Pacific Premier Bancorp: Earnings Likely To Return To Pre-Pandemic Level

Summary

• The allowance level appears quite high relative to expected impairments. Therefore, the provisioning will likely decline this year.
• Vaccine-driven economic recovery and a decline in payoffs will drive loan growth in 2021.
• The year-end target price suggests a limited upside from the current market price. Additionally, the company is offering a modest dividend yield.

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Earnings of Pacific Premier Bancorp, Inc. (NASDAQ: NASDAQ:PPBI) will return to the pre-pandemic level this year mostly because of a plunge in provision expense. The company's provisions surged last year because of the pandemic. As the portfolio’s credit risk has substantially declined since last year, the provision expense will likely trend downwards this year. Further, a reduction in loan payoffs will likely lead to growth in the loan portfolio. Overall, I'm expecting Pacific Premier to report earnings of $2.6 per share in 2021, up from $0.75 per share last year. The December 2021 target price suggests a limited upside from the current market price. As a result, I'm adopting a neutral rating on Pacific Premier Bancorp.

Last Year’s Heightened Provisioning to Allow a Decline in Provisions Expense in 2021

Pacific Premier built up a large reserve for loan losses last year. As a result, allowances made up 2.02% of total loans at the end of December 2020. In comparison, the net charge-offs were only 0.05% of average loans in the fourth quarter, as mentioned in the fourth quarter’s investor presentation. As a result, the allowances appear to be somewhat excessive. Additionally, the credit risk has substantially declined from last year’s peak due to the vaccine rollout. The credit risk can be gauged by loans requiring payment modifications, which declined to 0.6% of total loans at the end of December from 16.1% in June 2020, as mentioned in the presentation.

Nevertheless, the credit risk is not yet back to normal because of the pandemic and new variants. Further, COVID-19 sensitive industries, including hotels, made up 20% of total loans at the end of last year. The following table gives the details of high-risk industries.

Considering the allowance level and credit risk, I'm expecting the provision expense this year to decline substantially from last year. I'm expecting Pacific Premier to report a provision expense of $14 million in 2021, i.e. ten basis points of total loans. In 2019, the company reported a provision expense that was seven basis points of total loans.

Economic Recovery, Lower Paydowns to Drive the Loan Portfolio

Pacific premier's loan balance declined in the last quarter of 2020 due to elevated payoffs, as mentioned in the fourth quarter’s conference call. The prepayments will likely decline this year because of stable to rising interest rates. Moreover, the management mentioned in the conference call that it does not expect to sell further loans due to greater clarity around future economic activity. To recall, Pacific Premier sold off its PPP loan portfolio in July last year, as mentioned in the 10-K filing for 2020.

Further, the vaccine-driven economic recovery will likely drive loan balances this year. However, Pacific Premier operates mostly in the state of California, which has been trailing most other states in terms of the vaccine rollout. According to data maintained by John Hopkins, around 17.36% of California's population is currently fully vaccinated.

Considering the factors mentioned above, I'm expecting the loan portfolio to increase by 1% by the end of 2021 from the end of 2020. The following table shows my estimates for loans and other balance sheet items.

Expecting Earnings of $2.60 per Share

The anticipated plunge in provision expense will likely be the chief driver of earnings this year. Further, low loan growth will likely boost the bottom line. However, the reinvestment of cash flows from maturing loans at lower interest rates will likely pressurize the net interest margin, which will in turn limit the earnings growth. Overall, I’m expecting Pacific Premier to report earnings of around $2.60 per share in 2021, up from $0.75 per share in 2020. The following table shows my income statement estimates.

Actual earnings may differ materially from estimates because of the risks and uncertainties related to the COVID-19 pandemic and new variants. Further, the future corporate tax rate is uncertain. I have assumed a tax rate of 28% in my earnings estimates for the second half of 2021.

Year-End Target Price Near the Current Market Price

Pacific Premier is offering a dividend yield of 2.8%, assuming the company maintains its quarterly dividend at the current level of $0.30 per share. There is little threat of a dividend cut because the earnings and dividend estimates suggest a payout ratio of 46% for 2021, which is sustainable.

I’m using the historical price-to-tangible book multiple (“P/TB”) to value Pacific Premier. The stock has traded at an average P/TB ratio of 1.67 in the past, as shown below.

Multiplying the average P/TB multiple with the forecast tangible book value per share of $20.2 gives a target price of $33.8 for the end of 2021. This price target implies a 21.4% downside from the April 7 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.

To support my investment thesis, I’m also using the price-to-earnings multiple (“P/E”) to value Pacific Premier. The stock has traded at an average P/E ratio of around 20.2x in the past, as shown below.

Multiplying the average P/E multiple with the forecast earnings per share of $2.60 gives a target price of $52.6 for the end of 2021. This price target implies a 22.4% upside from the April 7 closing price. The following table shows the sensitivity of the target price to the P/E ratio.

Equally weighting the target prices from the two valuation methods gives a combined target price of $43.2, which implies just a 0.5% upside from the current market price. Adding the forward dividend yield gives a total expected return of only 3.3%. Consequently, I’m adopting a neutral rating on Pacific Premier Bancorp.

The company’s earnings per share are set to return to the pre-pandemic level due to the anticipated plunge in provision expense and vaccine-driven loan growth. However, the earnings outlook appears to be mostly priced-in as the stock is already trading quite close to the year-end target price.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: This article is not financial advice. Investors are expected to consider their investment objectives and constraints before investing in the stock(s) mentioned in the article.