Pacific Premier Bancorp Inc

Good day, and welcome to the Pacific Premier Bancorp 2024 Second Quarter 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 the 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.

Very good. Thank you, Nick. Good morning, everyone. I appreciate you joining us today. As you are all aware, we released our earnings report for the second quarter of 2024 earlier this morning. We have also published an updated investor presentation with additional information 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 second quarter performance. Ron Nicholas, our CFO, will also review a few of the details surrounding our financial results, and then we will open up the call to questions. During the second quarter, our team delivered consistent results as we navigate a challenging operating environment marked by prolonged elevated interest rates, competitive loan and deposit pricing dynamics, and heightened regulatory expectations. Our second quarter results reflect Pacific Premier's ongoing support of our small and medium-sized business clients, along with our commitment to expanding existing relationships and driving new customers to the bank. Looking now at the results for the second quarter, we generated earnings per share of 43 cents, a return on average assets of 90 basis points, and a return on tangible common equity of 8.9%. The prolonged higher interest rate environment continued to impact our cost of deposits, which increased 14 basis points to 1.73%, though our funding costs remained low on a relative basis compared to our peers. Loan production increased to $151 million, but was offset by higher loan payoffs as our clients utilized excess liquidity to reduce debt. This dynamic that has impacted both sides of the balance sheet for the past few quarters, in part, reflects the high quality nature of the businesses we attract to the franchise. Based on client communications, we expect loan and deposit levels to stabilize as we move through the second half of the year. Our capital ratios rank among the strongest in the industry. In the second quarter, our TCE ratio increased 44 basis points to 11.41%, and our tangible book value per share increased to $20.58. Our CET1 ratio came in at 15.89%, and our total risk-based capital ratio was a robust 19.01%. These capital levels provide us with significant optionality, and we are considering a number of strategic options, including balance sheet repositioning that could drive earnings higher in future periods. Our total liquidity position of approximately $9.8 billion was double the level of our uninsured deposits at June 30th. This consisted of $1.2 billion of cash in unpledged short-term treasuries as well as $8.6 billion of unused borrowing capacity. As you are aware, we have placed a strong emphasis on capital accumulation and proactive liquidity management over the past several quarters for good reason. We are well-positioned to pursue organic and strategic growth opportunities, especially once risk-adjusted spreads on new loans normalize relative to those currently available in today's market. As noted on last quarter's call, the anticipated decline in deposit balances was concentrated in the early part of the quarter due to seasonality around tax payments and distributions. Additionally, clients are using deposits to pay down and pay off loans and to a lesser extent seeking higher returns for excess liquidity. Our relationship managers continue to bring in new relationships And in particular, our teams at Pacific Premier Trust and Community Association Bankering are delivering solid results. That said, the current deposit gathering environment remains highly competitive. Throughout this rate cycle, we have maintained our disciplined deposit pricing practices due to the quality of our client relationships and their trust in our organization. As a proof point, Our average cost on non-maturity deposits was 117 basis points for the second quarter. As of June 30th, non-interest-bearing deposits comprised 32% of total deposits, which compares favorably to our peers. Our relationship-based business model is also reflected in our long-tenured client base, as the length of our commercial and consumer banking relationships is, on average, 13.3 years. Tepid demand for CRE and multifamily loans, lower C&I loan utilization rates in conjunction with our disciplined approach to managing credit risk contributed to our loan portfolio contracting during the quarter. Across our footprint, competition persists in terms of structure, tenor, and credit spreads. Candidly, some of our competitors are originating loans that are not consistent with our approach to credit and pricing discipline. 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. We appreciate that uncertainty persists within certain commercial real estate markets. Importantly, our CRE concentration has steadily decreased with the portfolio continuing to perform well. And broadly speaking, we are not seeing an overall degradation in borrower cash flows within our loan portfolios. Our asset quality remains solid as non-performing loans decreased $11.7 million to $52.1 million from the prior quarter. Non-performing assets ended the quarter at 28 basis points of total assets, while classified assets declined 9 basis points to 1% of total assets. We have been transparent in our commitment to prudent and proactive credit risk management. We work quickly to identify and move problem credits off our balance sheet, and we historically have done very few workouts or extensions. To be successful in our approach, we must maintain open lines of communication with our clients regarding their financial status, liquidity, and market dynamics, all of which inform our process for managing individual credits. Should demand for credit strengthen as the economy progresses through the cycle and borrowers gain more clarity following the November election, we are well positioned to add new loans and drive organic growth. With that, I'll 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 $41.9 million, or 43 cents per share, and our average return on average assets and average tangible common equity were 0.90 percent and 8.92 percent, respectively. Total revenue, was $154.6 million, and non-interest expense decreased $5.1 million to $97.6 million, resulting in an efficiency ratio of 61.3 percent and a pre-provision net revenue as a percentage of average assets of 1.23 percent for the quarter. Taking a closer look at the income statement, net interest income decreased to $136.4 million, primarily as a result of higher cost of funds, as well as lower loan balances, reflecting the impact from the prolonged higher interest rate environment and tepid loan demand. On the funding side, the deposit mix shift also contributed to the increase in deposit costs, impacting the second quarter net interest margin, which narrowed 13 basis points to 3.26 percent. Our average non-maturity deposit costs increased 11 basis points to 1.17 percent, and total deposit costs were 1.73 percent, reflecting the shift of interest-bearing to interest-bearing money market and retail CDs during the quarter. On the earnings side, we saw higher yielding loans prepaid during the quarter as well as lower CNI line utilization, keeping the average loan rate flat with the prior quarter. Assuming one rate cut in September, our current expectation is for the third quarter is modest net interest margin pressure from continuing higher funding costs. On a spot basis, our total cost of deposits was 1.81% at quarter end. Lastly, we have $600 million of fixed-to-floating SOFR-based swaps that are set to mature in a latter fashion beginning in September through year-end. For the third quarter, we expect a similar level of swap income as we saw in the second quarter, again, assuming we don't see any Fed moves before September. Non-interest income of $18.2 million decreased $7.6 million from the first quarter. driven by the prior quarter's $5.1 million debt extinguishment gain and $1.7 million of lower trust income due to the seasonal timing of annual tax fees recognized in the first quarter. For the third quarter, we expect our total non-interest income to be in the range of $19 to $20 million. Non-interest expense came in better than expected at $97.6 million, representing a reduction of $5.1 million compared to the first quarter, primarily due to a nonrecurring $4 million legal-related insurance claim. Compensation and benefits expense also decreased $1 million to $53.1 million, primarily reflecting lower payroll tax expense. From a staffing perspective, we ended the quarter relatively flat with a headcount of 1,348 compared with 1,353 as of March 31st. We continue to manage expenses tightly and our expense expectations for the third quarter for expenses to be in the range of approximately $101 to $102 million. Our provision for credit losses of $1.3 million decreased compared to the prior quarter, commensurate with the smaller loan portfolio and our current asset quality profile. While we have not seen any meaningful deterioration in asset quality, we continue to actively monitor our portfolio concentrations and performance of certain asset classes that are more sensitive to the higher for longer rate environment. Turning now to the balance sheet, we finished the quarter at $18.3 billion in total assets as lower deposit levels were matched by decreases in loans and lower cash balances offset by increases in our AFS securities portfolio. Total loans held for investment declined $522 million, driven by prepayments, paydowns, maturities, and lower CNI line utilization. The CNI spot utilization rate decreased to 41 percent from 48 percent at March 31st. Consistent with prior periods, we maintained a prudent approach to balance sheet risk management, opting to prioritize capital accumulation and enhance liquidity. As part of these ongoing efforts, we sold $35 million of adversely classified loans during the second quarter as part of our proactive credit risk management approach. Total deposits ended the quarter at $14.6 billion, which represented a length quarter decrease of $560.2 million. The anticipated decrease was due to seasonality around tax payments and clients continuing to pay down loans and seeking higher returns for excess liquidity. The securities portfolio increased $155.7 million to $3.1 billion, and the average yield on our investment portfolio was 3.62%. During the quarter, we purchased $443 million of shorter-term U.S. treasuries with maturities predominantly 18 months or less at a weighted average yield of 5.08%. Our investment strategy continues to prioritize liquidity, providing us important balance sheet optionality. Our reinvestment levels will be dependent upon customer deposit flows, as well as interest rate risk considerations. The combination of solid earnings and a smaller balance sheet further strengthen our capital ratios this quarter, with all ratios increasing significantly from March 31st. In addition, Our total common equity increased 44 basis points to 11.41%, and our tangible book value per share increased to $20.58. And lastly, from an asset quality standpoint, non-performing loans were 0.42% of total loans, seven basis points lower from the prior quarter, and our classified loans also fell to 1.47 percent from 1.57 percent in the first quarter. Delinquency continues to run at low levels at 0.14 percent. During the second quarter of 2024, we had $10.3 million of net charge-offs primarily related to the sale of two substandard loans compared to $6.4 million of net charge-offs in the first quarter. We remain very well-reserved across all loan segments with our ACL at a healthy $183.8 million and our coverage ratio essentially flat at 1.47 percent. Our allowance reflects changes in the economic and market forecasts as well as changes in our asset quality profile and loan portfolio balances and composition. Finally, our total loss absorption which includes the fair value discount on loans acquired through bank acquisitions, finished the quarter at 1.78%. With that, I'll turn the call back to Steve.