Yahoo Finance Pacific Premier Bancorp, Inc. (NASDAQ:PPBI) Q1 2024 Earnings Call Transcript
Pacific Premier Bancorp, Inc. (NASDAQ:PPBI) Q1 2024 Earnings Call Transcript April 24, 2024
Pacific Premier Bancorp, Inc. beats earnings expectations. Reported EPS is $0.49, expectations were $0.48. Pacific Premier Bancorp, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon and good morning, and welcome to the Pacific Premier Bancorp First Quarter 2024 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.
Steve 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 the 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. 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. 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 $0.49 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. Our CET1 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 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. As deposit inflows continue to be largely directed toward money market funds, savings and retail certificates, it was notable that we did see growth in noninterest-bearing deposits of $65 million this quarter. Despite significant macroeconomic uncertainty, total deposits increased by $192 million, driven by $120 million increase in non-maturity deposits, enabling us to further reduce higher-cost FHLB borrowings and by $400 million during the quarter. Given current expectations for higher interest rates, we have also seen client preferences towards higher-yielding nonbank alternatives.
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 1.06%. On the liability side of the balance sheet, we anticipate that our level of wholesale funding will closely -- will be closely tied to customer loan and deposit flows. Our expectation for the current quarter is that deposit flows could reverse due to seasonal factors. 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.
In addition, some business in commercial real estate clients continue to deleverage their balance sheets, utilizing excess cash reserves to reduce debt. 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. Shifting to asset quality. Our metrics remain solid, and our loss experience remains exceptionally low, owing to our proven 3-legged approach to disciplined cash flow underwriting standards, active portfolio management and a proactive loss mitigation tactics. During the quarter, nonperforming assets increased $39 million to $64 million or 0.34% of total assets, primarily the 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 long-standing approach to aggressively resolving potential credit issues, the team has acted swiftly working closely with the guarantor on a solution. I'll note that this particular borrower is current on all payments and we ended the quarter with total loan delinquencies of just 0.09%. 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 credits. Credit risk management has always been deeply ingrained in our culture and we regularly utilize a variety of tools when resolving problem credits. We are closely monitoring the trends in the commercial real estate markets and proactively identifying and managing potential weaker credits. Overall, our loan portfolio is structured and effectively managed in all facets across the organization. As I noted, the movement in NPLs 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 portfolios. Recently, there have been discussions in the industry around multifamily loans, and we have provided additional disclosures in our investor presentation.
A couple of items to highlight are, the multifamily 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. 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. 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. 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.
Ron 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 net income of $47 million or $0.49 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-provision net revenue as a percentage of average assets totaled 1.43% for the quarter. Taking a closer look at the income statement. 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%, due primarily to a 12 basis point increase in our overall earning asset yields. Total average reported loan yields were flat at 5.29%. 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 the increased line draws and utilization rates during the quarter. Overall, our cost of funds increased 4 basis points to 1.73% as we saw continued strength in deposit cost increases. Our average nonmaturity deposit costs 1.06% compared to the prior quarter of 1.02%. While our cumulative deposit beta stands at 31%, which includes broker deposits and retail CDs, our nonmaturity cumulative deposit beta is 21%, illustrating our disciplined pricing throughout this rate cycle.
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, noninterest 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.
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. Noninterest 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 headcount of 1,353 compared to 1,429 as of March 31 of last year. 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. 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 million to $103 million, representing a full quarter's impact of the annual merit increases as well as higher benefits and related personnel costs. Our provision for credit loss 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 slightly lower unfunded loan commitments. Shifting 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 seasonally deposit flows.
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. As noted, our linked quarter growth in total deposits enabled us to mix -- 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. 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 continue 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. 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 31, 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 1 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. 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 3 basis point increase in the ACL coverage ratio to 1.48%. With the fair value discount on loans acquired through bank acquisition, our total loss absorption ratio for the quarter ended higher at 1.79%.
With that, I'll turn the call back to Steve.
Steve Gardner: Great. Thanks, Ron. 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. 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. As we head into the second quarter, we are well positioned to opportunistically attract new loan opportunities that meet our risk-adjusted return thresholds.
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. 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. 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.
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