KBRA Affirms Ratings for Pacific Premier Bancorp, Inc.

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 Stable.

Key Credit Considerations

The ratings are supported by the company’s long-term credit performance, which includes an annual NCO ratio below 0.2% dating back to 2012. PPBI employs a rather conservative approach to lending, supported by sound underwriting and loan review practices, which has enabled the company to sustain comparatively low levels of credit costs over the long-term. Management’s risk conscious strategy is further reflected by the measured approach to growth observed in 2H22 and 1Q23. In anticipation of increased funding pressures and a deterioration of macro-economic conditions, PPBI positioned itself to sufficiently navigate these headwinds by slowing new loan originations (which subsequently caused a decrease in loans of 8%, annualized, from 2Q22 through 1Q23) and incrementally adding term funding over multiple periods. This has enabled PPBI to remain disciplined with regards to its deposit pricing (total cost of deposits was 0.94% for 1Q23, 33 bps better than the median of the KBRA rated universe of publicly traded banks) while maintaining sufficient liquidity, with total primary and secondary funding sources totaling $10 billion at 1Q23, giving the company adequate coverage of uninsured deposits (PPBI reported $6.7 billion of uninsureddeposits at 1Q23, or $6.0 billion when excluding collateralized deposits).

In addition to securing stable funding, PPBI’s recent strategy has also benefited capital ratios, particularly risk-based measures which have increased ~150 bps since 2Q22 and included a CET1 ratio situated well above peer averages at 13.5% at 1Q23. We expect PPBI to manage capital closer to historical norms (CET1 ratio near 11%) over the long-term; however, the company intends to run with this higher level of capital until there is greater clarity regarding the outlook on macro-economic conditions. PPBI’s earnings are expected to trend moderately lower over the near term, particularly given the company’s largely spread-reliant revenue base (near 90% of total revenues) as funding pressures further squeeze NIM.

Rating Sensitivities

The Stable Outlook reflects KBRA's view that a change in ratings is unlikely over the medium term. However, increased revenue diversification, with noninterest income (as a % of average assets) tracking more in line with peer averages coupled with a continued disciplined lending approach and strong core funding remaining in place could result in positive ratings momentum over time. Conversely, a material deterioration in credit quality, with rising credit costs coupled with a decreasing NIM that impacts the profitability of the company could result in a negative rating action.

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