PacWest Bancorp

over to Bill Black from PacWest Bancorp.

Thank you.

Good morning and welcome to PacWest's first quarter 2023 earnings conference call. With me today are Paul Taylor, President and CEO, and Kevin Thompson, our CFO. Before I hand the call over to Paul, please note that we may make forward-looking statements during today's call that are subject to risks, uncertainties, and assumptions. For 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 8K filed yesterday afternoon, which is also available on the company's website. I'd like to turn the call over to our CEO, Paul Taylor.

Thank you, Bill, and good morning, everyone. I'd like to start by thanking our clients and team for their dedication to PacWest, especially over these last six weeks. which have been a very challenging period of time for the banking industry, including PacWest Bancorp. Like many other banks, PacWest had an outflow of deposits immediately following the closure of the two large regional banks in early March. In response, we took swift action to enhance our liquidity and capital positions. To withstand the deposit outflows we saw in March, we focused on maximizing our balance sheet liquidity by accessing various resources. Deposits stabilized in the latter part of March and have rebounded nicely in April, increasing approximately $600 million subsequent to quarter end with over 80% of that in our community bank. Immediately available liquidity now exceeds our uninsured deposits with a coverage ratio of approximately 153%. Deposit growth has benefited from deposit campaigns in the community bank focused on savings accounts and CDs, as well as over 140 new business accounts opened in the venture bank since March 9th. To further bolster our deposit base, we kicked off initiatives to launch new depository channels, including a direct-to-consumer bank expected to be operational by the third quarter of 2023. Having addressed these pressures, we are now able to return to the initiatives under our renewed strategic plan we announced in January. which will expedite PacWest's evolution to focus on our core community bank franchise and de-emphasize non-core businesses while intently focusing on reducing expenses on a smaller balance sheet. As such, we have begun to take actions, including moving our $2.8 billion balance lender finance business to held for sale and initiating the sale of approximately $650 million in civic loans. Once completed, these steps will significantly delever the balance sheet, further enhance our liquidity position, and accelerate our strategy to increase the CET1 ratio to over 10%. The market dynamics during the quarter caused a significant decline in regional bank stocks, ours included. As a result, we recorded a non-cash $1.38 billion goodwill impairment charge. Despite these challenges, we are pleased with our adjusted financial results of EPS of 66 cents that exceed analyst estimates, and we are continuing to leverage the core strength of our balance sheet. As we navigate the challenging industry dynamics, PacWest will continue to prioritize our customer relationships, which have been the bedrock of our success for more than 20 years. Now I will turn it over to Kevin to review our financials in more detail.

Thank you, Paul. As you mentioned, the market volatility in the quarter resulted in a significant decline in regional bank stocks. As a result, we reported a goodwill impairment charge of $1.38 billion. It is important to note that goodwill is a non-cash charge and has no impact on our regulatory capital ratios, cash flows, or liquidity position. We also incurred severance and contract termination expenses of $8.5 million related to our strategic transformation initiatives. In total, this resulted in a net loss of $1.21 billion, or $10.22 per diluted share. Adjusting for these unusual items, our earnings would have been 89.4 million or 66 cents per diluted share, which demonstrates the strength of our underlying business. Total deposits decreased by 5.7 billion or 16.9% in the quarter due primarily to a 7.3 billion decrease in retail non-maturity deposits and a 609 million decrease in wholesale non-maturity deposits. offset partially by a $2.2 billion increase in time deposits. As Paul mentioned, deposits increased approximately $600 million subsequent to quarter end, mostly in the community bank. Total insured deposits represented approximately 73% of total deposits in mid-April, up from 48% at year end. We're holding a higher than usual amount of cash on balance sheet of $7 billion at quarter end. We anticipate bringing that balance down to more normalized levels over the next weeks. Total loans and leases decreased slightly to $28.5 billion this quarter as part of our continuing balance sheet management strategy. We transferred the $2.8 billion lender finance portfolio to Help or Sell to expedite the delevering of the balance sheet, giving us the ability to pay down excess borrowings. Between this and other asset sales, we expect to increase the CET1 ratio to above 10% over the next few months. With our solid underlying earnings this quarter, the CET1 ratio already increased 52 basis points to 9.22% at quarter end. Unrealized losses on the company's investment portfolio also improved, 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 6.14% in the quarter. This was offset by the cost of deposits increasing 61 basis points to 1.98% in the same period. As part of our actions to enhance our on-balance sheet liquidity in the latter part of the quarter, We utilized borrowings from the FHLB, the bank term funding program, and temporarily from the Federal Reserve discount window. We also secured $1.4 billion in fully funded cash proceeds from Atlas SP partners through a new senior asset-backed financing facility, which unlocked liquidity from unencumbered high-quality assets in an expeditious manner. These prudent actions impacted our interest expense in the quarter, which increased by $88 million to $239 million. The resulting net interest margin decreased to 2.89%. The severance expense mentioned earlier is related to a reduction in force in our civic business that was initiated in the first quarter. We expect an annualized decrease in expenses of approximately $32 million beginning in May as a result of these actions. We were already engaged in an operational efficiency strategy, and we are now expediting these efforts to reduce facilities and vendors, optimize business processes, and execute on other cost savings across the business in order to improve our profitability. Excluding the goodwill impairment and severance of contract termination items, non-interest expense decreased by 4.4 million to 188 million in the quarter. This was mainly due to lower compensation expense, offset by higher insurance assessment and customer-related expenses. Credit metrics remain steady, with the non-performing asset ratio declining three basis points to 35 basis points. Finally, the allowance for credit loss ratio increased slightly to 1.11%.

This concludes our prepared remarks. Operator, could you please open the line for questions?

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star 1 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 McGrady with Keefe, Brea, and Woods.

Good morning.

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

Yeah, so to address the 10% first, I mean, Ten percent has always been sort of a threshold for me. But, I mean, we will continue to build capital. I mean, we're going to most likely exceed ten percent here in the next few months once we finalize some of the asset sales we've talked about. But we will continue to go on from there. I think today more capital is better, so we'll continue to grow capital. You know, as you look at, you know, we did, you know, as you mentioned, we did look at raising capital. You know, we, at the time when this event first happened, this deposit event first happened in the banking industry, we really looked at everything. You know, what should we do? What can we do? What are our options? Capital was one of the options we were looking at. But then we also looked at what we could do to the balance sheet. Even in our strategic plan, we had talked about operating a smaller balance sheet that would be more profitable. So our goal was to shrink the balance sheet, get some of the ballooning out of the balance sheet. You know, unfortunately, the wrong side of the balance sheet shrank, but the balance sheet is shrunk. So we're selling off some of these portfolios to get the balance sheet more in balance. And by doing that, we're creating capital and we're also creating liquidity. So we're very happy with what we've done so far, especially after we sell the portfolios. But at the end of the quarter, we're at 922. sort of the vision that we had has been accelerated pretty dramatically.

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

Thanks for all that, Chris.

Yeah, and as we looked at shrinking, it seemed like a much better economic situation for our shareholders.

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

So that is a 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.

Yeah, as you look at the balance sheet at the end of the quarter, I mean, there's a tremendous amount of cash. I mean, our Fed account has about $7 billion in it. We chose to become very liquid, you know, going through this event. We didn't know how deep the event would go. But now we can start sort of pulling those cash levels down. Balance sheet's about $44 billion as we sit. And you know, 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, pre-CIVB, your cash is about 5% running out. Is that kind of what you're thinking normal, you know, 5% on, you know, 35 or so?

I think that's 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 of the stress testing, but we may hold a little more cash because of uninsured balances.

Yeah, and our insured balances are about 73% of our deposits right now.

Got it. Thanks a lot, Collin. Appreciate it. Thanks.

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

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

Yeah, so we have not quantified those expenses. It's a very small team in Chicago. And the balance is a little over 2.7 billion.

And we'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?

Yeah, we did. Bill, you want to take the exact dollar amount, sir?

Yeah, we sold about $300 million at roughly a 1.8.

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

Yeah, so it needs to be paid. The loan terminates in December, and that's something we're considering right now. You know, we're letting the balance sheet settle down a little bit with all the actions and sort of trauma that it's been through, but...

We're absolutely considering that. Okay.

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

Yeah, you know, we're working on that right now. We think that, you know, I mean, our prediction is that, you know, we're going to go into some type of recession here that will bleed into next year. So we're more looking at, you know, sort of flattish type balance sheet going into next year.

Okay. And then just in terms of the borrowings, I mean, should we assume, you know, borrowings come down by six, seven billion here in the upcoming quarter? Is that fair or plus or minus? I think it's more like five, six billion.

Yeah, I think we'll bring our cash down by that much. But then we'll also have the benefit of our lender finance and civic sales. As those happen, we'll use those to pay down wholesale funding and get that balance sheet over time. Also, we do anticipate some repatriation of some of our deposits over time. Our team's working really hard on that. We have different deposit campaigns and initiatives we're working on. And, you know, there is some outflow of some of the customers from SBV, and there could be some potential upside for us there. So, that could also benefit our balance sheet in terms of lower 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 new accounts, somewhere around 140 new accounts. It takes a little while for them to fund, but, you know, 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.

We'll take our next question from the line of Jared Shaw with Wells Fargo Securities. Please go ahead.

Good morning.

Hey, good morning. If you look at the – what was the margin in March at the end of the quarter?

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

Yep, okay. And then, you know, you answered that expect to see the borrowings come down at a rapid pace as cash comes down and as the proceeds from loan sales come in. But what's the expectation or what should we be thinking about deposit growth from here with some of those initiatives that you spoke about? Yeah, how should we think about dollars and 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. You know, there's, you know, 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 people's press releases, I was pretty shocked at how pervasive it was. you know, we've been pretty successful at bringing back $700 million. I think that, you know, over the year, I mean, it's probably going to be a few billion dollars, we hope, but we'll have to see.

Okay. Thanks. And then, yeah, looking at on the loan growth side, you know, 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 remaining unfunded commitments 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, you know, even before this deposit event, we were trying to shrink the balance sheet and we're we became very selective in our lending. And, you know, a couple reasons there. We wanted to shrink, but we also feel that there's some kind of downturn, recession, whatever you want to call it, in our not-so-distant future, and we wanted to prepare for that also.

The unfunded commitments, Kevin, they're... Yeah, they 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 of that's moving lender finance to help her sell but also we're just we're not funding new loans uh 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 are the unfunded portions there were previous commitments we do not plan to grow going forward as we kind of get through the recession get our balance sheet restructured

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

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

Paul, maybe I can compliment. This is Mark 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 so even if you look at today, we're still kind of one-to-one there in terms of outs and deposits. So that focus continues very strongly going forward. And that depository program is focused on venture capital funds as opposed to private equity funds.

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

Great. Thanks for that, Keller.

Our next question comes from the line of Andrew Terrell with Stevens. 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 gap 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 you're going to be building to 10% CET1 in pretty short order, but I guess, why not lower the dividend and help out that kind of capital glide path moving forward?

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

And I'll just add, you know, there are various rules in terms of the different regulators, Federal Reserve, FDIC, state regulators have their different rules and different states have their different rules on what we can pay in dividends. But regulators understand that goodwill write-down is a non-cash event and not necessarily a threat to the underlying operational income of the company.

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

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

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

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

Yeah, so the 700 million that we've are grown has no broker wholesale deposits of any kind. 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 of a few weeks.

Okay, very good. Thanks for taking the questions. I'll step back. Thank you.

Our next question comes from the line of Christopher Maranac with Jannie Montgomery Scott. Please go ahead.

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

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

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

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

They would be similar, I believe. Yeah, they would be similar. Great, Paul. Thank you for taking the questions. All right. Thank you.

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

Good morning.

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

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

And also, we haven't talked about this much, but the first quarter, generally, we see seasonal outflow of deposits. That's the period 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'll start to see some seasonal inflows starting in the second quarter.

Good point. Got it. Got it. And could you, I'm not sure if you disclosed 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 2.3% on total deposits. Got it. Got it. And then last question, just strategically, philosophically, what is kind of a target payout ratio that you envision for the bank kind of in a normal environment, Paul?

You know, as we look forward, we're looking at it, you know, we've got to do a little balance sheet reconstruction. So, you know, that's something that 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 Tanner with DA Davidson. Please go ahead.

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

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

Okay. And it looks like there was no mark placed on those zones transferred. Is that correct?

There was no mark. That's correct. We're expecting a par or better bid.

Okay, great. And then longer term, you know, when you announced your strategic shift and initiatives back in January, you talked about a long-term ROA target in the 150 range. I imagine you'll have 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 could be in 24-25 based on kind of the current trajectory? and what your plans are balance sheet-wise, as opposed to maybe the 150 that you were at previously?

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

Thank you. Thank you.

Once again, if you would like to ask a question, please signal by pressing star 1. Our next question comes from the line of John Arpstrom with RBC Capital Markets. Please go ahead.

Good morning. Hey, good morning. Good morning. I wanted to ask a question, kind of a backward question, I guess, on the reduction in assets. You have a borrowings table in your press release. that shows that $10 billion increase in borrowings, and it shows the FHLB increase, the bank term funding, the repurchase agreement. And maybe another way to ask this question is, what do you think that looks like in a quarter, that $11.8 billion in borrowings? Where do you reduce it, and how much can you reduce that by?

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

And in terms of which order it would be in, you know, it probably would start with FHLB. The bank term funding program is a fantastic program that the Federal Reserve put in place. Very impressed with that approach. It's very favorable. And so it makes sense for us to utilize the lower rate you can see there and the flexibility there and the ability to use PAR over time. but we'll also bring that down over time as well as we do leverage the balance sheet.

And the secret here is, you know, as we all know, we've got to rebuild deposits as quick as we possibly can.

Any restrictions on bringing down, I mean, the repurchase agreement stands out at eight and a half percent. What do you need to do to start to bring that down?

It matures in December, John.

Okay. So, so there, is there a, restriction on bringing that down early, prepayment penalties or anything like that?

Yeah, there's just a prepayment penalty. There's a prepayment penalty.

So we should assume that hangs around.

It's math. We'll figure it out as we get there and as we deliver 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 to unwind some of these borrowings, maybe you're in a mid twos type margin level for a run rate for the second quarter. I know it's incredibly difficult, but it's probably the one linchpin to a lot of this that I think we want to figure out.

Well, with the, you know, we're already basically over with April. So I think you're going to see the margin in the second quarter, you know, be below the mid twos and somewhere between the lower twos and mid twos. And then in the third quarter, I think that you'll see it improve a lot more.

But it depends on many of our actions, you know, the timing of loan sales and other things that we do. And we, of course, we've mentioned this in an expeditious manner. We were already working on this, but we're working very hard on expense 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. That's very helpful. So the message is we should have low expectations, lower profitability for Q2, and then as you unwind some of this, we're going to see some improvement in Q3. Is that fair?

Yeah, I think that's fair. You know, we're moving as fast as we can, you know, but it's sort of a crazy market today.

Yeah, I think we're more focused on trying to maximize what we can, you know, put forth in 24 than any quarterly number in 23.

Yep, okay, good. I understand all that.

You know, protect the balance sheet, you know, protect the balance sheet, prepare the balance sheet for 24 more. Okay, okay.

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

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

Okay. All right. Thank you, guys. Thank you.

Our next question comes from the line of Andrew Terrell with Stevens. Please go ahead.

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

Well, again, that's something we're looking at. I would love to reposition the bond portfolio. You know, it's pretty costly today, although the AOCI declined in this quarter. You know, it's a pretty costly thing. But, yeah, we look at that almost daily. We look at, you know, 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. Thank you.

And this concludes today's question and answer session. I will turn the call back for any additional or closing remarks.

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