Pacific Premier Lagging On Weaker Core Banking

Smaller banks have had a so-so year as a group, and Pacific Premier Bancorp (PPBI) has done worse than average, and particularly since second quarter earnings. Not only has this growing Southern California bank disappointed the Street, but the combination of weaker loan growth and weaker spreads has hit expectations. Adding to that, Pacific Premier management has made it clear that they intend to remain active in M&A at a time when it seems that many investors would prefer that banks return surplus capital to shareholders rather than expand their businesses through M&A.

I do have some near-term concerns about the commercial real estate market, where Pacific Premier does around 40% of its lending, and while the California multifamily housing market doesn’t have the same challenges as the New York area, Pacific Premier’s higher than average exposure here is a potential risk. Pacific Premier still has a higher short interest than peers, but I do believe the valuation has become much more reasonable for a very profitable, fast-growing SoCal bank.

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Pacific Premier Lagging On Weaker Core Banking

Pacific Premier Bancorp Seems To Be Living Up To Its Name

Given the melt-up in bank stocks, I think it's wise to be skeptical if not downright suspicious when a bank screens as undervalued. In the case of Wells Fargo (NYSE:WFC), for instance, there's the bank's well-publicized fraudulent account issue to explain the discount, and in a few cases here and there investors can find smaller banks trading at a discount in large part because they're below the radar screen of most analysts and investors.

To be sure, my growth expectations for Pacific Premier Bancorp (NASDAQ:PPBI) aren't conservative, but I do believe the bank could double its adjusted earnings between 2017 and 2020/2021 and double them again over the ensuing five years. I like this bank's leverage to "prudently aggressive" lending and its stated desire to deploy surplus capital into M&A to further grow the business. While the shares are expensive on a tangible book basis (at least on the basis of what has normally been reasonable for the bank's ROTCE), there could be upside into the $40's as this bank's lending continues to outgrow its peers and it continues to improve its deposit base.

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Pacific Premier Bancorp Seems To Be Living Up To Its Name