Pacific Premier Bancorp, inc (PPBI) Q2 2021 Earnings Call Transcript

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Pacific Premier Bancorp, inc (PPBI 0.62%)
Q2 2021 Earnings Call
Jul 27, 2021, 12:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Pacific Premier Bancorp Second Quarter 2021 Conference Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]

I would now like to turn the conference over to Mr. Steven Gardner, Chairman and CEO. Please go ahead, sir.

Steven R. Gardner -- Chairman, President and Chief Executive Officer

Thank you, Chuck. Good morning, everyone. I appreciate you joining us today. As you are all aware, earlier this morning we released our earnings report for the second quarter of 2021. We have also published an updated investor presentation that has additional information on our financial performance. If you haven't done so already, we would encourage you to visit our Investor Relations website to download a copy of the presentation.

In terms of our call today, I will walk through some of the notable items. Ron Nicolas, our CFO will review a few of the financial details and then we'll open up the call to questions. I note that in our earnings release and in 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. We plan to keep our prepared comments relatively brief given the level of detail and disclosures.

We've included in our earnings release and investor presentation. We had a very productive second quarter both in terms of business development and implementing multiple initiatives that will further enhance our ability to drive profitable growth in the future. Our team executed at a high level throughout the quarter and is well positioned as we enter the back half of 2021.

During the second quarter, we generated net income of $96.3 million, or $1.01 per share, which translated to a return on average assets of 1.90%, and a return on average tangible common equity of 22.45%. Our profitability drove a 6.5% increase in tangible book value per share, and allowed us to continue to return a meaningful amount of capital to our shareholders.

Our results were driven by incremental improvement across the board, relative to the prior quarter. A higher level of loan production and net loan growth that enabled us to start remixing the balance sheet toward higher-yielding assets. Increased contributions from most of our fee-generating areas, incremental improvement in our already strong asset quality ratios, which in part contributed to a material release of the reserve levels we have built last year, and well-controlled expenses.

Our financial performance reflects the synergies emanating from a larger, more diverse and capable organization. It reflects our success in effectively leveraging the collective strengths of our teams throughout the bank. Our people are working in a collaborative fashion to expand existing relationships and add new clients, including larger and more sophisticated middle-market companies and real estate investors, which is driving the growth we are seeing in our balance sheet.

From our frontline business development personnel to credit administration and the on-boarding of new clients, we are operating with a high level of proficiency in all areas, which is enabling us to efficiently generate quality growth. We have the strongest quarter in our history, with nearly $1.6 billion in new loan commitments, which was up from $1.2 billion last quarter, while loan disbursements increased 54% over the prior quarter. This resulted in 14.5% annualized growth in total loans during the quarter, despite loan pay-offs and pay-downs increasing.

The mix of loan production continues to be well-diversified with balanced contributions coming from across our markets. As we emerge from the pandemic, real estate-related loan demand has been the first area to pick up, and relative to last quarter, we had a higher level of commercial real estate, multi-family and construction loan commitment production. Commercial loan commitments remain healthy, reflective of our ever improving capabilities to attract new small businesses, middle market and corporate clients.

During the second quarter, we began seeing a higher level of commercial line utilization rates, compared to the historic lows at the end of the prior quarter, which helped drive an increase in our C&I portfolio. But it's too early to call this growth rate a sustainable trend. Our commercial clients still maintain significant liquidity levels and coupled with the challenges of supply chain disruptions and the reemerging concerns around the coronavirus, it may take time before we see a substantive increase in line utilization rates.

Our loan production was weighted more toward the back half of the quarter, so we didn't realize the full benefit of net loan growth. The end of the period loans were $383 million, higher than our average loans. In addition to the higher level of loan production, our business development efforts continue to result in strong inflow of commercial deposits. In the second quarter, this resulted in a $466 million increase in non-interest bearing deposits, which further improved our deposit mix and helped to reduce our total cost of deposits to 8 basis points.

Looking ahead, we expect the trends in the second half of the year to be relatively consistent with what we saw in the first half of the year, depending upon the pace and sustainability of the economic expansion. We will continue to execute well on the things that we can control, and that includes our ongoing assessment of all parts of the company, as we look for opportunities to improve.

During the second quarter, given our strong liquidity and capital levels, we redeemed $25 million of sub-debt and at the beginning of July, we redeemed another $149 million of sub-debt that we had acquired through various acquisitions. The elimination of these high cost funding sources will reduce our interest expense and help support our net interest margin going forward.

We are also trimming around the edges of our branch network and consolidated two more branches in July. As part of our disciplined approach to expense management, we regularly review our branch footprint to see where we can gain synergies and consolidate locations, without negatively impacting client service. This is something we do on a regular basis. Our continuous focus on optimizing every area of our organization enables us to increase our investment in areas that help grow revenue, enhance efficiencies and improve client service.

With that, I'm going to go ahead and turn the call over to Ron to provide a few more details on our second quarter results.

Ronald J. Nicolas -- Senior Executive Vice President and Chief Financial Officer

Thanks, Steve, and good morning. The majority of my comments will be directed on a linked quarter basis. Total revenue was $187.7 million for the quarter, compared with $185.4 million in the prior quarter, driven by higher non-interest income. Our efficiency ratio for the quarter was 49.4%, and our pre-provision net revenue as a percent of assets was 1.84%, highlighting the benefit of our increased operating scale.

During the quarter, we took a number of balance sheet actions, including growing our investment portfolio by approximately $600 million, increasing our BOLI investment by $150 million, and redeeming additional high cost of debt. I will touch on the benefit of these actions a bit more with my Q3 guidance.

Our net interest margin came in at 3.44% for the quarter, and the core margin came in at 3.22%, a decrease of 8 basis points from the prior quarter, as lower loan yields and fees negatively impacted the margin, partially offset by a lower cost of funds. As noted, we believe the balance sheet actions taken, as well as the growth of our loans and deposits in the second quarter will favorably impact net interest income and the margin in Q3. As a result, we see the core NIM in the 3.25% to 3.30% range.

Non-interest income of $26.7 million increased $3 million, compared with $23.7 million in the prior quarter. Key drivers of the increase included a higher gain on the sale of SBA loans, a result of increasing SBA production, as well as higher trust and escrow-related fees, as the latter saw increased transaction activity. Also, the additional $150 million BOLI investment will add a little more than $1 million per quarter to non-interest income starting in Q3.

Non-interest expense, excluding merger-related costs came in at $94.5 million, compared with $92.5 million in the prior quarter. Higher incentive costs related to the higher level of loan and deposit production, primarily drove the increase in compensation, as headcount was flat to the prior quarter at 1,521 employees. Our non-interest expense should approximate $94 million to $96 million in Q3, as we continue to invest in both staff and technology, as well as experienced higher levels of business activity costs related to growth.

Provision expense was a recapture of $38.5 million, compared with an expense of $2 million in the prior quarter. The recapture was driven principally by the improving macroeconomic forecast and key modeling variables, as well as our continued strong asset quality profile.

Turning now to the balance sheet. Total assets grew to $20.5 billion, compared with $20.2 billion in the prior quarter, as deposits grew $275 million and equity just over $100 million. As highlighted earlier, we redeployed approximately $900 million of excess liquidity into higher-yielding loans and investments, which combined grew by $1.1 billion from the prior quarter. In our earnings release, we included a loan roll-forward table to provide greater transparency to the period-end loan portfolio results and the primary drivers.

As noted, our total investment securities increased to $4.5 billion at quarter-end. We saw strong inflows into our non-interest bearing deposits, which grew by over $450 million from the prior quarter, fueling total deposit growth to just over $17 billion. Year-to-date, we have redeemed a total of approximately $170 million in sub-debt that had an average weighted cost of 5.5%.

Asset quality continued to perform well with non-performing assets at 17 basis points of total assets and total delinquency at 14 basis points of loans held for investment. Net charge-offs totaled $1.1 million for the quarter, compared with $1.3 million in the prior quarter.

Our allowance for credit losses finished the quarter at 1.71%, and the total loss-absorbing capacity comprised of the allowance and the remaining fair-value discount on acquired loans totaled $327 million at quarter-end or 2.39% of loans held for investment. Given our strong asset quality and the improving economy's impact on our CECL model, we are likely to see continued reserve releases in the coming quarters.

With that, I'll hand it back to Steve.

Steven R. Gardner -- Chairman, President and Chief Executive Officer

Great. Thanks, Ron. In summary, our teams are executing at a high level, and we are seeing our business development efforts translating into attractive profitable growth. We remain highly confident in the organization's ability to capitalize on any number of economic scenarios that may develop in the second half of this year.

With our strong capital levels, conservative risk profile and our earnings strength, we are well-positioned to support both organic and acquisitive growth. We continue to seek out acquisitions and merger partners throughout the Western US, that can add meaningful earnings accretion and scale to our franchise. Our board and management are open to pursuing transformative transactions that will deliver for all of our shareholders.

That concludes our prepared remarks, and we would be happy to answer any questions. Chuck, please open up the call for questions.

Questions and Answers:

Operator

Yes, sir. We will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Gary Tenner with D.A. Davidson. Please go ahead.

Gary Tenner -- D.A. Davidson -- Analyst

Thanks. Good morning. I wanted to ask about, kind of, the outlook for liquidity deployment. You've worked on your cash balance quite a bit in the second quarter through loan growth, as well as the incremental investment in the bond portfolio, and I guess a little more here in July with the sub-debt repayment. So could you just talk about how you're thinking about any additional need of deploying, I guess, cash right now in terms of the investment book? Or if you're just going to rely on expectations of loan growth for the back half of the year?

Steven R. Gardner -- Chairman, President and Chief Executive Officer

I think, Gary, you're going to see us continue to manage it similar to the way that we have during the second quarter here. Ideally, that access liquidity goes into loans, but depending upon what we see as net growth there, if we're going to redeploy that liquidity into higher earning assets along with -- which includes, of course, securities.

Gary Tenner -- D.A. Davidson -- Analyst

Okay. And on that topic then in terms of, kind of, the net loan growth outlook, could you talk about any kind of visibility you have at this point on pay down activity or pay-off activity early into the third quarter, there has been any kind of slowdown of that kind of activity?

Steven R. Gardner -- Chairman, President and Chief Executive Officer

We haven't seen any material change from Q2. The line utilization rates have remained relatively stable. We'd certainly like to see increasing growth there, and we're hopeful that, that will occur here as we move through the summer and into the fall. But it just remains to be seen, as I mentioned in my prepared comments, our clients are sitting on a lot of liquidity.

Gary Tenner -- D.A. Davidson -- Analyst

All right. Thanks for taking my questions.

Steven R. Gardner -- Chairman, President and Chief Executive Officer

Anytime.

Operator

The next question will come from Matthew Clark with Piper Sandler. Please go ahead.

Matthew Clark -- Piper Sandler -- Analyst

Hey, good morning, Steve and Ron.

Steven R. Gardner -- Chairman, President and Chief Executive Officer

Good morning, Matthew.

Matthew Clark -- Piper Sandler -- Analyst

Maybe first on the pipeline, I think coming out last quarter, you had mentioned that it was over $2 billion. Just want to get a sense for where the pipeline stood coming out of 2Q?

Steven R. Gardner -- Chairman, President and Chief Executive Officer

Yes, we're -- today, we're sitting at a little over $1.7 billion, down from where we were. But in part, that's owing to the very strong loan closings, so that the team was able to accomplish in the latter part of the second quarter. We still see pretty strong demand in just about all areas, so we're encouraged that we will continue to efficiently pull through the loans that we have in the pipeline and grow net loans going forward.

Matthew Clark -- Piper Sandler -- Analyst

Okay. And then just on the reserve, it sounds like you'll -- we're going to see some more releases going forward. Your Day 1 CECL reserve was 1.05%. Is that -- I guess how do you feel about that level longer-term? Is that kind of where you think you might stabilize as we maybe get into late next year? Or do you feel like you might be able to dip below that based on the balance sheet today relative to the balance sheet at the beginning of 2020?

Steven R. Gardner -- Chairman, President and Chief Executive Officer

Yes. I think there's a number of factors up play here. And obviously, CECL was designed and has proven to be rather volatile at times, so it's really hard to see where it's going to end up. Also as the portfolio changes over time, that will be a factor. Certainly, given our historic asset quality or the performance of the loan portfolio relatively benign charge-offs. At the end the credit discounts that we have on the book, one would certainly expect it to come down. And as Ron alluded to, that's what we think now, but we'll have to run the models at those time -- at the time in future quarters and see where it ultimately shapes out.

Matthew Clark -- Piper Sandler -- Analyst

Okay. And then on the SBA gain on sale, I think you'd plan to start doing some more of that given where -- how healthy the premiums are. Is that still the case? And how much do you think you might sell on a quarterly basis going forward?

Steven R. Gardner -- Chairman, President and Chief Executive Officer

Historically, we've sold most of the production that we had done, either early in the current quarter or loans they came on in the prior quarter. And that will be our plan. Demand has picked up as the SBA PPP program has wound down, and we like the opportunities we're seeing there. So we'll see where production ends up in the coming quarters.

Matthew Clark -- Piper Sandler -- Analyst

Okay. And then just last one on M&A. Can you just give us some color on how your conversations have tracked relative to the last time we spoke on the earnings call, whether not that activity has picked up at all or not?

Steven R. Gardner -- Chairman, President and Chief Executive Officer

Well, hard to say for us, because we are so active in general and are regularly reaching out to other CEOs and Boards to chat with them about what might make sense, and that's continued in the second quarter and continues today. We think that in this environment that M&A and consolidation makes as much sense as it ever has, and we're going to continue to pursue it with a number of what we think are very attractive other organizations that we can partner with.

Matthew Clark -- Piper Sandler -- Analyst

Okay, great. Thank you.

Operator

The next question will come from Jackie Bohlen with KBW. Please go ahead.

Jackie Bohlen -- KBW -- Analyst

Hi. Good morning. Lingering on Matthew's question, Steve. In the past, we've talked about $5 billion as a rough floor for what you take a look at. If you aren't able to announce something, I think just don't align in the coming quarters. Would you take a look below that level?

Steven R. Gardner -- Chairman, President and Chief Executive Officer

I think we'll be somewhat hard-pressed to do so. But If things didn't come together in the next couple of quarters, we would -- we're always reassessing at the Board level in what we makes -- what we think makes sense, and is right for all of our stakeholders. At this point in time, we think it makes a lot more sense to be pursuing larger transactions, MOE-like, if you will, and that's where we're going to continue to put our efforts. But as we all know, markets change over time and we'll adjust along the way also.

Jackie Bohlen -- KBW -- Analyst

Okay. Thank you for that clarification. That's helpful. And then I wonder, if you could provide an update on how the systems conversion went this quarter with Pacific Premier Trust?

Steven R. Gardner -- Chairman, President and Chief Executive Officer

We completed the conversion at the end of May. The team is working through that process with a new system, and working with clients on the transition to the new systems, and we're progressing well there. It will be nice as we put that aspect behind us and start to move to offense here later in the second half of the year.

Jackie Bohlen -- KBW -- Analyst

And the bump-up in the trust administrative fees in the quarter, was that related to the conversion, or was that a separate item?

Steven R. Gardner -- Chairman, President and Chief Executive Officer

In part related and some of the small amount of growth we've seen.

Jackie Bohlen -- KBW -- Analyst

Okay. And this might be a question for next quarter's call. But just -- it sounds like you're still excited for the opportunities that are there, but maybe not quite ready to give an update on where that line item could grow to. Is that fair?

Steven R. Gardner -- Chairman, President and Chief Executive Officer

Yes. I don't know that I'm ever willing to give much of a guidance on where I think a line item could grow to. I'll -- that's usually Mr. Nicolas' daily wick. So, Ron, I don't know, do you want to venture out there and give us your thoughts?

Ronald J. Nicolas -- Senior Executive Vice President and Chief Financial Officer

I think that's a question for next quarter, Steve. I agree with you or Jackie.

Jackie Bohlen -- KBW -- Analyst

Okay, fair enough. Thank you.

Operator

[Operator Instructions] Our next question will come from Andrew Terrell with Stephens. Please go ahead.

Andrew Terrell -- Stephens -- Analyst

Hey, thanks. Good morning.

Steven R. Gardner -- Chairman, President and Chief Executive Officer

Good morning.

Andrew Terrell -- Stephens -- Analyst

Thanks. So I appreciate the color on the sub-debt redemption post the quarter. It looks like post those, kind of, three tranches, you still have around $330 million or so of sub-debt on the balance sheet. Is there any room to redeem more over the next couple of quarters? Or is this kind of about after the near-term?

Steven R. Gardner -- Chairman, President and Chief Executive Officer

Ron, you want it?

Ronald J. Nicolas -- Senior Executive Vice President and Chief Financial Officer

Yes, yes. Andrew, that -- on the near-term, that's about it. I don't have it exactly in front of me, but I don't think we have another issue that's redeemable yet for a couple of years. So we've pretty much done what we could do on that front, at least in the short run here.

Andrew Terrell -- Stephens -- Analyst

Okay. Thanks. And then Ron, just to make sure, I heard you correctly on the BOLI investments made this past quarter. Is the $1 million of anticipated fee income pick up, is that an annual -- on an annual basis or per quarter?

Ronald J. Nicolas -- Senior Executive Vice President and Chief Financial Officer

That'll be on a quarterly basis, Andrew.

Steven R. Gardner -- Chairman, President and Chief Executive Officer

And that will be an interest income, Andrew, not fee side.

Andrew Terrell -- Stephens -- Analyst

Okay, got it. All right. I'll step back. Thanks for taking my questions.

Steven R. Gardner -- Chairman, President and Chief Executive Officer

Sure. Bye.

Operator

I show no further questions. And I would like to turn the call back over to management for any closing remarks. Please go ahead.

Steven R. Gardner -- Chairman, President and Chief Executive Officer

Very good. Thank you all for joining us. We appreciate it. We look forward to talking to you at our next earnings release.

Operator

[Operator Closing Remarks]

Duration: 29 minutes

Call participants:

Steven R. Gardner -- Chairman, President and Chief Executive Officer

Ronald J. Nicolas -- Senior Executive Vice President and Chief Financial Officer

Gary Tenner -- D.A. Davidson -- Analyst

Matthew Clark -- Piper Sandler -- Analyst

Jackie Bohlen -- KBW -- Analyst

Andrew Terrell -- Stephens -- Analyst

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