Earnings Call Transcript
CVB FINANCIAL CORP (CVBF)
Earnings Call Transcript - CVBF Q1 2023
Operator, Operator
Good morning, ladies and gentlemen, and welcome to the First Quarter of the 2023 CVB Financial Corporation and its subsidiary Citizens Business Bank Earnings Conference Call. My name is Latonya and I'm your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer period. Please note, this call is recorded. I would now like to turn the presentation over to your host for today's call, Christina Carrabino. You may proceed.
Christina Carrabino, Host
Thank you, Latonya, and good morning, everyone. Thank you for joining us today to review our financial results for the first quarter of 2023. Joining me this morning are Dave Brager, President and Chief Executive Officer; and Allen Nicholson, Executive Vice President and Chief Financial Officer. Our comments today will refer to the financial information that was included in the earnings announcement released yesterday. To obtain a copy, please visit our website at www.cbbank.com and click on the Investors tab. The speakers on this call claim the protection of the Safe Harbor provisions contained in the Private Securities Litigation Reform Act of 1995. For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from our forward-looking statements, please see the company's annual report on Form 10-K for the year ended December 31st, 2022, and in particular, the information set forth in Item 1A, risk factors therein. For a more complete version of the company's Safe Harbor disclosure, please see the company's annual earnings release issued in connection with this call. Now I will turn the call over to Dave Brager. Dave?
David Brager, CEO
Thank you, Christina. Good morning, everyone. For the first quarter of 2023, we reported net earnings of $59.3 million or $0.42 per share, representing our 184th consecutive quarter of profitability. We previously declared a $0.20 per share dividend for the first quarter of 2023, representing our 134th consecutive quarter of paying a cash dividend to our shareholders. Financial highlights for the first quarter include a 35% year-over-year increase in earnings per share, a return on average tangible common equity that exceeded 20%, an efficiency ratio below 40% and a return on average assets of 1.47%. First quarter net income of $59.3 million or $0.42 per share compares with $66.2 million for the fourth quarter of 2022 or $0.47 per share and $45.6 million or $0.31 per share for the year ago quarter. Although the current interest rate environment and expectations of a near-term recession are impacting the bank, we continue to generate strong earnings. Our pretax pre-provision return on average assets exceeded 2% for the fourth consecutive quarter. For the first quarter of 2023, our pretax pre-provision income was $84 million compared with $95.4 million from the prior quarter. Pretax pre-provision income grew by approximately 28% when compared to the $65.9 million earned in the year ago quarter. Loan growth during the first quarter was impacted by the seasonal decline in dairy and livestock loans, lower C&I line utilization as well as a slowdown in loan demand. Although loans declined at quarter end from the end of 2022, we recorded a provision for credit losses of $1.5 million for the first quarter of 2023 to reflect a further deterioration in our economic forecast. Although our net interest margin expanded by 55 basis points compared to the year ago quarter, it decreased by 24 basis points compared to the fourth quarter of 2022 due to a 36 basis point increase in the cost of funds. Considering short-term interest rates have risen by almost 5% over the last 12 months, our customers have sought higher rates on their excess deposits, which has resulted in both a 25 basis point increase in the cost of our interest-bearing deposits and approximately $370 million of customer deposits transitioning to our Citizens Trust Group's liquidity management products. As deposits have become the primary focus of the banking industry, I would like to emphasize that Citizens Business Bank has and will continue to focus on financially strong, lower middle market businesses, providing these customers with both a high-touch relationship banking model and a wide array of products. Our deposits are 100% relationship-based core deposits and customer repos. We had zero broker deposits at the end of the first quarter. As you can see in our investor presentation, 77% of our deposits are business deposits and 23% are consumer, primarily the owners and employees of our business customers. The largest percentage of our deposits, 40%, are annualized business checking accounts, which represent customer operating accounts that generally utilize a full suite of treasury management products. Our customer deposit relationships represent a diverse set of industries. The industry with the largest concentration is manufacturing, which represents 9% of our deposits. This quarter, we included a graph in our investor presentation that shows our deposits by industry classification, highlighting each of the 14 industries that represent 2% or more of our deposits as of March 31st, 2023. Our depositors have typically banked with Citizens Business Bank for many years. Our investor presentation has a slide that shows the tenure of our deposits has consistently been comprised of deposit relationships that have banked with us for three years or more. And as of March 31st, 2023, 41% of our deposit relationships have banked with us for more than 10 years, and 77% of our deposit relationships have been with us for three years or more. We have historically maintained one of the lowest costs of deposits in the industry based on the customers we target and our business model. Our cost of deposits was 17 basis points on average for the first quarter of 2023, which compares to eight basis points for the fourth quarter of 2022 and three basis points for the first quarter of 2022. As we focus on banking operating companies, we continue to have a high percentage of noninterest-bearing deposits. At March 31st, 2023, 61% of our deposits and customer repos were noninterest-bearing. This compares to 60% at the end of the year ago quarter. Also, the unprecedented increase in short-term interest rates is impacting our deposit levels. Total deposits and customer repos were $13.3 billion on average for the first quarter of 2023, a $943 million or 6.6% decrease compared to the prior quarter. Noninterest-bearing deposits averaged $8.1 billion, a $610 million or approximately 7% decrease from the average balance in the fourth quarter. Noninterest-bearing deposits were approximately 63.7% of our average deposits for the first quarter of 2023 compared with 63.6% for the prior quarter and 61.5% for the year ago quarter. The decrease in average deposits was primarily offset by an $811 million increase in average short-term borrowings at a cost of 4.81%. At March 31st, 2023, our total deposits and customer repos were $12.8 billion compared with $13.4 billion at December 31, 2022, and $15.1 billion for the same period a year ago. At March 31st, 2023, our noninterest-bearing deposits were $7.8 billion compared with $8.2 billion for the prior quarter and $9.1 billion from the year ago quarter. This represents a 3.9% decline from the end of 2022. As noted earlier, more than $370 million of the $640 million decline in deposits from the end of the year were moved into Citizens Trust, where they are invested in higher-yielding liquid assets such as treasury notes. As I commented at the beginning of the call, higher interest rates have impacted our deposits with both deposits leaving to Citizens Trust as well as customers using deposits to pay down their credit lines that have seen rates rise past 7% and 8%. Furthermore, deposit levels continue to be impacted by both the burn down due to the overall inflationary environment and the slowdown in the residential real estate market. For example, our specialty banking group's deposits as of March 31st, 2023 are $500 million lower than the year ago quarter. This decline occurred primarily in title and escrow. My final comment on deposits is that we continue to focus on core deposit growth, as reflected by new accounts opened during the first quarter that totaled more than $269 million of new deposits. In contrast, we had deposit accounts that closed during the quarter, representing balances of $160 million. Additionally, as of April 25th, our deposits and repos have increased by approximately $152 million from the end of the first quarter. Now let's discuss loans in more detail. Total loans at March 31st, 2023 were $8.9 billion, a $137 million or 1.5% decrease from the end of 2022. From December 31st, 2022, loans declined by $6.5 million after excluding PPP loan forgiveness and the seasonal increase in dairy and livestock loans at the end of the year. Dairy and livestock loans decreased by $127 million from the fourth quarter as we experienced paydowns in the first quarter of each calendar year as a result of the temporary increase we experienced in the fourth quarter of each year. Average outstanding loan balances grew by $95 million or 4% annualized compared to the fourth quarter of 2022, while average loans were $463 million or approximately 5.5% higher than the first quarter of 2022. Loan demand is slowing down due to both higher interest rates and the uncertainty in real estate markets. Our new loan production slowed during the first quarter. New loan commitments were approximately $480 million in the fourth quarter of 2022 and approximately $240 million in the first quarter of 2023. After excluding PPP loan forgiveness, year-over-year loan growth was $466 million for a growth rate of approximately 5.5%. Commercial real estate loans continued to grow, with growth from the end of the year of $65 million or approximately 4% annualized. C&I loans decreased by $50.5 million as the overall line utilization rate for C&I loans decreased from 33% at year-end to 28% at March 31st, 2023. All of the remaining loan categories declined modestly from the end of 2022 to March 31st, 2023. We remain cautiously opportunistic about our ability to grow high-quality loans in 2023 as higher interest rates and uncertain economic conditions could impact the level of growth we achieved this year, but we are still winning and targeting low single-digit growth. Asset quality continues to be strong, and the trends remain stable. At quarter end, nonperforming assets, defined as nonaccrual loans plus other real estate owned were $6.2 million or four basis points of total assets. We had no OREO properties. The $6.2 million in nonperforming loans compared to $4.9 million for the prior quarter and $13.3 million for the year ago quarter. During the first quarter, we experienced credit charge-offs of $110,000 and total recoveries of $33,000, resulting in net charge-offs of $77,000 compared with net recoveries of $16,000 for the fourth quarter of 2022. Classified loans for the first quarter were $67 million compared with $78.7 million for the prior quarter and $64.1 million for the year ago quarter. As of March 31st, 2023, classified loans included $22 million of loans acquired from Suncrest Bank. I will now turn the call over to Allen to discuss the allowance for credit losses, liquidity and capital. Allen?
Allen Nicholson, CFO
Thanks, Dave. Good morning, everyone. At March 31st, 2023, our ending allowance for credit losses was $86.5 million or 0.97% of total loans, which compares to $85.1 million or 0.94% of total loans at December 31st, 2022. For the quarter ended March 31st, 2023, we recorded a provision for credit losses of $1.5 million compared to $2.5 million for both the quarter ended December 31st, 2022 and for the first quarter of 2022. The provision for credit losses in the first quarter was driven by the change in our economic forecast, which resulted in lower GDP growth and higher unemployment when compared to our forecast at the end of 2022. Our economic forecast continues to be a blend of multiple forecasts produced by Moody's. The U.S. economic forecasts include a baseline forecast as well as downside forecast. We continue to have the largest individual scenario weighting on the baseline forecast with downside risks weighted among multiple forecasts. As of March 31st, the resulting weighted forecast assumes GDP will increase by 1.4% in 2023, including a decline in GDP in the second half of this year, followed by modest growth of 0.9% for 2024 and then grow by 2.4% in 2025. The unemployment rate is forecasted to be 4.2% in 2023, 5.1% in 2024 and then 4.8% in 2025. As a result of declining deposit balances, we borrowed on average $972 million from the Federal Home Loan Bank during the first quarter. The short-term borrowings peaked at quarter end at $1.4 billion. The cost of these borrowings at quarter end was approximately 5%. In addition to the increase in short-term borrowing during the first quarter, we shrunk our investment portfolio by not reinvesting the cash flows generated by our investments. Our investment portfolio declined by $69 million from the end of the fourth quarter to $5.7 billion primarily due to a decline in investment securities available for sale, or AFS securities. AFS securities totaled $3.2 billion at the end of the first quarter, inclusive of a pretax net unrealized loss of $460 million. The $51 million decline in AFS securities reflects principal cash flows, which offset a $40 million increase in market value that resulted from a decline in interest rates. We do not intend to sell any AFS securities as the bank has ample off-balance sheet sources of liquidity. Those sources of liquidity include $3.5 billion of secured and unused capacity with the Federal Home Loan Bank, more than $800 million of secured borrowing capacity at the Fed discount window and $1.7 billion of unpledged fair value AFS securities that could be pledged at the discount window or the Fed's new bank term funding program. In addition to these secured borrowing sources that total almost 50% of our total deposits and repos, the bank has not utilized wholesale deposit sources, such as broker deposits. Therefore, selling any AFS securities is a remote probability when all of these funding sources are considered. Investment securities held to maturity or HTM securities totaled approximately $2.54 billion at March 31st, 2023. The HTM portfolio declined by approximately $18 million from the end of 2022 as cash flows were not reinvested during the quarter. The tax equivalent yield on the entire investment portfolio was 2.37% for the first quarter of '23, essentially the same as the prior quarter, but grew by 67 basis points in comparison to the first quarter of 2022. Now turning to our capital position. Shareholders' equity increased by $41 million to $2 billion at the end of the first quarter. The company's tangible common equity ratio at March 31st, 2023 was 7.8%. Equity increased as a result of income from the quarter of $59.3 million, which was offset by a $28 million in dividends, representing a 47% dividend payout ratio. The 10b5-1 stock repurchase plan we initiated back in 2022 expired on March 2nd, 2023. During the first quarter of 2023, we repurchased approximately 792,000 shares of common stock at an average price of $23.43, totaling $18.5 million in stock repurchases. As interest rates declined from the end of 2022 to March 31st, the unrealized loss on our AFS security decreased. This resulted in a tax effected increase to other comprehensive income of $28.7 million. Our overall capital position continues to be very strong. Our regulatory capital ratios are well above regulatory requirements to be considered well capitalized and above the majority of our peers. At March 31st, 2023, our common equity Tier 1 capital ratio was 13.8%, and our total risk-based capital ratio was 14.6%. I'll now turn the call back to Dave for further discussion of our first quarter earnings.
David Brager, CEO
Thank you, Allen. Net interest income before provision for credit losses was $125.7 million for the first quarter compared with $137.4 million for the fourth quarter and $112.8 million for the year ago quarter. First quarter earning assets decreased by $60.3 million on average from the fourth quarter, but our earning asset yield increased by nine basis points. The increase in our earning asset yield was a result of a 12 basis point increase in loan yields and a shift in the composition of earning assets with average loans growing by $95 million while lower-yielding investment securities declined by $80 million on average. Our tax equivalent net interest margin was 3.45% for the first quarter of 2023, compared with 3.69% for the fourth quarter and 2.9% for the first quarter of 2022. The decrease in our net interest margin was a result of a 36 basis point increase in the cost of funds, driven primarily by an $811 million increase in short-term borrowings. The year-over-year increase in net interest income of $12.9 million was the net result of a 55 basis point increase in our net interest margin that offsets the $1.2 billion decline in average earning assets from the year ago quarter. Interest-earning asset yields grew by 98 basis points from the first quarter of 2022 to the first quarter of 2023, while our cost of funds increased by 46 basis points. Moving to noninterest income. Noninterest income was $13.2 million for the first quarter of 2023 compared with $12.5 million for the prior quarter and $11.3 million for the year ago quarter. Our customer-related banking piece, including deposit services, international and Merchant Bankcard services decreased by approximately $400,000 compared to the fourth quarter and increased by approximately $250,000 when compared to the first quarter of 2022. The conversion to SOFR of all of our previously originated interest rate swaps indexed to LIBOR generated approximately $500,000 of fee income during the first quarter of 2023. Our trust and wealth management fees were essentially flat when compared to the prior quarter, but increased by $92,000 year-over-year. Income from bank-owned life insurance, or BOLI, decreased by $228,000 compared to the prior quarter as the decline in debt benefits of more than $1 million was offset by increases in fair value due to the improved market conditions for the separate account policies associated with our deferred compensation plans. Income from community development investments, some of which are impacted by mark-to-market adjustments, increased from the prior quarter by approximately $700,000, including a $500,000 recapture of a previously written down impaired investment. This investment was repaid in full during the first quarter of 2023. Now expenses. Noninterest expense for the fourth quarter was $54.9 million compared with $54.4 million for the fourth quarter and $58.2 million for the year ago quarter. The first quarter of 2023 included a provision for unfunded loan commitments of $500,000, which was zero for both comparable quarters. Noninterest expense totaled 1.36% of average assets for the first quarter of 2023. This compares to 1.32% for the fourth quarter and 1.36% for the first quarter of 2022. Our efficiency ratio was 39.5% for the first quarter of 2023 compared with 36.31% for the prior quarter and 46.93% for the first quarter of 2022. Excluding the $500,000 provision for unfunded loan commitments and $5.6 million of acquisition expense incurred in the first quarter of 2022, noninterest expense grew by approximately 3.5% year-over-year. The growth in noninterest expense was driven by an 8% increase in staff-related expenses. Staff-related expenses grew by $1.1 million from the prior quarter as a result of $1.8 million of higher payroll taxes in the first quarter due to the annual reset of payroll tax thresholds and the payment of annual bonuses during the first quarter. Base salary and benefit expense grew by approximately $300,000 from the fourth quarter, but bonus profit-sharing and stock compensation expense declined by $1 million. In light of the recent financial reports about some banks, I'm pleased to emphasize that our bank has continued to stand the test of time. Since our founding of the bank in 1974, we have managed to build a safe, sound and secure institution focused on banking the best small to medium-sized businesses and their owners. While economic uncertainty and the impact of the rapid rate increases by the Federal Reserve Board continue to create potential challenges for the banking industry and our bank, we seek to maintain our focus on our core values, our financial strength, superior people-customer focus, cost-effective operation and having fun. Over the course of time, we have built a diverse and durable base of customers who have remained loyal to our bank through a variety of business cycles, and we will continue to provide a wide array of banking products and solutions designed to satisfy our customers' goals and business objectives. This is evidenced by the fact that a plurality of our customer deposit relationships have achieved tenures with our bank of over 10 years, and many of our customers have been banking with us for decades. Our strategy of making the best privately held small to medium-sized businesses and their owners will remain steady and consistent. We bank great American success stories, and we are committed to executing on our relationship banking model and operating our business in an efficient and focused way. We remain disciplined in our approach to credit and will strive to produce and maintain consistent earnings, strong capital levels, solid credit quality and excellent liquidity. I'd like to thank our associates for their hard work and dedication and our customers for their business and ongoing loyalty. This concludes today's presentation. Now Allen and I will be happy to take any questions that you might have.
Operator, Operator
And our first question will come from David Feaster of Raymond James.
David Feaster, Analyst
Hey, good morning, everybody.
David Brager, CEO
Good morning, David.
David Feaster, Analyst
I would love to hear your thoughts on the deposit trends from the quarter. You provided a lot of detail in your prepared remarks, which I appreciated. Some of the funds went to the trust, and there were impacts from title and escrow. I'm curious, as you analyze this and look at the attribution, it appears that there’s no significant relationship lost. A lot of it seems to be seasonal, with customers potentially using cash to pay down higher-cost floating rate debt and some movement to higher cost accounts. It feels like we may have activated more interest in the rates. As you investigate further, how would you categorize the flows between those factors and concerns over uninsured deposits? Have you started seeing balances stabilize or possibly rebound?
David Brager, CEO
Yes, that's definitely a key topic. We'll address the office aspect soon, but I want to emphasize that we have a clear understanding of where our deposits go; we monitor them daily. Typically, the first and fourth quarters are our weaker ones for deposits, while the second and third quarters tend to see growth. As of the 25th, our deposits have increased by $152 million since the end of the first quarter, and I'm hopeful that this is a continuing trend. We're simultaneously managing both defensive and offensive strategies. The movement of funds to trust accounts and the paydown of commercial and industrial loans are part of our strategy. We've also experienced cash burn, which we've been discussing over several quarters. In the first quarter, we often see significant bonuses, taxes, and other expenses impacting our numbers. While I can't specify how much each factor contributes, they all play a role. I've focused intensely on deposit flows and have a solid grasp on them. Importantly, we haven't lost any significant relationships; there has been some movement of excess deposits to trust accounts and brokerage firms. The value of the customer relationships we've built over the years became exceptionally clear after March 10th, as everything unfolded. This situation hasn't raised any safety and soundness concerns; rather, it's been driven by the attractiveness of returns, with offers around 4.5%. We're addressing this situation and nurturing our customer relationships. In our investor presentation, we noted that the average cost was 54 basis points.
Allen Nicholson, CFO
Yes, interest bearing deposits.
David Brager, CEO
In March, interest-bearing deposits increased slightly and showed a faster pace towards the end of the month. Overall, the situation is better than I had feared and even surpasses my expectations regarding deposits. I credit this improvement to the strong relationships we've established with our customers and their trust in us. I hope that answers your question.
David Feaster, Analyst
Yes, that's extremely helpful. I appreciate it.
David Brager, CEO
I apologize for not mentioning earlier that we are also proactive in our approach. We have established $260 million in new account relationships, with average balances from the first quarter. So, we are actively working on both offense and defense.
David Feaster, Analyst
That's great. Let's touch on the second topic you mentioned. There's a significant focus on Southern California commercial real estate and a particular emphasis on offices, as you noted. You're well underwritten and have a conservative approach to lending, which I appreciate, and I think the insights you provided in the presentation are very helpful and reinforce the narrative. Could you share your thoughts on commercial real estate throughout your footprint? Specifically, I would like details on the office sector and any feedback you're receiving from those borrowers. After highlighting those points, what trends are you observing in that portfolio?
David Brager, CEO
Yes, we conduct stress testing at three levels: a normal base case scenario, mild stress, and severe stress. We have a solid understanding of our portfolio due to our annual reviews of term loans. We evaluate the entire loan portfolio for any loans over $1 million, gathering updated financial data and information on guarantors, as well as assessing property values. Our loan portfolio is very detailed, with an average loan-to-value of 50% at origination, and 28% of our loans originated in 2017 or earlier, suggesting some amortization has occurred. Regardless of whether values from those times have increased or decreased, we can theoretically assume a lower overall loan-to-value even based on current values. We currently have no classified loans in our office portfolio, though this could change in the future. We're vigilant about monitoring it. Given that the average loan-to-value at origination is 50% and the average loan size is $1.6 million, there's significant detail in our lending approach. We don't finance large, high-rise office buildings, and to date, we haven't noticed any weaknesses in our portfolio. Additionally, 25% of our office loans are owner-occupied, and 36% of our entire portfolio falls into that category. Taking these factors into account, I feel cautiously optimistic about our CRA loan portfolio. While there could be challenges ahead, we believe that the original underwriting will help mitigate potential losses. Regarding classified loans, we previously reported no industrial loans classified, but we have now included a new column in our investor presentation that details classified loans by collateral type. This shows $4 million in industrial loans, with a 22% loan-to-value on a fully amortizing 15-year loan, which is currently up to date on payments. We've been diligent in grading loans when issues arise, especially concerning companies that have encountered difficulties. We downgraded one loan related to that. The other classified loans include one from last quarter regarding a senior living facility that we acquired from Suncrest, alongside a farmland loan that also has a low loan-to-value. Overall, among the classified loans in our commercial real estate portfolio, I feel confident that we can manage any potential payment issues without incurring notable losses.
David Feaster, Analyst
That's great information, and I appreciate it. However, on a different note, let's discuss growth a bit. Loans decreased this quarter, mainly due to seasonality. I'm pleased to learn that you're still active in the market and continuing to make new loans. I'm curious about how demand is currently trending and where you are still identifying good risk-adjusted returns at this point in the cycle.
David Brager, CEO
All of our strong risk-adjusted returns paid off their loans in the first quarter, specifically the C&I loans, which are influenced by the Fed funds rate in prime. We focus on banking the top 25% of clients, so we need to remain competitive with our pricing. For instance, I hold customer luncheons, and I've been having two per month recently. In April, during two luncheons, one of our largest depositors, a title company, mentioned that his business dropped by 40% from the fourth quarter to the first quarter. He also noted that half of the banks referring loans to him had stopped doing commercial real estate loans, which made me concerned. I reached out to our Chief Credit Officer to ensure we wouldn’t become the fallback option for those seeking every commercial real estate loan and emphasized the importance of adhering to our underwriting guidelines. Demand has indeed slowed, as reflected in our first-quarter bookings. I adjusted my earlier comments to indicate that we’re aiming for low single-digit growth instead of the previously mentioned low to middle single-digit growth, which I believe is achievable. We are securing higher yields on the commercial real estate loans and have raised our interest rates a few times over the last several weeks. We aim to focus on the best credit and the best relationships, using this situation to our advantage, especially since some banks may be facing challenges and we can acquire solid relationships.
David Feaster, Analyst
That's really helpful. I appreciate it. Thanks, everybody.
Operator, Operator
And one moment for our next question. And our next question will come from Gary Tenner of D.A. Davidson. Your line is open.
Gary Tenner, Analyst
Thanks. Good afternoon or good morning excuse me.
David Brager, CEO
Hi, Gary.
Gary Tenner, Analyst
It's already been a long day. Allen, I wonder if you could update us on kind of what the current quarterly projected cash flows are from the securities portfolio currently?
Allen Nicholson, CFO
Yes. I would say the projections for both principal and interest are closer to $150 million a quarter. However, I believe the reality is probably around $115 million to $120 million. Many models seem to be overestimating cash flows from commercial mortgage-backed securities right now, and we're not seeing as much cash flow from those as projected. Based on what we've observed recently, I think the range of $110 million to $120 million is more likely in the near term.
Gary Tenner, Analyst
Okay, I appreciate it. So as you think about the remainder of the year from a balance sheet kind of mix perspective, you got the cash flows coming from the securities portfolio. You talked about second, third quarter being better on deposits, and we've seen that a little bit so far here in April. To the degree that deposit pipelines are projectable at this point, how do you think of the, sort of, the mix or the ability to fund what modest loan growth you may have this year without having to pull down additional borrowings or resort to other sources of funding?
David Brager, CEO
Yes, that is precisely what we are trying to do: shift the asset mix from investment securities to loans without increasing our borrowing. We are currently assessing this by not just pricing off the treasury, like we would have a couple of quarters ago using a light 5-year or 10-year treasury. Now, we are considering the base pricing plus a spread for any incremental borrowing needed to fund this shift. We are looking at this from a worst-case funding perspective, using an average borrowing rate of around 5% for discussion purposes, along with the spread. Our loan rates are significantly higher compared to using a 5-year or 10-year treasury plus that same spread. The goal is to use that cash flow to transition into loans and help offset higher deposit and borrowing costs. We will work diligently towards achieving this, though it will depend on the economy and the interest rate environment.
Gary Tenner, Analyst
Okay. Thanks. And then just last for me. Classified loans down, and it's not a huge number in the scheme of things. But what caught my eye is that essentially every loan segment or a major loan segment on your chart did have a sequential quarter decline. So just kind of curious about that and wondering if there's any kind of Suncrest-related resolutions that impacted just quarter-over-quarter shift.
David Brager, CEO
You mean the down, the Suncrest resolutions?
Gary Tenner, Analyst
Yes.
David Brager, CEO
Yes. So we gave the number, I think, Allen, it was $22 million.
Allen Nicholson, CFO
$22 million of Suncrest.
David Brager, CEO
$22 million of Suncrest is included, which is about the same as last quarter. Therefore, the resolutions were not really related to Suncrest. More than 50% of Suncrest consists of the one loan we mentioned last quarter, which is the senior living facility that is paying as agreed and has a relatively low loan-to-value ratio with strong guarantor support. That loan is approximately $12 million.
Allen Nicholson, CFO
$12 million to $13 million of that. And that, Gary, is showing up on our page 40 in the other category. So the majority of that other category as far as classified loans is that one Suncrest loan. Yes, Gary, if you look at the chart we put on the IP, it has sort of moved around a little bit quarter-to-quarter, but it's been generally within the same range. And as Dave alluded to before, we're highly conservative in the classifications. And a lot of times, these can cure themselves within a quarter sometimes.
Gary Tenner, Analyst
Great. Appreciate the color. Thank you.
Operator, Operator
One moment for our next question. And our next question will come from Matthew Clark of Piper Sandler. Your line is open.
Matthew Clark, Analyst
Hey, good morning guys.
Gary Tenner, Analyst
Good morning.
Matthew Clark, Analyst
Maybe just a couple of additional questions around the margin spot rate on deposits at the end of March, and the average margin in the month of March?
Allen Nicholson, CFO
I guess we gave you two pieces of information in the prepared remarks and in our IP. So if you look at the IP, cost of interest-bearing deposits at the end of the quarter was 54 basis points. On average, it was 47 basis points. Also, we noted that our average cost of borrowings was 4.81% during the quarter. And at the quarter end, it was almost exactly 5%. So hopefully, that helps you, Matthew.
Matthew Clark, Analyst
Okay, great. And then the margin likely will clearly be down again here in 2Q. But do you feel like, given the remix that you plan from here and working down borrowings, I would assume that would recover in the second half. Is that how you're thinking about it?
Allen Nicholson, CFO
I think it's possible. Obviously, the net interest margin goes down further in the next quarter. I think we alluded to that last quarter that the first half of the year would probably be under some pressure. Certainly, even with just a static balance sheet, we model and you'll see this in our Q, there's not a lot of volatility in our net interest margin, plus two or minus two ramp. We're looking at 0.5% either way, up and down. And over 24 months, it's up or down 2%. So if we're able to remix the funding side, that will offset, I think, some of the pressure there. But that will be the question as we get into the latter half of the year.
David Brager, CEO
Yes. And if we can have some normal seasonality in the deposits and we can grow deposits, which obviously would help pay down the borrowings as well.
Matthew Clark, Analyst
Yes, okay. And then just shifting to the securities book. What's your appetite to just blow out of that AFS book? I mean your securities yields barely budged this quarter, and you have plenty of capital, CET1 of 13.8%. I mean if you blow it out, you can earn it back pretty easily, 2.5% pickup just at 5%. It's like $0.80 a share. It's like a four-year or less earn back, 25% accretive to earnings. I guess why not do it? It's already in your tangible book TCE.
Allen Nicholson, CFO
Well, we understand that, certainly. But I think from our perspective, a three or four year earn back is rather long still at this point in time in the cycle. And we really don't see a reason to do that.
David Brager, CEO
Yes. But Matthew, just to sort of the broader maybe answer to your question is we've evaluated it over time, multiple times since we started borrowing in the fourth quarter. So obviously, a lot of this depends on what's happening with rates, where we are, what we can do. And so we'll continue to evaluate it. But at this point, we've made the determination not to do that. But that doesn't mean that we're not looking at it and evaluating it. So I just want to make that clear, too.
Matthew Clark, Analyst
Yes. And the earn back is shorter than the duration of the portfolio. So I think you still end up in a better place, but, okay.
David Brager, CEO
That's assuming that rates remain unchanged. There are numerous assumptions involved, and if rates fluctuate, whether they decrease or increase, it will affect the earned back as well.
Matthew Clark, Analyst
Yes, I totally understand. Okay. And then just shifting to the other mark on the loan book. What would you say to those that are critical of the unrealized loss on your loans and the exercise of running that mark through your balance sheet, equity and book?
Allen Nicholson, CFO
Matthew, we do not intend to sell any loans, so they will not be categorized as available for sale. At this moment, I believe it's a new development. I'm not quite sure what your question pertains to. However, if you examine our quarterly report, you'll notice that the fair value of our loans has likely improved compared to the end of the year, as interest rates have decreased.
Matthew Clark, Analyst
Yes. No, I agree. I think it's ridiculous. I'm just allowing you to confront that criticism.
David Brager, CEO
Yes, we have core funding that supports all of our loans, and the securities are what we’ve done with the excess funds. There are no plans to sell the loans. The average loan yields are increasing while rates are slightly decreasing. I’ll need to remind everyone when we are in a positive position and what we could sell them for to make a profit, but selling was never considered. I understand your point and appreciate the opportunity to address it. We are in a strong position with our loan portfolio and the quality of our loans. While we are currently funding some of them with borrowings and securities, we believe we can reduce that as the year progresses.
Matthew Clark, Analyst
Okay. Great. And then last one, just on the buyback. Any appetite to re-up the buyback?
David Brager, CEO
I think at this point, we're just kind of waiting and seeing. Obviously, right now, the stock is trading down, and it's a time where we could take advantage of that. But I think right now, just with some of the uncertainty that's still out there, we feel good about where we are. And having the fortress balance sheet that we have is an important thing for us going into potentially some more uncertainty in the future.
Allen Nicholson, CFO
And I think we talked about this last quarter too, Matthew, is that when we get out of this cycle, obviously, we foresee more opportunities for M&A and having excess capital to deploy in that is something we want to consider.
Matthew Clark, Analyst
Great. Thank you.
David Brager, CEO
Thank you.
Operator, Operator
One moment for our next question. And our next question will come from Kelly Motta of KBW.
Kelly Motta, Analyst
Hi. Good morning. Thanks for the question.
David Brager, CEO
Good morning, Kelly.
Kelly Motta, Analyst
Most of my questions have been asked and answered at this point. But since you mentioned M&A, I might just kick it off with that. I imagine it's been pretty slow. But any update, especially given how well positioned you are with your fortress-like balance sheet, like you said. Any update on maybe some of the challenging headwinds perhaps getting people more willing to sell? Any changes there?
David Brager, CEO
Yes. I think everyone has been a bit reserved lately, and we haven't had many discussions. However, I believe this will lead to more conversations. There are some challenges for March that we need to assess, but there could also be opportunities for us. We are open to discussions, but we won't pursue anything that doesn't align with our established standards for evaluating deals. Currently, there isn't much dialogue happening. Many investment bankers are eager to discuss this with us, and we are listening. But for now, it seems like everyone is waiting to see what happens. As a light-hearted note, since my first day as CEO was March 16, 2020, and we have March 2023, I've decided we are not going to acknowledge March 2026, as every March seems to bring an unexpected event.
Kelly Motta, Analyst
Oh my god. Mark it on the calendar.
David Brager, CEO
Yes, thank you. I think as Allen mentioned, that's a reason for us to explore opportunities, and we'll see. People may tire out more quickly.
Kelly Motta, Analyst
Understood. We've discussed deposits and funding at length, but one question I didn't hear asked was the proportion of noninterest-bearing, I mean, it's remarkable thought 64% of total deposits. Pre-COVID, you were at 60%, so you're still running a bit higher than that. Is the right way to think about the overall mix of the deposit base? Is that 60% kind of drifting down towards that as excess continues to go in search of rate? And anything that makes you think that noninterest-bearing will dip below that pre-COVID sort of composition?
David Brager, CEO
Yes, I've discussed this frequently before. It seems that people may have had more confidence in it earlier, while now there might be some doubts. We provide services to operating companies, and they require treasury management solutions and fraud prevention to function effectively. We have set up accounts for these customers, and it's important to note that any sizable company cannot operate with just a $250,000 insured balance. We have used the insured cash sweep, now known as inter-buy cash services, to a minimal extent. While some may worry about safety, the primary concern for these companies is maintaining higher balances in their noninterest-bearing accounts to cover service charges for their operations. We don’t provide specific guidance on potential numbers, but based on our model, I believe that figure will remain similar to what we’ve seen in previous years. Projecting it accurately is challenging. We have witnessed significant withdrawals of deposits seeking better rates, but we've retained much of it internally. In the fourth quarter, we noted that around $350 million had exited.
Allen Nicholson, CFO
Last year.
David Brager, CEO
So that money is in short-term liquidity strategies. If we enter a recession and that causes rates to drop, the yield may not be there, and that money will likely return to us because it hasn’t departed from the family. It’s challenging for me to make projections, but that reflects the type of client we serve, and generally, this is what occurs.
Kelly Motta, Analyst
Got it. I really appreciate all the color on that, Dave.
David Brager, CEO
Yes. And Kelly, I wanted to mention one other point that hasn't been directly addressed. We included more detailed information on page 34 regarding the characteristics of deposits and the uninsured. There are discrepancies between call reporting and actual figures, and I want everyone to understand how we interpret those numbers.
Kelly Motta, Analyst
I appreciate all that detail. One last thing from me. Allen, if you have it, just the expected duration of the AFS and HTM books would be helpful.
Allen Nicholson, CFO
Yes. Our AFS portfolio still is between 5% and 5.5%.
David Brager, CEO
Years. Duration. Years. You said percent.
Kelly Motta, Analyst
Okay. I got it. Do you have the HTM book as well?
Allen Nicholson, CFO
I don't have that. We don't usually disclose that.
Kelly Motta, Analyst
Thanks. All right. Thank you so much. I'll step back.
Operator, Operator
And our next question will come from Tim Coffey of Janney Scott Montgomery. Your line is open.
Timothy Coffey, Analyst
Great. Thanks. Good morning, gentlemen.
David Brager, CEO
Hi, Tim.
Timothy Coffey, Analyst
Hey, Dave, the transfer of deposits to the Citizens Trust business in the quarter. Obviously, it's a popular trade. I'm wondering kind of what your approach to that is.
David Brager, CEO
Yes. Actually, it's a really good question. So in the hierarchy, we look at keeping those deposits here at one rate. Then the second choice is keeping the deposits here at a little bit higher rate. And the third choice is keeping them here in a little bit higher rate. And then we look at treasuries, which is higher generally than the highest money market rate depending on the tenure of the treasury. So we want to keep the deposits. That's the first goal, but we also don't want the deposits to go outside of the family. So that's sort of how we're looking at it. Obviously, since this whole thing happened on March 10, it's in many ways, been even more of an awakening on the rate side and the excess deposit side. So we want to keep the deposits. We just don't let it walk out the door to trust, whether our Citizens Trust or outside the bank. I'm having conversations with people about what we can do.
Timothy Coffey, Analyst
Okay. Great. That's very helpful. And then the borrowings that were brought on during the quarter, the short-term ones, how long do you envision that staying on the balance sheet?
David Brager, CEO
Well, I mean, it's hard to say, obviously, with what's going on in the economy and things like that. I mean we anticipate that it will diminish as the year goes on, but that's just our current view of it. A lot of things could change between now and the end of the year. It was borrowing themselves, the advances are very short term. So obviously, if deposit flows increase, then there's no reason we would have them.
Timothy Coffey, Analyst
Right. Okay. That makes sense. Those of my questions. Thank you very much for the time.
David Brager, CEO
Thank you.
Operator, Operator
I would now like to turn the conference back to Dave Brager for closing remarks.
David Brager, 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 July for our second quarter 2023 earnings call. Please let Allen and me know if you have any questions. Have a great day, and we'll see you next month or next quarter.
Operator, Operator
And this concludes today's conference call. Thank you for participating. You may now disconnect.