Q1 2023 PacWest Bancorp Earnings Call
Good day and welcome to the Pac West 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 Blacks attack West Bancorp.
Thank you good morning, and welcome to Pac West 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 uncertainty.
These are 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.
I'd like to turn the call over to our CEO Paul Taylor.
Thank you Bill and good morning, everyone.
Like to start by thanking our clients and team for their dedication to Pac west, especially over these last six weeks, which have been a very challenging period of time for the banking industry, including Pac West Bancorp.
Many other banks Pac West 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 expand 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 by approximately $600 million.
Quinn to quarter end with over 80%.
Of that in our community bank.
<unk> 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 nine.
To further bolster our deposit base, we kicked off initiatives to launch new depositary channels, including a direct to consumer bank expected to be operational by the third quarter of 2023.
Having to address these pressures we are now able to return to the initiatives under our renewed strategic plan, we announced in January .
Which will expedite Pac west evolution to focus on our core community Bank franchise, and deemphasize noncore businesses, well intently focusing on reducing expenses on a smaller balance sheet as such we have begun to take actions including me.
Moving our $2 8 billion dollar lender finance business to held for sale and initiating the sale of approximately $650 million and civic loans. Once completed these steps will significantly delever the balance sheet further enhance our liquidity position.
<unk> and accelerate our strategy to increase the CET one 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 138 billion goodwill impairment charge.
Despite these challenges we are pleased with our adjusted financial results of EPS of <unk> 66 cents that exceed analysts' estimates and we are continuing to leverage the core strength of our balance sheet.
As we navigate the challenging industry dynamics Pac West will continue to prioritize our most 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.
Thank you Paul as you mentioned the market volatility in the quarter resulted in a significant decline in regional base 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 has no impact on our regulatory capital ratios cash flows or liquidity.
<unk> position.
We also incurred severance and contract termination expenses of $8 5 billion related to our strategic transformation initiatives. In total this resulted in a net loss of $1 1 billion or $10 22 per diluted share.
Adjusting for these unusual items, our earnings would have been $89 4 million or <unk> 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 a decrease in retail non maturity deposits and $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.
Bringing the 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 continued balance sheet management strategy.
Transfer the $2 8 billion lender finance portfolio to held for sale to expedite the delevering of our balance sheet, giving us the ability to pay down excess borrowings.
Between this and other asset sales, we expect to increase the CET one ratio to above 10% over the next few months.
With our solid underlying earnings this quarter. The CET, one ratio already increased 52 basis points to 922% at quarter end.
Unrealized losses on the company's investment portfolio also improved declining 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 614% in the quarter.
This was offset by the cost of deposits increased 61 basis points to 198% in the same period.
As part of our actions to enhance our on balance sheet liquidity in the latter part of the quarter, we utilized borrowings from the <unk>. The bank term funding program and temporarily from the federal reserve discount window.
We also secured $1 4 billion and fully funded cash proceeds from Atlas SP partners through a new senior asset backed financing facility, which unlock liquidity from unencumbered high quality assets in an expeditious manner.
These prudent actions impacted our interest expense expense in the quarter, which increased by 88 million to $239 million, the resulting net interest margin decreased to two 8%.
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.
Executing 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 of <unk> 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 one 1%.
This concludes our prepared remarks, operator could you. Please open the line for questions.
Yeah.
Thank you.
I'd like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Ken Please press star one to ask a question.
And we'll pause for just a moment to allow everyone an opportunity to signal for questions.
Our first question comes from Chris Mcgratty with Keefe, Bruyette <unk> Woods.
Hey, good morning, Seth.
Hey, good morning, Paul Thanks for the color on the 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 cap a philosophical capital question. How is what's your view on <unk> being the right number today I think some of your peers that have you been said 11, and then maybe more broadly you know the dividend obviously.
Elevated relative to current or how are we thinking just broadly about capital.
I understand you also made an attempt to raise capital during the quarter.
Yeah, 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 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 will continue to grow capital.
You know as you look at.
We did as you mentioned, we did look at raising capital.
At the time when this event first happened this the positive event first happened in the banking industry.
We really looked at everything.
We do what can we do what our options are 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 probably more profitable. So our goal is to shrink the balance sheet gets some of the <unk>.
Ballooning out of the balance sheet.
Unfortunately, the wrong side of the balance sheet strength, but the balance sheet has shrunk. So we're selling off some of these portfolios to get the balance sheet more imbalance 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 were at $9 22. So.
Sort of the vision that we had has been accelerated pretty dramatically.
I'll add to that.
One 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, 2% and Youll see thats actually above a number of our peers. So we're very proud of that and happy with that and just wanted to get the CET one in line as well as an important element with the common equity.
It.
Thanks, Thanks for all that.
Yeah.
Yeah, and and as we look to shrinking that seemed like a much better economic situation for our shareholders.
Okay.
Okay.
Thanks for that Paul the $35 billion you referenced.
The press release.
Is that a 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 in the $3 billion portfolio I'm, just trying to get a sense of our earning assets are going to shake out.
So that is the total asset number.
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.
Yes, as you look at the balance sheet at the end of the quarter. I mean, there is a tremendous amount of cash I mean, our 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 sheets about $44 billion as we said.
And going through the steps that Kevin mentioned, along with taking that cash out brings you down to $35 36 billion.
Okay, and pre Covid or I'm, sorry, <unk>. Your cash is about 5% right now is that kind of what youre thinking normal 5% on.
35 or so.
I think thats right and 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 in the stress testing, but we may hold a little more cash because of the uninsured balances are.
Our insured balances are about 73% of our deposits right now.
Got it thanks for all the color I appreciate it.
Thanks.
Our next question comes from Matthew Clark with Piper Sandler. Please go ahead.
Good morning, Hey, good morning.
Hey, How're 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.
Okay.
Yes, so we have not quantified those expenses is a very small team.
In Chicago.
And the balance is a little over $2 7 billion.
And we're in the we're in the process of selling it right now.
Okay.
And then did you have any civic loan sales in the quarter and if you did.
At what price.
Yes, we did bill you want to take the exact dollar amount Sir yes, we sold about $300 million at roughly a one point gain.
Okay.
Got it and then in terms of the loans that are pledged against the Atlas Atlas repo.
Can you.
Yes.
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 at repo.
Yes 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 settled down a little bit with all the actions.
Sort of trauma that it's been through but.
We are absolutely considering that.
Yes.
Okay.
And then just on.
The balance sheet size as we get into next year I mean, it sounds like you didn't get to 35 billion here in short order.
<unk>.
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.
Yes, we're working on that right now.
We think that you know I mean.
Our prediction is that we're going to go into some type of recession here that will bleed into next year. So we're more looking at sort of flattish type.
Type balance sheet going into next year.
Okay.
Okay, and then just in terms of the borrowings I mean should we assume borrowings come down by six 7 billion here in the upcoming quarter is that fair or.
Plus or minus.
I think it's more like $5 6 billion.
I think we'll bring our costs down by that much. But then we'll also have the benefit of our lender finance.
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 some.
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 SBB there could be some potential upside for us there so that could also benefit.
Our balance sheet in terms of lower bulk borrowings yeah, 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 our new a lot of new accounts somewhere around 140, new accounts. It takes a little while for them to fund but.
We're.
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.
Got it thank you.
Thank you.
And we'll take our next question from the line of Jared Shaw with Wells Fargo Securities. Please go ahead.
Good morning.
Hey, good morning.
Yeah.
If you look at it.
What was the.
Okay.
So that's what we're here what was the margin in March at the end of the quarter.
End of the quarter it was dipping into the low two <unk>.
And of course, even in the 270 is actually as I look at my schedule here and.
Obviously, the borrowings came in the latter half of the quarter. So we will see some pressure into the next quarter.
Yeah, Okay and then.
You answered that you expect to see the borrowings come down at a rapid pace as cash comes down and as the proceeds from loan sales come in but what's the 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 of deposits growing through the end of the year.
You know that as we look at that you know we've talked a lot about that that is incredibly hard to predict.
Uh huh.
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.
As I read peoples press releases I was pretty.
Shocked at how how pervasive it was.
<unk>.
You've been pretty successful, bringing back $700 million I think that.
Over the year munis could probably going to be a few million Bucks few billion dollars we hope.
But we'll have to see.
Okay.
And then looking at that on the loan growth side this quarter most of the.
Gross growth was in disbursements.
How should we think about the appetite for additional new loan production here and what's the the.
The remaining.
Unfunded commitments on the on the loan side.
Yes, so you know.
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 is some kind of downturn recession, whatever you want to call it and theyre not so distant future and we wanted to prepare for that also the unfunded commitments, Kevin there they've dropped from above 11 billion to just above $9 billion in the quarter.
Part of that is the moving of lender finance to about $400 million Thats 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 portions we anticipate that coming down over time, but you are correct.
The fundings that are happening right now or the unfunded portions that were previous commitments, we do not plan to grow going forward as we kind of get through the recession and get our balance sheet restructured.
Okay and then just finally for me I, maybe a little more philosophically when you look at the.
When you look at the the loans to equity funds and the outflow of deposits. There I guess, what's the what's the sentiment or that 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.
Faster pullback in the future or do you think that there's actually maybe an opportunity there with the market disruption.
Yes, so I think theres, a theres a huge opportunity there.
We have to manage that business differently I mean.
Clearly deposits aren't.
Are very similar to our normal community commercial bank deposits. So.
We've spent a lot of time analyzing those deposit outflows.
<unk>.
Trying to figure out where the floor is in that deposit base, where they've got a key keep onboard but.
Yes, we understand your I understand your question that's something we're working on right now, but we will 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.
Maybe I can ask this.
This is Martin young 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.
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 that focus continues very strongly going forward not depository programs focused on venture capital funds.
Most of the private equity funds.
Great. Thanks, and I'll, just add the intrastate and fairly new here.
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 back West there are a number of venture banking deposits. It didn't move a penny and love banking with US and that includes our community banking side people love banking with Pac West we have a white glove treatment of our clients.
Great reciprocal relationship and so we're very focused on those clients that have those operating accounts that relationship who have been loyal to us and we've been loyal to them in and.
We anticipate repatriating as I mentioned before some balances of clients, who just temporarily move balances to be safe during this time.
Great Thanks for that color.
Our next question comes from the line of Andrew <unk> with Stephens. Please go ahead.
Good morning.
Hey, good morning.
Thanks for the questions if I could start just on the dividend.
Can you remind us just the rules 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 a focus on internal capital I realize youre going to be building to 10% CET one in pretty short order, but I guess why not lower the dividend and help out that kind of capital glide path moving forward.
Okay.
Yeah. So one.
Once you take a hit like we've taken you've got too.
Good.
Permission from the regulators to pay a dividend.
But it's very <unk>.
Perfunctory, if you will.
But so thats in process for the for the first quarter.
And as we look as we look forward at a dividend we have a regularly scheduled board meeting next week and Thats.
On agenda item to talk about.
And approved that obviously Thats a board decision.
And I'll just add their various rules in terms of the different regulators Federal reserve FDIC state regulators have their different roles and different states have different rules on what we can pay dividends, but regulators understand that goodwill write down is noncash.
And not necessarily a threat to the.
Buying operational income of the company.
Got it okay.
I can move over to expenses really quick.
It sounds like the actions taken this quarter or about 30.
$32 million improvement in the annual run rate.
$8 million or so a quarter.
Yes, as we think about expenses in <unk>, obviously before the the lender finance sale.
$8 million off the run rate on a quarterly basis into two <unk> a good way to think about the operating expenses there just given some of the commentary around.
Expedition of the efficiency initiative I guess can we see it.
Expense improvement further interest in $88 million decline.
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 head count we've been looking at facilities in particular pack west has a lot of facilities across the country.
Some that are duplicative.
So we're very aggressively attacking those.
But you will you will continue to see throughout the remainder of this year Cigna.
Significant expense reductions.
I agree and you know it takes time for expense reductions to take effect. So in the fourth quarter. We had done some early retirements, we have found that our premium finance and multifamily businesses, you'll start seeing those benefits really.
Latter end of first quarter into the second quarter and the first quarter.
Did a reduction of force of over 200 people on our civic entity, we will start seeing that.
<unk> $32 million annualized benefit to that starting in may and so the things that we're working on 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. So we are our long term balance sheet strategy.
The long term profitability.
Yes.
Okay.
<unk>.
And then just maybe a clarification for the quarter to date deposit growth in <unk>, you guys referenced I think around 700 million.
Was there any of that broker deposit growth and then if I could clarify on page four of the presentation. It looks like the insured balances are up about 1 billion one quarter to date, but the uninsured is off $400 million or so is there any movement from uninsured to insurers included in that graph or so far in the second.
Quarter are you still seeing quarter to date net outflows in uninsured deposits.
Yes, so the 700 million that we've grown it has no brokered wholesale deposits or any kind of those are customer deposits that we have that we've brought in.
That's right and uninsured has been fairly uninsured and insured balance has been fairly steady over the past number a few weeks.
Okay very good thanks for taking the questions I'll step back.
Thank you.
The next question comes from the line of Christopher <unk> with Janney Montgomery Scott. Please go ahead.
Good morning, Hey, Thanks. Good morning, Good morning, Paul I, just wanted to ask about the core community bank or to what extent you can give us more information about the granularity of your lending and how that can play out.
As you go through this recession scenario in the next few quarters.
Yes, so when you look at the core community Bank of Pac West I mean, it's.
$14 $15 billion bank.
It's predominantly located in southern California, and it is.
It's a really great bank.
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 a smaller amount in the community bank.
<unk> is about 22 years old it's got very high when.
When I first came on board.
Several months ago I mean, it is the <unk>.
<unk> thing was is the longevity of customers and the loyalty of customers in the community bank space to Pac West.
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 good granularity, but theres also some larger customers are there.
I'll 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 a low yields but you look at that 20% of our our loan book is multifamily mostly in California very good experience there in terms of the worst recessions and multi.
And the performance then you'll look at our single family mortgage also very low Ltvs high quality vehicles, our premium finance business, our lender Finance business Fund finance this is 50% of our portfolio.
Great history history through recessions.
Great and if we looked at the criticized and classified ratios have you disclosed what they'd be similar.
Similar at the at the community Bank would they in fact do better.
Okay.
They would be similar I believe yes, there would be similar.
Yeah.
Great Paul Thank you for taking the questions.
Alright, thank you.
Okay.
Our next question comes from the line of Brandon King with Trust Securities. Please go ahead.
Good morning.
Hey, good morning.
So I wanted to follow up on the quarter to date deposit growth.
And customers.
Could you elaborate more on how you are able to achieve that growth and if it was more rate driven are relationship driven.
What kind of accounts grew when there was a time deposits or Cds or checking accounts.
Yes, 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.
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 have been lowering the rate, but we're still having that continued growth. So.
Im very encouraged by the amount of deposit growth and also we havent talked about this much but the first quarter generally we see seasonal outflow of deposits that superior when people are paying taxes people are paying bonuses and things like that so we expected to see deposits down during that period, and we will start to see some seasonal inflows start in the second quarter.
Good morning, Scott.
And could you I am not sure disclose this but what was the spot rate on deposits at the end of the quarter.
The spot rate right at the end of the quarter was about two 3%.
On total deposit.
Got it got it.
And then last question just.
Strategically for the Sabra clean.
What is kind of a target payout ratio that you envision for the bank.
Kind of in a normal environment Paul.
No.
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 we are exploring next week at the board meeting.
Okay.
Thanks for answering my questions.
Thank you.
Our next question comes from the line of Gary Tenner with D. A Davidson. Please go ahead.
Good morning, Thanks, Good morning, good morning.
Question on the lender finance.
Pending sale.
In the deck that.
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.
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 some real genuine interest there.
Okay and it looks like there was no mark.
<unk> placed on those loans transferred does that does that.
Correct.
There was no mark that's correct, we're expecting a par or better bid.
Okay, Great and then.
Longer term when you.
You announced your strategic shift initiatives back in January you talked about a long term <unk> target and the $1 50 range.
<unk> been through several iterations of planning over the last month, or so and what that might look like can you give us.
Any updated thoughts on where that number.
It could be in 2025 based on kind of the current trajectory.
And what your plans are balance sheet wise as opposed to maybe the 150 that you record yourself.
Yes, so <unk>.
After this event I mean clearly those.
<unk> to get to those types of levels have extended a bit.
We're still in the middle of modeling.
Forecasting.
Forward.
Even.
Going through 2025, we're.
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 the sales and everything but.
We're not releasing guidance on that at this point in time.
Alright, thank you.
Thank you.
Okay.
Once again, if you would like to ask a question. Please signal by pressing star one.
Our next question comes from the line of Jon <unk> with RBC capital markets. Please go ahead. Good morning, Hey, good morning, good morning.
I wanted to ask a question kind of a bad.
Quick question I guess on the <unk>.
Reduction in assets.
<unk> table in your press release.
So that $10 billion increase.
And borrowings.
And it shows the FH Ob increase the bank term funding the repurchase.
<unk>.
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.
Or do you reduce it.
And how much can you reduce that fire.
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 that could go down further from there.
When we 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 on liquidity this months right now.
In terms of which order it would be and it probably was we'd start with <unk> bank.
Bank term funding program is a fantastic program that the federal reserve put in place very impressed with that approach is very favorable.
And so it makes sense for us to utilize the lower right you can see there and the flexibility there.
Do you use par overtime, but will also bring that down over time as well as we deleverage the balance sheet and the secret here is as we all know we've got a rebuilt the positives as quick as we possibly can.
Uh-huh.
And any restrictions on bringing down.
The repurchase agreement stands out.
5%.
What do you need to do to start to bring that down.
It matures in December John .
Okay.
Is there a restriction on bringing that down early prepayment penalties or anything like that or is that a prepayment penalty.
Okay. There is a prepayment penalty.
So we should assume that haynesville.
It's math will figure it out.
As we get there and as we deleverage the balance sheet.
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 twos I know that isn't really fair.
But when you start.
On wind some of these borrowings.
Maybe youre in a mid twos type margin level for <unk>.
Our run rate for the second quarter I know it is incredibly difficult, but its probably the one linchpin through a lot of this that I think we want to figure out.
Well, let's see.
We're already basically over with April .
So I think youre going to see the margin in the second quarter.
Below the mid twos and somewhere between the lower twos and mid twos and then in the third quarter I think that Youll see it <unk>.
Improve a lot more.
But it depends on many of our actions and the timing of loan sales and other things that we do and we of course, we have mentioned this or in.
In an expeditious manner, we were already working on this but we're working very hard on the expense cuts cuts asset sales.
Rebalancing the balance sheet and so it depends on a lot of that and the strategy that we're able to execute over time.
Okay.
Very helpful and I guess, so the messages, 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, yes, I think thats I think Thats fair, we're moving as fast as we can.
<unk>.
But it's sort of a sort of a crazy market today, yes, I think we're more focused on trying to maximize what we can.
Put forth in 'twenty four than any quarterly number in 'twenty three.
Okay, I understand and protect the balance sheet.
Protect the balance sheet prepare the balance sheet.
For 24 months.
Okay. Okay. That's all helpful. And then just one more on credit are you 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.
Credit has really held up I mean <unk>.
<unk> West is incredible a credit on sort of a new guy but I.
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 theres going to be.
Stress out there I mean in a very short period of time interest rates have dramatically changed so there's going to be some distress out there for sure but as we sit here today, where we were in pretty good shape.
Okay, Alright, thank you guys.
Thank you.
Our next question comes from the line of Andrew Terrell with Stephens. Please go ahead.
Hey, Thanks for the follow up here.
Do you have about your quarterly cash flow is from the from the Bond book and then I guess as you more capital upwards of you surpassed 10% CET one number in fact, theres more opportunities, especially with yields pulling back some to reposition portions of the bond book in coming quarters.
Okay.
Well again, that's something it's something we're looking at I would I would love to reposition the bond portfolio.
It's pretty costly today, although the OCI declined in this quarter.
It's a pretty costly thing, but yes, we look at that almost daily we look at.
Loans any asset we can sell at this point in time, but we're absolutely looking at that and the quarterly cash flow on the bond portfolio between maturities Paydowns accretion et cetera is about $70 million.
Okay got it thank you.
Yeah.
Thank you.
This concludes today's question and answer session I will turn the call back for any additional or closing remarks.
Well wed like to thank all of you for calling in and your interest in Pac West.
Here are very excited about Pac west we've gone through a very interesting to positive in here I have not been through that in my 40 year career at this type of level.
But <unk>.
Rest assured we will bring back.
Great profitability back to Pac West 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.
<unk>.
And we really appreciate you calling in.
This concludes today's call. Thank you for your participation and you may now disconnect.
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