Pacific Premier Bancorp Inc

Good afternoon and good morning and welcome to the Pacific Premier Bancorp first quarter 2024 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, Gary. Good morning, everyone. I appreciate you joining us today. As you are all aware, we released our earnings report for the first quarter of 2024 earlier this morning. We have also published an updated investor presentation with additional information on and disclosures on our financial results. If you have not done so already, we encourage you to visit our investor relations website to download a copy of the presentation and related materials. 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. On today's call, I'll walk through some of the notable items related to our first 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. Our team continues to execute at a high level in an evolving banking landscape, navigating challenges and capitalizing on opportunities. During the quarter, we maintained our commitment to prudent risk management and the cultivation of long-lasting client relationships. Many of the trends in the beginning of 2024 were similar to what we saw throughout 2023, elevated interest rates, ongoing inflationary pressures, muted loan demand, and competitive pricing dynamics. Despite these challenges, we delivered solid quarterly results with net income of $47 million, or 49 cents per share. Our net interest margin increased 11 basis points to 3.39%, a direct result of our securities portfolio repositioning last quarter. We began the year on solid ground, given our commitment to capital accumulation over the past several quarters contributing to our capital ratios being among the strongest in our industry. In the first quarter, our TCE ratio increased 25 basis points to 10.97%, and our tangible book value per share increased 11 cents to $20.33. Our CET1 ratio came in at 15.20%. And our total risk-based capital ratio was a healthy 18.23%. These ratios consistently place us in the top tier relative to other regional banks and provide us with a high level of optionality. In addition to fostering capital strength, we have remained committed to disciplined business development efforts, deepening relationships with existing clients and attracting new customers to the bank. It's important to note that we have always operated with a philosophy that our franchise value is created through the generation of new clients with a primary emphasis on growing full banking relationships with significant deposits. As deposit inflows continue to be largely directed toward money market funds, savings, and retail certificates, it was notable that we did see growth in non-interest-bearing deposits of $65 million this quarter. Despite significant macroeconomic uncertainty, total deposits increased by $192 million, driven by $120 million increase in non-maturity deposits, enabling us to further reduce higher cost FHLB borrowings by $400 million during the quarter. Given current expectations for higher interest rates, We have also seen client preferences towards higher yielding non-bank alternatives. Ultimately, our teams did an outstanding job given the circumstances as non-maturity deposits made up 84% of total deposits and the average cost of non-maturity deposits was well controlled at 1.06%. On the liability side of the balance sheet, we anticipate that our level of wholesale funding will closely will be closely tied to customer loan and deposit flows. Our expectation for the current quarter is that deposit flows could reverse due to seasonal factors. On the asset side of the balance sheet, we saw our loan balances contract slightly as our level of prepayments exceeded new loan fundings, which were modest to begin the year. Loan demand has been relatively muted while competition for new loans has seen a notable increase with lenders willing to offer higher advance rates in more aggressive terms. In addition, some business and commercial real estate clients continue to deleverage their balance sheets, utilizing excess cash reserves to reduce debt. Even with these market dynamics, as we head into the second quarter, we are beginning to see a modest increase in new loan opportunities. and are cautiously optimistic that we'll be able to add high-quality relationship loans to the portfolio as we move through the year. Shifting to asset quality, our metrics remain solid, and our loss experience remains exceptionally low, owing to our proven three-legged approach to discipline cash flow underwriting standards, active portfolio management, and a proactive loss mitigation tactics. During the quarter, non-performing assets increased $39 million to $64 million, or 0.34% of total assets, primarily the result of a single diversified commercial banking relationship in the Pacific Northwest. This relationship includes C&I, investor real estate, and owner-occupied real estate loans, with the real estate comprising multiple property types. Approximately $38 million of loans in this relationship were downgraded in the quarter. Consistent with the bank's longstanding approach to aggressively resolving potential credit issues, the team has acted swiftly, working closely with the guarantor on a solution. I'll note that this particular borrower is current on all payments, and we ended the quarter with total loan delinquencies of just 0.09%. As always, We take a proactive approach to portfolio management and credit monitoring, maintaining open lines of communication with our clients regarding market trends in their respective industries. These regular updates on our clients' financial status, liquidity, and market dynamics shape our approach to managing individual credits. Credit risk management has always been deeply ingrained in our culture. and we regularly utilize a variety of tools when resolving problem credits. We are closely monitoring the trends in the commercial real estate markets and proactively identifying and managing potential weaker credits. Overall, our loan portfolio is well-structured and effectively managed in all facets across the organization. As I noted, the movement in MPLs this quarter was mostly due to specific circumstance with one borrower. I'll add that broadly, we are not seeing an overall degradation in the cash flows within our loan portfolios. Recently, there have been discussions in the industry around multifamily loans, and we have provided additional disclosures in our investor presentation. A couple of items to highlight are that multifamily loans have been one of the best performing asset classes for us throughout our history, with minimal credit losses through multiple economic and interest rate cycles. A majority of our loans are tied to workforce housing projects, which are more stable due to the broader tenant base. These properties are more affordable than other housing alternatives in the western U.S., and as such, less sensitive to market forces. Rent control regulations are materially different in the West Coast, and in particular, California, as compared to New York, which we highlight in the investor slide deck. Our goals remain to drive profitable, risk-adjusted growth that enhances the long-term value of our franchise while maintaining strong capital levels, disciplined expense control, and adhering to effective risk management practices. With that, I'll turn the call over to Ron to provide a few more details on the first quarter financial results.

Thanks, Steve, and good morning. For comparison purposes, my comments today are on a linked quarter basis unless otherwise noted. Let's start by looking at the first quarter's overall results. For the first quarter, we generated net income of $47 million or 49 cents per share. This translated into a return on average assets of 0.99% and a return on average tangible common equity of 10.05%. Our efficiency ratio came in at 60.2% and our pre-provision net revenue as a percentage of average assets totaled 1.43% for the quarter. Taking a closer look at the income statement, net interest income of $145.1 million reflected a full quarter's benefit from the securities repositioning as well as higher earning asset yields offset by lower average balances one fewer day in the quarter, and lower contribution from our swap portfolio. We saw the net interest margin expand by 11 basis points to 3.39% due primarily to a 12 basis point increase in our overall earning asset yields. Total average reported loan yields were flat at 5.29%. However, excluding swap income, fees, and discounts, the weighted average rate of our loan portfolio increased 10 basis points compared to the prior quarter. This was due in part to the increased line draws and utilization rates during the quarter. Overall, our cost of funds increased four basis points to 1.73% as we saw continued slowing of deposit cost increases. Our average non-maturity deposit costs were 1.06% compared to the prior quarter of 1.02%. While our cumulative deposit beta stands at 31%, which includes broker deposits and retail CDs, our non-maturity cumulative deposit beta is 21%, illustrating our disciplined pricing throughout this rate cycle. For the second quarter, the net interest margin will continue to be influenced by increases in our cost of funds, the mix of our deposits, as well as the size and mix of our loan portfolio. Looking at the second quarter, we will consider deploying excess liquidity into higher yielding earning assets to remix the balance sheet in tandem with lower levels of wholesale funding that should help support the net interest margin. Excluding the fourth quarter's security sale loss of $254.1 million, non-interest income increased $5.9 million primarily due to the $5.1 million gain on the prepayment of a $200 million FHLB term borrowing in March. Trust fee income results were favorable, increasing $1.3 million to $10.6 million due to the annual tax fees earned at the beginning of each year. For the second quarter of 2024, we expect our total non-interest income to be in the range of $19 to $20 million, as our commercial real estate-adjacent fee-based businesses continue to be impacted by lower transaction volumes.