Q1 2024 Pacific Premier Bancorp Inc Earnings Call
Operator: Good afternoon and good morning, and welcome to the Pacific Premier Bancorp first quarter 2024 conference call. All participants will be in listen-only mode.
Good afternoon, and good morning, and welcome to the Pacific Premier Bancorp first quarter 'twenty 'twenty four conference call.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
Operator: Should you need assistance, please signal a 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 telephone keypad. 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 Steve Gardner, Chairman and CEO. Please go ahead. Great, thank you.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
Please note this event is being recorded.
I would now like to turn the conference over to Steve Gardner Chairman and CEO. Please go ahead.
Steven R. Gardner: Great. Thank you, Gary. Good morning, everyone. I appreciate you joining us today. As you are all aware, we released our earnings report for the first quarter of 2024 earlier this morning. We have also published an updated investor presentation with additional information and disclosures on our financial results. If you have 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 carefully read that statement.
Thank you Gary Good morning, everyone. I appreciate you joining us today as you were all aware we released our earnings report for the first quarter of 2024 earlier this morning.
We have also published an updated investor presentation with additional information and disclosures on our financial results.
Speaker Change: 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.
Speaker Change: I note that our earnings release and Investor presentation include a safe Harbor statement relative to the forward looking comments.
Speaker Change: I encourage each of you to carefully read that statement.
Steven R. Gardner: On today's call, I'll 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 surrounding our financial results, and then we'll open up the call to questions. Our team continues to execute at a high level in an evolving banking landscape, navigating challenges and capitalizing on opportunities. During the quarter, we maintained our commitment to prudent risk management and the cultivation of long-lasting client relationships. Many of the trends in the beginning of 2024 were similar to what we saw throughout 2023.
Speaker Change: On today's call I'll 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 surrounding our financial results.
Ronald J. Nicolas: And then we will open up the call to questions.
Ronald J. Nicolas: Our team continues to execute at a high level and an evolving banking landscape navigating challenges and capitalizing on opportunities.
Ronald J. Nicolas: During the quarter, we maintained our commitment to prudent risk management and the cultivation of long lasting client relationships.
Ronald J. Nicolas: Many of the trends in the beginning of 2024 were similar to what we saw throughout 2023.
Steven R. Gardner: Elevated interest rates, ongoing inflationary pressures, muted loan demand, and competitive pricing dynamics. Despite these challenges, we delivered solid quarterly results with net income of $47 million, or 49 cents per share. Our net interest margin increased 11 basis points to 3.39%, a direct result of our securities portfolio repositioning last quarter. We began the year on solid ground, given our commitment to capital accumulation over the past several quarters, contributing to our capital ratios being among the strongest in our industry. In the first quarter, our TCE ratio increased 25 basis points to 10.97%, and our tangible book value per share increased $0.11 to $20.33.
Ronald J. Nicolas: Elevated interest rates ongoing inflationary pressures muted loan demand and competitive pricing dynamics.
Ronald J. Nicolas: Despite these challenges we delivered solid quarterly results with net income of $47 million or <unk> 49.
Ronald J. Nicolas: Sure.
Ronald J. Nicolas: Our net interest margin increased 11 basis points to 339% a direct result of our securities portfolio repositioning.
Ronald J. Nicolas: Last quarter.
Ronald J. Nicolas: We began the year on solid ground, given our commitment to capital accumulation over the past several quarters contributing to our capital ratio has been among the strongest in our industry.
Ronald J. Nicolas: In the first quarter, our TCE ratio increased 25 basis points to 10, 97%.
Ronald J. Nicolas: And our tangible book value per share increased 11 cents to $20.33.
Steven R. Gardner: Our CET-1 ratio came in at 15.20%, and our total risk-based capital ratio was a healthy 18.23%. These ratios consistently place us in the top tier relative to other regional banks and provide us with a high level of optionality. In addition to fostering capital strength, we have remained committed to disciplined business development efforts, deepening relationships with existing clients and attracting new customers to the bank. It's important to note that we have always operated with the philosophy that our franchise value is created through the generation of new clients with a primary emphasis on growing full banking relationships with significant deposits, as deposit inflows continue to be largely directed toward money market funds, savings, and retail certificates.
Ronald J. Nicolas: Our CET one ratio came in at $15 two zero percent.
Ronald J. Nicolas: And our total risk based capital ratio was a healthy $18 two 3%.
Ronald J. Nicolas: These ratios consistently place us in the top tier relative to other regional banks and provide us with a high level of Optionality.
Ronald J. Nicolas: In addition to fostering capital strength, we have remained committed to disciplined business development efforts deepening relationships with existing clients and attracting new customers to the bank.
Ronald J. Nicolas: It's important to note that we have always operated with a philosophy that our franchise value is created through the generation of new clients with a primary emphasis on growing full banking relationships with significant deposits.
Ronald J. Nicolas: As deposit inflows continue to be largely directed towards money market funds savings and retail certificates. It was notable that we did see growth in noninterest bearing deposits of $65 million this quarter.
Steven R. Gardner: It was notable that we did see growth in non-interest-bearing deposits of $65 million this quarter, despite significant macroeconomic uncertainty. Total deposits increased by $192 million, driven by a $120 million increase in non-maturity deposits, enabling us to further reduce higher-cost FHLB borrowings by $400 million during the quarter, given current expectations for higher interest rates. We have also seen client preferences towards higher yielding non-bank alternatives. Ultimately, our teams did an outstanding job given the circumstances.
Despite significant macroeconomic uncertainty total deposits increased by $192 million driven by a $120 million increase in non maturity deposits and enabling us to further reduce higher cost borrowings.
Ronald J. Nicolas: Borrowings by $400 million during the quarter.
Ronald J. Nicolas: Given current expectations for higher interest rates, we have also seen client preferences towards higher yielding nonbank alternatives oleds.
Ronald J. Nicolas: Ultimately our teams did an outstanding job given the circumstances as non maturity deposits made up 84% of total deposits and the average cost of non maturity deposits was well controlled at 1.0% to 6%.
Steven R. Gardner: As non-maturity deposits made up 84% of total deposits, and the average cost of non-maturity deposits was well controlled at 1.06%. On the liability side of the balance sheet, we anticipate that our level of wholesale funding will be closely tied to customer loan and deposit flows. However, our expectation for the current quarter is that deposit flows could reverse due to seasonal factors.
Ronald J. Nicolas: On the liability side of the balance sheet, we anticipate that our level of wholesale funding more closely will be closely tied to customer loan and deposit flows our expectation for the current quarter is the deposit flows could reverse due to seasonal factors.
Steven R. Gardner: On the asset side of the balance sheet, we saw our loan balances contract slightly as our level of prepayments exceeded new loan funding, which was modest to begin the year. Loan demand has been relatively muted, while competition for new loans has seen a notable increase with lenders willing to offer higher advance rates and more aggressive terms. In addition, some business and commercial real estate clients continue to deleverage their balance sheets by utilizing excess cash reserves to reduce debt.
Ronald J. Nicolas: On the asset side of the balance sheet, we saw our loan balances contract slightly as our level of prepayments exceeded new loan fundings, which were modest to begin the year.
Loan demand has been relatively muted while competition for new loans has seen a notable increase with lenders willing to offer higher advance rates and more aggressive terms.
Ronald J. Nicolas: In addition, some business in commercial real estate clients continued to deleverage their balance sheets utilizing excess cash reserves to reduce debt.
Steven R. Gardner: Even with these market dynamics, as we head into the second quarter, we are beginning to see a modest increase in new loan opportunities and are cautiously optimistic that we will be able to add high-quality relationship loans to the portfolio as we move through the year. Shifting to asset quality, our metrics remain solid, and our loss experience remains exceptionally low, owing to our proven three-legged approach to discipline cash flow underwriting standards, active portfolio management, and a proactive loss mitigation tactic.
Ronald J. Nicolas: Even with these market dynamics as we head into the second quarter. We are beginning to see a modest increase in new loan opportunities and are cautiously optimistic that we'll be able to add high quality relationship loans to the portfolio as we move through the year.
Ronald J. Nicolas: Shifting to asset quality, our metrics remained solid and our loss experience remains exceptionally low owing to our proven three legged approach to disciplined cash flow underwriting standards.
Ronald J. Nicolas: Active portfolio management, and a proactive loss mitigation tactics.
Steven R. Gardner: During the quarter, non-performing assets increased $39 million to $64 million, or 0.34% of total assets, primarily as a result of a single diversified commercial banking relationship in the Pacific Northwest. This relationship includes C&I, investor real estate, and owner-occupied real estate loans, with the real estate comprising multiple property types. Approximately $38 million of loans in this relationship were downgraded in the quarter, consistent with the bank's longstanding approach to aggressively resolving potential credit issues. The team has acted swiftly, working closely with the guarantor on a solution.
During the quarter nonperforming assets increased $39 million to $64 million or three 4% of total assets, primarily the result of a single diversified commercial banking relationship in the Pacific Northwest.
Ronald J. Nicolas: This relationship includes C&I investor real estate and owner occupied real estate loans with the real estate comprising multiple property types.
Ronald J. Nicolas: Approximately $38 million of loans in this relationship were downgraded in the quarter.
Ronald J. Nicolas: Consistent with the bank's long standing approach to aggressively resolving potential credit issues. The team has acted swiftly working closely with the guarantor on a solution.
Steven R. Gardner: I'll note that this particular borrower is current on all payments, and we ended the quarter with total loan delinquencies of just.09%. As always, we take a proactive approach to portfolio management and credit monitoring, maintaining open lines of communication with our clients regarding market trends in their respective industries. These regular updates on our clients' financial status, liquidity, and market dynamics shape our approach to managing individual credit. Credit risk management has always been deeply ingrained in our culture, and we regularly utilize a variety of tools when resolving problem credit.
Ronald J. Nicolas: I'll note that this particular borrowers current on all payments and we ended the quarter with total loan delinquencies of just 0.09%.
Ronald J. Nicolas: As always we take a proactive approach to portfolio management and credit monitoring maintaining open lines of communication with our clients regarding market trends in their respective industries. These regular updates on our clients' financial status liquidity and market dynamics shape, our approach to managing it.
Ronald J. Nicolas: Individuals' credits.
Ronald J. Nicolas: Credit risk management has always been deeply ingrained in our culture and we regularly utilize a variety of tools and then resolving problem credits.
Steven R. Gardner: We are closely monitoring the trends in the commercial real estate market and proactively identifying and managing potential weaker credit. Overall, our loan portfolio is well-structured and effectively managed in all facets across the organization. As I noted, the movement in MPLs this quarter was mostly due to specific circumstances with one borrower. I'll add that, broadly, we are not seeing an overall degradation in the cash flows within our loan portfolio. Recently, there have been discussions in the industry around multifamily loans, and we have provided additional disclosures in our investor presentation.
Ronald J. Nicolas: We are closely monitoring the trends in the commercial real estate markets.
Ronald J. Nicolas: Proactively identifying and managing potential weaker credits.
Ronald J. Nicolas: Overall, our loan portfolio is well structured and effectively managed in all facets across the organization.
Ronald J. Nicolas: As I noted the movement in Npls. This quarter was mostly due to specific circumstance with one borrower I'll add that broadly we are not seeing an overall degradation in the cash flows within our loan portfolios.
Ronald J. Nicolas: Recently, there have been discussions in the industry around multifamily loans and we have provided additional disclosures in our industrial presentation.
Steven R. Gardner: A couple of items to highlight are that multi-family loans have been one of the best performing asset classes for us throughout our history with minimal credit losses through multiple economic and interest rate cycles. Additionally, a majority of our loans are tied to workforce housing projects, which are more stable due to the broader tenant base. These properties are more affordable than other housing alternatives in the western U.S. and, as such, less sensitive to market forces.
Ronald J. Nicolas: A couple of items to highlight are the multifamily loans that had been one of the best performing asset classes for us throughout our history with minimal credit losses through multiple economic and interest rate cycles.
Ronald J. Nicolas: A majority of our loans are tied to workforce housing projects, which are more stable due to a broader tenant base.
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Ronald J. Nicolas: These properties are more affordable than other housing alternatives in the western U S and as such less sensitive to market forces.
Steven R. Gardner: Rent control regulations are materially different on the West Coast, and in particular California, as compared to New York, which we highlight in the investor slide. Our goals remain to drive profitable, risk-adjusted growth that enhances the long-term value of our franchise, while maintaining strong capital levels, disciplined expense control, and adhering to effective risk management practices. With that, I'll turn the call over to Ron to provide a few more details on the first quarter financial results.
Ronald J. Nicolas: Rent control regulations are materially different in the west coast and in particular, California, as compared to New York, which we highlight in the Investor slide deck.
Ronald J. Nicolas: Our goals remain to drive profitable risk adjusted growth that enhances the long term value of our franchise, while maintaining strong capital levels disciplined expense control and adhering to effective risk management practices.
Ronald J. Nicolas: With that I'll turn the call over to Ron to provide a few more details on our first quarter financial results.
Ronald J. Nicolas: Thanks, Steve, and good morning. For comparison purposes, my comments today are on a linked quarter basis unless otherwise noted. Let's start by looking at the first quarter's overall results. For the first quarter, we generated a net income of $47 million, or 49 cents per share. This translated into a return on average assets of 0.99% and a return on average tangible common equity of 10.05%. Our efficiency ratio came in at 60.2%, and our pre-provisioned net revenue as a percentage of average assets totaled 1.43% for the quarter. Taking a closer look at the income statement.
Ronald J. Nicolas: Thanks, Steve and good morning.
Ronald J. Nicolas: For comparison purposes, my comments today on a linked quarter basis, unless otherwise noted.
Ronald J. Nicolas: Let's start by looking at the first quarter's overall results.
Ronald J. Nicolas: For the first quarter, we generated net income of $47 million or <unk> 49 per share.
Ronald J. Nicolas: This translated into a return on average assets of <unk>, 99% and our return on average tangible common equity of 10.05%.
Ronald J. Nicolas: Our efficiency ratio came in at 62% and our pre provision net revenue as a percentage of average assets totaled 1.43% for the quarter.
Ronald J. Nicolas: Taking a closer look at the income statement.
Ronald J. Nicolas: Net interest income of $145.1 million reflected a full quarter's benefit from the securities repositioning as well as higher earning asset yields, offset by lower average balances, one fewer day in the quarter, and lower contribution from our swap portfolio. We saw the net interest margin expand by 11 basis points to 3.39 percent, due primarily to a 12 basis point increase in our overall earning asset yields. Total average reported loan yields were flat at 5.29%.
Ronald J. Nicolas: Net interest income of $145 1 million reflected a full quarters benefit from the securities repositioning as well as higher earning asset yields offset by lower average balances one fewer day in the quarter and lower contribution from our swap portfolio.
Ronald J. Nicolas: We saw the net interest margin expanded by 11 basis points to 339% due primarily to a 12 basis point increase in our overall, earning asset yields.
Ronald J. Nicolas: Total average reported loan yields were flat at 529%.
Ronald J. Nicolas: However, excluding swap income, fees, and discounts, the weighted average rate of our loan portfolio increased 10 basis points compared to the prior quarter. This was due, in part, to increased line draws and utilization rates during the quarter. Overall, our cost of funds increased four basis points to 1.73%, as we saw continued slowing of deposit cost increases. Our average non-maturity deposit costs were 1.06% compared to the prior quarter of 1.02%, while our commutative deposit beta stands at 31%, which includes broker deposits and retail CDs. Our non-maturity cumulative deposit beta is 21%, illustrating our disciplined pricing throughout this rate cycle.
Ronald J. Nicolas: However, excluding swap income fees and discounts the weighted average rate of our loan portfolio increased 10 basis points compared to the prior quarter.
Ronald J. Nicolas: This was due in part to the increased line draws and utilization rates during the quarter.
Ronald J. Nicolas: Overall, our cost of funds increased four basis points to 173%.
Ronald J. Nicolas: As we saw continued slowing of deposit cost increases.
Ronald J. Nicolas: Our average non maturity deposit costs were 1.06% compared to the prior quarter of 1.02%.
Ronald J. Nicolas: While our cumulative deposit beta stands at 31%.
Ronald J. Nicolas: Which includes broker deposits and retail Cds are non maturity cumulative deposit beta is 21% illustrating our disciplined pricing throughout this rate cycle.
Ronald J. Nicolas: For the second quarter, the net interest margin will continue to be influenced by increases in our cost of funds, the mix of our deposits, as well as the size and mix of our loan portfolio. Looking at the second quarter, we will consider deploying excess liquidity into higher-yielding earning assets to remix the balance sheet in tandem with lower levels of wholesale funding that should help support the net interest margin, excluding the fourth quarter's security sale loss of $254.1 million.
Ronald J. Nicolas: For the second quarter. The net interest margin will continue to be influenced by increases in our cost of funds the mix of our deposits as well as the size and mix of our loan portfolio.
Ronald J. Nicolas: Looking at the second quarter, we will consider deploying excess liquidity into higher yielding earning assets to remix the balance sheet in tandem with lower levels of wholesale funding that should help support the net interest margin.
Ronald J. Nicolas: Excluding the fourth quarter's security sale loss of $254 $1 million.
Ronald J. Nicolas: Non-interest income increased $5.9 million, primarily due to the $5.1 million gain on the prepayment of a $200 million FHLB term borrowing in March. Trust fee income results were favorable, increasing $1.3 million to $10.6 million due to the annual tax fees earned at the beginning of each year.
Ronald J. Nicolas: Noninterest income increased $5 $9 million, primarily due to the $5 $1 million gain on the prepayment of a $200 million FH L. B term borrowing in March.
Ronald J. Nicolas: Trust fee income results were favorable increasing $1 3 million to $10 $6 million due to the annual tax fees earned at the beginning of each year.
Ronald J. Nicolas: For the second quarter of 2024, we expect our total non-interest income to be in the range of $19 to $20 million as our commercial real estate adjacent fee-based businesses continue to be impacted by lower transaction volumes. Non-interest expense decreased slightly to $102.6 million. Compensation and benefits expense increased $2.2 million due primarily to higher payroll taxes as well as annual equity-based compensation expense. From a staffing perspective, we ended the quarter with a head count of 1,353 compared to 1,429 as of March 31st of last year.
Ronald J. Nicolas: For the second quarter of 2024, we expect our total noninterest income to be in the range of $19 million to $20 million as our commercial real estate adjacent fee based businesses continue to be impacted by lower transaction volumes.
Ronald J. Nicolas: Noninterest expense decreased slightly to $102 $6 million.
Ronald J. Nicolas: Compensation and benefits expense increased $2 2 million due primarily to higher payroll taxes as well as annual equity based compensation expense.
From a staffing perspective, we ended the quarter with a head count of <unk> hundred 53, compared to <unk> hundred 29 as of March 31 of last year.
Ronald J. Nicolas: We also saw an expected $1.5 million increase in deposit expense driven by a higher deposit earnings credit rate, as well as a seasonally higher HOA deposit balance. However, while we do foresee increases in earnings credit rates, our expectation is that these increases will slow, similar to deposit interest rates. We continue to diligently manage our expense base, and we expect second-quarter expenses in the range of $102 to $103 million, representing a full quarter's impact of the annual merit increase, as well as higher benefits and related personnel costs.
We also saw an expected $1 $5 million increase in deposit expense driven by a higher deposit earnings credit rates as well as seasonally higher HOA deposit balances.
Ronald J. Nicolas: While we do foresee increases in earnings credit rates, our expectation is that these increases will slow similar to deposit interest rates.
Ronald J. Nicolas: Yeah.
Ronald J. Nicolas: We continue to diligently manage our expense base and we expect second quarter expenses in the range of $102 million to $103 million, representing a full quarter's impact of the annual merit increases as well as higher benefits and related personnel costs.
Ronald J. Nicolas: Our provision for credit losses of $3.9 million increased from the prior quarter, which included a $6.3 million increase in our on-balance sheet reserve and a $2.4 million decrease in our unfunded commitment reserve, reflecting a slightly lower unfunded loan commitment. Moving now to the balance sheet. We ended the quarter with $18.8 billion in total assets, slightly lower than the prior quarter, driven by lower loan balances and wholesale funding. We did see a slight increase in cash, in part funded by higher seasonal deposit flows.
Ronald J. Nicolas: Our provision.
Ronald J. Nicolas: <unk> for credit losses of $3 $9 million increase from the prior quarter, which included a $6 $3 million increase in our on balance sheet reserve and a $2 $4 million decrease in our unfunded commitment reserve, reflecting slightly lower unfunded loan commitments.
Ronald J. Nicolas: Shifting now to the balance sheet.
Ronald J. Nicolas: We ended the quarter with $18 $8 billion in total assets slightly.
Slightly lower than the prior quarter, driven by lower loan balances and wholesale funding.
We did see a slight increase in cash in part funded by higher seasonally deposit flows.
Ronald J. Nicolas: Total loans held for investment decreased $277 million, driven by prepayment sales and maturities of $392 million, exceeding $110 million of net draws on existing lines and new loan commitments of $46 million. Commercial line utilization for the first quarter was 45% compared with 37.5% in the prior quarter, although we expect utilization rates to come down over time.
Total loans held for investment decreased $277 million, driven by prepayments sales and maturities of $392 million exceed.
Ronald J. Nicolas: Exceeding $110 million of net draws on existing lines and new loan commitments of $46 million.
Commercial line utilization for the first quarter was 45% compared with 37, 5% in the prior quarter.
Ronald J. Nicolas: Though we expect utilization rates to come down over time.
Ronald J. Nicolas: As noted, our linked quarter growth and total deposit growth enabled us to remix the liability side of the balance sheet via lower wholesale funding. Total deposits increased $192 million, due mostly to a $120 million increase in non-maturity deposits as seasonal inflows positively impacted the first quarter. We would anticipate some outflows as we move into the second quarter, in particular tax season. We also saw a $110 million increase in retail CDs, partially offset by a $38 million decline in broker deposits.
As noted our linked quarter growth in total deposits.
Ronald J. Nicolas: Enabled us to mix remixed the liability side of the balance sheet via lower wholesale funding.
Ronald J. Nicolas: Total deposits increased $192 million due mostly to a $120 million increase in non maturity deposits as seasonal inflows positively impacted the first quarter.
Ronald J. Nicolas: We would anticipate some outflows as we move into the second quarter.
Ronald J. Nicolas: In particular tax season.
Ronald J. Nicolas: We also saw $110 million increase in retail Cds, partially offset by a $38 million decline in broker deposits.
Ronald J. Nicolas: In addition to the maturity of a $200 million FHLB term advance, we paid down an additional $200 million in the latter part of the quarter as we continued to fine-tune our funding mix. The securities portfolio was flat at $2.9 billion, and the average yield on our investment portfolio increased 56 basis points to 3.64%. During the quarter, we purchased $175 million in U.S. Treasuries at a blended rate of 5.15%, consistent with our stated desire to invest in short-term, highly liquid securities.
Ronald J. Nicolas: In addition to the maturity of a $200 million FH L. B term advance we paid down an additional $200 million in the latter part of the quarter as we continued to fine tune our funding mix.
Ronald J. Nicolas: The securities portfolio was flat at $2 $9 billion and the average yield on our investment portfolio increased 56 basis points to 364%.
Ronald J. Nicolas: During the quarter, we purchased $175 million and U S. Treasuries at a blended rate of 515% consistent with our stated desire to invest in short term highly liquid securities.
Ronald J. Nicolas: We continue to focus on capital accumulation in this environment, and as a result, our consolidated and bank capital ratios further strengthened this quarter. As of March 31st, 2024, our tangible book value per share increased to $20.33. Lastly, from an asset quality standpoint, overall, asset quality trends generally remain favorable, with total delinquency increasing one basis point to 0.09% of loans held for investment. Classified assets to total assets increased to 1.09% as a result of the one borrower relationship Steve previously mentioned.
Ronald J. Nicolas: We continue to focus on capital accumulation in this environment and as a result, our consolidated and bank capital ratios further strengthen this quarter as of March 31, 2024, our tangible book value per share increased to $20.33.
Lastly from an asset quality standpoint.
Ronald J. Nicolas: Overall asset quality trends generally remain favorable with total delinquency, increasing one basis point to 0.09% of loans held for investment.
Ronald J. Nicolas: Classified assets to total assets increased to 1.09% as a result of the one borrower relationship Steve previously mentioned.
Ronald J. Nicolas: Our provisioning for our on-balance sheet ACL nearly matched our net charge-offs for the quarter, leaving our ACL reserve virtually unchanged at $192.3 million, and resulted in a three basis point increase in the ACL coverage ratio to 1.48%. However, with the fair value discount on loans acquired through bank acquisition, our total loss absorption ratio for the quarter ended higher at 1.79%.
Ronald J. Nicolas: Our provisioning for our on balance sheet ACL nearly matched our net charge offs for the quarter, leaving our ACL reserve virtually unchanged at $192 $3 million and resulted in a three basis point increase in the ACL coverage ratio to 148%.
Ronald J. Nicolas: With the fair value discount on loans acquired through Bank acquisition, our total loss absorption ratio for the quarter ended higher at 179%.
Steven R. Gardner: With that, I'll turn the call back to Steve. Great. Thanks.
Ronald J. Nicolas: With that I'll turn the call back to Steve Great. Thanks, Ron.
Steven R. Gardner: I'll conclude with a few comments about our outlook. In the short term, there appears to be some moderation in deposit costs. Rate cuts, if any, in 2024 could positively impact funding costs, depending upon the timing and magnitude of the cuts. However, if rates remain higher for longer, we may see additional deposit pressures as clients deploy cash into higher-yielding assets. We will look to offset any migration by expanding deposit relationships with existing clients and attracting new, high-quality, whole banking relationships to the franchise.
Steve: I'll conclude with a few comments about our outlook.
Steven R. Gardner: In the short term there appears to be some moderation in deposit costs.
Steven R. Gardner: <unk> cuts if any in 2024 could positively impact funding cost depending upon the timing and magnitude of the cost cuts.
Steven R. Gardner: If rates remain higher for longer we may see additional deposit pressures as clients deploy cash into higher yielding assets.
Steven R. Gardner: We will look to offset any migration by expanding deposit relationships with existing clients and attracting new high quality whole banking relationships to the franchise.
Steven R. Gardner: As we head into the second quarter, we are well-positioned to opportunistically attract new loan opportunities that meet our risk-adjusted return threshold. While there are a number of factors presently contributing to the uncertain outlook, including ongoing inflationary and labor pressures, interest rate volatility, and geopolitical risks, we will continue to assess various alternatives to proactively deploy our excess capital level. We are committed to a prudent, proactive approach to credit risk management, which has served our organization and our shareholders well through various cycles. This will become increasingly important if we find ourselves in a higher-for-longer interest rate environment.
Steven R. Gardner: As we head into the second quarter, we are well positioned to opportunistically attract new loan opportunities that meet our risk adjusted return thresholds.
Steven R. Gardner: While there are a number of factors presently contributing to the uncertain outlook, including ongoing inflationary and labor pressures interest rate volatility and geopolitical risks, we will continue to assess various alternatives to proactively deploy our excess capital levels.
Steven R. Gardner: We are committed to a prudent proactive approach to credit risk management.
Steven R. Gardner: Which has served our organization and our shareholders well through various cycles.
Steven R. Gardner: This will become increasingly important if we find ourselves in a higher for longer interest rate environment.
Steven R. Gardner: I'd like to thank all Pacific Premier employees for their outstanding efforts during the quarter, as well as all of our stakeholders for continuing to support our organization as we prioritize sustainable long-term value creation. That concludes our prepared remarks. We'd be happy to answer any questions. Gary, please open up the call for questions. We will now begin.
I'd like to thank all Pacific Premier employees for their outstanding efforts during the quarter as well as all of our stakeholders for continuing to support our organization as we prioritize sustainable long term value creation.
Steven R. Gardner: That concludes our prepared remarks, we'd be happy to answer any questions. Gary. Please open up the call for questions.
We will now begin the question and answer session.
Operator: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question is from Chris McGratty with KBW. Please go ahead.
Gary: To ask a question you May press Star then one on your telephone keypad.
Gary: If you are 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 to assemble our roster.
Gary: The first question is from Chris Mcgratty with K B W. Please go ahead.
Christopher Edward McGratty: Hey, good morning.
Christopher Edward McGratty: Hey, Rob.
Christopher Edward McGratty: Chris Good morning, maybe Brian maybe a question for you.
Christopher Edward McGratty: Hey, good morning. Hey, Steve. Hey, Ron. Ron, I might have a question for you. I just want to make sure I'm understanding the balance.
Christopher Edward McGratty: Just want to make sure I'm understanding the balance sheet.
Christopher Edward McGratty: Tweaking comments I guess high level, how should we be thinking about earning assets.
Over the next couple of quarters and Steve Your comments about seeing some early signs of potential some inflection that does that mean, we decline in loans were a little bit more and then maybe grow in the back half I'm, just trying to get a sense of <unk>.
Unnamed: [inaudible]
Unnamed: and the overall balance sheet.
Ronald J. Nicolas: It's a good question, Chris. We're still looking into it. I think we're certainly encouraged by some of the opportunities that we're seeing, but we're going to maintain our discipline. And then, as I commented, we've been a little bit surprised here at just how aggressive some lenders are in sacrificing term and structure, and we're just not willing to go there. So we'll see. It's certainly, as you're well aware, dependent upon a multitude of factors, prepays, paydowns on the loan, line utilization rates, and the like.
Christopher Edward McGratty: <unk> balance sheet.
Christopher Edward McGratty: No.
Steve: It's a good question Chris.
Steve: We're still looking at it.
Steve: I think we're certainly encouraged by some of the opportunities that we're seeing but we're going to maintain our discipline and then I also as I commented, we've been a little bit surprised here at just how aggressive some lenders are.
Steve: In sacrificing term and structure and we're just not willing to go there.
Steve: So we'll see it certainly as you're well aware, it's dependent upon a multitude of factors.
Steve: Prepays pay downs on the loan line utilization rates and the like.
Ronald J. Nicolas: But certainly, my expectation is that we expect to reverse this decline in the loan portfolio, but there are a lot of factors at play, and it's really our discipline is gonna dictate the ability to how quickly we're able to grow that.
Steve: But we certainly my expectation is is that.
Steve: We expect to reverse.
This decline in the loan portfolio, but there's a lot of factors at play and.
Steve: Yeah.
Steve: Really our discipline is going to dictate the ability to how quickly we're able to grow that.
Ronald J. Nicolas: Okay, that's great. Thanks. And maybe, Ron, you mentioned the swaps briefly in your prepared mark. Can you just remind me, the mechanics, what's going to happen over the next few quarters in terms of the swaps?
Steve: Okay.
Speaker Change: That's great. Thanks.
Speaker Change: And maybe Ron you mentioned the swaps briefly in your prepared remarks can you just remind me.
Speaker Change: Mechanic.
Speaker Change: What's going to happen over the next few quarters.
Ronald J. Nicolas: In terms of the swaps.
Ronald J. Nicolas: Sure, sure Chris. Yeah, so the swap portfolio for the second quarter will remain fairly flat compared to this first quarter. There'll be no change in the total principal that we have in our swap position, and I expect the results to be very similar to this quarter, roughly call it 20-21 basis points contribution to our net interest margin. In Qs 3 and 4, we do have a rate cut. We've modeled a rate cut in each of those quarters, so that's important to note.
Ronald J. Nicolas: Sure sure Chris Yeah, So the swap portfolio for the second quarter will remain fairly flat to this first quarter here.
Ronald J. Nicolas: No change in the total principle that we have.
Ronald J. Nicolas: In our swap position and I expect the results very similar to this quarter roughly call. It 2021 basis points contribution to our net interest.
Ronald J. Nicolas: Margin.
Ronald J. Nicolas: In Q3, and four we do have a rate cut we've modeled a rate cut in each of those quarters.
Ronald J. Nicolas: So that's going to cut each of those quarters by anywhere from 4 to 5 basis points if those rate cuts do come to fruition. And then we have a small step down in Q3 in principle. And then by the fourth quarter of Q3, and then by the fourth quarter, we're about a little more than half. Call it about 60% of our current outstanding, which is $1.35 billion today. So we're at about $750 million for the fourth quarter.
Ronald J. Nicolas: So that's important to note so that's going to haircut.
Ronald J. Nicolas: Each of those quarters by anywhere from four to five basis points, if those rate cuts do come to fruition.
Ronald J. Nicolas: And then we have a small step down in Q3 in principle.
Ronald J. Nicolas: And then by the fourth quarter in Q3, and then by the fourth quarter.
Ronald J. Nicolas: We're about a little more than half call. It about 60% of our current outstanding which is $135 billion today. So we're at about $750 million.
Ronald J. Nicolas: By the fourth quarter, so for the most part Qs two and three will be fairly consistent with what we saw here in Q1 again 2021 basis points in Q2, 15% to 20 in Q3, if the rate cut comes about and then in Q4, the actual principal will step down.
Ronald J. Nicolas: So for the most part, Qs 2 and 3 will be fairly consistent with what we saw here in Q1. Again, 20-21 basis points in Q2, 15-20 in Q3 if the rate cut comes about. And then in Q4, the actual principle will step down. The notional. The notional, excuse me. Yeah, we'll step down about half.
The notion notional excuse me, yes, we will step down about half a little more than half.
Ronald J. Nicolas: Okay, so a little bit of a headwind in the back of the ear, back of the ear, okay. And that's assuming we don't add any. Right. Swaps between now and then, and it's like always we're assessing a variety of options.
Ronald J. Nicolas: Okay, so a little bit of a headwind in the back of the back of the year Okay.
Ronald J. Nicolas: And that's assuming we don't add any debt swaps.
Ronald J. Nicolas: Swaps between now and then it's like always we're assessing a variety of options.
Ronald J. Nicolas: Okay, perfect. And then maybe just lastly, the tax rate, any, any guidance on the tax rate?
Okay.
Perfect and then maybe just lastly tax rate any any guidance.
Ronald J. Nicolas: On the tax rate.
Ronald J. Nicolas: Okay.
Ronald J. Nicolas: I think the tax rate for the full year and each quarter would probably be right about where we're at, maybe a tad bit lower, you know, in that 26-27% range. Thank you.
Ronald J. Nicolas: I think I think the tax rate for the full year.
Ronald J. Nicolas: Each each quarter be probably right about where we're at maybe a tad bit lower.
Ronald J. Nicolas: Net 26, 27% range.
Speaker Change: Okay. Thank you.
Speaker Change: Welcome.
Matthew Timothy Clark: The next question is from Matthew Clark with Piper Sandler. Please go ahead.
Speaker Change: The next question is from Matthew Clark with Piper Sandler. Please go ahead.
Matthew Timothy Clark: Okay. Thank you.
Matthew Timothy Clark: Yeah.
Matthew Timothy Clark: Maybe just.
Matthew Timothy Clark: Rounding up the NIM conversation, what if you had the average NIM in the month of March and the spot rate on deposits at the end of March?
Matthew Timothy Clark: Rounding up the NIM conversation.
Matthew Timothy Clark: If you had the average NIM in the month of March and the spot rate on deposits at the end of March.
Ronald J. Nicolas: I think the spot rate is in the IP. I know it's in the IP. It's disclosed in the IP there.
Matthew Timothy Clark: I think the spot rate spot rate is in the IP, yet I know, it's a needed the IP, it's disclosed in the IP there.
Ronald J. Nicolas: I don't have it off the top of my head, Matt. And then, Matt, the March NIM was down a few basis points from the average for the quarter, but not terribly material, is where we came out.
Speaker Change: I don't have it off the top of my head, Matt and then Matt.
Speaker Change: March NIM was down a few basis points.
Speaker Change: From.
Speaker Change: From the average for the quarter, but not terribly material.
Speaker Change: Is where we came out.
Ronald J. Nicolas: Okay. And then just on the borrowing costs, you paid down $400 million of FHLB. I think some of those were at lower rates. Should we expect the borrowing...
Speaker Change: Okay, and then just on the on the borrowing costs, you paid down $400 million of FHA.
Speaker Change: <unk> I think some of those were at lower rates should we expect the borrowing.
Speaker Change: The cost of.
Speaker Change: Borrowings that rate.
Speaker Change: Maybe increase here in <unk>.
Ronald J. Nicolas: Well, I mean, we have the term that we have on it, the 200 million is that's a fixed rate, and that matures in Q3, early Q4, early Q4, early Q4. Yeah, is when that matures.
Speaker Change: Well I mean, we have now the term that we have on it the 200 million is fixed.
Right and that matures in end of Q3 early Q4 early Q4 I think early Q4 is when that matures. So absent unless we paid that off early which you know as we've talked about.
Ronald J. Nicolas: So absent, you know, unless we pay that off early, which, you know, as we've talked about. Our plan is to reduce wholesale funding, whether it's FHLB borrowings or brokerage, over time. We've historically not used them, so that's our plan, but absent additional barrings, no, but we do have some sub-debts, some troughs at the holding company, and so we'd look to potentially do something there over time as well.
Speaker Change: Our our plan is to.
Speaker Change: Reduce wholesale funding, whether it's FHA borrowings our brokered over time, we've historically not use them.
Speaker Change: Hum.
Speaker Change: So that's our plan, but absent additional borrowings no, but we do have.
Speaker Change: Some sub debt some trups at the holding company.
Speaker Change: And so we would look to potentially do something there over time as well.
Ronald J. Nicolas: Got it. And then just with the swap, income running off more so in 4Q. I guess, what are the odds of maybe considering a securities loss trade just to help mitigate that downtrend?
Speaker Change: Okay.
Speaker Change: Got it and then just with the.
Speaker Change: The swap.
Speaker Change: Income running off more so in <unk> I guess, what are the odds of maybe considering a securities loss trade just to help mitigate that.
Speaker Change: Downdraft.
Ronald J. Nicolas: You know, I think we're always the board management. We're assessing, you know, a variety of tactics here. And that really owes to the comment that I mentioned that, you know, given our high capital levels, we've got a lot of optionality. So we're going to continue to look at that and other options as well.
Speaker Change: I think we're always the board management, we're assessing.
Speaker Change: You know a variety of tactics here and not really owes to the comment that I mentioned that given our high capital levels. We've got a lot of optionality. So.
We're going to continue to look at that.
Ronald J. Nicolas: Okay, and then just on capital. It's up quite a bit again this quarter. Are you more open to a buyback now, do you think, at this level?
Speaker Change: And the other options as well.
Speaker Change: Yes.
Speaker Change: Okay, and then just on capital, it's up quite a bit again this quarter.
Speaker Change: Are you more open more open to a buyback now do you think that this.
Steven R. Gardner: I think that we're, you know, given the outlook, other than the one, the one credit, the one relationship that moved up, I mean, equality remains very strong. We're going to continue to talk about it at the board, but you're absolutely right. We recognize that we have very high levels of capital across the board right now. So we'll continue to assess that as well.
Speaker Change: I think that we're at.
Speaker Change: Given the outlook.
Speaker Change: Other than the one the one credit the one relationship that moved up I mean asset quality remains very strong.
It's we're going to continue to talk about it at the board, but youre absolutely right. We recognize that we have very high levels of of capital across the board right now so.
Speaker Change: So we'll continue to assess that as well.
Steven R. Gardner: Okay, and then, um, go ahead. Sorry, I'm mad. I was just going to say this.
Speaker Change: Okay and then.
Speaker Change: Go ahead, sorry, Matt I was just going to say the spot rate on the <unk>.
Ronald J. Nicolas: I was just going to say the spot rate that you asked about earlier was 1.66%.
Speaker Change: That you asked about earlier was 166%.
Ronald J. Nicolas: Okay, that's total. Great. Thank you. I thought I saw the non-maturity.
Speaker Change: Yes.
Matt: Okay. That's total great. Thank you I would tell you what I saw the.
Ronald J. Nicolas: I thought I was looking at the non-maturity spot rate, so that's helpful. Okay, thank you. And then, Ron, while I have you, I know you mentioned, I think, I guess we can back into it, but I also have accretion in here. So I'm just trying to isolate the swap income this quarter in dollars.
Matt: Non maturity I thought I was looking at the non maturity alright. So thats helpful. Okay. Thank you.
Speaker Change: Then maybe just Ron while I have you just I know you mentioned I think we get back into it but I also have accretion in here. So I'm just trying to isolate the swap income this quarter in dollars.
Ronald J. Nicolas: The swap income, in dollars, was $6.7 million.
Ronald J. Nicolas: The swap income in dollars was $6 $7 million.
Andrew Terrell: The next question is from Andrew Terrell with Stevens. Please go ahead.
Ronald J. Nicolas: Okay.
Hugh.
Speaker Change: Youre welcome.
Speaker Change: The next question is from Andrew <unk> with Stephens. Please go ahead.
Andrew: Hey, good morning.
Andrew Terrell: Just to follow up on the last question around the FHLB, the $200 million of remaining termed FHLB, I get it, matures later this year. Do you have the current?
Andrew: Good morning.
Andrew: Just to follow up on the last question around the FHA will be the $200 million of remaining term FHL P I get it.
Andrew: It turns later this year do you have the current cost of that.
Ronald J. Nicolas: Let me take a look at that Andrew. We can't, we don't have it up top of our heads. Yeah. Okay. And then on the discussion around the SWOT maturities, so it sounds like... nearly half of it kind of late this year. Is there an incremental trunch that also matures in early 2025 or is it beyond?
Speaker Change: Let me, let me take a look at that Andrew we can't we don't have it.
Speaker Change: My head yes.
Speaker Change: Okay got it and then on the.
Speaker Change: On the discussion around the swap maturities so it sounds like.
Speaker Change: Nearly half of it kind of late this year is there an incremental tranche then that also matures in early 2025 or is it is it beyond that.
Ronald J. Nicolas: It's in 2025, and is there, I think, a small piece that goes out? Yeah, there's continued laddering a little bit in 2025 and maybe even to early 2026. Yeah, it's a relatively small amount. But we're talking, yeah, as Steve indicates, small amounts. Under a million oceanic.
Speaker Change: It's in 2025 and yes cut.
Speaker Change: A small piece that goes out yes. There is a there is a continued lettering a little bit in 2025, and maybe even to early 2020.
Speaker Change: So relatively small, but we're talking to yes, as Steve indicated small under all of monitor a million notional.
Speaker Change: Okay understood.
Andrew Terrell: Okay. Um, understood.
Andrew Terrell: On the deposit front, I heard the comments around maybe some of the 1Q deposit growth that you saw was maybe a little more seasonal, or you expected some seasonal headwinds here kind of in the second quarter. I'm just curious if maybe you could quantify what you thought either growth-wise occurred in the first quarter that was more seasonal in nature or kind of the... The magnitude of the seasonal headwinds you would expect in the second quarter would be helpful.
Speaker Change: On the deposit front.
I heard the comments around maybe some of the <unk> deposit growth you saw was maybe a little more seasonal or are you expecting some seasonal <unk>.
Speaker Change: Headwinds here kind of in the second quarter I'm just curious if maybe you could you could quantify what you thought either growth wise occurred in the first quarter that was more seasonal in nature kind of the.
Speaker Change: The magnitude of the seasonal headwinds you would expect in the second quarter it would be helpful.
Ronald J. Nicolas: I think both of those are really hard to quantify with any specificity at all, Matt. Andrew, excuse me. I think that in talking to some of our clients, large depositors, they've got some pretty big – the business was pretty good last year, and they've got some pretty healthy tax bills coming up that they're looking at, and so we're factoring that in, and then just some other seasonality that we sometimes see in the HOA business and the like. So we just wanted to highlight that, but we don't have a specific estimate
Speaker Change: I think both of those are really hard to quantify.
Speaker Change: Quantify with any specificity at all Matt.
Andrew: Andrew excuse me.
Speaker Change: I'll take that in talking to some of our clients larger depositors.
Speaker Change: They've got some pretty businesses was pretty good last year, and you've got some pretty healthy tax bills coming up.
Speaker Change: They're looking at and so we're factoring that in and then just some other seasonality that we sometimes see in the HOA business and the like so we just wanted to highlight it but we don't have a specific estimate for you.
Speaker Change: Okay.
Ronald J. Nicolas: Okay, I can appreciate it. It's tough to forecast, I'm sure. Maybe last one for me just for Ron, I heard some of the comments around deploying maybe some of the excess cash into, I'm just curious, on the cash position overall, what would you view as maybe a more normal cash position versus the, I think it's a little north of a billion you have today? I'm just trying to figure out what the end result is.
Speaker Change: No I can appreciate its tough to tell.
Speaker Change: Forecast I'm sure.
Speaker Change: Maybe last one for me just for Ron I heard some of the comments around the deploying maybe some of the excess cash in two.
Speaker Change: Higher yielding earning assets.
I'm just curious on the cash position overall, what would you view as maybe a more normal cash position versus the I think it's a little north of $1 billion you have today I'm just trying to figure out what the.
Ronald J. Nicolas: Sure, Andrew. Yeah, we did see cash, you know, a slight uptick this quarter. And, you know, a lot of that we've already discussed what the key drivers there were. I would anticipate that a more normalized cash is probably around half of that, somewhere in that $500 million range. At times, we've been a little bit lower under a normalized environment, and other times, we've been slightly higher, but effectively, somewhere in that $500 million range would be the normalized. And, you know, kind of looking forward, I would expect us to slowly move down into that direction here, you know, over the next quarter or two, as well.
Speaker Change: To quantify.
Sure Andrew Yeah, we did see cash slight uptick this quarter end.
Speaker Change: You know a lot of that we've already discussed with the key drivers there were I would anticipate a more normalized cash is probably around half of that somewhere in that $500 million range at times, we've been a little bit lower under a normalized environment and times <unk> been slightly higher but effectively somewhere in that $500 million range.
Speaker Change: Would be the normalized.
Speaker Change: And you know.
Speaker Change: Looking forward I would expect us to slowly move down into that direction.
Speaker Change: Here.
Speaker Change: Over the next quarter or two.
Speaker Change: As well.
Ronald J. Nicolas: Okay, very good. Thank you for taking the questions. Go ahead. Yeah, Andrew, that tranche, that last tranche is 468. 468, the $200 million.
Speaker Change: Okay.
Speaker Change: Hey, guys. Thank you for taking my questions go ahead Andrew.
Net debt tranche debt last tranches for 68.
Andrew: The $200 million, yes that remaining $200 million.
Ronald J. Nicolas: Yes, that remaining $200 million.
Ronald J. Nicolas: Got it. Okay. Thank you very much. You're welcome.
Andrew: Got it okay. Thank you very much youre welcome.
Gary Peter Tenner: The next question is from Gary Tenner with D.A. Davidson. Please go ahead.
Andrew: The next question is from Gary Tenner with D. A Davidson. Please go ahead.
Thanks, Good morning.
Gary Peter Tenner: Most of my financial specific questions have been asked, but Steve, I'd love to hear your sense of the competitive environment. I'm curious what you're seeing and hearing in terms of lending appetite at some of the banks you typically run up against, you know, and just given the kind of state of banking in California, from last year's failures to some merger activity, you know, kind of what the lay of the land is from a talent opportunity and just the broad competitive dynamic. Sure.
Gary Peter Tenner: Most of my financial specific questions have been.
Gary Peter Tenner: But Steve I'd love to hear kind of your <unk>.
Gary Peter Tenner: Sense of the competitive environment, I'm curious, what you're seeing and hearing in terms of lending appetite at some of the banks you typically run up against.
Gary Peter Tenner: And just given the kind of state of banking in California.
Gary Peter Tenner: From ushers failures to some merger activity.
Gary Peter Tenner: Kind of what the label and as from a talent opportunity and just the broad competitive dynamics.
Steven R. Gardner: Sure, Gary, there's a lot to unwrap there. Let me see if I can try to wrap it.
Speaker Change: Sure Gary there is a lot to unwrap there.
Speaker Change: Let me see if I could let me see if I could try to cover it I think that.
Steven R. Gardner: I think that, you know, as I mentioned in the prepared remarks, we've been a little bit surprised at just how aggressive some lenders are on term and structure. I mean, you know, we understand rates, but we kind of scratch our heads on what some of the things are that we're seeing. But maybe that's just the fact that, you know, there is relatively muted demand out there. From the pricing standpoint, I think I nearly fall out of my chair every day when I see what some people are pricing deposits, earnings, and credits on some specific lines of business. We walk away and say, boy, that is some really short-term thinking, but maybe they're under dynamics that are different than what we are experiencing or maybe what they're thinking; I'm just not sure.
Speaker Change: As I mentioned in the prepared remarks, we've been a little bit surprised at just how aggressive.
Speaker Change: Some lenders are on term and structure.
Speaker Change: We understand right, but we kind of scratch our heads on on what some of the things are that we're seeing.
Speaker Change: But maybe that's just the fact that there is relatively muted demand out there.
Speaker Change: From the pricing standpoint, I think our nearly fall out of my chair everyday when I see what some people are pricing deposits earnings credits on some specific lines of business.
Speaker Change: It really we walk away and say boy that is some really short term thinking but maybe they are under dynamics that are different than what we are.
Speaker Change: Are experiencing or maybe what theyre thinking I'm just not sure.
<unk>.
Speaker Change: From from from the talent standpoint, our team is.
Steven R. Gardner: From the talent standpoint, our team is strong, but we are always seeking to upgrade where we can. We historically have not gone out and done the team lift-out thing. It just historically hasn't really worked; the return on investment just isn't there. From an M&A standpoint, there are a lot of headwinds to M&A right now, whether it's our own valuation and multiple, whether it's just volatility in the stock market and interest rates. And then, of course, that rolls into the impact on fair value accounting and how that's going to impact capital ratios in M&A.
Speaker Change: <unk> is strong, but we are always seeking to upgrade where we can we historically have not gone out and done the team lift out thing.
Speaker Change: Storage really hasnt really.
Speaker Change: The return on investment just isn't there.
<unk>.
Speaker Change: M&A standpoint.
Speaker Change: So there is a lot of headwinds to M&A right now whether it's <unk>.
Speaker Change: Our own valuation and multiple.
Speaker Change: Whether it's just volatility in the stock market and interest rates and then of course that rolls into.
Speaker Change: The impact of fair value accounting, and how thats going to impact capital ratios in M&A and then probably the biggest unknown and uncertainty is just the regulatory environment and.
Steven R. Gardner: And then probably the biggest unknown and uncertainty is just the regulatory environment and how long it is going to actually take to get a transaction done, and so that's playing into it as well, and so it's generally been relatively muted as far as the level of M&A activity, which everybody is well aware of. But you know what? The great thing is that it allows some of your colleagues to spend more time with us being quote-unquote helpful with ideas.
Speaker Change: How long it is going to actually take to get a transaction done.
Speaker Change: And so that's playing into it as well and so.
Speaker Change: It's generally been relatively muted as far as the level of M&A activity, which everybody is well aware of.
Speaker Change: But you know what the great thing is that it allows some of your colleagues to spend more time with us being quote unquote helpful on ideas.
Steven R. Gardner: Steve, I appreciate your thoughts. Thanks. Sure.
Speaker Change: Okay.
Speaker Change: Steve I appreciate your thoughts thanks.
Speaker Change: Sure.
David Pipkin Feaster: Again, if you have a question, please press star then 1. The next question is from David Feaster. It was Raymond James. Please go ahead.
Speaker Change: Again, if you have a question. Please press Star then one.
Speaker Change: The next question is from David Feaster with Raymond James. Please go ahead.
David Pipkin Feaster: Hi everybody. Hi David.
David Pipkin Feaster: Hey, good morning, everybody.
David Pipkin Feaster: Hi, David.
David Pipkin Feaster: Maybe just two quick ones. You know, I think we've hammered home the impact of Fed cuts, but I'm just curious, maybe touching on some of the ancillary impacts. Obviously, there's going to be a nice improvement in sentiment broadly if we do start getting cuts. I'm just curious, how do you think about Fed cuts impacting other parts of the income statement or balance sheet, from, you know, loan growth to fee revenue growth from escrow, and, you know, obviously, we get some benefit on the earnings credit side, too, and on the expense side. So just maybe some of your thoughts around some of those dynamics if we do start getting a declining rate.
David Pipkin Feaster: Maybe just two.
David Pipkin Feaster: Two quick ones you know I think we've hammered home the impact of fed cut but I'm. Just curious maybe you touched on some of the ancillary impacts.
David Pipkin Feaster: Obviously, theres going to be a nice improvement in sentiment broadly if we do start getting cuts. So I'm just curious how do you think about fed cuts impacting other parts of the income statement, our balance sheet from loan growth fee revenue grow from escrow and obviously, we get some benefit on the earning credit.
Speaker Change: Good too on.
Speaker Change: On the expense side. So just maybe some of your thoughts around some of those dynamics, if we do start getting a declining rate environment.
Steven R. Gardner: Yeah, you know, I think that what is going to be the driver of that declining rate environment is that inflation is starting to slowly come down, or are we going to be seeing widespread disinflation, which could be certainly problematic? Is it because, you know, suddenly jobs are not expanding but are contracting?
Speaker Change: Yeah.
Speaker Change: I think that what is going to be the driver of that declining rate environment is that inflation.
Speaker Change: Starting to slowly come down or are we going to be seen widespread disinflation, which could be certainly problematic as it because.
Speaker Change: Donnelley.
Jobs are not expanding but our contracting so I think what's going to be the driver of that I think obviously all of us.
Steven R. Gardner: So I think what's going to be the driver of that? I think obviously all of us are hopeful that it's a, you know, a soft landing, but most of us prognosticators, forecasts have generally been wrong. So from our standpoint, we're prepared for a variety of scenarios and situations. We generally manage the balance sheet relatively neutral from an interest rate risk standpoint. And I think, you know, we're carrying capital levels that protect us from tail risks that may occur.
Speaker Change: Our hopeful that it's a you know what.
Speaker Change: A soft landing but.
Speaker Change: Most all of US Prognosticators forecast have generally been wrong. So from our standpoint, we're prepared.
Speaker Change: For a variety of scenarios and situations, we generally manage the balance sheet relatively.
Speaker Change: Neutral from an interest rate risk standpoint, and I think we're carrying capital levels that protect us from the tail risks.
Steven R. Gardner: You know, if you get the kind of soft landing and the nice gradual decline in interest rates, and if somebody can point to a time in history where that actually occurred, that would be exciting. But if that does occur, yes, you'd probably see increased activity around areas like our escrow business and 1031 exchange activity. You know, I would think that in a declining rate environment, one that's gradual, you would probably see improved deposit flows, the money market funds and other higher yielding alternatives not being as attractive. And that would certainly benefit us. And the like, you'd probably see potentially some increase in overall credit demand if that type of scenario were to play out.
That that may occur.
Speaker Change: If you get the kind of the soft landing in a nice gradual <expletive>.
Speaker Change: The decline in interest rates and if somebody can point to a time in history, where that's actually occurred.
That would be exciting.
Speaker Change: But if that does occur, yes, you'd probably see increased activity around areas like the.
Speaker Change: Our escrow business and 10 31 exchange.
Speaker Change: Activity.
Speaker Change: You know I would think that in a declining rate environment, one that's gradual.
Speaker Change: You would see probably improved deposit flows the money market funds and other higher yielding alternatives not being as attractive and that would certainly benefit us.
The like you'd probably see potentially some some increased in overall credit demand.
If that type of scenario were to play out.
Steven R. Gardner: That's helpful. And then maybe just touching on going back to kind of the competitive landscape, you know, I mean, origination slowed down materially. And it was really across the board. I mean, you've obviously had a conservative and cautious outlook for a long time, and it's been the right call. I'm curious how much of the decline in originations is strategic where there is, you know, maybe less appetite for demand or even the pulse of your clients.
Speaker Change: Okay. That's helpful and then maybe just touching on <unk>.
Speaker Change: Going back to kind of the competitive landscape.
Speaker Change: I mean origination slowed down materially and it was really across the board.
You've obviously I mean, you've had a conservative and cautious outlook for a long time and it's been the right call I'm curious how much of the decline in originations is.
Speaker Change: His strategic where it's maybe less appetite for demand or even the pulse of your clients like I'm curious what are you hearing from clients or are they is there a <unk>.
Steven R. Gardner: Like, I'm curious, what are you hearing from clients? Are they experiencing, you know, uncertainty in the market, and they're just holding out on investing? And then are there any lines where you're seeing more competition for new credit?
Speaker Change: Certainty in the market and they're just holding out on investing and then is there any lines, where youre seeing more competition for new credit.
Steven R. Gardner: Yeah, I think there's a... You know, it's complex, as always. There are no simple answers. Certainly, you're right.
Speaker Change: Yeah, I think there is.
Speaker Change: It's complex as always there are no simple answers.
Speaker Change: Certainly you're right, we made a conscientious decision to pretty significantly slow new loan activity going back to early 2022.
Steven R. Gardner: We made a conscientious decision to pretty significantly slow new loan activity going back to early 2022. You know, that's always a balancing act, and you're trying to make adjustments along the way. I don't think that any of us were too pleased about, you know, originating $45 million in the first quarter. But again, that, I think, owes to the discipline that we have around structure, pricing, and the like. I think from our clients' standpoint, you know, they're generating good cash flow, but there doesn't seem to be... a lot of excitement or enthusiasm about expanding operations beyond where they are.
Speaker Change: That's always a balancing act and youre trying to make adjustments.
Speaker Change: Along the way I don't think that any of us were too pleased.
Speaker Change: Originating $45 billion.
Speaker Change: In the first quarter, but again that I think owes to the discipline that we have around structure pricing and the like I think from our client standpoint.
Speaker Change: Generating good cash flow, but there doesn't seem to be a.
Speaker Change: Lot of the excitement or enthusiasm about expanding operations.
Speaker Change: And where they are they are still dealing with.
Steven R. Gardner: They're still dealing with the effects of inflation in a competitive labor environment. And so business owners are pretty pleased with the cash flow and profitability they're generating now, but there doesn't seem to be a lot of enthusiasm for expansion. If you will, I certainly have to think that some of the domestic geopolitical risks are at play in an election this year and those dynamics and for others, international geopolitical risks influence their decision making at their businesses, a question and dynamic that's going on in the market, but as I said, we began to see some incremental, credit opportunities that were attractive and that we're hopeful that will come to fruition and we can execute on because we certainly have the capital and the ability to add high quality loan relationships to the book.
Speaker Change: The effects of inflation.
Speaker Change: And in a competitive labor environment, and so business owners are pretty pleased with.
Speaker Change: The cash flow and profitability they are generating now, but there doesn't seem to be a lot of enthusiasm for.
Speaker Change: Expansion.
Speaker Change: If you will I certainly got it.
Speaker Change: That some of the domestic geopolitical risks are at play in an election this year.
Speaker Change: And those dynamics and for others.
The international geopolitical risks influence their decision making.
Speaker Change: Their business is so it's a.
Speaker Change: Multi pronged.
Speaker Change: A question and dynamic that's going on in the market, but as I said, we began to see some.
Speaker Change: Incremental.
Speaker Change: Credit opportunities that were attractive and that we're hopeful that will come to fruition and we can execute on because we certainly have the capital and the ability to to add.
Speaker Change: High quality loan relationships to the book.
Steven R. Gardner: And maybe last one, you know, you've got a great reputation as an aggressive manager of credit. I saw that this quarter with the proactive sale of some substandard credits, you know, a couple CRE and some in franchise. I'm just curious, was there anything specific about those loans or any commonalities among them that drove the sale? And then just on continued sales, like what's the market like and whether there might be some interest in some additional, you know, potential problem loans, sales in the coming quarters?
Speaker Change: That's great.
Speaker Change: And maybe last one you've got a great reputation as an aggressive manager of credit.
Speaker Change: Solid this quarter with the proactive sales and some substandard credits.
Speaker Change: The CRE a couple of CRE and some in franchise I'm. Just curious was there anything within those loans specific or any commonalities among them that drove the sale and then just on continued sales like what's the market like.
Speaker Change: And whether there might be some interest and some additional potential problem loans sales and then coming quarters yeah.
Steven R. Gardner: Yeah, there wasn't really any common denominator amongst any of those individual loans. They were specific to that borrower, that business, that property that we sold. You know, look, we've utilized loan sales for a long period of time, and we're going to continue to do so. We generally don't broadly market them. We've tried one or two firms. I don't think that it didn't necessarily work out the way that we had expected. And we've gone back to a number of small funds, and high net worth individuals that are involved in this business.
Speaker Change: There wasn't really any common denominator amongst any of those individual credits they were specific to that borrower that business that that property.
Speaker Change: That we sold.
Speaker Change: Look we've utilized loan sales for a long period of time, we're going to continue to.
Speaker Change: We generally don't broadly market them we've tried.
Speaker Change: One or two firms I don't think that it's.
Speaker Change: That didn't necessarily work out there.
Speaker Change: The way that we had expected and we've gone back to a number of <unk>.
Speaker Change: Small funds high net worth individuals.
Speaker Change: That are involved in this business and.
Steven R. Gardner: And we get pretty good execution there, so we'll continue to consider it. You know, we'll put loans out to bid, you know, pretty regularly, and then decide on the best course of action. All right.
Speaker Change: We get pretty good execution there.
Speaker Change: So we will continue to consider it will put we put loans out to bid.
Speaker Change: Pretty regularly and then decide on what the best course of action is.
Steven R. Gardner: All right, that's helpful.
Speaker Change: Alright Thats helpful. Thank you.
Operator: This concludes our question and answer session. I would like to turn the conference back over to Steve Gardner for any closing remarks.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to Steve Gardner for any closing remarks.
Steven R. Gardner: Very good. Thank you, Gary. Look forward to seeing folks at various conferences. Have a good week.
Steven R. Gardner: Very good thank you Gary.
Steven R. Gardner: Look forward to seeing folks at various conferences have a good week.
Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Steven R. Gardner: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Steven R. Gardner: Okay.
Steven R. Gardner: [music].