Pacific Premier Bancorp Inc

Good day and welcome to the Pacific Premier Bancorp second quarter 2023 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 Stephen Gardner, Chairman and CEO. Please go ahead, sir.

Thank you, Rocco. Good morning, everyone. I appreciate you joining us today. As you are all aware, we released our earnings report for the second quarter of 2023 earlier this morning. We have also published an updated investor presentation with 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. On today's call, I'll walk through some of the notable items related to our second quarter performance. Ron Nicholas, our CFO, will also review a few of the details surrounding 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 through that statement as they apply to our comments today. We delivered another quarter of solid results in a challenging environment. Our performance reflects our disciplined focus on prudent and proactive risk, liquidity, and capital management, balanced with profitable growth. Over the years, we have prepared for a wide variety of scenarios to successfully navigate through each point in the economic cycle. To that end, beginning in early 2022, we strategically prioritized capital and liquidity accumulation by intentionally moderating our growth rates, hedging interest rate risk, and positioning our organization to leverage additional sources of liquidity if needed. This approach is aligned with our longstanding commitment to disciplined risk management. Specifically, on the capital front, we began curtailing loan production. We strategically increased loan pricing at the onset of rising interest rates in order to manage our balance sheet and capital position. We continued to emphasize our commitment to prove credit underwriting standards. even as other lenders aggressively pursued loan growth that we determined did not present attractive risk-adjusted returns in the prevailing environment. Obviously, liquidity and stable funding are paramount in times of stress and dislocation. Although we could not have foreseen the events of the first six months of 2023, we anticipated that in an environment of rapidly rising interest rates, we would have to proactively manage liquidity, potentially sacrificing margin in the short run, while concurrently protecting our core deposit base, the foundation of our franchise. Over the past year, we opportunistically accessed wholesale funding sources by adding modest levels of term FHLB advances and broker time deposits to complement and enhance our liquidity levels. This two-pronged approach to liquidity risk management provides us with greater flexibility as we remain focused on maintaining a low-cost deposit base and opportunistically reducing higher-cost wholesale funding sources over time. The quality of our client relationships and the trust in our organization enabled us to maintain disciplined deposit pricing practices This resulted in the average cost of non-maturity deposits of just 71 basis points for the second quarter. As of June 30th, non-interest-bearing deposits comprised 36% of our total deposits. This proactive and disciplined approach to capital and liquidity management puts us in a position to capitalize on future organic and strategic growth opportunities, especially once risk-adjusted spreads on new loans normalize relative to those currently available in today's market. Looking now at our results for the second quarter, we generated earnings per share of $0.60, have produced solid returns despite the macroeconomic uncertainty and the impact of 500 basis points of Fed funds rate increases since March of 2022, producing a return on average assets of 1.09%, and a return on tangible common equity of 12.7%. We continue to prioritize capital accumulation during the second quarter as our tangible common equity ratio increased to 9.59%, and our second quarter CET1 and total risk-based capital ratios increased 80 and 91 basis points to 14.34%. and 17.24% respectively. During the back half of the second quarter, we expanded new client relationships as uninsured and uncollateralized deposits decreased to 32% of total deposits at June 30th. Our end-of-quarter liquidity of approximately $10 billion consisted of over $1.5 billion of cash and $8.5 billion of unused borrowing capacity, which equated to nearly two times the coverage ratio of uninsured deposits. During the second quarter, average non-maturity deposits declined due in part to clients seeking higher returns for excess liquidity, prepaying or paying down loans, as well as seasonality around tax payments, and to a lesser extent, the ongoing uncertainty in the market, particularly after the first Republic Bank failure in early May. Notably, the decline in deposit balances was concentrated in the early part of the quarter, and these flows have since reversed, with deposit balances growing later in the quarter and continuing through July thus far. Our relationship-based business model is reflected in our long-tenured client base, as the length of our commercial and consumer banking relationships is on average 12.5 years. Our continued focus on retaining and expanding new client relationships was supported by opportunities to gain clients given disruptions in the industry. Although we remain in a defensive posture relative to managing our funding costs and deposit flows, we are encouraged by a number of ongoing business development initiatives to expand client relationships. The size of our new account openings in our trust division increased. And we are seeing attractive opportunities to add high-quality relationships in PPT, as well as new core commercial banking clients. During the second quarter, our loan portfolio further contracted due to both a lower level of demand, particularly in CRE and multifamily, along with our actions to tighten underwriting standards and raise loan pricing. Although a level of uncertainty remains within commercial real estate markets, our CRE concentration has steadily decreased, reaching the lowest levels since the Opus acquisition and continues to perform at a high level, exhibiting very little in the way of stresses. We remain focused on providing the highest level of service to our clients while staying committed to originating loans that meet our risk-adjusted return thresholds. Our asset quality remains solid as non-performing assets declined from the prior quarter and totaled just eight basis points of total assets, while classified assets to total assets declined 20 basis points to 0.58%. Our team is continuously and proactively managing credit risk within our high-quality and diverse loan portfolio. They are in regular contact with our clients regarding market dynamics and their impacts on business and real estate cash flows. With that, I will turn the call over to Ron to provide a few more details on our second quarter financial 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 quarter's financial highlights. Second quarter net income totaled $57.6 million, or $0.60 per share, and our return on average assets and average tangible common equity were 1.09% and 12.66% respectively. Total revenue was $180.6 million, and non-interest expense came in at $100.6 million, resulting in an efficiency ratio of 54.1%, and pre-provision net revenue as a percentage of average assets of 1.52 percent for the quarter. Taking a closer look at the income statement, net interest income decreased to $160.1 million, primarily as a result of higher cost of funds, as well as a smaller balance sheet, reflecting our strategic pricing and underwriting actions implemented over the last several quarters. On the funding side, both our deposit mix as well as our higher cost of funds impacted the net interest margin, which narrowed 11 basis points to 3.33%. Our non-maturity deposit costs rose 17 basis points to 0.71%, and our total cost of deposits were 1.27%, reflecting the higher cost of brokered CDs. Partially offsetting our higher average cost of funds was an 18 basis point increase in the average earning asset yields with loans increasing 17 basis points. With the exception of higher interest rates or the expectation of higher interest rates, we anticipate continued net interest margin pressure from higher funding costs and potential changes in deposit mix. We will continue to balance liquidity and net interest margin considerations while evaluating opportunities to deploy our excess cash reserves into higher yielding earning assets or paying down higher cost liabilities. We are actively monitoring market interest rates and in early July added $300 million of fixed to floating rate swaps to replenish a portion of our existing swaps that are maturing later in 2023. Non-interest income of $20.5 million decreased 647,000, driven by 1.7 million of lower trust income due to the seasonal timing of annual tax fees recognized in the first quarter, partially offset by $770,000 of higher other income and $345,000 in loan sale gains. For the third quarter of 2023, we expect our total non-interest income to be in the range of $19 to $20 million, excluding any loan or security sales. Non-interest income came in better than expected at $100.6 million, representing a reduction of $708,000 compared to the first quarter. Compensation and benefits expense decreased to $53.4 million, reflecting lower staffing levels and variable-based incentives, as well as lower legal and professional services expense. This was partially offset by an increase in deposit expense related to higher deposit earnings credit rates. From a staffing perspective, we ended the quarter with a headcount of 1,383 compared with 1,429 as of March 31st. We continue to manage our expenses prudently And our expectations for the third quarter are approximately $101 to $102 million due to expected increases in deposit expense and incentives partially offset by lower staffing levels. Our provision for credit losses of $1.5 million decreased compared to the prior quarter commensurate with the smaller loan portfolio and our current asset quality profile. Turning now to the balance sheet, we finished the quarter at $20.7 billion in total assets, as deposit decreases were matched by loan and investment portfolio decreases during the quarter. Total loans held for investment declined $562 million, driven by prepayments, sales, and maturities of $557 million, partially offset by loan fundings of $148.5 million. Lower loan originations in the first half of 2023 have been partially offset by lower prepayments and maturities when compared to the first half of 2022. Lastly, we opportunistically sold $77 million of non-relationship loan participations during the second quarter, continuing to prioritize liquidity and allocating capital to strategic banking relationships. Total deposits ended the quarter at $16.5 billion, which represented a linked quarter decrease of $668 million. As we noted, we are committed to remaining disciplined as it relates to deposit pricing. This discipline was evident in the spot rate for non-maturity deposits at June 30th, which was well controlled at 78 basis points. The securities portfolio decreased $112 million to $3.7 billion and the average yield on our investment portfolio increased seven basis points to 2.64%. We anticipate approximately $200 million in cash flow from the amortization and maturities of our investment portfolio over the remainder of the year, and reinvestment will be dependent upon deposit flows and liquidity considerations. The combination of solid earnings and a smaller balance sheet further strengthened our risk-based capital ratios this quarter. In addition, our tangible common equity increased 39 basis points to 9.59%, and our tangible book value per share increased to $19.79. We continue to operate the institution from a position of capital strength to maximize strategic optionality, as well as investor and regulatory expectations regarding capital maintenance. Lastly, from an asset quality standpoint, Non-performing loans were 0.13% as a percentage of total loans, five basis points improved from the prior quarter. Although total delinquency increased slightly to 0.23%, our classified loans fell to 0.88% from 1.14% in the first quarter. Our allowance for credit loss remained a healthy $192.3 million and our coverage ratio increased to 1.41%. Our total loss absorption, which includes the fair value discount on loans acquired through acquisition, finished the quarter at 1.76%. We would not anticipate any decreases in our coverage ratio given the broader economic uncertainty and could see a potential increase if an economic downturn materializes. With that, I will turn it back to Steve. Great. Thanks, Rod.