Q2 2021 Pacific Premier Bancorp Inc Earnings Call

Good day and welcome to the Pacific Premier Bancorp second quarter 2021 conference call all participants will be in a listen only mode should you need assistance. Please.

No conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question. You May Press Star then 1 on your Touchtone phone and to withdraw your question. Please press Star then 2 please note. This event is being recorded I would now like to turn the conference over to Mr. Steven Gardner Chairman and CEO.

Please please go ahead sir.

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

You're all aware earlier. This morning, we released our earnings report for the second quarter of 2021.

We have also published an updated investor presentation that has traditionally.

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 will walk through some of the notable items Ron Nicolas our CFO will review.

On the financial details and then we will open up the call to questions.

I noted in our earnings release 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.

We plan to keep our.

A few comments relatively brief given the level of detail and disclosures. We've included in our earnings release and Investor presentation.

We had a very productive second quarter, both in terms of business development and implementing multiple initiatives that will further enhance.

Our ability to drive profitable growth in the future.

Our team executed at a high level throughout the quarter and is well positioned as we enter the back half of 2021.

During the second quarter, we generated net income of $96.3 million or 1.

Hands on 1 cents per share, which translated to a return on average assets of 190% and a return on average tangible common equity of 22.45%.

Our profitability drove a 6.5% increase in tangible book value per share.

And allowed us to continue to return a meaningful amount of capital to our shareholders.

Our results were driven by incremental improvement across the board relative to the prior quarter.

A higher level of loan production.

Net loan growth that enabled us to start remixing.

The balance sheet towards higher yielding assets.

Increased contributions from most of our fee generating areas.

Incremental improvement in our already strong asset quality ratios, which in part contributed to a material release of the reserve levels. We had built last.

Seeing that there.

And well controlled expenses.

Okay.

Our financial performance reflects the synergies emanating from a larger more diverse and capable organization.

It reflects our success in effectively leveraging the collective strengths of our tier.

Last year throughout the bank.

Our people are working in a collaborative fashion to expand existing relationships and add new clients, including larger more sophisticated middle market companies and real estate investors, which is driving the growth we are seeing in our balance sheet.

From our frontline business development personnel to credit administration, and the Onboarding of new clients, we are operating with a high level of proficiency in all areas.

Which is enabling us to efficiently generate quality growth.

We had the strongest quarter in our history with nearly.

$1.6 billion in new loan commitments, which was up from $1.2 billion last quarter, while loan disbursements increased 54% over the prior quarter.

This resulted in 14, 5% annualized growth in total loans.

During the quarter, despite loan payoffs and Paydowns increasing.

The mix of loan production continues to be well diversified with balanced contributions coming from across our markets.

As we emerge from the pandemic real estate related loan demand has been the first.

<unk> to pick up and relative to last quarter, we had a higher level of commercial real estate multifamily and construction loan commitment production.

Commercial loan commitments remain healthy reflective of our ever improving capabilities to attract new small businesses.

Middle market and corporate clients.

During the second quarter, we began seeing a higher level of commercial line utilization rates compared to the historic lows at the end of the prior quarter.

Which helped drive an increase in our C&I portfolio.

But it's too early to call this growth rate of <unk>.

It will trend.

Our commercial clients still maintain significant liquidity levels.

Coupled with the challenges with supply chain disruptions and the re emerging concerns around the Corona virus. It may take time before we see a substantive increase in line utilization.

<unk> rates.

Our loan production was weighted more towards the back half of the quarter. So we didn't realize the full benefit of net loan growth.

At the end of period loans were $383 million higher than our average loans.

In addition to the higher level of loans.

On production our business development efforts continue to result in strong inflow of commercial deposits.

In the second quarter. This is this resulted in a $466 million increase in non non interest bearing deposits.

Which further improved our deposit.

6.

And to help reduce our total cost of deposits to 8 basis points.

Looking ahead, we expect the trends in the second half of the year to be relatively consistent with what we saw in the first half of the year, depending upon the pace and sustainability of that.

<unk> expansion.

We will continue to execute well on the things that we can control.

And that includes our ongoing assessment of all parts of the company as we look for opportunities to improve.

During the second quarter.

Given our strong liquidity.

It could happen levels, we redeemed $25 million of sub debt.

And at the beginning of July we redeemed another $149 million of sub debt that we had acquired through various acquisitions.

The elimination of these high cost funding sources will reduce.

<unk> and interest expense and help support our net interest margin going forward.

We are also trimming around the edges of our branch network and consolidated 2 more branches in July.

As part of our disciplined approach to expense management, we regularly review our branch.

Our footprint to see where we can gain synergies and consolidate locations without negatively impacting client service.

This is something we do on a regular basis.

Our continuous focus on optimizing every area of our organization enables us.

Branch increase our investment in areas that help grow revenue and enhance efficiencies and improve client service.

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

Thanks, Steve.

The Inc, and good morning.

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

Total revenue was $187.7 million for the quarter compared with $185.4 million in the prior quarter driven by higher noninterest.

<unk>.

Our efficiency ratio for the quarter was 49, 4% and our pre provision net revenue as a percent of assets was 184% highlighting the benefit of our increased operating scale.

During the quarter, we took a number of balance.

Net income to actions, including growing our investment portfolio by approximately $600 million.

Increasing our boley investment by $150 million.

And redeeming additional high cost sub debt.

I will touch on the benefit of these actions a bit more with.

<unk> Q3 guidance.

Our net interest margin came in at 344% for the quarter and the core margin came in at $3.2 2% a decrease of 8 basis points from the prior quarter.

As lowered loan yields and fees negatively impacted the margin partially.

<unk> offset by a lower cost of funds.

As noted we believe the balance sheet actions taken as well as the growth of our loans and deposits in the second quarter will favorably impact net interest income and the margin in Q3.

As a result, we see the core NIM.

In the 3.5% to 330% range.

Noninterest income of $26.7 million increased $3 million compared with $23.7 million in the prior quarter.

Key drivers of the increase included higher gain on the sale.

SBA loans are result of increasing SBA production as.

As well as higher trust and escrow related fees as.

As the latter saw increased transaction activity.

Also the additional $150 million Boley investment will add a little more than $1 million.

Per quarter to noninterest income starting in Q3.

Noninterest expense, excluding merger related costs came in at $94.5 million compared with $92.5 million in the prior quarter.

Higher.

Incentive costs related to the higher level of loan and deposit production, primarily drove the increase in compensation as head count was flat to the prior quarter at 521 employees.

Our noninterest expense should approximate 94 to 96 million.

In Q3, as we continue to invest in both staff and technology.

As well as experienced higher levels of business activity costs related to growth.

Provision expense.

Was a recapture of 38 point.

$5 million compared.

With an expense of $2 million in the prior quarter.

The recapture was driven principally by the improving macroeconomic forecasts and key modeling variables as well as our continued strong asset quality profile.

Turning now to the balance sheet.

Total assets grew to $25 billion compared with $20.2 billion in the prior quarter.

Deposits grew $275 million and equity just over $100 million.

As highlighted earlier, we redeployed approximately $900 million of excess liquidity.

Into higher yielding loans and investments, which combined grew by $1.1 million billion dollars from the prior quarter.

In our earnings release, we included a loan roll forward table to provide greater transparency to the period end loan portfolio results and the primary drivers.

Okay.

As noted our total investment securities increased to $4.5 billion at quarter end.

We saw strong inflows into our noninterest bearing deposits, which grew by over $450 million from the prior quarter fueling total deposit growth to just over 17 billion.

<unk>.

Year to date, we have redeemed a total of approximately $170 million in sub debt.

That had an average weighted cost of 5.5%.

Asset quality continued to perform well with nonperforming.

At 17 basis points of total assets and total delinquency.

At 14 basis points of loans held for investment.

Net charge offs totaled $1.1 million for the quarter compared with $1.3 million in the prior quarter.

Our allowance for credit.

Forming assets finished the quarter at 171% and the total loss absorbing capacity comprised of the allowance and the remaining fair value discount on acquired loans totaled $327 million at quarter end or to 3.9% of loans held for investment.

Loss from our strong asset quality and the improving economies impact on our seasonal model. We are likely to see continued reserve releases in the coming quarters.

Great. Thanks, Ron.

In summary, our teams are executed.

At a high level and we're seeing our business development efforts translating into attractive profitable growth.

We remain highly confident in the organization's ability to capitalize on any number of economic scenarios that may develop in the second half of this year.

Security with our strong capital levels Conservative risk profile and earnings strength, we are well positioned to support both organic and acquisitive growth.

We continue to seek out acquisitions and merger partners throughout the Western U S that can add meaningful earnings accretion and ski.

<unk> to our franchise.

Our board and management are open to pursuing transformative transactions that will deliver for all of our shareholders.

That concludes our prepared remarks, and we would be happy to answer any questions. Chuck. Please open up the call for <unk>.

Questions.

Yes, Sir we will now begin the question and answer session to ask a question you May Press Star then 1 on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys and to withdraw. Your question. Please press Star then 2 and at this time, we will pause momentarily to assemble our roster.

And the first question will come from Gary Tenner with D. A Davidson. Please go ahead.

Thanks, Good morning.

Wanted to ask about kind of the outlook for liquidity deployment, you've worked on your cash balance quite a bit on the second quarter through loan growth as well as you know the incremental investment on the bond portfolio.

And I guess, a little more here in July with the sub debt repayments. So can you just talk about how you're thinking about any additional need of deploying excess cash right now.

And so the investment book or if you're just going to rely on expectations of loan growth for the back half of the year.

I think Gary Youre going to.

Let's continue to manage it similar to the way that we have during.

The second quarter here.

Ideally.

That access liquidity goes into a.

Loans, but.

Depending upon what we see is net growth there.

We're we're going to redeploy that.

Liquidity into higher earning assets on.

Along with which includes of course securities.

Yeah.

And on that topic, then in terms of kind of the net loan growth.

<unk>.

Could you talk about any kind of visibility you have at this point on you know pay down activity or payoff activity early into the third quarter, there's been any kind of slow slowdown of that kind of activity.

We haven't seen any material change.

From from Q.

Q2.

On the line utilization rates have have remained relatively stable, we'd certainly like to see.

On increasing growth there and we're hopeful that that will occur here.

As we move through the summer.

And into the fall.

But it just remains to be seen as I mentioned in.

My prepared comments.

Our clients are sitting on a lot of liquidity.

Alright, thanks for taking my questions.

Anytime.

Summary, next question will come from come from Matthew Clark with Piper Sandler. Please go ahead.

Hey, good morning, Steve.

Good morning, Matthew.

Yeah.

Maybe first on the pipeline I think coming out of last quarter. He had mentioned that it was over $2 billion.

Just wanted.

Thanks for for where the pipeline stood coming out of <unk>.

We are today, where we're sitting at a little over a billion 7 debt down from where we were but in part that's owing to the very strong loan closings.

The team was able to a.

Get a simple ish.

In the latter part of the second quarter.

We still see pretty strong demand.

And just about all areas. So we're encouraged.

That will continue to efficiently pull through.

Capital loans that we have in the pipeline and growth.

<unk> net net net loans going forward.

Okay, and then just on the reserve it sounds like we're going to see some more releases.

Going forward your day, 1 seasonal reserve was 1.5%.

Is that.

How do you feel about that level longer term is that kind of where you think you might stabilize as we maybe get into late next year or do you feel like you might be able to get below that based on the.

The balance sheet today relative to the balance sheet at the beginning of 2020.

Yes, I think.

<unk> non fasteners.

Play here.

And obviously seasonal was designed.

And has proven to be.

Rather volatile.

At times.

So, it's really hard to see where it's going debt and.

Theres also as the portfolio changes over time that will be a factor.

Certainly given our historic asset quality or the performance of the loan portfolio.

Relatively benign charge offs.

<unk>.

Add in the credit discounts that we have on the book 1 would certainly expect it to come down and as Ron alluded to.

That's what we think now.

But we'll have to run the models out those taught at the time, Inc.

In future quarters, and see where it ultimately.

Ultimately shapes out.

Okay, and then on the SBA gain on sale.

<unk>.

I think you're you would plan to start doing some more of that given where how healthy the premiums or.

Is that still the case and how much do you think you might sell on a quarterly.

Italy basis going forward.

Historically, we've sold most of the production.

That we had done either early in the current quarter or loans that came on in the prior quarter end and that will be our plan demand has.

Picked up as the SBA PPP program has wound down.

On.

So we like the opportunities we're seeing there so we'll see where production ends up.

In the coming quarters.

Okay, and then just last 1 on M&A.

<unk>.

Can you just give us some color on how your conversations have.

Tracked relative to the.

Last time, we spoke on the earnings call, whether or not that activity has picked up at all or not.

Well.

Hard to say.

For us because we are.

So active in general and are regularly reaching out.

2 other Ceos and boards to chat with them about what might make sense.

And that can.

Sales in the second quarter it continues today.

We think that in this environment.

That that M&A and consolidation.

<unk>.

As much sense as it ever has.

And we're going to continue.

As can be to pursue it.

With with a number of what we think are very attractive other organizations that we can partner with.

Okay, great. Thank you.

The next question will come from Jackie Boland with K B W.

Go ahead.

Hi, good morning.

On to Matthew's question, Inc. In the past you talked about 5 billion. Another rough floor for what you can take a look at on if you are able to announce something and things just don't align in the coming quarters like you take a look below that level.

Please.

I think we'd be.

Somewhat hard pressed to do so but yes.

If things Didnt come together in the next couple of quarters.

We would we're always reassessing at the board level and what we.

<unk>.

What we think makes sense and is is right for all of our stakeholders that at this point in time, we think it makes a lot more sense to be pursuing.

Larger transactions.

Moh like.

Make if you will.

And that's where we're going to continue to put our efforts, but as we all know markets.

Change over time, and we'll we'll adjust along the way also.

Okay. Thank you for that.

That's helpful.

And then I Wonder if you could provide an update on how that system conversion went this quarter.

Excellent.

We completed the conversion.

At the end of May.

The team is working through that process.

The new system.

And working with clients on the transition to the new systems.

And we are progressing well there it will be nice.

We put that aspect behind us and start.

To to move to offense here later in the second half of the year.

And the bump up in in the trust administrative fees in the quarter was that related to the conversion or without a separate items.

In part related.

With a non and in some of the small amount of growth we've seen.

Okay.

This might be a question for next quarter's call, but just.

Sounds like you're still excited for the opportunities that are there, but you know maybe not quite ready to give an update.

At line item could grow too is that fair.

Yeah, I don't know that ive ever willing to give much of a guidance on where I think our line items could.

Could grow to.

That's usually a Mr. Nicholas.

Our bailiwick, so Ron I don't know do you want to venture out.

On wear them and give us your thoughts.

I think that's a question for next quarter, Steve I agree with you or Jackie.

Okay fair enough. Thank you.

Okay.

Again, if you have a question. Please press Star then 1 our next question will come from Andrew to rail.

Are there reasons. Please go ahead.

Hey, Thanks, good morning.

Good morning.

Hey, sorry, I appreciate the color on the on the.

On the sub debt redemption post the quarter on it and it looks like post those kind of 3 tranches youll still have around $330 million or so of sub debt on the balance sheet.

What's the is there any room to redeem more over the next couple of quarters or is this come about it from the near term.

Okay.

Ryan do you want to yeah, yeah, Andrew that debt.

On the near term that's about it.

Don't have it exactly in front of me, but I don't think we have another issue that's a redeemable yet for.

For a couple of years, so we've pretty much done what we what we could do on that front at least in the short run here.

Okay. Thanks, and then Ron just to make sure I heard you correctly on the bully investment made this past quarter.

The $1 million of anticipated fee income.

Is that on an annual on an annual basis or per quarter.

That'll be on a quarterly basis Andrew.

And that'll be an interest income Andrew not fee side okay.

Got it.

Alright, I'll I'll step back on thanks for taking my questions.

Certainly.

I show no further questions and would like to turn the call back over to management for any closing remarks. Please go ahead.

Very good. Thank you all for joining US we appreciate it we will look forward to.

Pick up talking to you at our next earnings release.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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