PacWest Bancorp (NASDAQ:PACW) Q4 2022 Earnings Call Transcript

PacWest Bancorp (NASDAQ:PACW) Q4 2022 Earnings Call Transcript January 27, 2023

PacWest Bancorp misses on earnings expectations. Reported EPS is $0.51 EPS, expectations were $0.97.

Operator: Good day, and welcome to the PacWest Bancorp Fourth Quarter 2022 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Bill Black, PacWest Bancorp.

William Black: Thank you. Good morning, and welcome to PacWest fourth quarter 2022 earnings conference call. With me today are; Paul Taylor, our President and CEO; Kevin Thompson, CFO; and Mark Yung, 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 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 SEC filings including the 8-K 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.

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 long-time CEO, Matt Wagner, who became the Executive Chairman; John Eggemeyer has become our Lead Director; and Kevin Thompson has joined us as 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 synergies across the company. We see opportunity for growth in 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 out across. 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.

William Black: 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 what 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.

Kevin Thompson: 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 sale 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 to $29 million. As a reminder, goodwill is a non-cash charge and has no impact on our regulatory capital ratios, cash flows or liquidity position. Finally, we are working to dramatically improve the overall operational efficiency of the bank.

As a first step in this initiative, we recorded early retirement benefits and a severance expense of $5.7 million. Adjusting for these unusual items, in the fourth quarter, our earnings per share would have been $0.93, 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 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 remained strong in all our loan portfolios, the allowance for credit losses 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 remained 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 are 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 increase reserves from current levels. This concludes our prepared remarks. Operator, could you please open the line for questions.

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Q&A Session

Operator: Thank you very much, sir. And we’ll take our first question from Brandon King from Truist Securities.

Brandon King: Hey, good morning.

Paul Taylor: Good morning, Brandon.

Brandon King: Good morning. 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?

Paul Taylor: Yes. So as you look at our balance sheet, I mean, one thing we do very well and a lot of it is we do a lot of real estate. So that’s one of the items we’ll continue to do. And then in our community bank, we do a lot of more commercial focused, more relationship type real estate that will continue on. And then we also have some units that do some more C&I lending. But again, that’s a nationwide business, and we’ll continue to do that. This year, we really looked at each one of our business lines and the ones we’ve discontinued are more of a low yield, no relationship type business. So I mean that was a fairly easy decision to get rid of those.

Brandon King: Okay. And then in regard to Civic, you mentioned there is some restructuring there. What is kind of the strategy for Civic going forward and the outlook for that?

Paul Taylor: Yes. So we’ve taken €“ sort of taken all 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 that we’ll hang on to and go forward with. We’ve put Mark Yung, 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.

Brandon King: Okay. Thanks for taking my questions. I’ll hop back in the queue.

Paul Taylor: Thank you.

Operator: Thank you. And we’ll take our next question from Matthew Clark from Piper Sandler.

Matthew Clark: Good morning.

Paul Taylor: Good morning, Matt.

Matthew Clark: Maybe just on the portfolios or businesses that you’re unwinding maybe just confirm the size of those portfolios. I think premium finance is over €“ 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? I mean the other €“ and then as a related question to that, I mean, you talked about loans being flat for the year, does that include the kind of unwind or runoff of those three areas €“ some portion of those areas?

Paul Taylor: Yes. Bill, why don’t you take that? You’ve got all those details.

William Black: Yes. So premium finance was about 800 €“ 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 a customer base multifamily business, which we’re not exiting, and we’re going to continue to service our core deposit customers. And we had a separate group that was originating small-balance multifamily. The small balance multifamily stuff that we’re running off is a little over $3 billion.