Steven Gardner - President and Chief Executive Officer Kent Smith - Executive Vice President, Chief Financial Officer, Corporate Secretary and Treasurer.

Brian Zabora - Keefe Bruyette & Woods Inc. Andrew Liesch - Sandler O'Neill & Partners LP Don Worthington - Raymond James Financial Inc. Timothy Coffey - FIG Partners LLC Gary Tenner - D.A. Davidson.

Good day and welcome to the Pacific Premier Bancorp Q1 2015 Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please also note this event is being recorded. I’d now like to turn the conference over to Mr. Steven Gardner, President and CEO. Please go ahead, sir..

commercial lending, construction and SBA.

We’re making good inroads into the Inland Empire, which is having a positive impact on our business development efforts and with the continued asset growth that we expect to see over the balance of the year and the synergies from the Independence Bank acquisition, we believe we are well positioned to deliver strong profitability over the remainder of 2015.

With that, I’m going to turn the call over to Kent to provide a little bit more detail on our first quarter results.

Kent?.

Thanks, Steve. We provided a significant amount of detail on our earnings release today, so I’m just to going to review a few items where I think some additional discussion is warranted. I’m going to start with our income statement.

Steve already discussed the major items impacting our net interest margin, but one thing that I’ll add is that we recognized $595,000 in loan discount accretion related to acquired loans, of which $534,000 was associated with the Independence Bank acquisition.

The Independence Bank portion of the accretion positively impacted our average loan yield by 12 basis points in the current quarter. As we reduced our cash balances and shipped our earnings asset mix more towards the loan and investment portfolio, we should see some improvement in our margin going forward.

Our non-interest income decreased $3.4 million from the prior quarter. The biggest driver of the decline was the absence of gains from loan sales this quarter as Steve discussed.

The other significant factor was a lower level of security gains after the rebalancing we did in the investment portfolio last quarter in anticipation of the Independence Bank acquisition. Our non-interest expense increased by $4.0 million from the fourth quarter.

The increase was primarily attributable to an increase of $3.1 million of merger-related expenses and $1.7 million increase in compensation and benefits expense associated with an increase in personnel, primarily related to the Independence Bank acquisition and higher employer taxes.

The one significant area of decline was in our other expense category, which was lowered this quarter after the non-recurring litigation expense accrual we made in the fourth quarter. The legal matter that drove this litigation expense is now been settled with no additional meaningful impact on our expenses.

Turning to our balance sheet, our total loans increased $503 million from the end of the prior quarter, due to the Independence acquisition and our strong organic growth.

Compared to the end of the prior quarter, we had increases in multifamily loans of $134 million, owner-occupied CRE loans of $141 million, warehouse facility loans of $103 million, non-owner-occupied loans of $93 million, construction loans of $22 million and SBA loans of $21 million.

The decrease we experienced in our C&I portfolio is partially attributable to the reclassification of certain loans into our owner occupied CRE as part of the Independence system conversion. Our investments increased by $92 million in the current quarter with $56 million of the increase coming from Independence.

With these additions, the duration of the portfolio dropped from 3.0 years at the end of the prior quarter to 2.6 years at the end of the current quarter. Our total deposits were up $412 million from the end of the prior quarter. Approximately 90% of the growth came in our non-time deposit categories.

Finally, looking at asset quality, our non-performing assets ticked up to 21 basis points of total assets from 12 basis points at the end of the prior quarter. We continued to have a very low loss experience with net charge-offs of just $384,000 in the quarter.

Given the organic growth in the portfolio, we recorded a provision for loan losses of $1.8 million in the quarter. Due to the addition of the Independence Bank loan portfolio that was marked to market at the time of closing, our allowance to total loans ratio declined to 64 basis points from 75 basis points at the end of the prior quarter.

Although when the fair market value discounts related to acquired loans are included in the total, then our ratio increased to 90 basis points from 87 basis points. And we continue to have very strong coverage of our non-accrual loans with an allowance that represents 293% of our non-accruals at the end of the quarter.

With that, we’d be happy to answer any questions you may have.

Operator, Chad, can you please open up the call for questions?.

Certainly. [Operator Instructions] Our first question comes today from Brian Zabora with KBW..

Just a question on the SBA, you indicated that you may hold down a little longer, are these months or quarters or how you look at the timeline as far as holding these SBA loans?.

It was based on our own analysis in approximately three to six months, Brian..

Is the second quarter may be going to be fairly maybe lower than what the run rate was in 2014, maybe towards the tail end as you catch up when you get to this three to six months hold period?.

I would say that we had pretty strong production in the first quarter over what historically we’ve done. So that gives us a little bit of a leg up. Also, I mentioned that the pipeline is the highest that it’s ever been in SBA just in general.

And so with that, sort of the fourth quarter run rate seems like a pretty good number as we enter the second quarter, but we’ll just see as the quarter unfolds..

And then on the provision expense, last quarter you talked about $1.5 million to $2 million run rate, has that changed at all with the strong loan growth you had or is that the expectations going forward?.

That’s reasonable, but it all depends upon both the growth rates and certainly asset quality in the portfolio, which has been very strong as you are aware. It just again depends upon the growth rates, but that seems like a pretty reasonable number..

Are you still talking about a 1% reserve to loan ratio at some point maybe out into 2016?.

I don’t know what the specific date is, but we’ve stated that we expect to be more in line with our peers and 1% is a number that we’ve put out there, but we have time to get there.

There is no reason to “rush” and certainly when you add a sizable portfolio like we did with the Independence acquisition that was marked to market, we take that into consideration as well. And as Kent had alluded to, with the discount, credit discount that we have on the portfolio plus reserves, we’re at 90 basis points today..

The next question is from Andrew Liesch with Sandler O'Neill..

Just looking at the expenses here, so I was walking through this, it seems like there’ll be maybe the full quarter effect of having Independence, but then also the cost savings that are coming.

So I was just backing out the merger cost like $16.5 million, is that a good run rate or do you think it could be even below that?.

That might be a little bit rich, just given the fact that obviously the branch consolidation occurred in mid-early April and so those personnel as well as the costs associated with those branches are gone, we also had the system conversion so we will pick up savings there as well..

And then also just really to the Independence deal, are there any more higher cost CDs that you expect to flow out?.

Maybe a little bit, I don’t know if it’s going to be a material number..

By holding on to the SBA loans a little bit, do you get a better premium if you hold them longer or is the premium more or less the same, but then you’re also getting the interest income and that’s what makes it a better IRR?.

That’s the key that we’re holding it and we pick up maybe about 5 basis points, maybe a little bit more over that period of time and it’s really the interest income from holding them a little bit longer.

Although we have made some tweaks and changes to the types of loans and the structure that may improve the level of gain that we’re able to attain in the secondary market..

The next question is from Don Worthington with Raymond James..

Steve, in terms of the loan purchases in the quarter, what types of loans were those?.

They were predominantly multifamily and CREs and stuff that was typically lined up in the fourth quarter. At times, we opportunistically will buy and/or sell loans aside from the SBA that we do and that’s predominantly what it was..

And then the warehouse lines, did you add new relationships in the quarter or were these primarily increases in existing lines?.

These were predominantly increases in existing lines with existing customers, some of our larger customers that saw a nice increase in their business and then we captured a little bit more of the market share that they have relative to the other lenders they do business with..

And then last one from me, the increase in FTEs in the quarter, was there anything in there other than the Independence acquisition, in other words, did you add any lenders during the quarter?.

Most of the SBA people that we hired came on in the fourth quarter, although there may have been one or two that had a start date in the first quarter, but it was predominantly Independence employees..

[Operator Instructions] Our next question comes from Timothy Coffey with FIG Partners..

Steve, holding the SBA loans three to six months, is that a firm plan or say if deposits were to increase faster than you anticipated, would you be more inclined to hold the SBA loans for say 12 months?.

We’re always assessing it and really the determination to hold them three to six months was based off of our analysis that we did that that is sort of the range that maximizes the IRR to us. And so that’s what drove the decision. We have the ability to sell other loans which we have done historically, be it multifamily, CRE or the like.

We certainly could sell franchise loans if we wanted, but we don’t have any desire at this point to do so.

But depending upon deposit flows, we could hold loans longer or shorter and we’re constantly assessing what the best strategy is in maximizing the returns as well as managing a number of other factors, be it concentrations, loan to deposit ratios and the like..

And then in the press release you discussed a record for the franchise loan pipeline going into the quarter, can you give me an idea of how much that is?.

I’m trying to recall in the earnings release, Tim, I think we talked about just a record loan pipeline in general and then also the highest level in SBA loans. I don’t know that we gave a specific figure on franchise, but it’s at right around $114 million..

Was that the entire pipeline or just franchise?.

That’s just franchise. Our entire pipeline is in excess of $425 million..

And then what do you see for the tax rate going forward?.

I’d like Kent to address that..

The tax rate, overall tax rate we’re talking about?.

Right..

I think it’s going to be similar to what we’ve seen all last year, we ran in that range of 37%, 38%..

Next question comes from Gary Tenner of D.A. Davidson..

You guys have leveraged your capital pretty effectively in the last couple of years both through organic means and through acquisition, can you talk about capital ratios and [indiscernible] ratios and talk about where you’d like to manage those numbers?.

Given the strong growth that we have, Gary, sort of the regulator [indiscernible] of our growth is the total risk based capital and we were right around 12%.

From a leverage standpoint, I’d like to operate at a much higher leverage ratio than where we are, but really we’re going to be constrained to a certain extent from just given the fact that we have such a high loan to deposit ratio and our assets are concentrated on the loan side.

That’s going to limit to a certain extent our ability to leverage the balance sheet and I’m not interested in doing any “leverage strategies” of borrowing long from the FHLB and investing those in securities.

From a TCE standpoint, where we ended the quarter just under 8%, we’re very comfortable running the bank at something in the mid low 7% range, just given the quality of both the assets and the liabilities.

Does that answer the question?.

Yeah, it sure does..

The next question is a follow-up from Brian Zabora with KBW..

Just a question on the accretion, thanks for the details for this quarter.

Are the scheduled accretion numbers going forward has that changed much from first quarter, or how does that look going throughout the year?.

It certainly depends upon what the run off in the portfolio, Brian, and early pay downs or pay offs, and how those materialize.

Kent, do you have any specific color?.

Just remember, the accretion we booked was really just two months worth, but as Steve said, it will depend on pay downs, pay offs..

Did you have any sizable pay downs or pay offs from that portfolio in this quarter?.

No, we didn’t..

This concludes our question-and-answer session. I’d like to turn the conference back over to Steven Gardner for any closing remarks..

Thank you, Chad. We appreciate everyone joining us this morning. If you have any other questions, please feel free to give either Kent or myself a call and we would be happy to chat with you. Have a nice day..

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect..