Earnings Call Transcript
CVB FINANCIAL CORP (CVBF)
Earnings Call Transcript - CVBF Q2 2023
Operator, Operator
Good morning, ladies and gentlemen, and welcome to the Second Quarter 2023 CVB Financial Corporation and its subsidiary Citizens Business Bank Earnings Conference Call. My name is Cherie, and I am your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. 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 Carrabino. You may proceed.
Christina Carrabino, Host
Thank you, Cherie, 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 earnings announcement released yesterday. To obtain a copy, please visit our website at www.cbbank.com and click on the Investors tab. The speakers on this call claim the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from our forward-looking statements, please see the company's annual report on Form 10-K for the year ended December 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?
Dave Brager, CEO
Thank you, Christina. Good morning, everyone. For the second quarter of 2023, we reported net earnings of $55.8 million or $0.40 per share, representing our 185th consecutive quarter of profitability. We previously declared a $0.20 per share dividend for the second quarter of 2023, representing our 135th consecutive quarter of paying a cash dividend to our shareholders. Our net earnings of $55.8 million or $0.40 per share compares to $59.3 million for the first quarter of 2023 or $0.42 a share and $59.1 million for the year-ago quarter or $0.42 per share. The second quarter demonstrated the bank's financial strength at a time where the industry has seen 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 a return on average tangible common equity of 18.39% and a return on average assets of 1.36%. Our pretax, pre-provision return on average assets was 1.91% for the second quarter. For the second quarter, our pretax 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. Our non-interest bearing deposits continued to be greater than 63% of our total deposits. At June 30, 2023, our total deposits and customer repos were $12.8 billion, an $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 or an approximate 12% decline year-over-year. We've experienced a $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 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. The bank continues to acquire new deposit customers and the deposit pipeline has strengthened over the last three months. New accounts opened during the first half of 2023 totaled approximately $650 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 35 basis points on average for the second quarter of 2023, which compares to 17 basis points for the first quarter of 2023 and 3 basis points for the second quarter of 2022. At June 30, 2023, our non-interest bearing deposits were $7.9 billion compared with $7.8 billion for the prior quarter and $8.9 billion from the year-ago quarter. Non-interest bearing deposits were greater than 63% of total deposits as they have been for the last five quarters. 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 and our customers typically have operating accounts that by the nature of each of their businesses, exceeds the FDIC insurance coverage level of $250,000. Therefore, 52% of total deposits and customer repos were uninsured and uncollateralized at June 30, 2023. As of the end of the second quarter, the Federal Reserve had increased the Fed funds rate by 500 basis points since April of 2022. The bank's cost of deposits over the same period of time has increased from 3 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 increases in short-term rates. And of the 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 costs slowed in June, we cannot be certain about the pace of increases in the future, especially as the Fed continues to raise rates as they did yesterday. Total loans at June 30, 2023, were $8.9 billion, a $172 million or 1.9% 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. Commercial real estate loans increased by $19 million from the end of 2022 to June 30, 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 30, 2023. Now let's discuss loans 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 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 core loan growth was led by growth in commercial real estate loans, which grew by $260 million or 3.9% 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 $500,000 for the second 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, non-performing assets, defined as non-accrual loans plus other real estate owned, were $6.5 million or 4 basis points of total assets. The $6.5 million in non-performing loans compares to $6.2 million for the prior quarter and $13 million from the year ago quarter. During the second quarter, we experienced credit charge-offs of $88,000 and total recoveries of $15,000, resulting in net charge-offs of $73,000 compared with net charge-offs of $77,000 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 have 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 in classified commercial and industrial loans. The increase in classified loans for the dairy and commercial real estate categories was 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 have 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 the granular nature of the portfolio, which is highlighted by the average loan size of less than $1.7 million, 87% of the office CRE loan balances are 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 show 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 conservatively underwritten, very granular, and not exposed to central business district areas. I will now turn the call over to Allen to discuss the allowance for credit losses, liquidity, and capital.
Allen Nicholson, CFO
Thanks, Dave. Good morning, everyone. At June 30, 2023, our ending allowance for credit losses was $87 million or 0.98% of total loans, which compares to $86.5 million or 0.97% of total loans at March 31, 2023 and $85.1 million or 0.94% of total loans at December 31, 2022. The allowance for credit losses as a percentage of classified loans was 112% as of June 30, 2023, compared to 108% as of December 31, 2022. For the quarter ended June 30, 2023, we recorded a provision for credit losses of $500,000 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 forecasted both March 31 and the end of 2022. Our economic forecast also resulted in a $400,000 increase in our off-balance sheet reserve at June 30 compared to an increase of $500,000 in the first quarter of 2023. Our economic forecast continues to be a blend of multiple forecasts produced by Moody's. These US 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 representing approximately 40% of our overall forecast. As of June 30, 2023, the resulting weighted average forecast assumes GDP will increase by 1.5% in 2023, including a decline in GDP in the second half of this year, followed by modest growth of 0.8% for 2024 and then GDP growth at 2% for 2025. The unemployment rate is forecasted to be 3.8% in 2023, followed by 5% in both 2024 and 2025. Borrowings as of June 30, 2023, consisted of $695 million from the bank term funding program that we borrowed during the second quarter of 2023 at a rate of 4.7%. These borrowings replaced higher-cost borrowings from the Federal Home Loan Bank. Our FHLB borrowings consist of short-term advances that declined from $1.4 billion as of March 31, 2023 to $800 million at June 30, 2023. So as of June 30, their cost was approximately 5%. These FHLB advances will mature over the next two quarters with the final maturity at the end of November. The modest growth in borrowings from the end of the first quarter of '23 to the end of the second quarter coincided with a $322 million increase in funds on deposits to the Federal Reserve, which are in a rate of more than 5%. In addition to having more than $600 million of cash on the balance sheet as of June 30, 2023, we had substantial sources of off-balance sheet liquidity. These sources of liquidity include $4.1 billion of secured and 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 AFS securities that could be pledged at the discount window or the Fed's 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 decline in investment securities available for sale or AFS securities. AFS securities totaled $3.07 billion at the end of the second quarter, inclusive of a pretax net unrealized loss of $498 million. As the bank has ample off-balance sheet sources of liquidity, it's unlikely that we would sell any of these AFS securities. Investment securities held to maturity or HTM securities totaled approximately $2.51 billion at June 30. The HTM portfolio declined by approximately $23 million from March 30, 2023 as cash flows were not reinvested during the quarter. The tax-equivalent yield on the entire investment portfolio was 2.37% for the second quarter of 2023, essentially the same as the prior quarter, but grew by 44 basis points in comparison to the second quarter of 2022. Now turning to our capital position. Shareholders' equity increased by $53 million to $2.0 billion at the end of the second quarter. The company's tangible common equity ratio at June 30 was 7.8%, consistent with the prior quarter, while higher than the 7.5% at June 30, 2022. 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%. The 10b5-1 stock repurchase plan we initiated in 2022 expired on March 2, 2023. There were no shares purchased during the second quarter of 2023. During the first quarter of this year, we repurchased approximately 792,000 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, the fixed rate is approximately 3.8%. The variable rate received by the bank is daily SOFR. At June 30, 2023, 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 AFS portfolio. On a net basis, the changes in fair value from our AFS 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 and considered well capitalized and above the majority of our peers. At June 30, 2023, our common equity Tier 1 capital ratio was 14.1%, 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.
Dave Brager, CEO
Thank you, Allen. Net interest income before the provision for credit losses was $119.5 million for the second quarter, a decrease from $125.7 million in the first quarter and $121.9 million in the same quarter last year. Our tax-equivalent net interest margin stood at 3.22% for both the first and second quarters of 2023, compared to 3.45% in the first quarter of 2023 and 3.16% in the second quarter of 2022. The quarter-over-quarter decline of 23 basis points in our net interest margin was due to a 34 basis point rise in the cost of funds against a 10 basis point increase in earning asset yields. This rise in the cost of funds from the first to the second quarter was primarily caused by a $555 million surge in short-term borrowings, which had an average cost of 4.9% in the second quarter, along with a 49 basis point rise in the cost of interest-bearing deposits. The 10 basis point rise in earning asset yield was largely driven by an 11 basis point increase in loan yields. Average earning assets for the second quarter increased by $165 million compared to the first quarter, largely due to a $310 million rise in average funds on deposit at the Federal Reserve. This increase offset reductions in average investment securities by $73 million and average loans outstanding by $71 million. Year-over-year, the 6 basis point improvement in net interest margin was attributed to an 81 basis point rise in earning asset yields, which countered a 79 basis point rise in our cost of funds. The increase in earning asset yields resulted from higher loan and investment yields in the second quarter of 2023 relative to the same quarter in 2022, alongside a better asset mix where average loans increased from roughly 55% of earning assets in the second quarter of 2022 to 59% in the second quarter of 2023. Loan yields were 5.01% in the second quarter of 2023, up from 4.31% in the previous year’s quarter. Investment security yields rose 44 basis points from 1.93% in the previous quarter to 2.37% in the second quarter of 2023. Earning assets decreased by $593 million compared to the second quarter of 2022. Loans grew by an average of $258 million from that same quarter. However, our investment portfolio and deposit balance at the Federal Reserve fell by a combined $865 million, with total deposits down by $1.9 billion year-over-year. Turning to non-interest income, it amounted to $12.7 million for the second quarter of 2023, down from $13.2 million in the prior quarter and $14.7 million year-over-year. Customer-related banking fees, including deposit services, international, and merchant bank card services, decreased by about $506,000 from the first quarter and $495,000 compared to the second quarter of 2022. Nonetheless, our trust and wealth management fees increased by $401,000 from the first quarter and by $353,000 year-over-year. The conversion to SOFR from previously LIBOR-indexed back-to-back interest rate swaps brought in about $100,000 in fee income during the second quarter compared to $500,000 in the first quarter of 2023. BOLI income for the second quarter increased $908,000 from the first quarter, including $806,000 in debt benefits surpassing the asset value of certain BOLI policies. Year-over-year, BOLI income was up by $1.5 million, attributed to both the debt benefits and higher returns on the underlying investments used to fund deferred compensation plans. In contrast, CRE investment income declined by $500,000 from the first quarter due to a recapture of a previous impairment charge that was resolved in the first quarter, along with a $475,000 decline in the second quarter because of valuation changes in the CRA fund. Compared to the second quarter of 2022, CRA investment income was down by $716,000, as the previous quarter included gains from equity fund distributions totaling $1.3 million, and the second quarter of 2022 also saw $2.7 million in net gains from property sales related to banking centers. Regarding expenses, non-interest expense for the second quarter was $54 million, compared to $54.9 million in the first quarter of 2023 and $50.9 million in the same quarter a year ago. The second quarter included $400,000 for the provision for unfunded loan commitments, down from $500,000 in the first quarter. There was no provision for the second quarter of 2022. Salaries and employee benefit costs fell by $1.7 million from the previous quarter, mainly due to lower payroll taxes, which are typically highest in the first quarter of each year. The $866,000 increase in professional services included a $357,000 rise in legal expenses and other professional services tied to the timing of various projects. The year-over-year increase of $3.1 million in non-interest expense included a $2 million or 6% rise in salaries and employee benefits, primarily due to inflationary pressures from late 2022. FDI assessments also rose by $785,000 year-over-year due to higher assessment rates effective at the start of 2023. For the second quarter of 2023, non-interest expense represented 1.32% of average assets, compared to 1.36% in the first quarter of 2023 and 1.2% in the second quarter of 2022. Our efficiency ratio stood at 40.86% for the second quarter of 2023, compared to 39.5% in the previous quarter and 37.2% year-over-year. Since our founding in 1974, we have successfully built a safe, sound institution with a strategy centered on serving small to medium-sized businesses and their owners. We are committed to our core values of financial strength, superior people, customer focus, cost-effective operations, and enjoyment in our work. As California's premier business bank, we have executed this strategy effectively, and our focus will remain consistent, enabling us to continue offering the best banking products and services to these businesses, which are key American success stories. Despite the challenging environment, we will maintain a disciplined credit approach and aim to produce consistent earnings, strong capital levels, solid credit, and excellent liquidity. Please stay healthy and safe. This concludes today’s presentation, and now Allen and I are ready to take any questions you may have.
Operator, Operator
Please remain in the queue for our next question. And that will come from the line of Ben Gerlinger with Hovde Group. Your line is open.
Ben Gerlinger, Analyst
Thanks. Good morning, guys.
Dave Brager, CEO
Good morning, Ben.
Ben Gerlinger, Analyst
It seems like there was some confusion between SVB and CVB for an entire quarter. You don't need to comment on that. I'm sure you're unable to. Regarding the borrowings, it's important to note the $800 million that will be paid off in November along with the bank term funding. Specifically looking at the bank term funding, considering the current high 4s rate from the Fed at 5.5%, there is a positive spread. Is there any interest in paying that down early if deposits increase in the latter half of the year?
Allen Nicholson, CFO
Ben, yeah, I mean, what's nice about the bank term funding program is you don't have any penalties if you want to pay it off. And so there was a time where the yield curve was favorable, and the fact these are one-year borrowings that it was just advantageous to utilize it. You get to use the par value of collateral rather than fair value and can pay it off anytime you want. In fact, we paid off and reborrowed a couple of times to get better rates. Now you can't replicate 4.7% right now. But if we do continue to see growth in the deposits, we could pay that off. But more than likely, we'll pay down FHLB first because it's generally more expensive borrowings. But having some cash on hand that pays us about 5.40% now versus the 4.70% is obviously some positive arbitrage for us.
Ben Gerlinger, Analyst
Got you. I think that's mostly based on your usual seasonality. It appears that you have a strong inflow of deposits in the latter half of the year, and we are just at the beginning of that. From what you usually say about your customer interactions, it seems like you've had quite a few discussions in the first half of this year compared to other periods. Is that still something we can anticipate? Typically, you don't offer high interest rates on deposits because of your strong relationships and other rewards for your depositors. Should we continue to expect that normal seasonality to persist?
Dave Brager, CEO
Yeah. 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, every day is a new day in the world out there. But I think the normal seasonality should be sort of anticipated.
Ben Gerlinger, Analyst
I understand. If I could ask one more question, I know you aren't planning a major deal, but your company has a history of making strategic acquisitions to enhance overall growth. With the first half of the year being relatively quiet, we have observed some notable deals announced recently across the country. Have there been any changes in the discussions, perhaps not directly involving your company, but has the willingness or the negotiation dynamics between buyers and sellers shifted significantly in recent months? Additionally, do you foresee your company participating in acquisitions within the next year, or do you need more economic clarity before taking action?
Dave Brager, CEO
Yeah. I think it's really a case-by-case basis. Just to your comment regarding 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. But I'd say they've slowed a little bit. And part of the challenge is just the economics and the marks and all the stuff that goes into looking at a deal. We would be open to looking at an opportunity if it was presented to us and it made sense for us just based on our normal criteria. But that probably would impact some of the financial metrics with the marks where they are and some of those things. But look, we're always looking and open for conversations. Obviously, yesterday, the announcement of the acquisition of PacWest 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, but we will remain disciplined in how we utilize our capital for those types of things and our currency.
Ben Gerlinger, Analyst
Got you. I mean has there been more free agency of just kind of the A-plus bankers because of the deals that have been announced this year in California?
Dave Brager, CEO
I mean there's still 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.
Ben Gerlinger, Analyst
Sounds good. Appreciate the color, guys.
Dave Brager, CEO
Of course.
Operator, Operator
Thank you. One moment for our next question. And that will come from the line of Gary Tenner with DA Davidson. Your line is open.
Gary Tenner, Analyst
Thanks. Good morning.
Dave Brager, CEO
Good morning.
Gary Tenner, Analyst
Hey, I wanted to ask about the pickup in C&I quarter-over-quarter. It looks like line utilization increased, 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 business as well over the last three months?
Dave Brager, CEO
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 would say anecdotally, it was 75-25 new relationship versus new borrowings from existing lines.
Gary Tenner, Analyst
Great. And then just since it's a sizable new relationship, could you kind of talk about the relative loan versus deposit impact of that relationship?
Dave Brager, CEO
Yeah. So this is actually really interesting. Allen's already laughing, Gary, sorry. This is not a new relationship to the bank. We actually acquired this relationship back in 2018 with the acquisition of Community Bank. They're an extremely large deposit customer, maintaining over $25 million in deposits with us. Back a couple of years ago, they left and went to another bank that offered them a line that we were unwilling 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. So it's pretty well balanced actually. It's probably about 80% coverage of their outstandings on the deposit side. So it's kind of an interesting story just because the relationship never really left; the borrowings did, but then the borrowings came back.
Gary Tenner, Analyst
Got it. I appreciate the color on that. And then just any commentary you could share on kind of what you're seeing almost through the first month of the third quarter in terms of deposit trends impression.
Dave Brager, CEO
Yeah, we didn't disclose that number, but I would describe it as very stable. Similar to my previous answer to Ben, we expect to see trends consistent with what we've historically experienced in second and third quarter deposit growth. A lot can influence that in today's environment, but I feel fairly confident that we will maintain those trends until the end of the third quarter. We have opened a significant number of new accounts, and while the average balances in our customers' relationships have decreased, I believe this is because they have invested some of that excess cash into trusts and other investments. However, we remain proactive throughout this period.
Gary Tenner, Analyst
Got it. Thank you.
Dave Brager, CEO
You're welcome.
Operator, Operator
Thank you. One moment for our next question. And that will come from the line of Matthew Clark with Piper Sandler. Your line is open.
Matthew Clark, Analyst
Hey, good morning.
Dave Brager, CEO
Good morning.
Matthew Clark, Analyst
Maybe just on the margin first, trying to get some visibility into the next quarter if you have the spot rate on interest-bearing deposits at the end of June and the average margin in the month of June?
Allen Nicholson, CFO
I believe we mentioned that it was 41 basis points in June, Matthew. You can check our investor deck for a monthly trend, which should provide more clarity. Regarding our net interest margin outlook, let me start with what you’ll see in our next quarter. We typically disclose a 200 basis point increase and a 200 basis point decrease over a 12-month period. With a static balance sheet, this would result in a 1.5% net interest income increase in the first 12 months and a 2.7% increase over 24 months. Conversely, if rates were to decrease by 200 basis points, we would see a modest decline of 1% in the first 12 months and a cumulative decline of 3% over 24 months. In the very short term, we could potentially see an improved asset mix on the earning asset side in the upcoming quarters, along with a better funding mix with reduced borrowing. Therefore, we believe there's a reasonable chance of an improved net interest margin, though this will depend on the possibility of further increases by the Fed in September.
Dave Brager, CEO
And Matthew, just one other point, the cost of interest-bearing deposits was 1.04% in the month of June.
Matthew Clark, Analyst
Got it. Thank you. Okay. And then it doesn't sound like it from your prepared comments on the AFS portfolio. But any change in your willingness to restructure the securities portfolio given regulatory capital strengthening even further here?
Allen Nicholson, CFO
No. I mean we'll always evaluate it and determine if there are opportunities. But as we commented, the balance sheets and the liquidity position is strong, and there's no need to really do anything there.
Matthew Clark, Analyst
Okay. And then expenses down a little bit here this quarter, including lower comp. Can you give us kind of a sense for the run rate outlook here in the second half?
Allen Nicholson, CFO
Well, as you may recall from prior years, we generally do salary increases midyear. So the third quarter over the second quarter should see some growth, probably 2% to 3% in overall staff and benefit expenses. The professional service number can be a little choppy quarter to quarter as we do different things. We have a lot of projects we continue to invest in to improve long-term efficiencies. But generally, we continue to be very focused on keeping expense growth in the low-single digits to the extent we can. 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-plus million show up? Is it one quarter? Did they change it? Is it split over multiple quarters? We'll have to wait and see.
Matthew Clark, Analyst
Okay. And on the office CRE portfolio, it looks like 26% of it matures or reprices over the next two years. Do you have any examples? Or have you experienced any of that type of any maturities or repricing to date here more recently? And I assume you've kind of looked through what's coming due in repricing. What's kind of the outcome of what you found?
Dave Brager, CEO
Yes, we conduct extensive testing as mentioned earlier. We perform an annual review of every loan exceeding $1 million, examining all economic factors, rent rolls, net operating income, and overall performance. We consistently monitor loan maturities, usually on a monthly basis, and sometimes weekly or daily. It’s important to note that the majority of these loans are not linked to prime rates; only a very few are. Most are tied to the five-year treasury. Typically, the structure involves a 25-year amortization, a 10-year term, with the first five years fixed and repricing occurring in the sixth year based on the five-year treasury. If you compare the current five-year treasury rates to those from five years ago, it offers a clear indication of how these loans might reprice. So far, I have not been informed of any customers needing to adjust their loans based on cash flow from the properties or our valuation at reset or maturity. Up to now, there have been no significant issues, and our customers have been able to manage their cash flow while maintaining solid debt service coverage ratios as per their loan covenants.
Matthew Clark, Analyst
Great. And then last one for me, just getting back to M&A more explicitly, did you have any interest in PacWest and why or why not?
Dave Brager, CEO
We have always stated our approach to mergers and acquisitions, aiming for deals between $1 billion and $10 billion. We prefer to focus on banks that are more similar to us. While there were various opportunities that caught my interest, many others did not align with our criteria. Ultimately, we want to carry out our strategy and maintain our identity as CVB. Any bank we consider for acquisition needs to integrate smoothly into our culture, processes, and credit standards. Given the current circumstances, it seems demanding to ask any bank to meet those criteria. I'm pleased for the overall banking sector that certain options were removed from consideration, but I believe they likely wouldn't have met our standards.
Matthew Clark, Analyst
Understood. Okay. Thank you.
Dave Brager, CEO
You're welcome.
Operator, Operator
Thank you. One moment for our next question. And that will come from the line of Kelly Motta with KBW. Your line is open.
Kelly Motta, Analyst
Hi, good morning. Thanks for the question.
Dave Brager, CEO
Good morning.
Kelly Motta, Analyst
I wanted to start on the excellent deposit trends you guys had this quarter. And I appreciate all the color there. Just wondering, if you could maybe step back and talk more broadly. I know there's been obviously a lot of disruption out West. And wanted to see if any of the inflows you're seeing have been from new customers that you're 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 some initial headwinds in March.
Dave Brager, CEO
In the second quarter, we experienced a comparison between the early part of the quarter and later on. Initially, there was some disruption related to the bank failures, which had a minor impact on us. Our average existing customer balance decreased quarter-over-quarter. Regarding the new deposit relationships totaling $647 million, I don't have a precise breakdown of how many are entirely new customers versus existing ones opening new accounts, but the majority are new customers. We began focusing on this last year by changing our incentive plan to prioritize deposits. The disruption from bank failures has actually benefited us as we acquired accounts from those banks. Many customers who left First Republic or Silicon Valley Bank, particularly from First Republic, are not inclined to return to larger banks. Our specialty deposit groups in areas like specialty banking and government services have been very active. Most of these deposits are non-interest bearing, and we haven't fully returned to the peak levels in specialty banking. Meanwhile, Government Services continues to establish new relationships with various municipalities. Specialty banking is having one of its best years for new production. I never thought I would say that our deposit pipeline might be larger than our loan pipeline, but we have many initiatives underway. The recent disruptions could also create additional opportunities for us.
Kelly Motta, Analyst
Great. Maybe I'll start by discussing the deposit pipeline and how we should view the size of the balance sheet moving forward. I appreciate the insights on securities. As we look ahead at the potential for deposits and considering your current borrowings, how should we perceive the overall size of the balance sheet? Do you anticipate growth? Also, regarding your comments on margin, could you provide any insights on where we might expect net interest income to finish the year and the outlook for that as we take into account both sides of the balance sheet and its size?
Allen Nicholson, CFO
So Kelly, I don't think the balance sheet size will change dramatically. Certainly, as deposits grow, our most likely reaction to that is to reduce the amount of debt on the balance sheet. We are going to look to try to grow loans, of course, let the securities portfolio pay down a little bit. So we could modestly grow, we could modestly decline just 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 the near term, maybe the second quarter is the worst net interest margin this year, but we still have to see how the Fed reacts later in the year.
Kelly Motta, Analyst
Okay. Got it. And provided that what you're thinking with, what you see for margin with maybe assuming the forward curve, it's fair to say flattish balance sheet and some kind of modest NII growth, any just way to size that?
Allen Nicholson, CFO
I think we don't really provide forward guidance, so I'll just leave it at that, Kelly.
Operator, Operator
Thank you. One moment for our next question. And that will come from the line of Tim Coffey with Janney Montgomery. Your line is open.
Tim Coffey, Analyst
Thanks. Good morning, gentlemen.
Dave Brager, CEO
Good morning.
Tim Coffey, Analyst
Hey, most of my questions have been asked and answered, but I had one question. Speaking of PacWest, can you describe your level of optimism about the possibility that pressures on deposit costs might decrease in the near term, given that PacWest was running some fairly aggressive deposit campaigns in your area?
Dave Brager, CEO
I believe many institutions are engaging in aggressive deposit campaigns in our area, so I’m not certain that PacWest alone will change much of that situation. However, I want to reiterate that we primarily serve operating companies, and we don’t have many clients looking for higher yields. While there has been an increase in the cost of interest-bearing deposits, most of our deposits come from operating companies, and our focus remains on them. I’ve noticed that a significant portion of our new loan opportunities and deposit relationships are coming from C&I companies. This focus on securing the right types of business rather than simply pursuing investor commercial real estate loans has been beneficial. I am optimistic about this trend moving forward. Although we may continue to experience some pressure on funding from the deposit side, particularly depending on the actions of the Fed, I have noticed a slight moderation in this pressure, and I hope that will persist.
Tim Coffey, Analyst
Very good. That was my question. Thank you for the time.
Dave Brager, CEO
Yeah, you're welcome.
Operator, Operator
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. Brager for any closing remarks.
Dave Brager, CEO
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 Allen or I know if you have any questions. Have a great day, and we'll talk to you soon.
Operator, Operator
Thank you all for participating. This concludes today's program. You may now disconnect.