Q4 2022 PacWest Bancorp Earnings Call
Speaker 2: Please stand by.
Speaker 3: Good day and welcome to the PAC West Band Corp fourth quarter 2022 earnings call. Today's conference is being recorded. At this time I'd like to turn the conference over to Bill Black, PAC West Band Corp. Thank you. Good morning and welcome to PAC West fourth quarter 2022 earnings conference call. With me today are Paul Taylor, our President and CEO , Kevin Thompson, CFO , and Mark Young, our COO and the leader of our venture banking business.
Speaker 4: president CEO Paul Taylor.
Speaker 5: Thank you, Bill. Good morning everyone and thank you for joining our call today.
Speaker 6: We've made several significant leadership changes in the fourth quarter that will set the stage for the future.
Speaker 7: Specifically, I assumed the role of President and CEO replacing our longtime CEO Matt Wagner, who became the Executive Chairman. John Agemeier has become our Lead Director, and Kevin Thompson has joined us as our new Chief Financial Officer. We announced a sharpened strategic vision...
Speaker 8: and plan to build on the strengths of the company's deposit-focused community bank business, operating as one team with a mission to maximize shareholder returns by exceeding customer expectations.
Speaker 9: PacWest has a long history of acquisitions that brought us great customers and talented employees, but also varied processes and different cultures. Now the time is right to focus on coming together to function even more uniformly and efficiently as one company.
Speaker 10: regardless of a business line or corporate function.
Speaker 11: We will simplify and improve our processes to deliver an even higher level of service to our customers and more valuable to our shareholders while meeting or exceeding our regulators' requirements for safety and soundness.
Speaker 12: This plan is the result of the past six months of work since I joined PAC-WES, assessing and building a detailed strategic vision and tactical plan to maximize shareholder value.
Speaker 13: We are operating with a sense of urgency.
Speaker 14: Specifically, in the fourth quarter, the company made the decision to wind down its operations in premium finance and multi-family lending.
Speaker 15: In addition, the company is restructuring our subsidiary to realign its operations to improve profitability and reduce risk.
Speaker 16: These actions will help us refocus our efforts on our core businesses, accelerate our capital growth, and improve operational efficiencies over time.
Speaker 17: In addition to the strategic decisions above, the company opportunistically sold $1 billion in bonds at a loss in the quarter, which was used to pay down higher cost funding and better position the balance sheet going forward. The management team has also initiated an operational and operational
Speaker 18: efficiency strategy to control costs, reduce processing systems, and define strategies across the company.
Speaker 19: We see opportunity for growth and earnings through focusing on our core business and customers and have created a list of financial performance metrics that we believe are achievable and where the bank should perform over time. These include building our CET1 ratio to 10 plus percent,
Speaker 20: Low cost core deposits equal to 40% or greater.
Speaker 21: Return on assets of 150% or better.
Speaker 22: efficiency ratio of 45% or less.
Speaker 23: non-performing asset ratio of less than 50 basis points, and top quartile earnings per share growth.
Speaker 24: We believe that the actions taken in the fourth quarter are meaningful first steps towards our goals but it comes at a cross.
Speaker 25: While our capital goals remain 10% CET1, our actions in the fourth quarter will delay the timing a little. And as such, we would expect our CET1 ratio to hit 9.75% by the end of 2023.
Speaker 26: achieve our target of 10% early in 2024.
Speaker 27: This minor delay enables us to accelerate the balance sheet transformation.
Speaker 28: There are real challenges ahead with rising interest rates and a slowing economy, but there is a significant opportunity for PAC West to improve our performance and return to shareholders, giving our strong team a great customer base.
Speaker 29: and a plan to unlock additional value for our shareholders and employees. Thank you.
Speaker 30: Thanks, Paul. Strategically, the fourth quarter marks the beginning of the next chapter for PAC-WES. We want to highlight four main points. First and foremost, we announced a clear strategic vision around the community bank with an operational focus on unifying our businesses and eliminating silos to improve performance.
Speaker 31: Second, we are acting with a real sense of urgency as you can see in the fourth quarter with on sale and the exiting of two business lines and a significant restructuring of another.
Speaker 32: Third, we announced an aggressive operating target list to hold ourselves accountable and to set the bar where we believe this company should perform over time.
Lastly, we like the industry are facing challenges in the current economic environment. We are 100% committed to managing the business through the cycle, preparing for whatever gets thrown at us.
And now I'd like to turn things over to Kevin, our CFO , for some specific commentary on the financial results before we go into the Q&A session.
Thank you, Bill. It's a pleasure to join the talented team at PAC West and I look forward to working with all of you. The fourth quarter was characterized by various strategic actions to improve our profitability and capital position going forward.
As Paul mentioned, our sale of $1 billion of available-for-sale securities resulted in a $49 million loss.
Use the proceeds to pay down FHLB borrowings.
As part of the efforts to restructure our civic lending subsidiary, we recorded a goodwill impairment to 29 million.
As a reminder, goodwill is a non-cash charge and has no impact on our regulatory capital ratios, cash flows, or liquidity position. Finally, we are working to dramatically improve the overall operational efficiency of the bank.
As a first step in this initiative, we recorded early retirement benefits and a severance expense of 5.7 million dollars.
Adjusting for these unusual items, in the fourth quarter our earnings per share would have been 93 cents.
And our return on average assets would have been 1.15%.
Loans and leases increased by 949 million in the quarter.
or by 3.4%, mostly connected to residential real estate mortgage and construction portfolios.
Loan production yields increased to 7.55% from 5.92% in the prior quarter due to the mix and increasing market rates. Deposits decreased by $260 million in the quarter, driven mostly by outflows in the venture banking deposit portfolio.
This was offset by increases in retail and brokered time deposits and wholesale non-maturity deposits at higher costs.
The net interest margin decreased by 16 basis points in the quarter.
With the unprecedented increase in interest rates, our cost of deposits increased by 67 basis points to 1.37%, while our average yield increased 61 basis points to 5.73%.
As a result, our net interest income decreased by $12.2 million to $323 million in the quarter.
Credit metrics remain strong in all our loan portfolios. The allowance for credit loss is increased by $7.4 million to $292 million in the quarter, mostly due to loan growth, with an allowance for credit loss ratio of 1.02%. Non-performing assets remain low at 36 basis points of total loss of $7.4 million.
and lower intangible asset amortization offset by higher customer related expenses of 5.5 million.
The efficiency ratio was 53.3% in the quarter.
Looking at the full year 2023 while we were just completing our budgeting process I will share with you our current outlook. We plan to accrete capital through the year and to reach a CET1 ratio of around 9.75% by year-end.
and reach our CET1 goal of 10% in the early part of 2024.
We expect loan balances to be flat for the year as part of our strategy to preserve capital and strengthen the balance sheet. We anticipate flat deposit balances as well with renewed focus on community banking and full deposit relationships. We currently expect two more 25 basis point rate increases from the Federal Reserve in 2020.
This includes tightening expense controls, especially around compensation, and reducing costs related to vendors, discontinued business lines, facilities, and projects. As a result, we expect a full year efficiency ratio in the low 50% area with a longer term goal of mid 40%.
Our credit quality continues to be strong and we presently do not anticipate any increase reserves from current levels.
This concludes our prepared remarks. Operator, could you please open the line for questions? Thank you very much, sir. Ladies and gentlemen, if you would like to ask a question today, please press star one on your telephone keypads. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. And again, that is star one to ask a question.
We'll pause for a moment to give everyone the opportunity to signal for a question.
And we will take our first question from Brandon King from Truist Securities.
Hey, good morning.
Hey, good morning. Good morning, Brandon.
Hey, so Paul, I wanted to get your top level thoughts on the strategy going forward.
Obviously you mentioned you're not doing anymore.
premium finance, multifamily. I'm curious, what are the other business lines you want to lean into more, particularly of the national business lines?
Yeah, so as you look at our balance sheet, I mean, one thing we do very well and a lot of it is we do a lot of real estate. So that's one of the items we'll continue to do. And then in our community bank, we do a lot of more commercial focused, more relationship type real estate.
That will continue on. Then we also have some units that do some more CNI lending. That again, that's a nationwide business and we'll continue to do that. This year, we really looked at each one of our business lines and the ones we've discontinued are more of a low yield.
going forward and you're out of it for that.
Yeah, so we've taken over and we're integrated and into PAC-WES. We're still in the process of analyzing that. The one thing we know is that there's a lot more overhead than there should be, so we expect significant savings.
from that entity. And right now we're looking at all the products that they offer and determining which ones of those products that we'll hang on to and go forward with. We put Mark Young, who's on the call here today.
in charge of Civic and he is in Civic right now and he's helping us with those determinations. But at the end of the day, it will be a much more profitable company and lowering the risk profile of the company also.
Thanks for taking my questions, I'll hop back in the queue.
Thank you. Thank you. We'll take our next question from Matthew Clark from Piper Sandler.
Good morning, Matt.
Maybe just on the...
The portfolios or businesses that you're unwinding, maybe just confirm the size of those portfolios. I think premium finance is just over 800 million. Multifamily maybe isolate that piece and how much you think you might have and run off from civic that's more deliberate. I mean, the other, and as a related question to that, I mean, you talked about loans being flat for the year.
real tranches. There's the customer-based multifamily business, which we're not exiting. We're going to continue to service our core deposit customers. We had a separate group that was originating small-balance multifamily. The small-balance multifamily, the stuff that we're running off is a little over $3 billion.
And I'll add Matthew, and hi, Matthew, good to hear your voice again. I will add that the flat loan growth for the year does anticipate the wind down of those entities.
Okay, great. And then as you're going through this restructuring process...
The other question is, what kind of ROA do you think you can maintain on an operating basis, excluding any additional severance and other unusual items?
As we look forward throughout this year, we believe that we can maintain somewhere around a 110 ROA for the year, but it is going to be ramping up. So as you look at December ROA, it is going to be about a 120.
But I'm going to preface that. I mean, 2023 is going to be an interesting year. I don't think any of us quite know how it's going to go. I mean, we've probably got some more increases from the Fed. You know, most economists believe we're going to go into some level.
variation and the actions we're taking now are in preparation so that we're flexible and have a balance sheet that's prepared for that type of environment.
Got it. And then just to close the loop on that ROA conversation, in terms of the denominator, you spoke about the loans being flattish, but what about overall assets and borrowings from here? I mean, is there a plan to sell more securities and pay off self-HLB, or how should we think about overall assets by the end of this year?
Yeah, you know, I mean quite honestly we're looking at everything, you know, everything's on the table. As you look at PACWES balance sheet it's about 41 billion. I mean there's an argument in there that a smaller balance sheet could be more profitable.
We're sort of distressed in some areas, but again, that's part of the reason we sold the billion dollars in bonds. There was sort of a dip in the 10-year and we had these groupings of bonds that we felt it was worthwhile to go ahead and sell them and take the loss.
But we're looking at all those types of things. It needs to be strategic. We're thinking of the long-term shareholder value here. What's the earn-back? There's a level of liquidity we need to hold in the bond portfolio. Also, there's an element of patience in our unrealized losses. If you wait and the bonds mature over time, those unrealized losses will be
sounds like that's kind of the.
First step as you mentioned in the release that sounds like there's more you know
Any order of magnitude in terms of the potential cost saves we could see this year?
Yeah, annualized is probably about the level of severance that we saw going forward. And we have other, we have an operational efficiency focus right now where we're looking at facilities, we're looking at projects, we're looking at compensation across the board. Are there things we can do more efficiently? We have a lot of systems.
Good morning, Chris.
Hey, good morning everybody you talked Paul about the 975 getting 10
What are your thoughts on, I mean, this seems like a restructuring year, like what are your thoughts on accelerating that with a capital raise?
Again, I would say everything is on the table. I think the pricing of our stock has moved up a bit here in the past week, two weeks, but at levels that we have been at, we have been at a lot of different levels.
it would be, I think it'd be very tough to raise stock. But again, I think that is on the table, but there's no plan to do that at this point in time.
We did raise the preferred stock earlier in the year and that buoyed capital a bit.
Again, we'd be very thoughtful about the earnback associated with that and shareholder dilution and other options that would dilute shareholders much less. Absolutely.
Great. And I could, I think I heard in your prepared remarks, you don't think you need to add reserves from here.
I guess most of your—most of your— Well, I would preface that with this year. We really don't—I mean, as we see it today, we don't see any need to add any substantial reserves. We feel that we're adequate. There's—you know, I just talked to our chief credit officer yesterday.
And there's really no signs of any issues with credit quality or any concerns at this point in time. But again, we're probably going into a recession this year, and that could elevate credit issues. But we don't know that. Over long period of time, you have seen a lot of Ely Government actions fail.
Okay, yeah, I was just thinking might get ahead of it just because the investors aren't buying your stock for current earnings. I get the limitations of CECL, but I'll step back. Thank you.
Yeah, but and again, I just want to make sure it's very clear that we are very comfortable with our credit position at this time. PacWest is a very, very good credit shop. You know, I've only been here a handful of months, but that's one of my biggest impressions is that PacWest is a very, very good credit shop.
2020-2023 for the world to be another positive year for the company and our inner owners. So with that, I pray.
Hello?
We'll go to our next question.
Our next question comes from Gary Tenner from DA Davidson.
Thanks. Good morning, everybody. Good morning.
Hey, so on the runoff portfolios, Bill, that you laid out in terms of the size of premium finance and multifamily, I assume premium finance, I mean, that's a pretty quick runoff, right, kind of a pretty short-term portfolio. It was multifamily, should we assume that's more of a...
couple or three years of runoff, but maybe the bulk of it on the front end.
So, in the multifamily, I would agree that's a reasonable assumption. It will come in depending upon when things were under and when they mature, it will kind of have been slow, but it will kind of pace itself out. You know, premium finance is a business that clearly we're exiting. We've communicated that to the borrowers and we're going to work with them. I wouldn't expect it to be immediate.
It's not going to be instantaneous and we're going to work it out. Is there an opportunity to sell the premium finance business? I think we saw last year or a year and a half ago or so, Texas Capital sold their premium finance business to Truist. Is there any appetite in the market for that kind of business?
Well, again, I would say that everything's on the table. We look at that, but nothing on that right now.
Okay. And then in terms of kind of the expectations on the deposit side, you know, knowing that it sounds like the balance sheet is going to be pretty flat. Do you have a view or expectation for, you know, deposit flows in the VC space? Obviously
We've heard Silicon Valley talk a little more optimistically towards the back half of the year, but do you have any expectations in terms of maybe recovering some of those flows and remixing the deposit base later in the year?
Silicon Valley talk a little more optimistically towards the back half of the year, but do you have any expectations in terms of maybe recovering some of those flows and remixing the deposit base later in the year from that channel?
Well, I can tell you we'd absolutely love to have venture deposits increase. Venture deposits are very, very hard to estimate. I'd have to tell you it's very frustrating. They've come down quite a bit. As I look at this year …
I mean, in the first half of the year, they seem to have sort of floored and we seem to be flat. We did have declines in the second half of the year, but they're nothing like we've seen in the past. So we would like to think, you know, we're about 11 billion dollars in venture deposits.
So we'd like to see them floor out somewhere around there, and that's sort of what we're planning for. They'll go down a little bit, and I hope we're right. Because then that will allow us to remix the deposit base, get out of some of the wholesale deposits.
and really dramatically decrease the cost of funds. It's a great low cost of funds to Paul's point, but at the same time, we will be very careful what assets we stack up against those deposits because of the element of volatility.
And Mark, I would agree the softness kind of earlier in the year and expected a better market towards the TON of the year. And again, this market is very rate sensitive as well, right? The venture market. There's a tremendous amount of dry powder, but obviously people have slowed down the investment cadence.
with all the news that we saw here in Q4 and that's carrying through earlier part of this year.
Thanks very much.
Thank you and we'll go to our next question from David Schirini from Wedbush Securities.
Good morning. Hi, thanks. Good morning. Thanks for taking the question. So I wanted to ask some follow-ups on the ROA discussion. You mentioned 1.1% for 2023 in December , getting to 1.2%. And then the overall target is 1.5%. Can you talk about the timing?
of getting to that 1.5 percent. Hello David, good to hear your voice. As Paul mentioned earlier, you know, 2023 is it could be an interesting year. We could see a mild recession. We're expecting two more Federal Reserve rate increases at 25 basis points. And so we're very focused on armoring our...
to have a really good chance to get back to the great profitability this bank has seen in the past.
You know, in terms of a little bit, you know, I'm not a very patient person, so we're gonna we're gonna push as hard as we can to get to these overall goals that we have and that we released yesterday.
That's helpful and should we expect...
any increased volatility around that target of 1.5% given you're exiting a couple of stable businesses of multifamily and premium finance, but retaining the presumably more volatile civic business. Can you discuss that?
Yeah, I mean, there's going to be, you know, we're going to take further actions as we go throughout the year and we're trying to have any more actions earlier in the year so we can get a better run rate. So there will be some volatility. I would think that would be in the year.
the beginning of this year and then it should smooth out as we get into the second half of this year and then into 2024. So David, in terms of volatility, a big part of this is to build a more consistent stable earnings profile.
And so the volatility has really been on the velocity of assets, and that's a big part of the overall equation where you're looking at the risk-reward of what you're doing in terms of yield, and then also, as Paul said, addressing the expense side of it as well. Yeah, and that's just an overarching comment. I mean—
One of our goals too is to take the volatility out of PACWES earnings. I think PACWES earnings typically and historically have been a little volatile and they're hard to predict and we're trying to get a better, smoother, more predictable earnings for the street.
Thanks for that. And then you mentioned that everything is kind of on the table in terms of potentially selling the premium finance business. I'll ask the same question on the multifamily portfolio. Would you consider selling that to accelerate that off the balance sheet?
You know, we definitely would. I believe that those are rates such that it would be very difficult to sell at this time without accepting a pretty significant loss.
Did you mention
And did you mention on the on the Civic portfolio 3.3 billion? Did you say what the right size, how much of that could come down over time?
Well, I think you're going to see it definitely come down. You know, again, we just installed Mark in there about a, he's been there for about a week, and we're still trying to figure out the business. Black West had really adopted sort of a decentralized hands-off.
method when they acquired it and we're in there trying to figure it out and try to figure out what type, what offerings we're going to keep and which offerings we're going to eliminate. And of course we had bought flow from this, the former entity in the past and like the asset and, but we're not familiar with the business. And so we liked the asset. It's just trying to find Put the web site at instagram.comdist liaison. Olham down have a nice places.
markets are opening up a little better in that area, and we are also looking at trying to sell some of that portfolio.
just to bring it down.
And the last one for me is on venture banking. I noticed on slide 11 you mentioned the FTX
I was curious, in what way does FTX...
impact your business? Are you guys banking crypto customers?
No, this is Mark.
Yeah, the way it impacts very simple just increased scrutiny and responsibility accountability by the VCs to their investors So greater diligence, a slower cadence of deals.
Got it. Thanks very much. To be clear, we do not have any direct crypto asset exposure.
That's correct. Yep. Didn't didn't think so. Just wanted to clarify. Thank you.
We'll take our next question from Andrew Turrell from Stevens.
Good morning. Good morning.
Okay.
Maybe just to start, I wanted to ask on the 30- to 89-day past due loans, I know those can...
specifically in civic kind of bounce around a bit quarter to quarter. I guess since quarter end have you seen those 30 to 89 past dues move lower and if so can you quantify the magnitude and and also whether or not you see any loss content there.
Yeah, so the answer is yeah, it was kind of a confluence of how the month ended there and some spillover from December . That number has come down pretty sizable already in the month. And so, no, we're not worried about any particular fear or anything there.
for a duration.
Yeah, I don't think we disclosed the specific reserves by portfolio, but you're right. For one of the products inside of CIVIC, it's 12 months. Our overall loss experience in 2022 is 8 bps. So you would imagine with a very low loss experience and a short impact IQ in we need to be more productive and reflect than just let's see what happens when the Everyday you cannot compare to 1000 workers whether best
tenure, you know, I kind of lead you to where the seasonal reserves come out. Yeah, okay. Maybe just just a bigger picture. It's really good to see this this plan announced and Paul congrats on announcing in short order. Just maybe a bigger picture. Can you help us understand how aligned?
you and the remainder of management team is with kind of investors in terms of this plan, I guess our incentive compensation targets aligned fully with this plan. Can you maybe just speak to that a bit?
Yeah, so you know this plan was put together. I brought the executive team together and we came up with this plan together. So there is, you know, there should be 100% buy-in, so very close connection. And then also I would tell you that some of our overall goal
Good morning.
Good morning, everyone. Paul, in July , you talked about some holes in technology, given the number of acquisitions that PacWest had put together. Want to see how this improving your technology platform coincides with your new decisions to improve overall operating efficiency.
Yeah, so I mean, we're still on a on the same plan for technology. It's exactly, it's everything we need to do to be a bank in 2023.
And Mark Young, who's on the call, is in charge of that vision for new technology. Maybe Mark, can you give a quick rundown on that? Yeah. I mean, our technology is very much centered around three values. One of them is, you know, cloud. The second one is really our digital banking API.
very much committed to the movement forward on those three fronts.
Got it. Thanks guys. Appreciate it.
Sure.
Perfect. Then our next question comes from Christopher Maranac from Jeannie Montgomery-Scott.
Good morning, Chris. Good morning. Hello, I just want to circle back on deposits from a big picture beyond just the venture that you and Mark had described. Can the pricing on deposits alleviate any time this year? I presume it's not this quarter, but just kind of want to compare the prices you have been paying the past two quarters and sort of what is possible as you continue to focus on the core deposit.
We're no different than that. We've got another couple rate bumps. I think that the yield on deposits or the rate on deposits are going to remain sort of flat throughout the year. We're hoping that with mixed changes we can lower the cost.
You know, one of the things that, you know, on loan committee, we're requiring that you've got to have a deposit in order to get a loan. And we're challenging all of our lenders this year, and we're putting it in their incentives, where they've got to gather deposits.
and a significant amount of deposits this year. We also have, you know, the standard CD specials, which aren't going to help rate, it'll just help the volume of deposits. But that's sort of as I see deposits for 2023. And I'll add to that, we do expect two more Fed rate increases, 25 basis points each. And so,
We have had a cycle to date, overall deposit beta of 34 percent. So we do anticipate some beta associated with that, some pressure the first half of the year, and then alleviating the second half of the year. So our net interest margin possibly decreasing slightly first half, and then increasing.
potentially above end of 2022 levels by end of year. So we're in an unprecedented period where deposit pricing, where rates increased so quickly that deposit pricing followed. And it takes a little time, you know, with our asset sensitive balance sheet for the loan beta to catch up. So we should see some of that loan beta catching up here in the second half of the year.
lot of movement there and I think in any particular quarter you can see that bounce around but the goal is obviously to you know driving increased profitability so you see the margin increase over time.
No, that's all very helpful and Bill, to your point, you can see that with a loan production yield just on its own this past quarter to your point. There was once a team of folks at PAC West several acquisitions ago who were both dedicated on just doing deposits and weren't sent in as such. Is that something that can still work in 2023, 2024 as sort of dedicated
So it's not just one group, Chris, it's everybody, from the lenders to the top of the house all the way to the front line. It is a reinvigorated core value. And that's the secret sauce of banking is low-cost deposits. And that's why we bother with a bank charter and deal with regulation.
is to get those deposits. So I mean, that's our biggest focus all the time. And we're tweaking incentive programs to be more deposit focused, as well as Paul mentioned earlier that loans, any loans that are approved in general need to have a deposit relationship.
Great. Thank you for all that reinforcement. Last question for me just goes back to the small uptick we saw in the criticized loans. Is that something that is possible this year? I know you mentioned obviously recession influences some of that. Just curious if there's any particular background this quarter.
Yeah, so if you're talking about on the nonaccruals, the bump there was in particular related to some civic loans. We've already seen some of that back off, and we have an NPL sale that is being teed up. So we feel that's kind of ordinary course, Chris. We did an NPL sale in the—I think last quarter. And we're not seeing anything indicative and credit as Paul said. We feel really good about.
individual stuff, but if you look at the absolute level of non-performers at 36 basis points, it's pretty low compared to history. So you could see things bounce around. We don't see anything driving that, but just realize we're kinda operating at the lower end of stuff, but we're not concerned about anything in particular.
Although we are obviously paying a lot of attention given where we think things are going. Great, thanks again for taking all of our questions.
a lot of attention given to where we think things are going. Great. Thanks again for taking all of our questions. Thank you.
And we'll next go to John Arfstam from RBC Capital Markets. Good morning.
A couple model questions and a couple strategic ones.
Kevin on the margin guide, I think you talked about 2022 as the baseline. Is that what you're thinking? 350 is the baseline we should be thinking about for the 23 average margin.
Yeah, 340 to 350 average margin, probably dipping lower first half of the year and then increasing latter half.
Okay, good. And then with the flat loan guide, are you basically saying relatively flat earning assets, but the churn in earning assets likely leads to that lift later in the year? Is that another fair way to think about it?
I think that's a good way to think about it.
I think that's a good way to think about it. On provisions.
You guys are talking about flat reserves.
flat loans, lower risk loans, and clean credit, which suggests to me that I may not need a provision in the model for 2023.
What kind of research do we have to do? We just have to preface that again with the year we are in is that we could have a recession so that could be a little dynamic. We are planning at this point in time that it will not be dynamic but we have to remember that.
There's some replenishment of small charge-offs that happen over time and make shifts. So, there will still be some provision, we anticipate, but not large. So, on a quarterly basis, though, you're talking about – you're not insignificant from what we've seen in prior quarters. Good way to say it. Yeah, not insignificant from what we've seen in 2022. Yeah.
Okay, okay, good. Thank you for those two. In terms of the investments and some of the maybe changes you're going to try to make, do you need to make investments in lenders or refresh the community bank loan production machine? that I'm told are well of that I have a system to do that where you can find more dough goto which are well developed from financeiz replenish and getsraash out in some of those states where today and the cities in many regions where the people are able to help and they come into interesting
You know, you know, 2022 was a really good year for long growth. We've got very seasoned, experienced lending teams. So I don't really anticipate we need to do anything like that. Again, I think
Our core competency here is credit.
And then I guess the last one of all the metrics that you laid out, the one that stands out to me is the top four tile EPS growth.
And can you talk to us a little bit about that? I know there's some restructuring and refreshing that you're doing, but is this something that we can start to see this momentum later in 2023?
I mean look John , I think that right now there's a lot of wood to chop, right? Paul and I mean Paul's been here as CEO for 28 days I think it is. But yeah, I mean I think that there's a clear plan, a clear vision of where we want to get to.
And if we can execute on that plan, I think the results are going to be pretty good for shareholders. And I think that the metrics we laid out are not the ultimate goals. This is kind of where we think there are. But I think if we do what we think we can do, you know, we think that's possible. And listen, like, we're not trying to be, you know, mediocre, right?
I mean, we're trying to push ourselves to generate really strong top quartile results.
push ourselves to generate really strong top quartile results. Absolutely.
Yeah the EPS growth one is the one that stands out right the others
with efficiency and returns and capital.
I think something's got to be a little bit different for top quartile and EPS growth.
Yeah, I think if you look at the core earnings power of PAC West historically, I don't think that it's changed. And I think the goal is to take what has been top quartile and drive it better. And if we can get there from here, you will generate those types of results.
Okay, thanks guys, I appreciate it.
Thank you. And for our last question, we'll go back to Matthew Clark from Piper Sandler.
Thanks for the follow-up. Just a couple of questions around the margin outlook. Can you speak to the cost of those FHLB borrowings that you...
ran off and
the securities yields as well. I mean, I would have thought you would have had a pickup.
in the spread for the upcoming quarter to help mitigate some pressure here.
That's right, Matthew. So, the securities we wound down were yielding about 3.93%, and we paid off FHLB of about 4.6%. So, yes, there was a benefit there, but we also had loan growth that offset much of that.
But that should be a benefit through the year, that negative yield that we were experiencing. And that was really late in the quarter. That's right.
Okay. And then just the spot rate on interest bearing deposits at the end of the year, if you had it or total deposits either one.
Yeah, spot rate on interest bearing deposits was trending to low 250s.
Okay. Okay. And then just the commentary around low-cost core deposits getting to 40%. It doesn't necessarily mean non-interest-bearing that are at 33%, I guess.
Were you trying to suggest a non-interest bearing, you want to get that to 40, or is there some other portion of your deposit base you view as low cost that will help you get there? Yeah. I would say the DDA base is up to 40%.
Okay, easy enough. Thanks.
Okay, easy enough. Thanks.
Thank you and we have no further questions. I'll turn it back to our speakers for any closing remarks.
Well, first of all, we want to thank all of you for calling in and your interest in PACWES Bancorp. You know, our numbers are out on our online and we're happy to talk to you at any time. So again, appreciate you guys calling in.
Well, first of all, we want to thank all of you for calling in and your interest in PACWES Bancorp. You know, our numbers are out on our online and we're happy to talk to you at any time. So again, appreciate you guys calling in.
Thank you, ladies and gentlemen. That does conclude today's conference. We appreciate your participation and have a wonderful day.
That does conclude today's conference. We appreciate your participation and have a wonderful day. Thank you.
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first half and then increasing potentially above end of 2022 levels by end of year. So we're in an unprecedented period where deposit pricing where rates increase so quickly that deposit pricing followed and it takes a little time you know with our asset sensitive balance sheet for the loan beta to catch up. So we should see some of that loan beta catching up here in the second half of the year and into the next year. I think the bigger thing when you look at the P&L though Chris is going to be the interplay between the the remix on both sides of the balance sheet from both you know you know lower yielding loans to higher yielding loans and then on the deposit side. So there's gonna be a lot of movement there and I think in any in particular quarter you can see that bounce around but the goal is obviously to you know driving increased profitability so to see the margin increase over time. No that's all very helpful and I and Bill to your point I you can see that with a loan production yield just on its own this past quarter to your point. There was once a team of folks at PAC West several acquisitions ago who were both dedicated on just doing deposits and weren't sent it as such. Is that something that can still work in 2023-2024 as sort of dedicated teams to sell deposits only? I mean listen our business has always been deposit focused so there's always been teams of people focused on deposits and I would tell you if you were on the internal call yesterday Paul was pretty clear about it it's all about deposits deposits deposits so it's not it's not just one group Chris it's everybody from the lenders to you know the top of the house all the way to the front line. It is a reinvigorated core value. Yeah and that's you know I mean that's I mean that's the secret sauce of banking is low-cost deposits and you know that's why we