Pacific Premier Bancorp Inc

Good day, and welcome to the Pacific Premier Third Quarter 2022 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 telephone keypad. 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.

Great. Thank you, Sarah. Good morning, everyone. I appreciate you joining us today. As you are all aware, earlier this morning, we released our earnings report for the third quarter of 2022. We have also published an updated investor presentation that has additional information and disclosures on our financial performance. If you have not done so already, we encourage you to visit our investor relations website to download a copy of the presentation. In terms of our call today, I'll walk through some of the notable items related to our performance. Ron Nicholas, our CFO, will also review a few of the details on our financial results, and then we will open up the call to questions. I note that our earnings release and investor presentation include a safe harbor statement relative to the forward-looking comments. I encourage each of you to read through that statement carefully. Over the past several quarters, we have taken a number of balance sheet management actions with respect to interest rate sensitivity designed to preserve our ability to deliver solid financial performance in an increasingly challenging and uncertain environment. These actions along with the ongoing business development efforts of our talented commercial banking teams, served us well during the third quarter. Our earnings per share and pre-provision net revenue both increased from the prior quarter. Our net income was $73.4 million, or 77 cents per share, in the third quarter. And our PPNR, return on average assets, increased eight basis points, to 1.85%. Our regulatory capital ratios further strengthened over the prior quarter. Increased profitability was driven largely by net interest margin expansion from the prior quarter. During the third quarter, our net interest margin increased 12 basis points as we effectively managed our deposit costs while realizing higher yields on earning assets. We highlight in our investor presentation our core deposit base, which remains the foundation of our franchise. Our cost of core deposits remained relatively low at 11 basis points in the third quarter, which reflects our relationship-focused business model that has resulted in more than 38% of our deposits comprised of non-interest bearing deposits. Given the expectations for further rate increases over the coming months, it is likely we will see some acceleration in deposit costs going forward as we are not immune to market dynamics. In addition to deposit pricing impacts, the higher interest rate environment has led to recent deposit fluctuations in our commercial escrow and exchange business due to lower commercial real estate refinance and sales activity in the third quarter, a dynamic that may persist as we work through the economic cycle, though we are taking steps to mitigate the potential impact, which I'll comment on a bit later. We held our loan-to-deposit ratio relatively flat at 84% as we added $400 million of brokered time deposits of varying maturities during the quarter. While incorporating time deposits into our funding mix will increase our deposit costs in the near term, We believe that locking in this longer-term funding ahead of additional rate increases will provide more funding flexibility and help us control our overall funding costs going forward. In terms of loan production, we saw decreased demand in the quarter while remaining disciplined in our pricing, underwriting, and overall credit risk management. This has been our approach throughout our management's tenure and has contributed to our strong asset quality throughout various cycles. Market conditions and implementation of our strategic pricing actions have the most pronounced effect on our new production of investor-owned CRE, multifamily, and construction loans, as we methodically decided to pull back the volume of new originations in these areas. The lower production of real estate related loans, along with a decrease in utilization rates on lines of credit, resulted in a slight decline in total loans from the end of the prior quarter. Our teams are actively engaged with existing clients and are focused on developing new commercial banking relationships with attractive businesses that will drive future organic growth. As a result, production of CNI loans was up from the prior quarter. The new banking relationships we are generating today continue to be attractive as the average yield on our new loan commitments increased 144 basis points from the prior quarter. Asset quality remains solid with low levels of problem loans and net charge-offs totaling 1.1 million dollars in the quarter. Overall, we are not seeing a degradation in our borrowers' cash flows or their ability to service their obligations. We have provided additional details on our loan portfolio segments in the investor presentation. Our loan-to-values and duck coverage ratios remain strong within each of our loan segments. Proactive monitoring of the loan portfolios, including ongoing analysis of the financial performance of our borrowers and the collateral supporting our loans are fundamental tenants of our credit administration process. This active management of the portfolio, together with our conservative underwriting standards, has been and we expect will continue to be important to our ability to effectively manage asset quality throughout the cycle. With that, I'm going to turn the call over to Ron to provide a few more details on our third quarter financial results.

Thanks, Steve, and good morning. For comparison purposes, the majority of my remarks are on a length quarter basis. Let's start with the quarter's financial highlights. Third quarter EPS increased to 77 cents per share, a 5% increase on a length quarter basis driven by a total revenue increase of $6.3 million to $201.3 million. Although fee income was slightly lower, Operating costs were well controlled as non-interest expense for the third quarter came in at $100.9 million. As a result, our pre-provision net revenue increased $4 million to $100.4 million, or 1.85% of average assets, and our efficiency ratio improved to 48.3%. Taking a closer look at the income statement, Net interest income increased $8.3 million to $181 million, driven primarily by a 26 basis point increase in our asset yields and slightly higher average loan balances. Additionally, our swap income added $4.2 million incrementally compared to the prior quarter. On the deposit front, total deposit costs came in at 22 basis points, and our cost of core deposits which excludes brokered and time deposits, increased to 11 basis points for the quarter. As a result, our reported net interest margin expanded by 12 basis points to 3.61%, and our core net interest margin expanded 11 basis points to 3.44%, as core loan yields increased 19 basis points to 4.40%. Non-interest income decreased $2 million from the prior quarter, driven mostly by a $679,000 decrease in net gain from the sale of loans and a $403,000 decrease in trust custodial fees. Lower trust fees were driven primarily by lower asset market asset values, while the SBA business has slowed recently in connection with the higher interest rates. Going forward, we expect our non-interest income for the fourth quarter to be in the range of $20 to $21 million, excluding any security sales. Non-interest expense came in at $100.9 million, an increase of $1.9 million primarily due to a $2.5 million increase in other expense, which included a one-time $1.9 million expense for a client loss where our investigation concluded that our client system was compromised. These items were partially offset by a $1.2 million decrease in compensation and benefits as overall staffing decreased to 1,481 employees. We anticipate our non-interest expense to be approximate $101 to $102 million in the fourth quarter. Our provision for credit loss of $1.1 million increased slightly compared to the prior quarter's $469,000, and our credit quality was largely unchanged in the quarter. While we have not seen a meaningful deterioration in credit quality, we are closely monitoring the macroeconomic environment. Turning to the balance sheet, We saw a slight decline in gross loans of $122 million from the prior quarter, driven by lower loan fundings and commercial line utilization rates, which declined slightly to a quarterly average of 40.4% and a spot rate of 39.9% as of quarter end. Not surprising given the interest rate environment, we also saw slower payoffs in the third quarter, somewhat offsetting the lower loan production. Period end deposits were $17.7 billion, a decrease of $338 million from June 30th, primarily driven by a $532 million decrease in deposits from the bank's escrow and exchange business due to lower transaction volumes and a $127 million decrease in municipal deposits. To help offset the escrow and exchange deposit flows, In early September, we added another $400 million in term broker deposits, which provided additional liquidity and enhanced our interest rate risk asset sensitivity. Notable, on a year-over-year basis, our HOA deposit business grew 16% to $2.3 billion. The trust business deposits grew 5% to $1.7 billion, and escrow deposits grew 4% to $1 billion. Our securities portfolio remained flat compared with the second quarter at $4 billion, while our portfolio yield is currently at 2.12%. The available for sale portfolio also remained flat at $2.7 billion, and our mark-to-market unrealized loss for the quarter as of 9-30 was $95 million. Our tangible common equity ratio ended the quarter at 8.59%, an increase of seven basis points from June 30th, and our tangible book value per share decreased slightly to $18.68 from $18.86 at June 30th. The decrease was primarily driven by the other comprehensive loss of $65 million from the impact of higher interest rates on our AFS securities portfolio, compared to a $71 million loss in the second quarter. Along with the higher TCE ratio, we further strengthened our capital position this quarter with common equity tier one, tier one risk-based, and total risk-based capital ratios all increasing from June 30th. And finally, from an asset quality standpoint, asset quality remains solid as non-performing loans and delinquency increased slightly at 0.41% and 0.28% of loans held for investment respectively, but well below industry historical averages. Our allowance for credit loss was effectively flat in terms of dollars and our coverage ratio at 1.31%, and our total loss absorption, which includes the fair value discount on loans acquired through bank acquisitions, finished the quarter at 1.70%. With that, I will hand it back to Steve.