PacWest Bancorp

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. Before I hand the call over to Paul, please note that we may make forward-looking statements during today's call to risks, uncertainties, and assumptions. For more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements, see our SEC filings, including the 8K filed yesterday afternoon, which is also available on the company's website. I'd like to turn the call over to our President and CEO, Paul Taylor.

Thank you, Bill. Good morning, everyone, and thank you for joining our call today. We've made several significant leadership changes in the fourth quarter that will set the stage for the future. Specifically, I assume the role of President and CEO replacing our longtime CEO, Matt Wagner, who became the Executive Chairman. John Eggemeier has become our lead director, and Kevin Thompson has joined us as our new chief financial officer. We announced a sharpened strategic vision 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. 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, regardless of a business line or corporate function. 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. This plan is the result of the past six months of work since I joined PacWest, assessing and building a detailed strategic vision and tactical plan to maximize shareholder value. We are operating with a sense of urgency. Specifically, in the fourth quarter, the company made the decision to wind down its operations in premium finance and multifamily lending. In addition, the company is restructuring our subsidiary to realign its operations to improve profitability and reduce risk. These actions will help us refocus our efforts on our core businesses, accelerate our capital growth, and improve operational efficiencies over time. 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 efficiency strategy to control costs reduce processing systems, and define strategies across the company. 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, low-cost core deposits equal to 40% or greater, return on assets of 150% or better, efficiency ratio of 45% or less, non-performing asset ratio of less than 50 basis points, and top quartile earnings per share growth. We believe that the actions taken in the fourth quarter are meaningful first steps towards our goals, but It comes at a cost. 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 and achieve our target of 10% early in 2024. This minor delay enables us to accelerate the balance sheet transformation. There are real challenges ahead with rising interest rates and a slowing economy. But there is a significant opportunity for PacWest to improve our performance and return to shareholders given our strong team, a great customer base, and a plan to unlock additional value for our shareholders and employees. Thank you.

Thanks, Paul. Strategically, the fourth quarter marks the beginning of the next chapter for PacWest. 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. Second, we are acting with a real sense of urgency, as you can see in the fourth quarter, with the on-sale and the exiting of two business lines and a significant restructuring of another. 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 PacWest, 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 sell of $1 billion of available for sale securities resulted in a $49 million loss. We used the proceeds to pay down FHLB borrowings. As part of the efforts to restructure our civic lending subsidiary, we recorded a goodwill impairment of $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. 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 has 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 loans and leases. Excluding the goodwill impairment of 29 million and 5.7 million related to early retirements and severance, non-interest expense decreased 3.5 million in the quarter. The decrease was due to lower services fees 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 2023. This will impact our deposit and loan pricing, likely resulting in a flat net interest margin to the level experienced in 2022. With our strategic focus on operational efficiency, we plan to continue the course we took in the fourth quarter to reduce expenses. 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 increased 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 1 on your telephone keypads. If you're using a speaker phone, 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'll take our first question from Brandon King from Truist Securities.

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 any more 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 in 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. And then we also have some units that do some, you know, more CNI lending. Again, that's a nationwide business. And we'll continue to do that. This year, you know, we really looked at each one of our business lines and, you know, the ones we've discontinued are more of a low yield, no relationship type business.

So, I mean, that was a fairly easy decision to get rid of those.

Okay. And then in regards to CIVIC, you mentioned there's some restructuring there. What is kind of the strategy for CIVIC going forward and the outlook for that?

Yeah, so we've taken, sort of taken over and we're integrated and into PacWest. 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, you know, 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 into the queue. Thank you.

Thank you. And 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 in runoff from civic that's more deliberate. And as a related question to that, you talked about loans being flat for the year. Does that include the kind of unwind or runoff of those three areas or some portion of those areas? Yeah, Bill, why don't you take that?

You've got all those details. Yeah, so premium finance is about $800 million. It's a little north of $850 million as we sit here today. On the multifamily stuff, there's kind of two different 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. And we had a separate group that was originating small balance multifamily business. The small-balance multifamily 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, you know, the other – I guess – Question is, you know, what kind of ROA do you think you can maintain on an operating basis, kind of excluding any additional severance and other kind of unusual items this year?

So, as we look forward and throughout this year, we believe that we can maintain somewhere around a 110 ROA for the year, but it's going to be ramping up. So, as you look at, like, December ROA 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. Most economists believe we're going to go into some level of a recession. I'm not smart enough to figure out what level or how long or anything like that. But, you know, I mean, we will do well, but there could be some macro type items like that that could cause some 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, you know, 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 PacWest's balance sheet, it's about $41 billion. I mean, there's an argument in there that – 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.

And 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 reverse. So we're being very strategic and thoughtful through this.

Got it. And then on the expense side, you had some severance here this quarter. Just curious what the related savings or annualized savings that you expect from that. And it sounds like that's kind of the first step, as you mentioned in the release. It 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, it's 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 and so much more to come in that area as we're working through our strategic plan.

Okay, I'll step back. Thanks. Thanks.

Perfect. And we'll take our next question from Chris McGrady from KBW.

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?

You know, again, I would say everything's on the table. I think, you know, the pricing of our stock has moved up a bit here in the past week, two weeks. But you know, at levels that we've been at, it would be, I think it'd be very tough to raise stock. But again, I think that is on the table. But, you know, 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.

And again, we'd be very thoughtful about the earn back associated with that and shareholder dilution and other options that would dilute shareholders much less.

Absolutely.

Great. And if I could, I think I heard in your prepared remarks, you don't think you need to add reserves from here. I guess, everyone, did I hear that correctly?

And I guess 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.

Okay. Yeah, I would just think you 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, and again, I just want to make sure it's very clear that, I mean, 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.

Hello?

Sorry about that. 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 won't be family. 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 on 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'll kind of ebb and flow, but it'll kind of pace itself out. 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 that, again, everything's on the table.

We look at that, but, you know, 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's going to be pretty flat, do you have a view or expectation for, you know, deposit flows in the VC space? You know, 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 from that channel?

Well, I can tell you we'd absolutely love to have venture deposits increase. You know, venture deposits are very, very hard to estimate. I'd have to tell you it's very frustrating. You know, 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 in venture deposits. So we'd like to see them, you know, 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, you know, 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 we expected a better market towards the tail end 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 investment cadence with all the news that we saw here in Q4 and that's carrying through the earlier part of this year.

Thanks very much.

Thank you.

And we'll go to our next question from David Chivrini 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%.

Hello, David. Good to hear your voice. As Paul mentioned earlier, 2023 could be an interesting year. We could see a mild recession. We're expecting two more Federal Reserve rate increases of 25 basis points. And so we're very focused on armoring our balance sheet, being prepared from a liquidity perspective, and making some big decisions and moves in terms of our operational efficiency going forward. So 2023, you may see a lot of noise because of that. But those should set us up really well in 2024 and 2025 to have a really good chance to get back to the great profitability this bank has seen in the past.

You know, and just to expand on that a little bit, You know, I'm not a very patient person, so we're going to 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, you know, 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 beginning of this year, and then it should smooth out as we get into the second half of this year and then into 24.

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 PacWest earnings. I think PacWest 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 streak.

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.

And did you mention 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. He's been there for about a week. And we're still trying to figure out the business. PacWest had really – um, adopted sort of a decentralized hands-off, uh, method when they acquired it. And, uh, we're in there trying to figure it out and, uh, try to figure out what type, what, 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, uh, but weren't as familiar with the business. And so we like the asset. It's just trying to find the right size within our risk profile and our capital base going forward.

But again, overall, I mean, it's around 10% of our earning assets. And we are going to shrink it below that. I think 10% is too big of a chunk. And we are also, you know, the 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 situation. I was curious, in what way does FTX impact your business? Are you guys banking crypto customers?

No, this is Mark. Mark, why don't you take that? Yeah, the way it impacts is very simple. Just increase scrutiny and responsibility and accountability by the VCs to their investors. So greater diligence, 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 think so. Just wanted to clarify.

Thank you.

And we'll take our next question from Andrew Terrell from Stevens.

Good morning. Hey, good morning.

Hey, 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 also whether or not you see any lost 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 sizably already in the month. And so, no, we're not worried about the, you know, any particular, you know, fear or anything there. It's just kind of an ebbs and flow and how the month ended, Andrew.

And growth in the quarter as well. But again, ebbs and flows, some noises you get, especially near year end.

Yeah, okay. And then can you remind us the reserve you have against the Civic portfolio? I know it's a bit short a duration.

Yeah, I don't think we've 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 eight BIPs. So you would imagine with a very low loss experience and a short tenure, you know, that kind of leads you to where the CECL reserves come out.

Yeah, okay. And maybe just a bigger picture. It's really good to see 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 align 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, and we came up with this plan together. So there's, 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 targets that we have announced are in our incentive for 2023.

Okay. Thank you for taking the questions. You're welcome.

And we'll take our next question from David Long from Raymond James.

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. I 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 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, you could 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 technology. The second one is really our digital banking API strategy, and our third one is our data stream, and those are fundamentally untouched. Obviously, we are focused here on operational efficiency, so as Kevin mentioned, we're looking at revisiting every project, revisiting milestones, et cetera, but fundamentally 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 Marinac from Janie Montgomery Scott.

Good morning, Chris.

Thanks.

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 wanted to compare the prices you have in paying the past two quarters and sort of what is possible as you continue to focus on the core deposit outlook.

So I think deposits are going to be very challenging in 2023. You know, I've read a lot of the earnings announcements from other banks, and deposits, liquidity are getting a little stretched in the industry. We're no different than that. I would, you know, and we've got another couple rate bumps. I think that, you know, 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%. 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 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 next year.

I think the bigger thing, when you look at the P&L, though, Chris, is going to be the interplay between the remix on both sides of the balance sheet from both, you know, lower-yielding loans to higher-yielding loans and then on the deposit side. So there's going to be a lot of movement there. And I think in any particular quarter, you could see that bounce around. But the goal is obviously to drive increased profitability so to see the margin increase over time.

No, that's all very helpful. And Bill, to your point, you can see that with the loan production yield just on its own this past quarter, to your point. There was once a team of folks at PacWest several acquisitions ago who were dedicated on just doing deposits and weren't sending 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 just one group, Chris. It's everybody from the lenders to the top of the house all the way to the front lines. It is a reinvigorated core value.

And that's, you know, I mean, that's the secret sauce of banking is low-cost deposits. And, you know, 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 non-accruals, 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. I mean, we did an NPL sale in, I think, last quarter, and we're not seeing anything indicative in credit. As Paul said, we feel really good about where the book is. The team's done a great job over the past you know, years in terms of making sure that the underwriting was solid and our team's been, you know, going through everything with a fine-tooth comb. And if you were to look at our non-accruals, for example, it's really granular in there. Our top 20 MPLs, for example, average about $3 million. So, and they're all kind of stories and 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 kind of 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 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 Arstom from RBC Capital Markets.

Good morning, guys. 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, that's 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.

On provision, 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, but what kind of – Well, and we just got to preface that again with the year we're in is that we could have a recession, so that could be a little dynamic. We're 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, mixed 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?

You know, 2022 was a really good year for loan 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. Okay.

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 quartile 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?

Hey, look, John, I think that right now, what there's a lot of wood to chop Right. You know, Paul and Paul's been here as CEO for 28 days, I think it is. Yeah. 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, you know, 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. Yeah, I think, John, I think something's got to be a little bit different between top quartile and EPS growth.

Yeah, I think if you look at the core earnings power of PacWest 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.

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've 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 the 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. Yeah, we're trying to take the DDA base up to 40%. 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 PacWest Bank Corp. You know, our numbers are out on our online, and, you know, 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.