Pacific Premier Bancorp: Great fit into any Portfolio

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.

                                                                                                    (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.