Pacific Premier Bancorp Inc

Good day and welcome to the Pacific Premier First Quarter 2022 Earnings Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference question by pressing star, then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a 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, Operator. Good morning, everyone. I appreciate you joining us today. As you are all aware, earlier this morning, we released our earnings report for the first quarter of 2022. We have also published an updated investor presentation that has additional information on our financial performance. If you have not done so, 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. Overall, we delivered solid financial performance in the first quarter, driven by strong loan and deposit production that generated net income of $66.9 million or 70 cents per share. The quarter's results are reflective of our disciplined approach, the growing capabilities of our teams, and the benefits of our technology-driven growth strategy. Notwithstanding our performance in the past quarter, we are mindful that the macroeconomic dynamics and global geopolitical headlines introduce a new level of uncertainty that must be managed prudently. Although it's typical to see some level of production seasonality at the beginning of the year, our bankers were able to generate nearly $1.5 billion in new loan commitments, essentially the same level as the prior quarter, which reflects our focus on consistent business development that results in new client acquisition and expanding existing relationships that meet our high credit standards. Given the deep and talented teams we have built and the expertise we have developed, we had well-balanced production in the first quarter across all of our lending segments. Commercial line utilization rates increased as our business clients responded to the higher levels of activity they are seeing as the economy expanded and moved beyond the pandemic's impacts. During the first quarter, the average utilization rate on commercial lines of credit increased to 39.5% from 35.2% last quarter, while the quarter end spot rate was 41%. The combination of loan production, increased utilization rates, and a lower level of prepayments and payoffs translated into 12% annualized loan growth in the first quarter. Importantly, we were able to fund our loan growth with strong inflows of low-cost core deposits. which increased 13% annualized. With the first quarter's loan growth, we continued to drive a favorable mix, a favorable shift in our mix of earning assets. And as such, we anticipate an expansion in our net interest margin and higher levels of interest income as we move through the year in conjunction with the expected increase in the Fed funds rate. During the quarter, we were successful in terms of attracting new talent across the company that will support our growth and risk management objectives. We are benefiting from our reputation as a high performing organization, and we were able to add quality talent that bring a level of sophistication, knowledge, and deep client relationships from larger regional and national banks. In keeping with our core value of continuous improvement, the talent we are adding is in enabling us to expand and upgrade our capabilities in many areas of the company. Given the macroeconomic and geopolitical issues that intensified during the first quarter, our team has sharpened its focus on risk management. During the quarter, the Federal Reserve began what is widely expected to be one of the most rapid tightening cycles in decades that will occur simultaneously with a contraction of its balance sheet in an effort to address high inflation. In a relatively short period of time, risk to the economic outlook have increased, creating a more uncertain operating environment. Our long track record of success and ability to build franchise value through varying cycles is attributable to the effective balance that we are able to strike between profitable growth and risk management. While we have been adding new clients and customers and expanding existing relationships, we have been mindful of the potential for a changing environment. We have been taking proactive steps to position our balance sheet to manage interest rate risk and mitigate the impact we may see from a potential deterioration economic conditions the actions we have taken over the last few quarters include reducing the size and duration of the securities portfolio and increasing our liquidity with higher cash balances maintaining strong levels of tangible common equity growing total capital and maintaining overall high levels of regulatory capital ratios adding 1.2 billion dollars of fixed to floating rate swaps, which increased our asset sensitivity. Adding $600 million in low-cost term FHLB advances, which reduced our interest rate risk. And making refinements to our CECL model to reflect a greater impact from supply chain disruption, inflationary pressures, and geopolitical unrest. than what is reflected in Moody's current economic forecast. These actions reflect our commitment to prudent risk management and operating with a long-term perspective. While some of these actions have had a short-term impact on earnings, they are helping us maintain important flexibility to capitalize on the opportunities that may arise from a variety of outcomes. With that, I'm going to turn the call over to Ron to provide a few more details on our first quarter results.

Thanks, Steve, and good morning. For comparison purposes, the majority of my remarks are on a linked quarter basis. Let's start with the income statement. Highlights for the first quarter included total revenue of $187.7 million, as net interest income was $161.8 million, and non-interest income $25.9 million. Pre-provision net revenue totaled $90.1 million, or 1.72% of average assets. Non-interest expense in the first quarter was consistent with our prior expectations at $97.6 million, and our efficiency ratio equaled 50.7%. Lastly, Asset quality remains favorable and at historically low levels. I will provide more detail on our ACL and asset quality later in my remarks. Net interest income decreased $8.9 million to $161.8 million, primarily due to a $2.6 million in lower interest income due to two less days in the first quarter. and nearly $5 million in lower loan-related prepayment fees and accretion income, as loan prepayments fell 23% from the prior quarter. Our reported net interest margin came in at 3.41% for the quarter, and the core net interest margin narrowed five basis points to 3.33%, which included the impact of six basis points due to the aforementioned lower loan-related fees, partially offset by the favorable shift in our earning asset mix, where we strategically reduced the size and duration of our securities portfolio to fund loan growth during the quarter. With the expectation for increases in the Fed funds rate, we would see incremental benefit in future quarters to the net interest income and net interest margin of $1.2 billion of notional overnight SOFR-based fixed-to-floating rate swaps. As of March 31st, The fair value of these swaps amounted to $38.7 million. Looking ahead to the second quarter of 2022, we expect our core net interest margin to be in the range of 3.25% to 3.30%, excluding the potential benefit of the swaps. This includes the full quarter impact of the $600 million in FHLB term borrowings at a blended rate of 2.15%. Non-interest income of $25.9 million decreased $1.4 million from the prior quarter, largely due to $1.5 million of lower security gains. And escrow fees decreased $560,000 as a result of seasonally higher transaction volumes in the fourth quarter compared to the first quarter. Going forward, we expect our non-interest income for the second quarter to be in the range of $23 to $24 million, excluding any security sales. Consistent with our expectations, non-interest expense was essentially flat at $97.6 million compared to $97.3 million in the fourth quarter. Salaries and benefits increased to $57 million, reflecting a partial quarter impact of annual merit increases as well as higher payroll taxes. Staffing overall increased to 1,577 employees as we continue to make strategic investments to hire key people to support the business. Professional expense decreased $1.8 million due to the timing of certain legal and professional fees. Our non-interest expense should approximate $99 to $100 million in the second quarter, reflecting the full quarter impact of higher compensation costs. The first quarter provision for credit loss of $448,000 was driven principally by loan growth and the increasing uncertainty of downside macroeconomic risks due to higher inflation, increasing interest rates, and supply chain challenges. Turning now to the balance sheet, first quarter results reflected both strong organic loan and deposit growth. Loan production for the quarter totaled $1.46 billion, an increase of 27% over the first quarter of 2021. Average loan balances increased $366 million, while average securities decreased $287 million. The decrease in average securities was attributable to our actions to shorten duration and add liquidity to the balance sheet. Additionally, we moved approximately $642 million of available for sale securities to held in maturity during the quarter, bringing the total held in maturity portfolio to just under $1 billion. On the funding side, we continued to grow non-interest bearing deposits, which increased to 40.2% of total deposits. and our total cost of deposits remain unchanged at four basis points. As noted, we added the $600 million in term FHLB borrowings to bolster liquidity and provide additional interest rate protection from projected higher interest rates, and increased cash balances by $505 million at quarter end owing to the evolving environment. Our combined cash and securities portfolio represented just under 25% of total assets. Tangible book value decreased to $19.12 at March 31st, compared with $20.29 at December 31st. With the higher interest rates, we had $1.44 per share negative impact to tangible book value for the mark-to-market loss on our AFS portfolio. I'd like to note that all else being equal, these mark-to-mark losses will accrete back to capital over time. Despite the AOCI loss, our tangible common equity to tangible assets ratio remained a solid 8.79% as of March 31st. And finally, from an asset quality standpoint, asset quality remained strong despite an increase in non-performing loans of $25.3 million related to a single credit, where we believe we are well collateralized. Non-performing assets overall remained at very low levels at 0.26% of total assets compared to 0.15% in the prior quarter. Net charge-offs totaled $446,000 for the quarter compared with a $1 million recovery in the prior quarter. And lastly, our allowance for credit losses ended the quarter at 1.34%, and the total loss absorbing capacity comprised of the allowance plus the remaining fair value discount on acquired loans total $268.7 million at quarter end, or 1.81% of loans held for investment. With that, I'll hand it back to Steve.