PPBI - Pacific Premier Bancorp Inc. Announces Second 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 for the second quarter of 2019 of $38.5 million, or $0.62 per diluted share, compared with net income of $38.7 million, or $0.62 per diluted share, for the first quarter of 2019 and net income of $27.3 million, or $0.58 per diluted share, for the second quarter of 2018.

For the three months ended June 30, 2019, the Company’s return on average assets (“ROAA”) was 1.33%, return on average equity (“ROAE”) was 7.71% and return on average tangible common equity (“ROATCE”) was 15.16%, compared to 1.34%, 7.78% and 15.45%, respectively, for the three months ended March 31, 2019 and 1.35%, 8.53% and 15.42%, respectively, for the three months ended June 30, 2018. Total assets as of June 30, 2019 were $11.8 billion compared with $11.6 billion at March 31, 2019 and $8.2 billion at June 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 focus on core deposit growth, proactive capital management, disciplined cost controls and strong asset quality continues to produce a superior level of risk-adjusted profitability. In the second quarter of 2019, we generated a ROAA of 1.33% and a ROATCE of 15.16%. We are making good progress on our core deposit growth initiatives, which resulted in strong inflows in lower-cost, transaction accounts. Organic deposit growth of transaction and non-maturity accounts increased $178.1 million in the current quarter.

“Our high level of profitability and on-going risk management discipline is enabling us to return significant amounts of capital to shareholders. During the second quarter, we took the opportunity to further optimize our capital structure by issuing $125 million in subordinated debt and using a portion of the proceeds to repurchase nearly $66 million of our common stock. We believe that replacing higher cost common equity with lower cost subordinated debt allows us to reduce our overall cost of capital and creates additional value for our shareholders.

“The success we are having in generating lower-cost core deposits provides us the flexibility to prudently increase our loan growth while protecting our net interest margin. Given our improved funding mix and historically consistent ability to originate high-quality loans at attractive yields, we believe we are well-positioned to deliver revenue and earnings growth over the second half of 2019,” said Mr. Gardner.

INCOME STATEMENT HIGHLIGHTS

Net Interest Income and Net Interest Margin

Net interest income totaled $110.6 million in the second quarter of 2019, a decrease of $765,000, or 0.7%, from the first quarter of 2019. The decrease in net interest income reflected our higher cost of funds and lower average loan balances as well as the issuance of $125.0 million of subordinated notes in May 2019, partially offset by the impact of one more day of interest and higher accretion income.

The net interest margin for the second quarter was 4.28%, compared with 4.37% in the prior quarter. The decrease was primarily driven by our higher cost of funds and lower average loan balances partially offset by higher accretion income of $5.0 million compared to $3.8 million in the prior quarter. Our core net interest margin, which excludes the impact of accretion, decreased 13 basis points to 4.08%, compared to 4.21% in the prior quarter. The core net interest margin was negatively impacted by 4 basis points due to the issuance of the previously mentioned $125.0 million of subordinated notes at an annual coupon of 4.875% during the second quarter of 2019. The remaining 9 basis-point decrease was primarily attributable to a higher cost of funds and lower average loan balances.

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

Net interest income for the second quarter of 2019 increased $29.5 million, or 36.3%, compared to the second quarter of 2018. The increase was primarily related to an increase in average interest-earning assets of $2.98 billion, which resulted primarily from our acquisition of Grandpoint Capital, Inc. (“Grandpoint”) in the third quarter of 2018, as well as organic loan growth since the end of the second quarter of 2018.

Provision for Credit Losses

A provision for credit losses of $334,000 was recorded for the second quarter of 2019, compared with a provision for credit losses of $1.5 million for the first quarter of 2019 and $1.8 million for the second quarter of 2018. The decrease in provision for credit losses was primarily driven by lower loan balances, continued strength in asset quality, and a reduction in the reserve for unfunded commitments.

The reduction of provision for unfunded commitments was attributable to lower loan commitments and loss rates as of June 30, 2019.

Noninterest Income

Noninterest income for the second quarter of 2019 was $6.3 million, a decrease of $1.4 million, or 17.7%, from the first quarter of 2019. The decrease was primarily due to a $827,000 decrease in net gain from the sales of loans, a $459,000 decrease in other income and a $215,000 decrease in net gain from sales of investment securities. The decrease in other income was primarily due to a positive fair value adjustment of $238,000 in Community Reinvestment Act (“CRA”) related equity investments, compared to a $612,000 positive fair value adjustment in the prior quarter.

During the second quarter of 2019, the Bank sold $24.4 million of Small Business Administration (“SBA”) loans for a net gain of $2.2 million, compared with the sale of $25.5 million of SBA loans for a net gain of $1.7 million during the prior quarter. The current quarter also included the sale of $82.5 million of non-SBA loans for a net loss of $1.3 million.

We anticipate our noninterest income will range from $6.5 million to $7.5 million for the third quarter of 2019 based upon current SBA loan sale gain rates and normal, recurring business activities.

Noninterest income for the second quarter of 2019 decreased $1.8 million, or 22.4%, compared to the second quarter of 2018. The decrease was primarily related to a $2.9 million decrease in net gain from sales of loans and a $118,000 decrease in net gain from sales of investment securities, partially offset by a $384,000 increase in service charges on deposit accounts, a $234,000 increase in earnings on bank-owned life insurance (“BOLI”) as well as increases in loan servicing fees, other service fee income, debit card interchange fee income, and other income, whose increases amounted to $614,000 in the aggregate.

The decrease in net gain from sales of loans for the second quarter of 2019 compared to the same period last year was primarily due to higher SBA loans sales and the gain from sale of commercial real estate loans during the second quarter of 2018. The Bank sold $31.9 million of SBA loans and $20.4 million of commercial real estate loans for a net gain of $2.9 million and $927,000, respectively, during the second quarter of 2018.

Noninterest Expense

Noninterest expense totaled $63.9 million for the second quarter of 2019, an increase of $359,000, or 0.6%, compared with the first quarter of 2019. The increase was driven by higher compensation and benefits expense of $33.8 million, compared to $33.4 million in the prior quarter, and to a lesser extent, higher legal, audit and professional expense of $3.5 million, $547,000 higher than the prior quarter. These increases were partially offset by a $650,000 decline in merger-related expense.

The Company anticipates that total operating expense will range from $64.5 million to $65.5 million for the third quarter of 2019.

Noninterest expense grew by $13.9 million, or 27.7%, compared to the second quarter of 2018. The increase was primarily related to the additional costs from operations, personnel and branches retained from the acquisition of Grandpoint, 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 a reduction in merger-related expense.

Income Tax

For the second quarter of 2019, our effective tax rate was 26.9%, compared with 28.3% for the first quarter of 2019 and 27.2% for the second 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 $8.77 billion at June 30, 2019, a decrease of $93.9 million, or 1.1%, from March 31, 2019, and an increase of $2.49 billion, or 39.7%, from June 30, 2018. The decrease was driven by higher loan prepayments and payoffs, and lower line utilization in the second quarter of 2019, as well as higher loan sales of $106.9 million, which included $82.5 million of non-SBA loans and $24.4 million of SBA loans, compared with $25.5 million of SBA loans sold in the prior quarter. The increase compared to the second quarter of 2018 was impacted by both organic loan growth and by the acquisition of Grandpoint, the latter of which added $2.4 billion of loans before fair value adjustments in the third quarter of 2018.

During the second quarter of 2019, the Bank generated $568.2 million of new loan commitments and $394.8 million of new loan fundings, compared with $549.7 million in new loan commitments and $391.8 million in new loan fundings for the first quarter of 2019 and $530.4 million in new loan commitments and $352.5 million in new loan fundings for the second quarter of 2018.

At June 30, 2019, the ratio of loans held for investment to total deposits was 99.0%, compared with 101.7% and 99.5% at March 31, 2019 and June 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 June 30, 2019 was 5.11%, compared to 5.13% at March 31, 2019 and 5.12% at June 30, 2018.

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

Asset Quality and Allowance for Loan and Lease Losses

At June 30, 2019, our allowance for loan and lease losses was $35.0 million, a decrease of $2.8 million from March 31, 2019 and an increase of $3.3 million from June 30, 2018. The provision for loan losses for the second quarter of 2019 was $742,000. During second quarter of 2019, the Company incurred $3.6 million of net charge-offs and released $3.2 million of related specific reserves.

The ratio of allowance for loan losses to loans held for investment at June 30, 2019 amounted to 0.40%, compared to 0.43% and 0.51% at March 31, 2019 and June 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 $52.0 million, or 0.59% of total loans held for investment as of June 30, 2019, compared to $57.2 million, or 0.65% of total loans held for investment as of March 31, 2019 and $22.2 million, or 0.35% of total loans held for investment as of June 30, 2018.

Nonperforming assets totaled $7.7 million, or 0.07% of total assets, at June 30, 2019, a decrease of $5.4 million from March 31, 2019 and an increase of $1.2 million from June 30, 2018. During the second quarter of 2019, nonperforming loans decreased $5.2 million to $7.6 million and other real estate owned decreased $145,000 to $35,000. Total loan delinquencies were $13.5 million, or 0.15% of loans held for investment, at June 30, 2019, compared to $15.8 million, or 0.18% of loans held for investment, at March 31, 2019, and $7.4 million, or 0.12% of loans held for investment, at June 30, 2018.

The decrease in nonperforming assets during the second quarter of 2019 was primarily attributable to the sale of a $4.3 million commercial owner occupied nonperforming loan and the payoff of a $1.1 million nonperforming SBA loan.

Investment Securities

Investments securities totaled $1.30 billion at June 30, 2019, an increase of $86.1 million, or 7.1%, from March 31, 2019, and $394.7 million, or 43.5%, from June 30, 2018. The increase in the second quarter of 2019 compared to the prior quarter was primarily the result of $147.9 million in purchases and a $24.4 million increase in mark-to-market fair value adjustment, partially offset by $57.0 million in sales and $29.2 million in principal payments, amortization and redemptions. The increase compared to the same period last year was primarily the result of $392.9 million of investment securities from the acquisition of Grandpoint.

Deposits

At June 30, 2019, deposits totaled $8.86 billion, an increase of $146.7 million, or 1.7%, from March 31, 2019 and $2.55 billion, or 40.5%, from June 30, 2018. At June 30, 2019, non-maturity deposits totaled $7.30 billion, or 82% of total deposits, an increase of $178.1 million, or 2.5%, from March 31, 2019 and an increase of $2.16 billion, or 42.1%, from June 30, 2018. During the second quarter of 2019, deposit increases included $133.6 million in money market/savings deposits, $57.6 million in retail certificates of deposits, and $56.4 million in noninterest-bearing deposits, partially offset by decreases of $89.0 million in brokered certificates of deposit and $12.0 million in interest checking, as compared to the first quarter of 2019.

The weighted average cost of deposits for the three-month period ending June 30, 2019 was 0.73%, compared to 0.63% for the three-month period ending March 31, 2019, and 0.50% for the three-month period ending June 30, 2018. The increase in the weighted average cost of deposits in the second quarter of 2019 compared to the prior quarter was primarily driven by higher rates and volume in money market and retail and brokered certificates of deposits as well as lower average noninterest-bearing deposit balances.

Borrowings

At June 30, 2019, total borrowings amounted to $804.5 million, an increase of $84.5 million, or 11.7%, from March 31, 2019 and an increase of $320.2 million, or 66.1%, from June 30, 2018. Total borrowings for the quarter included $571.6 million of advances from the Federal Home Loan Bank of San Francisco (“FHLB”) and $232.9 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 June 30, 2019, total borrowings represented 6.8% of total assets, compared to 6.2% and 5.9%, as of March 31, 2019 and June 30, 2018, respectively.

On July 8, 2019, the Company used the proceeds from the issuance of the Notes in May 2019 to redeem all $10,310,000 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. 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, as of June 30, 2019 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 $10,448,000.

Capital Ratios

At June 30, 2019, our ratio of tangible common equity to total assets was 9.96%, compared with 10.32% at March 31, 2019, and 9.91% at June 30, 2018, with a tangible book value per share of $17.92, compared with $17.56 at March 31, 2019 and $16.21 at June 30, 2018.

At June 30, 2019, the Company had a tier 1 leverage ratio of 10.32%, common equity tier 1 capital ratio of 10.82%, tier 1 capital ratio of 11.07% and total capital ratio of 13.54%.

At June 30, 2019, the Bank exceeded all regulatory capital requirements with a tier 1 leverage ratio of 11.66%, common equity tier 1 capital ratio of 12.51%, tier 1 capital ratio of 12.51% and total capital ratio of 12.90%. 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.

Dividend and Stock Repurchase Program

On July 19, 2019, the Company's Board of Directors declared a $0.22 per share dividend, payable on August 15, 2019 to stockholders of record as of August 2, 2019. During the second quarter of 2019, the Company repurchased 2,219,246 shares of common stock at an average price of $29.70 per share with a total market value of $65.9 million under its stock repurchase program, which authorized the repurchase of up to $100 million of the Company's 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 July 23, 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 July 30, 2019 at (877) 344-7529, conference ID 10132936.

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; the effect of changes in accounting policies and practices, 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; 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.