Yahoo Finance PacWest Bancorp (NASDAQ:PACW) Q1 2024 Earnings Call Transcript
PacWest Bancorp (NASDAQ:PACW) Q1 2024 Earnings Call Transcript April 23, 2024
PacWest Bancorp isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, and welcome to Banc of California's First Quarter Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask question. [Operator Instructions] Today's call is being recorded, and a copy of the recording will be available later today on the company's Investor Relations website. Today's presentation will also include non-GAAP measures. The reconciliation for these and additional required information is available in the earnings press release, which is available on the company's Investor Relations website. The reference presentation is also available on the company's Investor Relations website. Before we begin, we would like to direct everyone to the company's safe harbor statement on forward-looking statements included in both the earnings release in the earnings presentation.
I'd now like to turn the conference over to Mr. Jared Wolff, Banc of California's President and Chief Executive Officer.
Jared Wolff: Good morning. Welcome to Banc of California's first quarter earnings call. Joining me on today's call are Joe Kauder, our CFO; and our Bill Black, our Head of Strategy. We executed well in our first full quarter as a combined company. For those of you who have followed Banc of California for the past several years you have heard us talk about our commitment to demonstrating success methodically by making continuous progress on key initiatives, and consistently moving the ball down the field.
Operator: I'm sorry sir, it seems like its breaking up on your side. I'm going to place the music into the call, and I will pick-up your line privately. Just a moment please. [Technical Difficulty]
Operator: Excuse me, this is the conference operator. Mr. Wolff. Please recommence the opening of your speech. Thank you.
Jared Wolff: Okay. Good morning, everybody. We will try that again. Welcome to Banc of California’s First Quarter Earnings Call. Joining me on today's call are our Joe Kauder, our CFO; and Bill Black, our Head of Strategy. As I was saying earlier, we executed well in our first full quarter as a combined company. For those of you who have followed Banc of California for the past several years you have heard us talk about our commitment to demonstrating success methodically by making continuous progress on key initiatives and consistently moving the ball down the field. That's what we did in the first quarter. And we made solid progress on the initiatives that will lead to us achieving the profitability targets that we have set for the fourth quarter of 2024.
In the first quarter, we realized the benefits of the balance sheet repositioning. We executed following the closing of the merger. As a reminder, after closing on November 30, we executed on the sale of more than $6 billion of assets and paid down nearly $9 billion in borrowings. This resulted in significantly higher levels of net interest income in Q1 and an expansion in our net interest margin. The first quarter also demonstrated initial progress on the deposit gathering engine we have built having meaningful new business account relationships and absolute growth in non-interest bearing deposit balances much of which came from these new relationships. The increase in NID deposits along with the benefits of the balance sheet repositioning resulted in our cost of deposits declining 28 basis points and contributed to the significant increase we had in our average margin.
In terms of operating expenses, we are also making solid progress on realizing the cost savings from the merger and operating expenses are trending lower at a faster pace than we initially expected. With our higher level of profitability and prudent balance sheet management, we generated an increase in our tangible book value per share this quarter as well. As we've indicated profitability as our primary focus this year rather than growth. As a result our total assets declined during the quarter primarily due to our use of cash to pay down a bit over $1 billion of the bank term funding program, as well as running off higher cost deposits and borrowings. Our loan balances remained relatively flat, as we anticipated core loan production, which grew at a 4% annualized pace in Q1 was offset by runoff in our discontinued loan portfolio, particularly those with lower yields, such as our premium finance portfolio, which declined $77 million or 10.5% not annualized we've worked.
The runoff of those loans had a positive impact on our results, given that the premium finance portfolio has an average yield of 3.34%. Despite the muted economic backdrop and what we perceive to be slow loan demand, we had good core production of light of our portfolios, which reflects the strength of our team and our market position. This is true while we are also remaining conservative for sure that loans meet our disciplined underwriting and pricing criteria, with loans coming on the books at higher rates than what is running off, we are seeing an increase in our average loan yield, which was 41 basis points higher than the prior quarter. On the credit side, as we had previewed, we remain appropriately proactive and conservative with respect to credit and downgraded various CRE credits.
Four CRE credits drove the majority of the increase in non-performing loans during the quarter, which includes three office properties and one retail property. We took specific reserves against two of the office credits that we believe are sufficient to protect against potential future losses and recorded a $10 million overall provision. Additionally, the legacy civic portfolio contributed to an uptick in both delinquencies and non – and non-performing loans, so we see minimal potential losses in that portfolio. We continue to feel very good about the credit profile of our overall loan portfolio. The four CRE properties represented approximately 60% of the NPL increase. Civic loans accounted for approximately 29% of the increase. SFR consumer loans represented approximately 7% and various loans contributed to the remainder.
During the quarter, we also sold some of the Civic loans we have held-for-sale for approximately credit value. While we continue to be pleased with the credit profile of the portfolio, consistent with our conservative approach to credit management, these actions increased our level of loan loss reserves and raised our ACL to total loans to 1.26%. As we have previously mentioned, this ACL does not include the first loss position legacy PacWest sold the credit-linked notes on the SFR portfolio and it also does not reflect the credit marks taken on the legacy Bank of California portfolio at the closing of the merger. When these are factored in, our ACL to total loans is well north of 1.8%. Now I'll hand it over to Joe, who will provide some additional financial information.
And I'll have some closing remarks before we open up the line for questions, Joe.
Joe Kauder: Thank you, Jared. At the end of the prior quarter only included one month of combined operations and had a number of significant one-time items. I'm going to limit the quarter comparisons and review our core financial results. Starting with the income statement, we generated $239.1 million in net interest income, which reflects the favorable change in our mix of interest earning assets and a lower amount of high cost wholesale funding resulting from our balance sheet repositioning actions. Our net interest margin in the quarter increased to 2.78% versus 1.69% in 4Q 2023 and it increased to 2.82% for the month of March of 2024 versus 2.15% for the month of December 2023. Both increases driven by improvement in our average yield on interest earning assets and a decline in our average cost of funds.
The average yield on interest-earning assets increased 45 basis points from the fourth quarter of 2023, largely due to the full quarter inclusion of generally higher rate Banc of California loans along with the origination of higher yielding loans in our core portfolio and an increase in yield associated with purchase accounting marks. The average cost of interest-bearing liabilities decreased 59 basis points from the fourth quarter of 2023 and 81 basis points from December of 2023, reflecting a full quarter of benefits of the balance sheet restructuring action taken post merger, the use of excess liquidity to continue to pay down high-cost wholesale funding sources in Q1 of 2024, the lower cost of core deposits driven by an increase in our non-interest bearing deposit ratio, and targeted actions to the lower cost of our interest-bearing core deposits portfolio.
As we have shared previously, we expect to improve our cost of deposits and cost of funds through specific strategies for both core and wholesale funding. While our model anticipates two rate cuts in 2024, both in the second half of the year, even in a static rate environment, we expect that to continue to move our deposit cost down. Accordingly, we expect to see improvement in our net interest margin as we move through the year as new loan production originates at yields in excess of the yields on loans rolling off and we execute on our cost of fund strategy of reducing our reliance on high-cost wholesale funding and growing our low-cost core deposits. We are also finding that even in a flat rate environment, we are often able to reprice maturing deposits at lower prices than when they were originated, given that PacWest needed to pay high rates for deposits a year ago.
During the first quarter, we paid down $1.1 billion of our outstanding balances on the bank term funding program. We chose to retain the remaining $1.5 billion in order to hold higher liquidity as we continue to off expensive noncore deposits. At this point, is likely that we will repay the remaining balance during the second quarter but we could choose to retain it for a longer period of time based upon the deposit flows and the loan funding trends that we see. Our noninterest income was $33.8 million with all of our major areas of non -- I'm sorry, of recurring noninterest income coming in relatively close to the expected level. This amount was consistent with the fourth quarter of 2023 when the fourth quarter number is adjusted for various one-off items including a legal settlement.
Our noninterest expense was $210.5 million, down $73 million versus the December 2023 quarterly run rate. We are starting to see the lower FDIC assessment rate that we expected. However, in the first quarter, we also recorded an additional $4.8 million related to the FDIC special assessment. We continue to expect our assessment to decrease through the year, although the pace and timing of the reduction will be determined by the FDIC. Our other expense initiatives are gaining traction and deliver results in excess of expectations for the quarter. Turning to the balance sheet, as Jared indicated, our total loans were essentially flat. However, our core portfolio grew 4% annualized, primarily in commercial loans, offset by lower Civic loans and other discontinued portfolio loans.
Our non-interest-bearing deposits increased during the quarter, primarily as a result of new client relationships. Our balance sheet management strategy allowed us to reduce total deposits approximately $1.5 billion during the quarter, as we utilized our excess liquidity to pay down high-cost legacy PacWest brokered deposit products. This resulted in a favorable shift in our deposit mix with non-interest-bearing deposits increasing from 25.6% to 27.1% of total deposits. In addition, our wholesale funding percentage dropped 2% to 16.9% and our cash level was rightsized to approximately 8.5% consistent with our original merger target. Note we continued to retain robust liquidity with our total primary and secondary liquidity being 2.4 times our total uninsured and uncollateralized deposits.
At this time, I will turn the call back over to Jared.
Jared Wolff: Thanks Joe. Looking ahead to the remainder of the year, our primary focus will be on continuing to execute well on the initiatives that will enable us to meet our stated profitability targets, most notably in reducing both interest expense and operating expense. Based on the progress we are making, we continue to expect to generate ROAA of approximately 1.1% and ROTCE of approximately 13% in the fourth quarter of this year. While continuing to be conservative in our new loan production, based on the current loan pipeline, we expect to be able to largely offset the runoff we have in non-core portfolios with new fundings, which should keep our total loans relatively flat. But the new loans are expected to average higher rates than what is running off, so production should continue to be accretive to our margin and improve our level of profitability.
We also have a good deposit pipeline, and we expect to continue to grow NIB, which will further improve our deposit mix and reduce our cost of deposits. Our ability to drive down our cost of deposits, increase NIB, and expand our margin are the result of solid execution by our team at a time when others are finding it hard to achieve the same objectives. We have a very strong balance sheet with high levels of capital, liquidity, loan loss reserves, and solid credit quality, and our strong market position in California enables us to add attractive new client relationships at a time when many competing banks are not able to meet the needs of their clients due to capital and funding constraints or credit concerns. While meeting our profitability targets remains our primary goal for 2024, we will continue to operate with a long-term approach and add new client relationships that we believe will lead to further profitable growth of our franchise and add value -- and additional value being created for shareholders in the coming years.
And most importantly, Banc of California continues to benefit from having the best team in our markets, very talented bankers and professionals who know how to deliver on our goals and show up every day looking to deliver for our clients and communities in a way that separates us from our competitors. We continue to add talent to our workforce and I believe that will remain a differentiator for Banc of California in the years to come. As I said at the outset, I am very pleased with our progress to-date and expect to continue methodically moving the ball down the field towards specific targets in the coming quarters. With that, operator, let's go ahead and open up for questions.
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