PacWest Bancorp (NASDAQ:PACW) Q1 2023 Earnings Call Transcript

PacWest Bancorp (NASDAQ:PACW) Q1 2023 Earnings Call Transcript April 26, 2023

PacWest Bancorp misses on earnings expectations. Reported EPS is $-10.22 EPS, expectations were $0.61.

Operator: Good day and welcome to the PacWest Bancorp First Quarter 2023 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Bill Black from PacWest Bancorp.

William Black: Thank you. Good morning and welcome to PacWest First Quarter 2023 Earnings Conference Call. With me today are Paul Taylor, President and CEO; and Kevin Thompson, our CFO. Before I hand the call over to Paul, please note that we may make forward-looking statements during today’s call that are subject to risks, uncertainties and assumptions. For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements, see our company’s SEC filings, including the 8-K filed yesterday afternoon, which is also available on the company’s website. I’d like to turn the call over to our CEO, Paul Taylor.

Paul Taylor: Thank you, Bill, and good morning, everyone. I’d like to start by thanking our clients and team for their dedication to PacWest especially over these last six weeks, which have been a very challenging period of time for the banking industry, including PacWest Bancorp. Like many other banks, PacWest had an outflow of deposits immediately following the closure of the two large regional banks in early March. In response, we took swift action to enhance our liquidity and capital positions. To withstand the deposit outflows we saw in March, we focused on maximizing our balance sheet liquidity by accessing various resources. Deposits stabilized in the latter part of March and have rebounded nicely in April, increasing approximately $600 million subsequent to quarter end with over 80% of that in our community bank.

Immediately available liquidity now exceeds our uninsured deposits with a coverage ratio of approximately 153%. Deposit growth has benefited from deposit campaigns in the community bank focused on savings accounts and CDs as well as over 140 new business accounts opened in the Venture Bank since March 9. To further bolster our deposit base, we kicked off initiatives to launch new depository channels, including a direct-to-consumer bank expected to be operational by the third quarter of 2023. Having addressed these pressures, we are now able to return to the initiatives under our renewed strategic plan we announced in January which will expedite PacWest evolution to focus on our core community bank franchise and deemphasize noncore businesses while intently focusing on reducing expenses on a smaller balance sheet.

As such, we have begun to take actions, including moving our $2.8 billion lender finance business to held for sale and initiating the sale of approximately $650 million in civic loans. Once completed, these steps will significantly de-lever the balance sheet, further enhance our liquidity position and accelerate our strategy to increase the CET1 ratio to over 10%. The market dynamics during the quarter caused a significant decline in regional bank stocks, ours included. As a result, we recorded a noncash $1.38 billion goodwill impairment charge. Despite these challenges, we are pleased with our adjusted financial results of EPS of $0.66 that exceed analyst estimates and we are continuing to leverage the core strength of our balance sheet. As we navigate the challenging industry dynamics, PacWest will continue to prioritize our customer relationships which have been the bedrock of our success for more than 20 years.

Now I will turn it over to Kevin to review our financials in more detail.

Kevin Thompson: Thank you, Paul. As you mentioned, the market volatility in the quarter resulted in a significant decline in regional bank stocks. As a result, we recorded a goodwill impairment charge of $1.38 billion. It is important to note that goodwill is a noncash charge and has no impact on our regulatory capital ratios, cash flows or liquidity position. We also incurred severance and contract termination expenses of $8.5 million related to our strategic transformation initiatives. In total, this resulted in a net loss of $1.21 billion or $10.22 per diluted share. Adjusting for these unusual items, our earnings would have been $89.4 million or $0.66 per diluted share which demonstrates the strength of our underlying business.

Total deposits decreased by $5.7 billion or 16.9% in the quarter due primarily to a $7.3 billion decrease in retail non-maturity deposits and a $609 million decrease in wholesale non-maturity deposits, offset partially by a $2.2 billion increase in time deposits. As Paul mentioned, deposits increased approximately $600 million subsequent to quarter end, mostly in the community bank. Total insured deposits represented approximately 73% of total deposits in mid-April up from 48% at year-end. We are holding a higher than usual amount of cash on balance sheet of $7 billion at quarter end. We anticipate bringing that balance down to more normalized levels over the next weeks. Total loans and leases decreased slightly to $28.5 billion this quarter as part of our continuing balance sheet management strategy.

We’ve transferred the $2.8 billion lender finance portfolio to held for sale to expedite the de-levering of the balance sheet, giving us the ability to pay down excess borrowings. Between this and other asset sales, we expect to increase the CET1 ratio to above 10% over the next few months. With our solid underlying earnings this quarter, the CET1 ratio already increased 52 basis points to 9.22% at quarter end. Unrealized losses on the company’s investment portfolio also improved, declined from $791 million in the fourth quarter to $736 million. Interest income increased $45 million or 9% in the quarter, with 42% of our loans having variable interest rate terms. We continue to see a positive loan beta trend with loan yields increasing 41 basis points to 6.14% in the quarter.

This was offset by the cost of deposits, increasing 61 basis points to 1.98% in the same period. As part of our actions to enhance our on-balance sheet liquidity in the latter part of the quarter, we utilize borrowings from the FHLB, the bank term funding program and temporarily from the Federal Reserve discount window. We also secured $1.4 billion in fully funded cash proceeds from Atlas SP Partners through a new senior asset-backed financing facility, which unlocked liquidity from unencumbered high-quality assets in an expeditious manner. These prudent actions impacted our interest expense in the quarter, which increased by $88 million to $239 million. The resulting net interest margin decreased to 2.89%. The severance expense mentioned earlier is related to a reduction in force in our civic business that was initiated in the first quarter.

We expect an annualized decrease in expenses of approximately $32 million beginning in May as a result of these actions. We were already engaged in an operational efficiency strategy and we are now expediting these efforts to reduce facilities and vendors, optimize business processes and execute on other cost savings across the business in order to improve our profitability. Excluding the goodwill impairment and severance and contract termination items, noninterest expense decreased by $4.4 million to $188 million in the quarter. This was mainly due to lower compensation expense offset by higher insurance assessment and customer-related expenses. Credit metrics remained steady with the nonperforming asset ratio declining three basis points to 35 basis points.

Finally, the allowance for credit loss ratio increased slightly to 1.11%. This concludes our prepared remarks. Operator, could you please open the line for questions.

Q&A Session

Operator: Thank you. Our first question comes from Chris McGratty with Keefe, Bruyette, & Woods.

Christopher McGratty: Hey, good morning. Paul, thanks for the color on the slide deck. The 10% bogey that you’ve laid out previously, it seems like you’re going to get there with the sale of the — of the lender finance portfolio. I’m interested, I guess, in a philosophical capital question, how is — what’s your view on 10 being the right number today? I think some of your peers have even said 11? And then maybe more broadly, the dividend obviously is elevated relative to current . How are we thinking just broadly about capital? Understand you also made an attempt to raise capital during the quarter? Thanks.

Paul Taylor: Yes. So to address the 10% first, I mean, 10% has always been sort of a threshold for me, but I mean we will continue to build capital. I mean we’re going to most likely exceed 10% here in the next few months once we finalize some of the asset sales we’ve talked about. But we will continue to go on from there. I think today more capital is better. So we’ll continue to grow capital. As you look at — we did — as you mentioned, we did look at raising capital. We — at the time when this event first happened, is the positive event first happened in the banking industry. We really looked at everything. What should we do? What can we do? What are our options? Capital was one of the options we were looking at, but then we also looked at what we could do to the balance sheet.

Even in our strategic plan, we had talked about operating a smaller balance sheet that would be more profitable. So our goal was to shrink the balance sheet, get some of the ballooning out of the balance sheet. Unfortunately, the wrong side of the balance sheet shrink, but the balance sheet has shrunk. So we’re selling off some of these portfolios to get the balance sheet more in balance. And by doing that, we’re creating capital, and we’re also creating liquidity. So we’re very happy with what we’ve done so far, especially after we will — after we sell the portfolios. But at the end of the quarter, we’re at 9.22. So sort of the vision that we had has been accelerated pretty dramatically.

Kevin Thompson: And I’ll add to that, CET1 ratio is very important. We’re focused on that increasing that, but all our capital ratios are important as well. Our total capital ratio is actually very strong at 14.22% and you’ll see that’s actually above a number of our peers. So we’re very proud of that and happy with that. I just want to get the CET1 in line as well. It’s an important element with the common equity in it.

Christopher McGratty: Thanks for all that color. And on the — yeah.

Paul Taylor: Yeah, and as we looked at shrinking, it seems like a much better economic situation for our shareholders.

Christopher McGratty: Okay. Thanks for that Paul. The $35 billion you referenced in the press release, is that a total asset number? Or is that an earning asset number? I’m trying to map the earning asset with your comments of liquidity normalizing in the $3 billion portfolio? I’m just trying to get a sense of where earning assets are going to shake out?

Paul Taylor: So that is a total asset number.

Christopher McGratty: So to get there, you need to take out goodwill, our lender finance portfolio, some portions of our civic portfolio about $650 million and then bringing our cash position down to a more normalized level.

Paul Taylor: Yes. As you look at the balance sheet at the end of the quarter, I mean, there’s a tremendous amount of cash. I mean our Fed account has about $7 billion in it. We chose to become very liquid going through this event. We didn’t know how deep the event would go, but now we can start sort of pulling those cash levels down. Balance sheet is about $44 billion as we sit and going through the steps that Kevin mentioned along with taking that cash out, brings it down to $35 billion, $36 billion.

Christopher McGratty: Okay. And pre-COVID or I’m sorry pre — your cash is about 5% right now. Is that kind of what you’re thinking normal 5% on $35 billion or so?

Kevin Thompson: I think that’s right. We may be a little more conservative going forward in various ways. Obviously, uninsured deposits become a big focus in the entire banking industry. And so as we look at our liquidity stress testing that will probably have more severe treatment and the stress testing that we may hold a little more cash because of uninsured balances.

Paul Taylor: Again, our insured balances are about 73% of our deposits right now.

Christopher McGratty: Got it. Thanks for all that color. I appreciate it.

Paul Taylor: Thanks.

Operator: Our next question comes from Matthew Clark with Piper Sandler. Please go ahead.

Paul Taylor: Good morning.

Matthew Clark: Hey, good morning. Thank you. Hey, how are you doing? The first one for me is around the lender finance business. Can you quantify how much in the way of expenses you have tied to that business? And how quickly might those expenses come out?

Paul Taylor: Yes. So we have not quantified those expenses. It’s a very small team in Chicago. And the balance is a little over $2.7 billion and we are in the process of selling it right now.

Matthew Clark: Okay. And then did you have any civic loan sales in the quarter? And if you did, at what price?

Paul Taylor: Yes, we did. Bill, do you want to take the exact dollar amount, sir?

William Black: Yes. We sold about $300 million at roughly a one point gain.

Matthew Clark: Okay. Got it. And then in terms of the loans that are pledged against the Atlas Repo. Can you update us on whether or not you plan to sell those underlying assets here in the coming months or quarters? And just trying to get a sense for timing and when you might be able to pay off that repo?

Paul Taylor: Yeah. So it needs to be paid. The loan terminates in December. And that’s something we’re considering right now. We’re letting the balance sheet settle down a little bit with all the actions and sort of trauma that it’s been through, but we’re absolutely considering that.

Matthew Clark: Okay. And then just on the balance sheet size as we get into next year. I mean it sounds like you’re going to get to $35 billion here in short order. I assume it continues to come down next year, but what do you think the balance sheet kind of stabilizes? And do you have an ROA target for next year, knowing this year is going to be a little subdued?

Paul Taylor: Yes. We’re working on that right now. We think that, I mean, our prediction is that we’re going to go into some type of recession here that will lead into next year. So we’re more looking at sort of flattish type balance sheet going into next year.

Matthew Clark: Okay. And then just in terms of the borrowings, I mean, should we assume borrowings come down by $6 billion, $7 billion here in the upcoming quarter. Is that fair or plus or minus?

William Black: I think it’s more like $5 billion, $6 billion.

Kevin Thompson: Yeah. I think we’ll bring our cash down by that much, but then we’ll also have the benefit of our lender finance and civic sales. As those happen, we’ll use those to pay down wholesale funding and get that balance sheet over time. Also, we do anticipate some repatriation of some of our deposits over time. Our team is working really hard on that. We have different deposit campaigns and initiatives we’re working on. And there is some outflow of some of the customers from SVB and there could be some potential upside for us there. So that could also benefit our balance sheet in terms of lower borrowings.

Paul Taylor: Yes. And we’ve been successful as of, I think, the 24th we’ve brought back somewhere around $700 million in deposits. And on the venture side, we’ve opened up a lot of new — a lot of new accounts, somewhere around 140 new accounts. It takes a little while for them to fund. But we’re out there. We’re talking to customers, we’re talking to customers that have moved their money predominantly, but we’re also talking to new customers.

Matthew Clark: Got it. Thank you.

Paul Taylor: Thank you.

Kevin Thompson: Thank you.

Operator: And we’ll take our next question from the line of Jared Shaw with Wells Fargo Securities. Please go ahead.

Paul Taylor: Good morning.

Jared Shaw: Hey, good morning. If you look at the — what was the — sorry for the echo here. What was the margin in March at the end of the quarter?

Kevin Thompson: End of the quarter, it was dipping into the low 280s. And of course even in the 270s actually, as I look at my schedule here, and obviously, the borrowings came in the latter half of the quarter. So we’ll see some pressure into the next quarter.

Jared Shaw: Yes. Okay. And then you answered that expect to see the borrowings come down at a rapid pace as cash comes down and as the proceeds from loan sales come in. What’s the expectation or what should we be thinking about deposit growth from here with some of those initiatives that you spoke about, how should we think about dollars to deposits growing through the end of the year?

Paul Taylor: That as we look at that, we’ve talked a lot about that. That is incredibly hard to predict. There’s — it’s sort of hard to figure out what happened to begin with. If you look at the deposit run, it was pretty pervasive throughout the industry. I was — as I read people’s press releases, I was pretty shocked at how pervasive it was. We’ve been pretty successful at bringing back $700 million. I think that over the year, I mean, it’s probably going to be a few billion dollars, we hope, but we’ll have to see.

Jared Shaw: Okay. Thanks. And then looking at — on the loan growth side, this quarter, most of the growth was in disbursements. How should we think about the appetite for additional new loan production here? And what’s the remaining unfunded commitments on the loan side?

Paul Taylor: Yes. So we’ve seen a decline in demand as we’ve moved into this year. But we’re also — even before this deposit event, we were trying to shrink the balance sheet, and we became very selective in our lending. And a couple of reasons there, we wanted to shrink, but we also feel that there’s some kind of downturn recession, whatever you want to call it in a not-so-distant future and we wanted to prepare for that also. The unfunded commitments, Kevin, there —

Kevin Thompson: They dropped from above $11 billion to just about $9 billion in the quarter. Part of that is the moving of lender finance to about $400 million of that moving lender finance to held for sale. But also we’re just — we’re not funding new loans. Some of the loans we have on the books don’t pencil anymore in terms of the unfunded portion. We anticipate that coming down over time. But you are correct. The fundings that are happening right now are the unfunded portions. There were previous commitments. We do not plan to grow going forward as we kind of get through the recession, get our balance sheet restructured.

Jared Shaw: Okay. And then just finally for me, maybe a little more philosophically, when you look at the — when you look at the loans to equity funds and the outflow of deposits there. I guess, what’s the sentiment or the appetite to keep lending to potentially customers that don’t support the right side of the balance sheet as well? Is that an area we could see maybe a faster pull back in the future? Or do you think that there’s actually maybe an opportunity there with the market disruption?

Paul Taylor: Yeah. So I think there’s a huge opportunity there. I think we have to manage that business differently. I mean, clearly, deposits aren’t very similar to a normal community commercial bank deposits. So we’ve spent a lot of time analyzing those deposit outflows and trying to figure out where the floor is in that deposit base where they’ve got to keep on board. But we understand your question. That’s something we’re working on right now, but we will stay in the business. We see it as a — as a great opportunity for both the right and left side of the balance sheet.

Mark Yung: And Paul maybe I can complement. This is Mark Yung here. So in terms of equity funds, just to make sure, I mean, this has always been a kind of depository-focused program for us as opposed to other banks. And so even if you look at today, we’re still kind of one-to-one there in terms of outs and deposits. So that focus continues very strongly going forward. And that depository programs focused on venture capital funds as opposed to private equity funds.

Jared Shaw: Great. Thank you.

Kevin Thompson: And I’ll just add, the interest — fairly new here, and Paul and I have spent a lot of time speaking with clients through this process. I am so impressed with our client base and their loyalty to PacWest. There are a number of the venture banking deposits that didn’t move a penny and love banking with us and that includes our community banking side. People love banking with PacWest. We have a white glove treatment of our clients, a great reciprocal relationship. And so we’re very focused on those clients to have those operating accounts, that relationship who’ve been loyal to us and we’ve been loyal to them and anticipate repatriating, as I mentioned before, some balances of clients who just temporarily move balances to be safe during this time.

Jared Shaw: Great. Thanks for that color.

Operator: Our next question comes from the line of Andrew Terrell with Stephens. Please go ahead.

Paul Taylor: Good morning.

Andrew Terrell: Hey, good morning. Thanks for the questions. If I could start just on the dividend. Can you remind us just the roles after taking a GAAP loss? Does that preclude you from paying a common dividend or does it affect the preferred dividend at all? And then just with the focus on internal capital. I realize you’re going to be building to 10% CET1 in pretty short order. But I guess why not lower the dividend and help out that kind of capital glide path moving forward?

Paul Taylor: Yeah. So once you take a hit like we’ve taken, you’ve got to just get a permission from the regulators to pay a dividend. But it’s very perfunctory, if you will. But — so that’s in process for the first quarter. And as we look forward at a dividend, we have a regularly scheduled board meeting next week. And that’s an agenda item to talk about and approve that. Obviously that’s a Board decision.

Kevin Thompson: And I’ll just add there are various rules in terms of the different regular federal reserve FDIC, state regulators have their different rules in different states of their different rules and what we can pay in dividends, but regulators understand that goodwill write-down is a noncash event and not necessarily a threat to the underlying operational income of the company.

Andrew Terrell: Got it. Okay. If I can move over to expenses really quick. So the — sounds like the actions taken this quarter are about $32 million improvement in the annual run rate. So $8 million or so a quarter. I guess as we think about expenses into 2Q, obviously, before the lender finance sale, is $8 million off the run rate on a quarterly basis into 2Q a good way to think about the operating expenses? Or just given some of the commentary around expedition of the efficiency initiative. I guess could we see expense improvement further than just an $8 million decline?

Paul Taylor: Yes. So I’ll start with that and then I’ll let Kevin finish. But we’ve got a smaller balance sheet. So we absolutely need to accelerate the expense reduction plan. We had already started that. We’ve been looking at headcount. We’ve been looking at facilities in particular. PacWest has a lot of facilities across the country, some that are duplicative. So we’re very aggressively attacking those, but you will continue to see throughout the remainder of this year, significant expense reductions.

Kevin Thompson: I agree. It takes time for expense reductions to take effect. So in the fourth quarter, we had done some early retirements. We had wound on our premium finance and multifamily businesses. We start seeing those benefits really the latter end of first quarter and in the second quarter. In the first quarter, we did a reduction of course of over 200 people in our civic entity. We’ll start seeing a $32 million annualized benefit to that starting in May. And so the things that we’re working on, and again, we’ve mentioned we’re working more expeditiously on our operational efficiency will take place over the next while. But I do want to reiterate, we’re less focused on short-term earnings and we are our long-term balance sheet strategy long-term profitability.

Andrew Terrell: Yeah, totally understood, okay. And then just maybe a clarification for the quarter to date deposit growth in 2Q, you guys referenced I think around $700 million. Was any of that brokered deposit growth? And then if I could, clarify on page four of the presentation, it looks like the insured balances are up about $1.1 billion quarter to date, but the uninsured is all $400 million or so. Is there any movement from uninsured to insured included in that graph or so far in the second quarter, are you still seeing quarter-to-date net outflows in uninsured deposits?

Paul Taylor: Yeah. So, the $700 million that we’ve grown has no brokered, wholesale deposits of any kind. Those are customer deposits that we’ve brought in.

Kevin Thompson: That’s right and uninsured has been fairly — uninsured and insured balance has been fairly steady over the past number of — a few weeks.

Andrew Terrell: Okay, very good. Thanks for taking the questions. I’ll step back.

Paul Taylor: Thank you.

Operator: Our next question comes from the line of Christopher Marinac with Janney Montgomery Scott. Please go ahead.

Paul Taylor: Good morning.

Christopher Marinac: Hey, thanks, good morning. Good morning. Paul, I just wanted to ask about the core community bank, and to what extent you can give us some more information about the granularity of your lending and how that can play out as you go through this recession scenario over the next few quarters?

Paul Taylor: So, when you look at the core community bank of PacWest, I mean, it’s a $14 billion, $15 billion bank. It’s predominantly located in Southern California, and it’s a really great bank. I mean It’s a nicely balanced bank. It’s got lots of granularity. We do have some bigger accounts in there, both on the deposit side and on the loan side. And keep in mind that this deposit outflows, it was mostly in the venture bank and in a smaller amount in the community bank. PacWest is about 22 years old. It’s got very — when I first came on board several months ago, I mean the shocking thing was is the longevity of customers and the loyalty of customers in that community bank space to PacWest. As Kevin mentioned, he called a white glove service, but our guys out in the field in the community bank, they’re great at producing business, they’re great at taking care of customers. So, there is definitely some granularity, but there’s also some larger customers in there.

Kevin Thompson: And I will add, if you look at our balance sheet, 50% of it is extremely low-risk historically asset classes. And then unfortunately coming with that comes low yields, but you look at that, 20% of our loan book is multifamily, mostly in California. Very good experience there in terms of the worst recessions in multifamily performance. Then you look at our single-family mortgage, also very low LTVs high quality FICOs. Our premium finance business, our lender finance business, fund finance, this is 50% of our portfolio, they’ve great history through recessions.

Christopher Marinac: Great. And if we looked at the criticized and classified ratios that you disclosed, would they be similar at the community bank or would they in fact be better?

Paul Taylor: They would be similar, I believe. They would be similar.

Christopher Marinac: Great, Paul. Thank you for taking the questions.

Paul Taylor: All right. Thank you.

Operator: Our next question comes from the line of Brandon King with Truist Securities. Please go ahead.

Paul Taylor: Good morning.

Brandon King: Hey, good morning. So, I wanted to follow up on a quarter-to-date deposit growth in customers. Could you elaborate more on how you’re able to achieve that growth and if it was more rate driven or relationship driven and what kind of accounts you grew in, was it time deposits CDs or checking accounts?

Paul Taylor: Yeah. So the majority of the deposit growth was in money market accounts and CD accounts. And it’s a combination of existing customers and also new customers. I would say, it was driven partly by rate and partly by relationship. We did go out with a very nice rate on CDs and the money market in order to drive some of those balances back to the bank. We went out with a high rate to get everybody’s attention, which worked, and now, we’ve been lowering the rate, but we’re still having that continued growth, so very encouraged by the amount of deposit growth.

Kevin Thompson: And also, we haven’t talked about this much, but the first quarter generally, we see seasonal outflow of deposits. That’s a period when people are paying taxes, people are paying bonuses and things like that. So, we expect to see deposits down during that period and we’ll start to see some seasonal inflow starting in the second quarter.

Paul Taylor: Yeah. Good point.

Brandon King: Got it. Got it. And could you — I’m not sure you disclose this but what was the spot rate on deposits at the end of the quarter?

Kevin Thompson: The spot rate right at the end of the quarter was about 2.3%, on total deposits.

Brandon King: Okay. Got it. Got it. And then last question. Just strategically, philosophically, what is kind of a target payout ratio that you envision for the bank kind of in a normal environment, Paul?

Paul Taylor: As we look forward, we’re just — we’re looking at it, we’ve got to do a little balance sheet reconstruction. So that’s something that we are exploring next week at the Board meeting.

Brandon King: Okay. Thanks for answering my questions.

Paul Taylor: Thank you.

Operator: Our next question comes from the line of Gary Tenner with D.A. Davidson. Please go ahead.

Paul Taylor: Good morning.

Gary Tenner: Thanks. Good morning. Good morning. Question on the lender finance pending sale. It says in the deck that the transaction is expected to close within one to two months. Should we read that as though there is a contractual sale in place or is that process still underway?

Paul Taylor: So we do not have a contractual sale in place. We have conducted a process. We’re in the middle of the process right now. And there does appear to be some real genuine interest there.

Gary Tenner: Okay. And it looks like there was no mark placed on those loans transferred, is that correct?

Paul Taylor: There was no mark.

Kevin Thompson: That’s correct. We’re expecting a par or better bid.

Gary Tenner: Okay, great. And then longer term, when you announced your strategic shifts and initiatives back in January, you talked about a long-term ROA target in the 150 range. I imagine you all have been through several iterations of planning over the last month or so and what that might look like. Could you give us any updated thoughts on where that number could be in ’24, ’25 based on kind of the current trajectory? And what your plans are balance sheet wise as opposed to maybe the 150 that you were at previously?

Paul Taylor: Yeah. So after this event, I mean clearly those plans to get to those types of levels have extended a bit. We’re still in the middle of modeling forecasting a forward even going through 2025. We’re looking at. But it’s sort of difficult to forecast that right now, the market is settling down, but it’s still got some settling to do, our balance sheet needs to settle down and get through these sales and everything, but we’re not releasing guidance on that at this point in time.

Gary Tenner: All right. Thank you.

Paul Taylor: Thank you.

Operator: Our next question comes from the line of Jon Arfstrom with RBC Capital Markets. Please go ahead.

Paul Taylor: Good morning.

Jon Arfstrom: Hey, good morning. Good morning. I wanted to ask a question, kind of a backward question I guess on the reduction in assets. You’ve a borrowings table in your press release that shows that $10 billion increase in borrowings. And it shows the FHLB increase, the Bank Term Funding the repurchase agreement. And maybe another way to ask this question is, what do you think that looks like in a quarter? That $11.8 billion in borrowings, where do you reduce it and how much can you reduce that by?

Paul Taylor: So, it’s probably going to go down by at least $5 billion without the loan sales. And then if you factor in the loan sales, it could go down further from there. When we entered this event, we decided to be as absolutely liquid as we possibly could. We didn’t go through the — we didn’t want to — we didn’t have any idea of how deep this event was going to go, but we’re in the process of backing down liquidity this month right now.

Kevin Thompson: In terms of which order would be in, it probably will, we’d start with FHLB. The Bank Term Funding Program is a fantastic program that the Federal Reserve put in place. Very impressed with that approach, it is very favorable. And so it makes sense for us to utilize the lower rate you can see there and the flexibility there and the ability to use par overtime. But we will also bring that down over time as well as we deleverage the balance sheet.

Paul Taylor: And the secret here is, as we all know, we’ve got to rebuild deposits as quick as we possibly can.

Jon Arfstrom: Any restrictions on bringing down — I mean the repurchase agreement stands out at 8.5%. What do you need to do to start to bring that down?

Paul Taylor: It matures in December, Jon.

Jon Arfstrom: Okay. So there — is there a restriction on bringing that down early prepayment penalties or any — anything like that or is that?

Paul Taylor: Yeah, as a prepayment penalty. Yeah, as a prepayment penalty.

Jon Arfstrom: Okay. So we should assume that hangs around?

Kevin Thompson: It’s math. We’ll figure it out as we get there and as we de-lever the balance sheet.

Jon Arfstrom: Okay. And then just back to the margin. I know this is difficult. But it feels to me like if you fully load the margin for the incremental interest expenses that your margin dips into the low-2s, I know that doesn’t really fair, but when you start to unwind some of these borrowings, maybe you’re in a mid-2s type margin level for a run rate for the second quarter. I know it’s incredibly difficult, but it’s probably the one linchpin to a lot of this that I think we want to figure out?

Paul Taylor: Well, what the — we’re already basically over with April. So I think you’re going to see the margin in the second quarter will be below the mid-2s and somewhere between the lower 2s and mid-2s. And then in the third quarter, I think that you’ll see it improve a lot more.

Kevin Thompson: It depends on many of our actions. The timing of loan sales and other things we do and we, of course, we mentioned, in an expeditious manner. We were already working on this, but we’re working very hard on expense cuts, asset sales, rebalancing the balance sheets, and so it depends on a lot of that and the strategy that we’re able to execute over time.

Jon Arfstrom: Okay. Okay, that’s very helpful. And I guess — so the message is, we should have low expectations, lower profitability for Q2 and then as you unwind some of this, we’re going to see some improvement in Q3. Is that fair?

Paul Taylor: Yeah, I think that’s fair. We’re moving as fast as we can. But it’s sort of a crazy market today.

William Black: Yeah, I think we’re more focused on trying to maximize what we can put forth in ’24 than any quarterly number in ’23.

Jon Arfstrom: Yeah. Okay. I understand.

William Black: Protect the balance sheet — protect the balance sheet, prepare the balance sheet for ’24 more.

Jon Arfstrom: Okay. Okay. All helpful. And then just one more on credit. Are you seeing anything changing? I know you’ve been asked this a lot, but anything that you’re concerned about or worried about, at least in the very near term on credit?

Paul Taylor: Credit has really held up. I mean PacWest is incredible at credit. I’m sort of a new guy. But I mean, I’m very impressed with the credit process and our Chief Credit Officer. So I just don’t see any change, I mean clearly with interest rates rising, there’s going to be some stress out there. I mean in a very short period of time, interest rates have dramatically changed. So there’s going to be some stress out there for sure, but as we sit here today, we were in pretty good shape.

Jon Arfstrom: Okay. All right. Thank you, guys.

Paul Taylor: Thank you.

Operator: Our next question comes from the line of Andrew Terrell with Stephens. Please go ahead.

Andrew Terrell: Hey, thanks for the follow-up here. Do you have the quarterly cash flows from the bond book? And then I guess as you work capital upwards if you surpass kind of 10% CET1 number. If like there is more opportunities, especially with yields pulling back some to reposition portions of the bond book in coming quarters?

Paul Taylor: Well, again, that’s something — it was something we’re looking at. I would love to reposition the bond portfolio. It’s pretty costly today, although the AOCI declined in this quarter. It’s a pretty costly thing. But yeah, we look at that almost daily, we look at loans, any asset we can sell at this point in time, but that we’re absolutely looking at that.

Kevin Thompson: And the quarterly cash flow on the bond portfolio between maturities, paydowns, accretion et cetera is about $70 million.

Andrew Terrell: Okay, got it. Thank you.

Kevin Thompson: Thank you.

Operator: This concludes today’s question-and-answer session. I will turn the call back for any additional or closing remarks.

Paul Taylor: We’d like to thank all of you for calling in and your interest in PacWest. We here are very excited about PacWest. We’ve gone through a very interesting deposit event here. I’ve not been through that in my 40 year career, at this type of level. But rest assured, we will bring back great profitability back to PacWest as quick as humanly possible. We’re working on a number of things as we’ve talked about here. And those should come to fruition fairly quickly. And we really appreciate you calling in.

Operator: This concludes today’s call. Thank you for your participation and you may now disconnect.