Pacific Premier Bancorp Inc

Good day and welcome to the Pacific Premier Bancorp fourth quarter 2020 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Steve Gardner, Chairman, President, and CEO. Please go ahead.

Thank you, Allie. Good morning, everyone. I appreciate you joining us today. As you are all aware, earlier this morning we released our earnings report for the fourth quarter of 2020. We have also published an updated investor presentation that we will be speaking to today. If you have done so already, we would encourage you to visit our investor relations website to download a copy of the presentation. In terms of our call today, Ron and I will present our prepared remarks, and then we will open up the call to questions. I note that in our earnings release and investor presentation that we have our safe harbor statement relative to the forward-looking comments, which have been expanded and I would encourage all of you to read through those carefully, particularly in light of the current COVID-19 pandemic and how it may impact our business, financial condition, and results of operations. I'm going to start on slide six of the presentation. Our fourth quarter performance capped an extremely productive year for the company. Throughout 2020, while dealing with unprecedented challenges we were able to accomplish a number of significant initiatives. We completed our largest acquisition to date, including the integration, system conversion, and branch consolidations in a short timeframe. We launched our PPP program and funded more than $1.3 billion in loans, then eliminated the burden of managing the loan forgiveness process by selling the loans and accelerating the revenue recognition. And we designed and implemented a thoughtful loan modification program that assisted borrowers impacted by the pandemic while effectively protecting the bank's interests. Our strong culture of performance and accountability, one that strives for continuous improvement, has never been more important than it was in 2020. Our team consistently over-delivered for our clients, communities, our stockholders, and for all stakeholders. On behalf of the Board of Directors, I want to express our appreciation for the extraordinary efforts of our entire organization. Turning to our fourth quarter results, we delivered strong performance that reflects our improved earnings power. We generated a return on average assets and average tangible common equity exclusive of merger-related expenses of 1.41% and 17.2%, respectively, which should improve further as economic conditions strengthen and we are able to drive more loan growth and operating leverage. In October, we completed the system conversion, consolidated 20 branches, and made the final adjustments to staffing levels, and our cost savings from the transaction continue to run ahead of expectations. With these final integration items behind us, we were able to shift more of our focus towards business development. During the fourth quarter, we saw a significant increase in business. We originated $911 million in loan commitments that translated into $712 million in fundings, more than double what we produced in the prior quarter. We are seeing attractive growth opportunities in most of our markets. And from an anecdotal standpoint, we're seeing more clients starting to plan for increased economic activity, and that's continuing to positively impact our loan pipeline. So we are cautiously optimistic relative to our growth outlook. Obviously, there is still a great deal of uncertainty, but we believe we are well-positioned to perform regardless of the economic trajectory. While we saw a significant increase in loan production, it was not sufficient to offset elevated payoffs and a few strategic sales of lower-rated credits. As a result, our total loan balances declined by 1.6% in the quarter. While payoffs have been a headwind to loan growth, we do not expect loan sales to be as significant this year, given the overall strong trends in our loan portfolio along with the greater clarity we have around future economic activity. Our asset quality remains very strong, was stable to improve the migration trends during the fourth quarter. Our cost of deposits declined to 14 basis points during the quarter, which was primarily due to the repricing of higher cost deposits acquired through the OPUS acquisition along with growth in non-interest-bearing deposits. Our ability to execute throughout the company is generating greater amounts of capital, and that has provided us with the opportunity to return increasing amounts of capital to our shareholders. We recently announced a 50% increase in the size of our stock repurchase program, and today we announced we are raising our quarterly dividend to 30 cents per share. On slide seven and eight, we highlight a comparison of the company to our Western Bank peers on a number of important financial metrics and review our history of successful M&A. We've consistently generated strong pre-provision net revenue despite the pandemic. Our organization has an expertise and track record of executing on all aspects of M&A to drive value for our shareholders. And it remains a core competency and a competitive advantage for the company. We remain active in pursuing strategic transactions that will maximize long-term shareholder value. Slide 9 summarizes our capital strength at both the bank and holding company. All of our regulatory capital ratios exceed the well-capitalized thresholds. As an active acquirer, we have always been mindful to protect tangible book value, and that is evident in the bar chart. Our tangible book value ended the year at $18.65 a share, higher than in the first quarter of 2020 prior to the Opus acquisition. Our balanced approach to capital management provides us with a high degree of flexibility and positively impacts the total return that we generate for our stockholders. On slides 10 and 11, we summarize our longstanding approach to innovation and our ability to leverage technology as a key differentiator of Pacific Premier. Our investments have positioned us well to handle the increased demand for digital banking solutions and are enabling us to meet the more complex needs of larger commercial banking clients. At this point, I'm going to turn the call over to Ron to provide some additional details on our fourth quarter financials.

Thanks, Steve, and good morning. I'll pick up on slide 13, which illustrates the strength of our performance. As illustrated here, we delivered a 48.5 percent efficiency ratio and a pre-provision net revenue return on average assets of 1.92 percent. Our continued strong operating performance was demonstrated by the increase in net interest income and our lower non-interest expense, excluding merger-related costs. Our pre-provision net revenue continues to generate significant capital that supports our growth and capital management initiatives. On slide 14, we highlight the factors affecting our net interest margin, which was 3.61 percent in the fourth quarter, a seven basis point increase from the prior quarter, and our core net interest margin came in at 3.32 percent, up nine basis points. As highlighted with our attribution waterfall chart, the largest drivers of the increase were a lower cost of funds and higher fees due primarily to elevated loan prepayments. And our cost of deposits decreased six basis points to 0.14%, driven by the combination of lower repricing on interest-bearing deposits and growth in our non-interest-bearing deposits. As highlighted on slide 15, our non-interest expense during the second half of 2020 Excluding merger-related costs extrapolates to $379 million annually, less than the $390 million expense run rate we estimated at the announcement of the Opus transaction. The remaining cost savings from the acquisition were fully realized during the fourth quarter of 2020, as post-conversion actions have now been completed, and as a result, our headcount ended the quarter down 59%, at 1,477. During the fourth quarter, in recognition of these tremendous accomplishments of the entire team throughout the pandemic, we paid all employees other than senior executive managers a special appreciation bonus, which totaled $2.4 million. Our total loss-absorbing capacity of $382 million or 2.86 percent of loans held for investment remains very strong as highlighted on slide 16. This is comprised of an allowance for credit losses of $268 million plus the remaining fair value discount on acquired loans of $114 million. Our allowance for loans held for investment decreased from the prior quarter, although the ratio of ACL to loans remained above 2 percent. The key drivers of the change were overall lower loan balances as well as the mix of the loan portfolio. Conversely, our ACL for off-balance sheet commitments increased from the prior quarter, driven by increases in unfunded commitments as well as composition. As highlighted on slide 17, Our deposit base is diversified, with two-thirds residing in our traditional branches and the remaining third split amongst our varied deposit businesses. Our non-interest-bearing deposits increased $115 million, or 2%, from the prior quarter, and we continue to opportunistically run off our higher-cost deposits, including retail and brokered CDs. Lastly, we summarize the composition of our investment securities portfolio on slide 18. During the quarter, we increased our available for sale securities portfolio to $3.93 billion, redeploying some of our excess liquidity into highly rated AAA munis, agencies, and CMOs. The yield on our securities portfolio remained stable at 1.72 percent, and the duration decreased slightly to 5.0 years. With our strong liquidity and our securities portfolio, around 20% of total assets, we will likely remain at this level depending on our near-term deposit trends and loan demand. With this, I'm going to turn the call back over to Steve.