Release Date: July 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Successful core system conversion with minimal disruptions, integrating nearly 20,000 clients and over 55,000 accounts.
- Completed the sale of approximately $1.95 billion of CIVIC loans, freeing up approximately $100 million in Tier 1 capital.
- Paid down $1 billion in higher-cost BTFP funding, contributing to net interest margin (NIM) expansion.
- Generated $230 million in new non-interest bearing deposits from new relationships in just two quarters.
- Originated over $1 billion in loan commitments during the second quarter alone.
Negative Points
- Net charge-offs were elevated in the second quarter due to charge-offs related to the CIVIC portfolio and several commercial real estate loans.
- Increase in criticized and classified loans due to downgrading several rate-sensitive loans.
- Non-interest income was down from the prior quarter, primarily due to lower levels of other income from mark-to-market adjustments.
- Total non-interest expense was impacted by several items, including adjustments to acquisition-related costs and continued elevation in FDIC expenses.
- The overall climate for lending remains sluggish, with traditional real estate lending showing lower momentum.
Q & A Highlights
Q: What are you assuming in terms of relief around FDIC assessment costs in the fourth quarter?
A: Jared Wolff, President, Chief Executive Officer, Vice Chairman of the Board: We think we can get down to a $10 million to $12 million level by the fourth quarter, considering the normal assessment and the special assessment catch-up.
Q: How much of non-interest expense relief will you get from selling the CIVIC portfolio?
A: Jared Wolff, President, Chief Executive Officer, Vice Chairman of the Board: We expect around $2 million to $3 million in expense relief, but some expenses will continue due to servicing commitments.
Q: How much of the $1.9 billion loan sale proceeds will go to pay down brokered CDs?
A: Joseph Kauder, Chief Financial Officer, Executive Vice President: We plan to use north of half of the proceeds to pay down brokered CDs, depending on other balance sheet actions.
Q: Can you isolate the charge-offs tied to the two previously identified office credits and whether there’s anything else behind that within the portfolio?
A: Jared Wolff, President, Chief Executive Officer, Vice Chairman of the Board: We don’t expect further issues as of now. We are being proactive in migrating credits to avoid future headwinds.
Q: What is your view on the increase in classified loans and the potential for losses?
A: Jared Wolff, President, Chief Executive Officer, Vice Chairman of the Board: The increase is mostly in real estate loans due to repricing risk. We are being proactive, but it doesn’t mean we will incur losses.
Q: Where do you think the earning asset spot will be at the start of 2025?
A: Joseph Kauder, Chief Financial Officer, Executive Vice President: We estimate a range of $30.5 billion to $32 billion, depending on loan growth and runoff.
Q: How challenging will it be to re-engage with lender finance relationships?
A: Jared Wolff, President, Chief Executive Officer, Vice Chairman of the Board: We have a strong base of around $750 million to $800 million and good relationships. The recent acquisition of the Ares portfolio has also helped.
Q: What is the longer-term growth trajectory for deposits?
A: Jared Wolff, President, Chief Executive Officer, Vice Chairman of the Board: We aim to maintain our loan-to-deposit ratio around the 85% band, ensuring balanced growth in both loans and deposits.
Q: Are you optimistic about positive operating leverage for next year?
A: Jared Wolff, President, Chief Executive Officer, Vice Chairman of the Board: Yes, we are in a good spot to continue showing operating leverage and expand from there.
Q: How do you feel about the PacWest portfolio's credit quality?
A: Jared Wolff, President, Chief Executive Officer, Vice Chairman of the Board: We feel terrific about it. The office credits have behaved as expected, and our reserve levels are strong.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
