Pacific Premier Bancorp, Inc. : Announces Second Quarter 2018 Results (Unaudited)

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 2018 of $27.3 million, or $0.58 per diluted share, compared with net income of $28.0 million, or $0.60 per diluted share, for the first quarter of 2018 and net income of $14.2 million, or $0.35 per diluted share, for the second quarter of 2017. Financial results for the second quarter of 2018 include $943,000 of merger-related expense.

For the three months ended June 30, 2018, the Company’s return on average assets (“ROAA”) was 1.35% and return on average tangible common equity (“ROATCE”) was 15.42%. For the three months ended March 31, 2018, the Company's ROAA was 1.39% and the ROATCE was 16.51%. For the three months ended June 30, 2017, the Company's ROAA was 0.89% and its ROATCE was 11.33%. Total assets as of June 30, 2018 were $8.2 billion compared with $8.1 billion at March 31, 2018 and $6.4 billion at June 30, 2017.

Steven R. Gardner, Chairman, President and Chief Executive Officer of the Company, commented, “We continue to execute well on our strategic priorities while delivering solid financial results. On July 1, we completed the acquisition of Grandpoint Capital in a little more than four months since the announcement. We have finalized the operational integration of both the Pacific Premier and Grandpoint teams, which further strengthens and expands the organization's depth, breadth and expertise. All of the remaining cost savings are expected to be realized by year-end as we complete the system conversion in mid-October of this year. Our franchise has a strong foundation in place to drive growth and increase market share.

“We have substantively completed the investments in our personnel and systems necessary to meet the heightened regulatory requirements associated with surpassing the $10 billion asset threshold. As we continue to add scale through organic and acquisitive growth, we expect to more fully absorb the investments we have made in our infrastructure and realize greater operating leverage going forward.

“While our earnings performance has generated attractive risk adjusted returns in the first half of the year, it does not live up to the high standards that we set for ourselves. We are capable of stronger performance metrics across the organization, and with the completion of a number of key projects, I expect our team to operate at a higher level. As always, we are refining our business strategies to drive an increased level of balance sheet growth in the second half of the year, and when combined with the projected synergies from the Grandpoint acquisition, we expect to be well positioned to realize an increase in our earnings power in 2019,” said Mr. Gardner.

FINANCIAL HIGHLIGHTS

INCOME STATEMENT HIGHLIGHTS

Net Interest Income and Net Interest Margin

Net interest income totaled $81.2 million in the second quarter of 2018, essentially unchanged from the first quarter of 2018. Compared to the prior quarter, net interest income was positively impacted by higher yields and average balances on our loans and investments, higher prepayments and other loan related fees, which were principally offset by lower accretion income, and higher deposit and borrowing costs.

Net interest margin for the second quarter was 4.41%, compared with 4.50% in the prior quarter. The decrease was principally driven by lower accretion income of $1.9 million, compared to $3.7 million in the first quarter of 2018. Excluding the impact of accretion, our core net interest margin expanded to 4.29%, compared to 4.26% in the prior quarter. Following the closing of Grandpoint, we expect the core net interest margin to be in the 4.05% to 4.15% range.

Net interest income for the second quarter of 2018 increased $17.8 million, or 28%, compared to the second quarter of 2017. The increase was primarily related to an increase in average interest-earning assets of $1.6 billion, which resulted primarily from our acquisition of Plaza Bancorp (“Plaza”) in the fourth quarter of 2017 and our organic loan growth since the end of the second quarter of 2017.

Provision for Credit Losses

A provision for credit losses of $1.8 million was recorded for the second quarter of 2018, compared with a provision for credit losses of $2.3 million for the quarter ended March 31, 2018. The second quarter of 2018 provision for credit losses includes a $400,000 provision for unfunded commitments. The first quarter of 2018 included no additional allowance for unfunded commitments. The decrease in our provision for credit losses was primarily due to lower loan growth and lower net charge-offs compared to the prior quarter. We anticipate that our provision will approximate $2.5 million to $3.5 million per quarter in the second half of 2018.

Noninterest Income

Noninterest income for the second quarter of 2018 was $8.2 million, an increase of $485,000, or 6.3%, from the first quarter of 2018. The increase from the first quarter of 2018 was related to an $885,000 increase in net gain from the sales of loans and a $324,000 increase in net gain from sales of investment securities, partially offset by a $661,000 decrease in other income, driven primarily by a $290,000 net loss attributable to a CRA investment, and a $180,000 decrease in recoveries from pre-acquisition charged-off loans.

During the second quarter of 2018, the Bank sold $31.9 million of Small Business Administration (“SBA”) loans for a gain of $2.9 million, compared with $35.7 million of SBA loans sold for a gain of $2.7 million in the first quarter of 2018. Additionally, the Bank sold $20.4 million of commercial real estate loans during the second quarter of 2018 for a gain of $927,000, compared with the sale of one commercial real estate loan for a gain of $230,000 in the first quarter of 2018.

Noninterest income for the second quarter of 2018 decreased $608,000, or 6.9%, compared to the second quarter of 2017. The decrease from the second quarter of 2017 was primarily related to a $1.8 million decrease in net gain from sales of investment securities, partially offset by a $956,000 increase in net gain from sales of loans, and a $411,000 increase in debit card interchange fees, as well as other service fee increases. With the closing of Grandpoint, our quarterly estimate of noninterest income for the second half of 2018 is $9.0 million to $10.0 million.

Noninterest Expense

Noninterest expense totaled $50.1 million for the second quarter of 2018, an increase of $268,000, or 0.5%, compared with the first quarter of 2018. The increase was primarily due to a $626,000 increase in deposit expense and a $401,000 increase in compensation and benefits. These increases were partially offset by decreases of $278,000 in CDI amortization, $605,000 in other expense and $178,000 in marketing expense. The second quarter of 2018 included $943,000 of merger-related expense compared with $936,000 in the first quarter of 2018.

In comparison to the second quarter of 2017, noninterest expense grew by $1.6 million, or 3.3%. The increase was primarily related to the additional costs from operations, personnel and branches retained from the acquisition of Plaza, combined with our continued investment in personnel to support our organic growth in loans and deposits. The second quarter of 2017 included merger-related expense of $10.1 million. With the closing of Grandpoint, we expect quarterly noninterest expense, excluding merger-related expense, should range between $63 million and $65 million for the second half of 2018.

Income Tax

For the second quarter of 2018, our effective tax rate was 27.2%, compared with 24.1% for the first quarter of 2018 and 34.7% for the second quarter of 2017. The increase in the effective tax rate for the second quarter of 2018, compared to the first quarter of 2018, was primarily the result of the tax effect of exercised and vested share-based compensation awards, which are reported as discrete items in the period they occur, resulting in a $372,000 tax benefit to the Company for the second quarter of 2018, compared to a $1.4 million tax benefit in the first quarter of 2018. The Company expects the annual effective tax rate to be in the range of 26% to 27%.

The decrease in the effective tax rate for the second quarter of 2018, compared to the second quarter of 2017, was primarily the result of “H.R.1,” formerly known as the “Tax Cuts and Jobs Act,” which was 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%.

BALANCE SHEET HIGHLIGHTS

Loans

Loans held for investment totaled $6.3 billion at June 30, 2018, an increase of $35.7 million, or 0.6%, from March 31, 2018, and an increase of $1.4 billion, or 29%, from June 30, 2017. The $35.7 million increase for the current quarter compared to the prior quarter was driven primarily by new organic loan commitments of $530 million compared with $488 million in the first quarter of 2018, partially offset by higher loan prepayments increasing to $266 million in the second quarter from $213 million in the prior quarter, and loans sales increasing to $52 million compared with $37 million in the prior quarter.

Business loans increased $79.9 million, or 9.5%, and real estate loans and consumer loans decreased $39.6 million and $4.2 million, respectively. Business loans represented 55% of the total gross loans held for investment for the quarter compared with 54% in the prior quarter and 46% in the second quarter of 2017. The total end-of-period weighted average interest rate on loans at June 30, 2018 was 5.12%, compared to 5.04% at March 31, 2018 and 4.79% at June 30, 2017, reflecting the impact of higher rates on new originations as well as the favorable repricing of variable rate portfolio loans as a result of recent Federal Reserve Bank fed funds rate increases.

The $530 million of new organic loan commitments during the second quarter of 2018 included $126 million of commercial and industrial loans, $89 million of franchise loans, $80 million of commercial real estate owner occupied loans, $79 million of construction loans, $60 million of commercial real estate non-owner occupied loans, $36 million of SBA loans, $31 million of multi-family loans and $17 million of agribusiness and farmland loans. The weighted average rate on our new loan production was 5.35% during the second quarter of 2018, an increase from 5.27% in the first quarter of 2018.

At June 30, 2018, our ratio of loans held for investment to total deposits was 99.5%, compared with 100.8% and 98.2% at March 31, 2018 and June 30, 2017, respectively.

Asset Quality and Allowance for Loan Losses

At June 30, 2018, our allowance for loan losses was $31.7 million, an increase of $1.2 million from March 31, 2018. The provision for loan losses for the second quarter of 2018 was $1.4 million, while net charge-offs were $108,000.

The ratio of allowance for loan losses to loans held for investment at June 30, 2018 amounted to 0.51%, compared to 0.49% and 0.52% at March 31, 2018 and June 30, 2017, 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 $22.2 million, or 0.35% of total loans held for investment, as of June 30, 2018, compared to $24.5 million, or 0.39% of total loans held for investment, as of March 31, 2018.

Nonperforming assets totaled $6.4 million, or 0.08% of total assets, at June 30, 2018, a decrease from $8.6 million, or 0.11% of total assets, at March 31, 2018. During the second quarter of 2018, nonperforming loans decreased $2.1 million to $6.0 million and other real estate owned increased $14,000 to $220,000, while other assets owned decreased $50,000 to $183,000. Loan delinquencies were $7.4 million, or 0.12% of loans held for investment, at June 30, 2018, compared to $12.8 million, or 0.20% of loans held for investment, at March 31, 2018.

Investment Securities

Investments totaled $907 million at June 30, 2018, an increase of $18.9 million from March 31, 2018, and $196 million from June 30, 2017. The increase in the second quarter of 2018 was primarily the result of $71.8 million in purchases, partially offset by $15.9 million in sales and $32.3 million in principal payments/amortization/redemptions.

Deposits

At June 30, 2018, deposits totaled $6.3 billion, an increase of $116 million, or 1.9%, from March 31, 2018 and $1.4 billion, or 28%, from June 30, 2017. At June 30, 2018, non-maturity deposits totaled $5.1 billion, or 81% of total deposits, an increase of $64.9 million, or 1.3%, from March 31, 2018 and an increase of $1.0 billion, or 24%, from June 30, 2017. During the second quarter of 2018, deposit increases included $79.2 million in retail certificates deposit, $41.0 million in money market/savings deposits and $36.9 million in noninterest-bearing deposits, partially offset by a $28.1 million decrease in wholesale/brokered certificates of deposit and a $12.9 million decrease in interest checking.

The weighted average cost of deposits for the three-month period ending June 30, 2018 was 0.50%, compared to 0.39% for the three-month period ending March 31, 2018 and 0.25% for the three-month period ending June 30, 2017. The increase in the weighted average cost of deposits was primarily driven by higher rates in money market and retail certificates of deposit accounts.

Borrowings

At June 30, 2018, total borrowings amounted to $484 million, a decrease of $104 million, or 18%, from March 31, 2018 and an increase of $7.3 million, or 1.5%, from June 30, 2017. Total borrowings for the quarter included $338 million of advances from the Federal Home Loan Bank of San Francisco and $105 million of subordinated debt. At June 30, 2018, total borrowings represented 5.9% of total assets, compared to 7.3% and 7.4%, as of March 31, 2018 and June 30, 2017, respectively.

Capital Ratios

At June 30, 2018, our ratio of tangible common equity to total assets was 9.91%, compared with 9.63% in the prior quarter, with a book value per share of $27.63 and a tangible book value per share of $16.21 per share, compared with a tangible book value per share of $15.63 at March 31, 2018 and a tangible book value per share of $13.83 at June 30, 2017.

At June 30, 2018, the Company had a tier 1 leverage ratio of 10.41%, common equity tier 1 capital ratio of 10.80%, tier 1 capital ratio of 11.09% and total capital ratio of 12.75%.

At June 30, 2018, the Bank exceeded all regulatory capital requirements with a tier 1 leverage ratio of 11.31%, common equity tier 1 capital ratio of 12.05%, tier 1 capital ratio of 12.05% and total capital ratio of 12.53%. 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.

Conference Call and Webcast

The Company will host a conference call at 9:00 a.m. PT / 12:00 p.m. ET on July 24, 2018 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 31, 2018 at 877-344-7529, conference ID 10121631.

About Pacific Premier Bancorp, Inc.

Pacific Premier Bancorp is the holding company for Pacific Premier Bank, one of the largest banks headquartered in Southern California with approximately $11.6 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, shareholder value creation and the impact of the acquisition of Grandpoint Capital, Inc. (“Grandpoint”) and its wholly owned subsidiary, Grandpoint Bank, 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 expected cost savings, synergies and other financial benefits from the Grandpoint acquisition or any other 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; 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 (including the Dodd-Frank Wall Street Reform and Consumer Protection Act) 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