Pacific Premier Bancorp Inc

Good day and welcome to the Pacific Premier Bancorp third quarter 2021 earnings 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 and CEO. Please go ahead.

Thank you, Carrie. Good morning, everyone. I appreciate you joining us today. As you were all aware, earlier this morning we released our earnings report for the third quarter of 2021. We have also published an updated investor presentation that has additional information on our financial performance. If you have not 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, I will walk through some of the notable items. Ron Nicholas, our CFO, will review a few of the financial details, and then we'll open up the call to questions. I note that in our earnings release and investor presentation, we have our safe harbor statement relative to the forward-looking comments, and I would encourage all of you to read through those carefully. We plan to keep our prepared comments relatively brief, given the level of detail and disclosures we have included in our earnings release and the investor presentation. In the third quarter, our teams continued to execute at a high level, delivering strong financial results amidst a challenging operating environment. The resurgence of COVID cases arising from the spread of the Delta variant, inflationary pressures, and supply chain disruptions have all presented challenges to varying degrees to our employees, clients, and the communities at large. However, our disciplined approach to business development in terms of both adding new clients and expanding existing relationships enabled us to generate high-quality organic loan and deposit growth, an increase in revenue, and higher operating leverage. During the third quarter, we generated net income of $90.1 million, or 95 cents per share. We have gained scale and are realizing greater efficiencies as we are seeing improvement in our core earnings power. During the third quarter, we generated pre-provision net revenue of $103.1 million, which was an increase of 10.7 percent from the prior quarter, while our PP&R, return on average assets, increased to 1.98 percent from 1.84 percent in the prior quarter. Our results were driven by a continuation of a number of the positive fundamental trends that we saw last quarter, as well as progress across a number of areas. Our strong loan production enabled us to continue remixing the balance sheet towards higher-yielding assets. The more favorable mix of earning assets, along with the previous redemption of higher-cost sub-debt, supported the expansion in our core net interest margin. We had higher levels of non-interest income, largely driven by growth in our custodial account fees. Our favorable asset quality results and overall low risk profile drove an additional reserve release. And our consistent expense management saw revenue growth outpace operating expenses, resulting in a nearly 200 basis point improvement in our efficiency ratio to 47.5%. Despite the headwinds to a stronger economic recovery, our banking teams continue to be exceptionally productive in generating high-quality new relationships. We operate in a highly competitive market with many banks being aggressive on both pricing and structure to win deals. But our consistent approach to business development aided by our proprietary technology, Premier 360, enables us to add new clients and expand existing relationships without compromising on either pricing or credit risk. We are seeing a consistent level of activity and generated nearly $1.5 billion in new loan commitments during the third quarter, which was just slightly below our second quarter's record levels. This resulted in another quarter of double-digit annualized growth in loans. The mix of loan production was fairly similar to last quarter and continues to be well diversified, with balanced contributions coming from across our markets. The strong demand for multifamily loans, coupled with our expertise and deep relationships, are enabling us to capitalize on the opportunities to redeploy excess liquidity into these high-quality credits to provide attractive risk-adjusted returns. New C&I loan production was roughly the same as the prior quarter, while line utilization rates trended up slightly to 35 percent in September, but remained below historical levels. We had a strong finish to the third quarter. with period-ending loans $323 million higher than our average loans for the quarter. In addition to our loan production, our business development efforts resulted in strong inflow of commercial deposits. In the third quarter, this resulted in $455 million increase in total deposits with a further improvement in our deposit mix and a two basis point decline and our cost of deposits to six basis points. During the third quarter, we generated a higher level of non-interest income, largely due to an increase in the fees generated by our trust division. We are making good strides to optimize this line of business and are starting to see early returns on our efforts. Our managers and teams are working more effectively But we do have a ways to go to achieve the operational excellence that will allow us to scale the business over the coming years. As we head towards 2022, we are beginning to increase our business development efforts and client outreach. However, until we get our operations at the level we expect, the fee income generation will likely be a bit variable. Looking ahead, Our loan pipeline remains healthy at slightly more than $1.8 billion, and we expect to generate another quarter of net loan growth. We've intentionally maintained a meaningful portion of the investment portfolio and highly liquid short-term securities in order to provide us with the flexibility to quickly redeploy these funds into higher-yielding assets as loan growth materializes. As part of our culture of continuous improvement, we've had a productive year in terms of new technology rollouts, from modernizing our online business banking platform to introducing new credit card programs to refining our mobile banking applications, all designed to accelerate product adoption, support stronger growth, and enhance efficiencies. The technology platform we have built is designed to be scalable and enables us to steadily expand our capabilities without significant incremental expense. As a result, we are able to effectively maintain the technological advantage over all but the largest banks we compete against and deliver superior banking experience for businesses and consumers while automating more back office processes. With the momentum in business development combined with the company-wide commitment to continuous improvement, we are well positioned to drive franchise value higher. With that, I'm going to turn the call over to Ron to provide a few more details on our third quarter results.

Thanks, Steve, and good morning. For comparison purposes, The majority of my remarks are on a linked quarter basis. First, taking a look at the income statement. Our third quarter total revenue of $199.2 million increased 11.5 million, or 6.1% from the prior quarter, driven by growth in both net interest income and non-interest income. The top line revenue growth led to an increase in our pre-provision net revenue of $10 million, to 1.98 percent of average assets, reflecting strong balance sheet growth and fee income growth, which now approximates 15 percent of total revenue. Net interest income expanded by $8.1 million to $169.1 million. Higher average earning assets, principally loans, drove the increase in interest income of $5.4 million. Additionally, during the quarter, we benefited from the early quarter balance sheet actions redeeming $145 million in sub-debt and an average cost of 5.23%, which helped reduce our cost of funds by almost $3 million for the quarter. Our net interest margin came in at 3.51% for the quarter and our core margin at 3.30%. increased eight basis points from the second quarter, driven principally by a seven basis point decrease in our cost of funds. Loan yields decreased six basis points to 4.56% as core yields continue to be impacted by the low current interest rate environment. Looking ahead to the fourth quarter, we expect our core NIM to be in the 3.25 to 3.30 percent range. Non-interest income of $30.1 million increased $3.4 million from the prior quarter, primarily attributable to a $3.5 million increase in trust custodial fees resulting from strategic pricing initiatives and $1 million increase in bowling income reflecting the additional investments made at the end of June. Going forward, we expect our non-interest income for the fourth quarter to be in the range of $24 to $26 million, excluding any potential security sale gains. Non-interest expense totaled $96 million compared to $94.5 million in the second quarter. Salary and benefits were stable at $53.6 million, although we continue to see market-driven wage pressures. Staffing remained flat at 1,523 employees. Marketing expense increased due to the timing of certain business development initiatives in the third quarter. The higher levels of data processing expense reflect the full quarter impact of the Post-Conversion Trust Service Bureau expense and continued investments in technology across the organization. Our non-interest expense should approximate $96 to $98 million in the fourth quarter, as we expect higher business development and production-related costs tied to our continued growth expectations, as well as increasing incentive and wage costs. Revision for credit losses was a recapture of $19.7 million compared to a recapture of $38.5 million in the second quarter. The third quarter recapture was driven principally by the improving macroeconomic forecast and key modeling variables, as well as the continued favorable asset quality results. Turning now to the balance sheet, total assets grew to $21 billion compared to $20.5 billion in the prior quarter as deposits grew $455 million. We saw a favorable remix of our liabilities with $145 million sub-debt redemption and $147 million decrease in higher-cost CDs, while non-maturity deposits grew by $602 million, 15% annualized. We continue to deploy our excess liquidity into higher-yielding loans and investments, which grew on a combined basis $766 million from the prior quarter, funded almost half through lower cash balances, and the remaining from net deposit growth. Loans grew $329 million, or 11.5 percent annualized, and our securities portfolio increased to $4.9 billion. With consistently solid earnings, the company is generating significant amounts of capital. All of our capital ratios remain well above the regulatory well-capitalized levels. This quarter, in addition to our 33-cent dividend, we also repurchased a modest 280,000 shares with a total market value of $11.2 million, further enhancing our return of capital. And lastly, from an asset quality standpoint, our asset quality profile continues to perform well with non-performing assets stable at 17 basis points of total assets and total delinquencies at 14 basis points of loans held for investment, both virtually unchanged from the prior quarter. Net charge-offs totaled $1.8 million for the quarter, compared with $1.1 million in the prior quarter. Our allowance for credit losses ended the quarter at a healthy 1.51 percent, and the total loss absorbing capacity comprised of the allowance plus the remaining fair value discount on acquired loans totaled $296 million at quarter end, or 2.11 percent of loans held for investment. Given our strong asset quality profile and the potential improving economy's impact on our CECL model, we could see further reserve releases net of loan growth. With that, I'll hand it back to Steve.