Q1 2023 CVB Financial Corp Earnings Call
Of customer deposits transitioning to our citizens Trust group's liquidity management products.
As you can see in our investor presentation, 77% of our deposits are business deposits and 23% our consumer primarily the owners and employees of our business customers.
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 31 2023.
Our depositors are typically baked 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.
I have banked with us for three years or more.
And as of March 31, 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 in 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 31, 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 six 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 eight 1%.
At March 31, 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 31, 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 three 9% decline from the end of 2022 as noted earlier more than $370 million of the 600.
<unk> $40 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 the credit lines that have seen rates rise past seven 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 groups deposits as of March 31, 2023, or $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 31, 2023 were $8 9 billion.
A $137 million or one 5% decrease from the end of 2022.
From December 31, 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.
<unk> five 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 five 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 $55 million as the overall line utilization rate for C&I loans decreased from 33% at year end to 28% at March 31 2023.
All of the remaining loan categories declined modestly from the end of 2022 to.
Through March 31 2023.
We remain cautiously opera news 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 growth we achieved this year.
But we are still lending and targeting low single digit growth.
Asset quality continues to be strong and the trends remained 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 compares with $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 $110000 and total recoveries of $33000, resulting in net charge offs of $77000 compared with net recoveries of $16000 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 31, 2023 classified loans included $22 million of loans acquired from Suntrust Bank.
I will now turn the call over to Alan to discuss the allowance for credit losses liquidity and capital Alan.
Thanks, Dave Good morning, everyone.
At March 31, 2023, our ending allowance for credit losses was $86 $5 million or 97% of total loans.
Which compares to $85 1 million or <unk>, 94% of total loans at December 31, 2022.
For the quarter ended March 31, 2023, we recorded a provision for credit losses of $1 5 million compared to $2 $5 million for both the quarter ended December 31, 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.
U S. Economic forecast include a baseline forecast as well as downside forecast.
We continue to have the largest individual scenario weighting on the baseline forecast with downside risk weighted among multiple forecasts.
As of March 31, the resulting weighted forecast assumes GDP will increase by one 4% in 2023, including a decline in GDP in the second half of this year.
Followed by modest growth of 9% for 2024, and then grow by two 4% in 2025.
The unemployment rate is forecasted to be four 2% in 2020, 351% in 2024, and then four 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 borrowings during the first quarter, we shrunk our investment portfolio by not reinvesting the cash flows generated by our investments are.
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 <unk> Securities.
<unk> Securities totaled $3 $2 billion at the end of the first quarter inclusive of a pre tax net unrealized loss of $460 million.
The $51 million decline in <unk> 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 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.
More than $800 million of secured borrowing capacity at the fed discount window and.
And $1 $7 billion of Unpledged fair value securities that can be pledged at the discount window or the fed's New bank term funding program.
In addition to the 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.
For selling any assets.
<unk> securities as a remote probability when all of these funding sources are considered.
Investment Securities held to maturity or HTM securities totaled approximately $2 $5 4 billion at March 31 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 237% for the first quarter of 'twenty three.
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.
Company's tangible common equity ratio at March 31, 2023 was seven 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 <unk> one stock repurchase plan, we initiated back in 2022 expired on March <unk> 2023.
During the first quarter of 2023, we repurchased approximately 792000 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 31, the unrealized loss on our securities 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 31, 2023, our common equity tier one 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.
Year ago quarter.
First quarter, earning assets decreased by $63 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 345% for the first quarter of 2023, compared with $3 six 9% for the fourth quarter and two 9% for the first quarter of 2022.
The decrease in our net interest margin was the 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.
That offset that $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 fees, including deposit services International and merchant Bankcard services decreased by approximately $400000.
Compared to the fourth quarter and increased by approximately $250000 when compared to the first quarter of 2022.
The conversion to so for all of our previously originated interest rate swaps indexed to LIBOR generated approximately $500000 of fee income during the first quarter of 2023 or.
Our trust and wealth management fees were essentially flat when compared to the prior quarter, but increased by $92000 year over year.
Income from bank owned life insurance or bully decreased by $228000 compared to the prior quarter as the decline in death 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 $700000, including a $500000 recapture of a previously written down impaired investments.
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 $500000, which was zero for both comparable quarters.
Noninterest expense totaled 136% of average assets for the first quarter of 2023. This.
This compares to 132% for the fourth quarter and 136% for the first quarter of 2022 or.
Our efficiency ratio was 39, 5% for the first quarter of 2023, compared with $36 three 1% for the prior quarter and $46, 93% for the first quarter of 2022.
Excluding the $500000 provision for unfunded loan commitments of $5 6 million of acquisition expense incurred in the first quarter of 2022 noninterest expense grew by approximately three 5% year over year the growth in noninterest expense was driven by an 8% increase in staff related expense.
Yes.
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 benefits.
<unk> grew by approximately $300000 from the fourth quarter, but bonus profit sharing and stock compensation.
<unk> 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 and $19 74, we have managed to build a safe sound and secured institution focus.
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 of 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 10 years with our bank of over 10 years and many of our customers have been banking with us for decades.
Our strategy of banking 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 we will strive to produce a maintained 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 Alan and I will be happy to take any questions that you might have.
Certainly as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced.
Withdraw your question. Please press star one again, please standby, while we compile the Q&A roster.
Okay.
Okay.
And our first question will come from David Feaster of Raymond James Your line is open.
Hey, good morning, everybody.
Morning, David maybe can we just I'd love to get your thoughts on some of the deposit trends in the quarter. You got you gave a lot of color in your prepared remarks, you know what I. Appreciate some went to the trust.
And some of them.
It impacts a title and escrow and all that but I'm just curious maybe as you dissect it and look at the attribution I mean.
No real relationship lost.
It seems like a lot of it's 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.
<unk> sleeping giant on the interest rate side I'm just curious.
As you 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 that I think.
I mean, obviously that the topic of the day.
We will 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 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.
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 the trust as part of it the pay down of the C&I loans as part of it.
There has been cash burn, which we've been talking about for multiple quarters in a row now.
And then the first quarter Theres always a lot of bonuses and 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.
Yeah.
<unk>.
We've never spent more time looking everyday at deposit flows.
I have a really good feel for it and we literally have not lost any significant relationship. There has been some excess deposits that have gone to trust theres 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 then after March 10th.
Just with everything that went down.
And I think that.
That has not it has not been a safety and soundness.
<unk>, it's Ben.
I can get four 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.
It was 54 basis points in.
In March.
Of interest bearing deposits. So that has gone up a little bit sort of accelerated towards the end of March.
So I feel.
After all of 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 build with our customers and the customers' faith and confidence in us. So I hope that answered your question.
Yeah, No. That's that's extremely helpful 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.
$360 million 260, yes, im trying to make it grow.
$260 million of new account relationships average balances from the first quarter. So.
We're playing offense and defense.
No that's great.
Maybe let's just let's just hit the second topic that you brought up off of that I mean, obviously, there's a huge focus on southern California CRE in a hyper focus on office as you talked about you know.
Obviously, you are well underwritten have a conservative approach to lending and appreciate all that color that you put in the presentation. It's extremely helpful and I think 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 off vision, and what's you're hearing from those borrowers and after as distressed what what kind of what you're seeing in that book.
Yes, so we do stress testing, we have three levels of stress testing just normal.
Base case scenario than a miles trust in 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 a $1 billion, we're getting updated financial information were getting updated.
Information on the guarantor were 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, our earlier, which would infer some amortization on those loans and whether you think values from those timeframes.
Or lower or higher even if you just use the same value alone because there would be some appreciation and maybe some depreciation potentially.
You can look at it and say okay.
Theoretically we should have.
Lower overall loan to value based even on today's values and we havent 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 like I said with an average loan to value of 50% at origination and a one.
$6 million average loan size, there's just a lot of granularity on our loans, We don't Bank money Center Big 30, 50, 80 storey office buildings.
And so far.
We have not seen any cracks there.
25% of it is owner occupied and office, so we underwrite the underlying company and.
And 36% of our overall portfolio is owner occupied so when you when you put all those things together.
I feel cautiously optimistic that we'll be in a <unk>.
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 part the last peak.
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.
Our investor presentation that we had had in our investor presentation during sort of the Covid timeframe.
We added it back which breaks down the classified loans by collateral type.
And you can see on that page, there's $4 million and 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 its current on payments.
We great 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.
Other category includes the loan that we talked about last quarter that we acquired from Sunquest. The senior living facility and the farmland is primarily one loan that also has a 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 they are if they stopped paying or there is a problem that we should be in good shape to get out of those loans without incurring any losses.
That's terrific color and appreciate that but maybe maybe touching on the other side, let's 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.
We're I'm just curious how is demand trending and and.
Sure.
Are you still seeing 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 P&I.
[laughter], because those move with fed funds rate and prime obviously, but.
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 that had been doing two customer lunches a month I did one in March and I did.
Two in April excuse me I have done the Q&A, probably didn't do any in March I was hunkered down.
Yeah.
In April the two customer lunches as one of our largest depositors as 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.
We're not doing that referred title.
Title business to him.
<unk> had stopped doing commercial real estate loans, so I got nervous about that to make sure I called our Chief Credit Officer, and said, Hey, we're not going to be the soft landing spot for all of these people that need every single commercial real estate loan, we just need to stick to our knitting in our guidelines as far as how we underwrite. This so demand has slowed as evidenced by what we.
We booked in the first quarter demand has slowed I sort of modified my comments and then sort of I did modify my comments.
<unk> that we're looking for low single digit growth low to middle single digit growth now and I think thats something that we can attain.
We're 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.
The best credit.
The best relationships and we want to be able to use this offensively, where theres banks that maybe.
Are struggling more and we can pick up good relationships. So I hope that helped.
Yeah, No. That's that's really helpful. I appreciate it thanks everybody.
And one moment for our next question.
Okay.
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 its already been a long day.
I Wonder if you could.
Update us on kind of what's the current quarterly projected cash flows are from the securities portfolio.
Currently.
Yes.
Both both principal and interest.
Well I would say the projections are closer to $150 million a quarter, but actually I believe that the reality is there are probably about 115 to 120.
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 and as I think the field books et cetera projecting but.
Based on what we've seen recently.
I think the 110 to 120 range is at least near term is more more likely.
Okay. Appreciate it so as you think about that.
The remainder of the year from a balance sheet kind of mixed perspective, you've got the cash flows coming from the <unk> portfolio, you talked about second and 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 injectable 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.
Having to pull them additional borrowings or.
Other sources of funding.
Yes no.
This 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 of Treasury like Treasury, a five year or 10 year Treasury.
Now, we're really looking at the base pricing plus a spread if we had to borrow incrementally how.
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 a spread so our loan rates are.
<unk> significantly higher than using a five 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.
Helped offset higher deposit costs in the borrowing costs, 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.
Okay. Thanks, and then just last for me.
Classified loans down.
Not a huge number in the scheme of things, but what caught my eyes, essentially every loan segment or major loan loan segment on your on your chart did have sequential quarter decline. So just kind of curious about that and wondering if there's any kind of sunquest related resolutions that impacted.
Just.
After over quarter system.
You mean, the down the Sunquest resolutions yeah, yeah shows.
We gave you the number I think Alan It was 22 million a $22 million at Suntrust got $22 million of Sunquest is in there and that is about the same number than it was last quarter. So the resolutions were not really some press related and the sunquest of more than 50% is the one loan that we mentioned the previous quarter, which was the senior living.
<unk>.
Paying as agreed.
And as a relatively low loan to value with good guarantor support that loan is 12 million ish, yes.
Yes, 12 to 12 $12 million to $13 million of that and that Gary is showing up on our page 40.
In the <unk>.
In the other category.
So the majority of that other category as far as classified loans is that one sounds breslow.
Gary If you look at the chart, we put out in the IP. It has sort of moved around a little bit quarter to quarter, but it's been generally within the same range.
As Dave alluded to before we're highly conservative in the classifications and a lot of times you can carry themselves within a quarter sometimes.
Alright, great I appreciate the color. Thank you.
One moment for our next question.
Okay.
Our next question will come from Matthew Clark 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 interface 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.
Also we noted that.
Our average cost of borrowings was $4 eight 1% during the quarter and at quarter end. It was almost exactly 5% so.
Hopefully that helps you Matthew.
Okay great.
Then.
So the margins likely will clearly be down again here in <unk>, 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 possible obviously the net interest margin go 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 a just a static balance sheet.
When we model and Youll see this in our queue.
Theres not a lot of volatility in our net interest margin.
You know plus or minus to ramp.
We're looking at half a percent 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 other pressure there, but that'll be the question as we get into the later half of the year 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 NSS book I mean, your securities yield barely budged this quarter and you have plenty of capital T. One to 13, 8% I mean, if you blow it out.
Yeah.
You can earn it back pretty easily two 5% pick up just 5%. It's like 80 cents a share its like a full year or less earn back 25% accretive to earnings I guess why not do it.
It's already in your tangible book.
While we understand that.
Certainly but.
I think from our perspective.
Three or four year earn back is rather long so at this point in time in the cycle and.
We really don't see a reason to do that.
Yeah, Matthew just to sort of the broader maybe answer to your question is we've evaluated it overtime 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 will 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 would still end up in a.
In a better place, but okay.
That's assuming I mean, that's obviously assuming that rates stay exactly the same.
And so theres a lot of assumptions in that and if rates went down or rates went up that impacts that earn back too.
Yes totally understand okay, and then just.
Shifting to the other mark.
On the loan book.
What would you say to those that are critical.
Unrealized loss on your loans.
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.
And argue it's a moot point at.
At this point in time, so I'm not sure.
What your question is really related to but.
When you look at our Q, you'll see the fair value of our our loans.
Which has improved I would say most likely from the end of the year as rates have come down.
Yeah, No I agree I think it's ridiculous im just allowing you to.
Yes, yes.
Yeah, No I'd add look I think we can we as we've said.
To your earlier question about the <unk> portfolio and the Securities I mean, we have.
Core funding that funds all of our loans.
And the securities as what we've done with the excess money thats there so.
No plan to sell the loans.
The average loan yields going up rates are coming down a little bit all of these mark things.
I'll have to remember to remind everybody when we're in the positive and say how much we could tell him Jorge.
But.
But of course never came up in that question.
No.
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 quality loans, we have in and yes, we're funding them a little bit right now with them.
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 wait and see and obviously right now the stock is trading down in <unk>.
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.
I think we talked about this last quarter too Matthew is that you know.
When we get out of this cycle, obviously, we foresee any more opportunities for M&A and having excess capital to deploy in that.
It's something we want to consider.
Yep, great. Thank you.
Thank you.
One moment for our next question.
Okay.
And our next question will come from Kelly Motta of <unk>. Your line is open.
Hi, good morning, Thanks for the good morning Kelly.
Most of my questions have been asked and answered at this point.
You mentioned M&A I might just kick it off with that I imagine has been pretty slow but any.
Any update.
Especially given you know how.
As you are with.
Your fortress like balance sheet like you said.
Any update on maybe some of that.
Challenging headwinds.
People are more willing to sell any any changes there.
Yeah 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 accordingly.
According to the standards, we've established in 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 you don't want to talk about this in and we listen to them, but I think at this point I think everybody is just hunkered down kind of wait and see what's happened but.
This is my job for the morning.
I've decided because of my first day as CEO was March 16, 2020, and then we have March of 2023, I have decided that we are not recognizing march of 2026.
Just going to skip right over that because every march there seems to be some sort of black Swan event that occurs.
But.
[laughter] calendar.
But but no I just I think.
As Alan mentioned, that's something that a reason for us to.
Look at opportunities and we will see people may get tired tired faster.
Understood.
Can you discuss deposits and funding.
But one question I Didnt hear asked was on the proportion of noninterest bearing I mean, it's remarkable shot.
64% of total deposits.
Did you were you were at 60%, so you're still running a bit higher than that is the right way to think about that.
The overall mix of the deposit base.
Kind.
Kind of drifting down towards that.
<unk> access.
Continues to go in search of rate and anything that makes you think that noninterest bearing will dip below that pre COVID-19.
Conversation.
Yeah, I mean, I've talked about this a lot in the past in that.
In some ways maybe Pete.
People believed it a little bit more before and maybe now are questioning it but we bank operating companies in 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.
Customers and just notwithstanding the fact that if you have any company of any size they can't operate with.
A 250000 dollar balance that is insured.
<unk>.
We have access and have utilized two a very small degree.
The insured cash sweep I think they just changed the name to <unk> cash services, but same same product.
And that's something that 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 there and theyre non interest bearing to offset service charges to just to operate their business. So we don't give you.
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.
Yeah.
Last year so.
That money.
As in short term liquidity strategies, if we hit a recession and that source of lower rates and that yield is not there.
Money.
This likely will come back to us because it hasnt loss of habitat hasn't left excuse me that was hard for me to get out.
Left the family so I.
Yeah, it's hard for me to project, but.
That's the type of client, we bank and Thats generally what happens so.
Got it I really appreciate all the color.
Color on that Dave and Kelly just one other thing I wanted to mention and I don't know if this really hasnt been directly ask we also added on page 34, just a little more granularity around the deposit characteristics in the uninsured in.
There's differences in call reporting in reality.
I just want everybody to see.
What how we look at those numbers.
I appreciate all that detail one one last thing from me Alan If you if you have it just.
The expected duration of the SaaS and HCM thoughts would be helpful.
Yeah, our Ams portfolio still is between five and five 5% year on here's what's iteration years, you said per cent.
Bye bye.
Alright, yeah.
Yeah.
Yeah.
[laughter] I Gotta do you have the HTM book as well.
I don't have that we don't usually disclose that.
Alright. Thank you so much I'll step back.
Again, ladies and gentlemen, if you would like to ask a question. Please press star one one on your Touchtone telephone again for any questions. Please press star one one.
And our next question will come from Ken I'm, sorry, Tim Coffey of Janney Montgomery. Your line is open.
Great. Thanks, good morning, gentlemen.
Okay.
The transfer of deposits to the to the citizens trust business in the quarter.
The popular trade.
Kind of what your approach to the.
To that is.
Yeah actually it's a really good question so in the hierarchy.
Look at keeping those deposits here at one at one rate than the second choices are keeping the deposits here at a little bit higher rate in the third choices keeping them here at a little bit higher rate and then we look at treasuries.
So 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.
Excuse me on March 10.
In many ways been even more of an awakening on the rate side.
And the excess deposit side.
We want to keep the deposits, we just don't let them walk out the door to trust whether to our citizens trust or outside the bank I mean, we're having conversations with people about what we can do.
Okay, great. Thank you that's great that's very helpful.
And then the borrowings that were brought on during the quarter. The short term was that 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 borrowings themselves.
The advances are very short term so obviously.
If deposit flows increase and then there's no reason we would have them.
Right right. Okay that makes sense those are 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 Alan or I know if you have any questions have a great day, and we'll see you next month or next quarter.
And this concludes today's conference call. Thank you for participating you may now disconnect.
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