Good day, and welcome to the Pacific Premier First Quarter 2022 Earnings Call. [Operator Instructions] Please note this event is being recorded. .

I would now like to turn the conference over to Steve Gardner, Chairman and CEO. Please go ahead. .

Thank you, operator. Good morning, everyone. I appreciate you joining us today. As you are all aware, earlier this morning, we released our earnings report for the first quarter of 2022. We have also published an updated investor presentation that has additional information on our financial performance.

If you have not done so already, we would encourage you to visit our Investor Relations website to download a copy of the presentation. .

In terms of our call today, I will walk through some of the notable items. Ron Nicolas, our CFO, will review a few of the financial details, and then we'll open up the call to questions.

I note that in our earnings release and investor presentation, we have our safe harbor statement relative to the forward-looking comments, and I would encourage all of you to read through those carefully. .

Overall, we delivered solid financial performance in the first quarter, driven by strong loan and deposit production that generated net income of $66.9 million or $0.70 per share. The quarter's results are reflective of our disciplined approach, the growing capabilities of our teams and the benefits of our technology-driven growth strategy. .

Notwithstanding our hard performance in the past quarter, we are mindful that the macroeconomic dynamics and global geopolitical headwinds introduced a new level of uncertainty that must be managed prudently.

Although it's typical to see some level of production seasonality at the beginning of the year, our bankers were able to generate nearly $1.5 billion in new loan commitments, essentially the same level as the prior quarter, which reflects our focus on consistent business development that results in new client acquisition and expanding existing relationships that meet our high credit standards.

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Given the deep and talented teams we have built and the expertise we have developed, we have well-balanced production in the first quarter across all of our lending segments.

Commercial line utilization rates increased as our business clients responded to the higher levels of activity they are seeing as the economy expanded and moved beyond the pandemic's impacts. .

During the first quarter, the average utilization rate on commercial lines of credit increased to 39.5% from 35.2% last quarter, while the quarter end spot rate was 41%. The combination of loan production, increased utilization rates and a lower level of prepayments and payoffs translated into 12% annualized loan growth in the first quarter.

Importantly, we were able to fund our loan growth with strong inflows of low-cost core deposits, which increased 13% annualized. .

With the first quarter's loan growth, we continue to drive a favorable mix -- a favorable shift in our mix of earning assets. And as such, we anticipate an expansion in our net interest margin and higher levels of interest income as we move through the year in conjunction with the expected increase in the Fed funds rate. .

During the quarter, we were successful in terms of attracting new talent across the company that will support our growth and risk management objectives.

We are benefiting from our reputation as a high-performing organization, and we were able to add quality talent that bring a level of sophistication, knowledge and deep client relationships from larger regional and national banks.

In keeping with our core value of continuous improvement, the talent we are adding is enabling us to expand and upgrade our capabilities in many areas of the company. .

Given the macroeconomic and geopolitical issues that intensified during the first quarter, our team has sharpened its focus on risk management.

During the quarter, the Federal Reserve began what is widely expected to be one of the most rapid tightening cycles in decades that will occur simultaneously with the contraction of its balance sheet in an effort to address high inflation.

In a relatively short period of time, risks to the economic outlook have increased, creating a more uncertain operating environment. .

Our long track record of success and ability to build franchise value through varying cycles is attributable to the effective balance that we are able to strike between profitable growth and risk management.

While we have been adding new clients and customers and expanding existing relationships, we have been mindful of the potential for a changing environment. We have been taking proactive steps to position our balance sheet to manage interest rate risk and mitigate the impact we may see from a potential deterioration in economic conditions. .

reducing the size and duration of the securities portfolio and increasing our liquidity with higher cash balances, maintaining strong levels of tangible common equity, growing total capital and maintaining the overall high levels of regulatory capital ratios, adding $1.2 billion of fixed to floating rate swaps, which increased our asset sensitivity, adding $600 million in low-cost term FHLB advances, which reduced our interest rate risk and making refinements to our CECL model to reflect a greater impact from supply chain disruption, inflationary pressures and geopolitical unrest than what is reflected in Moody's current economic forecast.

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These actions reflect our commitment to prudent risk management and operating with a long-term perspective. While some of these actions have had a short-term impact on earnings, they are helping us maintain important flexibility to capitalize on the opportunities that may arise from a variety of outcomes. .

With that, I'm going to turn the call over to Ron to provide a few more details on our first quarter results. .

Thanks, Steve, and good morning. For comparison purposes, the majority of my remarks are on a linked-quarter basis. Let's start with the income statement. Highlights for the first quarter included total revenue of $187.7 million as net interest income was $161.8 million and noninterest income, $25.9 million.

Preprovision net revenue totaled $90.1 million, or 1.72% of average assets. Noninterest expense in the first quarter was consistent with our prior expectations at $97.6 million and our efficiency ratio equaled 50.7%. Lastly, asset quality remains favorable and at historically low levels.

I will provide more detail on our ACL and asset quality later in my remarks. .

Net interest income decreased $8.9 million to $161.8 million, primarily due to a $2.6 million in lower interest income due to 2 less days in the first quarter and nearly $5 million in lower loan-related prepayment fees and accretion income as loan prepayments fell 23% from the prior quarter.

Our reported net interest margin came in at 3.41% for the quarter, and the core net interest margin narrowed 5 basis points to 3.33%, which included the impact of 6 basis points due to the aforementioned lower loan-related fees, partially offset by the favorable shift in our earning asset mix, where we strategically reduced the size and duration of our securities portfolio to fund loan growth during the quarter.

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With the expectation for increases in the Fed funds rate, we would see incremental benefit in future quarters to the net interest income and net interest margin of $1.2 billion of notional overnight SOFR-based fixed-to-floating rate swaps. As of March 31, the fair value of these swaps amounted to $38.7 million. .

Looking ahead to the second quarter of 2022, we expect our core net interest margin to be in the range of 3.25% to 3.30%, excluding the potential benefit of the swaps. This includes the full quarter impact of the $600 million and FHLB term borrowings at a blended rate of 2.15%.

Noninterest income of $25.9 million decreased $1.4 million from the prior quarter, largely due to $1.5 million of lower security gains. And escrow fees decreased $560,000 as a result of seasonally higher transaction volumes in the fourth quarter compared to the first quarter. .

Going forward, we expect our noninterest income for the second quarter to be in the range of $23 million to $24 million excluding any security sales. Consistent with our expectations, noninterest expense was essentially flat at $97.6 million compared to $97.3 million in the fourth quarter.

Salaries and benefits increased to $57 million, reflecting a partial quarter impact of annual merit increases as well as higher payroll taxes. Staffing overall increased to 1,577 employees as we continue to make strategic investments to hire key people to support the business. .

Professional expense decreased $1.8 million due to the timing of certain legal and professional fees. Our noninterest expense should approximate $99 million to $100 million in the second quarter, reflecting the full quarter impact of higher compensation costs.

The first quarter provision for credit loss of $448,000 was driven principally by loan growth and the increasing uncertainty of downside macroeconomic risks due to higher inflation, increasing interest rates and supply chain challenges. .

Turning now to the balance sheet. First quarter results reflected both strong organic loan and deposit growth. Loan production for the quarter totaled $1.46 billion, an increase of 27% over the first quarter of 2021. Average loan balances increased $366 million, while average securities decreased $287 million.

The decrease in average securities was attributable to our actions to shorten duration and add liquidity to the balance sheet. Additionally, we moved approximately $642 million of available-for-sale securities to held-to-maturity during the quarter, bringing the total held-to-maturity portfolio to just under $1 billion. .

On the funding side, we continue to grow noninterest-bearing deposits, which increased to 40.2% of total deposits. And our total cost of deposits remain unchanged at 4 basis points. As noted, we added the $600 million in term FHLB borrowings to bolster liquidity and provide additional interest rate protection from projected higher interest rates.

And increased cash balances by $505 million at quarter end, owing to the evolving environment. Our combined cash and securities portfolio represented just under 25% of total assets. .

Tangible book value decreased to $19.12 at March 31 compared with $20.29 at December 31. With the higher interest rates, we had $1.44 per share negative impact to tangible book value for the mark-to-market loss on our AFS portfolio. I'd like to note that all else being equal, these mark-to-market losses will accrete back to capital over time.

Despite the AOCI loss, our tangible common equity to tangible assets ratio remained a solid 8.79% as of March 31. .

And finally, from an asset quality standpoint, asset quality remained strong despite an increase in nonperforming loans of $25.3 million related to a single credit, where we believe we are well collateralized. Nonperforming assets overall remained at very low levels at 0.26% of total assets compared to 0.15% in the prior quarter.

Net charge-offs totaled $446,000 for the quarter compared with a $1 million recovery in the prior quarter. .

And lastly, our allowance for credit losses ended the quarter at 1.34% and the total loss absorbing capacity comprised of the allowance plus the remaining fair value discount on acquired loans totaled $268.7 million at quarter end or 1.81% of loans held for investment. .

With that, I'll hand it back to Steve. .

Great. Thanks, Ron. I'll wrap up with a few comments about our outlook. We've seen positive trends to begin the year. Our clients have proven resilient and loyal as their businesses and investments continue to generate strong cash flow.

Specific premier clients trust and value the relationships they have with our bankers, and they look for us for innovative technology-enabled products and services. .

Our loan pipeline remains strong at $2.1 billion, and we are experiencing strengthening line utilization rates as well as lower prepayment and payout rates. However, we expect loan production to moderate over time as we have meaningfully increased new loan origination rates in recent weeks.

Additionally, we anticipate that the operating environment, which has changed quickly over the last quarter, may become more challenging as a result of the confluence of rapidly rising interest rates, high inflation and the ongoing disruptions caused by geopolitical events. .

As always, we are being proactive, disciplined and prudent as we think through these emerging risks and preparing for a variety of macroeconomic environments. The current level of uncertainty creates a wider range of outcomes than what we expected at the beginning of the year.

At this point, it's difficult to forecast the degree to which these challenges may impact loan demand and whether businesses and investors may delay their planned investments until there is greater clarity. But as always, we will maintain our disciplined pricing, structuring and underwriting of new credits as well as proactive portfolio management.

The discipline is a key aspect to our approach that has enabled the organization to perform well through a variety of cycles. .

Lastly, we will maintain our focus on delivering long-term value for our shareholders, clients and the communities we serve. We believe with our nimble technology-enabled business model, capital strength and operating expertise, we are well positioned to take advantage of organic and strategic growth opportunities to profitably expand our franchise. .

That concludes our prepared remarks, and we'd be happy to answer any questions.

Vaneeshi, will you please open up the call for questions?.

[Operator Instructions] Our first question comes from David Feaster with Raymond James. .

I just wanted to, first, I guess, follow up on your commentary in the prepared remarks talking about adding talent and capitalizing on the disruption from some larger M&A.

Just curious where you're seeing the most opportunities? Are there any segments or geographies where you're seeing more opportunity than others? And are you looking at potentially filling in some gaps in the footprint? Or entering new segments or verticals with some new hires?.

There's a lot of questions there, David. Let me try to cover the whole gamut. Generally, it's not geographic specific, it's throughout the markets we're operating in. And it's in a variety of roles, whether it's production, operations, credit, treasury, management or the like. .

Generally, we don't look to initiate or enter new market segments or lines of business through a de novo approach, if you will, or hiring of teams. It's just not what we've done. That return on investment, our experience is it takes a long time and it's a high level of uncertainty.

We've had far greater opportunities and success through acquiring, whether it's line -- whether it's specialty lines of business and, of course, whole banks. .

Okay. That makes sense. And then just maybe touching on the fee income side. I appreciate the $23 million to $24 million guidance. Just wanted to get some of the puts and takes there, especially with the trends that you're seeing on the trust side, just given the volatility in the markets. .

And then curious whether your guidance includes any adjustments for -- adjustments on NSF or overdraft fees?.

We have very little in the way of NSF overdraft fees in generally for a long period of time, very conservative in that respect. And I think as you know, very little of our deposit base is consumer related. .

I think that takes Ron -- and our guidance takes into consideration all the factors that we're seeing in the marketplace. And as we're thinking about how they will impact us here and obviously, the guidance was for the second quarter but moving forward. .

From the trust side of the business, we have made some great progress and strides there. I think I -- well, I know I talked about it quite a bit on how we spend time building the foundation to ensure operational excellence there. That has really come along over the last 6 months.

And during that period of time, have been building up the sales team and our outreach and meeting with clients. So we're certainly encouraged about the opportunity that, that line of business presents to continue to grow it. .

Okay. And then just wanted to follow up too on your commentary about being able to meaningfully increase new loan yields.

Just curious, if you could give us any color where you're seeing the most opportunity to push pricing? And then just how the competitive dynamics are on the pricing front? How new loan yields are trending? And whether you're starting to see more aggressiveness from the competitive landscape in terms of terms or structures?.

Well, we -- it was mid, late part of Q1 that we began really, in earnest, moving up pricing, that's continued.

Some of our -- as far as the competitive landscape, and I don't know that I wouldn't necessarily quantify it as we moved pricing up because we saw opportunity, it was just a reality of what we were seeing, and of course, occur on the yield curve, and so how we price credits in general. .

From a competitive standpoint, we've seen few of our competitors move pricing. And -- but hey, if that works for them, so be it. For us, we're thinking about future impacts.

Look, we've got the Fed that is talking about, and I think, generally, the markets are pricing in, as I mentioned, pretty aggressive rate increases over the remaining part of this year.

And coupled with this, a shrinking balance sheet of $95 billion a month that -- although that hasn't been put in stone, that's the expectation here beginning as early as May or June..

We think that, that is going to have an impact in the market. We don't know exactly how, but that's how we're thinking about it, and that's what's driven us to really move pricing up and think even more so about overall risk management. .

The next question comes from Matthew Clark with Piper Sandler. .

Maybe just starting with the uptick in nonaccruals at C&I relationship, can you just give us a sense for what the situation is there? The resolution process? The type of business? Expected loss? It sounds like there's some collateral there that's not fully covered. .

Yes. We -- any expected loss, we've already taken the charges on. And as -- Matthew, as you know, like I think most folks, we move through problem credits fairly aggressively, and that will be the case here. I'd expect our team to get it resolved if it's not this quarter, next quarter fully.

And that approach that we take, that proactive approach, serves us well. I mean, at this point, we're not seeing any degradation in cash flows in any segment. We're going to have, like, I think anybody who extends credit, an occasional one-off situation, and that's the case here. .

Okay. And the type of business though, just -- I know it sounds one-off, but just curious. .

It's -- they're located in L.A. and they have a variety of business interest, so I'm not going to comment though specifically on it. It's not really related to any segment that we're seeing any of the supply chain disruptions per se or maybe some of the other challenges around commodity pricing. .

Okay. And then maybe just moving to the reserve, didn't come down as much as you might have thought. It seems like part of that is the growing uncertainty in the economic environment, which is prudent.

But is it fair to assume that we might stabilize above day 1? Or do you feel like we could still approach day 1 kind of CECL level?.

That seems so long ago. That was pre-pandemic, pre everything that we're looking at 40-year highs in inflation, a Fed that's going to tighten the fastest in decades, shrink their balance sheet, we've got lockdowns in China impacting supply chains, we have the war in Ukraine impacting commodities.

I don't know that we have any sense of how all of these plays out from a reserve standpoint relative to the day 1 CECL reserve level. So that's my high-level thoughts. I don't know, Ron, maybe you have some more specifics that you might like to add. .

Steve, the only thing I would add is I think you nailed it. I -- it's very difficult to say what is normalized at this juncture. So I think it would be premature to even take a swag at it, so I like your answer. .

Yes, Matthew, I'd just add to that the way that we think about the ACL along with the credit discounts that we have, so that loss-absorbing capacity of 181 basis points is also a similar approach that we have in capital management and how we're thinking about our capital ratios and the composition of our capital. .

I think we're frankly in a great position, depending upon how the economy evolves over the next several quarters. We'll be able to take advantage of opportunities and I like where we stand today. .

Great. And then just on that point on capital, I would suspect that buyback is on hold for now, but maybe just confirm that.

And then just your latest trend in conversations with potential targets?.

Sure. So our approach to capital management and buybacks, in particular, has not changed. We've talked about the fact that historically, we'd be opportunistic around buybacks, but that also factors in our outlook for the bank, for our portfolio, for the economy as a whole. So we'll continue to think about it, but we have that available to us.

And we certainly have very strong levels of capital. .

As far as conversations, we're having conversations. We're looking at and considering and we have been, for several quarters, various opportunities. I think what remains is -- true is similar to what I've said in the past is that ideally, we're pursuing transactions that are going to move the needle and really add franchise value.

And we take in consideration the current environment and how that might impact targets. And if it is going to really add to the franchise value, not only being financially accretive and attractive. .

Our next question comes from Chris McGratty with KBW. .

Following up on Matt's question about capital, does the rapidly changing economic outlook and also the rate outlook make the economics of deals more challenging to get over the finish line given the marks? Is that something that would prohibit kind of a near-term consummation of a deal?.

No. I mean it is a factor, of course, that we consider, Chris, and that we are looking at. And you certainly, of course, have to have a meeting of the minds of the 2 parties, the 2 boards. But that doesn't preclude it.

We've always got our own perspective on maybe what the value of an entire franchise is, and we obviously replace nearly all the value on the liability composition of that institution, the deposit base and what is the extent of the relationships.

And then figuring out what the marks are, whether it's a credit mark or interest rate mark is, to a certain extent, it's just math. .

Obviously, the volatility in the equity markets and with all banks, for some, maybe make it more challenging. But I've told folks that we've bought institutions where we were trading below 1.20x of tangible book, and we bought institutions when we've been trading at 2.5x or high single PE multiples or mid-teen PE multiples.

It's all relative to the market and really ultimately from the way that we think about it, can we put the 2 institutions together and create greater value and returns for the combined shareholder bases over a period of time that either institution would have done on their own? And that's how we think about it. .

Great color. If I could, one more on deposits. It's been a hot topic this quarter. You obviously had nice growth.

I guess the question would be given the commercial nature of the balance sheet, have you done any kind of analysis that would potentially identify a sliver of the book that might be higher risk of either flight or beta that might move off over the next couple of quarters as the Fed unwinds?.

One, I would think that it's hard to know exactly what is going to transpire for the entire industry.

But given our deposit base and that it is predominantly relationship based with business owners, our belief in at least history, and we actually have a slide in the investor deck that I mentioned and referenced about our deposit beta at least in the last tightening cycle, how it behaved.

And we certainly think that over the years, we've continued to solidify and strengthen the relationships with our business owners. .

If I think about a particular segment, we don't do a lot, but we have a little bit in municipal deposits. I don't know, Ron, if you have your number. I think it's around $500 million or less, that they tend to be maybe a little bit more price sensitive.

And given the fact that we're also really sensitive to pricing, meaning we're not going to move it up much. It's potential that they find somebody else, but we know that's probably available to them today. We know there's institutions out there offering higher pricing already.

Ron, I don't know, do you have that number?.

Yes. Steve, you're spot on. It's about $500 million, and your characterization of that is spot on.

The only other thing I would add, Chris, is that when we model, of course, we do our internal modeling here, you talk about doing the analysis, the segment analysis, we do model deposit betas higher than what we've actually experienced as highlighted on Slide 19 in the investor deck. And also, we do show a little bit of negative migration.

In other words, coming out of the noninterest-bearing to the interest-bearing. .

So all of that does -- we think it's prudent to model it in that respect and into some of the things that Steve highlighted earlier in his prepared comments, take a more prudent approach to the risk management and actions in that.

So you see a lot of our actions are driven by trying to be very thoughtful and analytical in terms of the way we model this. .

Our next question comes from Andrew Terrell with Stephens. .

Steve, I know you guys have been very disciplined in kind of historical underwriting. I know you've pulled back some in the past when things don't make as much sense in the market.

Would love to just hear any kind of thoughts on, I guess, what portfolios, if any, you're watching more closely right now? And then, just given kind of the macro backdrop, any appetite to kind of pull back the reins a little bit? Or just any color there would be helpful. .

Yes. Are we watching any portfolio more so? No, not really. We're watching them all real closely. But that is, historically, been our approach. We have not pulled back or changed materially any of our underwriting analysis.

The folks that we look to bank, we're looking for the whole relationship and for good solid businesses and investors that have a track record of managing the business and/or assets pretty conservatively. .

We've always been a cash flow underwriter. We're not loan-to-value. I know there's a lot of folks like to focus on it. We report it, but that is not, never has been, our focus. That has always been on the existing cash flows, the quality, the durability of those cash flows in a variety of environments.

And that's something that we're going to continue to monitor. .

When I commented around the potential for moderation in new loan activity, I just think about it that if rates have moved as much as they have and that we have, that, that has the potential to moderate activity, it would be great.

If it doesn't, and the economy continues to expand at the pace that it did, we're very well positioned to take advantage of that. .

But it would seem to me that with this kind of higher rates that we're looking at, that that's got to put a damper on at least maybe the refinance activity that takes place. We're seeing that to an extent in the slowdown of the prepayments and the payoff rates in the portfolio. .

That's really helpful. I appreciate it. If I can move over to Ron, the core NIM guidance for the second quarter, I think it was 3.25% to 3.30% excluding the potential benefit of the swaps.

How many rate hikes do you have embedded within that core NIM guidance, if any?.

For right now, we've got the -- let's see, we've got the 2 rate hikes that are projected here in May and June in there. And of course, the addition again of the full quarter impact of the FHLB, which is about 6 basis points on a linked-quarter basis to the core NIM. So you've got the 2 hikes in there, one in May and one in June.

So those are partial benefits with the full quarter impact of the fixed term FHLB. .

Yes.

And okay, just to clarify, the FHLB was fixed rate?.

Yes, yes. That is correct. 2.15%. .

It was layered over a 1-year and 3-year period. .

Yes. .

Our next question comes from Gary Tenner with D.A. Davidson. .

Steve, you talked about kind of the liquidity build in the quarter, ending the quarter cash and cash equivalents a little over $800 million. And total securities were down, combined AFS and held-to-maturity.

How are you thinking about kind of cash flows off the securities portfolio from here in terms of kind of building a little more liquidity? Or would you expect to reinvest those cash flows?.

I think we'd expect to begin to reinvest those cash flows, Gary. But we do -- we are thinking about how things are going to play out, not only as the Fed raises rates, as they do, and as Ron said, we have this meeting coming up here in early May, another meeting in June and July.

And simultaneously with that, that they begin to contract the balance sheet. .

And I think, from our standpoint, we're thinking about how does this play out? How does it impact the industry? How does the industry respond? And then in turn, how does that impact us and our clients and the like? So at some point, we're certainly going to -- and we're looking at it as we speak. .

But I think that as you can hear in our voice and as we've talked about it, there is a level of uncertainty, and we think it's prudent to be maintaining higher levels of liquidity capital and the like and reserves in this environment until we get a little bit better clarity here. And so that's how we're thinking about it. .

That makes sense for sure.

In terms of the quarterly cash flows off the portfolio, Ron, can you give us a sense of kind of where the expected magnitude of that is in the next quarter or 2?.

Yes. The portfolio of cash flow is probably in the neighborhood of about $80 million to $100 million, a little over $100 million a quarter of the securities portfolio. .

I'm sorry, per quarter or per month?.

Per quarter. .

Per quarter. Okay.

And just a follow-up, on the swaps, was the entire $1.2 billion added here in the first quarter? Or was there any portion of that was already outstanding at your end?.

No. That was, Gary, that was layered in the last 6 months of 2012 in 3 different tranches, if you will. Back in July, again in October and again in December. And that's also on a laddered basis as well. So we feel we're in a very good position there. .

And just to clarify, that's 2021. And I think you may have heard 2012. .

Oh, I'm sorry, 2021. .

This concludes the question-and-answer session. I would like to turn the conference back over to Steve Gardner for any closing remarks. .

Very good. I'd also, before I end the call here, we'd also like to note that we recently published our inaugural corporate social responsibility report to highlight the impact that our teams are having in so many different areas. And that report is available on our website. And thank you, again, all, for joining us.

We look forward to talking to you at the end of the second quarter. .

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