Recently I
wrote an article about a community bank whose strategy is growing through
inorganic growth; it is trading at cheap valuation and has good growth
prospects for the long term. Now it’s time to know about another small cap
community bank: Pacific Premier Bancorp, Inc. (PPBI) It is a holding company
for Pacific Premier Bank, a business bank whose primary focus is serving small
and medium- sized businesses. It is one of the largest community banks in
Southern California.
Pacific
Premier Bancorp completed two acquisitions in 2013 and one at the end of
January 2014. The acquisitions were San Diego Trust Bank, First Associations
Bank and Infinity Franchise Holdings, LLC (IFH). The addition of Infinity into
the books will have some anticipated negative impacts on the earnings of
Pacific Premier in the first quarter of 2014, as the costs of consolidation
activities take place during that time.
Financials
The banking industry in general is focused on
cutting costs and provision releases (due to increased pressure on Net Interest
Margin). Only a few banks are choosing to buck this trend, and they have their
own reasons. Significant increase in expenditures, relating to Pacific Premier’s
operations and non-recurring merger expenses related to the recent acquisitions,
made a big dent in the earnings of Pacific Premier in 2013. The company
reported EPS of $ 0.54 cents for the year 2013, a decline by 62.5% from the
previous year EPS of $ 1.44 dollars.
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| (Source: Investor Presentation) |
Nonperforming
assets provides investors a way to assess the bank’s quality of assets. Only
0.20% of Pacific Premier’s total assets are nonperforming, which indicates a great
credit quality. This kind of credit quality requires tighter rules and
regulations and some trade-off in loans.
Growth
Strategy
There are
two ways for banks—or any company—to grow. One is organic growth and the other
is inorganic growth. When a company is growing through a pure organic growth
strategy, it can control the costs and leverage its resources to the highest extent
possible. In other words, everything is under the management’s control. How they
manage their resources to capture opportunity is up to them. But when there is
no greater opportunity to grow, or if the company wants to expand faster than
it can through organic growth alone, then it will go for inorganic growth. That
is, it acquires other banks, which gives it the opportunity to expand to nearby
locations and grow faster. Pacific Premier chose the inorganic growth strategy
and has made a few acquisitions that it thinks will fit into its current
structure.
These acquisitions give
more room for the bank to cross-sell its products and services to a wide
variety of customers. That means an improved opportunity to grow at a faster rate.
This growth strategy, however, brings some short-term disadvantages. The costs
related to merging these acquisitions will impact the bank’s income statement
for some time.
Efficiency
ratio of the company was at 64.68% for the full year of 2013. In the fourth
quarter of 2013 it declined to 60.45%, from 67.72% in the third quarter. Though
there is some improvement in the fourth quarter, it is still at very high
levels; if not managed well, it will dent the earnings in 2014 as well. Return
on average assets is 0.62 for the full year 2013. In the fourth quarter of 2013,
the company managed to post improved return on average assets of 1.05, compared
with previous quarter’s 0.78.
Return on average assets of above 1.00 is a good
sign that the company is doing well. However, Pacific Premier’s problem in 2013
for was that it was not consistent throughout the year, due to expenses related
to acquisitions and the company’s own operations.
The loan book
saw significant growth in 2013, for the fourth year in a row, thanks to the
management’s focus on inorganic growth. This significant improvement in the
loan book provides a great opportunity for the bank earnings to grow from 2014
onward.
Pacific Premier is trading at a Forward Price to
Earnings of 10.96, and at a Price to Book value of 1.49—not an highly
undervalued stock, but not an overvalued stock, either. Considering the investment
that Pacific Premier has made for growth through the recent acquisitions, it is
poised to deliver exceptional returns to its long-term shareholders.