Earnings Call Transcript
OLD SECOND BANCORP INC (OSBC)
Earnings Call Transcript - OSBC Q1 2023
Operator, Operator
Good morning, everyone, and thank you for joining us today for Old Second Bancorp, Inc.'s First Quarter 2023 Earnings Call. On the call today is Jim Eccher, the Company's Chairman, President, and Chief Executive Officer; Brad Adams, the Company's Chief Financial Officer; and Gary Collins, the Vice Chairman of our Board. I will start with a reminder that Old Second's comments today will contain forward-looking statements about the company's business, strategies, and prospects, which are based on management's existing expectations in the current economic environment. These statements are not a guarantee of future performance, and results may differ materially from those projected. Management would ask you to refer to the company's SEC filings for a full discussion of the company's Risk Factors. The company does not undertake any duty to update such forward-looking statements. On today's call, we will be discussing certain non-GAAP financial measures. These non-GAAP measures are described and reconciled to their GAAP counterparts in our earnings release, which is available on our website at oldsecond.com on the homepage and under the Investor Relations tab. Now I will turn it over to Jim Eccher.
Jim Eccher, CEO
Good morning and thank you for joining us today. I have several prepared opening remarks, and I'll give you my overview of the quarter and then turn it over to Brad for additional detail. I will then conclude with certain summary comments and thoughts about the future before we open it up for questions. Net income was $23.6 million or $0.52 per diluted share in the first quarter of 2023. Adjusted net income was $23.4 million, also $0.52 per diluted share in the first quarter. On the same adjusted basis, return on assets was 1.61%. First quarter return on average tangible common equity was 25.54%, and the tax-equivalent efficiency ratio was 47.66%. First quarter earnings were negatively impacted by a combined $2.2 million in pre-tax securities losses and fair value adjustments for mortgage servicing rights. The combination of these two impacts reduced earnings per share by $0.04 in the first quarter. Financial results continue to be favorably impacted by elevated market interest rates with a 55.4% increase in net interest income or $22.9 million over the first quarter of 2022 compared to the prior year’s like quarter. This was due to manageable funding and cost increases along with significant expansion in asset yields across the balance sheet. The first quarter of 2023 reflected solid loan growth of $133.7 million, or 3.5% over the linked period and $601 million, or 17.7% over the same period last year. Prepayments continue to be depressed as you might expect, and origination activity increased considerably relative to last quarter as we anticipated. Activity within the loan committee remained steady for the majority of the first quarter, although we do expect growth to moderate from this quarter's level considerably. The net interest margin continued to expand this quarter, with loan yields reflecting recent increases in market interest rates. Overall, tax-equivalent net interest margin was 4.74% for the first quarter compared to 4.63% in the fourth quarter of 2022. The margin benefit resulted from balance sheet mix improvement, the impact of rising rates on the variable portion of the loan portfolio, and continuing strong loan growth in early 2023. The loan-to-deposit ratio is now 82% at the end of the quarter compared to 76% last quarter. As we said last quarter, our focus now has shifted to balance sheet optimization. I'll let Brad talk about that more in a moment. In terms of credit, there was a bit of a disappointment this quarter in some of the headline metrics, but it is a bit more granular than it appears and we expect any potential losses to be manageable and covered by existing reserves at quarter end. We saw a $31 million increase in non-performers that was essentially three larger credits. The first of which is a suburban office building acquired in the West Suburban acquisition. It's currently 40% occupied and not meeting debt service requirements. We believe there's value here, but some work needs to be done either on the leasing front or the credit needs a significant principal write-down. The second credit is also an acquired asset, an assisted living facility that has struggled with both vacancy and staffing since the pandemic. This credit has been under intense scrutiny and classified for quite some time. The third is a purchase participation featuring a Chicago office building also impacted by the pandemic. Cash flow remains tight and is being utilized for tenant improvements. The outlook for this credit has improved significantly as of late, and leasing activity is starting to pick up, but it's spent too much time being criticized and does not yet qualify to be upgraded. A couple of additional points, clearly our focus is monitoring potential weakness in commercial real estate and office specifically. We've stressed all maturing credits under renewal rates, and we believe we don't see broad-based risks. We have been proactive on refreshing valuations, and as a result, our outlook for credit has not changed. I think it's important to remember that nearly half of our commercial real estate exposure is owner-occupied, which we believe is unusual for a bank of our size, and our office exposure is only about 5% of the loan book. We simply don't have a lot here, and we are watching it very closely. We recorded net charge-offs of $740,000 in the first quarter compared to $940,000 of net charge-offs in the fourth quarter of last year. Classified loans increased $16 million to $125.3 million from $108 million last quarter. The bulk of that move here is a retail office project for which construction was completed in late 2020. Cash reserves are sufficient to cover debt service, but leasing activity is behind schedule, and actual debt service coverage is not where it needs to be yet. Other real estate owned reflected a $306,000 decrease in the first quarter and is de minimis at a total of $1.3 million based on updated valuation. The allowance for credit losses on loans increased to $53.4 million as of March 31, 2023, from $49.5 million at the end of the previous quarter, which is at 1.3% of loans and is 5 basis points more than the total allowance for credit losses to gross loans as of year-end. Recession probabilities increased relative to last quarter in our estimation. I think investors should know that we remain confident in the strength of our portfolios, and though we did have some migration this quarter, the credits in question are the same ones that we have been watching and working for quite some time now. Non-interest income continued to perform well, and excluding losses on security sales and mortgage servicing right evaluations discussed earlier, non-interest income was relatively flat compared to the fourth quarter. Pre-tax losses of $1.7 million on security sales were incurred related to strategic positioning within certain types of our portfolio. On the non-interest expense side, discipline continues to be strong, and we believe our efficiency is simply outstanding at this point. As we look forward, we are focused on continuing to manage liquidity, strengthening capital, and building commercial loan origination capability for the long term. The goal is obviously to continue to build towards a more stable long-term balance sheet mix, featuring more loans and less securities in order to maintain the returns on equity commensurate with our recent performance. I'll turn it over now to Brad for some additional color.
Brad Adams, CFO
Thank you, Jim. Net interest income was flat at $64.1 million relative to last quarter and increased by $22.9 million or 55.4% from the year-ago quarter. Margin trends increased due to loan portfolio growth as well as increases in security and loan yields. Total yield on earning assets increased by 30 basis points over the linked quarter to 519 basis points, partially mitigated by an 8 basis point increase in the cost of interest-bearing deposits and a 30 basis point increase in interest-bearing liabilities in aggregate. The end result was an 11 basis point increase in the tax equivalent over the last quarter to 4.74%, which we believe reflects exceptional margin and performance. Once again, this quarter saw a significant move in market rates. The collapse of a few large regional banks reached the curve, and short rates moved down a somewhat smaller but still significant amount. Challenging times indeed for those attempting to make a living betting on rates. Fortunately for us, we don't attempt to do that. So my comments today will focus largely on deposits and why we believe we're a bit different than most. Almost two-thirds of our deposit accounts are retail and under $10,000 in total balance. The median of these accounts is less than $1,700 and the average is $2,600. Over half of our deposit accounts have less than $5,000 in them. We have over 100,000 unique households at the bank, a given hard address, if you will. Over 90% of these unique identifiers are retail, and this is as granular as it gets. Frankly, we believe it is also as good as it gets, at least in my experience. These facts shed light on why our deposit costs remain excellent. We obviously carry a great deal of servicing costs in people and facilities to manage these relationships, but I think investors are beginning to see the relative value they can afford. What is perhaps most remarkable about the deposit basis is how light our churn is, given the granularity. For most of the past decade, we have carried a positive open-to-close ratio on checking accounts. To understand how remarkable that is requires you to consider how rarely you hear about such a metric. The average age of a retail checking account at Old Second is greater than 14 years. The average age of a commercial checking account at Old Second is 12 years, excluding public funds. Our public funds accounts have an average age of 27 years. This is as mature as a deposit base gets in my experience. I would add that scrubbing for additional beneficiaries allows us to conclude that approximately $880 million or just 18% of our deposit base is over the FDIC insurance limit of $250,000 and uncollateralized. Even this can be a bit misleading though in my opinion because we have a few depositors over $5 million, and by far the largest uncollateralized uninsured depositor at the bank is our own holding company. Taken together, these two dynamics—granularity and maturity—explain the deposit data performance you've seen from Old Second. So why have we seen deposit leakage of approximately 10% over the last year plus? The answer is a bit complicated, but I think it speaks to some of the problems certain regional banks have had recently. We here have never been under the impression that the liquidity unleashed post-pandemic that resulted in historic deposit growth in late 2020 through 2021 was either permanent or organic. I continue to believe that money fled fixed income and hid in banks to both realize the gains provided by the Fed and hide from the losses that would come. Unfortunately, many in our industry took those deposit flows and put the money back in long bonds and have endured those losses instead of smarter investors. These banks have no choice but to pay fixed-income-like deposit rates to finance assets they cannot afford to sell. Old Second's investors know that we were a bit more prudent with those deposit flows than most, buying variable credit-protected securities in large part. A large chunk of those bonds remains within spitting distance of par, suffering only from spread widening due to a large-scale retreat of buyers from bank-qualified paper. Our plan, articulated on recent calls, is to fund loan growth by remixing out of those securities. This activity was interrupted briefly this quarter by the turmoil of large bank failures and the need to be in a very conservative liquidity position should problems spread downstream. We expect to resume this practice this quarter and don't feel the need to meet bond-type rates on deposits that were never core in the first place. Deposit flows this quarter exhibited the typical seasonal decline in January that we always see. Balances in February and March were stable, even in the face of terrible news flow for banks other than JP Morgan. This was all a bit long-winded and I apologize for that, but I think it's important. The implications for Old Second's investors are that we still aren't in a hurry to place large bets on the path of interest rates. Duration is being slowly added to reduce asset sensitivity in numerous ways, including remixing out of the variable securities that have served us so well and the addition of received fixed swaps. Effective duration on the bond portfolio has slowly climbed over the last six months and is now at 3.2 years. I would be remiss if I didn't mention that we have not moved a single dollar to held-to-maturity and that our overall asset sensitivity has been halved in the last two quarters. The loan-to-deposit ratio remains low, and our ability to source liquidity from the portfolio has increased relative to the color we gave you last quarter. I would like to remind you that longer duration portfolios in Old Second would have seen relative outperformance stars given the sharp inversion from the short end. The mark on the securities portfolio remains high but will be recaptured relatively quickly. The net result is that Old Second should continue to build capital quickly, as evidenced by the 59 basis point improvement in the tangible common equity ratio linked quarter, which combined with the 57 basis points last quarter means we have added 116 basis points of tangible common equity in just six months. As we sit here today, we have approximately $840 million in undrawn borrowing capacity and an additional $460 million in unpledged securities. In short, liquidity at the bank is excellent, and the holding company is in a strong position as well. We are likely to consider more debt retirement this year and seek permission to resume stock repurchases as well. Margin trends from here are projected to be more subdued over the remainder of the year, but remain at very high historical levels, given our balance sheet flexibility, and the fixed-rate portion of the loan portfolio will begin to contribute more as well. Provision for credit losses on loans of $4.7 million was recorded during the quarter. I would expect loan growth to be roughly consistent with provision growth over the near term, though that could change with significant worsening in the macro environment. Non-interest expense declined by $3.8 million from the previous quarter driven by lower salaries, employee benefits, as well as computer and data processing expenses. Wage pressure continues to remain very real in our markets, but it has lessened considerably. The first quarter did represent annual employee raises, so higher salary levels are anticipated for the remaining quarters of 2023. I continue to expect quarterly wages and benefits to be between $22 million and $23 million going forward in the near term. Given the revenue performance, employee investment costs have been running high, but we'll maintain the ability to dial back as conditions warrant. I'm very pleased with the way the team continues to work together to identify the improvements we need to make as we transition into a larger and more dynamic company. Our efforts in the coming quarters will continue to bring additional talent on board, helping our customers in funding quality loan growth with excellent overall core profitability. Expect loan growth to outpace earning asset growth for the bulk of the remainder of the year. With that, I'd like to turn the call back over to Jim.
Jim Eccher, CEO
Okay. Thanks, Brad. In closing, we remain confident in our balance sheet and the opportunities that are ahead. We are paying close attention to both credit and expenses. We believe our underwriting has remained disciplined and our funding position is strong. We have the balance sheet and liquidity flexibility to excel in a higher rate environment. Capital level should be above targets very soon and we will look to be aggressive in adding talent and relationships. That concludes our prepared comments this morning. So I'll turn it over to the moderator and open it up for questions.
Operator, Operator
Thank you. We will now begin the question-and-answer session. Our first question comes from Nathan Race with Piper Sandler. Please proceed.
Nathan Race, Analyst
I was hoping to just start on credit. Jim, appreciate all your comments in terms of some of the drivers for the increase in non-accrual loans and classified loans in the quarter. I guess just specific to the office migration that we saw, can you kind of just speak to any specific impairments that you took in the provision this quarter and to what degree you're seeing kind of rent rolls continue to go the other direction and just kind of overall kind of loss content expectations as you guys continue to work through these handful of credits going forward?
Jim Eccher, CEO
Sure, Nate. Let me start by providing an overview of our office exposure. Overall, our office exposure accounts for about 5% of the loan portfolio, which is at our concentration cap. We have maintained discipline in this area. The assets are primarily low-rise buildings, all under 10 stories, with no high-rise exposure. Most of our office commercial real estate is located in Illinois. The weighted loan-to-value ratio, based on mostly updated appraisals, is 68%. In terms of origination, 82% of our office commercial real estate was originated, while 18% was purchased. West Suburban has a higher percentage of purchased exposure, which is currently experiencing more stress compared to the originated portion. Old Second has purchased one asset, which I will discuss shortly. Approximately 25% of the office portfolio is situated in Chicago, with 20% located Downtown. The Chicago exposure is under more stress compared to the suburban portfolio, as indicated by the weighted loan-to-value ratios for each asset. In Downtown Chicago, the weighted loan-to-value ratio exceeds 90%, while it is 64% in the suburban markets. As mentioned, about 75% of the portfolio is in suburban areas, fairly distributed among Kane, DuPage, and Will Counties. Regarding the classified portion, our largest classified office is a purchased eight-story building in Chicago valued at about $12 million, which was 93% occupied in 2019 before the pandemic. It faced significant challenges due to COVID-19 but remains over 60% occupied as the owner adjusts to remote and hybrid work schedules. Recently, we have seen an uptick in leasing activity, and the sponsor is seeking a new equity partner to help with tenant improvements and capital expenditures, which gives us cautious optimism about this credit. The second-largest classified asset is a $9 million five-story building in the suburbs that was also purchased. This asset is our most deteriorated, largely vacant because of COVID-19 and the shutdown of one of the owner’s companies that previously occupied 40% of the space. The sponsors are working to liquidate other assets to either right-size or potentially pay off our loan in full. Beyond this asset, our suburban office exposure is performing well, and as I noted, it is primarily varied across different suburban markets, with a weighted loan-to-value ratio of 64%. It’s also worth mentioning that the total office commercial real estate exposure outside of the classified loans is just over $190 million, with an average loan size of $2 million. In relation to the two significant assets, we have taken appropriate reserves, and we believe we are well-prepared should they deteriorate, but it is too early to definitively assess any real loss exposure at this stage.
Brad Adams, CFO
So we classified or downgraded the bulk of what you see here in early 2021. So nothing here is really a surprise, and I think beyond the credits that are already classified, the remainder of the portfolio is exceptionally granular and small. I don't think there's another shoe here, and I think we've got our arms around this.
Nathan Race, Analyst
Okay. Great. I appreciate all that color. Thank you. And maybe changing gears, just thinking about kind of the net interest income and margin trajectory from here. It sounds like you guys have the opportunity to continue to remix from securities into loans. Albeit, it sounds like loan growth is going to slow from the level that we saw here in the first quarter. So, Brad, maybe just any thoughts on just kind of how net interest income trajectory here and just also if we can expect some additional margin expansion from here, assuming we get a May Fed rate hike and then maybe a higher for longer rate environment from there.
Jim Eccher, CEO
Man, that'd be nice.
Brad Adams, CFO
I would certainly love that scenario. Yes. So we had planned to do even more shrinkage in the bond portfolio, but we stepped back as the world kind of got exciting there for a couple of weeks and just looked to remain very liquid and cautious on that front. I had said last quarter that we would see earning asset growth about half the level of loan growth. I had not expected to fund loan growth in the mid-teens however. New loan yields are excellent. What we're originating is coming on the books at a very nice return. We're also seeing turnover on the fixed-rate loan portfolio as well. Now, what we saw, and it began sooner than maybe most people realize, is we saw a number of people in the market enter the teaser money market game and the time deposit game. It started well before the March blowups with 4.5% and even 5% rates on relatively short-term money. We haven't played. We're in the threes and fours on time deposit money, and we don't have a competitive teaser product because we just don't play that game. So there is pressure on funding, however. But I feel good about where we are on that front, and we should continue to see, I believe, more modest margin expansion would be my bias if we get that next rate hike. I don't think we'll see that 5%. I think somebody asked me that last quarter. We won't get there. But I do think that the bias is still modestly higher at this.
Nathan Race, Analyst
Okay. Great. Does that suggest a stable earning asset balance from here?
Brad Adams, CFO
I think we'll see some growth, but it will be significantly below the level of loan growth, around 2% to 3%.
Nathan Race, Analyst
And to the extent loan growth remains mid-single-digits or so, do the economics still work in terms of selling a handful of or a good chunk of securities at a pretty low loss based on where interest rate?
Brad Adams, CFO
Yes. We've got another $300 million to $400 million that are within reasonable distance of par, and I realize it’s a little bit confusing on who considers securities losses core versus non-core or anything like that. But I've tried to be very transparent that we would do this. I would like for assets—securities that are yielding 5% plus to be at par, but because there's no bank buyer paper out there, the bid-ask has just gotten much wider than is warranted. But we've got $350 million-ish that is within 1.5%, 2% of par right now. And I think it's reasonable to expect securities losses to look like what they have for the last two quarters, somewhere between $1 million and $3 million in order for us to get $100 million plus and just run down out of the securities portfolio, which should take care of loan growth. So I feel great about where we are. I mean, we've prepared—I won't say perfectly, but we've prepared very well for the environment that we sit in today. And I realize that credit looks a little bit uncomfortable to some given the sensitivity in the world around office. But we're just simply not that type of lender. And I would say that some of it is trust me; I realize that, but we are a very hard grader, and we beat ourselves up far harder than anyone else does. So what you see from us are credits that were marked down much earlier. And I feel good about where we are.
Nathan Race, Analyst
Okay. Great. And if I could just ask one more, going back to the office portfolio. Are there any other shared or club deals within the office spoke apart from the one that we discussed earlier?
Jim Eccher, CEO
Yes. I mean, with 18% of the book, Nate, is purchased and all but one credit came via acquisition. So we're stressing each asset. We're refreshing appraisals, and right now we're not seeing anything else on the radar that gives us concern.
Operator, Operator
Thank you. Our next question is coming from Jeff Rulis with D.A. Davidson. Please go ahead.
Unidentified Analyst, Analyst
Hey, good morning. This is Andrew on for Jeff this morning. Just a question on the credit side. Just seeing non-performing assets, the balance has been pretty volatile over the last couple of quarters and looking at this quarter, we see that non-accruals, those were deal related, but can you briefly touch on or briefly cover the comings and goings in the non-accrual balance over the last two quarters and if they were related?
Jim Eccher, CEO
Yes. I guess I can cover, Andrew, this quarter, and then I can get back to you on prior quarters. I just have first quarter data here, but the inflows were largely the credits I touched on—the office credits—and then one large healthcare credit that's been on our radar for a couple of years now. We did have some outflows as well, to the tune of about $11 million, that was mostly a combination of other office and retail investment-grade real estate. So we have seen some volatility, but not unexpected in this environment.
Unidentified Analyst, Analyst
Right. Thank you. That's helpful. And then maybe to jump back over to the deposit side. Brad, you mentioned that in February and March deposits were fairly stable and then January, you saw that seasonal runoff. Just wondering how deposit flows have been in April so far.
Brad Adams, CFO
We said we just took a—they were stable for the first two weeks of the month, and then you saw what you always see, which is people paying their taxes around the 15th or the 18th, where those direct debits and checks clear to the IRS. Now we can all commiserate on that, I think, yes. But nothing out of the ordinary. Now you'll see as we get into June, you'll see property tax payments come into municipalities, and we should see a bounce back. So you got some flows that are pretty predictable. The January stuff always happens as people pay their credit card bills from Christmas. So, I will say this, I expected to see something with all the stuff that was in the news flow for a couple of weeks there and being a paranoid and generally perilous individual anyway, I was walking down in the lobby and just waiting to see if there were lines down there or if anybody had brought in backpacks to carry the cash. And I was getting alerts from compliance monitoring, letting me know how many people wanted $10,000 in cash, and quite frankly, we saw none of it. It looked like a normal week. There was no pickup in traffic, no pickup in transactions, nothing online, no increase in wire activity. So I was by far the most paranoid person in the building, which is pretty much standard operating procedure around here. So nothing unusual.
Unidentified Analyst, Analyst
Got it. That's great to hear. Okay. That's helpful as well. And just one more item from me just to kind of check off the fee income and expense outlooks just excluding one-timers. How do those run rates look going forward?
Brad Adams, CFO
So I had said last quarter that on the expense side we would see a leg down of $2.5 million and then an inflation-adjusted growth from there, which reflects the point I made earlier about salaries or Jim made earlier about salaries being raised in the first quarter numbers. So you'll see kind of a 3% to 4% type growth from what is kind of where it runs from first quarter. If volumes are high, it could be at the high end of that range. If volumes are lighter because we see slowdowns in the economy and loan growth is softer, then you'll see something a little at the low end of that range. But it should be around 3% to 4% from this base rate just annualized growth. On the fee income side, mortgage is still going to stink. Unfortunately, and everything else should be pretty stable. It's a good, exactly what you'd expect in this environment.
Operator, Operator
Thank you. Our next question is coming from Terry McEvoy with Stephens. Please go ahead.
Jim Eccher, CEO
Hi Terry, welcome to the call.
Terry McEvoy, Analyst
Thank you. Good morning, and thanks for all the disclosures on office and the conversation on your deposit base, appreciate that. Maybe Brad, a question for you. You said that the asset sensitivity came down in the quarter. What will the rate sensitivity look like by the end of the year? I know you don't want rates to fall, but how are you thinking about that event, and what will the margin dynamics look like? Is it as simple as what's gone up must come down or would you push back on that?
Brad Adams, CFO
So—and you and I have talked about this a little bit, the absolute level of the short end is what really drives us because we've got so much of the portfolio is variable in short duration. So inverted curve is no fun because it creates what we see around massive deposit pricing pressure, but more subdued asset yields out the curve. Not really going to impact us thankfully, but it also is indicative that we will see margin compression if short rates fall. So I would've liked to have had not an explosion in more of a softer fallen rates. But the troubles in the banking industry mean that we lost 100 basis points in the kind of fat part of the curve between one and three years. I'd like to get asset sensitivity cut in half again by the end of the year, and that's going to be movement down of about $150 million in securities, a modest uptick from here in overnight borrowing levels, and that would insulate us. I think a couple of things; I don't think we're going back to zero rates anytime soon. I think that a 1% rate world is the new zero given the amount of equity that we've seen in terms of how the lower end of the income spectrum has been impacted by inflation and the fact that it's in sticky things now. So trough margin for us if short rates get cut to say 100 basis points is probably still something around four. If rates don't get cut, we will maintain a very high margin, and we will do very well. So it's just a function of that. But I think it's prudent at this point to take as much asset sensitivity off the table as you can with the understanding that we are what we are, which is a great retail funded deposit base, and there is an inherent level of asset sensitivity that comes from just being that. And we're not going to try and cover that up because it's impossible without being a hedge fund.
Terry McEvoy, Analyst
And what are your thoughts on this mix shift away from non-interest bearing to interest bearing? I mean, your percentage stayed flat at 40%, which is much better than what I've seen this week, but that does to see we are seeing an outflow there? What are your thoughts on outflows and what does that mean to kind of all-in interest bearing or deposit betas, total deposit betas?
Brad Adams, CFO
So I have said all along that we would remain around 10%. I haven't seen anything with us anyway that would change that for us. I know that the other numbers that I've seen this quarter, and I've been paying close attention, are much higher than that. It feels like 50% is a pretty good number for many, and that's why we put in there the color around $1,000 checking accounts, $2,000 checking accounts. The reality is whether a rate is 10 basis points on a $1,000 checking account or 100 basis points on a $1,000 checking account, it—the difference to the depositor is pennies per month. It's just not important. What is important is service and do I see the same faces when I go in the branch, and that’s the value of Old Second. That's the difference. So I think you can see that. I've been saying that for many years now. Jim has been saying that for much longer than I have and I think certainly people can see we were telling the truth at this point. I just don't think I'll change.
Terry McEvoy, Analyst
Okay. I mean, sorry, and maybe one last question; I should ask a credit question given the non-accruals, but outside of office and healthcare, when you're stress testing maturing loan balances—and that's a quote from the release. What are you seeing in kind of other commercial real estate areas outside of those two that were mentioned?
Jim Eccher, CEO
Yes, I mean, Gary, jump in, but we've certainly seen cap rates under some pressure here, but we've got half of our loan book coming up for maturity in the next I think 120 days. So we're going to be very busy this renewal season stress testing our borrowers. We do stress test them obviously at origination, but I mean nobody's stress tested 500 basis points in rate hikes in a calendar year. But I will say outside of healthcare and office, the portfolio is behaving like we thought it would, but we'll know a lot more here in the next quarter or two.
Operator, Operator
Thank you. Our next question is coming from Chris McGratty with KBW. Please go ahead.
Nick Moutafakis, Analyst
Hi, good morning guys. This is Nick Moutafakis on for Chris McGratty.
Jim Eccher, CEO
Hey Nick.
Brad Adams, CFO
Good morning.
Nick Moutafakis, Analyst
Hey, good morning. To start with the deposits, I believe your deposit base is approximately two-thirds retail. Can you clarify if the outflows in the first quarter were mainly in the commercial segment or more widespread across the portfolio, especially in non-interest areas?
Brad Adams, CFO
It's 75% plus retail, and what we saw in terms of the outflows is not any change in account closures or anything like that, or it was simply balances off the top end of accounts leaving. So an account that had $5 million and had went to $3 million. And I can't tell you whether that is normal cash flow progression or if that is chasing rate for a piece of excess liquidity. I can't—I don't know. Depending on the period you looked at historically, you've seen similar patterns. Either way, I'm not concerned by it. The relationships are long-term and are not at risk. If somebody needs to park liquidity somewhere else, fine with me. The reality is that a lot of money came out of fixed income and went into banks, and it's completely natural to expect it to do the reverse given the environment.
Nick Moutafakis, Analyst
Right. And I mean, just on the loan-to-deposit ratio, it ticked up to—I think it was like 82%. Is there— I mean, is there any discomfort with that going much higher from here if deposit outflows continue or until you've got plenty of?
Brad Adams, CFO
I'm not concerned at this point, and I wouldn't be concerned until it's 95% plus.
Nick Moutafakis, Analyst
Okay. And then maybe just on the runoff yields for securities versus new volume of loans upon the spot rates or maybe in the first quarter for runoff you have those figures.
Brad Adams, CFO
Yes, 200 basis points to the good for loans replacing securities.
Operator, Operator
Thank you. Our next question is coming from Brian Martin with Janney. Please go ahead.
Brian Martin, Analyst
Hey, thanks for all the update on the office, Jim, that's super helpful. So maybe just one, Jim, you talked about the originations in the prepayments in the quarter. Can you just give a little bit more color on that and just kind of your outlook on the loan growth front? I think you said your expectation was that maybe things slow a bit here, makes sense, but just maybe any a little bit more color on that would be helpful.
Jim Eccher, CEO
Yes. I mean, as you might imagine, Brian, there's been very little prepayment and pay-down activity in the first quarter. We do expect some in the second quarter, but I think historically the first quarter's been a slower asset generation quarter for us, but we had obviously a lot of momentum heading out of last year into this year. I think if you step back and look at the macro environment, there are certainly recession fears out there. Our borrowers are being very cautious. I think those factors, more so than our really shift in underwriting, are going to drive slower growth, not only for us but I think for the industry. So looking at our first-quarter growth, we certainly run rates at 14%. That is not sustainable. I mean, I think given the environment, I think low to mid-single-digits is probably more realistic for 2023.
Brian Martin, Analyst
Got you. Okay. And just the originations, I mean, if you think about how much of a haircut you have in 2023 or versus what you did in 2022, how much are you thinking that haircut could be? I know that was a big focus. Just trying to get a sense for where you think things are in the flowing world today.
Brad Adams, CFO
So I think we originated about $1.2 billion-ish last year. I think that we'll be somewhere around $1 billion would be my guess.
Brian Martin, Analyst
Yes. Okay. That's still a healthy level. Okay. And thanks, Brad. And just the—as far as I guess the new loan origination rates is—are they—did it sound like Brad, there are about 200 basis points higher than where we sit today on the balance sheet?
Brad Adams, CFO
Yes, they're around 7%.
Brian Martin, Analyst
7%. Okay. Okay. And then you guys talked about—Brad, I think you talked about possibly some debt repayment. Yes. I guess, what are you thinking about in terms of debt here, I guess, over the balance of the year.
Brad Adams, CFO
We've got $45 million in senior debt outstanding that has a yield of 9%. I'm looking at that.
Brian Martin, Analyst
Okay. And that—when is that up for?
Brad Adams, CFO
It is callable now.
Brian Martin, Analyst
Okay. So that's more of a near-term event is how you would think about it?
Brad Adams, CFO
I would say sometime in the next two months to four months.
Brian Martin, Analyst
Got you. Okay. And then just last one was on, Jim, you talked about the—or Brad, the granularity of the deposit base and of that office book. Yes. I guess are there any larger credits out there that I guess or maybe some of the larger credits in the book today that could be at risk or just are under special mention or kind of criticized or I guess any color on just the level of larger credits that are in the book today that I guess could be become possibly an issue or going forward?
Jim Eccher, CEO
Yes. I—Brian, I mean, I think the ones who most of our focus is certainly in office and healthcare. I think we've identified potential problems. Obviously, things pop up that are on special mention from time to time. But at this point, we're not seeing any major issues outside of what we've identified.
Brad Adams, CFO
Generally pretty paranoid people. Our eyes are always looking up the shoe.
Jim Eccher, CEO
Yes. I mean, Brian, I think one thing is—it's important to remember that historically we have run much higher classified relative to peers, and I think that goes to our underwriting culture. But our historical charge-off rates are significantly lower than peers. I think that will hold true going forward.
Brian Martin, Analyst
Yes. I totally agree. And I guess that just goes to the granularity of the book. So and last one, Brad, what was the end of March margin—net interest margin? Do you have that or where that was?
Brad Adams, CFO
Perfectly flat with what we reported.
Brian Martin, Analyst
Okay. 4.74%. Okay. Thanks for taking the question, guys. I appreciate it.
Brad Adams, CFO
All right. Thank you.
Jim Eccher, CEO
Thanks, Brian.
Operator, Operator
Thank you. Our next question is coming from Eric, an Investor. Please go ahead.
Unidentified Analyst, Analyst
Yes. Hi, good morning. Thanks for all the color. I just wanted to clarify something when you were talking about the securities portfolio earlier. Did you specifically state or imply that you have a portfolio of bank-related issuers; banks issued a lot of sub debt in the last few years.
Jim Eccher, CEO
Absolutely not. No.
Unidentified Analyst, Analyst
I didn't think so. You made a comment something about financial, and I wasn't sure if that's what you meant, so no. Good to hear. I know a lot of banks bought each other's paper and then underwrote them as loans and they're actually in the loan portfolio rather than securities. So it's good to hear you don't do that.
Jim Eccher, CEO
We haven't done any of that. Five, five-and-a-half years here, Eric, I have not bought a single bank issuance at all, and I think there was maybe $2 million of that here before I got here. We haven't bought any of that.
Unidentified Analyst, Analyst
Okay. Okay. Thanks for clarifying.
Jim Eccher, CEO
We got enough bank exposure.
Operator, Operator
Thank you. We have reached the end of our question-and-answer session. So I'd like to turn the call back over to Mr. Eccher for closing remarks.
Jim Eccher, CEO
Okay. Thanks, everyone for joining us this morning. We'll look forward to speaking to you again after the second quarter. Thank you.
Operator, Operator
Thank you. This does conclude today's conference, and you may disconnect your lines at this time. We thank you for your participation.