Pacific Premier Bancorp Inc. Q1 2023 Earnings Call
Okay.
Good day, everyone and welcome to the Pacific Premier Bancorp Q1, 2023 conference call.
All participants will be in a listen only mode should you need assistance. Please they know a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
I ask you a question you May press Star and then one using a touchtone telephone to withdraw your question you May Press Star two.
Please also note today's event is being recorded at this time I'd like to turn the floor over to Steve Gardner Chairman and CEO . Sir. Please go ahead great. Thank.
Hey, Jamie Good morning, everyone. I appreciate you joining us today as you're all aware, we released our earnings report for the first quarter of 2023 earlier this morning.
We have also published an updated investor presentation with additional information and disclosures on our financial results. If you've not done so already we encourage you to visit our Investor relations website to download a copy of the presentation and related materials.
I note that our earnings release and Investor presentation include a safe Harbor statement relative to the forward looking comments I encourage each of you to read carefully that statement.
In terms of today's call I will walk through some of the notable items related to our first quarter performance Ron Nicolas Our CFO will also review a few of the details on our financial results and then we will open up the call to questions.
We delivered another quarter of solid financial performance in a challenging operating environment, while maintaining a conservative approach to our overall balance sheet strategy.
Our first quarter total revenue was $189.8 million and we generated earnings per share of 66 cents.
We continued to produce solid returns with a return on average assets of 1.15% and a return on tangible common equity of 13, 9%.
Despite the uncertain macroeconomic environment and the impact from 475 basis points fed funds rate increases since March of 2022, our first quarter return on tangible common equity remained relatively consistent when compared to the first quarter of last year.
Our tangible common equity ratio finished the quarter at nine 2%.
Our first quarter CET, one and total risk based capital ratios increased 55, and 80 basis points to 13.54% and 16.33% respectively.
Our quarter end capital levels ranked us in the upper quartile of the K B W. Regional banking index with respect to our TCE ratio and our regulatory capital ratios.
Our strong capital levels provide us with significant optionality and flexibility in terms of balance sheet management.
Our performance in this environment demonstrates the resiliency of our relationship based commercial banking business model.
Our bankers develop and maintain high quality long tenured client relationships based on a relentless commitment to provide best in class service.
Pacific Premier as a diversified commercial bank with a conservative credit culture. The focus is on main street businesses by offering traditional products and services to small medium sized companies entrepreneurs real estate investors and nonprofit organizations.
The recent bank failures have highlighted the importance of sound enterprise risk management practices, and providing stability through prudent and proactive capital and liquidity management.
Getting back to our early 2022 and aligned with our long standing commitment to disciplined risk management, we prioritized accelerating our capital accumulation.
Enhancing liquidity and intentionally moderating our growth rates by increasing loan pricing and selectively tightening underwriting standards.
Regarding our deposit base uninsured and uncollateralized deposits represented 35% of total deposits at March 31st.
At the end of the first quarter, we had an aggregate of approximately $10 billion of liquidity available to us representing an uninsured deposit coverage ratio of one seven times.
Our end of quarter liquidity consisted of over $1.4 billion of cash on hand, and $8 6 billion of unused borrowing capacity.
Notably, we paid down our FHA ob borrowings by $200 million during the quarter and we did not utilize the federal reserve discount window or the federal Reserve's, New Bank term funding program at any point during the quarter.
Our disciplined prudent and proactive approach to managing capital and liquidity helped us navigate a turbulent quarter.
During this rising rate environment, and the industry wide volatility experienced during the quarter, we selectively raise deposit pricing to mitigate to mitigate deposit outflows.
We continued to leverage our investments in technology and comprehensive cash management solutions to foster deeper and more integrated banking relationships.
During the first quarter average commercial deposits declined in part due to some clients seeking higher returns on their excess balances as well as market turmoil.
Although we saw some outflows in certain core deposit products during the quarter the quality of our client relationships coupled with disciplined pricing resulted in a relatively modest increase in the average cost of core deposits to 54 basis points.
During the quarter. We also added some brokered time deposits have varying maturities to bolster liquidity as our loan to deposit ratio decreased to 82, 4%.
We remain focused on managing our funding costs and deposit flows and expect further pressure on each to continue in the second quarter has some clients deploy excess liquidity into higher yielding alternatives.
Notably we are seeing attractive opportunities to gain new clients given dislocations in our market.
Our customers are widely dispersed across a diverse set of established industries from both the depository and lending relationship perspective.
Many of the loan origination trends in the first quarter were similar to the fourth quarter with muted dump borrower demand coupled with our intentional moderation of loan growth.
During the first quarter, we did see a reduction in our loan portfolio from the prior quarter due to both a lower level of demand in connection with higher interest rates, particularly in CRE and multifamily.
And our proactive actions to tightened underwriting standards and raise the loan pricing.
We remain focused on providing best in class service to our clients, while also originating loans that meet our risk adjusted return thresholds.
As evidenced by the average yield on new loan commitments, increasing a 109 basis points over the prior quarter to 743%.
We continue to be disciplined in our approach to managing credit risk or asset quality remained solid as nonperforming loans declined from the prior quarter and our nonperforming assets totaled one 4% of total loans.
Our team does an outstanding job proactively managing our high quality diverse loan portfolio, we have regular discussions with our borrowers relative to their business their financial performance and overall trends in the market, which helps inform our approach to managing overall credit risks.
With that I'll turn the call over to Ron to provide a few more details on our first quarter financial results.
Thanks, Steve and good morning.
For comparison purposes. The majority of my remarks are on a linked quarter basis.
Let's start with the quarters financial highlights.
First quarter net income totaled $62 $6 million 60, <unk> 66 per share and our return on average assets and average tangible common equity were 1.15% and 13.89% respectively.
Total revenue was $189.8 million and noninterest expense came in at $101.4 million.
As a result, our efficiency ratio equaled 51, 7% for the quarter and our pre provision net revenue as a percentage of average assets was 163%.
All of our regulatory capital ratios increased as did tangible book value per share and our TCE ratio increased 32 basis points to 920%.
Lastly, asset quality remains solid and we further enhanced our contingent liquidity sources to $10 billion.
Let's take a closer look at the income statement.
Yeah.
Net interest income decreased to $168 $6 million as a result of higher cost of funds as well as lower average loan balances and two fewer days of interest income in the quarter.
On the funding side.
Both our deposit mix as well as our higher cost of funds impacted the net interest margin.
Our core deposit cost rose 23 basis points to five 4%.
And total deposit costs were 94 basis points, reflecting an increase in both retail Cds and brokered deposit balances in the quarter.
As a result, the first quarter net interest margin narrowed 17 basis points to 344%.
As we noted earlier, we have continued to increase our loan pricing, which contributed to an 18 basis point increase in earning asset yields offset by the higher cost of funds.
Regarding our second quarter expectations for net interest income.
Although we will likely see continued benefit from the March rate hike and higher rates on new loan originations. We anticipate continued net interest margin pressure from increasing deposit costs and potential changes in deposit mix.
We will continue to balance liquidity and net interest margin considerations, while evaluating opportunities to pay down higher cost funding.
Noninterest income of $21 $2 million increased 689000 from the prior quarter.
Driven by a $1.3 million increase in annual tax related trust fees received during the first quarter.
These increases were partially offset by lower other noninterest income as well as lower revenues in our escrow and exchange business, which continues to be impacted by lower transaction activity in the commercial real estate market.
For the second quarter of 2023.
We expect our total noninterest income to be in the range of $19 million to $20 million, excluding any loan or securities sales.
Noninterest expense increased $2 $2 million to $101.4 million, primarily due to a $1 $7 million increase in our deposit costs.
And a $962000 increase in FDIC insurance premiums.
Compensation and benefits expense was flat at $54.3 million, reflecting lower staffing bonus and incentive accruals, partially offset by higher payroll taxes and lower loan origination cost deferrals.
We continue to manage expenses prudently and our expectations for the second quarter or approximately $102 million to $103 million due to continued increases in deposit expense.
As well as the full quarter impact of annual Merit increases.
Our provision for credit losses of $3 million increased slightly compared to the prior quarter's provision expense of $2 $8 million.
While we have not seen any meaningful deterioration in asset quality.
We are closely monitoring the macro systemic issues impacting our borrowers.
Such as slowing economic activity inflationary pressures as well as higher interest rates.
Turning now to the balance sheet.
Total loans held for investment declined $504 million, driven by lower loan fundings of $117 million.
Given higher interest rates loan demand and refinance activity has slowed considerably.
Lower originations in the last two quarters have been partially offset by lower prepayments pay offs and maturities of approximately $500 million on average.
Compared with $800 million to $900 million in earlier 2022 quarters.
Consistent with our balance sheet strategy. We expect these trends to continue at least through the first half of 2023 with scheduled amortization and maturities totaling $1 $3 billion over the next three quarters.
Deposits ended the quarter at $17 $2 billion, which represented a linked quarter decrease of $145 million.
<unk>, a mixed shift towards retail Cds and brokered time deposits.
The linked quarter decrease was largely driven by a decline in core deposits as some customers redeploy their funds into higher yielding alternatives.
To help manage our liquidity position and customer deposit flows we added another $324 million in term broker deposits lateral across three to 18 month terms.
And $171 million of retail Cds during the quarter.
This helped to increase cash on hand to one $4 billion as of March 31 <unk>.
And provided additional interest rate protection should rates continue to move higher.
The securities portfolio decreased $127 million to $3 9 billion compared to the fourth quarter as we sold approximately $300 million of investment securities.
The average yield on our investment securities portfolio increased 18 basis points to 257%.
With a spot yield of 2.45% to 250% as of quarter end.
We anticipate approximately $300 million in cash flow from the amortization and maturities of our investment portfolio over the remainder of the year and.
And reinvestment will be dependent upon deposit flows and liquidity considerations.
The combination of solid earnings and a smaller balance sheet further strengthened our risk based capital ratios this quarter with all increasing significantly from December 31 2022.
In addition, our tangible common equity increased to $9 two zero percent and our tangible book value per share increased to $19 61.
Further if you added in the fair value impact of our held to maturity securities portfolio.
We would remain well capitalized across all regulatory capital ratios and our pro forma TCE ratio would be 839%.
We continue to operate the institution from a position of capital strength to maximize strategic optionality and investor and regulatory expectations regarding capital maintenance.
Okay.
Finally from an asset quality standpoint.
Asset quality remained stable as both nonperforming loans, a 0.18% and delinquent loans a 0.14%.
Each as a percentage of total loans improved from the prior quarter.
Our allowance for credit loss was effectively flat in terms of dollars and our coverage ratio increased five basis points to 138%.
Our total loss absorption, which includes a fair value discount on loans acquired through acquisition finished the quarter at 174%.
We would not anticipate any decreases in our coverage ratio given the uncertain economic environment and could see a potential significant increase.
An economic downturn materializes.
With that I'll turn the call back to Steve.
Great. Thanks, Ron and I'll wrap up with a few comments about our outlook first I'm grateful for the extraordinary effort our team put forth. During this past quarter for the benefit of all of our stakeholders, including our clients communities employees and our shareholders.
As noted earlier beginning in 2022, we shifted to a more cautionary posture by intentionally slowing our balance sheet growth, while building capital and liquidity.
Historically, our conservative approach has enabled us to effectively manage through a variety of cycles and consistently deliver strong financial results.
At this point it is difficult to forecast, how the economic environment will develop and to projected impact on our clients' businesses.
We believe we are well prepared for a variety of outcomes, depending upon how the economy evolves over the coming quarters rigor.
Regarding expense management, we will continue to invest in the franchise. However, staffing levels are expected to be commensurate with the level of business activity and we have taken steps to ensure our teams are appropriately aligned.
Our capital management priorities remain focused on deploying capital in a manner that will benefit all of our stakeholders, while allowing us a high degree of flexibility and optionality.
We remain opportunistic and open minded to strategic transactions that will maximize long term shareholder value is.
In summary, we have built a quality franchise and our colleagues have once again delivered for our stakeholders given.
Given the strength of our balance sheet and strong capital levels combined with our results oriented culture, we expect to capitalize on opportunities to acquire new clients and expand existing relationships.
That concludes our prepared remarks, and we would be happy to answer any questions. Jamie. Please open up the call for questions.
Ladies and gentlemen at this time well begin the question and answer session to ask a question you May Press Star and then one on your Touchtone phones.
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So it's all good questions you May press star two.
Once again that is star and then one.
And the question queue.
We will pause momentarily to assemble the roster.
And our first question today comes from Matthew Clark from Piper Sandler. Please go ahead with your question.
Hey, Thanks, and good morning.
<unk>.
Yeah.
Maybe just first one for me.
On deposit flows.
Can you just give us a sense for what you saw in the months of January February March.
I assume most of it occurred in March and then any update on in terms of flows April April quarter to date.
Yeah.
We saw obviously following the Silicon Valley and signature bank announcements that weekend Hum a highwall a high volume of call activity from clients that week, we saw some levels of increased outflows.
Lee to treasuries and to a lesser extent maybe some.
Some of the <unk>.
<unk>.
But by the end of that but it is the following week that had really died down pretty significantly and so I would consider our flows here. This.
Core at the beginning of the second quarter.
Pretty consistent.
We've seen a little bit of outflow, mainly due to tax payments and the like.
As well as to a lesser extent again those clients that are sitting on excess liquidity redeploying that into higher treasuries, but we're managing it our team is doing a great job and as I mentioned, we're seeing some attractive opportunities out there to to add clients as well.
And given your presence up in the north and the Pacific Northwest and first Republic, having some presence there as well obviously, California.
Is there an opportunity to promote your capital ratios and try to get some of those deposits I know, it's a little bit of a different model but.
It doesn't seem like there's a lot of our deposits up for grabs even.
So most of it might be going to the larger banks.
Yeah, I don't want to comment on on any open banks.
But certainly.
Matthew you see in our Investor Slide deck, we highlight pretty significantly the strength of our capital, where we rank compared to our peer group and the K Rx and so yes, we think that that is an important differentiator for us I know many of.
Our clients, who we've talked to and that our bankers have talk to.
Find that very reassuring the strength of our capital position and so we do see it benefiting us as we talk with various folks.
Okay, and then just shifting to the securities portfolio any appetite to just blow out of your portfolio and you have a ton of capital.
And earn it back I think in a relatively.
A reasonable time period will be shorter than that.
That's what it takes for those securities to mature.
Any any willingness there.
It's something that we've looked at hum more than once and discussed with the board and in fact on on slide 10 in our deck, we highlight that.
If in fact, we we were to sell the entire securities portfolio or our capital ratios would remain.
Significantly above the well capitalized level and in fact, even under that scenario I believe we'd be above.
All the peer median on all capital ratios, so youre right.
We do have a lot of flexibility and Optionality, we'll we'll continue to think about it and and make determinations.
With an eye towards what's best for the institution in the long term.
Okay, and then just on <unk>.
Loan balances.
I don't think most care to see loan growth right now anyway.
And it's good to see that you guys have raised pricing, but I mean should we just assume that loans continue to shrink here just given.
And then on tightening the standards and weaker demand.
I think that's a reasonable assumption here as we move into the second quarter, we will see how the <unk>.
Second half of the year plays out we're being pretty selective.
In the credit that we're extending.
And and then of course as we commented demand is pretty pretty light, but again. This is something that we began implementing in 2022.
So I don't see it changing here this quarter.
Okay and last one for me just on the M&A have conversations picked up at all.
No.
Yeah.
Easy enough. Thank you.
Sure thing.
Our next question comes from Chris Mcgratty from <unk>. Please go ahead with your question.
Hey, good morning.
Steve You you were one of the first banks to pull back and.
And it's obviously.
Pain pain and space with your balance sheet whats it going to take or is it. The passage of time is it something you have to see in the economy for you to kind of flip the script because it would feel like you've got a position that others don't have.
Yeah, I think that you know.
Theres a variety of factors you take into consideration. It's obviously, it's a dynamic economy, a dynamic marketplace that we operate in and.
Oh, well, we'll see how it all plays out Chris I don't think that there's a single marker out there per se, we really want to see how things.
Develop here and I think we're in a very unusual period of time, and we talk about it quite a bit at the board level that we've been 15 years of zero interest rates followed by <unk>.
Or nearly 15 years call it of zero interest rates since the financial crisis, followed by an injection of approximately 10 trillion dollars into the economy over a very short period of time.
Which translated into very strong growth and of course high levels of inflation and so now as the fed.
Is pretty rapidly raising rates 475 basis points in a year's period of time and engaged and quantitative tightening.
And now coupled with a likely pull back and just general credit.
You know I think those dynamics just lead wanted it to.
Be pretty cautious and and that's how we're thinking about the environment at least at this point, but we'll continue to mount or it because we all know it'll absolutely change here.
Thanks, Thanks for that in a follow up to Matt's question about.
Acquisitions.
Is there a scenario where you would would you buy your stock right here, obviously, there's a lot of uncertainty most banks a pause, but I'm just interested if there is it is it prudent to buy stock here.
I think that we obviously have an approved stock.
Stock buyback plan from the board, we haven't executed on its been in nearly two years that we've benefited from it from the low levels of capital that we have and so we'll continue to think about it.
<unk> into consideration the outlook.
And the risks that we see in the environment and then within our own portfolio and how it how it performs as well so we'll take that all into consideration.
And the board is very thoughtful.
And how it thinks about capital management.
Great and if I could just Ron do you want make sure I got the numbers on the bond cash flows.
You referenced 1 billion three but then you also referenced 300 can you can you just square up with the maybe I heard you wrong to the cash flows that are kind of come off over the next few quarters, yes, sure the $1 three.
After the loan portfolio.
Yeah, and the 300 million more or less $100 million of quarters off of the securities portfolio.
<unk> three is an estimate for the next three core that's right. So the remainder of the year in next three quarters, yes.
Got it thank you.
Sure thing.
And our next question comes from Gary Tenner from D. A Davidson. Please go ahead with your question.
Thanks, guys good morning.
Gary one of my questions were asked but I was curious in the yesterday's portfolio the movement of $400 million of Cmos to help help them mature in the quarter. Obviously, we saw a lot of shifts from NFS Halton mature did last year.
Just curious about the timing of doing that now do you have a bias towards our higher interest rates I wanted to kind of protect yourself or what's the what's the thought process on doing that now.
You know part of that was that occurred early in the quarter as we were thinking about things.
So certainly before some of the turmoil that of course, we saw in early March one have anything to add no I think thats spot on Stephen and Gary. The obviously, we have the intent to hold those two.
To maturity and we just felt at this point in time or at least at that point in time that was the prudent thing to do and.
So we went ahead and made that that decision and we still feel it's a prudent.
Yes, we do.
Okay, Alright, great and then just from a kind of as you think about on balance sheet cash cash liquidity running as many are a little bit higher what's your sense of kind of how long you you kind of manage to that higher on balance sheet liquidity level versus kind of normalizing to where you were.
Were saying at the end of the year.
Sure I think over time that that comes down at the same time, we're earning pretty good returns on cash today.
I I actually looked like or we actually it looks like we know what we're doing in that regard so.
So I would expect to Gary to over time come down.
Okay.
Okay great.
No. This was kind of this was asked but.
Yeah, I haven't run sort of addressed it I think with the commentary around the billion three of protective loan pay downs, but.
You have had four consecutive quarters of loan contraction now obviously following from when you kind of tightened things up on pricing and underwriting early last year, there doesn't seem to be.
Real.
Path, if you will towards net loan growth from here to the end of the year just.
I know you've kind of addressed it.
It seems like maybe later in the year, there's some opportunity but.
The way things lay out right now it seems unlikely.
Yes.
<unk> said that.
So I would expect that trend to continue in the second quarter, we will see how the second half of the year plays out.
Part of this is to where we're just seeing much less in the way of demand for new credit in the marketplace. I think that many investors are adjusting to the current rate environment and thinking about you know what.
What is the discount rate that I'm going to.
Put on the cash flows of of whether it's real estate or a business. What's the terminal cap rate that I think is appropriate for the business of real estate and so as I think we get better clarity, maybe as we get to the terminal rate wherever that might be with with fed funds and and how this.
Tightening cycle plays out and the length.
During the duration of it that as investors get better clarity and understanding.
Then we would expect them to start to put more capital to work and that would certainly benefit us as well, but at the end of the day as we've talked about we've been pretty cautious on the outlook here and I.
I have got to ensure that the risk adjusted returns meet meet our hurdles.
Yeah.
So that was a long winded long winded way of I've not seen much but thinking that.
We'll see how it plays out in the second half of the year.
Alright, Thanks Scott.
And our next question comes from Andrew <unk> from Stephens. Please go ahead with your question.
Hey, good morning.
Good morning.
Ron maybe just quickly on.
On the margin I think I heard you in prepared remarks kind of expectations for some continued margin pressure.
I mean, I guess, you guys should benefit you or not.
Throughout the quarter.
Better than some peers have but just when you think about the cadence of the margin compression going forward I guess would you expect.
The cadence of quarterly compression to slow relative to the first quarter going forward.
Andrew.
It's a very good question and a difficult one to answer obviously.
You know I think the industry and certainly we believe that the deposit costs and and our.
We're still moving at maybe even a faster pace of course, and then the remaining rate hikes here in at least in the foreseeable future here. So you know the.
<unk> wood.
We'd expect it to be similar but you know again very very difficult as Steve likes to say you can't model human behavior and.
We're going to be very mindful of liquidity, but of course, we're going to also be very mindful of our <unk>.
Protecting our net interest margin and and as I stated, we're going to be opportunistic in terms of trying to.
Pay down our higher funding costs.
You know when those opportunities arise.
Yeah understood Okay.
I apologize if I missed it did you give the.
At the end of the period on total deposits.
It's in our it's in our presentation I believe its slide deck core is 61 I believe in the total deposit is $1 15 on a spot rate basis. Okay.
Perfect. Thank you and then.
Steve I really appreciate all the commentary and color on that.
The office exposure I think I had mentioned.
Very minimal exposure to class a high rise our central business districts. I guess the question is do you have any exposure to the class a or central business areas and if so can you talk about the specific markets that might be and the underwriting of those maybe larger credits and then how occupancy levels are trending there.
Any incremental color on some of the larger office properties in your portfolio.
I don't know off the top of my head what the number is but it's pretty de Minimis. We've we've just never been we historically have not been ones to make really large loans and thats typically class a buildings are require that we have relatively limited.
Amount of participations.
Yeah.
If we have them, they're typically from ones that we've.
Because of our banks that we've acquired where we've inherited it.
It's pretty de Minimis, if any frankly.
But we could we could get that and the other thing is we just don't do much stop in those central business districts call. It the downtown so whether it's it's downtown L, a or or San Francisco Seattle, It's just not what we've historically done.
Okay, well I appreciate you taking the questions and congrats on a good quarter.
Thank you. Thank you.
And ladies and gentlemen, with that we'll be ending today's question and answer session.
Like to turn the floor back over to Steve Gardner for any closing remarks.
Great well. Thank you again, all for joining us and thank you Jamie have a good day.
Yeah.
And ladies and gentlemen, with that we'll conclude today's conference call and presentation. We thank you for joining you may now disconnect your lines.