Pacific Premier Bancorp Inc

Good morning and welcome to the Pacific Premier Bancorp fourth quarter 2022 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 from the question queue, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Steve Gardner. Please go ahead.

Thank you, MJ. Good morning, everyone. I appreciate you joining us today. As you are all aware, we released our earnings report for the fourth quarter of 2022 earlier this morning. We have also published an updated investor presentation with additional information and disclosures on our financial performance. If you've 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'll 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 carefully read that statement. We delivered another quarter of solid financial performance while maintaining a conservative approach to managing our balance sheet to drive long-term shareholder value. We generated a record level of quarterly total revenue of $201.9 million, and our net income increased from the prior quarter to $73.7 million. while earnings per share of 77 cents was consistent with the prior quarter. We generated an increase in pre-provision net revenue and realized a return on average tangible common equity of nearly 17%. Tangible book value per share grew 3.7% to $19.38 per share, and we ended the year with a TCE ratio of 8.88%, while all of our regulatory capital ratios further strengthened. Our ability to generate strong financial performance in a challenging environment is attributable to the deep client relationships we have built over several years, as well as our proactive and strategic approach to balance sheet management. I want to thank every one of my Pacific Premier colleagues for the outstanding work that they do every day to positively impact our clients, the organization, and the communities we serve. We enter 2023 with high levels of liquidity and capital, which will provide us with optionality and flexibility in a number of areas as we move through the year. Many of the trends of the fourth quarter were similar with what we observed in the third quarter. During this period of rising interest rates, We have maintained a disciplined approach to our loan and deposit production and pricing. By leveraging our robust treasury management solutions and innovative technology platforms, our bankers are successfully developing new commercial banking relationships. We saw a slight reduction in total loans from the prior quarter due to both a lower level of loan demand in connection with higher interest rates particularly in the areas of commercial real estate and multifamily, and the prudent underwriting standards we maintain in light of the ongoing economic uncertainty. In the fourth quarter, nearly half of our loan production was business-related loans, which reflects our ability to add quality banking relationships to the franchise. Our fourth quarter loan production continues to be attractive, as the average yield on new loan commitments increased 79 basis points over the prior quarter. Although we experienced a decline in core deposits, the strength of our client relationships coupled with disciplined pricing resulted in a relatively low cost of core deposits of 31 basis points. Our commercial escrow and exchange business experienced another quarter of deposit outflows declining by $396.7 million, which is a result of decreasing commercial real estate transactions. Additionally, we have seen clients utilizing excess cash to pay down or pay off loans, as well as some deposit mix shift. During the quarter, we added broker time deposits of varying maturities, which kept our loan-to-deposit ratio in the mid-80% range. These actions resulted in relatively low deposit betas for 2022, which Ron will discuss in more detail. Beginning in the fourth quarter of last year, our teams began executing on a number of new initiatives and marketing efforts to expand the products and services we are offering to existing clients and to enhance new client acquisitions, which we expect will benefit growth in future periods. Our asset quality remains solid. As always, our teams are proactive in terms of portfolio management and credit monitoring. We receive frequent updates on our clients' financial performance, liquidity, and collateral values, which informs our approach to managing individual credits. Our non-performing assets totaled 14 basis points at year end. And although we did see some migration of a few credits, We are not seeing an overall degradation in our borrowers' cash flows or their ability to service their obligations. With that, I'll turn the call over to Ron to provide a few more details on our fourth 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. Fourth quarter earnings increased to $73.7 million, driven by slightly higher revenues and lower operating expense. As a result, our efficiency ratio improved to 47.4% from 48.3%, and our pre-provision net revenue totaled $102.7 million, an increase of $2.3 million from the prior quarter, and as a percentage of average assets, rose to 1.89% from 1.85%. Our return metrics were solid, as return on average assets and average tangible common equity increased to 1.36% and 16.99% respectively. Taking a closer look at the income statement, non-interest income increased to 181.4% driven primarily by higher yields on interest earning assets and $3.8 million of additional swap income benefit compared to the prior quarter. The higher yields were partially offset by higher cost of funds and lower loan related fees and accretion income as a result of decreased prepayment activity. On the funding side, our core deposit cost was well controlled at 31 basis points with a spot rate of 43 basis points at year-end. Average total deposit costs came in at 58 basis points, reflecting an increase in broker deposits of $418 million. On a full-year basis, our cumulative period end total deposit beta was 18%. Our low-cost deposits supported the fourth quarter net interest margin of 3.61%, which was flat to the third quarter. As reported, loan yields rose 33 basis points to 4.94%, inclusive of the fixed to floating rate swaps. Our core net interest margin narrowed six basis points to 3.38%, with the decline being predominantly attributable to lower prepayment activity compared to the third quarter. Non-interest income increased $333,000 from the prior quarter, driven mostly by a $582,000 increase in other income, principally due to loan recoveries. These increases were partially offset by a $306,000 decrease in net gain from loan sales. We also saw slightly lower fee revenues in our escrow and exchange and trust business lines. In the escrow and exchange business, As we noted earlier, the decrease in fee revenue is attributable to the lower transaction activity in the commercial real estate market. We also anticipate an increase in trust income for the first quarter for annual tax service fees. As a result, for the first quarter of 2023, we expect our total non-interest income to be in the range of $21 to $22 million, excluding any security sales. Non-interest expense decreased $1.7 million to $99.2 million, primarily due to a $2 million decrease in compensation and benefits reflecting lower performance-based variable comp, as well as reduced staffing levels, which decreased to 1,430 employees. Commensurate with higher interest rates, as anticipated, deposit expense increased $1.9 million from the prior quarter. Looking at our expectations for the first quarter, we anticipate our non-interest expense to approximate $102 million to $103 million due to increases in deposit expense, FDIC insurance costs, as well as the timing of certain seasonal items such as payroll taxes and annual staff merit increases. Our provision for credit losses of $2.8 million increased compared to the prior quarter's $1.1 million, impacted by changes to the overall size, composition, asset quality, and unfunded commitments of the loan portfolio. While we have not seen a meaningful deterioration in our asset quality, we are closely monitoring the systemic issues impacting our borrowers, such as supply chains, inflationary pressures, and higher interest rates. Turning to the balance sheet, we saw a slight decline in loans of $239 million driven by lower loan fundings. Given the higher interest rates, we also saw the continued trend of slower prepayments and payoffs. Deposits ended the year at $17.4 billion, which represented a linked quarter decrease of $394 million attributable mostly to the escrow and exchange business, as well as lower deposits in both commercial and consumer businesses as we continue to defend our deposit costs. To help mitigate the cyclicality of deposit flows, we added another $418 million in term broker deposits and $214 million of retail CDs, which provided additional liquidity as well as interest rate protection. We saw a slight reduction in our securities portfolio as we did not purchase or sell any securities during the fourth quarter. Our overall securities portfolio yield increased to 2.35%. Additionally, we realized an incremental benefit with the fair value mark-to-market loss reduction of $20.6 million on the available for sale portfolio compared to September 30th. Our tangible common equity increased 29 basis points to 8.88%. Additionally, we further strengthened our other risk-based capital ratios this quarter with Tier 1 risk-based, Tier 1 leverage, and total risk-based capital ratios, all increasing meaningfully from September 30th. And finally, from an asset quality standpoint, asset quality remains stable as both non-performing assets and delinquent loans totaled 0.14% and 0.30% respectively. Although classified assets did increase from September 30th, they remain relatively low. Our allowance for credit loss was effectively flat in terms of dollars, and our coverage ratio increased two basis points to 1.33%. And our total loss absorption, which includes the fair value discount on loans acquired through acquisition finished the quarter at 1.70%. We would not anticipate any decreases in our coverage ratio given the uncertain economic environment and could see an increase if a potential downturn materializes. With that, I will turn the call back to Steve.