Q2 2023 CVB Financial Corp Earnings Call
Okay.
Good morning, ladies and gentlemen, and welcome to the second quarter 2023 D V be financial.
<unk> Financial Corporation, and its subsidiary citizens business Bank Earnings Conference call. My name is Sherry 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 session to ask a question. During this session. Please press star one one on your telephone.
We'll then hear an automated message advising that your hand is right to withdraw.
Your question Press Star one again, please be advised that today's call is being recorded I would now like to turn the presentation over to your host for today's call. Christina Carabiner. You May proceed. Thank you.
And good morning, everyone. Thank you for joining us today to review our financial results for the second 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 earning.
[noise] released yesterday to obtain a copy please visit our website at Www Dot C B bank.
Dot 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 companys.
Annual report on Form 10-K for the year ended December 31st 2022, and in particular, the information set forth in item one a risk factors therein.
For a more complete version of the Companys Safe Harbor disclosure. Please see the company's 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 second quarter of 2023, we reported net earnings of $55 $8 million 40 per share representing a 185th consecutive quarter of profitability. We previously declared a <unk> 20 per share dividend for.
For the second quarter of 2023, representing our 135th consecutive quarter of paying a cash dividend to our shareholders.
Net earnings of $55 $8 million were 40 cents per share compares with $59 3 million for the first quarter of 2023 or <unk> 42, a share.
$59 $1 million for the year ago quarter, or <unk> 42 per share the second quarter demonstrated the bank's financial strength at a time, where the industry is seeing disruption, although our net interest margin contracted by 23 basis points compared to the first quarter of 2023, our efficiency ratio was below 41% in the second.
Quarter of 2023.
We generated strong returns reflected by our return on average tangible common equity of $18 three 9% and our return on average assets of 136% our pre tax pre provision return on average assets was 191% for the second quarter for.
For the second quarter, our pre tax pre provision income was $78 million compared with $84 million for the prior quarter and $85 7 million earned in the year ago quarter.
Total deposits increased by approximately $126 million from the end of the first quarter of 2023 to June 30, without the benefit of brokered deposits are noninterest bearing deposits continued to be greater than 63% of our total deposits.
At June 32023, our total deposits and customer repos were $12 $8 billion and $88 million increase from March 31 2023.
However, deposits and customer repos were lower than the same period, a year ago by approximately $1 7 billion for an approximate.
<unk>, 12% decline year over year.
We've experienced $552 million decline in deposits and customer repos from the end of 2022, which includes $550 million that was moved into citizens Trust, where these funds were invested in higher yielding liquid liquid assets such as treasury notes.
The velocity of deposits moving to citizens Trust declined in the second quarter with approximately $180 million transferred off balance sheet in the quarter compared to $370 million in the first quarter of 2023.
Bank continues to acquire new deposit customers in the deposit pipeline has strengthened over the last three months new accounts opened during the first half of 2023 total approximately $650 million of new average deposits.
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 35 basis points on average for the second quarter of 2023, which compares to 17 basis points for the first quarter of 2023 and three basis points for the second quarter of 2022.
Two.
At June 32023, our noninterest bearing deposits were $7 9 billion.
Compared with $7 8 billion for the prior quarter and $8 9 billion from the year ago quarter noninterest.
Noninterest bearing deposits were greater than 63% of total deposits as they have been for the last five quarters the.
The bank has no broker deposits our deposits are 100% core customer relationships across diversified industries.
More than 75% of our deposits represent customer relationships that have banked with citizens business bank for three or more years.
76% of our deposits are business deposits at our customers typically have operating accounts that by their nature of each of their businesses exceeds the FDIC insurance coverage level of $250000. Therefore.
Therefore, a 52% of total deposits and customer repos were uninsured.
And uncollateralized at June 32023.
As at the end of the second quarter. The Federal Reserve had increase the fed funds rate by 500 basis points since April of 2022.
The bank's cost of deposits over the same period of time have increased from three basis points to 41 basis points for the month of June 2023.
The bank failures in March of 2023 brought greater attention to the fed's increases in short term rates.
And up to 38 basis point increase in our cost of deposits from the start of the fed's rate increase more than 50% of the increase has been experienced since March of 2023.
Although the pace of the increase in deposit cost slowed in June we cannot be certain about the pace of increases in the future, especially if the fed continues to raise rates as they did yesterday.
Total loans at June 32023 were $8 9 billion, a $172 million or one 9% decrease from the end of 2022.
From December 31, 2022 loans declined by $31 $9 million after excluding the seasonal increase in dairy and livestock loans and PPP loan forgiveness at year end.
Dairy and livestock loans decreased by $136 million from December 31, 2022, as we experienced paydowns in the first quarter of each calendar year.
As we can.
It gives me out.
Paydowns first quarter each year as a result of the temporary increase we experienced in the fourth quarter of each year.
Commercial real estate loans increased by $19 million from the end of.
Of 2022 to June 30th while C&I loans increased by approximately $8 million over the same period declines in construction SBA and consumer loans totaled $59 million from December 21, 2022 to June 32023.
Now, let's discuss <unk> in more detail.
Loan growth during the second quarter was impacted by a slowdown in loan demand total loans declined by $35 million from the end of the first quarter of 2023 to the end of the second quarter commercial real estate construction and consumer loans declined from the prior quarter, while C&I loans C&I loans increased as utilization rates.
Improved from 28% at the end of the first quarter to 31% at the end of June .
Year over year core loan growth was $277 million or approximately 3%. This.
This quarter loan growth was led by growth in commercial real estate loans, which grew by $260 million or three 9% year over year.
Our new loan production weakened in the second quarter, new loan commitments were approximately $240 million in the first quarter of 2023 and approximately $288 million in the second quarter of 2023.
In comparison, we originated $604 million of new loans in the second quarter of 2022.
New loan production at the end of the second quarter was generated at average yields exceeding 7%.
Although we continue to strive to grow loans, our current loan pipeline is at its lowest level in the last three years.
Although loans declined at quarter end from the end of the first quarter, we recorded a provision for credit losses of $500000 for the second quarter of 2023 to reflect a further deterioration in our economic forecast.
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 5 million or four basis points of total assets of $6 5 million in nonperforming loans compared with $6 2 million for the prior quarter.
And $13 million from the year ago, Your AR go quarter.
During the second quarter, we experienced credit charge offs of $88000 and total recoveries of $15000, resulting in net charge offs of $73000 compared with net charge offs of $77000 for the first quarter of 2023.
Classified loans for the second quarter were $78 million compared with $67 million for the prior quarter and $76 million for the year ago quarter.
Classified loans as a percentage of total loans over the last five quarters has been consistently less than 90 basis points.
The $10 $9 million increase in classified loans quarter over quarter was primarily due to a $9 $7 million increase in classified commercial real estate loans, and a $6 1 million increase in classified dairy and livestock and agribusiness loans, partially offset by a $4 $4 million decrease.
<unk>, Inc, classified commercial and industrial loans.
The increase in classified loans for the dairy in commercial real estate categories were primarily due to one dairy relationship in which $11 million of dairy and livestock loans and $6 million of owner occupied commercial real estate loans were downgraded during the second quarter.
Commercial real estate loans secured by office buildings has been an area of much attention.
Recently across the banking industry. So we've included additional information related to our office exposure in our July 2023 investor presentation.
A couple of data points regarding our $1 1 billion of office CRE.
Include a granite includes the granular nature of the portfolio, which is highlighted by the average loan size of less than $1 7 million, 87% of the office CRA loans CRE loan balances.
Our below $10 million and we only have one loan greater than $20 million.
Additionally, 25% of this portfolio is owner occupied and on average these loans were originated with loan to values of 55%.
Approximately 13% of the office portfolio will mature over the next 24 months, while an additional 13% of the portfolio will have their interest rates reset during those same 24 months.
To visualize where our office portfolio is positioned geographically we have maps on pages 33 through 36 of our investor presentation that showed the dispersion of our loans and the minimal exposure in the city centers of Los Angeles, San Diego and San Francisco in summary, we believe our office CRE portfolio was.
Evidently underwritten very granular and not exposed to central.
Business District areas 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 June 32023, our ending allowance for credit losses was $87 million or <unk>, 98% of total loans.
Which compares to $86 $5 million or <unk>, 97% of total loans at March 31 2023.
And $85 $1 million or 94% total loans at December 31, 2022.
The allowance for credit losses, as a percentage of classified loans was 112% as of June 32023, compared to 108% as of December 31 2022.
For the quarter ended June 32023, we reported we recorded a provision for credit losses of $500000 compared to $1 $5 million for the quarter ended March 31, 2023, and $3 $6 million for the second quarter of 2022.
The provision for credit losses in the second quarter was driven by the change in our economic forecast.
Which resulted in lower projected GDP growth lower commercial real estate values and higher unemployment when compared to our forecast at both March 31, and the end of 2022.
Our economic forecast also resulted in a $400000 increase in our off balance sheet reserve at June 30 <unk>.
<unk> two an increase of $500000 in the first quarter of 2023.
Our economic forecast continues to be a blend of multiple forecasts produced by Moody's.
<unk> U S. Economic forecasts include a baseline forecast a more optimistic forecast as well as numerous downside forecasts. We continue to have the largest individual scenario weighting on the baseline forecast with downside risk weighted among multiple forecasts represent approximately 40% of our overall forecast.
As of June 32023, the resulting weighted average forecast assumes GDP will increase by one 5% in 2023, including a decline in GDP in the second half of this year, followed by modest growth of <unk>, 8% for 2024, and then GDP growth at two <unk>.
<unk> for 2025.
The unemployment rate is forecasted to be three 8% in 2023, followed by 5% in both 2024 and 2025.
Borrowings as of June 32023 consisted of $695 million from the bank term funding program that we borrow during the second quarter of 2023 at a rate of four 7%.
These borrowings replaced at higher cost borrowings from the federal home loan Bank.
Our <unk> borrowings consist of short term advances declined from $1 4 billion as of March 31, 2000 $23 million to $800 million at June 32023.
So as of June 30th their cost was approximately 5%.
These <unk> advances will mature over the next two quarters with the final maturity at the end of November .
The modest growth in borrowings from end of the first quarter of 'twenty three to the end of the second quarter coincide with a $322 million increase in funds on deposit at the federal reserve, which earn a rate of more than 5%.
In addition to having more than $600 million of cash on the balance sheet as of June 32023, we added substantial sources of off balance sheet liquidity. These sources of liquidity include $4 1 billion.
Secured an unused capacity with the federal home loan bank $1 $3 billion of secured borrowing capacity at the fed discount window or bank term funding program.
More than $550 million of Unpledged securities that could be placed at the discount window or the Feds Bank term funding program.
And $300 million of unsecured lines of credit.
In addition to these borrowing sources the bank has not utilized any broker deposits as of June 30.
We continue to shrink our investment portfolio by not reinvesting approximately $120 million of cash flows generated by our investments during the second quarter.
Our total investment portfolio declined by $160 million from March 31, 2023 to $5 6 billion as of June 30.
The decrease was primarily due to a $136 million $136 million decline in investment securities available for sale or <unk> securities.
<unk> Securities totaled 3.07 billion at the end of the second quarter.
Inclusive of our pre tax net unrealized loss of $498 million.
As the bank has ample balance off balance sheet sources of liquidity, it's unlikely that we would sell any of these <unk> securities.
Investment Securities.
Curious, how the maturity or HTM securities totaled approximately $2 $5 1 billion at June 30.
The HTC HTM portfolio declined by approximately $23 million from March 32023, as cash flows were not reinvested during the quarter.
The tax equivalent yield on the entire investment portfolio was $2 three 7% for the second quarter of 2023.
Essentially the same as the prior quarter, but grew by 44 basis points and compare comparison to the second quarter of 2022.
Now turning to our capital position.
Shareholders' equity increased by $53 million 2.01 billion at the end of the second quarter.
The company's tangible common equity ratio at June 30 was seven 8% consistent with the prior quarter, while higher than the seven 5% at June 32022.
Equity increased for the first six months.
Of 2023 as a result of year to date income of $115 million, which was offset by $56 million in dividends for both the first and second quarters of this year.
The resulting year to date dividend payout ratio was 48, 5%.
A <unk> one stock repurchase plan, we have we initiated in 2022 expired on March <unk> 2023.
There were no shares purchased during the second quarter of 2023.
During the first quarter of this year, we repurchased approximately 792000 shares of common stock at an average price of $23 43.
Totaling $18 $5 million in stock repurchases.
At the end of the second quarter of 2023, we entered into $1 billion in notional pay fixed rate swaps.
As fair value hedges to mitigate the risk of rising interest rates on our capital.
These pay fixed swaps have maturities ranging from four to five years and on average that fixed rate is approximately three 8%.
The variable rate received by the bank as daily Sofa.
At June 32023, we recorded a $7 8 million fair value adjustment associated with the swap derivatives, which increased other comprehensive income partially mitigating the impact of a $38 million decline in fair value of our <unk> portfolio.
On a net basis the changes in fair value from our <unk> portfolio and fair value hedges resulted in a $19 million decline in other comprehensive income from the end of the first quarter to June 30.
Our overall capital position continues to be very strong.
Our regulatory capital ratios are well above regulatory requirements be consistent couldnt be considered well capitalized and above the majority of our peers.
At June 32023, our common equity tier one capital ratio was 14, 1% and.
And our total risk based capital ratio was 14, 9%.
I'll now turn the call back to Dave for further discussion of our second quarter earnings. Thank.
Thank you Alan net interest income before provision for credit losses was $119 $5 million for the second quarter compared with $125 7 million for the first quarter and $121 $9 million for the year ago quarter.
Our tax equivalent net interest margin was 322% for the first quarter of 2023.
Compared to.
Excuse me $3 two 2% for the second quarter of 2023, compared with $3 four 5% for the first quarter of 2023.
316% and 316% for the second quarter of 2022 to.
<unk> 23 basis points quarter over quarter decrease in our net interest margin was the result of a 34 basis point increase in cost of funds compared to a 10 point increase in earning asset yields the increasing cost of funds from the first quarter of 2023 to the second quarter was driven by a combination of a $555 million.
Increase in short term borrowings, which had an average cost of four 9% in the second quarter and 49 basis point increase in the cost of interest bearing deposits are 10 basis points quarter over quarter increase in earning asset yield was primarily the result of an 11 basis point increase in loan yields.
Second quarter average, earning assets increased by $165 million from the first quarter due to an increase of $310 million in average funds on deposit at the federal reserve the.
The increase in our funds at the fed offset decreases in both average investment securities of $73 million in average.
Bridge loans outstanding of $71 million, the six basis point increase in net interest margin year over year was due to an 81 basis point increase in earning asset yields offsetting a 79 basis point increase in our cost of funds the increase in earning asset yields was the result of higher loan and investment yield.
In the second quarter of 2023 compared to the second quarter of 2022 as.
As well as an improved asset mix in which average loans grew from approximately 55% of earnings earning assets in the second quarter of 2022% to 59% in the second quarter of 2023.
Loan yields were 5.01% for the second quarter of 2023, compared with $4 three 1% for the year ago quarter investment security yields increased 44 basis points from a yield of 193 in the prior quarter to $2 three 7% in the second quarter of 2023.
Earning assets for the quarter ending June 32023 declined from the second quarter of 2022 by $593 million.
Loans on average grew by $258 million from the second quarter of 2022, However, our investment portfolio and deposit balances at the federal.
Federal reserve declined by a combined $865 million as total deposits declined by $1 $9 billion year over year.
Moving on to noninterest income noninterest.
Noninterest income was $12 7 million for the second quarter of 2023, compared with $13 2 million for the prior quarter and $14 $7 million for the year ago quarter.
Our customer related banking fees, including deposit services International and merchant Bankcard services decreased by approximately $506000 compared to the first quarter and declined by approximately $495000 when compared to the second quarter of 2022.
However, our trust and wealth management fees grew by $401000 compared to the first quarter of 2023 and increased by $353000 year over year the.
The conversion to sober of all of our previously originated back to back interest rate swaps indexed to LIBOR generated approximately $100000 of fee income during the second quarter compared to $500000 of fee income during the first quarter of 2023.
Bully income for the second quarter of 2023 increased from the first quarter by $908000, including $806000 in death benefits that exceeded the asset value of certain boley policies bully income increased by $1 5 million compared to the second quarter of 2022 due to <unk>.
The death benefits received in the second quarter of 2023 and higher returns for the underlying investments and separate on life insurance policies used to fund deferred compensation plans.
Compared to the first quarter of 2023, CRA investment income declined by $500000 due to the inclusion in the first quarter of 2023, a recapture of previously of a previous impairment charge on our CRA investment that paid in full during the first quarter of 2023 as well as a 475.
Dollar decline in the second quarter due to valuation changes in a CRA fund <unk>.
Compared to the second quarter of 2020 to CRA investment income declined by $716000 as the prior quarter included gains from equity fund distributions totaling $1 $3 million.
The second quarter of 2022 also included $2 7 million and net gains on the sale of properties associated with banking centers.
Now expenses.
Noninterest expense for the second quarter was $54 million compared with $54 9 million for the first quarter of 2023, and $50 $9 million for the year ago quarter.
The second quarter of 2023 included $400000 in provision for unfunded loan commitments compared to $500000 in provision for the first quarter of 2023 there.
There was no provision for the second quarter of 2022.
Salaries and employee benefit costs decreased $1 $7 million quarter over quarter, primarily due to lower payroll taxes as the first quarter of each year typically has the highest.
Amount of payroll taxes.
$866000 quarter over quarter increase in professional services included increase increases of $357000 in legal expense as well as other professional services that were that are associated with the timing of various projects the $3 $1 million increase in noninterest expense year over.
For year included an increase of $2 million or 6% in salaries and employee benefits due to inflationary pressures primarily experienced in the second half of 2022 ft.
FDA assessments increased by $785000 over the prior quarter and prior year quarter as higher assessment rates were effective at the beginning of 2023.
Noninterest expense totaled $1 three 2% of average assets for the second quarter of 2023. This compares with 136% for the first quarter of 2023, and one 2% for the second quarter of 2022.
Our efficiency ratio was 48, 6% for the second quarter of 2023, which compares with 39, 5% for the prior quarter and 37, 2% for the first quarter of 2022.
Since our founding in 1974, we have managed to build a safe sound and secure institution with a strategy focused on banking the best small and medium sized businesses and their owners. We remain focused on our core values of financial strength superior people customer focus cost effective operation and having fun.
As the Premier business Bank in California, we have successfully executed on this strategy and our focus will remain steady and consistent. So we can continue to provide the best banking products and services to these businesses that represent great American success stories, despite the challenging environment, we will remain disciplined.
In our approach to credit and will strive to produce a maintained consistent earnings strong capital levels solid credit and excellent liquidity.
Please stay healthy and safe.
This concludes today's presentation now Alan and I will be happy to take any questions that you might have.
Yes.
Thank you as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
One moment, while we compile the Q&A roster.
And our first question will come from the line of Ben Garlinger with <unk>. Your line is open.
Thanks, Good morning, guys.
Ben.
Seems like people mixed of SBB CEB.
Quarter.
You don't have to comment on that I'm sure you can but anyway. So in terms of just.
Just the borrowings I think that weighing and out of the 800. It gets paid off in November .
The bank term funding.
When you think about the banking funding specifically because you do have the high fours right. The fed is valid for five and a half you are getting a positive spread is there any.
Tight or can you pay that down early of deposits in the back half of the year increase.
Ben Yes, I mean.
What's nice about the bank from funding program as you don't have any penalties if you want to pay it off.
And so we're there.
There was a time, where where the yield curve was and the fact these are one year.
Our borrowings then it was advantageous to utilize it you get to use par value of collateral rather than fair value pay it off anytime you want in fact, we we paid off in rebar out a couple of times to get better rates.
You can't replicate for seven right now.
But if we do continue to see.
Growth in the deposits, we could pay that off but more likely won't pay down <unk> first visit is generally more expensive borrowings, but having some cash on hand that pays us about 540 now versus the $4 70, and obviously some positive arbitrage for us.
Gotcha, and I think thats, largely just predicated on your normal seasonality. It seems like you've got pretty good inflow of deposits in the back half of the year. So we're pretty much on the startup date for that.
Just based on kind of the commentary you typically have with your customer base.
I mean I'm sure you've had a lot more conversations in the first six months of this year, that's probably any other six month period.
Is that still something that you should expect.
You guys typically don't pay up a ton on deposits because you have really great relationships and you have another ways of rewarding your depositor base, but.
Is that normal seasonality is something that we should continue to expect.
Yes, I think we should expect that and just to make sure. We're on the same page normally we kind of grow deposits in the second and third quarter and then deposits in the fourth quarter go down just due to a variety of reasons bonuses other things.
Distributions to business owners, so I would expect something similar on the seasonality side.
The pace of the money that left and went outside of the bank.
Slowed pretty significantly in the second quarter.
And I think that that should continue to be the case I mean subject to a lot of different factors everyday is a new day in the world out there, but I think that normal seasonality.
Should be sort of anticipated.
Gotcha, and then I'm going to sneak one more in.
You guys are looking to do a transformational deal, but you guys do have a history of making some pretty good roll up or additional M&A to bolster the broader company.
With the first six months been pretty quiet, we've seen them.
Not necessarily.
Flood gates. So we've seen a few notable deals announced this week across the country.
Has there been conversational changes maybe not so you guys are involved but just.
Has the appetite or the bid ask between buyer and seller materially changed over the past few months and then it's kind of judgment.
Against that do you think you'd be participating anytime in the next year.
Year or do you need some more economic clarity before you really get involved or.
I want to do something.
Yes.
It's really a case by case basis, just to your comment regarding the the conversations I think the conversations I would say picked up pretty significantly after the failures of the banks people were nervous and scared and looking for a safe Haven.
I'd say they have slowed a little bit and part of the challenge is just the economics and the marks and all of the stuff that goes into looking at a deal.
We would be open.
<unk> looking at an opportunity if it was presented to us and it made sense for US just based on our normal criteria, but that's that probably would would.
Impact some of the financial matrix with the markets, where they are and some of those things, but look we're always looking and open for conversations.
Obviously yesterday.
The change in or the.
The announcement of the acquisition of pack West was.
Something that I think was overall good for the banking industry just from a risk perspective out there, but at the end of the day we are open.
We will remain disciplined in how we utilize our capital for those types of things and our and our currency.
Gotcha, and then has there been more free agency of just kind of a plus bankers because of the deals that have been announced this year in California.
I mean, there has been a little bit of that I don't think anything has really happened with the one that was announced yesterday, but that could and will I believe be an opportunity for us as we move forward through the next quarter or two.
Sounds good I appreciate the color.
Of course.
Thank you one moment our next question.
And that will come from the line of Gary Tenner with D. A Davidson your line is now open.
Yes.
Thanks, Good morning.
Good morning, guys, Hey, I wanted to ask about the pick up in C&I quarter over quarter. It looks like line utilization increase I think 28% to 31%.
Which kind of correlates with the dollar increase but can you talk about the dynamics there between.
Increased drawdowns from your existing clients versus potentially have you brought on new new business as well or less three months.
Yeah. So.
Towards the end of the quarter, we did bring on a new large C&I relationship that sort of impacted that to a degree so that was probably.
A lot of that increase I don't have the exact number off the top of my head, but I.
I would say it was just anecdotally $75 25, new relationships versus new borrowings from existing lines.
Sure.
Great and then just since it's sizable.
New relationship could you kind of talk about the relative loan versus deposit.
Impact of that relationship.
Yeah. So this is actually a really interesting alan's already lapping Gary sorry.
This is a this is not a new relationship to the bank. We actually acquired this relationship back in 2018 with the acquisition of community Bank. They are an extremely large deposit customer maintaining over $25 million in deposits with us back.
Back couple years ago, They left and went to another bank that offered them aligned that we were unwilling to to do the size of the line.
And ultimately they never took their deposits from us they actually left their deposit relationship with US went to this other bank.
They made the decision that they wanted to leave the other bank and bring the line back to us.
It's pretty well balanced actually its probably about 80% coverage up.
Their outstandings on the deposit side.
No.
It's kind of an interesting story just because of the relationship never really left the borrowings did but then the borrowings came back.
Got it I appreciate the color on that.
And then just any commentary you could share on kind of what youre seeing almost through the first month of the third quarter in terms of deposit trends information.
Yes, I didn't we didn't.
What was that number but very stable, that's how I would characterize it.
And sort of similar to my answer to ban.
We anticipate kind of similar trends historically kind of second and third quarter deposit growth. Obviously, a lot can influence that in today's world, but I feel relatively confident that that will continue those trends between now.
Now and the end of the third quarter.
Gary we actually we've opened an enormous amount of new accounts.
<unk>.
The average balances on our customers' relationships have gone down.
Because I think they have taken some of that excess cash and invested it in trust and outside investments, but we're on offense through all of this.
Strong core deposits.
Thank you.
Youre welcome.
Thank you one moment our next question.
And that will come from the line of Matthew Clark with Piper Sandler Your line is now open.
Yes.
Hey, good morning.
Good morning.
Maybe just on the margin first.
I'm trying to get some visibility into the next quarter or if you have the spot rate on interest bearing deposits at the end of June and the average margin in the month of June .
Yes, I think we actually have noted there was 41 basis points in June .
And you can look at our investor deck, and Youll see a monthly trend so that should give you more color there.
In terms of the outlook for our net interest margin.
Let me start with what Youll see in our Q and we always disclose.
200 basis point up 200 basis point down ramp over 12 months.
And on a static balance sheet, that's going to generate over the first 12 months an increase in net interest income of one 5% and over a 24 month period to seven likewise, if rates were happened to a down 200 basis points as a modest decline of 1% in the first 12, and then cumulatively over the 2004 it would be a negative three.
I would guess I will give you a little more color on the very short term outlook and I think it's reasonable to assume that we could add some improved asset mix on the earning asset side.
In the near term quarter or quarters.
And as well as potentially improve the funding mix with less borrowing so I.
I think our outlook is that we think there's a reasonable chance of a better NIM and.
But obviously that's subject to maybe the fed increasing even further.
In September .
And Matthew just one other on page 39 in the Investor deck, the cost of interest bearing deposits was one <unk> percent in the month of June .
Got it thank you.
Okay and then.
It doesn't sound like some of your prepared comments on the ASF Port Folio.
But any change in your willingness to restructure the securities portfolio Givens.
Our regulatory capital strengthening even further here.
Yes.
Now and we will always evaluate it and determine if there's opportunities that but as we commented the balance sheets and liquidity position is strong and there is no need to really do anything there.
Okay, and then expenses down a little bit here this quarter.
Including lower comp can you give us kind of a sensitive so run rate outlook here in the second half.
Yes.
Well as you may recall from prior years, we generally do salary increases mid year. So the third quarter over the second quarter should see some growth, probably 2% to 3% and overall staff and benefit expenses.
The professional services number can be a little choppy quarter to quarter as we do different things.
We have a lot of projects, we continue to invest into improved long term efficiencies.
But generally we continue to be very focused on keeping expense growth in the.
Low single digits to the extent Mccann and obviously the big unknown for US is going to be how we have to account for the special assessment from the FDIC. So how does that $8 million show up is it one one quarter as they change it's bled over multiple quarters I will have to wait and see.
Okay.
And on the office CRE portfolio, it looks like 26% of it matures or re prices over the next few years.
Do you have any examples or have you.
Experienced any of that type of.
Any maturities of repricing to date.
Here more recently.
And I assume you've kind of look through what's coming due and repricing.
Yes.
What's kind of the outcome of what <unk>.
What you found.
Yes, I mean, we do a lot of testing as as we've said before we do an annual review of every loan that's over $1 million in the bank and we look at all the economics the rent rolls.
The NOI on the property how everything is going we have obviously had we always have every month, probably every week and maybe sometimes daily.
Repricing or maturities of loans and you have to remember most I would say the vast vast majority of those loans are not based on prime.
They're.
There might be very few that are even based on prime and so most of those are based on a five year treasury. It's the typical structure would be a 25 year amortization 10 year term five year fixed repricing at year six.
And that would be based on the five year Treasury. So if you look at the difference in the five year Treasury from five years ago to today.
That would give you a good indication as far as how those those loans would reprice.
To date.
<unk> really.
We don't know of one and I asked this question of our Chief Credit Officer, and our sales leaders.
If we had to have any customers right size their loans.
Based on.
Cash flow from the property or how we valued the property at reset our maturity and to date, there really hasn't been anything.
That has been material and no problems with our customers being able to cash flow and maintain solid debt service coverage ratios. According to the covenants in there alone.
Great and then last one from me just getting back to M&A and more explicitly.
Did you have any interest in Pac west and why or why not.
So look I.
As has been our stated approach to M&A, we want to do $1 billion to $10 billion, we want to stick kind of with banks that are more similar to us.
There were a lot of things that.
That I would have said that I would have been interested in but there were also a lot of things that I would have said I wouldn't have been interested in and I think that for us we want to execute on our strategy. We want to remain CBB, we want any bank that we look at acquiring to be able to fold into our culture our processes.
Our credit quality all of those things I, just think that right now that would be a pretty big.
Ask of anybody to go through some of that so I mean I'm happy for the overall banking industry that that was sort of taken off the table, but I do think that.
It probably wouldn't have fit our criteria.
Understood. Okay. Thank you.
Welcome.
Thank you.
Our next question.
And that will come from the line of Kelly Motta with <unk>. Your line is now open.
Hi, good morning, Thanks for the question.
Good morning.
I wanted to start on an.
Excellent deposit trends you guys had this quarter.
I appreciate all the color there I'm just wondering if you could maybe step back and talk.
More broadly I know theres been obviously a lot of disruption.
At West and wanted to see if any of them.
And the inflows youre seeing have been from.
New customers that Youre able to win from this disruption versus how much of these deposit flows are from existing customers just running their business or.
Coming back after that.
Some initial.
Yeah, well I mean.
It's really kind of a tail off in the second quarter is kind of a tale of the early quarter and later in the quarter.
And the early quarter I would say there was a little bit of disruption just from the failures and.
And we really we did have some impact there, but it really wasn't significant.
And as I think Ive mentioned are kind of average existing customer balance has been down.
Quarter over quarter and a lot of then when you when you ask a question about the new deposit relationships are $647 million I don't have a breakdown of how many of that is new customer new customers vis vis existing customers opening new accounts, but the vast majority of it is new customers to the bank I mean, we.
We started working on this last year, we changed our incentive plan to really focus on deposits we did.
Disruption has helped us with some of the the bank failures.
We've opened accounts from those banks a lot of the people that were at first Republic curve or silicon, we haven't got a ton from silicon, but a lot of the customers that were there a lot bigger banks and they don't they don't really want to go back to bigger banks and.
Our specialty deposit groups like specialty banking, our government services.
They've been very active and in those two sort of verticals.
The majority of those deposits are noninterest bearing because our operating funds or other people's money in short term escrow.
That type of thing and we still haven't seen a full return of where we were at the high point.
Our specialty banking site government services continues to generate new relationships with with cities and municipalities in districts.
Specialty banking is probably having one of their best new production years ever so.
I never thought I would say our deposit pipeline might be bigger than our loan pipeline, but.
But yes, we have a lot of things going and I think with the more recent disruption could create even more opportunities for us.
Great maybe I'll lead into just bandwidth with the deposit pipeline and kind of how we should be thinking about the size of the balance sheet going ahead I appreciate the commentary on.
Securities and.
As we look ahead.
With what Youre seeing in.
In the pipe for deposits and.
Considering what you have with borrowings like how should we be thinking about the overall size of the balance sheet do you expect that to grow in.
Tying it into what you had.
<unk> talked about with the margin commentary around that.
Uh huh.
Any color on where we should expect NII to kind of exit the year and kind of the outlook for that as we consider both sides of the balance sheet and besides.
So Kelly I don't think the balance sheet size will change dramatically.
<unk> is the <unk>.
Positive grow our most likely reaction to that is to reduce the amount of debt on the balance sheet.
We are going.
<unk> going to look to try to grow loans of course, let the securities portfolio pay down a little bit. So we can modestly grow it could modestly declined depending on some of those factors.
In terms of the net interest margin once again I think some of it is going to be predicated on changing the asset mix changing the funding mix.
We do feel that it's reasonable that in.
In the near term maybe the second quarter is the worst net interest margin this year, but we.
We still have to see how the fed reacts later in the year.
Okay got it.
Provided that.
But youre thinking with.
What you see for margin.
Maybe assuming the forward curve it fair to say we.
Flattish balance sheet in some kind of modest NII growth any any.
Weighted side of that.
I think it's.
We don't really give forward guidance. So I think I'll just leave it with the commentary that <unk> got it. Thank you so much.
Thank you as a reminder, if you would like to ask a question. Please press Star 111 moment, our next question.
Our next question will come from the line of Tim Coffey with Janney Montgomery. Your line is open.
Thanks, Good morning, gentlemen.
Good morning, and good morning.
Just most of my questions have been asked and answered, but I had one question on Im speaking with Pac West.
Can you describe kind of what your level of optimism is that pressures on deposit cost might come down.
Near term given that Pac west was running some fairly aggressive deposit campaigns within your footprint.
Yeah look I think there's a lot of people running fairly aggressive deposit campaigns in our footprint. So I'm not sure the Pac west in and of itself, we'll change much of that.
I just go back to the point that I've made we bank operating companies and we don't have a lot of people that are chasing yield I mean, there is some of that as evidenced by the increase in the cost of interest bearing deposits, but the.
The majority of our deposits are operating companies and so we are focused on that one thing.
Sort of trying to give you some of the color around here one of the things I looked at it.
It is just kind of the mix of the new the new loan opportunities, we're looking at the new deposit opportunities.
A significantly higher portion.
The new loans, we are doing and the new deposit relationships. We're getting that are really operating company C&I companies and I think the result of this has been a good thing just sort of what the focus of our people to make sure theyre going after the right types of businesses and not trying to necessarily do the next and burst in investor commercial real.
Real estate loans and so.
I am pretty.
Positive on where thats going and I think.
We will see.
Again, what the fed does we will see some continued pressure on the on the funding on the deposit side, but it has moderated a little bit.
My hope is that that continues.
Okay.
Yes that was my question. Thank you for the time.
Yes Youre welcome.
Yes.
Thank you I'm showing no further questions in the queue at this time I would like to now turn the call back over to Mr. Berger for any closing remarks.
Great. Thank you I want to thank everybody for joining us this quarter. We appreciate your interest and look forward to speaking with you in October for our third quarter 2023 earnings call. Please let Alan I know if you have any questions have a great day, and we'll talk to you soon.
Thank you all for participating. This concludes today's program you may now disconnect.
Okay.
Yeah.
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