Pacific Premier Bancorp, Inc. (NASDAQ:PPBI) Q3 2020 Earnings Conference Call October 27, 2020 12:00 PM ET Company Participants Steve Gardner - Chairman and Chief Executive Officer Ronald Nicolas - Chief Financial Officer Conference Call Participants David Feaster - Raymond James Matthew Clark - Piper Sandler Gary Tenner - D.A. Davidson Jackie Bohlen - KBW Tim Coffey - Janney Andrew Terrell - Stephens David Feaster - Raymond James Operator Good day and welcome to the Pacific Premier Bancorp Third Quarter 202 ...

Financial Performance - Pacific Premier Bancorp reported net income of $666 million, or $070 per diluted share for Q3 2020[7] - The company sold $12 billion of loans, including PPP loans, resulting in a pre-tax gain of $95 million[7] - Pre-provision net revenue (PPNR) reached $977 million, with a PPNR ROAA of 192%[7] - The efficiency ratio was 474%[7] Balance Sheet and Asset Quality - Deposits totaled $163 billion, a decrease of 38% from the prior quarter, with non-maturity deposits accounting for 89% and noninterest-bearing checking for 36% of total deposits[8] - The loan portfolio stood at $135 billion, a decrease of 36% from the prior quarter excluding PPP loans[8] - Nonperforming assets were 014% of total assets, a decrease from 017% in Q2 2020[8] - Allowance for credit losses was $2825 million, or 210% of loans[8] Capital and Dividends - Tangible common equity to tangible assets was 90%, and the total risk-based capital ratio was 160%[8] - A quarterly dividend of $028 per share was declared[8] Strategic Initiatives - Assets under custody within the company's leading custodian division reached over $15 billion, up approximately 58% year to date[23] - The custodian division contributes approximately $28 million of noninterest income annually[23]

Financial Performance - Pacific Premier Bancorp, Inc reported a net loss of $991 million, or $141 per share, primarily due to provision and merger-related expenses in Q2 2020[7] - Pre-provision net revenue increased by 31% to $606 million in Q2 2020, compared to $587 million in Q1 2020[7] - The company's efficiency ratio was 529% in Q2 2020[7] Balance Sheet and Capital - Deposits totaled $170 billion, with 89% in non-maturity deposits and 35% in noninterest-bearing checking accounts[8] - The average cost of deposits decreased to 032% from 048% in Q1 2020[8] - Loans outstanding were $151 billion, an increase of $63 billion, or 72%, from Q1 2020[8] - The allowance for credit losses was $2823 million, and the fair value net discount on acquired loans was $1445 million[8] - The total risk-based capital ratio was 1569%[6] Opus Bank Acquisition - The acquisition of Opus Bank was completed on June 1, 2020[7] - The acquisition added $66 billion in deposits and $59 billion in loans[8] - The company expects to exceed 25% cost savings from the Opus acquisition and plans to consolidate 20 branches[20] Loan Portfolio and Modifications - Total loan modifications closed amounted to $224 billion, representing 149% of total loans held for investment[43] - Of the closed modifications, 63% have been assessed, with 87% of borrowers indicating they intend to resume normal loan payments[50]

Financial Data and Key Metrics Changes - The company reported a net loss of $99 million, primarily due to a $160 million non-cash charge for loan losses and $39 million in merger-related costs [17] - Pre-provision net revenue increased to $60.6 million from $58.7 million in the previous quarter [11] - The net interest margin decreased by 45 basis points to 3.79%, with the core net interest margin at 3.59%, a decline of 49 basis points [35] Business Line Data and Key Metrics Changes - The loan portfolio reached $15 billion, with a loan-to-deposit ratio dropping to 89% [11] - The company granted accommodations on over $2.2 billion of loans, representing about 15% of the portfolio [45] - Noninterest income is projected to triple, now representing more than 10% of operating revenue due to contributions from Pacific Premier Trust and Commerce Escrow [30] Market Data and Key Metrics Changes - The company has seen strong deposit growth, improving on-balance sheet liquidity and reducing the cost of funds [11] - 89% of total deposits are non-maturity, with 35% being noninterest-bearing deposits [29] - The average cost of deposits dropped by 32 basis points in the second quarter [29] Company Strategy and Development Direction - The company aims to manage through the economic downturn caused by the COVID-19 pandemic while focusing on integration and synergies from the Opus acquisition [56] - A proactive approach to credit risk management and loss mitigation is emphasized, with significant reserves built up to handle potential economic scenarios [15][38] - The company plans to consolidate 20 branches in early October as part of the Opus integration [28] Management's Comments on Operating Environment and Future Outlook - Management expressed caution regarding the ongoing pandemic and its economic impact, noting the uncertainty as government support winds down [13] - The company believes it is well-positioned to capitalize on opportunities that may arise from the current economic challenges [57] - Future loan growth is expected to be flat, excluding the impact of PPP loans, with a focus on expanding existing client relationships [54] Other Important Information - The company issued $150 million in subordinated debt to bolster liquidity and Tier 2 capital [16] - The allowance for credit losses increased to 2.02% of total loans, excluding PPP loans, reflecting a proactive stance on credit quality [39] Q&A Session Summary Question: Concerns about the escrow business balances - Management acknowledged a decline in escrow balances due to slowed commercial transactions but remains optimistic about future growth opportunities [60] Question: Average PPP loans outstanding for the second quarter - The average for the quarter was reported at $830 million, with total origination at $1.2 billion [64][66] Question: Branch consolidation details - The number of branches consolidated was not previously announced, but management indicated it was based on a thorough assessment of each branch's market and performance [68] Question: Loan growth expectations - Management noted that there was no deliberate runoff of portfolios, attributing lower originations to the pandemic's impact on visibility into cash flows [74] Question: Efficiency ratio expectations post-Opus integration - Management expects to have a clearer view of the efficiency ratio by the end of the year, with significant cost savings anticipated post-conversion [90]