Q1 2021 Pacific Premier Bancorp Inc Earnings Call

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Good day and welcome to the Pacific Premier Bancorp first quarter 2021 conference call all participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero.

After today's presentation there'll be an opportunity to ask questions too.

To ask a question you May press Star then one on a touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Steve Gardner Chairman and CEO. Please go ahead.

Thank you Betsy and good morning, everyone. I appreciate you joining us today.

As you are all aware earlier. This morning, we released our earnings report for the first quarter 2021.

We have also published an updated investor presentation that has additional information on our financial performance.

If you have not 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 I'll walk through some of the notable items Ron Nicolas Our CFO will review a few of the financial details and then we'll open up the call to questions.

I noted in our earnings release and interest and Investor presentation, We have our safe Harbor statement relative to the forward looking comments and I would encourage all of you to read through those carefully.

Our first quarter results reflect the growing strength and discipline of our team as well as the added benefits from the scale of the organization.

We delivered strong financial performance in the first quarter with net income of $68 $7 million or <unk> 72 per share.

Which translated to a return on average assets of 137%.

And our return on average tangible common equity of $16 two 1%.

Despite the challenges in the current environment, our people are executing at a high level throughout the company.

Asset quality remains solid with no remaining COVID-19 loan modifications.

During the quarter, we added a number of new commercial client relationships that contributed to our non interest bearing deposits increasing by $292 million.

Or 20% annualized.

The growth in noninterest bearing deposits helped to reduce our deposit costs to 11 basis points and in part led to our net interest margin remaining relatively stable.

Our recurring fee income businesses are performing well and are accounting for a greater percentage of our overall revenue.

Later this quarter, we will complete the system conversion of Pacific Premier Trust.

And simultaneously deploy our customized salesforce platform, which.

Which we utilized throughout Pacific Premier to support business development data analytics and client relationship management.

These systems will ultimately improve our ability to scale the trust business as we move into the second half of 2021.

While elevated loan payoffs and a further decline in credit line utilization rates impacted loan growth.

In terms of new business development, we have the strongest quarter in our history with more than $1 1 billion in new loan commitments, which was up from $911 million last quarter.

This is particularly notable given that the first quarter is typically a seasonally low period for new originations.

As the economy continues to strengthen we are seeing greater diversification in the mix of loan and deposit relationships across our lines of business as compared to the prior quarter.

The more balanced loan production resulted in an improvement in the average rate on new loan commitments, which increased eight basis points to 363% in the first quarter.

There were a number of factors that are contributing to the increase in loan production that we're seeing across the portfolio.

Our teams are collaborating and working at a high level to develop and close new opportunities with improved efficiency.

We are seeing the benefit of scale as a $20 billion institution in terms of our ability to attract full banking relationships with larger more sophisticated middle market companies and stronger credit sponsors of commercial real estate projects.

Businesses and investors are exhibiting greater confidence in a sustainable recovery has more of the economy reopens.

That confidence is beginning to translate into business expansion.

As wind utilization rates appear to have hit their low point at the end of the first quarter.

Lastly, the current environment is providing our leaders the opportunity to selectively add and upgrade talent to their teams, which is having a positive impact on our capabilities to win new business.

With that I'm going to turn the call over to Ron to provide a few more details on our first quarter results.

Thanks, Steve and good morning.

The majority of my comments will be directed on a linked quarter basis.

Overall total revenue was $185 $4 million for the quarter.

Compared with $191 4 million in the prior quarter drill.

Driven by lower interest income, primarily due to two less days in the quarter and lower accretion income.

Both our efficiency ratio at 48, 6% and our pre provision net revenue as a percent of assets at 186% remains strong highlighting the benefit of our increased operating scale.

The net interest margin came in at 355% for the quarter a.

A decrease of six basis points from the prior quarter.

As changes in the mix of earning assets and lower loan yields as well as lower accretion income were partially offset by a lower cost of funds.

Our core net interest margin exclude.

Excluding the impact of accretion.

Decreased two basis points to 330%.

With the continued margin pressure of excess liquidity and less room on deposit repricing, we see the core NIM in the 3% to 5% range.

Noninterest income of $23 $7 million included $2 $3 million in PPP referral fee income in the quarter.

We do expect some additional PPP referral fees in the second quarter as the program winds down.

Noninterest expense, excluding merger related costs came in at $92 $5 million compared with $94 5 million in the prior quarter.

The cost savings from the <unk> acquisition has been fully realized and exceeds the amount we estimated when the transaction was announced last year.

Personnel costs were largely flat to the prior quarter and head count increased to 520 million from $14 77 at the prior quarter end.

Our quarterly noninterest expense should approximate $94 million as we continue to invest in people and technology.

Turning now to the allowance in asset quality.

Our allowance for credit losses finished the quarter at 2.04% and the total loss absorbing capacity.

Price of the allowance and the remaining fair value discount on acquired loans totaled $371 million at quarter end, our $2 eight 1% of loans held for investment.

The factors affecting our allowance for credit losses during the quarter were modest driven primarily by the economic forecast and model dynamics at the segment level as well as the portfolio mix.

Provision for credit losses was $2 million comparable $1 5 million in the prior quarter.

While net charge offs totaled $1 3 million down from $6 4 million in the prior quarter.

Overall, our asset quality continued to perform well with nonperforming assets at 19 basis points of total assets and total delinquencies at 17 basis points of loans held for investment.

Given our strong credit quality.

And the improving economies impact on our seasonal modeling.

We are likely to see reserve releases in the coming quarters.

Although it is not possible to estimate the exact likelihood or magnitude at this time.

With respect to the balance sheet loans decreased during the quarter as we continued to see higher level of pay offs and lower levels of C&I line utilization, which fell to less than 30% at quarter end.

Okay.

Total investment Securities were $3 88 billion at quarter end, a slight decrease from the prior quarter.

The yield on our securities portfolio remained stable at 171% and the duration increased to six two years.

During the first quarter, we grew total deposits by over $500 million.

Our 12% on an annualized basis.

Notably we grew non maturity deposits by nearly $800 million, an increase of 5% on a linked quarter basis as we continued to price down our higher cost retail Cds and runoff are broker Cds.

As noted in our release, we redeemed $25 million of high cost debt early in the second quarter after paying off some higher cost <unk> term borrowings this past quarter.

As we continue to look for ways to lower our cost of funds and support our NIM.

With that I'll hand, it back to Steve.

Great. Thanks, Ron.

In summary, the momentum we're seeing in business development is resulting in a growing loan pipeline that now exceeds $2 billion.

Based on the positive trends, we are seeing and contributions coming from all areas of the bank. We are more confident today that loan growth will accelerate as we move through the year.

In addition, as the economy further strengthens we anticipate an increase in credit line utilization rates as business investment expands and new projects come online.

This should lead to a remix of the balance sheet and drive an expansion in net interest income.

Given our consistent financial performance and our increasing confidence in the outlook for the economy.

We have increased our dividend by 10% to 33 per share.

During the first quarter, we initiated a stock repurchase program and have bought back approximately 200000 shares.

With our strong capital ratios conservative risk profile and expanding earnings we are able to increase the capital return to our shareholders. We.

While also being well positioned to support both organic and acquisitive growth.

We continue to pursue acquisitions and merger partners throughout the Western U S that can add meaningful earnings accretion and scale to our franchise.

That concludes our prepared remarks, and we would be happy to answer any questions. Betsy could you. Please open up the call for questions.

We 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.

Anytime Youre question has been addressed and you would like to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Our first question comes from Gary Tenner with D. A Davidson. Please go ahead.

Thanks, Good morning, guys.

Had a couple of questions I guess, Steven your closing remarks, you talked about the loan pipeline strength on expectations.

For accelerating loan growth later in the year.

Does that kind of inform the decision to kind of allow the cash balances to grow on balance sheet versus investing in this quarter, just because you're anticipating.

Need for that liquidity to fund growth later in the year.

That's part of it Gary Hi, I can't see us.

Running the full quarter at.

At the level of cash that we do have on the balance sheet. It's also to have being mindful of the level of deposit flows continue to obviously.

These strong.

Again, though I don't suspect.

We're going to be carrying now $1 5 billion of cash flow.

Throughout the remainder of the quarter or something near it.

Yeah.

Okay. Thanks.

And then the.

On the credit side, obviously, the metrics look really good but the multifamily allowance for credit losses jumped out at me in terms of the sequential quarter increase I think it was $17 million.

Is that just driven by growth and increased commitments in this space or is there anything else that youre seeing in the segment, that's giving you any any cause for concern.

I'll talk about it generally and then Ron can jump in and add any additional color is really driven in part by the model Gerry.

That we utilize which is as Moody's.

And therefore cash and what <unk> seen on a national level and something that we'll certainly take a look at.

As the model continues to be refined and we all have.

Added experience.

As we estimate.

Any number of factors in the model itself.

Ron you want to provide any greater detail color on it.

Sure Steve Thanks, Yes.

Yes, Gary.

You certainly noted the the one increase we did see mean.

Meaningful increase in the reserve levels, specifically in the Moody's model the Reese.

CRE and multifamily pricing the multifamily pricing deteriorated a little bit in terms of both rents and vacancies there theyre describing in some of their analysis and white papers, which you can pick up.

Continued.

A lag in the impact there. So that's really we had been hovering in that 120 to 130 basis point reserve level and as you saw it spiked to 150, so it's strictly a function of the.

Of the model itself and we did not see.

Or do not see any kind of deterioration in our own portfolio.

Alright, I appreciate the color on that and then just finally in terms of kind of pricing competition.

Any thoughts there I mean it.

It seems like we're still hearing anecdotally about banks some banks doing.

Long term fixed rate loans at pretty low rates have you seen any kind of moderation of the pricing.

Or loans, just kind of coming on at floors, right now and Thats the environment.

We haven't seen any real material change in pricing in the marketplace.

Alright, guys. Thank you for taking my questions.

Our next question comes from Matthew Clark with Piper Sandler. Please go ahead.

Hey, good morning, guys.

Maybe the first one on the NIM outlook of 325, I assume that's for the upcoming quarter.

But it also sounds like youre going to be holding less cash going forward.

<unk> assets.

Higher yielding assets, so I guess im little surprised that you expect the margin to be down a little bit and just wanted to confirm that that's for the upcoming quarter and does that contemplate.

I assume.

Youre thinking and expansion in the back half if that's the case.

It is.

Estimate is for the current quarter and and really at where we stand heading into the quarter.

We would expect as I said in my comments.

Net debt as the balance sheet remixes.

As loan growth accelerate or as loan growth accelerates.

We do a remix in the balance sheet and that should benefit from.

Net interest margin that is our expectation.

Okay and.

On the Prepays and payoffs do you happen to have those numbers this quarter versus last just trying to get order of magnitude. There I mean, we can back into a plug, but if you had them I take them.

Yeah.

Ron do you have that number handy.

Yes, Matt I don't I don't have it handy here I'll I'll look at it to here in a moment I will tell you that the Prepays were down just a smidgen, but they were still pretty high in terms of our historical levels and again the the line utilization really was the.

The new item that impacted our loan our loan growth quarter to quarter this quarter, but.

I'll circle back later on the call Matt on that.

Okay. Thank you and it does sound like utilization rates have hit a bottom at the end of the quarter have you seen usage pick up here in April.

Any color there.

Yes, we have.

Whether that's sustainable or remains to be seen but it does appear that.

By by the end of March we had hit the bottom, which was as Ron had mentioned below 30% and we have seen that move up.

Modestly in the first couple of weeks here.

In April and that seeing that trend seems to be old Inc. Here.

Here. So we'll see we believe it is reflective of again.

Improving confidence in the economic recovery.

Okay, and then last one from me just on M&A it sounded like coming out of last quarter. Your focus was on.

Primary versus secondary targets has that changed at all.

Any update in that that level of activity.

Hi.

We're still looking at all options. There are certainly some that are more attractive than others.

I'm getting.

Getting transactions done properly structuring them.

Rising them and ensure that they are going to create long term shareholder value is is always a challenge.

But we continue.

To pursue.

Those various opportunities and.

<unk>.

We still fundamentally believe this is a consolidating industry.

Scale matters, and where you can build scale with partnering.

With strong cash.

Complementary institutions is makes a lot of sense.

Great. Thank you Hey, Matt.

Matt This is Ron I'll, just tell you that the great between the maturities and the payoffs that were $740 million. This particular quarter and last quarter was about 840 approximately.

Million.

Okay. Thank you.

Sure.

Our next question comes from David Feaster with Raymond James. Please go ahead.

Hi, good morning, everybody.

Good morning, David.

It was great to see a record quarter of loan originations I'm, just curious what youre seeing drive that I mean do you think that's more of a function of just the improved economic outlook on clients being more confident in investing or is it more that you're gaining share just given the new hires that you've had and some of them the ability.

To move upstream and then just.

Growth in our origination activity and the increased pipeline and prospects for increase in C&I utilization. How do you think about growth for the year. I mean, do you think I mean mid single digits in kind of a reasonable expectation.

David you cut you cut out a little bit there.

But I think I understand.

Your question.

The new production is really being driven by a multitude of factors.

The larger scale of the organization and our ability to attract larger more sophisticated clients.

And whether that's true or treasury management offerings the relationships.

That's some of the folks that have joined the organization in the past year bring to it.

Plus we're seeing a little bit of the increase level of demand and then lastly, the integration with the Airbus team.

And that team, whether it's the commercial real estate side and C&I.

They are working very well together.

Along with the credit team and so we're we're just able to move.

Those opportunities through the system more quickly so all of those things are driving the increase in production and in the strength and the loan pipeline from the.

The line utilization rates as I mentioned earlier it seems your come off is low from the first quarter. We're hopeful that that continues throughout the quarter and into the year as the economy is.

Spans as far as loan growth.

We don't give guidance because that's just.

Very difficult.

So for cash in this environment, we're far more focused on the activities and the behaviors.

We know drive new business relationships and and focus on making sure that we're serving our existing clients.

Well.

Okay.

That's helpful and was.

I'm pleased to see the increased contribution from the escrow business from the quarter I'm, just curious whether you've started to see an increased deposit contribution there as well and then just any updates on the trust business.

Assets under custody, we need to grow.

Curious how client growth has trended in any updates on those lines may be from expectations just wants a deferred business is converted.

Sure I think we're from the escrow side.

We're seeing some nice synergies.

At the existing loan production net we're doing in the referrals from.

That business to the escrow and vice versa.

Again, its reflective of the team's working well together.

<unk> business as I mentioned will convert their systems their core operating system here.

This quarter. The team has worked tremendously hard to ensure that that is going to go through smoothly. It's a great opportunity to us for us to retool that business and deploy greater technology, not only through the core system, but but through our.

<unk> <unk>.

Sales force platform.

And we think the opportunities there are are fairly attractive and we're optimistic.

Yes.

Growth in that line of business here in the second half of the year and into 2022 will begin to accelerate.

And it's really been focused on getting the people and the talent in place there and the trust business and that foundation built around the processes.

And the core operating system.

Okay, and just you touched on something I wanted to shift gears to.

Just following up on your commentary on technology, you talked to in the prepared remarks about continued investment.

How do you think about technology, and where are you focusing your incremental investments going forward and talk about sales force across the organization. We've talked about API banking just wanted to get an update on the tech front until the initiatives that you have underway and kind of what's on the docket.

Sure it's continued.

Improvement in those.

Proprietary and customized systems that we have.

In and adding products and services through Treasury management.

<unk> is leveraging the existing technology.

You're continuing to push out.

Use of Digitization.

And.

Online banking that that utilization from our clients.

And part drives part of our efficiencies.

The relatively low number of branch locations.

That we have and it will be consolidating a couple of more branches here.

In the second quarter.

And in large measure technology has.

Wowed us.

Helped drive those efficiencies in the organization, but it's really throughout our platform and taking what we've learned and seen where we can deploy that and developed.

New technologies.

Net are complementary to the businesses that we have in place.

Okay. That's great color. Thank you. Thank you know David we don't.

Telegraph or tell folks a lot about what we're going to do.

Once we've done it and we roll it out.

We mentioned it at that point.

Annabelle thanks, everybody.

As a reminder, if you have a question. Please press star then one to be joining the queue.

Our next question comes from Jackie Bohlen from K BW. Please go ahead.

Hi, Steven Ron Good morning.

Oh, Hey, good morning, John.

And this is on the FTE, if I wrote it down correctly in prepared remarks that looked like it went up on a linked quarter basis. So I just wanted to see what the driver of that was.

It is continuing to add talent to the organization.

And invest in people.

Okay.

And I wish you guys a lot of that is producers.

Yes that is that is certainly a part of it go ahead, yeah I was just going to say, Steve Yes that is correct.

A fair amount were or the increase of 43 were producers.

Okay.

And what are they later quarter and that.

Plays into some of that increase.

Overall expense level that youre expecting in the second quarter, that's correct Jackie yes. They were they were more in the quarter and area.

Okay.

And then Steve.

Correct me, if I'm wrong on any of that thought I would just expect.

I know we've been talking about per year continued investment in the last conversation centered on a lot of that so just continuing to find people that you feel are beneficial to the organization getting from talent upgrades, where you can point people from other institution, that's just going to be kind of a continual ongoing items.

It always has been and it always will be Jackie.

And that's the way, we think about whether it's technology or people.

We are constantly seeking to improve.

At the organization.

Okay.

And then just one little housekeeping one from me in terms.

Net debt redemption in April.

I just wanted to double check that that expense is not included in the first quarter. It will be in the second quarter's rate right.

That is correct.

Okay.

Okay. Thank you.

Welcome.

This concludes our question and answer session.

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