Pacific Premier Bancorp, Inc. Announces Third Quarter 2022 Financial Results and a Quarterly Cash Dividend of $0.33 Per Share

Third Quarter 2022 Summary

• Net income of $73.4 million, or $0.77 per diluted share
• Return on average assets of 1.35%, return on average equity of 10.57%, and return on average tangible common equity of 16.74%(1)
• Pre-provision net revenue (“PPNR”) to average assets of 1.85%, annualized, and efficiency ratio of 48.3%(1)
• Net interest margin of 3.61%, and core net interest margin of 3.44%(1)
• Cost of deposits of 0.22%, and cost of core deposits of 0.11%(1)
• Loan-to-deposit ratio of 84.0%, compared with 83.2% in the prior quarter
• Noninterest-bearing deposits represent 38.2% of total deposits
• Nonperforming assets to total assets of 0.28%, and net charge-offs to average loans of 0.01%

Pacific Premier Bancorp, Inc. (NASDAQ: PPBI) (the “Company” or “Pacific Premier”), the holding company of Pacific Premier Bank (the “Bank”), reported net income of $73.4 million, or $0.77 per diluted share, for the third quarter of 2022, compared with net income of $69.8 million, or $0.73 per diluted share, for the second quarter of 2022, and net income of $90.1 million, or $0.95 per diluted share, for the third quarter of 2021.

For the quarter ended September 30, 2022, the Company’s return on average assets (“ROAA”) was 1.35%, return on average equity (“ROAE”) was 10.57%, and return on average tangible common equity (“ROATCE”)(1) was 16.74%, compared to 1.29%, 10.10%, and 16.07%, respectively, for the second quarter of 2022, and 1.73%, 12.67%, and 19.89%, respectively, for the third quarter of 2021. Total assets were $21.62 billion at September 30, 2022, compared to $21.99 billion at June 30, 2022, and $21.01 billion at September 30, 2021.

Steven R. Gardner, Chairman, Chief Executive Officer, and President of the Company, commented, “We produced solid results in the third quarter, increasing earnings per share and pre-provision net revenue(1), while producing higher returns and further enhancing our already strong capital position. These results reflect the Pacific Premier team's commitment to creating and maintaining long-term shareholder value, while proactively managing risk.

“During the quarter, we continued to benefit from the actions we took earlier this year to position our balance sheet for a higher interest rate environment, and when combined with our strategic actions throughout the year, contributed to a 12 basis point increase in our net interest margin and an $8.3 million increase in net interest income as compared to the prior quarter. Our disciplined approach to expense management further enhanced our efficiency ratio, which decreased to 48.3% for the quarter.

“Notwithstanding these positive results, the rising interest rate environment negatively impacted commercial real estate acquisition and refinancing activity, which resulted in overall lower loan production. In addition, the higher interest rate environment has led to deposit outflows in our commercial escrow and exchange business due to a decline in commercial real estate refinance and sales activity. We replaced these deposits with brokered time deposits of varying maturities and held our loan to deposit ratio at 84.0%. While incorporating brokered time deposits into our funding mix will increase our deposit costs in the near term, we believe that locking in this longer-term funding ahead of additional rate increases will reinforce our liquidity and help us control our overall funding costs going forward.

“We believe we are entering this current period of economic uncertainty from a position of strength. We will continue to focus on proactively managing risk across the enterprise, while at the same time growing existing and new client banking relationships.”

FINANCIAL HIGHLIGHTS

INCOME STATEMENT HIGHLIGHTS

Net Interest Income and Net Interest Margin

Net interest income totaled $181.1 million in the third quarter of 2022, an increase of $8.3 million, or 4.8%, from the second quarter of 2022. The increase in net interest income was primarily attributable to higher yields on average interest-earning assets, as well as a favorable interest impact from fair value hedges on fixed-rate loans of $4.2 million, partially offset by higher cost of funds and lower loan-related fees and accretion income as a result of decreased prepayment activity.

The net interest margin for the third quarter of 2022 increased 12 basis points to 3.61%, from 3.49% in the prior quarter. The core net interest margin(6) increased 11 basis points to 3.44%, compared to 3.33% in the prior quarter, reflecting higher yields on interest-earning assets and a favorable remix of earning-assets towards higher yielding loans, partially offset by higher cost of funds and lower loan prepayment fees.

Net interest income for the third quarter of 2022 increased $12.0 million, or 7.1%, compared to the third quarter of 2021. The increase was attributable to higher yields on average interest-earning assets and higher average loan balances, as well as a favorable impact from fair value hedges on fixed-rate loans, partially offset by higher cost of funds and lower loan-related fees and accretion income as a result of decreased prepayment activity.

Provision for Credit Losses

For the third quarter of 2022, the Company recorded $1.1 million of provision expense, compared to $469,000 of provision expense for the second quarter of 2022, and $19.7 million of provision recapture for the third quarter of 2021. The higher provision for credit losses for the third quarter of 2022 was driven principally by specific reserves on two individually evaluated loans and higher unfunded commitments in the commercial and industrial loan segment.

The provision recaptures for loans and unfunded commitments during the third quarter of 2021 were reflective of favorable changes in the macroeconomic forecasts related to the COVID-19 pandemic relative to prior periods.

Noninterest Income

Noninterest income for the third quarter of 2022 was $20.2 million, a decrease of $2.0 million from the second quarter of 2022. The decrease was primarily due to a $679,000 decrease in net gain from sales of loans, a $403,000 decrease in trust custodial account fees resulting primarily from a decrease in the market value of custodial assets, and a $362,000 greater net loss from sales of investment securities.

During the third quarter of 2022, the Bank sold $9.6 million of Small Business Administration (“SBA”) loans for a net gain of $434,000 and $15.0 million of other loans for a net gain of $23,000, compared to the sales of $23.4 million of SBA loans and U.S. Department of Agriculture (“USDA”) loans for a net gain of $1.1 million in the second quarter of 2022.

Additionally, during the third quarter of 2022, the Bank sold $231.1 million of investment securities for a net loss of $393,000, compared to the sales of $45.1 million of investment securities for a net loss of $31,000 in the second quarter of 2022.

Noninterest income for the third quarter of 2022 decreased $9.9 million, or 33.0%, compared to the third quarter of 2021. The decrease was primarily due to a $4.6 million decrease in net gain from sales of investment securities and a $3.0 million decrease in other income.

Noninterest Expense

Noninterest expense totaled $100.9 million for the third quarter of 2022, an increase of $1.9 million compared to the second quarter of 2022, primarily due to a $2.5 million increase in other expense, largely attributable to a client's unauthorized transaction incident for which the Bank provided a $1.9 million provisional credit pending its pursuit of insurance coverage, and a $765,000 increase in deposit expense, partially offset by a $1.2 million decrease in compensation and benefits.

Noninterest expense increased by $4.8 million compared to the third quarter of 2021. The increase was primarily due to a $2.8 million increase in compensation and benefits as well as a $2.3 million increase in other expense.

Income Tax

For the third quarter of 2022, income tax expense totaled $26.0 million, resulting in an effective tax rate of 26.1%, compared with income tax expense of $25.7 million and an effective tax rate of 26.9% for the second quarter of 2022, and income tax expense of $32.8 million and an effective tax rate of 26.7% for the third quarter of 2021. Our estimated effective tax rate for the full year is expected to be in the range of 26% to 27%.

BALANCE SHEET HIGHLIGHTS

Loans

Loans held for investment totaled $14.91 billion at September 30, 2022, a decrease of $138.8 million, or 0.9%, from June 30, 2022, and an increase of $926.0 million, or 6.6%, from September 30, 2021. The decrease from June 30, 2022 was primarily driven by lower loan fundings and lower commercial line utilization rates. The commercial line average utilization rate was 40.4% for the third quarter of 2022, a decrease from an average of 41.6% for the second quarter of 2022 and an increase from 33.1% for the third quarter of 2021.

During the third quarter of 2022, loan commitments totaled $789.2 million, and new loan fundings totaled $450.7 million, compared with $1.50 billion in loan commitments and $1.12 billion in new loan fundings for the second quarter of 2022, and $1.46 billion in loan commitments and $1.10 billion in new loan fundings for the third quarter of 2021.

At September 30, 2022, the total loan-to-deposit ratio was 84.0%, compared with 83.2% and 80.1% at June 30, 2022 and September 30, 2021, respectively.

The following table presents the primary loan roll-forward activities for total gross loans, including both loans held for investment and loans held for sale, during the quarters indicated:

The following table presents the composition of the loans held for investment as of the dates indicated:

The total end-of-period weighted average interest rate on loans, excluding fees and discounts, at September 30, 2022 was 4.34%, compared to 4.06% at June 30, 2022, and 4.03% at September 30, 2021. The quarter-over-quarter and year-over-year increases reflect higher rates on new originations and the repricing of loans as a result of the Federal Reserve Bank's interest rate increases since March 2022.

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

The weighted average interest rate on new loan commitments increased to 5.55% in the third quarter of 2022, compared to 4.11% in the second quarter of 2022, and 3.66% in the third quarter of 2021.

Asset Quality and Allowance for Credit Losses

At September 30, 2022, our allowance for credit losses (“ACL”) on loans held for investment was $195.5 million, a decrease of $526,000 from June 30, 2022, and a decrease of $15.9 million from September 30, 2021. The slight decline in ACL from June 30, 2022 was reflective primarily of lower loans held for investment. The decrease in ACL from September 30, 2021 was primarily due to favorable changes in the macroeconomic forecasts related to the COVID-19 pandemic.

During the third quarter of 2022, the Company incurred $1.1 million of net charge-offs, compared to $5.2 million and $1.8 million of net charge-offs during the second quarter of 2022 and the third quarter of 2021, respectively.

The following table provides the allocation of the ACL for loans held for investment as well as the activity in the ACL attributed to various segments in the loan portfolio as of and for the period indicated:

The ratio of allowance for credit losses to loans held for investment at September 30, 2022 was 1.31%, compared to 1.30% at June 30, 2022 and 1.51% at September 30, 2021. The fair value net discount on loans acquired through total bank acquisitions was $59.0 million, or 0.39% of total loans held for investment, as of September 30, 2022, compared to $63.6 million, or 0.42% of total loans held for investment, as of June 30, 2022, and $85.0 million, or 0.60% of total loans held for investment, as of September 30, 2021.

Nonperforming assets totaled $60.5 million, or 0.28% of total assets, at September 30, 2022, compared with $44.4 million, or 0.20% of total assets, at June 30, 2022, and $35.1 million, or 0.17% of total assets, at September 30, 2021. Loan delinquencies were $41.3 million, or 0.28% of loans held for investment, at September 30, 2022, compared to $36.3 million, or 0.24% of loans held for investment, at June 30, 2022, and $20.2 million, or 0.14% of loans held for investment, at September 30, 2021. All nonaccrual loans were individually evaluated with a total of $4.4 million ACL attributed to such loans as of September 30, 2022, compared with $1.8 million as of June 30, 2022.

Classified loans totaled $110.1 million, or 0.74% of loans held for investment, at September 30, 2022, compared with $106.2 million, or 0.71% of loans held for investment, at June 30, 2022, and $124.5 million, or 0.89% of loans held for investment, at September 30, 2021.

Investment Securities

At September 30, 2022, available-for-sale (“AFS”) and held-to-maturity (“HTM”) investment securities were $2.66 billion and $1.39 billion, respectively, compared to $2.68 billion and $1.39 billion, respectively, at June 30, 2022, and $4.71 billion and $170.6 million, respectively, at September 30, 2021. In total, investment securities were $4.05 billion at September 30, 2022, a decrease of $23.2 million from June 30, 2022, and a decrease of $833.8 million from September 30, 2021. The decrease in the third quarter of 2022 compared to the prior quarter was primarily the result of $231.1 million in investment securities sales, a $94.9 million decrease resulting from mark-to-market fair value adjustments, and $70.9 million in principal payments, amortization, and redemptions, partially offset by $373.6 million in purchases.

The decrease in investment securities from September 30, 2021 was primarily the result of $1.20 billion in sales, $488.3 million in principal payments, discounts from the AFS securities transferred from HTM, amortization, and redemptions, and a $329.0 million decrease resulting from mark-to-market fair value adjustments, partially offset by $1.19 billion in purchases.

Deposits

At September 30, 2022, total deposits were $17.75 billion, a decrease of $338.2 million, or 1.9%, from June 30, 2022, and an increase of $276.4 million, or 1.6%, from September 30, 2021.

At September 30, 2022, core deposits(1) totaled $15.87 billion, or 89.5% of total deposits, a decrease of $751.1 million, or 4.5%, from June 30, 2022, and a decrease of $476.5 million, or 2.9%, from September 30, 2021. The decrease was primarily driven by a $531.8 million decrease in deposits from the Bank's escrow and exchange business and a $127.4 million decrease in municipal deposits. The decrease from September 30, 2021 was primarily driven by decreases in money market/savings deposits and noninterest-bearing checking deposits, partially offset by an increase in business interest-bearing checking deposits.

At September 30, 2022, non-core deposits totaled $1.87 billion, an increase of $412.8 million, or 28.3%, from June 30, 2022, and an increase of $752.8 million, or 67.3%, from September 30, 2021. The increase in the third quarter of 2022 compared to the prior quarter was primarily due to the addition of $400.0 million in brokered certificates of deposit and an increase of $16.5 million in retail certificates of deposit. The increase from September 30, 2021 was primarily driven by an increase in brokered certificates of deposit, partially offset by decreases in retail certificates of deposit and brokered money market deposits.

The weighted average cost of total deposits for the third quarter of 2022 was 0.22%, compared to 0.06% for the second quarter of 2022, and 0.06% for the third quarter of 2021. The weighted average cost of core deposits(2) for the third quarter was 0.11%, compared to 0.04% for the second quarter of 2022, and 0.04% for the third quarter of 2021.

At September 30, 2022, the end-of-period weighted average rate of total deposits was 0.37%, compared to 0.13% at June 30, 2022 and 0.04% at September 30, 2021. At September 30, 2022, the end-of-period weighted average rate of core deposits was 0.20%, compared to 0.06% at June 30, 2022 and 0.04% at September 30, 2021, respectively.

Borrowings

At September 30, 2022, total borrowings amounted to $931.0 million, an increase of $159,000 from June 30, 2022, and an increase of $450.6 million from September 30, 2021. Total borrowings at September 30, 2022 were comprised of $600.0 million of Federal Home Loan Bank of San Francisco (“FHLB”) term advances and $331.0 million of subordinated debt. The increase in borrowings at September 30, 2022 as compared to June 30, 2022 was primarily due to the amortization of the subordinated debt issuance costs. The increase in borrowings at September 30, 2022 as compared to September 30, 2021 was primarily due to an increase of $450.0 million in FHLB term advances to bolster liquidity and reduce our interest rate risk.

Capital Ratios

At September 30, 2022, our common stockholder's equity was $2.74 billion, or 12.65% of total assets, compared with $2.76 billion, or 12.53%, at June 30, 2022, and $2.84 billion, or 13.51%, at September 30, 2021, with a book value per share of $28.79, compared with $29.01 at June 30, 2022, and $30.08 at September 30, 2021. At September 30, 2022, the ratio of tangible common equity to tangible assets(1) was 8.59%, compared with 8.52% at June 30, 2022, and 9.30% at September 30, 2021, and tangible book value per share(1) was $18.68, compared with $18.86 at June 30, 2022, and $19.75 at September 30, 2021. The decrease in tangible book value per share at September 30, 2022 from the prior quarter was primarily driven by the other comprehensive loss from the impact of higher interest rates on our AFS securities portfolio.

The Company implemented the current expected credit losses (“CECL”) model on January 1, 2020 and elected to phase in the full effect of CECL on regulatory capital over the five-year transition period. In the first quarter of 2022, the Company began phasing into regulatory capital the cumulative adjustments at the end of the second year of the transition period at 25% per year. At September 30, 2022, the Company and Bank were in compliance with the capital conservation buffer requirement and exceeded the minimum Common Equity Tier 1, Tier 1, and total capital ratios, inclusive of the fully phased-in capital conservation buffer of 7.0%, 8.5% and 10.5%, respectively, and the Bank qualified as “well-capitalized” for purposes of the federal bank regulatory prompt corrective action regulations.

Dividend and Stock Repurchase Program

On October 19, 2022, the Company's Board of Directors declared a $0.33 per share dividend, payable on November 10, 2022 to stockholders of record as of October 31, 2022. In January 2021, the Company’s Board of Directors approved a stock repurchase program, which authorized the repurchase of up to 4,725,000 shares of its common stock. During the third quarter of 2022, the Company did not repurchase any shares of common stock.

Conference Call and Webcast

The Company will host a conference call at 9:00 a.m. PT / 12:00 p.m. ET on October 20, 2022 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 27, 2022, at (877) 344-7529, conference ID 1207116.

About Pacific Premier Bancorp, Inc.

Pacific Premier Bancorp, Inc. (Nasdaq: PPBI) is the parent company of Pacific Premier Bank, a California-based commercial bank focused on serving small, middle-market, and corporate businesses throughout the western United States in major metropolitan markets in California, Washington, Arizona, and Nevada. Founded in 1983, Pacific Premier Bank has grown to become one of the largest banks headquartered in the western region of the United States, with approximately $22 billion in total assets. Pacific Premier Bank provides banking products and services, including deposit accounts, digital banking, and treasury management services, to businesses, professionals, entrepreneurs, real estate investors, and nonprofit organizations. Pacific Premier Bank also offers a wide array of loan products, such as commercial business loans, lines of credit, SBA loans, commercial real estate loans, agribusiness loans, franchise lending, home equity lines of credit, and construction loans. Pacific Premier Bank offers commercial escrow services and facilitates 1031 Exchange transactions through its Commerce Escrow division. Pacific Premier Bank offers clients IRA custodial services through its Pacific Premier Trust division, which has over $17 billion of assets under custody and approximately 40,000 client accounts comprised of self-directed investors, financial institutions, capital syndicators, and financial advisors. Additionally, Pacific Premier Bank provides nationwide customized banking solutions to Homeowners’ Associations and Property Management companies. Pacific Premier Bank is an Equal Housing Lender and Member FDIC. For additional information about Pacific Premier Bancorp, Inc. and Pacific Premier Bank, visit our website: www.ppbi.com.

FORWARD-LOOKING STATEMENTS

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 acquisitions we have made or may make.

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; our ability to attract and retain deposits and access to other sources of liquidity; the effect of acquisitions we have made or 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; possible impairment charges to goodwill, including any impairment that may result from increased volatility in our stock price; 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; the transition away from USD LIBOR and related uncertainty as well as the risk and costs related to our adoption of SOFR; 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 CECL model, which has changed how we estimate credit losses and may further increase the required level of our allowance for credit losses in future periods; possible credit related impairments of securities held by us; the impact of governmental efforts to restructure the U.S. financial regulatory system; the impact of any change in the FDIC insurance assessment rate or the rules and regulations related to the calculation of the FDIC insurance assessment amount; 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; the possibility that we may reduce or discontinue the payments of dividends on our common stock; the possibility that we may discontinue, reduce or otherwise limit the level of repurchases of our common stock we may make from time to time pursuant to our stock repurchase program; 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, including the war between Russia and Ukraine, which could impact business and economic conditions in the United States and abroad; public health crises and pandemics, including the COVID-19 pandemic, and their effects on the economic and business environments in which we operate, including on our credit quality and business operations, as well as the impact on general economic and financial market conditions; cybersecurity threats and the cost of defending against them; climate change, including the enhanced regulatory, compliance, credit and reputational risks and costs; natural disasters, earthquakes, fires, and severe weather; 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 Company's 2021 Annual Report on Form 10-K 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.