KBRA Affirms Ratings for Pacific Premier Bancorp, Inc. and Revises Outlook to Positive

KBRA affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, and the short-term debt rating of K2 for Irvine, California based Pacific Premier Bancorp, Inc. (NASDAQ: PPBI) (“the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for Pacific Premier Bank, the lead subsidiary. The Outlook for all long-term ratings is revised to Positive from Stable.

Key Credit Considerations

The revision of the Outlook to Positive from Stable is largely driven by KBRA’s favorable view of PPBI’s proactive approach to balance sheet management, which has placed the company in a position of comparative strength, with a strong, low-cost and durable deposit franchise, coupled with robust capital levels (CET1 ratio of 15.0% at 1Q24), allowing PPBI to be disciplined and opportunistic in its approach to growth. Moreover, the company employs an experienced leadership team with a proven track record of effectively managing growth, both organic and M&A, as demonstrated in the years preceding the pandemic. Earnings trends have been relatively stable, with an operating ROA at ~1% in recent quarters, tracking in line with rated peers. The proceeds of the company’s $1.3 billion sale of securities completed in 4Q23, which resulted in a $254 million pre-tax loss (1.2% of average assets), were used to paydown roughly $0.8 billion in higher-cost wholesale funding with the remaining $0.5 billion reinvested in short-term securities. The benefits of this transaction are reflected in the 26 bp increase in NIM since 3Q23. Funding costs have seemingly stabilized, tracking near 1.7% since 3Q23, benefitting from the previously noted securities sale as well as relatively stable total cost of deposits, which tracked well below peer averages at 1.6% at 1Q24. The company’s meaningful build of capital ratios in recent years was precipitated by the de-leveraging of the balance sheet, with loans decreasing 11% since YE22. PPBI expects to continue to manage its capital position relatively conservatively over the medium term due to lingering macro-economic concerns.

Somewhat counterbalancing credit strengths is the company’s elevated CRE concentration, which represented 318% of risk-based capital at 1Q24. The leading driver of this elevated concentration is its $5 billion multifamily portfolio, comprising nearly 40% of total loans. This portfolio has experienced no material credit deterioration with PPBI reporting no multifamily loan delinquencies or NPAs as of 1Q24. Moreover, the company has generally performed in line with rated peers over a multi-year period, while more recently, PPBI’s NCO ratio has remained below 0.2%.

Rating Sensitivities

The Positive Outlook reflects KBRA’s view that an upgrade is likely over the medium term, should PPBI continue to manage to higher-than-peer capital levels and maintain its strong funding profile, with earnings and credit continuing to track in line with the higher rated peer group through the current operating cycle. The revision of the Outlook to Stable could occur should PPBI’s loan portfolio underperform the peer group, with comparatively elevated credit losses becoming a drag to earnings or should the company manage capital to more peer-like levels.

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