased six basis points to 0.1, and 4% driven by the combination of lower repricing on interest bearing deposits and growth and our noninterest bearing deposits.
As highlighted on slide 15, our noninterest expense during the second half of 'twenty and 'twenty, excluding merger related costs extrapolates to 379 million annually less than the 390 million dollar expense run rate, we estimated at the announcement of the.
Opus transaction.
The remaining cost savings from the acquisition, we're fuller and fully realized during the fourth quarter of 2020 and post conversion actions have now been completed and as a result, our head count ended the quarter down 59 at 1000 and 477.
During the fourth quarter and recognition of these tremendous accomplishments of the entire team throughout the pandemic we.
We paid all employees other than senior executive managers, a special appreciation bonus which totaled $2 $4 million.
Our total loss absorbing capacity of $382 million or 2.86% of loans held for investment remains very strong as highlighted on slide 16.
This is comprised of an allowance for credit losses of $268 million.
Plus the remaining fair value discount on acquired loans of $114 million.
Our allowance for loans held for investment decreased from the prior quarter, although the ratio of ACL to loans remained above 2%.
The key drivers of the change were overall lower loan balances as well as the mix of the loan portfolio.
Conversely, our ACL for off balance sheet commitments increased from the prior quarter, driven by increases and unfunded funded commitments as well as composition.
Yes.
As highlighted on slide 17, our deposit base is diversified with two thirds residing in our traditional branches.
And the remaining third split amongst our very deposit businesses.
Our noninterest bearing deposits increased $115 million or 2% from the prior quarter and we continued to opportunistically run off our higher cost deposits, including retail and brokerage Cds.
Lastly, we summarize the composition of our investment securities portfolio on Slide 18.
During the quarter, we increased our available for sale securities portfolio to $3 93 billion redeploying some of our excess liquidity into highly rated AAA munis agencies and cmo's.
The yield on our securities portfolio remained stable at 1.72% and the duration decreased slightly to 5.0 years.
With our strong liquidity and our securities portfolio around 20% of total assets.
We will likely remain at this level, depending on our near term deposit trends and loan demand.
With this I'm going to turn the call back over to Steve.
Very good.
I'm not going to spend a lot of time on slides 20 through 24, which provide a lot of detail around credit trends.
Our loan portfolio is well diversified and performing at a high level.
And with the acquisition of Opus multifamily loans became our largest concentration.
This asset class has historically been one of the best performing in terms of risk adjusted returns owing in part to the housing shortage and the Western U S.
And the short and medium term, we expect multifamily will likely makeup of Sig.
And if he can portion of the portfolio mix.
Our asset quality metrics have remained strong throughout this volatile period.
Linked quarter loans nonperforming assets and classified assets all remained at very low levels and generally strengthened over the fourth quarter.
COVID-19, and temporary loan modifications declined significantly during the fourth quarter for <unk>.
6% of loans and there were no extensions of previously modified loans in process as of yearend.
On slides 26 through 30, we've included information to highlight some key areas related to our focus on social and environmental and governance matters.
And our culture is one that has consistently pursuing continuous improvement throughout the company.
Including ESG.
On slide 27, we highlight our commitment to corporate responsibility.
We have a long standing track record of accomplishment of investing our time and capital to help strengthen our communities and support organizations that foster diversity and economic inclusion.
During 2020, we began developing a framework for evaluating the environmental impact of our loan standards and assessing the risks within our loan portfolio related to climate change.
We are also evaluating the adoption of additional disclosure around sustainability accounting standards and methodologies.
On slide 28, we summarize the actions we implemented during 2020 and response to the pandemic.
This is not an exhaustive list as you can see we spent considerable time and resources on our employees' health and safety, while providing support to our clients and communities.
On slides 29 and 30.
And we highlight our governance structure.
Our board is composed of strong independent directors with diverse backgrounds and expertise and qualifications.
Board Refreshment is something we firmly believe that and since 2018, we have added for highly capable individuals.
Governance practices encourage thorough risk management.
Full engagement and transparency within the board and among executive officers.
We are equally dedicated to having a diverse board in terms of gender and ethnicity.
We recognize the value that accrues to our company by having a more diverse perspective on any number of matters.
And notably three of our nine independent directors are female.
As we enter 2021, our company has never been stronger more capable and ready to take advantage of opportunities to grow and expand both organically and through acquisitions.
We remain committed to building long term sustainable value for our shareholders. While further improving every aspect of our organization to positively impact all of our stakeholders.
While the ongoing pandemic continues to impact and near term environment.
And we feel optimistic about how we are positioned to maximize shareholder returns.
On behalf of the board of Directors I want to express our sincere appreciation to the women and men of Pacific Premier for their outstanding work in 2020.
With that we would be happy to answer a question you may have.
And could you. Please open up the call for questions.
And I will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
For all of your question. Please press Star then two.
Our first question today comes from Gary Tenner with D. A Davidson.
Thanks, guys good morning.
And a couple of questions.
And final question as it relates to 2021 loan growth and I guess.
You talked about the pipeline strengthening quite a bit I'm just wondering as you look out into the year.
For the early part of the year were what what loans segments.
<unk> offer and most opportunity for.
You're back to sort of grow loans and generate production.
I think Gary it's it's really across the board.
All of the various categories and why and cell is yes that we're in.
As we enter this year.
Pipeline as I mentioned has never been stronger a little over $1 billion.
On.
And our capabilities and the people that we've added to the organization.
Flow through the <unk> acquisition, and then over the last 12 to 18 months.
And we're really beginning to start to see that benefit so I would say it's across all of our various categories.
Alright, Thank you and then.
Regarding the expense outlook I appreciate that the $2 4 million.
And kind of onetime comp and the fourth quarter for the special bonuses and I think.
You had noted that kind of fourth quarter or end of the year.
All OPB cost savings were.
We're recognized so as you think of kind of the base.
Kind of stripped out.
Operating expense going through the first quarter run, where where would you kind of put that number.
Brian you want to go ahead and respond.
Sure Steve.
And Gary obviously, theres, a theres a lot of moving parts to that but but right now we're looking at.
Plus or minus right and that $94 million range as we sit here today with the with N E and that's that's if you will excluding any.
And extraordinary charges that we might incur but.
The staffing is at a good level right now as we entered the year, we will have higher payroll taxes of course, we did have a special bonus but is as you saw on our press release, we also had the benefit of some.
Higher originations with our loan deferrals, so kind of net net I think its and that 94, again, plus or minus of our range on a quarterly basis $94 million.
Great. Thank you and then if I could just ask one more question with regard to.
M&A.
Over a year since you closed on <unk>, obviously, you converted it.
Earlier back and fall just thoughts around the.
And the M&A environment.
And so your stock is has work you've got a bit.
On a currency to use potentially on a deal. So I'm just curious what your thoughts are there.
Well, we've talked about this Gary that obviously.
Covid has accelerated a lot of large macro trends that had been going on in the economy and and in financial services in particular.
The trend towards consolidation.
And that has only I think the pressure has only increased in this low rate environment and.
And so we're actively reaching out as we always are we're going to be disciplined.
Around the process and.
And and we certainly are always interested in talking to folks.
Where we can partner with and ultimately generate.
Returns for our shareholders on a combined basis than maybe either one of us.
Could do individually and then also looking at creating an institution that becomes.
Even more attractive to potential acquirers down the road.
Those are the factors are always on.
Part of the process and enter our mind as we're talking to folks.
Great. Thanks for taking my questions.
Our next question comes from Matthew Clark with Piper Sandler.
Hey, good morning, Steven.
Good morning, good morning.
On the.
On the core NIM $3 32.
Still have you're obviously much lower loan to deposit ratio than you've had in the past and <unk>.
<unk> got a pipeline I guess.
How quickly might you be able to remix the assets to help defend the margin.
Going forward and or do we should we expect kind of a step down here with maybe.
A little less prepay activity to start the year before.
And grinding higher.
And.
Yeah, I think that thats, probably accurate in that and the fact that we.
We're hopeful we'll see a little bit.
Slower run rate on the payouts go as I mentioned in the prepared comments.
We expect we don't expect it to do loans sales here.
And we'll just see that's the unknown is really is on the payoffs.
And we like what we're seeing around demand and in most of our markets again, the talent that we've brought on to the organization and then maybe some of the dislocations, you're seeing and at some of the largest organizations.
And make us optimistic at the same time, we are seeing some banks out there offering.
Rates that make us scratch, our head and is just not where we're going to go we're going to be disciplined around the pricing.
As it all comes together, we'll see where it shakes out on on the margin and then I think as you accurately pointed out the ability to potentially remix.
The balance sheet and increase our loan to deposit ratio here over time.
We're certainly encouraged with.
The improvement in the vaccine rollout here.
And.
Likely seen some light at the end of the channel.
In the next several months as it relates to the pandemic and its impact on.
The economy.
Okay, and then just on gain on sale. It was fairly muted this quarter or is there and expectation that.
And the SBA production roll on.
Does that volume and and related sales will start to come back here and the new year.
And maybe in the second half of the year.
SBA demand is somewhat muted at the moment.
Okay and then on the.
The ACL at two 2%.
On a post <unk> world, how low would you let that go assuming the economy continues to recover.
And it's hard to say that there are a number of factors that obviously.
Play into the model and.
And in addition to that.
You have to give consideration to to the fair value discounts that we have on the balance sheet. So that total loss absorbing capacity of 2.86.
Seems to be at this point very healthy given the performance of the portfolio and the.
Overall trends and asset quality.
Okay, and then last one from me just on the buyback you get is it realistic to assume you.
Could do some buyback here at this level I know you've got a pretty aggressive last time around one six times tangible but upwards of two times and I don't know if you still have the same appetite.
I think that the.
Stock is.
Pretty attractive given our.
Our outlook here and.
And I certainly expect us to.
We'll be looking at it closely.
Okay. Thank you.
Our next question comes from Jackie Bohlen with K B W.
Hi, Good morning, I, just curious what your thoughts are on the next round of PPP and if you plan to be a participants on that.
We don't plan to be a direct participant we're not change significant demand we have a relationship with the.
Folks that.
We had sold.
PPP loans to back during the summer Ah they they have a very nice platform. There as you recall on non depository.
So any clients.
Net debt, we have that might want to look into that or avail themselves of the program, we're referring over to them.
Okay, great. Thank you that's really helpful to know.
Yeah, just looking specifically at slide 17, and the mix of deposits sources that you have and I know that there's obviously a lot of liquidity flowing around now and potentially and more stimulus to come on and just how long do you think about the composition of your deposits worst day is as we've all through this year and true next.
And particularly in light of the day upcoming Pacific Premier truck conversion and some of the other strategic initiatives you might have going on.
I think that we're.
We ended the year.
For pretty stable what.
The high cost deposits that we had we ran off.
We have a small amount of wholesale brokered certificates that will likely go on off also.
Alright.
At a minimum we will re price those down.
We're pleased with the mix however were down.
We're satisfied.
And we want to continue to push noninterest bearing up.
We've had it much higher and the past.
And that the where we sit today as part of a function of the acquisition of Bovis So overtime.
We expect to further improve that.
But good built on good solid relationships with clients and so that doesn't come overnight.
We're satisfied with or rather we're pleased with where we are but we're not we're never satisfied there is clearly room for us to improve and all of our lines of business.
And and throughout the organization.
Okay and.
And you know the pending conversion I'm true Pacific Premier Trust and do you view that primarily as a business generator and.
Non interest income or could that also help you move on.
And the deposits and the men or U S.
As we grow that business, we expect.
Higher levels of fee income.
And more so in the second half for the year as well as potentially larger.
Deposit balances as their assets under custody.
Spanned and grow as well.
Okay, and a double benefit from that.
Okay, great. Thank you very much.
Certainly.
Our next question comes from Andrew <unk> with Steven.
Hey, good morning.
Good morning.
Wanted to start on the on the margin.
It seems like the bulk of the deposit repricing is kind of behind us, but I did want to ask about just overall the optionality.
On the funding base I think there is some higher price debt that was acquired from opus that can be redeem this year and just given on liquidity is trending and maybe growth is shaping up.
Do you think that's something you'd look to redeem and are there any further kind of levers you could look to pull on the liability side of the balance sheet.
I think thats accurate.
And we'll we'll look to see.
And and give consideration.
To that sub debt and that.
That is at the bank level.
And take it into consideration and our overall.
Capital management and planning.
Yeah, I think youre right on the deposit side, there isn't a lot of room to go lower at 14 basis points, but we're going to continue to manage.
And manage that closely and in particular, where reach and improves the mix by increasing the non interest bearing but we'll pick up some benefit there.
Understood.
Yes.
I appreciate it.
I'm trying to understand just kind of the duration on the CD premium amortization as well can you remind us how long of a life. This has or maybe what the remaining balance is here that needs to be amortized I'm just trying to think about how long. This presents kind of a tailwind to the state and margin versus the core.
Sure why don't we get that in for.
Why don't we get that information to you offline where that that may not be of interest to other listeners and were happy to provide that for you.
Unless Ron you've got it right there.
Yes, Steve I could just comment just very briefly on it and then we can always have a follow up Andrew.
It's an average of seven to eight years, typically obviously opus as being the most fresh but we've got a.
CDI amortization that goes back with a few prior <unk>.
Acquisitions already in motion, so what youre seeing is a little bit of a weighted average.
Impact that's going on now it probably has an average life of about five years, all and $5 six years all in.
Got it thanks.
Mhm.
And our next question comes from David Feaster with Raymond James.
Hey, good morning, everybody.
Good morning, David and you.
Just wanted to circle back to the origination questions I'm, just curious I guess from a geographic perspective, where are you seeing strength across your footprint and maybe at a high level. What do you think the organic loan production capacity of the combined institution is in light of the hires that you've made and.
And if I'm just reading between the lines it sounds like.
Loan balances and probably trough here or just just curious on all those topics what youre thinking.
Sure.
I think that.
The strength that we're seeing yeah and.
And in most of our market share is really it began I think and the fourth quarter as we were talking to business owners and investors is as they were getting greater clarity on on the economy the impact of the vaccine getting past the election and and some of these.
And on certainties that on.
Is where some of the optimism began to develop.
As far as.
And we're seeing that again and in most of the markets and the clients that we're talking with.
Obviously, there are pockets here and there.
We're still dealing with the significant amount of the lockdowns and and impacts of the pandemic, but again I think that we all have a little bit better clarity today.
And as far as the level of production we will see.
And we'll continue on.
Two to get better and and the team.
Continues to create synergies amongst themselves and then also with different on.
Lines of business in the bank and and so we're really seeing that come together.
And nicely as far as the net loan growth, we will see how things go as far as.
Amortization pay downs and early pay offs and and what again low utilization rates.
And from some of the businesses are they are still at very low levels.
And so as economic activity picks up we're hopeful.
That we'll see some of those utilization rates potentially increase as well.
Okay, and then just curious what youre seeing on the hiring front.
Touched on it a bit some of the issues and the market, but I'm just curious now that the integrations and the rearview the strength and the combined franchise and is clearly a parent are you seeing more opportunities for new lender hires.
Hum.
We're talking to folks I think that there has been some struggles that.
Some of the largest organizations and.
I think with that.
There is always a couple of folks that you lose that you don't want to on during these acquisitions and what's been nice is.
To hear them reach back out and and we'd like to rejoined the organization. So we're assessing all of that I think also too simply as we continue to grow and expand on.
And and lenders see the consistency and how we deliver for our clients. They are naturally becoming attracted due to wanting it to be.
Part of our team so all of those things are playing into it.
Okay and then just on the franchise segment just curious your thoughts there what youre seeing it looks like originations.
Accelerated just just curious on that.
Segment, your appetite for new credit and any trends that you're seeing.
Yeah, I think that that book of business performed exceedingly well and we.
We certainly when we acquired that franchise lending business.
It certainly has demonstrated that it was recessionary resistant based.
Based on decades of inflammation.
I don't think that anybody knew exactly how things would play out and a pandemic environment.
But that again that portfolio performed very well and continues to.
We have long standing deep relationships with franchisees and many of the key franchise ores and and so we're going to continue to leverage that and and build that business.
And as we have and the past.
Okay. That's helpful. Thank you.
And again, if you have further questions you can press Star then one to join our Q.
Our next question will come from Tim Coffey with Janney.
Thank you good morning, everybody.
Good morning.
And Steve as you look at kind of the deferments that you have still and modifications and it's not a big number but given where your reserves are you have options.
Are you is your outlook on those two kind of let them cure themselves.
We'll see we deal with each client individually and we will see as I said.
We don't expect much and the layout of loan sales moving forward, but that is always a narrow and our flavor. If you will that we've had for a long period of time.
So we're working with each one of the clients and.
And see how they progress from here.
Okay.
And then switching to kind of the franchise non real estate secured loans.
Can you provide some color on what happened there. This quarter was it just kind of a change and focus or maybe a rationalization of exposure.
No I just got done talking about franchise.
And then and the fact that we like that business, we just naturally seen some pay downs and that that business.
Okay. So the non real estate secured is leaving the pay downs.
I'm not I'm not sure specifically Tim.
What's the point.
I'm, just asking and I'm trying to get some color on on why the why those loans were down more and the others.
That would be paydowns, where where borrowers on.
Made early payments on their loans and and either paid down or paid off credit.
Alright.
And then just a question on M&A given that your footprint is much bigger than it's been before.
Or are you just are you interested and doing.
Out of our adjacent market deals more than youre doing and market deals or are you kind of agnostic.
We've always considered on geographic expansion.
And as a benefit.
Going back to if you look at the think about the heritage Oaks acquisition expanded us and to the Central Coast, We had top and before the Grand Pointe acquisition expanded us into.
And markets in Arizona and.
And into the Pacific northwest, albeit on a relatively small basis, and then and the franchise lending and the HOA lines of business, which are all on nationwide and <unk>.
Perfect Premier Trust and Opus those those expanded us geographically. So we are certainly open.
And to geographic expansion, where it makes sense and as I've shared and the patch.
And whether it's California the Pacific Northwest.
On the Rocky mountain range or into various parts of Texas, We think certainly Dallas it on many of those markets are very attractive.
Okay. All right that was my question.
Certainly.
This concludes our question and answer session and I'd like to turn the call back over to Steve Gardner for any closing remarks.
Thank you and and thank you all for joining US today again, if you have additional questions. Please do not hesitate to contact the wall on or myself directly.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.