Earnings Call Transcript - CVBF Q3 2023

Operator, Operator

Good morning, everyone, and welcome to the Third Quarter 2023 CVB Financial Corporation and its subsidiary Citizens Business Bank Earnings Conference Call. My name is Cherie, and I will be your operator today. I would now like to hand the presentation over to your host for today's call, Christina Carrabino. You may proceed.

David Brager, President and CEO

It looks like Christina may have some technical difficulties. Cherie, can you hear us okay?

Christina Carrabino, Host

I'm on the line now.

David Brager, President and CEO

Okay. Go ahead, Christina.

Christina Carrabino, Host

Thank you, Cherie, and good morning, everyone. Thank you for joining us today to review our financial results for the third 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 today. 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 31, 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 earnings release issued in connection with this call. Now I will turn the call over to Dave Brager. Dave?

David Brager, President and CEO

Thank you, Christina, and good morning, everyone. For the third quarter of 2023, we reported net earnings of $57.9 million or $0.42 per share, representing our 186th consecutive quarter of profitability. We previously declared a $0.20 per share dividend for the third quarter of 2023, representing our 136th consecutive quarter of paying a cash dividend to our shareholders. Our net earnings of $57.9 million or $0.42 per share compares with $55.8 million for the second quarter of 2023 and or $0.40 per share and $64.6 million for the year-ago quarter or $0.46 per share. Although headwinds exist in the current operating environment, we continued our long history of producing solid quarterly earnings and returns on capital in the third quarter. We produced a return on average tangible common equity of 18.82% and a return on average assets of 1.4% for the third quarter. Our pretax pre-provision income growth over the second quarter of 2023 was 5.7% as our pretax pre-provision income for the third quarter of 2023 was $82.6 million, compared with $78 million for the second quarter of 2023. This growth in earnings reflects the positive operating leverage we generated this quarter with total revenue growing by 4.2% compared to expense growth of 1.9%. We continue to be among the industry leaders with respect to expense control with a 40% efficiency ratio for the third quarter and full year 2023. Our net interest margin grew by 9 basis points from the second quarter of 2023 to 3.31% for the third quarter, reversing the trend of a declining net interest margin from the prior 2 quarters. The expansion of our net interest margin was the net result of a 17 basis point increase in our earning asset yield, which offset a 9 basis point increase in our cost of funds. Total loans outstanding declined from the second quarter of 2023 by approximately $30 million to $8.88 billion at the end of the third quarter. Our allowance for credit losses increased to approximately $89 million on September 30 based on net recoveries of $28,000 and $2 million in provision for credit losses for the third quarter of 2023. Average total deposits for the third quarter increased by approximately $278 million compared to the second quarter of 2023. Our average noninterest-bearing deposits continue to be greater than 62% of our average total deposits. At September 30, 2023, our total deposits were $12.4 billion, a decrease from June 30, 2023. I would highlight that we continue to have 0 brokered deposits. Noninterest-bearing deposits declined by $292 million, while interest-bearing deposits increased by $253 million from the end of the second quarter of this year. The velocity of deposits moving to CitizensTrust continued to decline in the third quarter with approximately $170 million transferred off balance sheet in the quarter compared to $180 million in the second quarter and $370 million in the first quarter of 2023. Customer repos were $270 million at the end of the third quarter, which was $183 million lower than the balance at June 30, 2023. We've experienced a $773 million decline in deposits and customer repos from the end of 2022, which includes, as I just noted, the $720 million that was moved to CitizensTrust, where these funds were invested in higher-yielding liquid assets, such as Treasury notes. The bank continues to acquire new deposit customers. New accounts opened during the first 9 months of 2023 totaled approximately $867 million of new average deposits. We have historically maintained one of the lowest costs of deposits in the industry based on the customers we target and our business model. Our cost of deposits was 52 basis points on average for the third quarter of 2023, which compares to 35 basis points for the second quarter of 2023 and 5 basis points for the third quarter of 2022. From the first quarter of 2022 through the third quarter of 2023, our cost of deposits has increased by 49 basis points, representing a deposit beta of less than 7% since the Federal Reserve began this tightening cycle by increasing rates by 525 basis points. Now let's discuss loans. Total loans at September 30, 2023, were $8.9 billion, a $30 million decrease from June 30, 2023, and a $202 million or 2.2% decrease from the end of 2022. The quarter-over-quarter decline was led by a $61 million decline in commercial real estate loans. We also experienced an $18 million decrease in C&I loans as the line utilization declined from 31% at the end of the second quarter to 27% at the end of September 2023. Partially offsetting the decrease in commercial and real estate loans was a $49 million increase in dairy and livestock loans. Utilization on dairy and livestock loans was at 73% on September 30, 2023, which compares to 67% at the same point last year. From December 31, 2022, loans declined by $109 million after excluding the seasonal increase in dairy and livestock loans from year-end and PPP loan forgiveness. Dairy and Livestock loans decreased by $87 million from December 31, 2022, as we experience a seasonal peak in line utilization in the fourth quarter of each year. Commercial real estate loans decreased by $42 million from the end of 2022 to September 30, 2023, and C&I loans decreased by approximately $11 million over the same period as line utilization decreased from 33% to 27%. In addition, construction loans declined by $25 million and consumer loans are lower by $23 million. Loan growth continues to be impacted by a slowdown in loan demand. Our new loan production weakened in the third quarter. New loan commitments were approximately $288 million in the second quarter of 2023 and approximately $217 million in the third quarter of 2023. In comparison, we originated $443 million of new loans in the third quarter of 2022. New loan production at the end of the third quarter of 2023 was generated at average yields of approximately 7%. Although loans declined at quarter end from the end of the second quarter, we recorded a provision for credit losses of $2 million for the third quarter of 2023 to reflect a further deterioration in our economic forecast. 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 $10 million or 6 basis points of total assets. The $10 million in nonperforming loans compared with $6.5 million for the prior quarter and $10.1 million for the year-ago quarter. The increase from the prior quarter was primarily due to a C&I loan that was placed on nonaccrual at the end of the third quarter. During the third quarter, we experienced credit charge-offs of $26,000 and total recoveries of $54,000, resulting in net recoveries of $28,000 compared with net charge-offs of $73,000 for the second quarter of 2023. Year-to-date, net charge-offs were $122,000. Classified loans for the second quarter were $92 million compared with $78 million for the prior quarter and $64 million for the year-ago quarter. Classified loans as a percentage of total loans were 1.04% at quarter end. The $14.4 million increase in classified loans quarter-over-quarter was primarily due to a $24.4 million increase in classified commercial real estate loans, partially offset by a $10.2 million decrease in classified dairy and livestock and agribusiness loans. The increase in classified loans for the commercial real estate category was primarily due to one relationship in which approximately $20 million of nonowner-occupied commercial real estate loans were downgraded due to the death of a borrower during the third quarter. This loan is well collateralized and the property is currently listed for sale. We anticipate no loss once the property is sold. I will now turn the call over to Allen to discuss the allowance for credit losses, investments, borrowings and capital. Allen?

Allen Nicholson, Executive Vice President and CFO

Thanks, Dave. Good morning, everyone. As of September 30, 2023, our ending allowance for credit losses was $89 million or 1% of total loans, which compares to $87 million or 0.98% of total loans at June 30, 2023, and $85.1 million or 0.94% of total loans at December 31, 2022. For the quarter ended September 30, 2023, we recorded a provision for credit losses of $2 million compared to $500,000 for the quarter ended June 30, 2023, and $2 million for the third quarter of 2022. The provision for credit losses in the third 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 June 30 and the end of 2022. Our economic forecast continues to be a blend of multiple forecasts produced by Moody's. We continue to have the largest individual scenario weighting on Moody's baseline forecast, with downside risk weighted among multiple forecasts which individually reflect various degrees of economic recession in 2024 and early 2025. The resulting economic forecast reflects a modest decline in GDP in the first half of 2024, but a more significant decrease in commercial real estate values that persist through all of 2025 and an unemployment rate rising through 2025. The resulting weighted average forecast assumes GDP will increase by 2.1% in 2023, followed by a modest recession at the beginning of 2024, and full year GDP growth of just 0.3% for all of 2024. GDP then grows at 1.1% in 2025. The unemployment rate is forecasted to be 3.8% in 2023 and 5.2% in 2024 with peak unemployment of 5.7% in 2025. Total borrowings declined by $375 million from June 30, 2023, as cash balances were drawn down by $378 million over that same time period. Borrowings as of September 30, 2023, consisted of $870 million from the bank term funding program that mature in 2024 with a weighted average rate of 4.87%, as well as $250 million of remaining short-term advances from the Federal Home Loan Bank. As of September 30, the cost of these FHLB advances was 5.05%. All of the FHLB borrowings will mature within the fourth quarter of this year. We continue to shrink our investment portfolio. Our total investment portfolio declined by $280 million from June 30, 2023, to $5.4 billion as of September 30. Of the approximately $120 million of cash flows generated by our investments during the third quarter of '23, we reinvested approximately $30 million in short-term treasuries. The overall decrease in our investment portfolio was primarily due to $195 million decline in investment securities available for sale, or AFS securities. AFS securities totaled $2.87 billion at the end of the third quarter, inclusive of a pretax net unrealized loss of $628 million. Investment securities held to maturity, or HTM securities, totaled approximately $2.49 billion at September 30, 2023. The HTM portfolio declined by approximately $23 million from June 30 as cash flows were not reinvested during the quarter. The tax equivalent yield on the entire investment portfolio was 2.64% for the third quarter of 2023 compared to 2.37% for the prior quarter. The increase in yield for the third quarter benefited from a $3.8 million of interest income from the positive carry on fair value hedges we executed in late June of this year. We receive daily SOFR on these pay-fixed swaps that have a weighted average fixed rate of approximately 3.8%. Now turning to our capital position. The company's tangible common equity ratio at September 30, 2023, was 7.73%, consistent with the prior quarter's ratio of 7.75%, while being higher than the 7% at September 30, 2022. Shareholders' equity decreased from the second quarter by $50 million to $1.95 billion at the end of the third quarter. Our OCI declined by $82 million due to the impact of higher interest rates that increased the unrealized loss on our AFS portfolio. 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 risks of rising interest rates on our capital. These pay-fixed swaps have maturities ranging from 4 to 5 years. At September 30, 2023, we recorded a fair value adjustment associated with the swap derivatives which increased other comprehensive income by $17.6 million, partially mitigating the impact to OCI of the decline in the fair value of our AFS portfolio. Equity increased for the first 9 months of 2023 by $3 million. Retained earnings increased as year-to-date income of $173 million was offset by $84 million in dividends for the 9 months of this year. The resulting year-to-date dividend payout ratio was 48.4%. The 10b5-1 stock repurchase plan we initiated in 2022 expired on March 2, 2023. There were no shares purchased during the second and third quarters of 2023. During the first quarter of this year, we did repurchase approximately 792,000 shares of common stock at an average price of $23.43, totaling $18.5 million in stock repurchases. 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 September 30, 2023, our common equity Tier 1 capital ratio was 14.4%, and our total risk-based capital ratio was 15.3%. I'll now turn the call back to Dave for further discussion of the third quarter earnings.

David Brager, President and CEO

Thank you, Allen. Net interest income before provision for credit losses was $123.4 million for the third quarter compared with $119.5 million for the second quarter and $133.3 million for the year-ago quarter. Our tax equivalent net interest margin was 3.31% for the third quarter of 2023 compared with 3.22% for the second quarter and 3.46% for the third quarter of 2022. Interest income grew by nearly $7 million over the prior quarter as our earning asset yield increased 17 basis points quarter-over-quarter based on the combination of 6 basis point increase in loan yields and the impact of $3.8 million a positive carry on pay-fixed swap derivative income in the third quarter. Third quarter average earning assets decreased by $68 million from the second quarter due to an increase in both average investment securities of $147 million and average loans outstanding of $30 million. The decline in those assets was offset by an increase of $121 million in average funds on deposit at the Federal Reserve. Interest expense increased by $3.2 million over the prior quarter as our cost of funds increased by 9 basis points from the second quarter of 2023. Interest expense on deposits increased by $5.7 million due to the combination of a $288 million increase in average interest-bearing deposits in the third quarter and a 41 basis point increase in the cost of interest-bearing deposits. The cost of interest-bearing deposits was 1.37% in the third quarter compared to 96 basis points in the prior quarter. Interest expense on borrowings, however, declined by $2.6 million as average borrowings declined by $209 million. The $10 million decline in net interest income from the year-ago quarter resulted from a 15 basis point decrease in net interest margin and a $484 million decline in average earning assets. The year-over-year net interest margin decline was due to an 87 basis point increase in our cost of funds, offsetting a 67 basis point increase in earning asset yields. The increase in earning asset yields was the result of higher loan and investment yields in the third quarter of 2023 compared to the third quarter of 2022, as well as an improved asset mix in which average loans grew from approximately 56% of earning assets in the third quarter of 2022 to 59% in the third quarter of 2023. Loan yields were 5.07% for the third quarter of 2023 compared with 4.56% for the year-ago quarter. Investment security yields increased 52 basis points from a yield of 2.12% in the prior year quarter to 2.64% in the third quarter of 2023. Moving on to noninterest income. Noninterest income was $14.3 million for the third quarter of 2023 compared with $12.7 million for the prior quarter and $11.6 million for the year-ago quarter. Our customer-related banking fees, including deposit services, international and merchant bankcard services, increased by $224,000 compared to the second quarter and declined by $171,000 when compared to the third quarter of 2022. Although our trust and wealth management fees decreased by $69,000 compared to the second quarter of 2023, year-over-year, these fees grew by $379,000. Third quarter BOLI income declined by $549,000 as the second quarter of 2023 included $806,000 in death benefits that exceeded the asset value of certain BOLI policies. BOLI income decreased by $439,000 compared to the third quarter of 2022. The third quarter of 2022 included $1.8 million in death benefits received, which was partially offset by more favorable market impacts on separate account policies during the third quarter of 2023. Compared to the second quarter of 2023, CRA investment income increased as the third quarter included $2.6 million of income from an equity fund distribution related to one of our CRA investments. Now expenses. Noninterest expense for the third quarter was $55 million compared with $54 million for the second quarter of 2023 and $53 million for the year-ago quarter. The third quarter of 2023 included $900,000 in recapture of provision for unfunded loan commitments compared to $400,000 in provision for the second quarter of 2023. There was no provision for the third quarter of 2022. Salaries and employee benefit costs increased by $1.2 million quarter-over-quarter, including annual salary increases that were effective at the beginning of the quarter. The quarter-over-quarter increase in salary expense was approximately $800,000 or 3.3% higher than the second quarter. As loan originations were lower in the third quarter, the contra expense from deferred loan origination costs declined, therefore increasing staff expense by almost $300,000. The $2 million increase in noninterest expense year-over-year included an increase of $1.5 million or 4.6% in salaries and employee benefits. Salary expense grew by 3.5% or approximately $800,000 over the second quarter of 2022. Deferred loan origination costs were also lower than the prior year quarter, resulting in an additional staff expense of $800,000. Regulatory assessment expense increased by more than $800,000 over the prior year quarter. Noninterest expense totaled 1.33% of average assets for the third quarter of 2023. This compares with 1.32% for the second quarter and 1.25% for the third quarter of 2022. Our efficiency ratio was 39.99% for the third quarter of 2023. This compares with 40.86% for the prior quarter and 36.59% for the third quarter of 2022. This concludes today's presentation. Now Allen and I will be happy to take any questions you may have.

Operator, Operator

Our first question will come from Matthew Clark with Piper Sandler.

Matthew Clark, Analyst

I want to first touch on the $850 million, I think, comes due next year. What's your plan for that? Are you going to just pay it off or are you going to refinance some portion of it?

Allen Nicholson, Executive Vice President and CFO

Well, I think that's a fairly long time in the future. But strategically, we'd love to continue to grow deposits and pay it off with deposits as well as security paydowns over that period of time. So we'll see what the future brings.

Matthew Clark, Analyst

Could you provide an update on the deposit pipeline? When we last spoke a couple of months ago, it seemed that there had been a significant increase due to the market disruptions. I noticed that while end-of-period noninterest-bearing deposits were down, the average remained relatively stable. Any insights on the movement in that pipeline would be helpful.

David Brager, President and CEO

Yes. The pipeline is still strong. I mean, when you're working on operating companies, it does take quite some time to move those relationships. You have to get everything set up from a treasury management perspective. The deposit pipeline still remains strong, stronger than our loan pipeline in pure dollars, but the sales cycle is a little bit longer. It's not like there's a growing commercial real estate loan. And so we're continuing to focus on deposit growth. As you know, the fourth quarter is always a little bit more challenging for us just due to some seasonality. And just to give you some color on the deposits, the last 10 business days of the month of September, our deposits went down by $283 million, and that was a result primarily of the payment of taxes. And I think that that sort of got moved around and the timing just because of the fact that people could pay their taxes later in the year. And then ultimately, now the taxes don't have to be paid until November, but most people had already sent out their taxes prior to that. So prior to the last 10 days, we were very stable on the deposit side, as evidenced by the average deposits being up so high during the quarter. So I feel relatively positive about the deposit pipeline. I feel relatively positive about the go-forward. But we do have some historical seasonality in the fourth quarter that will challenge us a little bit there as well. So I think all in all, we're in a really good spot, but we have a lot of work to do. We have to execute.

Matthew Clark, Analyst

Got it. Okay. And then on the securities portfolio, I mean, your CET1 is up another 30 basis points to 14.4%, and it seems like we're in a higher-for-longer environment. I guess, can you give us an update on your appetite to restructure that portfolio, given your ability to easily absorb those losses?

Allen Nicholson, Executive Vice President and CFO

We always evaluate opportunities. But at this point, I don't foresee anything of significance.

Matthew Clark, Analyst

Okay. Lastly, can you provide any details about the recent increase? I know it's still a relatively small amount, but on the classified side, it appears there has been some activity with both non-owner and owner-occupied commercial real estate. What are your plans to address those credits?

David Brager, President and CEO

Yes. The majority of the increase was due to one relationship, a loan. It's current and paying. The property is a mixed-use development near UCLA that is for sale, and it appears there's an offer on it. We are well collateralized and I expect the sale to close in the fourth quarter. I don't foresee any charge-offs as the proposed sale price is significantly higher than our loan amount by three to four times. I don't expect any issues, although the loan must close. The credit trends have remained very stable. The borrower passed away in the third quarter, and we downgraded the loan, but his heirs are in the process of listing it for sale, which should happen in the fourth quarter unless any major issues arise.

Operator, Operator

Question will come from the line of Kelly Motta with KBW.

Kelly Motta, Analyst

I was hoping you could give us a little bit of perspective on your outlook for loan growth. Could you talk a little bit about how the pipeline is? Remind us of any seasonality, any areas you may be getting more cautious. As well as provide any color on how pricing and spreads are holding up, and where new loan originations are coming on?

David Brager, President and CEO

At the end of the third quarter, new loan originations increased by over 7%. The pipelines remain challenging, but we are addressing several factors. Historically, the fourth quarter has been strong for us. Looking at the gross amount, particularly with dairy advances, we expect it to be close to seasonal averages based on past years. However, the pipelines are smaller than last year. Pricing is affecting decision-making, and many individuals seem to be waiting for potential opportunities. I am still targeting low single-digit growth, although we did not achieve that this quarter, as we saw a decrease of $30 million quarter-over-quarter. We are still securing new loans, but the volume is less than half of what we achieved a year ago. I believe I have addressed all your questions. Was there anything...

Kelly Motta, Analyst

I appreciate the insight into your interest in securities and restructuring. The $1 billion in swaps you implemented really boosted the margin this quarter. Could you remind us what the rate on that was, which I believe is 3.8%, and what the duration is? Also, are you considering the possibility of adding more swaps to reduce your securities exposure?

Allen Nicholson, Executive Vice President and CFO

Yes, Kelly, you're right. The weighted average cost on those fixed swaps is 3.8%. We have 4- and 5-year tenors, leaning more towards 5. We'll keep evaluating the situation. At this point, we don't feel the need to take further action in that area. We're satisfied with the current positioning on the balance sheet, but we will continue to assess that and other hedging opportunities.

Kelly Motta, Analyst

Do you know what your spot deposit rate was at the end of the quarter? Looking ahead to the fourth quarter, the margin expansion you achieved this quarter was impressive. How are you viewing deposit costs and margin for the last quarter of the year? Do you believe this trend can continue?

Allen Nicholson, Executive Vice President and CFO

Kelly, if you refer to the investor presentation we released last night, on Page 34, you'll find that as of September, the cost of interest-bearing deposits and repos was 1.39%. If you then look at Page 40, you'll see in the upper right that the overall cost of deposits was 56 basis points. The trend line indicated there shows that the increase in both of these costs is ongoing, although it has been at a slower pace over the last couple of months.

Operator, Operator

From the line of Gary Tenner with D.A. Davidson.

Gary Tenner, Analyst

I just wanted to ask prospectively about loan yields, assuming the Fed is not changing rates from here. This kind of 6 basis point increase in loan yields in the third quarter. Just with ongoing kind of repricing within the book and over the course of 2024, is that a similar sort of quarterly trajectory you would expect? Assuming, again, the rate environment is pretty stable from here.

Allen Nicholson, Executive Vice President and CFO

I'm not sure I fully understood your question, Gary. Generally speaking, if the Fed maintains its current stance, we will likely see a continuation of adjustable loans repricing at higher rates. This will serve as a catalyst, but it won't resemble what we experienced earlier this year and last year when the Fed was actively changing rates, causing all variable loans to reprice. You can gain some insights from our disclosures in the investor deck, particularly in the appendix, where we outline how much of our office commercial real estate is set to reprice or mature. This may give you an idea of how quickly that will happen.

David Brager, President and CEO

Yes. And Gary, the only thing I would add to that, most of the repricing on the commercial real estate portfolio is based off of a 5-year treasury rate. So if you look at the 5-year treasury 5 years ago compared to today, it is not a 500 basis point increase. It might be a 220 or 230 basis point increase. And so from a credit perspective, that's good. From an asset yield growth perspective, it's not as meaningful. But I do think that we will see the office portfolio is very similar to the rest of the portfolio as far as the repricing and maturities. We just call out the office individually, but the rest of the commercial real estate portfolio is probably pretty similar as far as the maturities and the repricings. But yes, we'll continue to see that, and we are originating loans above 7%, and higher later because the 5- and 10-year treasury have gone up pretty significantly in the last month or so. And so that and/or the incremental borrowing cost is how we're pricing the loans today.

Gary Tenner, Analyst

Well, I appreciate the answer to the question. Apparently, it was not phrased well, but you got me where I needed to be. And then just really quick on kind of the M&A environment. I mean, obviously, in your footprint, recently that CVCY-Community West transaction, obviously, Community West pretty small relative to your size. But just the deal was pretty well received by the market initially the first couple of days after it was announced. Just wondering if you've kind of seen any change in kind of the stance of prospective sellers' willingness to kind of take what the market is potentially giving them in the expectation that it would be received well or better at least by the market.

David Brager, President and CEO

Yes. Well, first and foremost, I think conversations have definitely picked up. There are some math issues with marks and different things to consummate a deal. And I believe that deal closed below book value. So sellers that are willing to sell below book value, that could be of interest to us, depending on the bank, obviously. But I do think that the conversations have picked up. I do think that there's going to be opportunities for us. That's sort of been our position sort of related to a restructure of the balance sheet and maybe potentially taking losses. We don't want to impact the capital, we'd rather have the excess capital and be prepared to do a deal where we might have to mark the other balance sheet that would impact our capital ratios. So I think we are actively interested in looking at opportunities, and I think there's going to be opportunities in the short to midterm here. And we'll just keep looking for the right opportunity for us that meets our criteria.

Operator, Operator

From the line of Tim Coffey with Janney Montgomery Scott.

Timothy Coffey, Analyst

Dave, in the first quarter, about $370 million in deposits left the balance sheet, and I believe two-thirds of that went to CitizensTrust. Do you have any insight on when some of that might be able to return?

David Brager, President and CEO

The $370 million that went to CitizensTrust was the amount mentioned. There was actually a bit more that left overall. In this environment of sustained high rates, the treasury securities they purchased might remain at CitizensTrust for a while. CitizensTrust is trying to transition those relationships to more managed arrangements and a new fee structure beyond just buying treasuries. However, I believe some of that will eventually return. Our trust group, and the bankers managing those relationships, would prefer to retain these assets within CitizensTrust rather than let them move elsewhere where we might not recover them. I don't expect any significant return in the near term, unless there’s a specific need for cash or liquidity. So, I think we're still some distance away from seeing any of that start to come back.

Timothy Coffey, Analyst

Okay. And then your noninterest-bearing percentage to total deposits is pretty much right on top of where you were pre-COVID. Do you expect there to be more downward pressure on the deposit mix?

David Brager, President and CEO

Yes, there is always a risk involved. As we've mentioned for many years, we deeply engage with many treasury management products. The expense of maintaining a free account is quite substantial, which is the demographic we target. There is a psychological aspect to this. If it were purely a mathematical decision, clients would likely choose a higher money market rate than what we're offering in ECR. However, that’s not how the situation works; operating companies, especially larger ones, need to maintain larger balances. We actively pursue this type of client. Over the past 49 years, we have consistently focused on this approach, particularly in the last 13 to 15 years during my predecessor's tenure and when Linn Wiley was in charge. This has allowed us to build a strong deposit base over time. Though there is ongoing pressure, many excess deposits that have left our balance sheet and moved into trust have influenced this dynamic, and there may be shifts in the deposit mix. Nonetheless, we have managed to perform fairly well thus far.

Timothy Coffey, Analyst

Okay. And then if I could switch to credit quality and your outlook. I mean, in normal times, death, divorce, business dissolution, like those are what drive performing loans into nonperforming status. But are you seeing anything in the loan book that would indicate a change in kind of the business or the economic environment?

David Brager, President and CEO

Yes. It's interesting. I mean, if you take out the one large loan that I mentioned in the call and answered the question on earlier, I mean, really, the numbers stayed pretty flat. I mean, there are other ins and outs. But I mean, generally speaking, things have held up pretty well. I still always get concerned just sort of about the small C&I type borrower, the SBA 7(a) stuff, which we have less and less of. But those are sort of the areas where we're seeing some maybe hiccups, but nothing material. I mean, it's just been sort of case-by-case basis. And our salespeople, our credit team, our special assets group, I mean, they all work really hard to get to these things early and work out any potential problems. And it's been pretty stable. It doesn't mean that things can't change, but so far, so good.

Operator, Operator

I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Dave Brager for closing remarks.

David Brager, President and CEO

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 January for our Fourth Quarter 2023 Earnings Call. As always, just let Allen or I know if you have any questions. Have a great day, and thanks for listening. Bye-bye.

Operator, Operator

Thank you for participating. This concludes today's program. You may now disconnect.