Pacific Premier Bancorp Inc

Good day and welcome to the Pacific Premier Bancorp third 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 today's event is being recorded. I would now like to turn the conference over to Steve Gardner, Chairman and CEO. Please go ahead, sir. Steve Gardner Very good.

Thank you, Rocco. Good morning, everyone. I appreciate you joining us today. As you are all aware, we released our earnings report for the third 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 third 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. We delivered solid results in the third quarter as we generated earnings of $36 million, or 37 cents per share. As a result of our business development team's consistent efforts to generate new business while deepening existing client relationships, non-interest-bearing deposits increased during the quarter and comprise 32% of total deposits at quarter end. We leverage these positive core deposit trends to further reduce higher cost wholesale funding sources by decreasing broker deposits by $184 million and repaying a $200 million FHLB term advance. The prolonged higher interest rate environment impacted our average cost of deposits which increased to 1.84%. However, our spot deposit costs at quarter end were 1.80%. Overall, our funding costs remain low on a relative basis compared to our peers, and we are confident in our ability to reprice deposits downward, assuming further decreases in interest rates. Our loan portfolio contracted during the quarter as we saw elevated loan payoffs in particular in the CNI portfolio as our clients utilized excess liquidity to reduce debt. This factor reflects, in part, the high quality nature of the businesses we attract to the franchise. This dynamic has impacted both sides of the balance sheet for the past few quarters. However, we expect this pressure to diminish as we move through the rest of 2024 and into next year. During the third quarter, our capital ratios increased meaningfully from June 30th, as the tangible common equity ratio increased 42 basis points to 11.83%. Our CET1 ratio increased to 16.83%, and our total risk-based capital ratio ended the quarter at 20.05%. On a year-over-year basis, our total risk-based capital ratio increased 231 basis points, and all of our capital ratios ranked near the top of the industry. As we enter 2025, the strength of our capital levels leaves us well positioned to take a more aggressive approach in pursuing opportunities to prudently gain market share and drive new business to the bank. Deposit trends during the third quarter improved. and we do not expect significant volatility in deposit flows for the remainder of the year. We saw nice increases in important deposit categories in the third quarter, and it appears the pressure from clients seeking higher returns for excess liquidity is easing. Today, as we look at our level of core deposits, we are optimistic we have reached an inflection point where balances can grow from year, which gives us confidence to pursue attractive risk-adjusted loan origination opportunities that will further diversify our portfolio. As of September 30th, our loan-to-deposit ratio stood at 83.1%, and together with nearly $1 billion of cash on hand, we have significant capacity to bring new credits onto the balance sheet. In regard to pricing, we believe that deposit costs may have peaked during the third quarter, And Ron will provide some additional detail in his comments regarding our fourth quarter outlook. Our longstanding philosophy has been that franchise value is created through deep client relationships, which is reflected in our strong deposit base. And to that end, it is important to note that the average length of our client relationships is over 13 years. It is a testament to the level of service our bankers provide to our clients and the trust our customers have in Pacific Premier that we have been able to increase average client tenure while maintaining pricing discipline. In our specialty business lines, we continue to enjoy success generating new client relationships in HOA and trust. And with the prospect of lower interest rates, we anticipate increased activity in our escrow and exchange division as the volume of commercial real estate transactions increases. Although our loan portfolio contracted during the quarter, recent client conversations have provided optimism for increased loan demand beginning in the fourth quarter. Borrower sentiment has modestly improved as the interest rate outlook has become more favorable. with more clients considering potential capital investments. Recently, we have taken a number of steps to positively impact our loan portfolio through new originations and loan retention. And as such, our loan pipeline has continued to expand as we have moved through this month. First, in mid-summer, we made strategic pricing adjustments to improve our competitive position in the market. we have added new relationship managers to drive commercial loan production. Third, we dedicated additional resources and improved processes around production and loan retention. Lastly, our bankers are continuing to proactively reach out to existing customers to deepen relationships and manage portfolio balances in advance of scheduled loan maturities and interest rate resets. As we look to the fourth quarter of 2024 and beyond, we've adopted a more constructive posture focused on deploying our excess liquidity and capital toward gaining market share and growing the loan portfolio. I'll note our perspective is predicated on macroeconomic factors that have fueled lingering uncertainty will continue to subside, namely interest rate volatility in the upcoming election. Asset quality was solid as non-performing loans decreased $13 million from the prior quarter to $39 million. The favorable third quarter results were a continuation of our long history of outperforming industry averages as non-performing assets decreased to 0.22% of total assets and delinquencies fell to 0.08% of loans. 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. Our proactive approach to credit risk management continues to serve us and our stakeholders well, as our asset quality measures are some of the strongest in the industry. With that, I'll 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, unless otherwise noted, my remarks are on a length quarter basis. Let's start with the quarter's financial highlights. Third quarter net income totaled $36 million, or 37 cents per share, and our return on average assets and average tangible common equity were 0.79% and 7.63% respectively. Notably, our return on average tangible common equity continues to be adversely impacted by our high levels of capital. Total revenue was $149.8 million, and non-interest expense was $101.6 million, resulting in an efficiency ratio of 66.1% and pre-provisioned net revenue as a percentage of average assets of 1.06%. The quarter's results were influenced by a smaller balance sheet as well as narrowing of the net interest margin largely attributable to rising funding cost momentum from earlier in the quarter. Taking a closer look at the income statement, Net interest income decreased to $130.9 million, primarily as a result of higher cost of funds, as well as lower loan balances. On the funding side, cost of funds increased to 1.97%, while earning asset yields remained flat, which resulted in a third quarter net interest margin narrowing 10 basis points to 3.16%. Our average non-maturity deposit costs rose 10 basis points to 1.27%. However, the spot cost of non-maturity deposits was 1.26%, lower than the quarterly average. Notably, we are cautiously optimistic that the third quarter represents a peak in deposit costs, and we see fourth quarter deposit costs holding flat to down slightly. On the earning asset side, we saw one basis point increase in average loan yields to 5.31% and overall earning asset yields were 4.96% compared with 4.97% in the prior quarter. Our swap portfolio contributed 16 basis points to the net interest margin consistent with the prior quarter. As of September 30th, we have 800 million of notional swaps remaining with 500 million maturing during the fourth quarter. With our current rate expectations, we anticipate approximately $3 to $4 million of swap income for the fourth quarter. We are actively monitoring market interest rates and anticipate one 25 basis point rate cut in our fourth quarter guidance. We anticipate the fourth quarter net interest margin to be in the 3.05% to 3.10% range due to the full quarter impact of lower rates earned on cash balances, downward repricing of variable rate loans, a lower SOFR-based swap income contribution, as well as lower average loan balances. As a result, and highlighted in our investor presentation, we anticipate net interest income to be in the $120 to $125 million range. We will also provide updated guidance for the full year 2025 during the January earnings call. Non-interest income of $18.9 million increased $645,000 from the prior quarter, driven by a $748,000 increase in other income attributable to higher CRA investment income and a $203,000 gain on debt extinguishment resulting from the early redemption of the $200 million FHLB term advance as we continued to pay down higher cost funding. For the fourth quarter, we expect our total non-interest income to approximate $19 million. Non-interest expense was $101.6 million, representing an increase of $4.1 million compared to the prior quarter, which included a $4 million legal loss recovery. Personnel costs remain relatively flat as we ended the quarter with headcount of 1,328 compared with 1,348 as of June 30th. Our expectations for the fourth quarter are for non-interest expense to be flat in the range of $101 to $102 million as we continue to tightly manage our expense base. Our provision for credit losses of $486,000 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 risk concentrations. Turning now to the balance sheet, we finished the quarter at $17.9 billion in total assets as the reduction in wholesale funding sources were effectively matched by lower loan balances during the quarter. Total loans held for investment declined $454.9 million, driven principally by early payoffs and lower loan production of $104 million. Our CNI line of credit balances at September 30th were $743.1 million, and the utilization rate was 40.2%. Compared with $896.4 million outstanding, and a 39.4% utilization rate at June 30th. The loan runoff experienced in the third quarter has continued early into the fourth quarter. Consistent with our proactive approach to credit risk management, we exited our single largest client relationship early in the fourth quarter. However, as Steve noted, we continue to build the loan pipeline and our optimistic loan balances will end the year between 11.75 and $12 billion. Total deposits at September 30th were $14.5 billion, a decrease of $146.7 million from the prior quarter, primarily as a result of maturity and payoff of higher-cost broker deposits. Non-maturity deposits remained relatively flat, as growth in noninterest-bearing deposits of $23 million offset some of the decrease in interest-bearing non-maturity deposits of $52 million. Of our remaining $300 million of broker deposits, $200 million matures in the second half of 2025 and the remaining $100 million in March of 2026. From a liquidity perspective, we saw our cash position increase to $983.5 million at September 30, reflecting the stability in non-maturity deposit balances compared to June 30th. We would anticipate our cash position coming down some as we begin to ramp up lending and reinvest excess cash into securities. Our cash position as well as strong cash flow from our securities portfolio and the almost $9 billion of unused borrowing capacity provides us a total of $10 billion of contingent liquidity. The securities portfolio remained flat at $3.1 billion, and the average yield on our investment portfolio was 3.67%. During the quarter, we reinvested $100 million of proceeds into three-month treasuries with a weighted average yield of 5.05%, and the duration on the AFS portfolio remained less than one year at September 30th. In the fourth quarter, We anticipate continued reinvestment of our cash flow from maturing securities and our overall position to increase slightly. We also anticipate some minor duration extension to take advantage of recent higher long-term rates while maintaining relatively overall a short position in our AFS portfolio in anticipation of loan growth. The combination of solid earnings and a smaller balance sheet further strengthen our capital ratios this quarter with all ratios increasing significantly from June 30th. The tangible common equity ratio increased 42 basis points to 11.83%, and our tangible book value increased 23 cents to $20.81. Lastly, from an asset quality standpoint, non-performing loans to total loans were 0.32%, a decrease of 10 basis points from the prior quarter. Total delinquency also decreased to 0.08% and our classified loan levels decreased $63.3 million or 47 basis points to 1.0% of total loans. Our allowance for credit loss balance of $181.2 million reflected the smaller loan portfolio and resulted in a four basis point increase in the allowance coverage to 1.51%. Our total loss absorption which includes a fair value discount on loans acquired through acquisition, finished the quarter at 1.80%. With that, I will turn the call back over to Steve. Great. Thanks, Ron.