Pacific Premier Bancorp Inc
NASDAQ:PPBI
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Pacific Premier Bancorp Inc
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Good day and welcome to the Pacific Premier Bancorp First Quarter 2021 Conference Call. [Operator Instructions] 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.
Thank you, Betsy. Good morning, everyone. I appreciate you joining us today. As you're all aware, earlier this morning, we released our earnings report for the first quarter of 2021. We have also published an updated investor presentation that has additional information on our financial performance. If you have not done so already, we would encourage you to visit our Investor Relations website to download a copy of the presentation. In terms of our call today, I'll walk through some of the notable items. Ron Nicholas, our CFO will review a few of the financial details, and then we'll open up the call to questions.
I noted on our earnings release and investor presentation, we have our Safe Harbor statement relative to the forward-looking comments. And I would encourage all of you to read through those carefully. Our first quarter results reflect the growing strength and discipline of our team, as well as the added benefits from the scale of the organization. We delivered strong financial performance in the first quarter with net income of $68.7 million or $0.72 per share, which translated to a return on average assets of 1.37% and a return on average tangible common equity of 16.21%. Despite the challenges in the current environment, our people are executing at a high level throughout the company. Asset quality remains solid, with no remaining COVID-19 loan modifications.
During the quarter, we added a number of new commercial client relationships that contributed to our noninterest bearing deposits increasing by $292 million, or 20% annualized. The growth in noninterest bearing deposits helped to reduce our deposit costs to 11 basis points, and in part led to our net interest margin remaining relatively stable. Our recurring fee income businesses are performing well and are accounting for a greater percentage of our overall revenue. Later this quarter, we will complete the system conversion of Pacific Premier Trust and simultaneously deploy our customized salesforce platform, which we utilize throughout Pacific Premier to support business development, data analytics, and client relationship management.
These systems will ultimately improve our ability to scale the trust business as we move into the second half of 2021. While elevated loan payoffs and a further decline in credit line utilization rates, impacted loan growth in terms of new business development, we have the strongest quarter in our history, with more than $1.1 billion in new loan commitments, which was up from $911 million last quarter. This is particularly notable given that the first quarter is typically a seasonally low period for new originations. As the economy continues to strengthen, we are seeing greater diversification in the mix of loan and deposit relationships across our lines of business as compared to the prior quarter.
The more balanced loan production resulted in an improvement in the average rate on new loan commitments, which increase eight basis points to 3.63% in the first quarter. There were a number of factors that are contributing to the increase in loan production that we are seeing across the portfolio. Our teams are collaborating and working at a high level to develop and close new opportunities with improved efficiency. We are seeing the benefit of scale as a $20 billion institution in terms of our ability to attract full banking relationships with larger, more sophisticated middle market competence and stronger credit sponsors of commercial real estate projects. Businesses and investors are exhibiting greater confidence in a sustainable recovery as more of the economy reopens. That confidence is beginning to translate into business expansion, as line utilization rates appear to have hit their low point at the end of the first quarter.
Lastly, the current environment is providing our leaders the opportunity to selectively add and upgrade talent to their teams, which is having a positive impact on our capabilities to win new business. With that I'm going to turn the call over to Ron to provide a few more details on our first quarter results.
Thanks, Steve, and good morning. The majority of my comments will be directed on a linked quarter basis. Overall, total revenue was $185.4 million for the quarter, compared with $191.4 million in the prior quarter, driven by lower interest income primarily due to two less days in the quarter and lower accretion income. Both our efficiency ratio at 48.6% and our pre provision net revenue as a percent of assets at 1.86% remained strong, highlighting the benefit of our increased operating scale. The net interest margin remained at 3.55% for the quarter, a decrease of six basis points from the prior quarter as changes in the mix of earning assets and lower loan yields, as well as lower accretion income were partially offset by a lower cost of funds.
Our core net interest margin, excluding the impact of accretion decreased two basis points to 3.30%. With the continued margin pressure of excess liquidity and less room on deposit repricing, we see the core NIM in the 3.25% range. Noninterest income of $23.7 million included $2.3 million in PPP referral fee income in the quarter. We do expect some additional PPP referral fees in the second quarter as the program winds down. Noninterest expense excluding merger related costs came in at $92.5 million, compared with $94.5 million in the prior quarter. The cost savings from the Opus acquisition has been fully realized and exceeds the amount we estimated when the transaction was announced last year. Personnel costs were largely flat to the prior quarter, and headcount increase to 1,520 from 1,477 at the prior quarter end.
Our quarterly noninterest expense should approximate $94 million as we continue to invest in people and technology.
Turning now to the allowance in asset quality. Our allowance for credit losses finished the quarter at 2.04% and the total loss absorbing capacity comprised of the allowance and the remaining fair value discount on acquired loans totaled $371 million at quarter end, or 2.81% of loans held for investment. The factors affecting our allowance for credit losses during the quarter were modest, driven primarily by the economic forecast and model dynamics at the segment level, as well as the portfolio mix. Provision for credit losses was $2 million comparable $1.5 million in the prior quarter. While net charge-offs totaled $1.3 million down from $6.4 million in the prior quarter.
Overall, our asset quality continued to perform well with nonperforming assets at 19 basis points of total assets and total delinquencies at 17 basis points of loans held for investment. Given our strong credit quality, and the improving economies impact on our CECL modeling, we are likely to see reserve releases in the coming quarters, although it is not possible to estimate the exact likelihood or magnitude at this time.
With respect to the balance sheet, loans decreased during the quarter as we continue to see higher level of payoffs and lower levels of C&I line utilization, which fell to less than 30% at quarter end. Total Investment Securities were $3.88 billion a quarter end, a slight decrease from the prior quarter. The yield on our securities portfolio remained stable at 1.71% and the duration increased to 6.2 years. During the first quarter, we grew total deposits by over $500 million, or 12% on an annualized basis. Notably, we grew non-maturity deposits by nearly $800 million, an increase of 5% on a linked quarter basis, as we continue to price down our higher cost retail CDs and run off our broker CDs. As noted in our release, we redeemed $25 million of high cost debt early in the second quarter, after paying off some higher cost FHLB term borrowings this past quarter, as we continue to look for ways to lower our cost of funds and support our NIM.
With that, I'll hand it back to Steve.
Great, thanks, Ron. In summary, the momentum we are seeing in business development is resulting in a growing loan pipeline that now exceeds $2 billion. Based on the positive trends we're seeing and contributions coming from all areas of the bank, we are more confident today that loan growth will accelerate as we move through the year. In addition, as the economy further strengthens, we anticipate an increase in credit line utilization rates as business investment expands, and new projects come online. This should lead to a remit to the balance sheet and derive an expansion in net interest income.
Given our consistent financial performance, and our increasing confidence in the outlook for the economy, we have increased our dividend by 10% to $0.33 per share. During the first quarter, we initiated a stock repurchase program and have bought back approximately 200,000 shares. With our strong capital ratios, conservative risk profile and expanding earnings, we are able to increase the capital return to our shareholders, while also being well positioned to support both organic and acquisitive growth. We continue to pursue acquisitions and merger partners throughout the western US that can add meaningful earnings accretion, and scale to our franchise.
That concludes our prepared remarks and we would be happy to answer any questions. Betsy, could you please open up the call for questions?
[Operator Instructions]
First question comes from Gary Tenner with D.A. Davidson.
Thanks. Good morning, guys. I had a couple of questions. I guess, Steve, in your closing remarks you talked about the loan pipeline strength and expectations for accelerating loan growth later in the year. Does that kind of inform the decision to kind of allow the cash balances to grow on balance sheet versus investing in this quarter? Just because you're anticipating the need for that liquidity to fund growth later in the year?
That's part of it. Gary, hi, I can't see us running the full quarter at the level of cash that we do have on the balance sheet. It's also to being mindful of the level of deposit flows. They continue to, obviously, be strong. Again, though I don't suspect we're going to be carrying $1.5 billion of cash throughout the remainder of the quarter or something near it.
Okay, thanks. And then on the credit side, obviously metrics look really good. But the multifamily allowance for credit losses jumped out, I mean in terms of the sequential quarter increase. I think it was $17 million. Is that just driven by growth and increased commitments in the space or is there anything else that you're seeing in the segment that's giving you any cause for concern?
I'll talk about it generally and then Ron can jump in and add any additional color, is really driven in part by the model, Gary, that we utilize, which is Moody's and, in their forecast, and in what seeing on a national level as something that we will certainly take a look at as the model continues to be refined, and we all have added experience. As we estimate any number of factors in the model itself. Ron, you want to provide any greater detail color on it.
Sure, Steve. Thanks. Yes, Gary, you certainly noted the one increase we did see meaningful increase in the reserve levels. Specifically in the Moody's model there, the REIS, CRE and multifamily pricing, the multifamily pricing deteriorated a little bit in terms of both rents and vacancies, they're describing in some of their analysis and white papers, which you can pick up, continued a lag in the impact there. So that's really, we had been hovering in that 120 to 130 basis point, reserve level, and as you saw, it spiked to 150. So it's strictly a function of the model itself, and we did not see or do not see any kind of deterioration in our own portfolio.
All right. Appreciate the color on that. And then just finally in terms of kind of pricing competition, any thoughts there? I mean, we're - seems like we're still hearing our daily about banks, some banks doing long-term fixed rate loans at pretty low rates. Have you seen any kind of moderation of the pricing, or loans just kind of coming on at floors right now, and that's the environment?
We haven't seen any real material change in pricing in the marketplace.
Our next question comes from Matthew Clark with Piper Sandler.
Hi, good morning, guys. Maybe the first one on NIM outlook of 3.25%. I assume that's for the upcoming quarter. But it also sounds like you're going to be holding less cash going forward and re mixing assets and, higher yielding assets. So I guess I'm a little surprised that you expect the margin to be down a little bit and just want to confirm that's for the upcoming quarter. And does that contemplate I assume you're thinking expansion in the back half, if that's the case.
It is that estimate is for the current quarter and really, where we stand heading into the quarter. We would expect as I said in my comments, Matt that as the balance sheet remixes as one loan accelerates or as loan growth accelerates, we do a remix in the balance sheet and that should benefit the net interest margin. That is our expectation.
Okay, and on the prepays and payoffs, do you happen to have those numbers this quarter versus last? Just trying to get order of magnitude there? Maybe we back into a plug but see how it might have taken.
Ron, do you have that number handy?
Yes, Matt, I don't have it handy here. I'll look at it to here in a moment. I will tell you that the prepays were down just a smidgen, but they were still pretty high in terms of our historical levels. And again, the line utilization really was the new item that impacted our loan growth quarter-to-quarter this quarter. But I'll circle back later on the call Matt on that.
Okay, thank you. It does sound like utilization rates have hit a bottom at the end of the quarter. Have you seen usage pick up here in April? Any color there?
Yes, we have. Whether that's sustainable remains to be seen. But it does appear that by the end of March, we had hit the bottom which was as Ron had mentioned below 30% and we have seen that move up modestly in the first couple of weeks here in April, and that seems - that trend seems to be holding here. So we'll see we believe it is reflective of again, improving confidence in the economic recovery.
Okay, and then last one for me just on M&A. It sounded like coming out last quarter; your focus was on primary versus secondary targets. Have that changed at all and any update on that level of activity?
We're still looking at all options. There are certainly some that are more attractive than others. Getting transactions done properly structuring them, pricing them and ensure that they're going to create long-term shareholder value is always a challenge. But we continue to pursue those various opportunities. And we still fundamentally believe this is a consolidating industry. Scale matters and where you can build scale with partnering with strong, complimentary institutions is makes a lot of sense.
Great, thank you.
Hey, Matt. This is Ron, I'll just tell you that the break between the maturities and the payoffs that were $740 million, this particular quarter, and last quarter was about $840 approximately million.
Our next question comes from David Feaster with Raymond James.
Hey, good morning, everybody. It was great to see a record quarter of loan originations. I'm just curious what you're seeing drive that? I mean, do you think it's more of a function of just the improved economic outlook and clients being more confident in investing? Or is it more that you're gaining share, just given the new hires that you've had, and some of them - the ability to move upstream. And then just taking the origination activity and the increased pipeline and prospects for increasing C&I utilization? How do you think about growth for the year? I mean, do you think, I mean, mid-single digits is kind of a reasonable expectation.
David, you cut out a little bit there. But I think I understand your question. The new production is really being driven by a multitude of factors, the larger scale of the organization, and our ability to attract larger, more sophisticated clients. And whether that's true our treasury management offerings, the relationships, that some of the folks that have joined the organization in the past year bring to it. Plus, we're seeing a little bit of an increase level of demand. And then lastly, there's the integration with the Opus team. And that team, whether it's the commercial real estate side, the C&I, they are working very well together, along with the credit team, and so we're just able to move those opportunities through the system more quickly.
So all of those things are driving the increase in production and the strength and the loan pipeline. From the line utilization rates, as I mentioned earlier, it seems to have come off as low from the first quarter. We're hopeful that continues throughout the quarter and into the year as the economy expands. As far as loan growth, we don't give guidance because that's just very difficult to forecast in this environment. We're far more focused on the activities and the behaviors that we know drive new business relationships, and focus on making sure that we're serving our existing clients well.
Okay, that's helpful, and I was pleased to see the increased contribution from the escrow business in the quarter. I'm just curious whether you started to see an increased deposit contribution there as well. And then just any updates on the truck business, AU, assets under custody, we need to grow. Just curious how client growth is trended and any updates on those lines, maybe some expectations, just want to get those businesses converted?
Sure, I think we're from the escrow side we're seeing some nice synergies with the existing loan production that we're doing, and the referrals from that business to the escrow and vice versa. Again, it's reflective of the teams working well together. The trust business, as I mentioned, will convert their systems, their core operating system here this quarter, the team is worked tremendously hard to ensure that is going to go through smoothly, it's a great opportunity to us, for us to retool that business and deploy greater technology not only through the core system, but through our salesforce platform. And we think the opportunities there are fairly attractive and we're optimistic that the growth in outline of business here in the second half of the year and into 2022 will begin to accelerate.
And it's really been focused on getting the people and the talent in place there in the trust business. And that foundation built around the processes and the core operating system.
Okay. And just, you touched on some I wanted to shift gears to just following up on your commentary on technology. You talked in your prepared remarks about continued investment. How do you think about technology? And where are you focusing your incremental investments going forward? You talked about salesforce across organizations, and we've talked about API banking, just want to get an update on the text run and some of the initiatives that you have on our way and kind of what's on the docket.
Sure, it's continued improvement, and in those proprietary and customized systems that we have and adding products and services through treasury management, is leveraging the existing technology continuing to push out that use of digitization and online banking, that utilization from our clients, it's in part drives part of our efficiencies, the relatively low number of branch locations that we have, then it will be consolidating a couple more branches here in the second quarter. And in large measure technology has allowed us and helps drive those efficiencies in the organization. But it's really throughout our platform and taking what we've learned and seeing where we can deploy that and develop new technologies that are complementary to the businesses that we have in place.
Got it. That's great color. Thank you so much.
I think you know David; we don't telegraph or tell folks a lot about what we're going to do. Once we've done it, we roll it out. We might mention it at that point.
Our next question comes from Jacquelynne Bohlen from KBW.
Hi, Steven, Ron. Good morning. I wanted to touch on FTE, if I wrote it down correctly in prepared remarks. It looked like it went up on a linked quarter basis. So just wanted to see what the driver of that was.
It continuing to add talent to the organization and invest in people.
Okay. And I would guess a lot of that is producers.
Yes, that is certainly a part of it. Go ahead, Ron.
Yes, I was just going to say, Steve. Yes, that is correct. A fair amount was the increases of 43 were producers.
Okay. And would they later quarter adds and that it plays into some of the increased overall expense level that you're expecting in the second quarter.
That's correct, Jackie. Yes, they were more in the quarter end area.
Okay. And then Steve, correct me if I'm wrong on any of this, but I would just expect, I know we've been talking about for years continued investment in the last conversation centered on a lot of that. So just continuing to find people that you feel is beneficial to the organization doing some talent upgrades where you can and pulling people from other institutions. So that's just going to be kind of a continued ongoing item.
It always has been and it always will be, Jackie. And that's the way we think about it, whether it's technology or people. We are constantly seeking to improve at the organization.
And then just one little housekeeping one for me, in terms of debt redemption in April, I just want to double check that expense is not included in the first quarter, it will be in the second quarters rate, right?
That is correct.
This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.