PPBI - Pacific Premier Bancorp Inc. Announces Fourth Quarter 2018 Financial Results (Unaudited) and the Initiation of 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 for the fourth quarter of 2018 of $39.6 million, or $0.63 per diluted share, compared with net income of $28.4 million, or $0.46 per diluted share, for the third quarter of 2018 and net income of $16.2 million, or $0.36 per diluted share, for the fourth quarter of 2017. Net income for the fourth quarter of 2018 includes $2.6 million of merger-related expense associated with the acquisition of Grandpoint Capital, Inc (“Grandpoint”), which was effective as of July 1, 2018.

For the three months ended December 31, 2018, the Company’s return on average assets (“ROAA”) was 1.37%, return on average equity (“ROAE”) was 8.15%, and return on average tangible common equity (“ROATCE”) was 16.65% as compared to 1.00%, 5.95%, and 12.89%, respectively, for the three months ended September 30, 2018 and 0.87%, 5.57%, and 10.48%, respectively, for the three months ended December 31, 2017. Total assets as of December 31, 2018 were $11.5 billion compared with $11.5 billion at September 30, 2018 and $8.0 billion at December 31, 2017. 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, “We delivered the highest level of quarterly earnings in our history, driven by the successful integration of Grandpoint and the synergies we anticipated from the transaction. The fourth quarter performance reflects our commitment to earnings growth, expanding client relationships, and effective expense and balance sheet management.

“In the fourth quarter, excluding $2.6 million in merger-related expense, we generated an operating ROAA of 1.43% and an operating ROATCE of 17.4%. These strong risk-adjusted returns resulted in strong capital generation that provides us the flexibility to return capital to shareholders while continuing to support our organic and acquisitive growth. Accordingly, we are pleased to announce the initiation of a quarterly cash dividend with an initial targeted payout ratio of 35%, or $0.22 per share based on fourth quarter of 2018 performance.

“Our near-term focus will be on driving earnings growth through the further expansion of our commercial client base and capitalizing on the investments in our infrastructure to realize additional operating leverage. Combined with our ability to return capital to shareholders while simultaneously growing and strengthening the franchise, we believe that we are well-positioned to create increased shareholder value going forward,” said Mr. Gardner.

FINANCIAL HIGHLIGHTS

INCOME STATEMENT HIGHLIGHTS

Net Interest Income and Net Interest Margin

Net interest income totaled $117.5 million in the fourth quarter of 2018, an increase of $4.8 million, or 4%, from the third quarter of 2018. The increase in net interest income reflected the impact of higher interest-earning asset balances and yields as well as higher accretion income, partially offset by higher short-term borrowing costs.

Net interest margin for the fourth quarter of 2018 was 4.49% compared with 4.38% for the third quarter of 2018. The increase was primarily driven by higher accretion income of $6.3 million compared to $4.1 million in the prior quarter. Our core net interest margin, which excludes the impact of accretion, certificates of deposit mark-to-market amortization and other one-time adjustments, expanded 5 basis points to 4.24%, compared to 4.19% from the prior quarter. The increase in core net interest margin was attributable to a more favorable mix of loans and investments, and the impact of loan repricing as a result of the Federal Reserve Bank's interest rate increase in September, partially offset by higher cost of funds, specifically, higher short-term borrowing costs. Cost of deposits rose 1 basis point to 0.55% during the quarter. We anticipate our core net interest margin will be in the range of 4.15% to 4.25% in the first quarter of 2019.

Net interest income for the fourth quarter of 2018 increased $39.4 million or 50% compared to the fourth quarter of 2017. The increase was primarily related to an increase in interest-earning assets of $3.6 billion, which resulted primarily from our acquisition of Grandpoint in the third quarter of 2018 and Plaza Bancorp (“Plaza”) in the fourth quarter of 2017, as well as organic loan growth since the end of the fourth quarter of 2017.

Provision for Credit Losses

A provision for credit losses of $2.3 million was recorded for the fourth quarter of 2018, compared with a provision for credit losses of $2.0 million in the prior quarter. The fourth quarter of 2018 provision for credit losses includes a $580,000 reduction for unfunded commitments due primarily to lower loan commitments and loss rates. The prior quarter included a $335,000 provision for unfunded commitments. Higher organic loan growth and an increasing percentage of acquired loans attributable to the allowance contributed to the increase for the fourth quarter of 2018. Net charge-offs were $138,000 in the fourth quarter compared to $87,000 in the prior quarter.

Noninterest income

Noninterest income for the fourth quarter of 2018 was $7.0 million, a decrease of $1.3 million, or 15%, from the third quarter of 2018. The decrease from the third quarter of 2018 was primarily due to a $1.1 million decrease in net gain from the sale of investment securities. Other noteworthy variances include a $219,000 decrease in service charges on deposit accounts due primarily to temporary fee waivers granted during the Grandpoint system conversion, and a $341,000 decrease in earnings on bank-owned life insurance (“BOLI”), which included an increment due to death benefit in the prior quarter, partially offset by a $414,000 increase in other income primarily due to a lower net loss on Community Reinvestment Act (“CRA”) related equity investments.

During the fourth quarter of 2018, the Bank sold $26.1 million of SBA loans for a gain of $1.6 million, compared with $29.9 million of SBA loans sold at a gain of $2.0 million in the third quarter of 2018. Additionally, the Bank sold $163.2 million of non-SBA loans during the fourth quarter of 2018, to manage its overall loan growth and credit risk, for a net gain of $320,000 and did not sell any non-SBA loans during the third quarter of 2018.

We anticipate our noninterest income will range from $6.5 million to $7.0 million for the first quarter of 2019, excluding the impact, if any, of the U.S. Government shutdown on Small Business Administration (“SBA”) lending.

Noninterest income for the fourth quarter of 2018 decreased by $2.5 million, or 26%, compared to the fourth quarter of 2017. The decrease was primarily related to a $2.4 million decrease in other income from lower recoveries on pre-acquisition charged-off loans, a $1.4 million decrease in net gain from sale of loans, partially offset by a $230,000 increase in service charges on deposit accounts, a $304,000 increase in earnings on BOLI, a $263,000 increase in loan servicing fees, and a net loss from sale of investment securities of $252,000 in the fourth quarter of 2017.

Noninterest Expense

Noninterest expense totaled $67.2 million for the fourth quarter of 2018, a decrease of $15.5 million, or 19%, compared with the third quarter of 2018. The decrease was primarily driven by merger-related expense of $2.6 million in the fourth quarter of 2018 compared with $14.0 million in the third quarter of 2018. Excluding merger-related expense, noninterest expense decreased $4.2 million to $64.6 million, primarily due to cost savings attributable to the acquisition of Grandpoint as compensation and benefits, data processing, and other related operating costs all decreased from the prior quarter. Compensation and benefits were equally impacted by overall lower staffing and lower incentives. The Company anticipates that total operating expense will range between $64.0 million and $67.0 million for the first quarter of 2019.

Noninterest expense grew by $17.4 million, or 35%, compared to the fourth quarter of 2017. The increase in expense was primarily related to the additional costs from the operations, personnel and branches retained from the acquisitions of Grandpoint and Plaza, core deposit intangible (“CDI”) amortization expense, combined with our continued investment in personnel to support our organic growth in loans and deposits, partially offset by the reduction in merger-related expense.

Income Tax

For the fourth quarter of 2018, our effective tax rate was 27.9% compared with 21.5% for the third quarter of 2018 and 38.6% for the fourth quarter of 2017. 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 re-measurement of deferred tax items realized in the third quarter of 2018.

The decrease in the effective tax rate for the fourth quarter of 2018, compared to the fourth quarter of 2017, was primarily the result of the enactment of the Tax Cuts and Jobs Act signed into law on December 22, 2017, which among other items, reduced the federal corporate tax rate to 21% effective January 2018, from the prior maximum rate of 35%.

The Company's full year tax rate for 2018 was 25.5%. The Company anticipates the full year 2019 effective tax rate to be in the range of 27.0% to 29.0% with the first quarter of 2019 to be approximately 28.0%, consistent with the fourth quarter of 2018.

BALANCE SHEET HIGHLIGHTS

Loans

Loans held for investment totaled $8.8 billion at December 31, 2018, an increase of $77.6 million, or 1%, from September 30, 2018, and an increase of $2.6 billion, or 43%, from December 31, 2017. The increase compared to the third quarter was impacted by organic loan growth partially offset by loan sales during the fourth quarter of 2018. The increase compared to the fourth quarter of 2017 was impacted both by organic growth and by the acquisition of Grandpoint, the latter of which added $2.4 billion of loans in the third quarter of 2018 before fair value adjustments.

During the fourth quarter of 2018, the Bank generated $730.0 million of new loan commitments and $531.5 million of new loan fundings compared with $604.8 million in new loan commitments and $439.8 million in new loan fundings in the third quarter of 2018. The Bank experienced higher loan prepayments of $407.6 million in the fourth quarter compared with $336.0 million in the third quarter and sold a total of $189.3 million of loans during the fourth quarter to manage its overall loan growth rates and credit risk.

Business loans and real estate loans increased $43.9 million and $59.8 million from the third quarter of 2018, respectively, while consumer loans decreased $25.3 million from the third quarter of 2018, primarily as a result of the loan sales.

At December 31, 2018 our loans held for investment to deposit ratio was 102.1%, compared with 103.0% and 101.8% at September 30, 2018 and December 31, 2017, respectively.

The following table presents the composition of the loan portfolio as of the dates indicated:

The total end of period weighted average interest rate on loans, excluding fees and discounts, at December 31, 2018 was 5.13%, compared with 5.08% at September 30, 2018 and 4.95% at December 31, 2017. The quarter-over-quarter and year-over-year increase reflects the impact of higher rates on new originations as well as the favorable repricing of loans as a result of the Federal Reserve Bank's interest rate increases.

The following table presents the composition of the organic loan commitments for the periods indicated:

The weighted average rate on our new loan production was 5.35% in the fourth quarter of 2018 compared with 5.21% in the third quarter of 2018 and 5.00% in the fourth quarter of 2017.

Asset Quality and Allowance for Loan Losses

At December 31, 2018, the allowance for loan losses was $36.1 million, compared to $33.3 million at September 30, 2018 and $28.9 million at December 31, 2017, with the increases driven principally by our organic loan growth and an increasing percentage of acquired loans attributable to the allowance. Allowance for loan loss provision for the fourth quarter was $2.9 million while net charge-offs were $138,000.

The ratio of allowance for loan losses to total loans held for investment at December 31, 2018 was 0.41%, compared to 0.38% at September 30, 2018. Under the guidance of ASC 820: Fair Value Measurements and Disclosures, the fair value discount on loans acquired through bank acquisitions was $61.0 million, or 0.69% of total loans held for investment, as of December 31, 2018, compared to $71.7 million, or 0.82% of total loans held for investment, as of September 30, 2018.

Nonperforming assets totaled $5.0 million, or 0.04% of total assets, at December 31, 2018, a decrease of $2.7 million from $7.8 million, or 0.07% of total assets, at September 30, 2018. During the fourth quarter of 2018, nonperforming loans decreased $2.4 million to $4.9 million and other real estate owned decreased $209,000 to $147,000. Loan delinquencies increased to $12.9 million, or 0.15% of loans held for investment, compared to $7.7 million, or 0.09% of loans held for investment, at September 30, 2018.

Investment Securities

Investment securities available for sale totaled $1.1 billion at December 31, 2018, an increase of $48.3 million, or 5%, from September 30, 2018, and an increase of $315.8 million, or 40%, from December 31, 2017. The increase in the fourth quarter of 2018 as compared to the third quarter of 2018 was primarily the result of purchases of $61.8 million and a mark-to-market fair value adjustment increase of $15.7 million, partially offset by $30.3 million in total principal payments, amortization, and redemptions.

Deposits

At December 31, 2018, deposits totaled $8.7 billion, an increase of $156.2 million, or 2%, from September 30, 2018 and an increase of $2.6 billion, or 42%, from December 31, 2017. At December 31, 2018, non-maturity deposits totaled $7.2 billion, an increase of $56 million, or 1%, from September 30, 2018 and an increase of $2.2 billion, or 45%, from December 31, 2017. During the fourth quarter of 2018, deposit increases included $61.1 million in noninterest-bearing deposits and $30.6 million in interest checking, partially offset by a $36.3 million decrease in retail certificates of deposits and a $35.7 million decrease in money market/savings deposits. Also during the quarter, the Bank added $136.5 million in brokered certificates of deposits as rates moved favorably to these sources compared with higher cost, overnight borrowings.

The $2.6 billion increase in deposits from December 31, 2017 was primarily due to the acquisition of Grandpoint in the third quarter of 2018, which contributed $2.5 billion of deposits at the time of acquisition, before purchasing accounting adjustments.

The weighted average cost of deposits for the three month period ending December 31, 2018 was 0.55%, compared with 0.54% for the third quarter of 2018 and 0.32% for the fourth quarter of 2017. The small increase in the weighted average cost of deposits from the third quarter of 2018 was primarily driven by higher rates in retail and wholesale/brokered certificates of deposit accounts, partially offset by the increase in noninterest-bearing deposits.

Borrowings

At December 31, 2018, total borrowings amounted to $778.0 million, a decrease of $194.2 million, or 20%, from September 30, 2018 and an increase of $136.6 million, or 21%, from December 31, 2017. Total borrowings for the quarter included $667.7 million of advances from the Federal Home Loan Bank of San Francisco and $110.3 million of subordinated debt. At December 31, 2018, total borrowings represented 6.8% of total assets, compared to 8.5% and 8.0%, as of September 30, 2018 and December 31, 2017, respectively.

Capital Ratios

At December 31, 2018, our ratio of tangible common equity to total assets was 10.02%, compared with 9.47% in the prior quarter, with tangible book value per share of $16.97, compared with $16.06 at September 30, 2018 and $15.26 at December 31, 2017.

At December 31, 2018, the Company had a tier 1 leverage capital ratio of 10.38%, common equity tier 1 risk-based capital ratio of 10.88%, tier 1 risk-based capital ratio of 11.13% and total risk-based capital ratio of 12.39%.

At December 31, 2018, the Bank exceeded all regulatory capital requirements with tier 1 leverage capital ratio of 11.06%, common equity tier 1 risk-based capital ratio of 11.87%, tier 1 risk-based capital ratio of 11.87% and total risk-based capital of 12.28%. These capital ratios exceeded the “well capitalized” standards defined by the federal banking regulators of 5.00% for tier 1 leverage capital, 6.50% for common equity tier 1 risk-based capital, 8.00% for tier 1 risk-based capital and 10.00% for total risk-based capital.

Dividend and Stock Repurchase Program

On January 28, 2019 the Company's Board of Directors declared a $0.22 per share dividend, payable on March 1, 2019 to shareholders of record on February 15, 2019. The Company did not repurchase any shares under the recently approved stock repurchase program, which authorized the repurchase up to $100 million of its 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 January 29, 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 February 5, 2019 at (877) 344-7529, access code 10127379.

About Pacific Premier

Pacific Premier Bancorp is the holding company for Pacific Premier Bank, one of the largest banks headquartered in Southern California with approximately $11.5 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, operating expense, financial performance and profitability, planned dividends, loan and deposit growth, yields and returns, loan diversification and credit management, effective tax rates, shareholder value creation 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 impact, if any, of the prolonged U.S. federal government shutdown, the expected cost savings, synergies and other financial benefits from any acquisition the Company has made or may make might not be realized within the expected time frames or at all; the strength of the United States economy in general and the strength of the local economies in which the Company conducts 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; the possibility that we may reduce or discontinue the payment of dividends on common stock, inflation, interest rate, market and monetary fluctuations; the timely development of competitive new products and services and the acceptance of these products and services by new and existing customers; the willingness of users to substitute competitors’ products and services for the Company’s products and services; the impact of changes in financial services policies, laws and regulations and of governmental efforts to restructure the U.S. financial regulatory system; technological changes; changes in the level of the Company’s nonperforming assets and charge offs; any oversupply of inventory and deterioration in values of California real estate, both residential and commercial; the effect of changes in accounting policies and practices, as may be adopted from time-to-time by bank regulatory agencies, the Securities and Exchange Commission (“SEC”), the Public Company Accounting Oversight Board, the Financial Accounting Standards Board or other accounting standards setters; possible other-than-temporary impairment of securities held by us; changes in consumer spending, borrowing and savings habits; the effects of the Company’s lack of a diversified loan portfolio, including the risks of geographic and industry concentrations; ability to attract deposits and other sources of liquidity; 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; unanticipated regulatory or judicial proceedings; and the Company’s 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 2017 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).

Pacific Premier 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.

SELECTED FINANCIAL DATA

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