PacWest Bancorp (NASDAQ:PACW) Q4 2022 Earnings Conference Call January 27, 2023 11:00 AM ET
Company Participants
William Black – Executive Vice President of Strategy and Corporate Development
Paul Taylor – President and Chief Executive Officer
Kevin Thompson – Executive Vice President and Chief Financial Officer
Mark Yung – Executive Vice President and Chief Operating Officer
Conference Call Participants
Brandon King – Truist Securities
Matthew Clark – Piper Sandler & Co.
Christopher McGratty – Keefe, Bruyette, & Woods, Inc.
Gary Tenner – D.A. Davidson & Co.
David Chiaverini – Wedbush Securities
Andrew Terrell – Stephens, Inc.
David Long – Raymond James & Associates, Inc.
Christopher Marinac – Janney Montgomery Scott LLC
Jon Arfstrom – RBC Capital Markets
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 [indiscernible] 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 [indiscernible] 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.
Question-and-Answer Session
Operator
Thank you very much, sir. [Operator Instructions] 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.
Paul Taylor
And I’ll add, Matthew. Hi Matthew, good to hear your voice again. I will add that the flat loan growth for the year does anticipate the wind down of those entities.
Matthew Clark
Okay. Great. And then as you’re going through this restructuring process, the other, I guess, question is what kind of ROA do you think you can maintain on an operating basis kind of excluding any additional severance and other kind of unusual items this year?
Paul Taylor
So as we look forward and throughout this year, we believe that we can maintain somewhere around a 110 ROA for the year, but it’s going to be ramping up. So as you look at like December ROA is going to be about a 120, but I’m going to preface that. I mean, 2023 is going to be an interesting year. I don’t think any of us quite know how it’s going to go. I mean we’ve probably got some more increases from the Fed. Most economists believe we’re going to go into some level of a recession. I’m not smart enough to figure out what level or how long or anything like that. But I mean, we will do well, but there could be some macro type items like that, that could cause some variation. And the actions we’re taking now are in preparation, so that we’re flexible and have a balance sheet that’s prepared for that type of environment.
Matthew Clark
Got it. And then just to close the loop on that ROA conversation. In terms of the denominator, you spoke about the loans being flattish, but what about overall assets and borrowings from here? I mean, is there a plan to sell more securities and pay off FHLB? Or how should we think about overall assets by the end of this year?
Kevin Thompson
Yes. I mean, quite honestly, we’re looking at everything. Everything is on the table. As you look at PacWest balance sheet, it’s about $41 billion. I mean there’s an argument in there that a smaller balance sheet could be more profitable. We’re sort of distressed in some areas. But again, that’s part of the reason we sold the billion dollars in bonds. There was sort of a dip in the 10-year, and we had these groupings of bonds that we felt it was worthwhile to go ahead and sell them and take the loss, but we’re looking at all those types of things.
William Black
And it needs to be strategic. We’re thinking of the long-term shareholder value here, what’s the earn back. There’s a level of liquidity we need to hold in the bond portfolio. Also, there’s an element of patience in our unrealized losses, if you wait and the bonds mature overtime, those unrealized losses reverse. So we’re being very strategic and thoughtful through this.
Matthew Clark
Got it. And then on the expense side, you had some severance here this quarter. Just curious what the related savings or annualized savings that you expect from that? And it sounds like that’s kind of the first step, as you mentioned in the release. It sounds like there’s more. Any order of magnitude in terms of the potential cost saves we could see this year?
William Black
Yes, annualized, it’s probably about the level of severance that we saw going forward. And we have other – we have an operational efficiency focus right now, where we’re looking at facilities, we’re looking at projects. We’re looking at compensation across the board. Are there things we can do more efficiently? We have a lot of systems and so much more to come in that area as we’re working through our strategic plan.
Matthew Clark
Okay. I’ll step back. Thanks.
Paul Taylor
Thanks.
Operator
Perfect. And we’ll take our next question from Chris McGratty from KBW.
Paul Taylor
Good morning, Chris.
Christopher McGratty
Hey. Good morning, everybody. You talked, Paul, about the $975 million getting $10 million. What are your thoughts on – I mean, this seems like a restructuring year. Like what are your thoughts on accelerating that with the capital raise?
Paul Taylor
Again, I would say everything is on the table. I think the pricing of our stock has moved up a bit here. In the past week to weeks, but at levels that we’ve been at, it would be – I think it’d be very tough to raise stock. But again, that is on the table, but there’s no plan to do that at this point in time. We did raise the preferred stock earlier in the year and that buoyed capital a bit.
William Black
And again, we’d be very thoughtful about the earn back associated with that and shareholder dilution and other options that would dilute shareholders much less.
Paul Taylor
Absolutely.
Christopher McGratty
Great. If I could – I think I heard in your prepared remarks, you don’t think you need to add reserves from here. I guess wanted to hear that correctly. And I guess most of your – most…
Paul Taylor
Well, I would preface that with this year. We really don’t – I mean, as we see it today, we don’t see any need to add any substantial reserves. We feel that we’re adequate. I just talked to our Chief Credit Officer yesterday, and there’s really no signs of any issues with credit quality or any concerns at this point in time. But again, we’re probably going into a recession this year, and that could elevate credit issues, but we don’t know that.
Christopher McGratty
Okay. Yes. I would just think you might get ahead of it just because the investors aren’t buying your stock for current earnings. I get the limitations of CECL, but I’ll step back. Thank you.
Paul Taylor
And again, I just want to make sure it’s very clear that we are very comfortable with our credit position at this time. PacWest is a very, very good credit shop. I’ve only been here a handful of months, but that’s one of my biggest impressions is that PacWest is a very, very good credit shop.
Operator
We’ll go to our next question. Our next question comes from Gary Tenner from D.A. Davidson.
Gary Tenner
Thanks. Good morning, everybody.
Paul Taylor
Good morning.
Gary Tenner
So on the runoff portfolios, Bill, that you laid out in terms of the size of premium finance and multifamily. I assume premium finance – I mean that’s a pretty quick runoff right, kind of a pretty short-term portfolio is multifamily, should we assume that’s more about a couple or three years of runoff, but maybe the bulk of it on the front-end?
William Black
So on the multifamily, I would agree that’s a reasonable assumption coming depending upon when things were underwriting and when they mature, it will kind of ebb and flow, but it will kind of pace itself out. Premium finance is a business that, clearly, we’re exiting. We have communicated that to the borrowers, and we’re going to work with them. I wouldn’t expect it to be immediate. It’s not going to be instantaneous, and we’re going to work it out.
Gary Tenner
Is there an opportunity to sell the premium finance business? I think we saw last year or year and a half ago or so, Texas Capital sold at their premium finance business to Truist. Is there any appetite in the market for that kind of business?
Paul Taylor
Well, again, I would say that – again, everything is on the table. We look at that, but nothing on that right now.
Gary Tenner
Okay. And then in terms of kind of the expectations on the deposit side, knowing that it sounds like the balance sheet is going to be pretty flat. Do you have a view or expectation for deposit flows in the DC space? Obviously, we’ve heard Silicon Valley talk a little more optimistically towards the back half of the year, but do you have any expectations in terms of maybe recovering some of those flows and remixing the deposit base later in the year from that channel?
Paul Taylor
Well, I can tell you, we’d absolutely love to have venture deposits increase. Venture deposits are very, very hard to estimate. I’d have to tell you it’s very frustrating. They come down quite a bit. As I look at this year, I mean, in the first half of the year, they seem to have sort of floored and we seem to be flat. We did have declines in the second half of the year, but they’re nothing like we’ve seen in the past. So we would like to think we’re about $11 billion in venture deposits. So we’d like to see them floor out somewhere around there, and that’s sort of what we’re planning for. They’ll go down a little bit. And I hope we’re right. Because then that will allow us to remix the deposit base, get out of some of the wholesale deposits and really dramatically decrease the cost of funds.
Mark Yung
It’s a great low cost of funds to Paul’s point. But at the same time, we will be very careful what assets we stack up against those deposits because of the element of volatility.
William Black
And Mark, I would agree the softness kind of earlier in the year and we expected a better market towards the tail end of the year. And again, this market is very rate sensitive as well, right, the venture market. There’s a tremendous amount of dry powder, but obviously, people are – have slowed down investment cadence with all the news that we saw here in Q4, and that’s carrying through earlier part of this year.
Gary Tenner
Thanks very much.
Operator
Thank you. And we’ll go to our next question from David Chiaverini from Wedbush Securities.
Paul Taylor
Good morning.
David Chiaverini
Hi. Thanks. Good morning. Thanks for taking the question. So I wanted to ask some follow-ups on the ROA discussion. You mentioned 1.1% for 2023 in December, getting to 1.2%. And then the overall target is 1.5%. Can you talk about the timing of getting to that 1.5%?
Kevin Thompson
Hello, David, good to hear your voice. As Paul mentioned earlier, 2023 is – it could be an interesting year. We could see a mild recession. We’re expecting two more Federal Reserve rate increases of 25 basis points. And so we’re very focused on armoring our balance sheet, being prepared from a liquidity perspective and making some big decisions and moves in terms of our operational efficiency going forward. So 2023, you may see a lot of noise because of that, but those should set us up really well in 2024 and 2025 to have a really good chance to get back to the great profitability this bank has seen in the past.
Paul Taylor
[Indiscernible] expect a little bit. I’m not a very patient person, so we’re going to push as hard as we can to get to these overall goals that we have and that we released yesterday.
David Chiaverini
That’s helpful. And should we expect any increased volatility around that target of 1.5%, given you’re exiting a couple of stable businesses of multifamily and premium finance, but retaining the presumably more volatile Civic business. Can you discuss that?
Paul Taylor
Yes. I mean there’s going to be – we’re going to take further actions as we go throughout the year and we’re trying to have any more actions earlier in the year, so we can get a better run rate. So there will be some volatility, I would think that would be in the beginning of this year, and then it should smooth out as we get into the second half of this year and then into 2024.
William Black
So David, in terms of volatility, a big part of this is to build a more consistent, stable earnings profile. And so the volatility has really been on the velocity of assets and that’s a big part of the overall equation where you’re looking at the risk reward of what you’re doing in terms of yield. And then also, as Paul said, addressing the expense side as well.
Paul Taylor
Yes. And that’s just an overarching comment. I mean one of our goals, too, is to take the volatility out of PacWest earnings. I think PacWest earnings typically and historically have been a little volatile and they’re hard to predict, and we’re trying to get a better, smoother, more predictable earnings for The Street.
David Chiaverini
Thanks for that. And then you mentioned that everything is kind of on the table in terms of potentially selling the premium finance business. I’ll ask the same question on the multifamily portfolio. Would you consider selling that to accelerate that off the balance sheet?
Paul Taylor
We definitely would. I believe that those are rates such that it would be very difficult to sell at this time without accepting a pretty significant loss.
David Chiaverini
Did you mention – and did you mention on the Civic portfolio, $3.3 billion, did you say what the right size, how much of that could come down over time?
Paul Taylor
Well, I think you’re going to see it definitely come down. Again, we just installed Mark in there about – he’s been there for about a week. And we’re still trying to figure out the business PacWest had really adopted sort of a decentralized hands off method when they acquired it, and we’re in there trying to figure it out and try to figure out what type – what offerings we’re going to keep and which offerings we’re going to eliminate.
Kevin Thompson
And of course, we had bought flow from the former entity in the past and like the asset, but weren’t as familiar with the business. And so we like the asset. It’s just trying to find the right size within our risk profile and our capital base going forward.
Paul Taylor
But again, overall, I mean, it’s around 10% of our earning assets, and we are going to shrink it below that. I think 10% is too big of a chunk, and we are also – the markets are opening up a little better in that area, and we are also looking at trying to sell some of that portfolio just to bring it down.
David Chiaverini
And the last one for me is on venture banking. I noticed on Slide 11, you mentioned the FTX situation. I was curious, in what way does FTX impact your business? Are you guys banking crypto customers?
Mark Yung
No, this is Mark. Yes, the way it impacts is very simple, just increased scrutiny and responsibility and accountability by the VCs to their investors. So greater diligence, a slower cadence of deals.
David Chiaverini
Got it. Thanks very much.
William Black
David, to be clear, we do not have any direct crypto asset exposure.
Mark Yung
That’s correct.
David Chiaverini
Yes. Didn’t think so. Just wanted to clarify. Thank you.
Operator
We’ll take our next question from Andrew Terrell from Stephens.
William Black
Good morning.
Andrew Terrell
Hey, good morning. Hey, maybe just to start, I wanted to ask on the 30 to 89-day past due loans. I know those can specifically in Civic kind of bounce around a bit quarter-to-quarter. I guess since quarter end, have you seen those 30 to 89 past dues move lower? And if so, can you quantify the magnitude? And also whether or not you see any lost content there?
William Black
Yes. So the answer is yes. It was kind of a confluence of how the month ended there and some still over from December. That number has come down pretty sizably already in the month. And so no, we’re not worried about the – any particular fee or anything there. It’s just kind of an ebbs and flow and how the month ended, Andrew.
Paul Taylor
And growth in the quarter as well. But again, ebbs and flows, some noise as you get, especially near year-end.
Andrew Terrell
Yes. Okay. And then can you remind us the reserve you have against the Civic portfolio? I know it’s a bit shorter duration?
Paul Taylor
Yes. I don’t think we’ve disclosed the specific reserves by portfolio, but you’re right. For one of the products inside of Civic, it’s 12 months. Our overall loss experience in 2022 is 8 bps. So you would imagine with a very low loss experience and a short tenure, I kind of leave you were the CECL reserves come out.
Andrew Terrell
Yes. Okay. And then maybe just a bigger picture. It’s really good to see this plan announced and Paul, congrats on announcing in short order. So just maybe a bigger picture, can you help us understand how aligned you and the remainder of the management team is with kind of investors in terms of this plan, I guess, our incentive compensation targets aligned fully with this plan. Can you maybe just speak to that a bit?
Paul Taylor
Yes. So this plan was put together, I brought the executive team together and we came up with this plan together. So there should be 100% buy-in, so very close connection. And then also, I would tell you that some of our overall goal targets that we have announced are in our incentive for 2023.
Andrew Terrell
Okay. Thank you for taking the questions.
Paul Taylor
You’re welcome.
Operator
We’ll take our next question from David Long from Raymond James.
Paul Taylor
Good morning.
David Long
Good morning, everyone. Paul, in July, you talked about there be some holes in technology given the number of acquisitions that PacWest had put together. I want to see how the – this improving your technology platform coincides with your new decisions to improve overall operating efficiency?
Paul Taylor
Yes. So I mean, we’re still on the same plan for technology. It’s exactly – it’s everything we need to do to be a bank in 2023. And Mark Yung, who’s on the call, is in charge of that vision for new technology. Maybe Mark, you could give a quick rundown on that?
Mark Yung
Yes. I mean, our technology is very much centered around three values. One of them is cloud. Second one is really our digital banking API strategy. And our third one is our data stream. And those are fundamentally untouched. Obviously, we are focused here on operational efficiencies. So as Kevin mentioned, we’re looking and revisiting every project, revisiting milestones, et cetera. But fundamentally, very much committed to the movement forward on those three fronts.
David Long
Got it. Thanks guys. Appreciate it.
Paul Taylor
Sure.
Operator
Perfect. And our next question comes from Christopher Marinac from Janney Montgomery Scott.
Paul Taylor
Good morning, Chris.
Christopher Marinac
Thanks. Good morning. Hello. I just want to circle back on deposits from a big picture beyond just the venture that you and Mark had described. Can the pricing on deposits alleviate anytime this year? I presume it’s not this quarter, but just kind of want to compare the prices you have in paying the past two quarters and sort of what is possible as you continue to focus on the core deposit outlook?
Paul Taylor
So I think deposits are going to be very challenging in 2023. I’ve read a lot of the earnings announcements from other banks and deposits, liquidity are getting a little stretched in the industry. We’re no different than that. I would – we’ve got another couple of rate bumps. I think that the yield on deposits or the rate on deposits are going to remain sort of flat throughout the year. We’re hoping that with mix changes, we can lower the cost.
One of the things that our loan committee were requiring that you’ve got to have a deposit in order to get a loan, and we’re challenging all of our lenders this year, and we’re putting it in their incentives where they’ve got to gather deposits and a significant amount of deposits this year. We also have the standard CD specials, which aren’t going to help rate, it will just help the volume of deposits, but that’s sort of as I see deposits for 2023.
Kevin Thompson
And I’ll add to that. We do expect two more Fed rate increases, 25 basis points each. And so we have had a cycle to date, overall deposit beta 34%. So we do anticipate some beta associated with that, some pressure in the first half of the year and then alleviate in the second half of the year. So our net interest margin possibly decreasing slightly first half and then increasing potentially above end of 2022 levels by end of year. So we’re in an unprecedented period where deposit pricing where rates increased so quickly that deposit pricing fall and it takes a little time with our asset-sensitive balance sheet for the loan beta to catch up. So we should see some of that loan beta catching up here in the second half of the year and into next year.
William Black
I think the bigger thing when you look at the P&L, though, Chris, is going to be the interplay between the remix on both sides of the balance sheet from both lower-yielding loans to higher-yielding loans and then on the deposit side. So there’s going to be a lot of movement there. And I think in any particular quarter, you could see that bounce around. But the goal is obviously driving increased profitability, so to see the margin increase over time.
Christopher Marinac
No, that’s all very helpful. And Bill, to your point, you can see that with the loan production yield just on its own this past quarter, to your point. There was once a team of folks at PacWest, several acquisitions ago, who were dedicated on just doing deposits, and we’re incented as such. Is that something that can still work in 2023, 2024 as sort of dedicated teams to sell deposits only?
William Black
I mean, listen, our business has always been deposit focus. So there’s always been teams of people focused on deposits. And I would tell you, if you were on the internal call yesterday, Paul was pretty clear about it, it’s all about deposits, deposits, deposits. So it’s not just one group, Chris. It’s everybody, from the lenders to the top of the house all the way to the front line. It is a reinvigorated core value.
Paul Taylor
I mean that’s the secret sauce of banking is low-cost deposits. And that’s why we bother with a bank charter and deal with regulation is to get those deposits. So I mean, that’s our biggest focus all the time.
Kevin Thompson
And we’re tweaking incentive programs to be more deposit-focused as well as Paul mentioned earlier, that loans – any loans that are approved, in general, need to have a deposit relationship.
Christopher Marinac
Great. Thank you for all that reinforcement. Last question for me just goes back to the small uptick we saw in the criticized loans. Is that something that is possible this year? I know you mentioned obviously, recession influences some of that. Just curious if there’s any particular background this quarter.
William Black
Yes. So if you’re talking about on the non-accruals, the bump there was, in particular, related to some Civic loans. We’ve already seen some of that back off, and we have an NPL sale that is being teed up. So we feel that’s kind of ordinary course, Chris. I mean we did an NPL sale in, I think, last quarter, and we’re not seeing anything indicative in credit. As Paul said, we feel really good about where the book is. The team has done a great job over the past years in terms of making sure that the underwriting is solid, and our team has going through everything with a fine-tooth comb. And if you were to look at our non-accruals, for example, it’s really granular in there.
Our top 20 NPLs, for example, averaged about $3 million. And they’re all kind of stories and individual stuff. But if you look at the absolute level of non-performers at 36 basis points, it’s pretty low compared to history. So you could see things bounce around. We don’t see anything driving that, but just realize we’re kind of operating at the lower end of stuff, but we’re not concerned about anything in particular, although we are obviously paying a lot of attention given to where we think things are going.
Christopher Marinac
Great. Thanks again for taking all of our questions.
Paul Taylor
Thank you.
Operator
And we’ll next go to Jon Arfstrom from RBC Capital Markets.
Paul Taylor
Good morning.
Jon Arfstrom
Good morning. A couple of model questions and a couple of strategic ones. Kevin, on the margin guide, I think you talked about 2022 as the baseline. Is that what you’re thinking 350 is the baseline we should be thinking about for the 2023 average margin?
Kevin Thompson
Yes. 340 to 350 average margin probably dipping lower first half of the year and then increasing latter half.
Jon Arfstrom
Okay. That’s good. And then with the flat loan guide, are you basically saying relatively flat earning assets, but the churn in earning assets likely leads to that lift later in the year. Is that another fair way to think about it?
Kevin Thompson
I think that’s a good way to think about it.
Jon Arfstrom
Okay. On provision, you guys are talking about flat reserves, flat loans, lower risk loans and clean credit, which suggests to me that may not need a provision in the model for 2023, but what kind of…
Paul Taylor
And we just got to preface that again with the year we’re in, is that we could have a recession so that could be a little dynamic. We’re planning, at this point in time, that it will not be dynamic, but we have to remember that.
Kevin Thompson
There’s some replenishment of small charge-offs that happen over time mix shift. So there will still be some provision we anticipate, but not large.
Jon Arfstrom
So on a quarterly basis, you’re talking about you’re not insignificant from what we’ve seen in prior quarters?
Paul Taylor
Good way to say it. Yes, not insignificant from what we’ve seen in 2022.
Jon Arfstrom
Okay. Good. Thank you for those two. In terms of the investments and some of the maybe changes you’re going to try to make, do you need to make investments in lenders or refresh the community bank loan production machine?
Paul Taylor
2022 was a really good year for loan growth. We’ve got very seasoned, experienced lending teams. So I don’t really anticipate we need to do anything like that. Again, I think our core competency here is credit.
Jon Arfstrom
Okay. And then I guess the last one of all the metrics that you laid out, the one that stands out to me is the top quartile EPS growth. And can you talk to us a little bit about that? I know there’s some restructuring and refreshing that you’re doing, but is this something that we can start to see this momentum later in 2023?
William Black
Jon, I think that right now, that there’s a lot of wood to chop, right? I mean, Paul has been here as CEO for 28 days, I think, it is.
Paul Taylor
Yes.
William Black
I mean I think that there’s a clear plan, a clear vision of where we want to get to. And if we can execute on that plan, I think the results are going to be pretty good for shareholders. And I think that the metrics we laid out are not the ultimate goal. This is kind of where we think there are. But I think if we do what we think we can do, we think that’s possible. And listen, like we’re not trying to be a mediocre, right? I mean we’re trying to push ourselves to generate really strong top quartile results.
Paul Taylor
Absolutely.
Jon Arfstrom
Yes, the EPS growth, one is the one that stands out, right, the others with efficiency and returns and capital [indiscernible] something got to be a little bit different to the top quartile and EPS growth?
Paul Taylor
Yes. I think if you look at the core earnings power of PacWest historically, I don’t think that it’s changed. And I think the goal is to take what has been top quartile and drive it better. And if we can get there from here, you will generate those types of results.
Jon Arfstrom
Okay. Thanks, guys. Appreciate it.
Paul Taylor
Thank you.
Operator
And for our last question, we’ll go back to Matthew Clark from Piper Sandler.
Matthew Clark
Thanks for the follow-up. Just a couple of questions around the margin outlook. Can you speak to the cost of those FHLB borrowings that you ran off and the securities yields as well? I mean I would have thought you would have a pickup in the spread for the upcoming quarter to help mitigate some pressure here?
Kevin Thompson
That’s right, Matthew. So the securities we’ve wound down, we’re yielding about 3.93%. And we paid out FHLB of about 4.6%. So yes, there was a benefit there, but we also have loan growth that offset much of that, but that should be a benefit through the year that negative yield that we were experiencing.
Paul Taylor
And that was really late in the quarter.
Kevin Thompson
That’s right.
Matthew Clark
Okay. And then just the spot rate on interest-bearing deposits at the end of the year if you had it or total deposits to other one?
Kevin Thompson
Yes. Spot rate on interest-bearing deposits was trending to low 250s.
Matthew Clark
Okay. And then just commentary around low-cost core deposits getting to 40%. It doesn’t necessarily mean non-interest-bearing that are at 33%. I guess, were you trying to suggest the non-interest-bearing, you want to get that to 40%? Or is there some other portion of your deposit base you view as low cost that will help you get there?
Kevin Thompson
Yes, we’re trying to take the DDA base up to 40%.
Matthew Clark
Okay. Easy enough. Thanks.
Kevin Thompson
Thank you.
Operator
Thank you. And we have no further questions. I’ll turn it back to our speakers for any closing remarks.
Paul Taylor
Well, first of all, we want to thank all of you for calling in and your interest in PacWest Bancorp. Our numbers are out on our online, and we’re happy to talk to you at any time. So again, I appreciate you guys calling in.
Operator
Thank you. Ladies and gentlemen, that does conclude today’s conference. We appreciate your participation, and have a wonderful day.
Paul Taylor
Thank you.
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