Q3 2021 Pacific Premier Bancorp Inc Earnings Call
Good day and welcome to the Pacific.
<unk> Premier Bancorp third quarter 2021 earnings conference call.
All participants will be in listen only mode.
So do you need assistance. Please signal our conference specialist by pressing the star key followed by zero. After today's presentation there'll be an opportunity to ask questions.
To ask a question you May press.
And then one on your Touchtone phone.
Withdraw your question. Please press Star then two.
Please note this event is being recorded.
I'd now like to turn the conference over to Steve Gardner Chairman and CEO. Please go ahead.
Thank you Carrie and good morning, everyone. I appreciate you joining us today.
As you were all aware earlier. This morning, we released our earnings report for the third quarter of 2021.
We have also published an updated investor presentation has additional information on our financial performance.
If you have not done so already we would encourage you.
At 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 a few of the financial details and then we'll open up the call to questions.
No.
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.
Okay.
We plan to keep our prepared comments relatively brief given the level of detail.
Oh and disclosures we have included in our earnings release and the Investor presentation.
In the third quarter, our teams continued to execute at a high level delivering strong financial results amidst a challenging operating environment.
The resurgence.
Of Covid cases are rising from the spread of the Delta variant inflationary pressures and supply chain disruptions have all presented challenges to varying degrees to our employees clients and the communities at large.
However, our disciplined approach to business.
Element in terms of both adding new clients and expanding existing relationships enabled us to generate high quality organic loan and deposit growth and increase in revenue and higher operating leverage.
During the third quarter, we generated net income.
Of $91 million or <unk> 95 per share.
We have gained scale and are realizing greater efficiencies as we are seeing improvement in our core earnings power.
During the third quarter, we generated pre provision net.
Net revenue of $103 $1 million, which was an increase of 10, 7% from the prior quarter.
While our P P and our return on average assets increased to 1.98% from $1 eight 4% in the prior quarter.
Our results were driven by a continuation of a number of the positive fundamental trends that we saw last quarter.
As well as progress across a number of areas.
Our strong loan production enabled us to continue remixing the balance sheet towards higher yielding assets.
The more favorable.
<unk> mix of earning assets along with the previous redemption of higher cost sub debt supported the expansion in our core net interest margin.
We had higher levels of noninterest income largely driven by growth in our custodial account fees.
Our favorable.
Asset quality results and overall low risk profile drove an additional reserve release.
And our consistent expense management.
Revenue growth outpaced operating expenses, resulting in a nearly 200 basis point improvement in our efficiency ratio.
To 47, 5%.
Despite the headwinds to stronger.
Two a stronger economic recovery.
Our banking teams continue to be exceptionally productive in generating a high quality new relationships.
We operate in a highly competitive.
<unk> market with many banks being aggressive on both pricing and structure to win deals.
But our consistent approach to business development aided by our proprietary technology Premier 360 enables us to add new clients and expand existing relationships without.
Without compromising on either pricing or credit risk.
We are seeing a consistent level of activity and generated nearly $1 $5 billion in new loan commitments during the third quarter.
Which was just slightly below our second quarters record level.
This resulted.
Another quarter of double digit annualized growth in loans.
The mix of loan production was fairly similar to last quarter and continues to be well diversified with balanced contributions coming from across our markets.
The strong demand for multifamily loans.
Coupled with our expertise and deep relationships are enabling us to capitalize on the opportunities to redeploy excess liquidity into these high quality credits that provide attractive risk adjusted returns.
New C&I loan production was roughly the same as the prior.
Prior quarter, while line utilization rates trended up slightly to 35% in September but remain below historical levels.
We had a strong finish to the third quarter with period, ending loans $323 million higher than our average loans for.
For the quarter.
In addition to our loan production our business development efforts resulted in strong inflow of commercial deposits.
And the third quarter. This resulted in $455 million increase in total deposits with a further improvement in our deposit.
Mix.
And a two basis point decline in our cost of deposits to six basis points.
During the third quarter, we generated a higher level of noninterest income.
Largely due to an increase in the fees generated by our Trust Division.
We are making good strides there.
Optimize this line of business and are starting to see early returns on our efforts.
Our managers and teams are working more effectively but we do have a ways to go to achieve the operational excellence that will allow us to scale the business over the coming years.
As we head towards 2022, we are beginning to increase our business development efforts and client outreach.
However, until we get our operations at the level, we expect the fee income generation will likely be a bit variable.
Looking ahead, our loan pipeline.
It's healthy it's slightly more than one $8 billion and we expect to generate another quarter of net loan growth.
We've intentionally maintained a meaningful portion of the investment portfolio and a highly liquid short term securities in order to provide us with the flexibility.
To quickly redeploy these funds into higher yielding assets as loan growth materializes.
As part of our culture of continuous improvement we've had a productive year in terms of new technology Rollouts.
From modernizing our online business banking platform.
Reducing.
Do you see new credit card programs to refining our mobile banking applications, all designed to accelerate product adoption.
Support stronger growth and enhance efficiencies.
The technology platform. We have built is designed to be scalable and enables us to steadily.
Expand our capabilities without significant incremental expense.
As a result, we are able to effectively maintain the technological advantage over all but the largest banks, we compete against and deliver a superior banking experience for businesses and consumers.
<unk>, while automating more back office processes.
With the momentum in business development combined with a companywide commitment to continuous improvement, we are well positioned to drive franchise value higher.
With that I'm going to turn the call over to Ron to provide.
A few more details on our third quarter results.
Thanks, Steve and good morning.
For comparison purposes. The majority of my remarks are on a linked quarter basis.
First taking a look at the income statement.
Our.
<unk> quarter total revenue of $199 $2 million increased $11 5 million or six 1% from the prior quarter driven by growth in both net interest income and noninterest income.
The topline revenue growth led to an increase in our pre provision net revenue.
A $10 million to $1, 98% of average assets.
Reflecting strong balance sheet growth and fee income growth, which now approximates 15% of total revenue.
Net interest income expanded by $8 1 million to $169.
Our third lien.
Higher average, earning assets principally loans drove the increase in interest income of five $4 million.
Additionally, during the quarter, we benefited from the early quarter balance sheet actions redeeming $145 million in sub debt.
1 million average cost of five 3%, which helped reduce our cost of funds by almost $3 million for the quarter.
Our net interest margin came in at 351% for the quarter and our core margin at 330% increased eight basis points from.
The second quarter, driven principally by a seven basis point decrease in our cost of funds.
Loan yields decreased six basis points to 456% as core yields continued to be impacted by the low current interest rate environment.
And looking ahead to the fourth quarter.
We expect our core NIM to be in the three to 5% to 330% range.
Noninterest income of $30 $1 million increased $3 4 million from the prior quarter primarily attributed.
Two of $3 $5 million increase in trust custodial fees, resulting from strategic pricing initiatives and $1 million increase in bowling income, reflecting the additional investments made at the end of June.
Going forward, we expect our noninterest income for the fourth quarter.
<unk> to be in the range of $24 million to $26 million, excluding any potential security sale gains.
Noninterest expense totaled $96 million compared to $94 5 million in the second quarter.
Salary and benefits were stable.
At $53 $6 million, although we continue to see market driven wage pressures.
Staffing remained flat at 523 employees.
Marketing expense increased due to the timing of certain business development initiatives in the third quarter.
The higher levels of data processing expense reflect the full quarter impact of the post conversion Trust Service Bureau expense and continued investments in technology across the organization.
Our noninterest.
<unk> expense should approximate $96 million to $98 million.
Per quarter, as we expect higher business development and.
And production related costs tied to our continued growth expectations as well as increasing incentive and wage costs.
Provision for credit losses was a recapture of $19 $7 million.
Compared to a recapture of $38 5 million in the second quarter.
The third quarter recapture was driven principally by the improving macro economic forecasts and key modeling variables.
As well as the continued favorable asset quality results.
Turning now to the balance sheet.
In the four total assets grew to $21 billion compared to $20 5 billion in the prior quarter as deposits grew $455 million.
We saw a favorable remix of our liabilities with the $145 million sub debt redemption.
147.
Our decrease in higher cost Cds, while non maturity deposits grew by $602 million, 15% annualized.
We.
To deploy our excess liquidity into higher yielding loans and investments, which grew on a combined basis seven.
$766 million from the prior quarter fund.
Funded almost half through lower cash balances and the remaining from net deposit growth.
Loans grew $329 million or 11.
5% annualized and our securities portfolio increased to $4 nine.
<unk> million dollars.
With consistent solid earnings the company is generating significant amounts of capital.
All of our capital ratios remained well above the regulatory well capitalized levels.
This quarter in addition to our 33.
Dividend.
We also repurchased a modest 280000 shares with a total market value.
$11 2 million further.
Ensing our return of capital.
And lastly from an asset quality standpoint.
Our asset quality profile.
<unk> continues to perform well with nonperforming assets stable at 17 basis points of total assets and total delinquencies at 14 basis points of loans held for investment both virtually unchanged from the prior quarter.
Net charge offs totaled $1 8 million for the quarter compared.
Paired with $1 1 million in the prior quarter.
Yeah.
Our allowance for credit losses ended the quarter at a healthy 151%.
And the total loss absorbing capacity comprised of the allowance plus the remaining fair value discount on acquired loans totaled 296 million.
While COVID-19.
Order and or to one 1% of loans held for investment.
Given our strong asset quality profile.
And the potential improving economies impact on our <unk> model.
We could see further reserve releases.
Net of loan growth.
With.
With that I'll hand, it back to Steve.
Thanks, Ron.
In summary, the organization is performing exceptionally well and generating solid organic growth despite the ongoing headwinds affecting our markets.
At the same time, we continue to evaluate.
Wide range of M&A opportunities and are open to transactions that will either incrementally expand our franchised or be transformative in nature.
While we have grown significantly over the past decade, and the size of the targets. We seek have increased we will not deviate from our formula.
<unk> criteria that has led to the substantial value creation from previous acquisitions.
We are not interested in transactions that are predicated upon and driven by social issues that carry a high degree of execution risk.
We have been and will remain.
Been a disciplined acquirer that thoughtfully prices structures and executes on all aspects of M&A.
Our shareholders can be assured that whatever the transactions, we pursue either as a buyer or seller, we will have their best long term interests in mind as.
As well as those of all of our stakeholders.
That concludes our prepared remarks, and we would be happy to answer.
Any questions Sherry if you could please open up the call for questions.
We will now begin the question and answer session to ask a question you May press.
And then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily.
Oster.
Yeah.
The first question will.
Be from David Feaster of Raymond James.
Hi, good morning, everybody.
Good morning.
I just wanted to touch on the loan growth and the originations it's great to see the continued strength in originations and the diversity of the production.
I'm, just curious maybe from a regional or marquee.
Where do you where are you seeing the highest demand and I guess as you look at the pipeline, where do you see the most opportunity for growth going forward is it similar to this quarter, where we should expect most of the growth to be driven by multifamily and CRE.
I think that most all of our markets are contributing.
Nicely David.
<unk>.
Theres some various initiatives that we've had ongoing.
We think should add to a further diversification of some of the loans that were closing from whether it's on the construction side the franchise.
Spec side.
And the like.
Certainly the C&I production has been strong.
We are being impacted as most of the industry is on the line utilization side.
But overall it should be it should continue roughly.
Roughly the same mix, but.
With incremental increases from some of these other areas I mentioned.
Okay. Okay, that's great.
And then maybe just touching on the hiring side I mean, theres been a lot of.
Disruption across your footprint from some some M&A.
Are you looking to use that I got to imagine that you are looking at to use that as an opportunity to increase density in certain markets or high grade talent or are you interested in some potential market expansion and de novo growth into some of these adjacent msas.
And markets that Youre.
We're not currently in and add new talent.
Historically, we haven't been interested in and de Novo growth we've been successful.
And M&A and it's in our when we expand.
We are always looking to recruit.
Talented folks.
Whether it's on the production the operations the credit.
Back office side wherever it may be and that's something that is always ongoing and.
We're certainly taking.
We're taking advantage of opportunities.
As they arise.
That's right and then just one.
One more just you talked in the press release and you touched on in your prepared remarks, too, but talking about your proprietary technology driving growth and I was just wondering if you could maybe elaborate on that where you think the tech investments are paying off the most.
And in what areas maybe.
I've seen the most revenue or loan growth.
Or efficiency improvements from technology.
It's really as I referenced that David we're talking about our Premier 360 platform, which is really the system that we've built over the last 10 years.
That.
Has salesforce at the core of it and really is a proprietary system that we use from client and data management to workflow management call Center management.
And really helps our people.
At much greater visibility.
<unk> into their existing portfolios of loans and deposits and their relationships as well as what is in our pipeline.
New loans and relationships.
As well as the activity levels of all of their teams underneath them.
So that they can help.
Help guide and direct folks to be the most effective possible in their calling efforts their business development moving loans through the system and alike.
And so it's all of that we've certainly benefited from the work that we've done on our API banking.
And continue to invest in it and expand it.
Where we can and we've got a few slides in the deck that speak to that more directly.
That's great color. Thank you.
The next question will be from Matthew Clark of Piper Sandler.
<unk> Matthew your line is open if you wish to ask a question.
Hey, good morning.
First one.
On the loan pipeline sounds like it's up a little bit here your production strong once again.
It seems like you're.
You're tracking to.
Low.
Did you kind of net loan growth still going forward is there anything unusual in terms of payoffs paydowns or anything.
That you think might not repeat itself going forward that would make it difficult to put up that type of growth here in the near term.
I mean, it's always a challenge to forecast.
Early payoffs I mean, certainly the amortization, we can finger pretty closely.
Where wind utilization if it continues its upward trend.
Factor Ron anything that you could think of from the.
Run off in the portfolio that may impact net loan growth here in the fourth quarter.
Steve I think you hit the.
The more.
Unknowns, the better of the unknowns, obviously, Matt as you saw from our earnings release disclosure we saw.
Little bit of a benefit this quarter relative to the prior quarter in terms of our maturities and prepayments.
Prepayments.
Whether thats sticks or whether we see an uptick in that that will that will create a little bit of volatility and as Steve indicated.
The lines of credit really are the the other.
Pretty much unknown.
That impact that but it's really those two are the key drivers.
With respect to our loan growth.
Okay, and then just on the <unk>.
<unk>.
I think there was an.
The expectation to kind of return to day, one fairly swiftly it looks like Youre on path to do that I guess, what are your latest thoughts on how quickly you might get there and whether or not.
There would be some flexibility to dip below it.
I, it's hard to say, we're we're monitoring.
Any number.
Number of factors.
How do you forecast that impact the model.
How they shake out.
We'll see.
I don't know Ron.
If you could talk to probably.
More eloquently than I did.
The only thing.
Matthew to Steve's comments.
Is that the.
These supply chain disruptions that we're seeing are the slowness in that.
Those potentially could continue to bleed into some of the economic.
Forecast, which quite frankly have been improving.
I would add decoratively with each quarter, but we could see that actually bleed in and maybe slow down.
The effect, especially in the C&I, where you're talking about.
Business business growth business sales GDP those types of drivers employment, so im with Steve.
We'll see how the model plays itself out.
It's done at the at the loan level at the segment level in each of those drivers are are unique.
Unto themselves. So we'll see how it plays itself out.
Okay, and then just last one for me.
We've seen some.
Emma.
M&A transactions in the northwest and the Midwest.
You may or may not have been interested in.
How has that shifted your focus in terms of.
Your appetite in terms of size geography, and your overall.
List of priorities.
Some hasnt changed it.
Got it all we're still <unk>.
Interested in an expanding throughout the west coast.
And we've talked about those targets.
Not specific names obviously, but.
But general description.
We're looking at but it hasn't changed our view at all.
Okay, and how is the <unk>.
Cadence of your conversations changed since last quarter.
They always ebb and flow Matthew.
We are.
Of reaching out to folks and discussing how it might make sense for us to partner.
But.
As I said in my prepared comments.
We have been a disciplined acquirer.
That is going to continue that just will not.
Change.
We've demonstrated very clearly our ability to create value for our shareholders and the collective shareholders.
When folks.
If a partner with us.
We're not going to do anything that's going to change that fact.
Sure. Thank you.
Yeah.
The next question comes from Gary Tenner of D. A Davidson.
Thanks, Good morning.
I got on a moment or two late so I apologize Steve If you noted this in your prepared remarks, but.
The trust fees moving higher this quarter.
Now that you've got the conversion around mid year, and you talked about moving to offense, you know kind of in the back half of the year is this purely I mean.
You know a function of greater business generation or is there anything lumpy this quarter that that would have stuck out.
This is really reflective of.
An adjustment that we made and the fees of the business.
So it really doesn't affect it wasn't impacted Gary Baidu business development I did make a comment in the prepared remarks about us is we're heading towards.
2022 to increase our business development efforts and outreach.
Clients.
And then we talked about the fact that.
Since the conversion, we've been making good strides and progress in optimizing our.
Our operations.
We got a couple of bumps in the road along the way but.
Yes.
We are the team is making very good progress and we still have a little bit of work to do ahead of us really to get the business to that level of excellence.
From an operational standpoint that will really allow us to scale the business and so as that work progresses here towards the end of the year, we said that is.
There could be some variable aspects to those fees, but we do expect to grow there.
Them.
Over time here.
Okay. So broadly speaking, though the step up in fees is kind of a permanent baseline level just given the fee structure you've changed in the business is that right.
Yeah.
It could be it.
Possibly is the baseline.
As far as the cost, but there may be some variability here as we move through the fourth quarter and into next year.
Which may be offset by new business development and growth in the business.
Okay, Okay fair enough.
And then second.
Line is in terms of the balance sheet. Obviously, you were cash down to what appear at least to me to be fairly reasonable levels.
As you think about the deposit base right now you've had some ongoing runoff in our retail CD is that still an area you want to work lower.
Or looking.
Just the kind of loan deposit ratio right now and your cash balances you know it was just kind of a.
More steady level, I guess going going forward for the overall.
Balance sheet mix.
Ah well.
Well, obviously, we'd rather.
Hi.
Increase the level of loans to deposits and fund that through.
Through some of the securities that we have.
We've been holding a pretty sizable chunk of securities really short duration.
To be in.
Positioned to redeploy those into loans.
And our expectation is to continue to grow the balance sheet.
Okay. Thanks, Dave.
Sure.
The next question is from Andrew <unk> of <unk>.
Stevens.
Hey, good morning.
Good morning, Good morning, Steve.
Steve I'm looking at page 12 of the slide deck on technology and API adoption. I'm curious are you currently working with any Fintech partners in order to reach end customers and just how are you thinking about leveraging.
We are working with.
Those fintech partners in the future to provide banking services payment services to clients.
We are working with.
A number of.
Fintech clients now.
Sure.
A bit.
<unk> are in those areas of payment processing.
Some in there that have high transaction volumes.
Some of these I don't want to give individual names.
There are specific accounting sort.
Software packages.
And the like.
And so we look to expand that over time. This initially began as working to solve a problem for some of our clients in the HOA management space a number of years ago.
And.
We've got a nice advantage there and so we've just looked here.
Over the last call it <unk>.
18 months or so to expand that to other.
Cases that would make sense.
Okay.
Got it and would this.
<unk> kind of.
Our fee income impact or is it more focused on efficiency or could there ultimately be balance sheet impacts from some of these offerings.
All three were looking at potential growth in and benefiting us on the fee side incrementally benefiting us on.
Efficiency side, and maybe to a greater extent on the balance sheet side and acquisition of new clients.
Understood Okay.
Thanks, and then.
If I look at the repurchases from this quarter and it looks like the stock's about eight or.
9% higher than where you repurchased that during the quarter do you think appetite towards the buyback has cooled off a bit or just any kind of update on expectations here.
Look we've used the stock buyback as for since it was.
Implemented.
Opportunistic.
And that's what we're going to continue to do.
Okay, great. Thanks for taking my questions.
Certainly.
This concludes our question and answer session I would now like to turn the conference back over to Steve Gardner for any closing remarks.
Well, we appreciate everyone joining.
The call.
You all have a realized weekend. Thank you.
Thank you. The conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines have a great day.
[music].
Okay.
[music].
Yeah.