NIO Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 26, 2023

There are 13 speakers on the call.

Operator

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

Speaker 1

Thank you. Good morning and welcome to PacWest's Q1 2023 earnings conference call. With me today are Paul Taylor, President and CEO and Kevin Thompson, our CFO. Before I hand the call over to Paul, please note that we may make forward looking statements during today's call that are subject to risks, uncertainties and assumptions. For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward looking statements, See our company's SEC filings, including the 8 ks filed yesterday afternoon, which is also available on the company's website.

Speaker 1

I'd like to turn the call over to our CEO, Paul Taylor.

Speaker 2

Thank you, Bill, and good morning, everyone. I'd like to start by thanking our Like many other banks, PacWest Had an outflow of deposits immediately following the closure of the 2 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 600,000,000 Immediately available liquidity now exceeds our uninsured deposits with a coverage ratio of approximately 153%.

Speaker 2

Deposit Growth has benefited from deposit campaigns in the Community Bank focused on savings accounts and CDs As well as over 140 new business accounts opened in the Venture Bank since March 9. To further bolster our deposit base, we kicked off initiatives to launch new depository channels, including 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 deemphasize 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 $2,800,000,000 lender finance business to held for sale And initiating the sale of approximately $650,000,000 in civic loans. Once completed, these steps We'll 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 Klein and Regional Bank Stocks, Hours Included.

Speaker 2

As a result, we recorded a non cash $1,380,000,000 goodwill impairment charge. Despite these challenges, we are pleased With our adjusted financial results of EPS of $0.66 that exceed analyst estimates, 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 Rachel Bates stocks.

Speaker 2

As a result, we recorded a goodwill impairment charge of $1,380,000,000 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 $8,500,000 related to our strategic transformation initiatives. In total, this resulted in a net loss of 1,210,000,000 or $10.22 per diluted share. Adjusting for these unusual items, our earnings Would have been $89,400,000 or $0.66 per diluted share, which demonstrates the strength of our underlying business. Total deposits decreased by $5,700,000,000 or 16.9 percent in the quarter due primarily to a $7,300,000,000 decrease in retail Non maturity deposits and a $609,000,000 decrease in wholesale non maturity deposits, offset partially by a $2,200,000,000 increase Endtime deposits.

Speaker 2

As Paul mentioned, deposits increased approximately $600,000,000 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 $7,000,000,000 at quarter end. We anticipate bringing that balance down to more normalized Total loans and leases decreased slightly to $28,500,000,000 this quarter as part of our continuing balance sheet management strategy. We transferred the $2,800,000,000 lender finance portfolio to held Purcell to expedite the deleveraging of the balance sheet, giving us the ability to pay down excess borrowings.

Speaker 2

Between this and other asset sales, we expect to increase the CET1 ratio to above 10% over the With our solid underlying earnings this quarter, the CET1 ratio already increased 52 basis points to 9.22 percent at quarter end. Unrealized losses on the company's investment portfolio Also improved declined from $791,000,000 in the 4th quarter to 736,000,000 Interest income increased $45,000,000 or 9% in the quarter. With 42% of our loans having variable interest rate terms, We continue to see a positive loan beta trend with loan yields increasing 41 basis points to 6.14% in the quarter. This was offset by the cost of deposits increasing 61 basis points to 1.98% in the same period. As part of our actions to enhance our on balance sheet liquidity in the latter part of the quarter, we utilize borrowings from the FHLB, The bank term funding program and temporarily from the Federal Reserve discount window.

Speaker 2

We also secured 1,400,000,000 Fully funded cash proceeds from Atlas SP Partners through a new senior asset backed financing facility, which unlocks liquidity from unencumbered high quality assets in an expeditious manner. These prudent actions impacted our interest expense in the quarter, which increased by $88,000,000 to 239,000,000 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 It was initiated in the Q1. We expect an annualized decrease in expenses of approximately $32,000,000 Beginning in May as a result of these actions, we were already engaged in an operational efficiency strategy And we are now expediting these efforts to reduce facilities and vendors, optimize business processes and execute on other cost Savings across the business in order to improve our profitability. Excluding the goodwill impairment and severance and contract termination items, Non interest expense decreased by $4,400,000 to $188,000,000 in the quarter.

Speaker 2

This was mainly due to lower compensation expense, offset by higher insurance assessment and customer related expenses. Credit metrics remained steady with the non performing asset ratio declining 3 basis 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?

Operator

Thank Our first question comes from Chris McGratty with Keefe, B, Brett and Woods.

Speaker 3

Hey, good morning.

Speaker 4

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 cap a philosophical capital question. How is 10 what's your view on 10 being the right number today? I think some of your peers Have you been said 11? And then maybe more broadly, the dividend obviously is elevated relative to current earnings.

Speaker 4

How are we thinking just broadly about capital? I Understand you also made an attempt to raise capital during the quarter.

Speaker 5

Thanks.

Speaker 2

Yes. So to address the 10% first, I mean, 10% has always been sort of a threshold for me. But I mean we will continue to build capital. I mean We're going to most likely exceed 10% here in the next few months, once we finalize some of the asset sales we've talked about. But we will continue to go on from there.

Speaker 2

I think today more capital is better, so we'll continue to grow capital. As you look at we did as you mentioned, we did look at raising capital. At the time when this event first happened, this deposit event first happened in the banking industry, We really looked at everything. What should we do? What can we do?

Speaker 2

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 is to shrink the balance sheet, get some of the Ballooning out of the balance sheet.

Speaker 2

Unfortunately, the wrong side of the balance sheet shrank, but the balance sheet has shrunk, so we're selling off some of these portfolios To get the balance sheet more in balance and by doing that we're creating capital and we're also creating liquidity. So we're very happy with what we've done so far, especially after we will After we sell the portfolios, but at the end of the quarter, we're at 9.22. So, sort of the vision that we had has been Accelerated pretty dramatically. And I'll add to that. CET1 ratio is very important.

Speaker 2

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 as an important element with the common equity in it.

Speaker 5

Thanks for all that color. Yes.

Speaker 2

Yes. And as we look to shrinking, it seems like a much better economic situation for our shareholders.

Speaker 4

Okay. Thanks for that Paul. The $35,000,000,000 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 $3,000,000,000 portfolio. I'm just trying to get a sense of where earning assets are going to shake out.

Speaker 2

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 $650,000,000 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's a tremendous amount of cash. I mean, our Fed account has about $7,000,000,000 in it.

Speaker 2

We chose to become very liquid going through this event. We didn't know how deep the event would go. But now we can start sort of pulling those cash levels down. Balance sheet is about $44,000,000,000 as we sit And going through the steps that Kevin mentioned along with taking that cash out brings it down to $35,000,000,000 $36,000,000,000

Speaker 4

Okay. And pre COVID or I'm sorry, pre SIVV, your cash is about 5% right now. Is that kind of what you're thinking normal, 5% on 35 or so?

Speaker 2

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. Yes.

Speaker 2

And our uninsured balances are about 73 percent of our deposits right now.

Speaker 3

Got it. Thanks for the color. Appreciate it. Thanks.

Operator

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

Speaker 6

Good morning. Hey, good morning. Thanks. Thank you. Hey, how are you doing?

Speaker 6

First one for me Is around the lender finance business. Can you quantify how much in the way of expenses you have Hi to that business and how quickly might those expenses come out?

Speaker 2

Yes. So we have not Quantified those expenses, it's a very small team in Chicago and the balance is a little over $2,700,000,000 and we're in the process of selling it right now.

Speaker 6

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

Speaker 2

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

Speaker 1

Yes, we sold about $300,000,000 at roughly a 1.8

Speaker 6

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 And just trying to get a sense for timing and when you might be able to pay off that repo.

Speaker 2

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 settle down a little bit with all the actions and sort of trauma that it's been through, but We're absolutely considering that.

Speaker 6

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 $35,000,000,000 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.

Speaker 2

Yes. We're working on that right now. We think that I mean our Prediction is that we're going to go into some type of recession here that will bleed into next year. So we're more looking at Sort of flattish type balance sheet going into next year.

Speaker 6

Okay. And then just in terms of the borrowings, I mean, should we assume borrowings come down by $6,000,000,000 $7,000,000,000 here in the upcoming quarter? Is that fair or Plus or minus?

Speaker 2

I think it's more like $5,000,000,000 $6,000,000,000 Yes. 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 Overtime, also we do anticipate some repatriation of some of our deposits overtime. Our team is working really hard on that. We have different Deposit campaigns and initiatives we're working on and there is some outflow of some of the customers from SVB and there could be some potential upside for us there. So that Also benefit our balance sheet in terms of lower borrowings.

Speaker 2

Yes. And we've been successful As of I think 24th, we've brought back somewhere around $700,000,000 in deposits. And on the venture side, we've opened up a lot of new accounts, somewhere around 140 new accounts, To customers that have moved their money predominantly, but we're also talking to new customers.

Speaker 6

Got it. Thank you.

Speaker 3

Thank you.

Operator

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

Speaker 3

Good morning.

Speaker 7

Hey, good morning. Good morning. If you look at the Sorry, I forgot to hear. What was the margin in March at the end of the quarter?

Speaker 2

End of the quarter, it was dipping into the low-280s. And of course, even in the 270s, 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.

Speaker 7

Yes. Okay. And then you answered that expect to see the borrowings come down at a rapid pace as cash comes down and as the proceeds from loan sales come in. 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, how should we think about dollars and deposits growing through the end of the year?

Speaker 2

That as we look at that, we've talked a lot about that. That is incredibly hard to predict. There's It's sort of hard to figure out what happened to begin with. If you look at the deposit run, it was pretty pervasive throughout the industry. As I read people's press releases, I was pretty shocked at how pervasive it was.

Speaker 2

We've been pretty successful at bringing back $700,000,000 I think that over the year, I mean, it's Probably going to be a few $1,000,000,000

Speaker 5

we hope,

Speaker 2

but we'll have to see.

Speaker 7

Okay. Thanks. And then looking at 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 remaining unfunded commitments on the loan side?

Speaker 2

Yes. So we've seen a decline in demand as we've moved into this year, But we're also, even before this deposit event, we were trying to shrink the balance sheet and We became very selective in our Linde and a couple of reasons there, we wanted to shrink, but we also Feel that there's some kind of downturn, recession, whatever you want to call it, in our not so distant future, and we wanted to prepare for that also. The unfunded commitments, Kevin, they're yes, they dropped from above $11,000,000,000 to just above $9,000,000,000 in the quarter. Part of that is the Moving of lender finance to about $400,000,000 of that's moving lender finance to help Purcell. But also we're just we're not funding new loans.

Speaker 2

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. You are correct. The fundings that are happening right now are 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

Speaker 7

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?

Speaker 5

Yes. So I

Speaker 2

think there's a huge opportunity there. I think we have to manage that business differently. I mean, Clearly deposits aren't very similar to a normal community commercial bank 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 yes, we understand your question. That's Something we're working on right now, but we will stay in the business.

Speaker 2

We see it as a great opportunity for both the right and left side

Speaker 3

of the balance And Paul, maybe I can complement this.

Speaker 8

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 1 to 1 there in terms of outs and deposits. So that focus continues very strongly going forward. Net depository program is focused on venture capital funds as opposed to private equity funds.

Speaker 3

Great.

Speaker 7

Thanks.

Speaker 2

And I'll just add, the interest is I'm fairly new here. And Paul and I have spent a lot of time speaking with clients Through this process, I am so impressed with our client base and their loyalty to PacWest. There are a number of the venture banking deposits that didn't move a penny And love banking with us, and that includes our community banking side. People love banking with PacWest. We have a white glove treatment of our clients, A great reciprocal relationship.

Speaker 2

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

Operator

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

Speaker 3

Good morning.

Speaker 5

Hey, good morning. Thanks for the questions. If I could start just on the dividend. Can you remind us just the roles after taking a GAAP loss, does that preclude you from paying a common dividend or does it affect the preferred dividend at all? And then Just with 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 Moving forward.

Speaker 2

Yes. 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 Q1. 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 Item to talk about and approve, obviously, that's a Board decision. And I'll just add, 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.

Speaker 5

Got it. Okay. If I can move over to expenses really quick. So the Sounds like the actions taken this quarter are about $32,000,000 improvement in the annual run rate, so $8,000,000 or so a quarter. I guess as we think about expenses into 2Q, obviously before the lender finance sale, is $8,000,000 off the run rate On a quarterly basis into 2Q, a good way to think about the operating expenses?

Speaker 5

Or just given some of the commentary around expedition of the efficiency initiative, I Can we see expense improvement further than just an $8,000,000,000 decline?

Speaker 2

Yes. So I'll start with that and then I'll let Kevin finish, but we've got a smaller balance sheet. So we absolutely need to accelerate the expense reduction plan. We had already started that. We've been looking at headcount.

Speaker 2

We've been looking at facilities in particular. Pac West has a lot of facilities across the country, some that are duplicative. So we're very aggressively attacking those. But you will continue to But you will continue to see throughout the remainder of this year significant expense reductions. I agree.

Speaker 2

And it takes time for expense reductions to take effect. So in the Q4, we had done some early retirements. We had wound on our premium finance and multifamily businesses. You start seeing those benefits really the latter end of Q1 and in the Q2. In the Q1, we did a reduction in Over 200 people in our civic entity, we'll start seeing that $32,000,000 annualized benefit to that starting in May.

Speaker 2

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.

Speaker 5

Yes, totally understood. Okay. And then just maybe a clarification And for the quarter to date deposit growth in 2Q, you guys referenced I think around $700,000,000 Was any of that brokered deposit growth? And then if I could clarify on Page 4 of the It looks like the insured balances are up about $1,100,000,000 quarter to date, but the uninsured is off $400,000,000 or so. Is there any movement from uninsured to insured included in that graph?

Speaker 5

Or so far in the second quarter, are you still seeing Quarter to date net outflows and uninsured deposits?

Speaker 2

Yes. So the $700,000,000 that we've grown has no brokered Wholesale deposits of any kind, those are customer deposits that we have 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.

Speaker 5

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

Operator

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

Speaker 9

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

Speaker 2

Yes. So when you look at the core community bank of PacWest, I mean, it's $14,000,000,000 $15,000,000,000 bank. It's predominantly located in Southern California. And it's a really great bank. I mean, it's a nicely balanced bank.

Speaker 2

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 the Venture Bank and a smaller amount in the Community Bank. PacWest is about 22 years old. It's got very When I first came on board several months ago, I mean, the shocking thing was The longevity of customers and the loyalty of customers in that community bank space to Pac West.

Speaker 2

As Kevin mentioned, he called it white glove service, but our guys out in the field and 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, 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.

Speaker 2

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 great history through recessions.

Speaker 9

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?

Speaker 2

They would be similar, I believe. Yes, they would be similar.

Speaker 9

Great, Paul. Thank you for taking the questions.

Speaker 2

All right. Thank you.

Operator

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

Speaker 3

Good morning. Hey, good morning.

Speaker 10

So I wanted to follow-up on the quarter to date deposit growth And customers, could you elaborate more on how you're able to achieve that growth And if it was more rate driven or relationship driven and what kind of accounts you grew in? Was it Time deposits, CDs or checking accounts?

Speaker 2

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 a very nice rate CDs and the money market in order to drive some of those balances back to the bank.

Speaker 2

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 Q1 generally we see seasonal outflow of deposits. That's the period when people are paying taxes, people are paying bonuses and things like that.

Speaker 2

So we expected to see deposits down during that period and we'll start to see some seasonal inflow

Speaker 10

Got it. And could you I'm not sure if you disclosed this, but what was the spot rate on deposits

Speaker 2

The spot rate right at the end of the quarter was about 2.3% On total deposits.

Speaker 10

Okay. 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?

Speaker 2

As we look forward, we're just we're looking at it. We've got to do a little balance Sheet reconstruction. So that's something that we are exploring next week at the Board meeting.

Speaker 10

Okay. Thanks for answering my questions.

Speaker 3

Thank you.

Operator

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

Speaker 4

Good morning.

Speaker 11

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 1 to 2 months.

Speaker 11

Should we read that as though there is a contractual sale in place or is that process So under what?

Speaker 2

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

Speaker 11

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

Speaker 2

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

Speaker 11

Okay, great. And then longer term, when you announced your strategic shift Initiatives back in January, you talked about a long term ROA target in the $150,000,000 range. I imagine you all 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 2024, 2025 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?

Speaker 2

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

Operator

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

Speaker 2

Good morning.

Speaker 12

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 $10,000,000,000 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 $11,800,000,000 in borrowings?

Speaker 12

Where do you reduce it? And how much can you reduce that by?

Speaker 2

So it's probably going to go down by at least 5,000,000,000 Without the loan sales, and then if you factor in the loan sales, it could go down further from there. When we Enter this event, we decided to be as absolutely liquid as we possibly could. We didn't go Drew, the we didn't want to we didn't have any idea of how deep this event was going to go, but we're in the process of backing down liquidity this month Right now. And in terms of which order it would be in, it probably was we'd start with FHLB. The bank term funding program is a fantastic The program that the Federal Reserve put in place, very impressed with that approach.

Speaker 2

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 The ability there and the ability to use par over time, but we'll 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 to rebuild deposits as quick as we possibly can.

Speaker 12

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

Speaker 1

It matures in December, John.

Speaker 12

Okay. So there is there a restriction I'm bringing that down early, prepayment penalties or anything like that?

Speaker 1

Yes, it's

Speaker 10

a prepayment

Speaker 3

penalty. Okay.

Speaker 10

Yes, it's a prepayment penalty.

Speaker 12

So we should assume that hangs around?

Speaker 1

It's math. We'll figure it out as we get there and as we delever the balance sheet.

Speaker 12

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 End of the low 2s, I know that isn't really fair, but when you start to unwind some of these borrowings, Maybe you're in a mid-2s type margin level for a run rate for the Q2. I know it's incredibly difficult, but it's probably the one Lynch been to a lot of this that I think we want to figure out?

Speaker 2

Well, with the we're already basically over with April. So I think you're going to see the margin in the 2nd quarter be below the mid-2s and somewhere between the lower-2s and mid-2s. And then in the Q3, I think that you'll see it improve a lot more.

Speaker 10

Okay.

Speaker 2

But it depends on many of our actions, the Timing of loan sales and other things that we do and we of course we've mentioned this are 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.

Speaker 12

Okay. Okay. That's very helpful. And I guess, So the message is we should have low expectations, lower profitability for Q2. And then as you unwind some of this, We're going to see some improvement in Q3.

Speaker 12

Is that fair?

Speaker 2

Yes. I think that's fair. We're moving as fast as we can, But it's sort of a crazy market today.

Speaker 1

Yes. I think we're more focused on trying to maximize what we can Put forth in 2024 than any quarterly number in 2023.

Speaker 12

Yes. Okay. Good. I understand all

Speaker 1

Protect the balance sheet, prepare the balance sheet for 24 more.

Speaker 12

Okay, okay. All helpful. And then 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?

Speaker 2

Credit has really held up. I mean, Pac West is incredible at credit. I'm sort of a new guy, but I mean, I'm very impressed with the credit process and our Chief Credit Officer. So I just don't see any change. I mean, clearly, with interest rates rising, there's going to be some stress out there.

Speaker 2

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.

Speaker 12

Okay. All right. Thank you, guys.

Speaker 2

Thank you.

Operator

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

Speaker 5

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 kind of 10% CET1 number, you feel like there's more opportunities, Specialty yields pulling back some to reposition portions of the bond book in coming quarters?

Speaker 2

Well, again, that's something we're looking at. I would love to reposition the bond portfolio. It's pretty costly today, although the AOCI declined in this quarter. It's a pretty costly thing, but yes, we look at that almost daily. We look at loans, Any asset we can sell at this point in time, but that we're absolutely looking at that.

Speaker 2

And the quarterly cash flow on the bond portfolio between maturities, Paydowns, accretion, etcetera is about $70,000,000

Speaker 5

Okay. Got it. Thank you.

Speaker 3

Thank you.

Operator

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

Speaker 2

We'd like to thank all of you for calling in and your interest in Pac West. We here are very excited about Pac West. We've gone through a very interesting deposit event here. I've not been through that in my 40 year career at this type of level. But rest assured, we will bring back great profitability back to Pac West as quick as humanly possible.

Speaker 2

We're working on a number of things as we've talked about here, and those should come to fruition fairly quickly. And we really appreciate you calling in.

Operator

This concludes today's call. Thank you for your participation and you may now disconnect.

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Earnings Conference Call
NIO Q1 2023
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