Steven Gardner - President, Chief Executive Officer, Director Allen Nicholson - Chief Financial Officer, Executive Vice President.

Brian Zabora - KBW Tim Coffey - FIG Partners Andrew Liesch - Sandler O'Neill & Partners Gary Tenner - D.A. Davidson Don Worthington - Raymond James.

Good day and welcome to the Pacific Premier Bancorp Third Quarter 2015 Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded.

I would now like to turn the conference over to Mr. Steven Gardner, President and CEO. Please go ahead..

Thank you, Carrie. Good morning, everyone. I appreciate you joining us today. As you are all aware, earlier this morning we released our earnings report for the third quarter of 2015. I am going to walk through some of the notable items.

Allen Nicholson, our CFO, is going to review a few of the financial details and then we will open up the call to questions. I will also note that in our earnings release this morning, we have the Safe Harbor statement relative to the forward-looking comments and I’d encourage all of you to take a look and read through those.

From an overall perspective, we delivered another solid quarter with $7.8 million in net income and $0.36 per diluted share which equals last quarters as our most profitable in our history. On a core basis though this quarter was even stronger than last quarter.

Our second quarter results were positively impacted by a onetime $500,000 FHLB special dividend, while our third quarter results were negatively impacted by $400,000 of merger related expense.

When you exclude these onetime items we had a nice improvement in profitability relative to last quarter which is attributable to the positive trends we are seeing in loan production, core deposit gathering, expense management and asset quality. We continue to see fairly healthy economic conditions in our markets and good loan demand.

We had 236 million in originations during the third quarter and the loan production continues to be well balanced across a broad variety of lending products, which is producing the diversified lower risk portfolio that we are targeting.

Our primary areas of focus continue to be C&I, construction and SBA lending which produced higher risk adjusted yields and drive higher levels of fee income. We had $72 million in new C&I loan production in the third quarter with the franchise lending group contributing 47 million of this production.

We continue to take market share and franchise lending and the group has done an outstanding job of developing relationship with franchisees of new brands that we hadn’t worked with prior to joining Pacific Premier. Our construction lending team had another strong quarter with 51 million in new loan production.

Additionally, we had 48 million in SBA loan production which is the largest quarter in our history. Over the past couple of years we have steadily strengthened our SBA lending group by adding experienced producers and they are doing a great job of delivering the results we were expecting.

We are not expecting this level of SBA production every quarter but compared to our past history we should continue to generate strong levels of new loans and gain on sale income. Our end of period loans were up by 2.3% during the quarter, but average loans were lower than in the second quarter.

The lower level of average loans was due to lower utilization rates on our warehouse lines of credit which was approximately 66 million lower on an average basis than in the second quarter. As you are aware the warehouse lending business is inherently volatile and extremely competitive.

And as a secondary or [Indiscernible] credit provider to most of our mortgage banking clients we see a great deal of fluctuation in utilization rates from quarter to quarter. Its not an area that we are looking to actively grow and as our other portfolios continue to increase the impact of the volatility in this line of business should be reduced.

With our aggressive consistent approach to customer acquisition, we haven’t needed to comprise on pricing to win new business with our core lending products. The average yield on our loan originations in the third quarter was 4.99% up from 4.81% last quarter.

The strong yield we had on new loan originations help us to keep our overall yield on the loan portfolio at 5.24% unchanged from last quarter. With our focus on higher margin areas like franchise, construction and SBA lending we’ve been able to mitigate some of the pressure on loan yields resulting from the lower interest rate environment.

Looking ahead to the fourth quarter we continue to have a very healthy loan pipeline we’re expecting to deliver in another quarter of strong loan production. Looking at deposits, we had another solid quarter of deposit gathering and improvement in our overall deposit mix.

We had very strong growth in non-interest bearing deposits which were up by approximately 45 million from the end of the prior quarter. We are seeing good inflows of non-interest bearing deposits from the new commercial relationships we are developing as well as the continued strong performance of our HOA [ph] business.

This inflow has allowed us to be more conservative in our CD pricing which resulted in some run off of time deposits during the quarter. With the positive shift we are seeing in the deposit mix, time deposits have been reduced to 23.6% of total deposits compared with 27.4% a year ago.

Of course the most significant recent development was the announcement of our acquisition of Security California Bank Corp, the holding company of Security Bank of California. We are well underway with the approval process as we filed our bank merger application on October 05, just two business days after the announcement of the transaction.

We fully expect the transaction to close in early 2016. Since the merger was announced, we’ve had a chance to meet with a number of security banks largest customers and two things are very clear.

One, they have strong long term relationships with security bank that they highly value and two, many of these companies are experiencing strong growth and need larger credit facilities to support that growth and they are starting to push up against the legal lending limit that security bank has.

With the larger lending limits that we will be able to provide there is a very good opportunity for us to expand a number of banking relationships after the merger is completed. These customers are also very interested in utilizing the broader suite of cash management and treasury products that we will be able to offer them.

We’ve also melt [ph] with every one of the relationship bankers at security bank and made it known to them how they were a key part of what attracted us to the company. This is an experienced group of commercial bankers and senior managers that will significantly our overall C&I banking capabilities as well as our management team.

We think we’ll have excellent growth opportunities both from expanding relationships with securities banks existing customers and also winning new business as we indoctrinate the security banking and our sales culture and lead development process.

The more time we spend with the security bank team and their customers, the more bullish we are on this acquisition. As we captured the synergies that we project for this merger we believe the addition of security banks talent, customer base and branch network will significantly enhance the value of our franchise in years to come.

As we’ve mentioned numerous times, M&A is an ongoing line of business. We’ve consistently been able to identify and complete transactions that create value for our shareholders.

We have a well honed integration process and we’ve been able to consistently achieve smooth, disruption free integrations while continuing to evaluate and pursue other M&A possibilities.

While we proceed with the completion of the security bank transaction, we remain open to additional M&A opportunities and we don’t see any obstacles that would prevent us from pursuing an attractive deal in the near term if one becomes available.

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

Thanks, Steve. We have provided a fair amount of detail on our earnings release today. So I am just going to review some of the more significant items in the quarter. Going to start with our income statement.

Our net interest income declined by 712,000 from last quarter, which was attributable to a combination of lower average loan balance that Steve mentioned and a 12 basis point in our net interest margin.

The margin income compression from the second quarter was due to the positive bump we had last quarter from the onetime FHLB dividend which contributed to 8 basis points to our net interest margin that quarter.

The remainder of the compression came from an unfavourable shift in the mix of running assets, due to the lower average loan balances as line utilization and warehouse mortgage lines declined on average from the second quarter, and our level of funds at the Fed increased by approximately 20 million on average.

Although we had an NIM compression on a quarter-to-quarter basis, on a year-over-year basis our margin was unchanged at 4.14% as we expanded our earning interest asset yield by 4 basis points and decreased our cost of deposits by 3 basis points which in combination offset the higher cost of borrowings from the last year.

Given the persistent low interest rate environment we are very pleased that we have been able to maintain stability in our non-interest margin over the past year.

Our ability to keep our net interest margin in the low 4% range is due to our focus on growing higher yielding areas [Indiscernible] portfolio as well as our growth and non-interest bearing deposits. Our non-interest income increased by 313,000 from the prior quarter, although our gain on sale from loans declined by 177,000.

The lower gain on sale loans was driven by a lower volume of sold [ph] loans as the second quarter included 68 million in non SBA loan sales that resulted in a gain on sale of 700,000 in that quarter.

The gain on sale related to SBA loans increased by 500,000 over the prior quarter as the volume of loans sold increased by approximately 7 million while the gross premium had a modest decline from the second quarter.

We had a good quarter of expense management when the 400,000 of merger-related expenses are excluded, our non-interest expense decline by 240,000 from the prior quarter. All the line items were well within small variances on a quarter-to-quarter basis.

Turning to balance sheet, our total loans increased by approximately $49 million from the end of the prior quarter, the increase was spread across a number of portfolios with a largest increase is coming from the SBA, franchise and construction lending areas.

The growth in the loan portfolio came despite of $54 million decline in warehouse facility borrowings on a period end to period end basis. Although the balance on a warehouse facility was lower compared to June 30th, we did see higher utilization on these lines towards end of the quarter compared to the average throughout the quarter.

Our total deposits increased $43 million from the end of the prior quarter with growth in non-interest bearing deposits and other non-material deposits offsetting a decline in time deposits. Finally, looking at asset quality, we continue to see positive trends within the portfolio.

Our non-performing assets ticked down to 18 basis points of total assets from 19 basis points at the end of the prior quarter. We continue to have a very low loss experience with net charge-offs of just 17,000 in this quarter.

We recorded a provision for loan losses of $1.1 million in the quarter, which cover the growth we had in the portfolio particularly in segments that require higher level of reserve. This brought our allowance to total loans ratio up to 74 basis points from 71basis points at the end of the prior quarter.

Although, when the fair market value discounts related to acquired loans were included in the total, our ratio increases to 93 basis points. We continue to have a very strong coverage of our non-accrual loans with an allowance that represents 394% of our non-accruals at the end of the quarter.

With that, we'd be happy to answer any questions you may have. Operator, please open up the call..

Thank you. We will now begin the question and answer session. [Operator Instructions] Our first question comes from Brian Zabora of KBW. Please go ahead..

Thanks. Good morning..

Hi, Brian..

Question on the warehouse, not surprising to see the decline, any thoughts of what it might look like in the fourth quarter around to 2016 as far as balances?.

No..

Okay. I know it's hard to predict..

I'd like to tell you I have some insight Brian, but it's very difficult and as we've said, the business is highly volatile..

Okay. On the deposit side, you mentioned HOA, was that a source of growth as far as your non-interest bearing deposits this quarter.

Is that maybe smoothing out or should we still expect first quarter to be generally where you see most of the growth from the HOA business?.

During the third quarter most of that non-interest bearing was through commercial C&I relationships that we have business banking here in Southern California. The first quarter has historically been stronger and it's just a seasonal difference with the HOA line of business.

And we don't see anything on the horizon that would change that seasonality and we would expect the first quarter to generally be one of the strongest from a growth standpoint..

All right. Thanks for taking my questions..

Sure..

Our next question comes from Andrew Liesch of Sandler O'Neill & Partners. Please go ahead. I'm sorry we're actually going to take our next question from Tim Coffey of FIG Partners..

Hi, good morning, Steven.

How are you doing?.

Good.

How are you Tim?.

I'm good. Notice that the tables for loans this quarter are little bit different than we see in the past.

What is the historical breakdown between -- and the franchise lending business between C&I and owner occupied commercial real estate?.

Its fluctuated quarter-over-quarter, roughly 65% to 70%, maybe as high 75% C&I, 25%, 30% owner occupied CRE..

And in this most recent quarter I think it was probably 80% to90% C&I of the growth from franchise?.

Correct..

Okay.

That’s best -- and then just kind of looking at the over portfolio absent kind of success you saw this quarter, in the forward course where you see kind of the strongest product type that you have available right now?.

I think that the areas that we're concentrating on that we talked about C&I and both in our primary markets of Southern California as well as the franchise lending business, construction and SBA, their higher yielding risk adjusted loans and from that standpoint its really what are focus will continue to be.

And then, you layer in some of the owner occupied CRE and investor CRE and each quarter we manage that level of growth occasionally utilizing loan sales. And as know, we felt it was appropriate to breakout the franchise loans on the loan table, just given the growth level in some of questions we feel did over the past quarter..

Okay. No, I think that's very helpful. And then, when you see new loans come into the bank for review, where is the most competition coming from.

Is it on price or structure?.

We just don't compete on either one, Tim, and given our discipline sales calling process and that active outreached to business owners, its frequently those business owners are looking for a bank that is going to provide them with a fairly priced loan and we tell them right upfront, we are not the lowest price lender in the market, but what you get is superior service and quick response times and flexibility and a business banker that is going to be there when they need questions answered, consultation or additional credit.

And so in many ways we just don't compete on either the price or the structure..

Okay. All right. Well, those were my questions. Thank you very much..

You're welcome..

Our next question will be from Andrew Liesch of Sandler O'Neill & Partners. Please go ahead..

Hey, guys. Steve, can you just talk more about SBA business little bit. It look like sale was pretty good, but then you kept some of the portfolio.

What is the driving decision on what you retain versus what you sell?.

We talked about it at the – in the first quarter of this year, Andrew, when we had done an analysis over the fourth quarter about how to maximize the IRR on those loans.

And we found that if we hold those loans for 60, maybe 90 days and benefit from the interest income from those loans we can still generate the same gain on sale as if we were to sell those immediately after we originated them. So, earlier this year if you recall we didn't do any loan sales during the first quarter.

And it was because of that analysis we had done in the fourth quarter and so that's continue to hold true here. In third quarter some of that production that came on in the latter part of the third quarter we just shows to hold on to and we will likely sell that product in the fourth quarter and that maximizes the IRR..

Got you. Thanks. And then, just I guess follow-up on your comments on M&A.

It sounds like there's nothing that would be if any you're doing another deal, would you expect something before the end of this year or next year more likely?.

As I mentioned, we're open to discussions. We continue – I continue to actively reach out to other CEOs to see if we might sit down and have a couple of coffee and chat about where it might make sense to partner. And if there's something that comes along we'll have something to announce..

Great. Thanks a lot..

Sure..

Our next question comes from Gary Tenner of D.A. Davidson. Please go ahead..

Thanks. Good morning. Just couple of questions, one regarding SBA in terms of the premiums, you mentioned there we down a little this quarter.

Were they down at all given the mix of loans you were selling? Or is it generally secondary market, premiums were down and appetites maybe less that it was?.

It was modest, Gary, and as I was looking back at prior quarters, there is not necessarily a consistent pattern in terms of what that gross premium has been. Some of that just comes down to where we price some of those loans, the pricing on the loans might have been a little bit lower than some of the ones we have sold in the prior quarter.

I don't know if we're seeing necessarily a pattern per say. It just will be a little bit lower..

Okay. Thanks.

And then Steve, I was just wondering if you could comment on the Independence acquisition, given your sales process and securities more traditional C&I process, how do you sort of corporate those two and put them together?.

We've done it in the past and we'd be taking the same similar approach here. As I mentioned, we met with all of the relationship managers. I think that they're equally excited about the process and what we're able to bring to the table.

And we're just seeing maturation in our business model and the way that we approach, bringing in those relationships and then managing the larger more complex businesses that we're banking today and that security brings to the table..

Okay. Thanks, guys..

Sure..

[Operator Instructions] Our next question comes from Don Worthington of Raymond James. Please go ahead..

Good morning..

Good morning, Don..

Steve, in terms of the gain on sale this quarter, was that all SBA or there was anything else in there?.

No. It was – yes, it was all SBA..

Okay.

And then, any loan purchases this quarter?.

Minimal, $11 million..

Okay.

What type of loans were those?.

Owner occupied CRE..

Okay.

And then my last one is, it looks like the balance of borrowings went up a bit in the quarter, was that the overnight variety or the genuity term borrowing there?.

Just overnight and most of that came towards the end of the quarter and it is in connection with that volatility with the warehouse lending business, and so we carry a little bit more cash as well in those lines, both the warehouse lines get paid down in the early part of the following quarter and we do the same with the FHLB advances as well..

Okay, great. Thank you..

Sure..

The question and answer session has now concluded. I would like to turn the conference back over to Steve Gardner for any closing remarks..

Thank you, Carrie. Thanks again for joining us this morning. If you have any additional questions, please feel free to give either Allen or myself a call, and we'd be happy to talk with you. Have a great day..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day..