Pacific Premier Bancorp(PPBI) - 2021 Q4 - Annual Report

PART I ITEM 1. BUSINESS Pacific Premier Bancorp, Inc. is a California-based bank holding company with $21.09 billion in assets, operating 61 branches across the Western U.S. General Development and Description of Our Business - Pacific Premier is a California-based bank holding company with its primary subsidiary, Pacific Premier Bank, operating 61 full-service branches in Arizona, California, Nevada, Oregon, and Washington[19] Consolidated Financial Position as of December 31, 2021 | Metric | Value (Billions) | | :--- | :--- | | Total Assets | $21.09 | | Net Loans | $14.10 | | Total Deposits | $17.12 | | Stockholders' Equity | $2.89 | - The company's strategic focus is a dual approach of strategic acquisitions and organic growth, completing 11 acquisitions since 2011 and growing assets nearly eight-fold from $2.79 billion in 2015 to $21.09 billion by year-end 2021[23] Loan Portfolio Composition as of December 31, 2021 | Loan Type | Amount (Billions) | % of Gross Loans | | :--- | :--- | :--- | | Multifamily Residential | $5.89 | 41.2% | | Commercial Non-Owner-Occupied | $2.77 | 19.4% | | Commercial Owner-Occupied | $2.63 | 18.4% | | Commercial and Industrial (C&I) | $2.50 | 17.4% | | Construction | $0.21 | 1.5% | | HOA & Consumer | $0.09 | <1% | - The company leverages technology, including its proprietary Premier 360™ (a Salesforce™ enabled platform) and Pacific Premier API Banking platform, to drive organic growth and enhance client services[30][32] - Specialty divisions are significant contributors to low-cost deposits and fee income, with the HOA division holding over $2.12 billion in deposits, Pacific Premier Trust having $1.82 billion in deposits from $18.11 billion in custodial assets, and Commerce Escrow holding $903.8 million in deposits as of December 31, 2021[31][34][35] - The 2020 acquisition of Opus Bank was a transformative deal, adding approximately $8.32 billion in assets and expanding the company's footprint in the Western U.S., particularly in Seattle, Washington[37] Prudent Liquidity and Capital Management - The company's primary funding source is stable, low-cost deposits, with non-interest bearing deposits making up 38% of the total deposit mix as of December 31, 2021, and an average cost of deposits of 0.07% in Q4 2021[42][43] - The securities portfolio, totaling $4.66 billion (22% of total assets) at year-end 2021, is a key part of liquidity management, with 95% of these investments having a credit rating of 'A' or better[44] - The company returns capital to stockholders through dividends and share repurchases, increasing the quarterly cash dividend to $0.33 per share in Q2 2021 and repurchasing $18.1 million of its common stock in 2021[47][48] Enterprise Risk Management - The company employs a three-line defense model for risk management: 1) business lines, 2) independent risk management (ERM, compliance), and 3) Internal Audit[52] - Credit quality metrics remained strong through 2021, with non-performing assets as a percentage of total loans holding steady at low levels throughout the year[54] - The company maintains a comprehensive cybersecurity strategy, including regular employee training, defense-in-depth technologies, and third-party oversight, with no material compromises or data losses detected to date[56][57] Human Capital and Competition - As of December 31, 2021, the company had 1,520 full-time equivalent employees, emphasizing a culture of diversity, equity, and inclusion with senior management reporting on these initiatives to the Board regularly[60][61] - The company competes with larger regional/national banks, community banks, and non-bank entities like fintech companies, differentiating itself through personalized relationship banking, in-depth knowledge of borrower industries, and superior client service[66][68][70] Supervision and Regulation - The Corporation is a bank holding company regulated by the Federal Reserve, while the Bank is a California state-chartered commercial bank regulated by the DFPI and the Federal Reserve, with its deposits insured by the FDIC[76][78] - Under the Basel III framework, fully phased-in on January 1, 2019, banks are subject to minimum capital ratios including a CET1 ratio of 4.5%, Tier 1 ratio of 6.0%, and Total capital ratio of 8.0%, plus a 2.5% capital conservation buffer for each[89][90] - The company adopted the CECL accounting standard on January 1, 2020, electing to phase in the regulatory capital impact over a five-year transition period as permitted by regulators in response to the COVID-19 pandemic[100] - As of December 31, 2021, both the Corporation and the Bank exceeded all regulatory capital requirements, and the Bank was considered "well capitalized" for prompt corrective action purposes[101][104] - The Bank's ability to pay dividends to the Corporation is restricted by the California Financial Code, with approximately $404.9 million available for distribution as of December 31, 2021[112] - With assets exceeding $10 billion, the Bank is subject to examination for consumer compliance by the Consumer Financial Protection Bureau (CFPB)[130] ITEM 1A. RISK FACTORS The company faces economic, market, credit, regulatory, operational, and strategic risks, including interest rate sensitivity, credit concentration, and cybersecurity threats. - The ongoing COVID-19 pandemic continues to pose risks to the business, with potential impacts on capital, liquidity, and credit quality depending on its duration and governmental response[135][138] - A significant portion of the loan portfolio (approximately 61% as of December 31, 2021) is secured by real estate in California, concentrating risk to the economic conditions of that state[145] - Profitability is highly dependent on net interest income and is therefore sensitive to changes in interest rates, with the company using derivative instruments like interest rate swaps to mitigate this risk[146][152] - The transition away from LIBOR to alternative reference rates like SOFR presents operational and financial risks, including potential costs, customer disputes, and valuation impacts on financial instruments[155][157] - Credit risk is elevated due to a focus on commercial lending, with commercial real estate and commercial business loans comprising 81.8% and 17.5% of the portfolio, respectively, as of year-end 2021[164] - As an institution with over $10 billion in assets, the company is subject to heightened regulatory requirements, including supervision by the CFPB and reduced debit card interchange fee income under the Durbin Amendment[170][172] - Cybersecurity threats and reliance on third-party vendors for key infrastructure components pose significant operational risks[173][182] - Future acquisitions involve risks such as failure to realize synergies, disruption of business, loss of key employees, and potential dilution of stockholder value[189][193] ITEM 1B. UNRESOLVED STAFF COMMENTS The company reports no unresolved staff comments from the SEC. - None[213] ITEM 2. PROPERTIES The company's headquarters is in Irvine, California, with 26 administrative offices and 61 branches across the Western U.S., 14 of which are owned. - As of December 31, 2021, the Company's properties included 26 administrative offices and 61 branches, with 14 properties owned and the remaining facilities leased[214] ITEM 3. LEGAL PROCEEDINGS The company is involved in ordinary course legal proceedings, none of which are expected to have a material adverse financial impact. - The Company is involved in legal proceedings occurring in the ordinary course of business, which are not expected to have a material adverse impact[216] ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to the company. - Not applicable[217] PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES The company's common stock trades on NASDAQ (PPBI); in 2021, it increased dividends to $1.29 per share and repurchased $18.1 million in shares. - The Corporation's common stock is traded on the NASDAQ Global Select Market under the symbol PPBI, with approximately 919 holders of record as of February 18, 2022[220] Quarterly Common Stock Dividends Declared | Quarter | 2021 | 2020 | | :--- | :--- | :--- | | First | $0.30 | $0.25 | | Second | $0.33 | $0.25 | | Third | $0.33 | $0.25 | | Fourth | $0.33 | $0.28 | | Total | $1.29 | $1.03 | - In January 2021, the Board approved a new stock repurchase program for up to 4,725,000 shares, with 479,944 shares repurchased for $18.1 million at a weighted average price of $37.61 during 2021[228] Issuer Purchases of Equity Securities (Q4 2021) | Period | Total Shares Purchased | Average Price Paid Per Share | Shares Purchased as Part of Program | Max Shares Remaining for Purchase | | :--- | :--- | :--- | :--- | :--- | | Oct 2021 | — | $ — | — | 4,245,056 | | Nov 2021 | — | $ — | — | 4,245,056 | | Dec 2021 | — | $ — | — | 4,245,056 | ITEM 6. [RESERVED] This item is reserved and contains no information. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net income surged to $339.9 million in 2021 due to provision recapture and increased net interest income, with assets growing to $21.09 billion, improved credit quality, and strong capital ratios. The COVID-19 Pandemic - The company activated its Business Continuity Program and Pandemic Preparedness Plan in early March 2020, expanding remote-access capabilities and reconfiguring offices for social distancing[234] - The company participated in the SBA Paycheck Protection Program (PPP), originating loans and subsequently selling its entire $1.13 billion portfolio in July 2020, resulting in a gain on sale of approximately $18.9 million[236] - A temporary loan modification program was implemented for affected borrowers under the CARES Act, with no loans outstanding under a COVID-19 hardship modification as of December 31, 2021[236] Acquisition of Opus - Effective June 1, 2020, the company acquired Opus Bank for a total consideration of approximately $749.6 million, with Opus having $8.32 billion in assets, $5.94 billion in loans, and $6.91 billion in deposits at closing[240][242] - The acquisition added specialty lines of business, including trust services (Pacific Premier Trust) and escrow services (Commerce Escrow)[240] - As part of the integration, 20 branch offices were consolidated in October 2020 to improve operational efficiency[244] Operating Results Net Income and Earnings Per Share | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net Income | $339.9M | $60.4M | | Diluted EPS | $3.58 | $0.75 | - The increase in net income from 2020 was primarily due to a $70.9 million provision recapture in 2021 compared to a $191.8 million provision expense in 2020, an $88.2 million increase in net interest income, and a $49.1 million decrease in merger-related expenses[272] - Net interest income increased 15.35% to $662.4 million in 2021, driven by a $3.52 billion increase in average interest-earning assets (from the Opus acquisition and organic growth) and a lower cost of funds[275] - Net interest margin decreased by 23 basis points to 3.51% in 2021, as the yield on interest-earning assets fell 41 basis points, partially offset by a 20 basis point decrease in the cost of funds[275] - Noninterest income grew 51.2% to $107.9 million in 2021, mainly due to a $21.5 million increase in trust custodial account fees and a $4.6 million increase in escrow and exchange fees from the acquired Opus divisions[282] - Noninterest expense decreased slightly to $380.3 million, with operating expenses increasing (excluding a $49.1 million decrease in merger-related expenses) due to higher compensation, premises, and data processing costs post-acquisition[286] Financial Condition - Total assets increased by $1.36 billion (7%) to $21.09 billion at year-end 2021, primarily driven by a $1.07 billion increase in loans and a $700.7 million increase in investment securities[290] - Loans held for investment grew 8.0% to $14.30 billion, led by increases in multifamily ($720.6 million) and C&I ($334.3 million) loans[304] - Total deposits increased by $901.4 million (5.6%) to $17.12 billion, with a significant mix shift towards non-maturity deposits, which grew by $1.47 billion, allowing for a runoff of higher-cost time deposits[353] - Total borrowings increased by $356.1 million to $888.6 million, mainly due to a $519.0 million increase in FHLB overnight advances, partially offset by the redemption of $170.4 million in subordinated debentures[356][361][374] - Stockholders' equity increased by $139.7 million to $2.89 billion, reflecting net income of $339.9 million, partially offset by $121.9 million in dividends and $18.1 million in stock repurchases[364] Credit Quality and Allowance for Credit Losses - Nonperforming assets remained stable at 0.15% of total assets at both December 31, 2021 and 2020[325] - The Allowance for Credit Losses (ACL) on loans decreased by $70.3 million to $197.8 million at year-end 2021, due to a $67.1 million provision recapture, reflecting improved economic forecasts and favorable asset quality[344] - The ACL as a percentage of loans held for investment decreased to 1.38% at December 31, 2021, from 2.02% at December 31, 2020[349] - The company's CECL model uses three probability-weighted economic scenarios (base-case 40%, upside 30%, downside 30%) over a two-year forecast horizon before reverting to long-term averages[336][337] - Net loan charge-offs for 2021 totaled $3.2 million (0.02% of average loans), a significant decrease from $16.9 million (0.14% of average loans) in 2020[281][352] Liquidity and Capital Resources - Primary sources of funds are deposits, loan payments, and FHLB advances, with the company maintaining a Contingency Funding Plan (CFP) to manage liquidity risk[365][367] - At December 31, 2021, the company had access to $5.50 billion in available borrowing capacity from the FHLB and $330.0 million in unsecured lines of credit with correspondent banks[369] Regulatory Capital Ratios as of December 31, 2021 | Ratio | Pacific Premier Bancorp, Inc. | Pacific Premier Bank | Well Capitalized Minimum | | :--- | :--- | :--- | :--- | | Tier 1 Leverage | 10.08% | 11.62% | 5.00% | | Common Equity Tier 1 | 12.11% | 13.96% | 6.50% | | Tier 1 Capital | 12.11% | 13.96% | 8.00% | | Total Capital | 14.62% | 14.70% | 10.00% | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company's primary market risk is interest rate risk, managed via simulation models showing moderate sensitivity, with NII and EVE projected to increase in a rising rate environment. - The company's main market risk is interest rate risk, with management using simulation models to estimate the impact on Net Interest Income (NII) and Economic Value of Equity (EVE) under various interest rate scenarios[386][389] Net Interest Income (NII) Sensitivity Analysis (Earnings at Risk) as of Dec 31, 2021 | Change in Rates (bps) | NII $ Change (in thousands) | NII % Change | | :--- | :--- | :--- | | +200 | $19,799 | 3.0% | | +100 | $9,090 | 1.4% | | Static | $0 | 0.0% | | -100 | ($22,211) | (3.3)% | | -200 | ($55,679) | (8.4)% | Economic Value of Equity (EVE) Sensitivity Analysis as of Dec 31, 2021 | Change in Rates (bps) | EVE $ Change (in thousands) | EVE % Change | | :--- | :--- | :--- | | +200 | $169,608 | 5.7% | | +100 | $111,677 | 3.8% | | Static | $0 | 0.0% | | -100 | ($202,337) | (6.8)% | | -200 | ($626,912) | (21.1)% | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This section presents the company's audited consolidated financial statements for 2021, including key statements and notes, highlighting the CECL adoption and ACL for commercial loans as a critical audit matter. Consolidated Financial Statements Consolidated Statements of Financial Condition (Abridged) | (In thousands) | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Assets | $21,094,429 | $19,736,544 | | Loans held for investment, net | $14,098,145 | $12,968,415 | | Investment securities | $4,655,538 | $3,954,847 | | Goodwill | $901,312 | $898,569 | | Total Liabilities | $18,208,118 | $16,989,895 | | Total deposits | $17,115,589 | $16,214,177 | | Total Stockholders' Equity | $2,886,311 | $2,746,649 | Consolidated Statements of Income (Abridged) | (In thousands) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net interest income | $662,374 | $574,211 | $447,301 | | Provision for credit losses | ($70,876) | $191,816 | $5,719 | | Noninterest income | $107,850 | $71,325 | $35,236 | | Noninterest expense | $380,277 | $381,119 | $259,065 | | Net income | $339,889 | $60,351 | $159,718 | Notes to Consolidated Financial Statements - The company adopted ASC 326 (CECL) on January 1, 2020, resulting in a $55.7 million increase to the ACL for loans and an $8.3 million increase for off-balance sheet commitments, recorded as a cumulative effect adjustment to retained earnings[473][329] - As of December 31, 2021, the loan portfolio was primarily composed of investor loans secured by real estate (62.8%), business loans secured by real estate (18.9%), and commercial loans (17.5%)[559] - The company's Pacific Premier Trust division held approximately $18.11 billion in custodial assets as of December 31, 2021, up from $15.89 billion in 2020[697] - In 2021, the company redeemed subordinated debentures totaling $170.4 million, including notes assumed in prior acquisitions and junior subordinated debt securities[672][676][677] - The acquisition of Opus on June 1, 2020, was accounted for as a business combination, with total merger consideration of $749.6 million, resulting in the recognition of $93.0 million in goodwill, $16.1 million in core deposit intangibles, and $3.2 million in customer relationship intangibles[770][776][777] ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The company reports no changes in or disagreements with its accountants on accounting and financial disclosure. - None[792] ITEM 9A. CONTROLS AND PROCEDURES Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021, with no material changes during the year. - Based on an evaluation as of December 31, 2021, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective[793] - Management assessed the effectiveness of internal control over financial reporting using the COSO framework and concluded that as of December 31, 2021, it was effective[795] ITEM 9B. OTHER INFORMATION The company reports no other information for this item. - None[799] ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS. This item is not applicable to the company. - Not applicable[800] PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE Information on directors, executive officers, and corporate governance is incorporated by reference from the company's 2022 proxy statement. - Information required by this item is incorporated by reference from the Company's definitive proxy statement for its 2022 Annual Meeting of Stockholders[803] ITEM 11. EXECUTIVE COMPENSATION The information regarding executive compensation is incorporated by reference from the company's 2022 proxy statement. - Information required by this item is incorporated by reference from the Company's 2022 Proxy Statement[805] ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information on security ownership by beneficial owners, management, and equity compensation plans is incorporated by reference from the company's 2022 proxy statement. - Information required by this item is incorporated by reference from the Company's 2022 Proxy Statement[806] ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE Details concerning related party transactions and director independence are incorporated by reference from the company's 2022 proxy statement. - Information required by this item is incorporated by reference from the Company's 2022 Proxy Statement[807] ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information regarding fees paid to and services provided by the principal accountant is incorporated by reference from the company's 2022 proxy statement. - Information required by this item is incorporated by reference from the Company's 2022 Proxy Statement[808] PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES This section lists the financial statements, schedules, and exhibits filed as part of the Form 10-K, including consolidated financial statements and various corporate documents. - This section lists the financial statements from Item 8 and all other schedules and exhibits filed with the Form 10-K[810][811][812] ITEM 16. FORM 10-K SUMMARY The company reports no Form 10-K summary. - None[814]