CVBF - NASDAQ

Good morning, ladies and gentlemen, and welcome to the First Quarter of the 2023 CVB Financial Corporation and its subsidiary Citizens Business Bank Earnings Conference Call. My name is Latonya and I'm your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer period. Please note, this call is recorded. I would now like to turn the presentation over to your host for today's call, Christina Carrabino. You may proceed.

Thank you, Latonya, and good morning, everyone. Thank you for joining us today to review our financial results for the first quarter of 2023. Joining me this morning are Dave Brager, President and Chief Executive Officer; and Allen Nicholson, Executive Vice President and Chief Financial Officer. Our comments today will refer to the financial information that was included in the earnings announcement released yesterday. To obtain a copy, please visit our website at www.cbbank.com and click on the Investors tab. The speakers on this call claim the protection of the Safe Harbor provisions contained in the Private Securities Litigation Reform Act of 1995. For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from our forward-looking statements, please see the company's annual report on Form 10-K for the year ended December 31st, 2022, and in particular, the information set forth in Item 1A, risk factors therein. For a more complete version of the company's Safe Harbor disclosure, please see the company's annual earnings release issued in connection with this call. Now I will turn the call over to Dave Brager. Dave?

Thank you, Christina. Good morning, everyone. For the first quarter of 2023, we reported net earnings of $59.3 million or $0.42 per share, representing our 184th consecutive quarter of profitability. We previously declared a $0.20 per share dividend for the first quarter of 2023, representing our 134th consecutive quarter of paying a cash dividend to our shareholders. Financial highlights for the first quarter include a 35% year-over-year increase in earnings per share, a return on average tangible common equity that exceeded 20%, an efficiency ratio below 40% and a return on average assets of 1.47%. First quarter net income of $59.3 million or $0.42 per share compares with $66.2 million for the fourth quarter of 2022 or $0.47 per share and $45.6 million or $0.31 per share for the year ago quarter. Although the current interest rate environment and expectations of a near-term recession are impacting the bank, we continue to generate strong earnings. Our pretax pre-provision return on average assets exceeded 2% for the fourth consecutive quarter. For the first quarter of 2023, our pretax pre-provision income was $84 million compared with $95.4 million from the prior quarter. Pretax pre-provision income grew by approximately 28% when compared to the $65.9 million earned in the year ago quarter. Loan growth during the first quarter was impacted by the seasonal decline in dairy and livestock loans, lower C&I line utilization as well as a slowdown in loan demand. Although loans declined at quarter end from the end of 2022, we recorded a provision for credit losses of $1.5 million for the first quarter of 2023 to reflect a further deterioration in our economic forecast. Although our net interest margin expanded by 55 basis points compared to the year ago quarter, it decreased by 24 basis points compared to the fourth quarter of 2022 due to a 36 basis point increase in cost of funds. Considering short-term interest rates have risen by almost 5% over the last 12 months, our customers have sought higher rates on their excess deposits, which has resulted in both a 25 basis point increase in the cost of our interest-bearing deposits and approximately $370 million of customer deposits transitioning to our Citizens Trust Group's liquidity management products. As deposits have become the primary focus of the banking industry, I would like to emphasize that Citizens Business Bank has and will continue to focus on financially strong, lower middle market businesses, providing these customers with both a high-touch relationship banking model and a wide array of products. Our deposits are 100% relationship-based core deposits and customer repos. We had zero broker deposits at the end of the first quarter. As you can see in our investor presentation, 77% of our deposits are business deposits and 23% are consumer, primarily the owners and employees of our business customers. The largest percentage of our deposits, 40%, are annualized business checking accounts, which represent customer operating accounts that generally utilize a full suite of treasury management products. Our customer deposit relationships represent a diverse set of industries. The industry with the largest concentration is manufacturing, which represents 9% of our deposits. This quarter, we included a graph in our investor presentation that shows our deposits by industry classification, highlighting each of the 14 industries that represent 2% or more of our deposits as of March 31st, 2023. Our depositors have typically banked with Citizens Business Bank for many years. Our investor presentation has a slide that shows the tenure of our deposits has consistently been comprised of deposit relationships that have banked with us for three years or more. And as of March 31st, 2023, 41% of our deposit relationships have banked with us for more than 10 years, and 77% of our deposit relationships have been with us for three years or more. We have historically maintained one of the lowest cost of deposits in the industry based on the customers we target and our business model. Our cost of deposits was 17 basis points on average for the first quarter of 2023, which compares to eight basis points for the fourth quarter of 2022 and three basis points for the first quarter of 2022. As we focus on banking operating companies, we continue to have a high percentage of noninterest-bearing deposits. At March 31st, 2023, 61% of our deposits and customer repos were noninterest-bearing. This compares to 60% at the end of the year ago quarter. Also, the unprecedented increase in short-term interest rates is impacting our deposit levels. Total deposits and customer repos were $13.3 billion on average for the first quarter of 2023, a $943 million or 6.6% decrease compared to the prior quarter. Noninterest-bearing deposits averaged $8.1 billion, a $610 million or approximately 7% decrease from the average balance in the fourth quarter. Noninterest-bearing deposits were approximately 63.7% of our average deposits for the first quarter of 2023 compared with 63.6% for the prior quarter and 61.5% for the year ago quarter. The decrease in average deposits was primarily offset by an $811 million increase in average short-term borrowings at a cost of 4.81%. At March 31st, 2023, our total deposits and customer repos were $12.8 billion compared with $13.4 billion at December 31, 2022, and $15.1 billion for the same period a year ago. At March 31st, 2023, our noninterest-bearing deposits were $7.8 billion compared with $8.2 billion for the prior quarter and $9.1 billion from the year ago quarter. This represents a 3.9% decline from the end of 2022. As noted earlier, more than $370 million of the $640 million decline in deposits from the end of the year were moved into Citizens Trust, where they are invested in higher-yielding liquid assets such as treasury notes. As I commented at the beginning of the call, higher interest rates have impacted our deposits with both deposits leaving to Citizens Trust as well as customers using deposits to pay down their credit lines that have seen rates rise past 7% and 8%. Furthermore, deposit levels continue to be impacted by both the burn down due to the overall inflationary environment and the slowdown in the residential real estate market. For example, our specialty banking group's deposits as of March 31st, 2023 are $500 million lower than the year ago quarter. This decline occurred primarily in title and escrow. My final comment on deposits is that we continue to focus on core deposit growth, as reflected by new accounts opened during the first quarter that totaled more than $269 million of new deposits. In contrast, we had deposit accounts that closed during the quarter, representing balances of $160 million. Additionally, as of April 25th, our deposits and repos have increased by approximately $152 million from the end of the first quarter. Now let's discuss loans in more detail. Total loans at March 31st, 2023 were $8.9 billion, a $137 million or 1.5% decrease from the end of 2022. From December 31st, 2022, loans declined by $6.5 million after excluding PPP loan forgiveness and the seasonal increase in dairy and livestock loans at the end of the year. Dairy and livestock loans decreased by $127 million from the fourth quarter as we experienced paydowns in the first quarter of each calendar year as a result of the temporary increase we experienced in the fourth quarter of each year. Average outstanding loan balances grew by $95 million or 4% annualized compared to the fourth quarter of 2022, while average loans were $463 million or approximately 5.5% higher than the first quarter of 2022. Loan demand is slowing down due to both higher interest rates and the uncertainty in real estate markets. Our new loan production slowed during the first quarter. New loan commitments were approximately $480 million in the fourth quarter of 2022 and approximately $240 million in the first quarter of 2023. After excluding PPP loan forgiveness, year-over-year loan growth was $466 million for a growth rate of approximately 5.5%. Commercial real estate loans continued to grow, with growth from the end of the year of $65 million or approximately 4% annualized. C&I loans decreased by $50.5 million as the overall line utilization rate for C&I loans decreased from 33% at year-end to 28% at March 31st, 2023. All of the remaining loan categories declined modestly from the end of 2022 to March 31st, 2023. We remain cautiously opportunistic about our ability to grow high-quality loans in 2023 as higher interest rates and uncertain economic conditions could impact the level of growth we achieved this year, but we are still winning and targeting low single-digit growth. Asset quality continues to be strong, and the trends remain stable. At quarter end, nonperforming assets, defined as nonaccrual loans plus other real estate owned were $6.2 million or four basis points of total assets. We had no OREO properties. The $6.2 million in nonperforming loans compared to $4.9 million for the prior quarter and $13.3 million for the year ago quarter. During the first quarter, we experienced credit charge-offs of $110,000 and total recoveries of $33,000, resulting in net charge-offs of $77,000 compared with net recoveries of $16,000 for the fourth quarter of 2022. Classified loans for the first quarter were $67 million compared with $78.7 million for the prior quarter and $64.1 million for the year ago quarter. As of March 31st, 2023, classified loans included $22 million of loans acquired from Suncrest Bank. I will now turn the call over to Allen to discuss the allowance for credit losses, liquidity and capital. Allen?

Thanks, Dave. Good morning, everyone. At March 31st, 2023, our ending allowance for credit losses was $86.5 million or 0.97% of total loans, which compares to $85.1 million or 0.94% of total loans at December 31st, 2022. For the quarter ended March 31st, 2023, we recorded a provision for credit losses of $1.5 million compared to $2.5 million for both the quarter ended December 31st, 2022 and for the first quarter of 2022. The provision for credit losses in the first quarter was driven by the change in our economic forecast, which resulted in lower GDP growth and higher unemployment when compared to our forecast at the end of 2022. Our economic forecast continues to be a blend of multiple forecasts produced by Moody's. The U.S. economic forecasts include a baseline forecast as well as downside forecast. We continue to have the largest individual scenario weighting on the baseline forecast with downside risks weighted among multiple forecasts. As of March 31st, the resulting weighted forecast assumes GDP will increase by 1.4% in 2023, including a decline in GDP in the second half of this year, followed by modest growth of 0.9% for 2024 and then grow by 2.4% in 2025. The unemployment rate is forecasted to be 4.2% in 2023, 5.1% in 2024 and then 4.8% in 2025. As a result of declining deposit balances, we borrowed on average $972 million from the Federal Home Loan Bank during the first quarter. The short-term borrowings peaked at quarter end at $1.4 billion. The cost of these borrowings at quarter end was approximately 5%. In addition to the increase in short-term borrowing during the first quarter, we shrunk our investment portfolio by not reinvesting the cash flows generated by our investments. Our investment portfolio declined by $69 million from the end of the fourth quarter to $5.7 billion primarily due to a decline in investment securities available for sale, or AFS securities. AFS securities totaled $3.2 billion at the end of the first quarter, inclusive of a pretax net unrealized loss of $460 million. The $51 million decline in AFS securities reflects principal cash flows, which offset a $40 million increase in market value that resulted from a decline in interest rates. We do not intend to sell any AFS securities as the bank has ample off-balance sheet sources of liquidity. Those sources of liquidity include $3.5 billion of secured and unused capacity with the Federal Home Loan Bank, more than $800 million of secured borrowing capacity at the Fed discount window and $1.7 billion of unpledged fair value AFS securities that could be pledged at the discount window or the Fed's new bank term funding program. In addition to these secured borrowing sources that total almost 50% of our total deposits and repos, the bank has not utilized wholesale deposit sources, such as broker deposits. Therefore, selling any AFS securities is a remote probability when all of these funding sources are considered. Investment securities held to maturity or HTM securities totaled approximately $2.54 billion at March 31st, 2023. The HTM portfolio declined by approximately $18 million from the end of 2022 as cash flows were not reinvested during the quarter. The tax equivalent yield on the entire investment portfolio was 2.37% for the first quarter of '23, essentially the same as the prior quarter, but grew by 67 basis points in comparison to the first quarter of 2022. Now turning to our capital position. Shareholders' equity increased by $41 million to $2 billion at the end of the first quarter. The company's tangible common equity ratio at March 31st, 2023 was 7.8%. Equity increased as a result of income from the quarter of $59.3 million, which was offset by a $28 million in dividends, representing a 47% dividend payout ratio. The 10b5-1 stock repurchase plan we initiated back in 2022, expired on March 2nd, 2023. During the first quarter of 2023, we repurchased approximately 792,000 shares of common stock at an average price of $23.43, totaling $18.5 million in stock repurchases. As interest rates declined from the end of 2022 to March 31st, the unrealized loss on our AFS security decreased. This resulted in a tax effected increase to other comprehensive income of $28.7 million. Our overall capital position continues to be very strong. Our regulatory capital ratios are well above regulatory requirements to be considered well capitalized and above the majority of our peers. At March 31st, 2023, our common equity Tier 1 capital ratio was 13.8%, and our total risk-based capital ratio was 14.6%. I'll now turn the call back to Dave further discussion of our first quarter earnings.

Thank you, Allen. Net interest income before provision for credit losses was $125.7 million for the first quarter compared with $137.4 million for the fourth quarter and $112.8 million for the year ago quarter. First quarter earning assets decreased by $60.3 million on average from the fourth quarter, but our earning asset yield increased by nine basis points. The increase in our earning asset yield was a result of a 12 basis point increase in loan yields and a shift in the composition of earning assets with average loans growing by $95 million while lower-yielding investment securities declined by $80 million on average. Our tax equivalent net interest margin was 3.45% for the first quarter of 2023, compared with 3.69% for the fourth quarter and 2.9% for the first quarter of 2022. The decrease in our net interest margin was a result of a 36 basis point increase in cost of funds, driven primarily by an $811 million increase in short-term borrowings. The year-over-year increase in net interest income of $12.9 million was the net result of a 55 basis point increase in our net interest margin that offsets the $1.2 billion decline in average earning assets from the year ago quarter. Interest-earning asset yields grew by 98 basis points from the first quarter of 2022 to the first quarter of 2023, while our cost of funds increased by 46 basis points. Moving to noninterest income. Noninterest income was $13.2 million for the first quarter of 2023 compared with $12.5 million for the prior quarter and $11.3 million for the year ago quarter. Our customer-related banking piece, including deposit services, international and Merchant Bankcard services decreased by approximately $400,000 compared to the fourth quarter and increased by approximately $250,000 when compared to the first quarter of 2022. The conversion to SOFR of all of our previously originated interest rate swaps indexed to LIBOR generated approximately $500,000 of fee income during the first quarter of 2023. Our trust and wealth management fees were essentially flat when compared to the prior quarter, but increased by $92,000 year-over-year. Income from bank-owned life insurance, or BOLI, decreased by $228,000 compared to the prior quarter as the decline in debt benefits of more than $1 million was offset by increases in fair value due to the improved market conditions for the separate account policies associated with our deferred compensation plans. Income from community development investments, some of which are impacted by mark-to-market adjustments, increased from the prior quarter by approximately $700,000, including a $500,000 recapture of a previously written down impaired investment. This investment was repaid in full during the first quarter of 2023. Now expenses. Noninterest expense for the fourth quarter was $54.9 million compared with $54.4 million for the fourth quarter and $58.2 million for the year ago quarter. The first quarter of 2023 included a provision for unfunded loan commitments of $500,000, which was zero for both comparable quarters. Noninterest expense totaled 1.36% of average assets for the first quarter of 2023. This compares to 1.32% for the fourth quarter and 1.36% for the first quarter of 2022. Our efficiency ratio was 39.5% for the first quarter of 2023 compared with 36.31% for the prior quarter and 46.93% for the first quarter of 2022. Excluding the $500,000 provision for unfunded loan commitments and $5.6 million of acquisition expense incurred in the first quarter of 2022, noninterest expense grew by approximately 3.5% year-over-year. The growth in noninterest expense was driven by an 8% increase in staff-related expenses. Staff-related expenses grew by $1.1 million from the prior quarter as a result of $1.8 million of higher payroll taxes in the first quarter due to the annual reset of payroll tax thresholds and the payment of annual bonuses during the first quarter. Base salary and benefit expense grew by approximately $300,000 from the fourth quarter, but bonus profit-sharing and stock compensation expense declined by $1 million. In light of the recent financial reports about some banks, I'm pleased to emphasize that our bank has continued to stand the test of time. Since our founding of the bank in 1974, we have managed to build a safe, sound and secure institution focused on banking the best small to medium-sized businesses and their owners. While economic uncertainty and the impact of the rapid rate increases by the Federal Reserve Board continue to create potential challenges for the banking industry and our bank, we seek to maintain our focus on our core values, our financial strength, superior people-customer focus, cost-effective operation and having fun. Over the course of time, we have built a diverse and durable base of customers who have remained loyal to our bank through a variety of business cycles, and we will continue to provide a wide array of banking products and solutions designed to satisfy our customers' goals and business objectives. This is evidenced by the fact that a plurality of our customer deposit relationships have achieved tenures with our bank of over 10 years, and many of our customers have been banking with us for decades. Our strategy of making the best privately held small to medium-sized businesses and their owners will remain steady and consistent. We bank great American success stories, and we are committed to executing on our relationship banking model and operating our business in an efficient and focused way. We remain disciplined in our approach to credit and will strive to produce and maintain consistent earnings, strong capital levels, solid credit quality and excellent liquidity. I'd like to thank our associates for their hard work and dedication and our customers for their business and ongoing loyalty. This concludes today's presentation. Now Allen and I will be happy to take any questions that you might have.

[Operator Instructions] And our first question will come from David Feaster of Raymond James.

Hey, good morning, everybody.

Good morning, David.

Maybe could we just -- I'd love to get your thoughts on some of the deposit trends in the quarter. You gave a lot of color in your prepared remarks. And I appreciate some went to the trust, and some of the impacts of title and escrow and all that. But I'm just curious, maybe as you dissect this and look at the attribution, I mean, no real relationship lost, it seems like a lot of it is seasonality, maybe customers utilizing cash to pay down higher-cost floating rate debt and just some migration to higher cost accounts. It kind of feels like we've woke a sleeping giant on the interest rate side. I'm just curious, as you dig into this, if you had to attribute the flows to any of those separate categories versus real concern over the uninsured deposits, how would you break it down? And have you started to see balances stabilize or even start coming back?

Yes. And I mentioned, I think, I mean, obviously, that's the topic of the day. We'll soon get to office. But I wanted to -- look, we know exactly where all the deposits go. We look at it every single day. The first -- the fourth and first quarter generally are our weaker deposit quarters. The second and the third quarter, generally, deposits grow. As I mentioned in the prepared remarks, as of the 25th -- our deposits were up $152 million from the end of the first quarter. I hope that's a trend and that it continues. But we're playing defense and offense at the same time. And so the money that moved to trust is part of it. The pay down of the C&I loans is part of it. There's been cash burn, which we've been talking about for multiple quarters in a row now. And in the first quarter, there's always a lot of bonuses and taxes and other things that occur. So I don't have an exact number on how much was attributed to each of those, but that was definitely part of it. I mean we -- I've never spent more time looking every day at deposit flows, so I have a really good feel for it. And we literally have not lost any significant relationship. There's been some excess deposits that have gone to trust. There's been some excess deposits that have gone outside to their brokerage houses. But the relationships that we have and the customers that we bank and what we've built over the years was never more evident to me than after March 10th, just with everything that went down. And I think that has not. It is not has not been a safety and soundness question. It's been, oh wait, I can get 4.5% on something? And so we've been dealing with that, and we're managing relationships. I think in our investor -- I don't think. I know in our investor presentation, we put the average cost, what was 54 basis points, Allen?

Yes, interest bearing deposits.

In March interest-bearing deposits. So that's gone up a little bit. It's sort of accelerated towards the end of March. So I feel -- after all that this started happening, it's definitely better than I feared, and it's even better than I anticipated from a deposit perspective. And I really attribute that to the relationships we've built with our customers and the customers placing confidence in us. So I hope that answered your question.

Yes. No, that's extremely helpful. And I appreciate --

And I'm sorry, just the other thing I mentioned in the prepared remarks, I mean, we were on offense, too. I mean we opened $360 million -- $260 million, yes, I'm trying to make it grow -- $260 million of new account relationships, average balances from the first quarter. So we're playing offense and defense.

Yeah that's great. And maybe let's just hit the second topic that you brought up off of that. I mean, obviously, there's a huge focus in -- on Southern California CRE and a hyperfocus on offices, as you talked about. Obviously, you're well underwritten, have a conservative approach to lending and I appreciate all that color that you put in the presentation, it's extremely helpful and I think it supports the story. But could you just give us any color on your thoughts on CRE across your footprint? And maybe just specific details on office? And what you're hearing from those borrowers? And after -- as you stressed it, what kind of -- what are you seeing in that book?

Yes. So we do stress testing. We have three levels of stress testing, just normal base case scenario, then a mild stress and a severe stress. And we have a good idea because, as you know, and we've talked about this in the past on this call that we do annual term loan reviews. We do -- we are looking at the portfolio, not just office but the entire loan portfolio of any loan over $1 million. We're getting updated financial information. We're getting updated information on the guarantor, we're taking a look at the value of the property. We have a very granular loan portfolio. And at origination, 50% loan-to-value was the average loan to value of those loans at origination. And 28% of those loans were originated in 2017 or earlier, which would infer some amortization on those loans. And whether you think values from those time frames or lower or higher, even if you just use the same value, the loan -- because there would be some appreciation and maybe some depreciation potentially, you can look at it and say, okay, theoretically, we should have a little bit lower overall loan to value based even on today's values. And we have zero classified loans in our office portfolio. That doesn't mean that we won't have any classified loans in our office portfolio going forward. But we pay very close attention to it. And with -- like I said, with an average loan-to-value of 50% at origination and a $1.6 million average loan size, there's just a lot of granularity in our loans. We don't bank money center, big 30, 50 ,80-story office buildings. And so far, we have not seen any cracks there. And 25% of it is owner-occupied in office. So we underwrite the underlying company, and 36% of our overall portfolio is owner-occupied. So when you put all those things together, I feel cautiously optimistic that we'll be in a good spot as far as the CRA loan portfolio. There might be problems, but the loss given default will be -- should be mitigated by how we underwrote it originally. And then the last piece of information I'll give you on this, I used to say -- last quarter, I said we had no loans in industrial that were classified. Well, we added a column on Page 40 in our investor presentation that we had, had in our investor presentation during sort of the COVID time frame. And we added it back, which breaks down the classified loans by collateral type. And you can see on that page, there's $4 million in industrial loans. Just to give you a flavor of that loan, it's a 22% loan to value on a 15-year fully amortizing loan, and it's current on payments. So we grade these things pretty aggressively when we see some issues, and that has to do with the underlying company had, had a rough year. And so we downgraded it. The other category includes the loan that we talked about last quarter that we acquired from Suncrest, the senior living facility. And the farmland is primarily one loan that also has very low loan to value. So of all the loans that are classified in our commercial real estate portfolio, I really feel pretty good, again, about if there -- if they stop paying or there's a problem that we should be in good shape to get out of those loans without incurring any losses.

That's terrific color. And I appreciate that. But maybe touching on the other side. Let's touch on growth a little bit. Obviously, loans were down this quarter, mostly seasonality. But it sounds like -- I'm glad to hear you're still open for business, you're still making new loans. Where -- I'm just curious, how is demand trending? And where are you still seeing open good risk-adjusted returns at this point in the cycle?

All of our good risk-adjusted returns paid down their loans in the first quarter, the C&I loans. Because those move with the Fed funds rate in prime, obviously. But no, I mean, look, we're -- we bank the top 25% of clients. And so we have to be competitive on pricing. Just some anecdotal information. I do, as I've mentioned, I do customer luncheons, and I've been doing two customer luncheons a month. I did one in March, and I did two in April -- excuse me, I've done two in April, I didn't do any in March. I was hunkered down. But in April, the two customer luncheons, one of our largest depositors is a title company. And he was telling me that his title business is down 40% from the fourth quarter to the first quarter, and he said half the banks that refer loans to him were not doing the referred title business to him, had stopped doing commercial real estate loans. So I got nervous about that and made sure I called our Chief Credit Officer and said, "Hey, we're not going to be the soft landing spot for all these people that need every single commercial real estate loan. We just need to stick to our knitting and our guidelines as far as how we underwrite this. So demand has slowed. It's evidenced by what we booked in the first quarter, demand has slowed. I sort of modified my comments then, sort of, I did modify my comments stating that we're looking for low single-digit growth, not low to middle single-digit growth now. And I think that's something that we can attain. We're getting higher yields on the commercial real estate loans we book. We have raised our interest rates a few times in the last six to eight weeks. And we're just looking at the best credit, the best relationships, and we want to be able to use this offensively where there's banks that maybe are struggling more, and we can pick up good relationships. So I hope that helped.

That's really helpful. I appreciate it. Thanks, everybody.

And one moment for our next question. And our next question will come from Gary Tenner of D.A. Davidson. Your line is open.

Thanks. Good afternoon or good morning excuse me.

Hi, Gary.

It's already been a long day. Allen, I wonder if you could update us on kind of what the current quarterly projected cash flows are from the securities portfolio currently?

Yes. The -- both principal and interest is -- well, I would say the projections are closer to $150 million a quarter. But actually, I believe that the reality is they're probably about $115 million to $120 million. A lot of the models, I think, are over-projecting a little bit on commercial mortgage-backed securities right now, and we're not seeing as much cash flow from those as I think the field books, et cetera, are projecting. But based on what we've seen recently, I think the $110 million to $120 million range is, at least, near term is more likely.

Okay, I appreciate it. So as you think about the remainder of the year from a balance sheet kind of mix perspective, you got the cash flows coming from the securities portfolio. You talked about second, third quarter being better on deposits, and we've seen that a little bit so far here in April. To the degree that deposit pipelines are projectable at this point, how do you think of the, sort of, the mix or the ability to fund what modest loan growth you may have this year without having to pull down additional borrowings or resort to other sources of funding?

Yes. No, that is exactly what we're attempting to do is just move the mix on the asset side from investment securities to loans without having to borrow more. So the way we're looking at that, candidly, is we're not really -- a couple of quarters ago, we would price off the treasury, a light treasury, a 5-year or a 10-year treasury. Now we're really looking at the base pricing plus a spread if we had to borrow incrementally, how would we fund that. So we're looking at the worst-case funding perspective, and we're basing it on that average borrowing rate of just, say, 5% for discussion purposes, plus the spread. So our loan rates are significantly higher than using a 5-year or 10-year treasury plus that same spread. So that is the goal, Gary. We want to utilize that cash flow to move it into loans and help offset higher deposit costs and the borrowing cost. But we will work hard towards doing that. Some of that will depend on the economy. Some of that will depend on the interest rate environment. But that's the goal.

Okay. Thanks. And then just last for me. Classified loans down, and it's not a huge number in the scheme of things. But what caught my eye is that essentially every loan segment or a major loan segment on your chart did have a sequential quarter decline. So just kind of curious about that and wondering if there's any kind of Suncrest-related resolutions that impacted just quarter-over-quarter shift.

You mean the down, the Suncrest resolutions?

Yes.

Yes. So we gave the number, I think, Allen, it was $22 million.

$22 million of Suncrest.

$22 million of Suncrest is in there, and that is about the same number that it was last quarter. So the resolutions were not really Suncrest related. And the Suncrest -- more than 50% is the one loan that we mentioned the previous quarter, which was the senior living facility that is paying as agreed, and is relatively low loan-to-value with good guarantor support. That loan is $12 million-ish?

Yes.

$12 million to $13 million of that. And that, Gary, is showing up on our page 40 in the other category. So the majority of that other category as far as classified loans is that one Suncrest loan.

Yes, Gary, if you look at the chart we put on the IP, it has sort of moved around a little bit quarter-to-quarter, but it's been generally within the same range. And as Dave alluded to before, we're highly conservative in the classifications. And a lot of times, these can cure themselves within a quarter sometimes.

Great. Appreciate the color. Thank you.

One moment for our next question. Our next question will come from Matthew Clark of Piper Sandler. Your line is open.

Hey, good morning guys.

Good morning.

Maybe just a couple of additional questions around the margin spot rate on deposits at the end of March, and the average margin in the month of March?

I guess we gave you two pieces of information in the prepared remarks and in our IP. So if you look at the IP, cost of interest-bearing deposits at the end of the quarter was 54 basis points. On average, it was 47 basis points. Also, we noted that our average cost of borrowings was 4.81% during the quarter. And at the quarter end, it was almost exactly 5%. So hopefully, that helps you, Matthew.

Okay, great. And then the margin likely will clearly be down again here in 2Q. But do you feel like, given the remix that you plan from here and working down borrowings, I would assume that would recover in the second half. Is that how you're thinking about it?

I think it's possible. Obviously, the net interest margin goes down further in the next quarter. I think we alluded to that last quarter that the first half of the year would probably be under some pressure. Certainly, even with just a static balance sheet, we model and you'll see this in our Q, there's not a lot of volatility in our net interest margin, plus two or minus two ramp. We're looking at 0.5% either way, up and down. And over 24 months, it's up or down 2%. So if we're able to remix the funding side, that will offset, I think, some of the pressure there. But that will be the question as we get into the latter half of the year.

Yes. And if we can have some normal seasonality in the deposits and we can grow deposits, which obviously would help pay down the borrowings as well.

Yes, okay. And then just shifting to the securities book. What's your appetite to just blow out of that AFS book? I mean your securities yields barely budged this quarter, and you have plenty of capital, CET1 of 13.8%. I mean if you blow it out, you can earn it back pretty easily, 2.5% pickup just at 5%. It's like $0.80 a share. It's like a four-year or less earn back, 25% accretive to earnings. I guess why not do it? It's already in your tangible book TCE.

Well, we understand that, certainly. But I think from our perspective, a three or four year earn back is rather long still at this point in time in the cycle. And we really don't see a reason to do that.

Yes. But Matthew, just to sort of the broader maybe answer to your question is we've evaluated it over time, multiple times since we started borrowing in the fourth quarter. So obviously, a lot of this depends on what's happening with rates, where we are, what we can do. And so we'll continue to evaluate it. But at this point, we've made the determination not to do that. But that doesn't mean that we're not looking at it and evaluating it. So I just want to make that clear, too.

Yes. And the earn back is shorter than the duration of the portfolio. So I think you still end up in a better place, but, okay.

That's assuming -- I mean, that's obviously assuming that rates stay exactly the same. And so there's a lot of assumptions in that. And if rates went down or rates went up, that impacts that earned back too.

Yes, I totally understand. Okay. And then just shifting to the other mark on the loan book. What would you say to those that are critical of the unrealized loss on your loans and the exercise of running that mark through your balance sheet, equity and book?

Matthew, I mean, we have no plans to sell any loans, so they're not going to be classified as available for sale. So I would say it's -- in our view, it's a new point at this point in time. So I'm not sure what your -- what question it's really related to. But when you look at our Q, you'll see the fair value of our loans, which have improved, I'd say, most likely from the end of the year as rates have come down.

Yes. No, I agree. I think it's ridiculous. I'm just allowing you to confront that criticism.

Yes. No. And look, I think we can -- we -- as we've said, to your earlier question about the AFS portfolio and the securities, I mean, we have core funding that funds all of our loans, and the securities is what we've done with the excess money that's there. So no plan to sell the loans. We -- the average loan yields going up, rates are coming down a little bit, all these marked things. I mean, I'll have to remember to remind everybody when we're in the positive and say how much we could sell them for, to make money. But quite never came under consideration. But no, we -- I understand the point, and I appreciate you giving us the opportunity to speak to that, but we're in a really good spot with the loan portfolio and the quality loans we have. And yes, we're funding them a little bit right now with -- and the securities with some borrowings. But we really believe we can whittle that down as we get through the year.

Okay. Great. And then last one, just on the buyback. Any appetite to re-up the buyback?

I think at this point, we're just kind of waiting and seeing. Obviously, right now, the stock is trading down, and it's a time where we could take advantage of that. But I think right now, just with some of the uncertainty that's still out there, we feel good about where we are. And having the fortress balance sheet that we have is an important thing for us going into potentially some more uncertainty in the future.

And I think we talked about this last quarter too, Matthew, is that when we get out of this cycle, obviously, we foresee more opportunities for M&A and having excess capital to deploy in that is something we want to consider.

Great. Thank you.

Thank you.

One moment for our next question. And our next question will come from Kelly Motta of KBW.

Hi. Good morning. Thanks for the question.

Good morning, Kelly.

Most of my questions have been asked and answered at this point. But since you mentioned M&A, I might just kick it off with that. I imagine it's been pretty slow. But any update, especially given how well positioned you are with your fortress like balance sheet, like you said. Any update on maybe some of the challenging headwinds perhaps getting people more willing to sell? Any changes there?

Yes. Look, I mean, very candidly, I think everybody has been hunkered down a little bit, and there haven't been a lot of conversations. But I do think that this will drive more conversations. I mean there are some headwinds to that March, different things that we would have to evaluate. There potentially is some opportunities there for us. And we're open to having those conversations. But obviously, we're not going to stretch for anything, and we need to make sure that we do it according to the standards we've established and how we look at these deals. But there's not a lot of conversations going on. I mean, again, it's -- there's a lot of investment bankers that want to talk about this, and we listen. But I think at this point, I think everybody's just hunkered down, kind of wait to see what's happened. But -- this is my joke for the morning. I've decided because my first day as CEO was March 16, 2020, and then we have March of 2023, I've decided that we are not recognizing March of 2026. We're just going to skip right over that, because every March, there seems to be some sort of black swan event that occurs.

Oh my god. Mark it on the calendar.

Yes. Thank you. But no I just -- I think as Allen mentioned, that's something that a reason for us to look at opportunities, and we'll see. People may get tired faster.

Understood. We've discussed deposits and funding at length, but one question I didn't hear asked was the proportion of noninterest bearing, I mean, it's remarkable thought 64% of total deposits. Pre-COVID, you were at 60%, so you're still running a bit higher than that. Is the right way to think about the overall mix of the deposit base? Is that 60% kind of drifting down towards that as excess continues to go in search of rate? And anything that makes you think that noninterest-bearing will dip below that pre-COVID sort of composition?

Yes. I mean, I've talked about this a lot in the past. In some ways, maybe people believed it a little bit more before and maybe now are questioning it. But we bank operating companies. And those operating companies want the treasury management products and services, and they want the fraud prevention and they want to be able to do things. And the way we have structured those accounts, those customers -- and just notwithstanding the fact that if you have any company of any size, they can't operate with a $250,000 balance that is insured. We have access and have utilized, to a very small degree, the insured cash sweep. I think they just changed the name to inter-buy cash services, but same product. And that's something that is there, somebody is concerned about the safety. But quite candidly, it's not really been about that, and they need to maintain higher balances in their noninterest-bearing to offset service charges to just operate their business. So we don't give guidance on what we think that could be or where I think it could be. But just based on our model, I think that number can stay around the number that we've been at for the last few years. So it's hard to project that exactly. Obviously, we've had a significant amount of deposits that have gone out in search of rate. We've kept a lot of it in the family. I think we said in the fourth quarter, about $350 million had gone.

Last year.

Last year. So that money is in short-term liquidity strategies. If we hit a recession and that starts to lower rates and that yield is not there, that money most likely will come back to us because it hasn't lost -- hasn't left -- excuse me, that was hard for me to get out, it hasn't left the family. So I -- it's hard for me to project, but that's how -- that's the type of client we bank, and that's generally what happens. So --

Got it. I really appreciate all the color on that, Dave.

Yes. And Kelly, just one other thing I wanted to mention, and I don't know if this really hasn't been directly asked. We also added on page 34, just a little more granularity around the deposit characteristics and the uninsured. And there's differences in call reporting and reality. So I just want everybody to see what -- how we look at those numbers.

I appreciate all that detail. One last thing from me. Allen, if you have it, just the expected duration of the AFS and HTM books would be helpful.

Yes. Our AFS portfolio still is between 5% and 5.5%.

Years. Duration. Years. You said percent.

5 to 5.5 years. Yes.

Okay. I got it. Do you have the HTM book as well?

I don't have that. We don't usually disclose that.

Thanks. All right. Thank you so much. I'll step back.

[Operator Instructions] And our next question will come from Tim Coffey of Janney Scott Montgomery. Your line is open.

Great. Thanks. Good morning, gentlemen.

Hi, Tim.

Good morning.

Hey, Dave, the transfer of deposits to the Citizens Trust business in the quarter. Obviously, it's a popular trade. I'm wondering kind of what your approach to that is.

Yes. Actually, it's a really good question. So in the hierarchy, we look at keeping those deposits here at one rate. Then the second choice is keeping the deposits here at a little bit higher rate. And the third choice is keeping them here in a little bit higher rate. And then we look at treasuries, which is higher generally than the highest money market rate depending on the tenure of the treasury. So we want to keep the deposits. That's the first goal, but we also don't want the deposits to go outside of the family. So that's sort of how we're looking at it. Obviously, since this whole thing happened on March 10, it's in many ways, been even more of an awakening on the rate side and the excess deposit side. So we want to keep the deposits. We just don't let it walk out the door to trust, whether our Citizens Trust or outside the bank. I mean we're having conversations with people about what we can do.

Okay. Great. That's very helpful. And then the borrowings that were brought on during the quarter, the short-term ones, how long do you envision that staying on the balance sheet?

Well, I mean, it's hard to say, obviously, with what's going on in the economy and things like that. I mean we anticipate that it will diminish as the year goes on, but that's just our current view of it. A lot of things could change between now and the end of the year. It was borrowing themselves, the advances are very short term. So obviously, if deposit flows increase, then there's no reason we would have them.

Right. Okay. That makes sense. Those of my questions. Thank you very much for the time.

Thank you.

I would now like to turn the conference back to Dave Brager for closing remarks.

Thank you very much. I want to thank everybody for joining us this quarter. We appreciate your interest and look forward to speaking with you in July for our second quarter 2023 earnings call. Please let Allen and I know if you have any questions. Have a great day, and we'll see you next month or next quarter.