Q4 2021 Pacific Premier Bancorp Inc Earnings Call

Okay.

Hello, everybody and a warm welcome to todays Pacific Premier Bancorp Q4, 2021 Covid School. My name is minutes, then it'll be operator, if you would like to ask a question on today's call that'd be staff led by one can you kind of think he asked.

And your mind that'll be thoughtful they buy cheap.

I now have the pleasure of handing over to Akshay, Steve Gardner Chairman and CEO , Steve. Please go ahead.

Thank you Melissa.

Good morning, everyone. I appreciate you joining us today.

As Youre all aware earlier. This morning, we've released our earnings report for the fourth quarter of 2021. We have also published an updated investor presentation that has additional information on our financial performance.

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 a few of 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 you all to all.

To read through those carefully.

We delivered another quarter of strong financial performance reflects the strength of our diversified commercial banking model.

During the fourth quarter, we generated net income of $84 $8 million or <unk> 89 cents per share as full year 2021, net income increased to a record $339 9 billion or $3 58 per share.

Our full year 2021 results highlight the growing capabilities and sophistication of our bankers as total revenues increased 19% year over year to a record $770 million.

Despite the challenges presented throughout the year, including the impact of the pandemic supply chain disruptions and labor shortages, we grew total assets by 7%.

One $1 billion.

Asset quality remained and trended favorably.

We finished the year with nonperforming assets, representing just 15 basis points of total assets and net charge offs of two basis points of average loans for the year.

As a result of the balance between loan and deposit production as well as our solid profitability, we increased our tangible book value per share by nearly 9%, while returning $140 million to cap in capital to shareholders during 2021.

On behalf of the board of directors I want to thank the entire Pacific Premier team for their efforts in delivering another year of outstanding performance and maintaining our commitment to continuous improvement that not only enables us to deliver strong financial results in the near term.

But also increases the value of our franchise for the long term.

We finished the year with another strong quarter of business development generating nearly one $5 billion in new loan commitments.

Our loan production was more heavily weighted towards commercial loans than earlier in the year as we saw an increase in demand among new and existing commercial clients.

We are also benefiting from enable to capitalize on the disruption that we're seeing for merger activity within our markets.

Over the past two years, we have naturally generated more multifamily loans given the relationships we added through the Opus acquisition.

And the opportunities that this asset class presents on a risk adjusted basis during the pandemic.

Over the longer term our primary focus remains on commercial banking and serving the needs of business clients and in the fourth quarter, we saw a shift back towards our traditional mix of loan production.

New C&I loan commitments increased by more than 50% from the prior quarter, while franchise loan commitments more than doubled.

Additionally, we saw another quarter of higher utilization rates on lines of credit.

The combination of new loan production and an increase in utilization rates. This past quarter resulted in an annualized loan growth of 9%.

Our disciplined approach to business development and the competitive advantage, we have from our proprietary Premier 360 technology allows us to consistently generate new business banking relationships.

A mere 360 enables our production underwriting closing and Treasury management teams to work seamlessly and to be highly responsive to our clients. So that when businesses and entrepreneurs have additional credit or cash management needs.

Turning to the Pacific Premier team, knowing they can count on us to deliver.

It's an important element of our success in building deep long lasting relationships with clients and is one of the reasons why we win business based on providing exceptional service rather than competing on price or terms.

Reflective of our deep client relationships non maturity deposits increased $1 $5 billion or 10% compared to last year.

And although our period end deposits were slightly lower than the third quarter. This was largely a result of seasonality and deposit flows for some of our business in commercial real estate clients.

Outside of the high quality relationships, our bankers continue to produce we are seeing positive trends across most areas of the business and our key performance metrics.

Our strong loan growth enabled us to further redeploy excess liquidity into higher yielding assets, which combined with a reduction in our cost of deposits.

<unk> it in a higher net interest margin this quarter.

As we mentioned on our last earnings call. We are intentionally maintained a meaningful portion of the investment portfolio.

Highly liquid short term securities while also lowering the effective duration of the entire portfolio.

This strategy provides us with the flexibility to quickly redeploy these funds into higher yielding assets as the opportunities arise.

This strategy has helped us realize an improvement in our loan to deposit ratio and a more favorable mix of earning assets.

We also had another solid quarter across the majority of our fee generating businesses.

Pacific Premier Trust has been able to maintain a higher level of fees that began to materialize during the second half of last year.

Our commercial escrow and exchange businesses continues to perform at a high level as we are realizing synergies with our lending teams.

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

Thanks, Steve and good morning.

For comparison purposes. The majority of my remarks are on a linked quarter basis.

Beginning with the income statement highlights.

Highlights for the fourth quarter included total revenue of $198 million as net interest income increased to $177 million and noninterest income came in at $27 $3 million.

Our pre provision net revenue was $107 million.

Or 193% of average assets, reflecting strong organic loan growth and higher revenue contributions from our fee based businesses.

Noninterest expense in the fourth quarter was consistent with our prior expectations at $97 $3 million and our efficiency ratio came in at 48%.

Lastly, we continued to see favorable asset quality results with a provision for credit loss recapture of $14 $6 million in the fourth quarter compared to the prior quarter's recapture of $19 $7 million.

Net interest income increased $1 $7 million to $177 million higher average loan balances of $346 million and a higher securities yield drove the increase in interest income of $1 million.

On the funding side, we had a favorable shift in our average deposit mix lowering our cost of deposits to four basis points compared to six basis points in the prior quarter.

Our net interest margin came in at 353% for the quarter and the core margin at 336% an increase of six basis points from the third quarter.

The margin expansion was driven principally by a favorable remix of average earning assets with average loan balance is $346 million higher than average cash balances $329 million lower.

Loan yields decreased 10 basis points to 4.46% as rates on new originations were lower than rates on loan maturities and repayments during the fourth quarter.

Accretion contributed 22 basis points to loan yields in the quarter compared with 27 basis points in the third quarter.

Looking ahead to the first quarter of 2022.

We expect our core net interest margin to be in the three to five years to three 3% range.

Noninterest income of $27 $3 million decreased $2 $8 million from the prior quarter primarily.

Attributable to a $2 $5 million decrease in valuation adjustments for certain CRA equity investments.

Trust custodial fees increased $165000 in escrow and exchange fees increased $354000 as a result of higher transaction volumes.

Going forward, we expect our noninterest income for the first quarter to be in the range of 24% to $25 million, excluding any security sale gains.

Consistent with our expectations noninterest expense totaled $97 3 million compared to $96 million in the third quarter.

Salaries and benefits increased $2 5 million to $56 $1 million.

Reflecting higher production and performance based incentives as well as market driven wage pressures.

Staffing overall remained flat at 520 employees.

Professional expense increased due to the timing of certain legal and professional fees.

Our noninterest expense should approximate $97 million to $98 million in the first quarter due.

Due to the anticipated higher payroll taxes, and lower deferred loan origination costs offset by lower business incentive accruals.

Okay.

And as I mentioned earlier, the fourth quarter recapture of $14 $6 million was driven principally by the continued improvement in the current and forecasted macro environment environment as well as key modeling variables.

Now to the balance sheet.

Loans grew $316 million or 9% annualized as we saw another quarter of strong loan production and increased line utilization, partially offset by higher levels of loan prepayments.

In addition, we added 900 million in overnight sulfur based fixed to floating rate swaps for a total notional position of $1 $2 billion.

Our securities portfolio decreased $225 million to $4 $7 billion, which provided additional liquidity to fund the incremental loan growth.

We will continue to manage the securities portfolio in conjunction with loan and deposit growth.

With consistently solid earnings the company continues to generate significant amounts of capital supporting balance sheet growth and strengthening our capital ratios.

Tangible book value grew to $20 29 at December 31, compared with $19 75.

At September 30th.

As noted in our earnings release.

The board of directors declared a <unk> 33 dividend payable on February 11th to shareholders of record on February 4th.

And finally from an asset quality standpoint.

Total delinquencies remained unchanged at 14 basis points of loans held for investment.

While classified assets to total assets declined to 58 basis points.

Net recoveries totaled $1 million for the quarter compared with one 8 million of net charge offs in the prior quarter.

Lastly, our allowance for credit losses ended the quarter at 138% and.

And the total loss absorbing capacity comprised of the allowance plus the remaining fair value discount on acquired loans totaled $274 9 million at quarter end or.

Or 191% of loans held for investment.

With that I will hand, it back to Steve.

Great. Thanks.

I'll wrap up with a few comments about our outlook.

While the actions of the Federal Reserve will certainly play a significant role this year in terms of influencing the operating environment. We believe the fundamental underpinnings of the economy are strong, particularly in our west coast markets.

Consumers in good shape has low levels of debt and high levels of savings, which should lead to business is looking to capitalize on higher levels of economic activity.

We have the strength and capability to support the expansion of those businesses, which should lead to continued growth in our balance sheet.

We entered 2022 with the highest level of commercial loan commitments in our history. So further increases in utilization rates will be another potential catalyst.

Our balance sheet is positioned to benefit from a rising from rising interest rates as we have demonstrated in the past we were able to execute in any interest rate environment, regardless of the shape of the yield curve.

While we are always on the outlook for new banking talent, our ability to generate organic growth is not dependent upon recruiting new teams.

During 2021, we generated $5 7 billion.

And new loan commitments and grew total loans by 8% with essentially the same banking teams we had in place in 2020.

We benefit from our approach of consistently investing in the organization and our philosophy of continuous improvement.

Along with the productivity gains we get from leveraging technology. We also benefit from the development of our people.

We have consistently developed highly productive bankers that steadily increase of debt have steadily increased their contribution to our growth.

And as we have scaled the company we've benefited from the investments in technology.

Net of enhanced efficiencies and allow us to deliver excellent client service.

Finally, we will continue to be efficient from a capital management perspective.

We remain committed to returning capital to shareholders, while maintaining sufficient levels of capital to support our organic and strategic growth initiatives.

As always we will maintain our discipline as we assess M&A transactions to ensure they make strategic and economic sense.

We have a long track record of successfully identifying structuring and integrating transactions that have consistently created value for our shareholders.

That approach will not change.

With the strength of our organization the robust infrastructure, we have built.

And the depth and experience of our management team, we are well positioned to execute on transactions that complement our organic growth strategy and enhance franchise value.

That concludes our prepared remarks, Melissa will you.

Let folks know how to get into the queue. Please.

Yes.

Of course, if you would like to ask a question it will be followed by one on your telephone keypad.

As a reminder.

Sure.

So please ensure you on these early to make any when do you think to ask two questions. So our first question comes from Matthew Clark of Piper Sandler. Please.

Please go ahead.

Hey, good morning.

Steve could you quantify the pipeline coming out of the fourth quarter.

And whats.

What's changed I guess within the franchise lending business of late is that a longer list of franchises youre willing to lend to ore.

Or is there some dynamic that's changed.

Just in the marketplace.

That space.

Hey, Matt it's principally has to do with the fact that when as the pandemic began.

We cut back on a couple of.

Of producers.

The team at that time.

And as we got better visibility in saw.

The economy played out and in particular.

The benefit of.

That many of the quick service restaurants on naturally had in their business models and they performed very well we began to add a couple of producers to that team in the mid part of last year. So we're benefiting principally from that.

No we haven't changed.

In any fashion.

Clients that we are going after the concepts that we will do.

We regularly review the out west of Franchisers, but we haven't made any significant changes there.

Okay, and then the size of the pipeline in dollars to be had it.

The pipeline is right around 1 billion and a half.

This is typically the beginning of the year as maybe the lowest.

Point.

We're seeing pretty good activity.

Expect it to come along here and.

In the weeks and months to come.

Okay.

Then just on the <unk>.

Additional $900 million of swaps.

Maybe Ron do you have any.

<unk> four.

How that impacts your asset sensitivity, if you could quantify that.

Yes.

Sure Matt.

It obviously is.

Swapping out fixed for floating it increases our asset sensitivity probably in the neighborhood of 100 to 200 basis points.

Round numbers.

So and that reprice immediately with with any kind of initial 25 basis points or more.

Right a rate hike.

Okay.

And then just on the expense outlook getting a lot of attention. This quarter you gave the range for the first quarter.

What are your thoughts on kind of beyond <unk> with wage inflation and what's your appetite for hiring teams given all the disruption out west.

Yeah, I think that.

Look we are seeing in the wage crashers says as many others are.

I think we'll manage it very effectively.

And then as it relates to the teams that are out there.

Historically, we haven't.

Pursuit teams per se.

But we're always looking to recruit.

Good talented bankers that we think would enhance.

Our franchise and that's been an ongoing process and will continue and.

Certainly given some of the disruptions here in the west.

Sure.

Those opportunities probably increased here.

And in the last few months.

Okay. Thank you.

Okay.

Keith will now take our next question from David Feaster Raymond James.

David Please go ahead.

Sure.

Good morning, everybody.

One follow up on that I, just wanted to follow up on the asset sensitivity question, you kind of touched on it a bit in the prepared remarks and again good to see the additional swaps, but maybe how do you think about.

Additional moves to improve your rate sensitivity I mean.

<unk> taken the duration of the Securities book down added some swaps.

There are some other potential moves going forward or are you kind of happy with where you are sitting now.

I think we're pretty satisfied with where we are at this point I think the primary thing around for us David and our interest rate risk sensitivity is.

You look at our deposit base and in the way it has reacted over the past rate cycle and historically no.

What does business, our banks with Pacific Premier because of the rates, we pay on deposits, where the rates we offer on loans are.

Ours is very much a very relationship based business model and that's why our business clients turn to us. So I think that that is.

The strongest aspect.

Of our franchise and in particular around interest rate risks risk.

We will continue to take measured steps as we see appropriate whether it's in the securities portfolio or swaps, but I think that.

I'm very comfortable with where we stand right now.

Okay. That's great and then just puts it on the trust and the escrow businesses. Those you guys have done a great job there continuing to invest and it's paying off just curious maybe some of the underlying trends in each of those businesses and just where you're seeing growth is it are we starting to see is this is COO.

Core organic growth or how do we really started to see some of the cross sell across the legacy franchise.

Just curious some some comments on those two segments.

I think that from the escrow and exchange business, we are seeing.

Good synergies amongst the team and referring business.

Tal wanted either and that is certainly a line of business.

That will we think there are opportunities to expand it in in 2022 further it is principally.

In L a orange County.

Maybe call it southern California focused business.

Business, and we think there's opportunities to expand it so we're considering that part.

Here as we move through the year and then on the trust in our rather on the trust business.

There's been a lot of work that we've done.

Once we got the systems converted the mid part of last year and a lot of work around the operational team.

We think that there is some very attractive opportunities to grow that business with some large institutional clients. It's generally.

Business that they don't want to be and just given.

They don't have any desire for scale in it and it is something that.

The competitors that we have.

I just don't think have the tools that we now have in place. So we'll be looking to grow that.

Here over this year and into the future.

Okay. That's good color and then lastly.

Last one from me is great to see the improvement in C&I utilization in the quarter and the increasing commitments.

Just curious what are you seeing in the C&I segment and hearing from your customers. That's really driving the improvement are there any segments that you might be seeing more demand and just how do you think about C&I growth as we head into next year.

I think that is.

As business has got passed as we all got past the Delta wave and feeling pretty good about.

Calgary.

In the latter part of the third quarter and into the fourth quarter.

And just the overall demand that the instances where shane.

Where we were.

Experiencing.

The expansion and line utilization rates, although still relatively modest.

Modest I think that omicron has certainly.

Acerbate at some of the challenges.

Around.

Retaining and recruiting employees getting employees into work and to be productive.

But that too will pass here.

Time, it's relatively broad based that we're seeing the demand and it's both new clients that we're bringing into the bank and as existing clients.

Okay, that's great color thanks, everybody.

Thank you. Our next question will be coming from Gary Tenner.

Debbie.

Thanks, Good morning.

Well a couple of questions I guess first on the <unk>.

On the deposit side, Steve I think you mentioned a little bit of seasonality at the end of the year. As you also talked about some increase in C&I utilization just wondering if you were drawing any lines towards.

Companies, drawing down their deposit balances.

In conjunction with kind of the C&I utilization and activities or or would you really put all of that on seasonality late in the year.

Aye.

I put the majority of it on seasonality for late in the year, we start.

And in the escrow and exchange business some balances come down towards year end I think that's relatively typical is as people move to get their transactions closed.

Bob.

And so I don't at least at this point equated to.

The decrease in any of this relatively slight decrease in deposits.

Weighted to increases in line utilization I really think it's around.

Businesses are.

<unk> seen some some pretty good growth opportunities and they're utilizing their lives, which we're pleased to see.

Okay. So the increase in.

The FHA will be outstanding.

Outstanding at the end of the year or was that just kind of a stopgap to address that without having to.

Shift.

Asset mix anymore, because you guys have done a better job than most.

Staying pretty fully invested in terms of your asset base or just kind of as we're thinking through 2022.

And what should be a.

I think a pretty solid year from a loan growth perspective, how you are balancing or how you think about balancing.

The earning asset mix.

Moving through the quarter.

We want to balance it against what is in all likelihood I think that all of us expect a rising rate environment Bal.

Balance sheet against it.

We have remained fully invested in in the securities portfolio, but at the same time as as we mentioned we've brought down that duration over time over the last two or three quarters.

We've got more sitting in the highly liquid.

Short duration securities.

So I think we're well positioned for any eventuality and yes, we will utilize our map hlv advances overnight advances at various times and historically, we've utilized FHA advances term advances.

Two for any number of reasons, so we'll see how things develop and play out here over.

Over the year.

Thanks, Jeff.

Sure.

Alright, our next question will be coming from Chris Mcgratty of clothing.

Yes.

Chris.

Yes.

Hey, How's it going this is annualized neurons Chris Mcgratty.

Can you just discuss.

The loan pricing Youre seeing in your markets and how those rates compare to what's in the existing portfolio.

Yeah, I think it's Mitch.

Relatively competitive.

We've been pleased to see the movement in the in the 10 year recently and look to capture that.

As we are pricing.

Loans.

The yield on the new production is below what the overall portfolio is yielding an enron.

Had touched on that in his prepared remarks.

Ron did you have anything you'd like to add.

Yes, Steve it's spot on.

The natural churn of the portfolio.

Yeah, you know continues.

Were originating around the three 6%.

And I think we ended at 395 as of the loan portfolio yield.

As of 12 31.

Okay, great. Thanks, Thanks for that color.

Just looking at M&A.

What are you seeing your existing markets in terms of potential opportunities and are there any new or expansion markets that you'd consider.

No.

The new as far as our markets are still principally the west coast, whether that's California, the Pacific Northwest are from the.

Down call it the Rocky Mountain range from the Canadian border down into into the Dallas, Texas market those are all.

There are a number of attractive markets there.

There are some attractive institutions.

We were going to read and then we're going to maintain the discipline that we have.

Around the franchises that will pursue and discipline around the.

The structure.

Sure to ensure that.

We have the.

Best opportunity to execute and deliver long term shareholder value.

Okay, great. Thanks for the questions.

Thank you Chris.

Final question, so how much so the management team for any closing remarks.

Very good thank you Melissa and thank you all for joining us today.

Thank you everyone. This concludes today's Cook you may now disconnect.

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