Classified in: Business
Subjects: EARNINGS, Dividend, Conference Call, Webcast

Pacific Premier Bancorp, Inc. Announces Third Quarter 2019 Results (Unaudited) and a Quarterly Cash Dividend of $0.22 Per Share

Pacific Premier Bancorp, Inc. (NASDAQ: PPBI) (the "Company"), the holding company of Pacific Premier Bank (the "Bank"), reported net income of $41.4 million, or $0.69 per diluted share for the third quarter of 2019, compared with net income of $38.5 million, or $0.62 per diluted share, for the second quarter of 2019 and net income of $28.4 million, or $0.46 per diluted share, for the third quarter of 2018.

For the three months ended September 30, 2019, the Company's return on average assets ("ROAA") was 1.44%, return on average equity ("ROAE") was 8.32% and return on average tangible common equity ("ROATCE") was 16.27%, compared to 1.33%, 7.71% and 15.16%, respectively, for the second quarter of 2019 and 1.00%, 5.95% and 12.89%, respectively, for the third quarter of 2018. Total assets were $11.8 billion at September 30, 2019 compared with $11.8 billion at June 30, 2019 and $11.5 billion at September 30, 2018. A reconciliation of the non?U.S. GAAP measure of ROATCE to the U.S. GAAP measure of common stockholders' equity is set forth at the end of this press release.

Steven R. Gardner, Chairman, President and Chief Executive Officer of the Company, commented, "Our third quarter results reflect successful execution on the strategies we are employing to manage risk and enhance franchise value in the current environment of economic uncertainty and slowing growth. During the third quarter, we were able to effectively manage our cost of funds, protect our net interest margin, and realize a high level of efficiencies.

"Our performance continues to produce a superior level of risk-adjusted profitability, as we generated an ROAA of 1.44% and an ROATCE of 16.27% in the third quarter of 2019. Our strong profitability enabled us to return approximately $140 million of capital to our shareholders during the first nine months of the year through our quarterly dividend and stock repurchase program.

"Our focus on core deposit gathering continues to produce positive results. During the third quarter, our noninterest-bearing and money market deposits increased by $233.2 million, which enabled us to reduce higher cost funding, improved our overall deposit mix and helped drive a six basis point reduction in our cost of funds.

"While the markets in our geographic footprint remain healthy, we continue to be disciplined in our approach to loan production given the length of the economic expansion and our commitment to maintaining our conservative underwriting and pricing criteria. In the current environment, our focus will be on enhancing our franchise value through further improving our deposit mix, maintaining disciplined expense control and efficiently managing our capital," said Mr. Gardner.

INCOME STATEMENT HIGHLIGHTS

Net Interest Income and Net Interest Margin

Net interest income totaled $112.3 million in the third quarter of 2019, an increase of $1.7 million, or 1.5%, from the second quarter of 2019. The increase in net interest income reflected one more day of interest, higher accretion and loan-related fees as well as lower cost of funds driven primarily by lower average balances of Federal Home Loan Bank of San Francisco ("FHLB") advances and rates, partially offset by lower interest-earning asset yields and average balances.

The net interest margin for the third quarter of 2019 was 4.36%, compared with 4.28% in the prior quarter. The increase was primarily driven by higher accretion income of $6.0 million compared to $5.0 million in the prior quarter. Our core net interest margin, which excludes the impact of accretion, increased four basis points to 4.12%, compared to 4.08% in the prior quarter. The increase in our core net interest margin was primarily attributable to higher loan-related fees and lower cost of funds.

We anticipate our core net interest margin will be in the range of 4.00% to 4.10% in the fourth quarter of 2019.

Net interest income for the third quarter of 2019 decreased $378,000, or 0.3%, compared to the third quarter of 2018. The decrease was primarily related to an increase in our cost of funds since the end of the third quarter of 2018, partially offset by an increase in average interest-earning asset balances, which resulted primarily from investment securities purchases and organic loan growth since the end of the third quarter of 2018.

Provision for Credit Losses

Provision for credit losses for the third quarter of 2019 was $1.6 million, an increase of $1.2 million from the second quarter of 2019. The increase was primarily due to the replenishment of $1.4 million of net charge-offs in the third quarter, compared to $360,000 replenishment in the second quarter. Additionally, the provision for unfunded commitments was $197,000 compared with a reduction of $408,000 in the prior quarter. Provision for credit losses for the third quarter of 2019 decreased $419,000 compared to the third quarter of 2018 primarily driven by lower loan balances and commitments, and continued strength in asset quality.

Noninterest Income

Noninterest income for the third quarter of 2019 was $11.4 million, an increase of $5.1 million, or 80.7%, from the second quarter of 2019. The increase was primarily due to a $4.0 million increase in net gain from sales of investment securities and a $1.4 million increase in net gain from the sales of loans, partially offset by a $724,000 decrease in debit card interchange fee income. The decrease in debit card interchange fee income was the result of the Bank becoming a non-exempt institution, effective July 1, 2019, under the Durbin Amendment that regulates debit card interchange fee income.

During the third quarter of 2019, the Bank sold $26.3 million of Small Business Administration ("SBA") loans for a net gain of $2.3 million, compared with the sale of $24.4 million of SBA loans for a net gain of $2.2 million during the prior quarter. The current quarter also included the sale of $684,000 of non-SBA loans for a net gain of $8,000 compared with sales of $82.5 million of non-SBA loans for a net loss of $1.3 million during the prior quarter.

We anticipate our noninterest income will range from $6.5 million to $7.0 million for the fourth quarter of 2019 based upon current SBA loan sale gain rates and normal, recurring business activities.

Noninterest income for the third quarter of 2019 increased $3.2 million, or 38.7%, compared to the third quarter of 2018. The increase was primarily related to a $3.2 million increase in net gain from sales of investment securities as well as a $698,000 increase in other income, partially offset by a $640,000 decrease in debit card interchange fee income and a $409,000 decrease in earnings on bank-owned life insurance ("BOLI"), primarily the result of a death benefit received in the third quarter of 2018.

The increase in net gain from sales of loans for the third quarter of 2019 compared to the same period last year was primarily due to a higher premium on SBA loans sales of 109%, compared with 107% in the third quarter of 2018. The Bank sold $29.9 million of SBA loans for a net gain of $2.0 million during the third quarter of 2018.

Noninterest Expense

Noninterest expense totaled $65.3 million for the third quarter of 2019, an increase of $1.4 million, or 2.2%, compared to the second quarter of 2019. The increase was driven by a $1.7 million increase in compensation primarily as a result of higher incentive and benefits expense and, to a lesser extent, a $641,000 increase in other expense. These increases were partially offset by a $750,000 decline in FDIC insurance premiums due to small institution assessment credits and a $487,000 decline in legal, audit and professional expense.

The Company anticipates that total operating expense will range from $65.0 million to $66.0 million for the fourth quarter of 2019.

Noninterest expense decreased by $17.4 million, or 21.1%, compared to the third quarter of 2018. The decrease was primarily related to a reduction in merger-related expense and additional cost savings from personnel and operations from the acquisition of Grandpoint Capital, Inc. ("Grandpoint"), partially offset by our continued investment to support our organic growth.

Income Tax

For the third quarter of 2019, our effective tax rate was 27.2%, compared with 26.9% for the second quarter of 2019 and 21.5% for the third quarter of 2018. The increase in the effective tax rate from the third quarter of 2018 was the result of a $2.3 million one-time benefit associated with the filing of the 2017 federal and state tax returns, and the remeasurement of deferred tax items realized in the third quarter of 2018.

The Company expects our 2019 annual effective tax rate to be in the range of 27% to 28%.

BALANCE SHEET HIGHLIGHTS

Loans

Loans held for investment totaled $8.76 billion at September 30, 2019, a decrease of $14.5 million, or 0.2%, from June 30, 2019, and a decrease of $1.7 million, or 0.02%, from September 30, 2018. The decreases were primarily driven by higher loan prepayments and payoffs, as well as lower line utilization and fundings when compared to the prior quarter, partially offset by lower loan sales and higher loan purchases. Loan sales during the third quarter of 2019 included $26.3 million of SBA loans and $684,000 of non-SBA loans, compared with $24.4 million of SBA loans and $82.5 million of non-SBA loans sold in the second quarter of 2019.

During the third quarter of 2019, the Bank generated $536.9 million of new loan commitments and $356.6 million of new loan fundings, compared with $568.2 million in new loan commitments and $394.8 million in new loan fundings for the second quarter of 2019, and $604.8 million in new loan commitments and $439.8 million in new loan fundings for the third quarter of 2018.

At September 30, 2019, the ratio of loans held for investment to total deposits was 98.9%, compared with 99.0% and 103.0% at June 30, 2019 and September 30, 2018, respectively.

The following table presents the composition of the loan portfolio for the period indicated:

The total end-of-period weighted average interest rate on loans, excluding fees and discounts, at September 30, 2019 was 5.00%, compared to 5.11% at June 30, 2019 and 5.08% at September 30, 2018.

The following table presents the composition of the organic loan commitments originated during the period indicated:

The weighted average interest rate on new loan production was 5.28% in the third quarter of 2019 compared with 5.42% in the second quarter of 2019 and 5.21% in the third quarter of 2018. During the third quarter of 2019, the Bank also purchased $94.9 million of multi-family loans at a weighted average interest rate of 4.27% and $35.5 million of commercial non-owner occupied loans at a weighted average interest rate of 4.52%.

Asset Quality and Allowance for Loan Losses

At September 30, 2019, our allowance for loan losses was $35.0 million, a decrease of $26,000, or 0.1%, from June 30, 2019 and an increase of $1.7 million, or 5.1%, from September 30, 2018. The provision for loan losses for the third quarter of 2019 was $1.4 million, compared to $742,000 and $1.6 million, for the second quarter of 2019 and the third quarter of 2018, respectively. During the third quarter of 2019, the Company incurred $1.4 million of net charge-offs, compared to $3.6 million and $87,000, at June 30, 2019 and September 30, 2018, respectively.

The ratio of allowance for loan losses to loans held for investment at September 30, 2019 amounted to 0.40%, compared to 0.40% and 0.38%, at June 30, 2019 and September 30, 2018, respectively. Under the guidance of ASC 820: Fair Value Measurements and Disclosures, the fair value net discount on loans acquired through total bank acquisitions was $46.8 million, or 0.53% of total loans held for investment as of September 30, 2019, compared to $52.0 million, or 0.59% of total loans held for investment as of June 30, 2019, and $71.7 million, or 0.82% of total loans held for investment as of September 30, 2018.

Nonperforming assets totaled $8.2 million, or 0.07% of total assets, at September 30, 2019, an increase of $559,000 from June 30, 2019 and an increase of $478,000 from September 30, 2018. During the third quarter of 2019, nonperforming loans increased $468,000 to $8.1 million and other real estate owned increased $91,000 to $126,000. Total loan delinquencies were $11.2 million, or 0.13% of loans held for investment, at September 30, 2019, compared to $13.5 million, or 0.15% of loans held for investment, at June 30, 2019, and $7.7 million, or 0.09% of loans held for investment, at September 30, 2018.

Investment Securities

Investments securities totaled $1.30 billion at September 30, 2019, a decrease of $4.3 million, or 0.3%, from June 30, 2019, and an increase of $195.8 million, or 17.8%, from September 30, 2018. The small decrease in the third quarter of 2019 compared to the prior quarter was primarily the result of $187.1 million in sales and $33.3 million in principal payments, amortization and redemptions, offset by $205.1 million in purchases and an $11.0 million increase in mark-to-market fair value adjustment. The increase compared to the same period last year was primarily the result of $667.3 million in purchases and a $66.1 million increase in mark-to-market fair value adjustment, partially offset by $413.6 million in sales and $124.0 million in principal payments, amortization and redemptions.

Deposits

At September 30, 2019, deposits totaled $8.86 billion, a decrease of $2.6 million, or 0.03%, from June 30, 2019 and an increase of $357.1 million, or 4.2%, from September 30, 2018. At September 30, 2019, non-maturity deposits totaled $7.52 billion, or 85% of total deposits, an increase of $214.3 million, or 2.9%, from June 30, 2019 and an increase of $323.7 million, or 4.5%, from September 30, 2018. During the third quarter of 2019, deposit decreases included $171.1 million in brokered certificates of deposit, $45.8 million in retail certificates of deposits and $18.9 million in interest checking, offset by increases of $143.2 million in noninterest-bearing deposits and $89.9 million in money market/savings deposits, as compared to the second quarter of 2019.

The weighted average cost of deposits for the three-month period ending September 30, 2019 was 0.71%, compared to 0.73% for the three-month period ending June 30, 2019, and 0.54% for the three-month period ending September 30, 2018. The decrease in the weighted average cost of deposits in the third quarter of 2019 compared to the prior quarter was primarily driven by lower volume in brokered certificates of deposits as well as higher average noninterest-bearing and money market deposit balances.

Borrowings

At September 30, 2019, total borrowings amounted to $822.4 million, an increase of $17.9 million, or 2.2%, from June 30, 2019 and a decrease of $149.8 million, or 15.4%, from September 30, 2018. Total borrowings at September 30, 2019 included $604.6 million of FHLB advances and $217.8 million of subordinated debt. In May 2019, the Company issued $125.0 million aggregate principal amount of its 4.875% Fixed-to-Floating Rate Subordinated Notes (the "Notes") due May 15, 2029. At September 30, 2019, total borrowings represented 7.0% of total assets, compared to 6.8% and 8.5%, as of June 30, 2019 and September 30, 2018, respectively.

On July 8, 2019, the Company used partial proceeds from the issuance of the Notes in May 2019 to redeem all $10.3 million principal amount of Junior Subordinated Deferrable Interest Debentures (the "Subordinated Debentures") due 2034 issued by PPBI Trust I, a statutory business trust created under the laws of the State of Delaware. Prior to redemption, the Subordinated Debentures carried an interest rate of three-month LIBOR plus 2.75% per annum, for an effective rate of 5.35% per annum, and were scheduled to mature on April 6, 2034. The Subordinated Debentures were called at par, plus accrued and unpaid interest, for an aggregate amount of $10.4 million.

On September 17, 2019, the Company used partial proceeds from the issuance of the Notes in May 2019 to redeem all $5.2 million outstanding principal amount of floating rate junior subordinated debt securities associated with First Commerce Bancorp Statutory Trust I, a statutory business trust created under the laws of the State of Connecticut, acquired as part of the Grandpoint acquisition. Prior to redemption, the junior subordinated debt securities carried an interest rate of three-month LIBOR plus 2.95% per annum, for an effective rate of 5.36% per annum, and were scheduled to mature on September 17, 2033. The junior subordinated debt securities were called at par, plus accrued and unpaid interest, for an aggregate amount of $5.2 million.

On October 7, 2019, the Company used partial proceeds from the issuance of the Notes in May 2019 to redeem all $3.1 million outstanding principal amount of floating rate junior subordinated debt securities associated with Mission Community Capital Trust I, a statutory business trust created under the laws of the State of Delaware, acquired as part of the Heritage Oaks Bancorp acquisition. The junior subordinated debt securities carried an interest rate of three-month LIBOR plus 2.95% per annum, for an effective rate of 5.25% per annum, as of September 30, 2019 and were scheduled to mature on October 7, 2033. The junior subordinated debt securities were called at par, plus accrued and unpaid interest, for an aggregate amount of $3.1 million.

Capital Ratios

At September 30, 2019, our ratio of tangible common equity to total assets was 10.01%, compared with 9.96% at June 30, 2019 and 9.47% at September 30, 2018, with a tangible book value per share of $18.41, compared with $17.92 at June 30, 2019 and $16.06 at September 30, 2018.

At September 30, 2019, the Company had a tier 1 leverage ratio of 10.34%, common equity tier 1 capital ratio of 10.93%, tier 1 capital ratio of 11.04% and total capital ratio of 13.40%.

At September 30, 2019, the Bank exceeded all regulatory capital requirements with a tier 1 leverage ratio of 12.20%, common equity tier 1 capital ratio of 13.01%, tier 1 capital ratio of 13.01% and total capital ratio of 13.41%. These capital ratios each exceeded the "well capitalized" standards defined by the federal banking regulators of 5.00% for tier 1 leverage ratio, 6.5% for common equity tier 1 capital ratio, 8.00% for tier 1 capital ratio and 10.00% for total capital ratio and exceeded the minimum common equity Tier 1, Tier 1 and total capital ratio inclusive of the fully phased-in capital conservation buffer for 7.0%, 8.5% and 10.5%, respectively.

Dividend and Stock Repurchase Program

On October 18, 2019, the Company's Board of Directors declared a $0.22 per share dividend, payable on November 15, 2019 to stockholders of record as of November 1, 2019. During the third quarter of 2019, the Company repurchased 1,145,515 shares of common stock at an average price of $29.68 per share with a total market value of $34.0 million under its stock repurchase program. The total number of common stock shares repurchased during the second and third quarter of 2019 under the program was 3,364,761 shares for a total of $100 million, or $29.69 per share, the maximum dollar value of shares approved by the Board of Directors. The Company's third stock repurchase program has been completed.

Conference Call and Webcast

The Company will host a conference call at 9:00 a.m. PT / 12:00 p.m. ET on October 22, 2019 to discuss its financial results. Analysts and investors may participate in the question-and-answer session. A live webcast will be available on the Webcasts page of the Company's investor relations website. An archived version of the webcast will be available in the same location shortly after the live call has ended. The conference call can be accessed by telephone at (866) 290-5977 and asking to be joined to the Pacific Premier Bancorp conference call. Additionally, a telephone replay will be made available through October 29, 2019 at (877) 344-7529, conference ID 10135275.

About Pacific Premier Bancorp, Inc.

Pacific Premier Bancorp, Inc. is the holding company for Pacific Premier Bank, one of the largest banks headquartered in Southern California with approximately $11.8 billion in assets. Pacific Premier Bank is a business bank primarily focused on serving small and middle market businesses in the counties of Orange, Los Angeles, Riverside, San Bernardino, San Diego, San Luis Obispo and Santa Barbara, California, as well as markets in the states of Arizona, Nevada and Washington. Through its more than 40 depository branches, Pacific Premier Bank offers a diverse range of lending products including commercial, commercial real estate, construction, and SBA loans, as well as specialty banking products for homeowners' associations and franchise lending nationwide.

FORWARD-LOOKING COMMENTS

The statements contained herein that are not historical facts are forward-looking statements based on management's current expectations and beliefs concerning future developments and their potential effects on the Company including, without limitation, plans, strategies and goals, and statements about the Company's expectations regarding revenue and asset growth, financial performance and profitability, loan and deposit growth, yields and returns, loan diversification and credit management, stockholder value creation, tax rates and the impact of the acquisition of Grandpoint and other acquisitions.

Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company. There can be no assurance that future developments affecting the Company will be the same as those anticipated by management. The Company cautions readers that a number of important factors could cause actual results to differ materially from those expressed in, or implied or projected by, such forward-looking statements. These risks and uncertainties include, but are not limited to, the following: the strength of the United States economy in general and the strength of the local economies in which we conduct operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; inflation/deflation, interest rate, market and monetary fluctuations; the effect of acquisitions we may make, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions, and/or the failure to effectively integrate an acquisition target into our operations; the timely development of competitive new products and services and the acceptance of these products and services by new and existing customers; the impact of changes in financial services policies, laws and regulations, including those concerning taxes, banking, securities and insurance, and the application thereof by regulatory bodies; the effectiveness of our risk management framework and quantitative models; changes in the level of our nonperforming assets and charge-offs; uncertainty regarding the future of LIBOR; the effect of changes in accounting policies and practices or accounting standards, as may be adopted from time-to-time by bank regulatory agencies, the U.S. Securities and Exchange Commission ("SEC"), the Public Company Accounting Oversight Board, the Financial Accounting Standards Board or other accounting standards setters, including ASU 2016-13 (Topic 326), "Measurement of Credit Losses on Financial Instruments," commonly referenced as the Current Expected Credit Loss ("CECL") model, which will change how we estimate credit losses and may increase the required level of our allowance for credit losses after adoption on January 1, 2020; possible other-than-temporary impairments of securities held by us; the impact of current governmental efforts to restructure the U.S. financial regulatory system, including any amendments to the Dodd-Frank Wall Street Reform and Consumer Protection Act; changes in consumer spending, borrowing and savings habits; the effects of our lack of a diversified loan portfolio, including the risks of geographic and industry concentrations; our ability to attract deposits and other sources of liquidity; the possibility that we may reduce or discontinue the payments of dividends on common stock; changes in the financial performance and/or condition of our borrowers; changes in the competitive environment among financial and bank holding companies and other financial service providers; geopolitical conditions, including acts or threats of terrorism, actions taken by the United States or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the United States and abroad; cybersecurity threats and the cost of defending against them, including the costs of compliance with potential legislation to combat cybersecurity at a state, national or global level; unanticipated regulatory or legal proceedings; and our ability to manage the risks involved in the foregoing. Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in the 2018 Annual Report on Form 10-K of Pacific Premier Bancorp, Inc. filed with the SEC and available at the SEC's Internet site (http://www.sec.gov).

The Company undertakes no obligation to revise or publicly release any revision or update to these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made.

 

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