Q1 2024 CVB Financial Corp Earnings Call

Participants

Christina Carrabino; IR; CVB Financial Corp

David Brager; President, Chief Executive Officer, Director; CVB Financial Corp

E. Allen Nicholson; Chief Financial Officer; Executive Vice President and Chief Financial Officer of the Bank; CVB Financial Corp

Kelly Motta; Analyst; Keefe, Bruyette & Woods North America

David Feaster; Analyst; Raymond James

Gary Tenner; Analyst; D.A. Davidson & Company

Matthew Clark; Analyst; Piper Sandler Companies

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the first quarter 2024 CVB Financial Corporation and its subsidiary, Citizens Business Bank, earnings conference call. My name is Sherry, and I'm your operator for today. (Operator Instructions) Today's conference is being recorded.
I'd like to turn the presentation over to your host for today's call, Christina Carrabino. You may proceed.

Christina Carrabino

Thank you, Sherry, and good morning, everyone. Thank you for joining us today to review our financial results for the first quarter of 20204.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 this 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, 2023, and in particular, the information set forth in Item 1A, Risk Factors, therein. For a more complete version of the company's Safe Harbor disclosure, please see the company's earnings release issued in connection with this call.
Now, I will turn the call over to Dave Brager. Dave?

David Brager

Thank you, Christina, and good morning, everyone. for the first quarter of 2024, we reported net earnings of $48.6 million, or $0.35 per share, representing our 188th consecutive quarter of profitability. We previously declared a $0.2 per share dividend for the first quarter of 2024, representing our 138th consecutive quarter of paying a cash dividend to our shareholders.
Our net earnings of $48.6 million, or $0.35 per share, compared to $48.5 million for the fourth quarter of 2023, or $0.35 per share, and $59.3 million for the year ago quarter, or $0.42 per share. We produced a return on average tangible common equity of 15.13% and a return on average assets of 1.21% for the first quarter of 2024.
Our net income in the first quarter was impacted by the addition of $2.3 million of accrued expense for the FDIC special assessment. This is in addition to the $9.2 million accrued in the fourth quarter of 2023. The increase in the accrual was the results of the FDIC revising its initial estimate of losses from last year's bank failures up by 25%.
Net interest income declined by $6.9 million when compared to the fourth quarter of 2023. Our earning assets were stable over the past two quarters, but our net interest margin declined by 16 basis points from the fourth quarter to 3.1% for the first quarter of this year. The decrease in our net interest margin resulted primarily from a 22 basis point increase in our cost of funds.
Cost of funds increased primarily due to higher average borrowings, which had a cost of 4.75%, and the addition of broker deposits that had a cost of approximately 4.2%. Average total deposits for the first quarter decreased by approximately $517 million compared to the fourth quarter of 2023, while average borrowings grew by $407 million. Our average non-interest bearing deposits continued to be greater than 61% of our average total deposits for the first quarter of 2024.
As we highlighted on our last earnings call, we experienced an outflow of deposits from the bank's largest depositor of more than $400 million, which occurred during December of 2023. At March 31, 2024, our total deposits were $11.9 billion, a $461 million increase from December 31, 2023. This increase included growth in non-maturity deposits of approximately $180 million as our seasonally low level was reached in January, followed by growth in February and March.
The increase in total deposits at March 31, 2024, also included the addition of $300 million in brokered deposits we added between the end of February and the end of March, although non-interest bearing deposits declined by $93 million from the end of the fourth quarter, non-interest bearing deposits still represented approximately 60% of total deposits.
At the end of the first quarter. Our cost of deposits was 74 basis points on average for the first quarter of 2024, which compares to 62 basis points for the fourth quarter of 2023 and 17 basis points for the first quarter of last year from the first quarter of 2022. Through the first quarter of 2024, our cost of deposits has increased by 71 basis points, representing a deposit beta of 14% compared to the 525 basis point increase in the Fed funds rate during the Federal Reserve's tightening cycle.
Now let's discuss loans. Total loans at March 31, 2024 were $8.8 billion, a $134 million decline from December 31, 2023, and a $172 million or 1.9% decrease from March 31, 2023. The quarter-over-quarter decrease included a $66 million decrease in dairy and livestock loans, dairy and livestock loans see higher line utilization at year end, which is reflected in the 80% utilization rate at the end of the fourth quarter. The utilization rate on dairy and livestock loans declined to 75% at March 31, 2024.
C&I loans remained relatively flat when comparing period end balances at March 31, 2024, to December 31, 2023, but we have generally seen growth in average balances over the last four quarters. This reflects the growth in new relationships as you see in C&I line utilization continues to be at a rate of less than 30%.
Commercial real estate loans declined by $64 million from December 31st, 2023, a continuation of the trend that we have experienced for multiple quarters. In comparison to March 31st, 2023, loans declined by $172 million. The majority of the decline was in commercial real estate loans, which decreased by $230 million from March 31st, 2023. Over this period, we also experienced decline in both construction and consumer loans of $25 million and $13 million, respectively.
C&I loans increased by approximately $65 million over the same period, although line utilization remained flat at 28% and our strategy of banking, the best small to medium-sized businesses and their owners and our focus on sourcing new relationships that use our full suite of products has resulted in a higher percentage of new loans that are either owner-occupied or C&I loans.
We've seen a modest change in our mix of loans over the last year with C&I growing from 10% to 11% and investor real estate loans declining from 50% to 49%. Although loan demand is slower than past years, we are optimistic about growth from our pipeline of C&I loans. We compete on loans very selectively, which has also impacted new loan production. Yields on new loans have been well over 7%.
We believe our asset quality remained strong, even though we experienced greater net charge-offs this quarter than we have since the great financial crisis, our allowance for credit losses decreased to approximately $83 million on March 31st due to the net charge-offs of $4 million. The vast majority of the loan charge-offs during the first quarter were related to two borrowers in which we have previously established specific loan loss reserves in 2023, the largest write-down was for commercial real estate participation loan that was acquired in the Suncrest merger. We're aggressively pursuing recovery from these borrowers and optimistic we will be successful.
The net charge-offs of $4 million in the first quarter compares with net charge-offs of $153,000 for the fourth quarter of 2023 and net charge-offs of $77,000 for the first quarter of 2023. At quarter end, nonperforming assets defined as nonaccrual loans plus other real estate owned were $13.8 million or nine basis points of total assets. $13.8 million in non-performing loans compares with $21 million for the prior quarter and $6 million for the year ago quarter. Classified loans for the first quarter were $103 million compared with $102 million for the prior quarter and $67 million for the year ago quarter. Classified loans as a percentage of total loans was 1.18% at quarter end.
I will now turn the call over to Allen to discuss the allowance for credit losses and additional aspects of our balance sheet. Allen?

E. Allen Nicholson

Thanks, Dave. Good morning, everyone. As of March 31st, 2024. Our allowance for credit losses was $82.8 million or 0.94% of total loans, which compares to $86.8 million or 0.98% of total loans at December 31st, 2023, and $86.5 million or 0.97% of total loans at March 31st, 2023, our allowance for credit losses that is established on a collective pool basis for performing loans grew from 8 to $80.9 million at December 31st, 2023, the $82.8 million at March 31st, 2024. The changes in our allowance over the last few quarters have been primarily due to changes in our economic forecast as well as reserves established on specific loans. We did not record a provision in the first quarter of 2024 as the $1.9 million increase in allowance for those loans that are evaluated on a collective pool basis were offset by the net impact from the $5.9 million reduction in specific reserves and the 4-million dollars net charge-offs for the quarter ended December 31st, 2023, we recorded a $2 million recapture provision for credit losses. While the first quarter of 2023 included a $1.5 million provision. Our economic forecast continues to be a blend of multiple forecasts produced by Moody's. We continue to have the largest individual scenario weighting on Moody's baseline forecast with downside risks weighted among multiple forecasts. If the resulting economic forecast resulted in real GDP declining in the third and fourth quarters of 2020 for GDP growth is forecasted to be below 2% for 2025 before returning to growth between 2% and 2.5% in 2026. Unemployment is forecasted to rise in 2024, peaking around 6% in the first quarter of 2025. The unemployment rate is forecasted to stay elevated through 2026. Commercial real estate values are forecasted to continue their decline until reaching their lowest level in the third quarter of 2024 before slowly rising in 2025, our total investment portfolio declined by $129 million from December 31st, 2023 to $5.3 billion as of March 31st, 2024, as cash flows generated from the portfolio were not reinvested during the first quarter and the unrealized loss in AFS securities increased by $36 million, the $36 million increase in fair value of our AFS securities was partially offset by a $19 million increase in the fair value of our derivatives that hedge the change in value in our AFS portfolio, the $450 million decrease in our investment portfolio from the prior year quarter was primarily due to a $367 million decline in investment securities available for sale or AFS securities. Afs securities totaled $2.84 billion at the end of the first quarter, inclusive of our pretax net unrealized loss, $486 million. Investment securities held to maturity or HTM securities totaled approximately $2.4 billion at March 31st, 2023. The HTM portfolio declined by approximately $81 million from March 31st, 2023. The tax-equivalent yield on the entire investment portfolio was 2.64% for the first quarter of 2024 compared to 2.71% for the prior quarter. We continue to have positive carry on the fair value hedges we executed in late June of 2023. We receive daily sulfur on the fixed swaps, which have a weighted average fixed rate of approximately 3.8%. Our cash on deposit at the Federal Reserve grew by more than $700 million from the end of 2023 to March 31st, 2024. This growth in cash was partly attributable to the issuance of $300 million in brokered deposits. These deposits, which mature every 90 days were combined with cash flow hedges, which resulted in a fixed rate of approximately 4.2% borrowings from the bank term funding program at the end of the first quarter included $695 million of advances that mature in May of this year at $1.3 billion of advances that mature in January of 2025, our bank term funding program borrowings had a weighted average borrowing rate of approximately four points 75%. We anticipate that the bank term funding program borrowings will be repaid through a combination of existing cash, future principal and interest payments from our security portfolio, core deposit growth and additional wholesale funding sources, which may consist of new borrowings and or additional brokered deposits.
Now turning to our capital position. The Company's tangible common equity ratio at March 31st, 2024, was 8.33% compared with December 31st, 2020 threes ratio of 8.51% at March 31st, 2020, for our shareholders' equity increased from the fourth quarter of 2023 by $8.9 million to $2.09 billion. Retained earnings increased in 2024 as year to date, income of $49 million was offset by $28 million in dividends. The resulting year to date dividend payout ratio was approximately 57%. ROCI. decreased by $12 million from the end of 2023. Our regulatory capital ratios continue continued to be above the majority of our peers at March 31st, 2024, and our common equity Tier one capital ratio was 14.9% and our total risk-based capital ratio was 15.8%.
I'll now turn the call back to Dave for further discussion of our first quarter earnings.

David Brager

Thank you, Alan. Net interest income before provision for credit losses was $112.5 million for the first quarter compared with $119.4 million for the fourth quarter and $125.7 million for the year ago quarter. Our tax-equivalent net interest margin was 3.1% for the first quarter of 2024 compared with 3.26% for the fourth quarter of 2023. Interest income declined by $389,000 over the prior quarter. As interest income on investment securities decreased by more than $800,000, while interest revenue on loans increased by more than $600,000. Our earning asset yield at 4.34% for the first quarter of 2024 compared to 4.3% in the fourth quarter of 2023. Interest expense increased by $6.5 billion over the prior quarter as our cost of funds increased by 22 basis points from the fourth quarter of 2023. Interest expense on deposits increased by 2.5 million. Average interest bearing deposits declined by $249 million quarter over quarter, while the cost of interest-bearing deposits increased from 1.59% in the prior quarter to 1.93% in the first quarter of 2024. Interest expense on borrowings increased from the prior quarter by $4 million as average borrowings in the first quarter increased by $407 million. The cost of borrowings, however, declined by approximately 15 basis points and the $13 million decline in net interest income from the year ago quarter resulted from a 35 basis point decrease in net interest margin and a $158 million decline in average earning assets year over year. Net interest margin decline was due to an 82 basis point increase in our cost of funds, offsetting a 43 basis point increase in earning asset yields. The increase in earning asset yield was the result of higher loan and investment yields in the first quarter of 2024 compared to the first quarter of 2023 loan yields were 5.3% for the first quarter of 2024 compared with 4.9% for the year ago quarter. Investment security yields increased by 27 basis points from a yield of 2.37 in the prior year quarter to 2.64 in the first quarter of 2024, including the positive carry on the pay-fixed swaps of $3.7 million.
Moving on to noninterest income, noninterest income was $14.1 million for the first quarter of 2024 compared with $19.2 million for the prior quarter and $13.2 million for the year ago quarter. Our customer related banking fees, including deposit services, international and merchant bankcard, were essentially the same compared to the fourth quarter of 2023, but declined by $308,000 when compared to the first quarter of 2023. Our trust and wealth management fees increased by $143,000 compared to the prior quarter and year over year. These fees grew by $310,000 first quarter. Bully income decreased by $4.3 million from the fourth quarter of 2023 and increased by $2.4 million compared to the first quarter of 2023, primarily due to the restructuring and enhancements in Boise policies in the fourth quarter of 2023.
Now on to expenses. Noninterest expense for the first quarter was $59.8 million compared with $66 million for the fourth quarter of 2023 and $54.9 million for the year ago quarter. The $6.2 million quarter over quarter decrease was primarily due to the expense associated with the FDIC special assessment. The first quarter of 2024 reflected an additional accrual of $2.3 million for the FDIC special assessment, resulting from a 25% increase in the FDIC.'s initial loss estimate, which was $9.2 million as reflected in the fourth quarter of 2023.
In total, regulatory assessment expense was $4.4 million for the first quarter of 2020 for a $6.8 million decrease from the fourth quarter of 2023 and a $2.4 million increase from the first quarter of 2023. Salaries and employee benefit costs increased $749,000 quarter over quarter. This increase includes $1.7 million in higher payroll taxes paid in the first quarter as a result of the annual reset of salary caps on payroll taxes and the payment of annual bonuses. The increase in payroll taxes was offset by a $900,000 decrease in bonus accruals compared to the fourth quarter of 2023. Total salaries and employee benefits increased by $1.2 million compared with the prior year quarter as salary expense grew year over year by $1.1 million or 4.5%. There was no provision or recapture for unfunded loan commitments for the first quarter of 2020 for the fourth quarter of 2023 included $500,000 in recapture provision for unfunded loan commitments compared to $500,000 in provision for the first quarter of 2023. Noninterest expense totaled 1.48% of average assets compared with 1.62% for the prior quarter and 1.36% for the first quarter of 2023. Our efficiency ratio was 47.22% for the first quarter of 2024 or 45.4% when the special FDA's FDIC assessment expenses excluded. This compares with 47.6% for the prior quarter or 41% excluding the special FDIC assessment and 39.5 for the first quarter of 2023.
This concludes today's presentation now and I will be happy to take any questions you might have.

Question and Answer Session

Operator

Thank you. (Operator Instructions) Kelly Motta, KBW.

Kelly Motta

Yes, thank you so much for the question. Good morning. I was hoping we could start with how you're thinking about the funding base. I appreciate all I'm around broker. Do you took on it seems like you might take on I spoke more to pay off the chunk of PTFP. that comes due in May. Just wondering how we should be thinking now on the overall contribution of borrowings as well as at liquidity levels?
I saw the ELP. cash built up quite a bit this quarter. I missed I'm assuming some of that is to prefund that BTFP. payoff, but any any color as to how you're approaching it would be helpful.

E. Allen Nicholson

I sure, Kelly, Tom, you're correct. We did do some brokered CDs to start to support the pay down of that BTFP. that comes in May, I think cash levels, some may be elevated at the end of the first quarter, so they may come down a little bit as the year goes on. But yes, I don't think it's going to be dramatically different. We always want to keep some cash on the balance sheet. I think the biggest thing for us as we go through the rest of the year is how we mix the funding on our pipelines, as Dave alluded to on on core deposits are pretty good right now. So we feel optimistic about that. But we do anticipate that we'll need to mix in some wholesale deposits to replace that overall $2 billion of bank term funding program. So we'll manage it both from an interest rate risk perspective as well as trying to get the lowest cost of funding.

Kelly Motta

Go ahead, Kelly and David, could you say that was really helpful maybe maybe we could talk slide. You just spoke of some core deposits that's up pretty sound now. Just wondering, it's such a competitive environment for deposits. Is that from penetration of your existing client base. I know you guys or do you do a fantastic job with the customers you support your new prospects. Just wondering kind of what's what's driving that pipeline any change in incentives or any color you could provide?

David Brager

Yes, there really isn't any change in incentives. We changed that back in December of 2022 to really make non-interest bearing deposits, operating deposits pretty much of I mean, the equivalent of three times of doing the same size loan as far as the incentive is concerned. So that's been in place for all of 23 and obviously continuing into 24 with the focus on the really calling on those operating companies and driving that. I think there's a few pieces of the puzzle here, and I'll talk about all of them. So the pipeline is strong. We have hired some some good people from other organizations that are driving some of that. I think we've always been focused on the operating company, but I think there's sort of a renewed enthusiasm from the salespeople of going after those full relationships as evidenced by the sort of the modest mix and in the C&I loans relative to the investor commercial real estate loans. And I think right now from the lending side, for those that lead lead with lending. There's just not a lot of investor commercial real estate deals out there that we are interested in doing from a either a credit perspective or a pricing perspective. And so they really had to focus on those operating companies. And the second part of it, I would say is just the normal seasonality in our deposit base. And we've talked about this in the past, you know, the fourth and first quarter sort of are the I'll say, the down quarters historically, excluding 2020, because everybody was growing deposits in the first quarter and second quarter of 2020. But excluding 2020, we normally have about a 4% to 6% decline in the fourth quarter. And then we sort of build that back towards the end of the first quarter. And then we really see that sort of start to build more in the second and third quarter. So I think just naturally, if things hold true as they have for a long time. We'll see some growth in our existing relationships, coupled with a stronger pipeline. And I think will I should, I should say, create sort of that buildup on the deposit side as we go through the next couple of quarters, at least. I hope that helps. Thanks.

Kelly Motta

Thanks so much, Jay. That was well, I will.

Operator

Thank you. David Feaster, Raymond James.

David Feaster

Hey, good morning, everybody.

David Brager

Good morning, David.

David Feaster

It's Tom, maybe I just wanted to start out on the competitive landscape from your perspective and for both what I mean, you touched you just touched a little bit on the deposit side, but maybe touching on the loan side, I'm curious how is the competitive landscape and then how's demand trending? And what are you hearing from your clients? And just kind of how do you think about loan growth at this point? What's your appetite?

David Brager

Yes. So what we're interested in doing quality loans, we always are and whether that's a real estate loan or a C&I loan. We're interested in both. We do have a better pipeline at this point this year than we had last year at the same time frame. But I will say that, you know, it is definitely slower than it was the year before that. And we're just really focused on the operating company side. The majority of the loans we funded in the last two or three quarters had been either owner-occupied or C&I loans, whereas normally it would the majority of the loans we would be funding are more investor commercial real estate related loans. I do think the competitive landscape is still there. I mean, we're still sticking to our low single digit growth. I think we can accomplish that throughout the year. We're in a little bit of a lull. We've booked some some very nice relationships that haven't started to borrow yet on the C&I side on the facilities that we provided them so I think we're in a little bit of a lull there. But I'm I still stick into that kind of low single digit growth. Our objective, not guidance, but objective and where we're focused on get the whole relationship. And so I think the bankers have done a really good job at sort of redoubling their efforts and towards that type of business but I will tell you I've been somewhat shocked at some of the pricing that's out there on the loan side, especially given potentially funding challenges at institutions. Of course, we're starting to see stuff get back into the mid sixes on five-year rates. And I just think that's probably too low for us. And normally, we want to make sure that credit comes first, making sure we underwrite it right. And then we'll be aggressive on pricing if we believe that we're getting the full relationship. But that's the that, that competitive landscape for lending out there is driving price down even though rates are going up. So we're just not going to compete at that rate, you know, and as I said in the call, we're booking loans well over 7% recently.

David Feaster

That's helpful. And then maybe just touching on ag specifically, obviously, there's some challenges in that space. You've alluded to that from commodity prices costs and all that. I'm curious what you're seeing and hearing from your clients where you're specifically seeing any stresses? And just how do you think about managing that book?

David Brager

Yes. I mean, look, it's a smaller part of our overall portfolio, but it's an important part of our portfolio. A lot of our offices are located in the Central Valley, which California, which is the notes, the breadbasket of the world, really, I mean, the largest static producing counties in the country are in the Central Valley. And so it's an important part of what we do we just have to be very cautious when we're looking at it, the dairy and livestock or the ag production side have been challenged, but things recently and maybe gotten a little bit better milk prices, futures are starting to pop up a little bit. The some of the input costs have stabilized or even gone down in some cases and there is a lot of news that comes out of that area. One thing we shouldn't have to worry about at least in the foreseeable futures water, we've had a lot of rain over the last couple of years. So that's a good thing, but it but it remains challenging. I mean, this it's a hard business. We just like everything want to bank the best in each of the specific industries that we do business with. And so we just tried to pick and choose the right customers and as much as they're picking and choosing us that is, but I would say it's going to remain sort of in that five ish or less percent of our total loan portfolio. But it's still an important part of what we do.

David Feaster

Okay. That's great. And then obviously, there's a lot of moving parts in the balance sheet right now. And we touched on a bit of that with Guy's question with using cash cash flows from the securities book to fund upcoming BTFP. maturities. But I'm just curious how you think about managing the balance sheet other moves you're considering at this point, I mean, we did the swap. You've we did some restructuring on the bully policies, b, kind of curious what implications of that. But I'm curious how you think about managing the balance sheet and whether maybe a higher for longer outlook impacts that?

E. Allen Nicholson

Well, David, it's definitely a balancing act. I mean, we are balancing both our interest rate risk which is now become a little more asset-sensitive as we put on these derivatives balancing, obviously, a lot of liquidity measurements we look at and ultimately trying to fund the bank in the cheapest way possible. So and so there's a lot of tweaks and sometimes we make decisions balancing against all three of those. So I do agree that interest-rate probably will stay elevated for a fairly long time in some ways. That's not really a bad thing in my mind. And so I think long term, as we continue to change the funding mix and put on loans well into the 7%. I think that will be positive for us long time.

David Feaster

Okay. And any details on that?

E. Allen Nicholson

Fully a restructuring while we completed it successfully. I think you saw the impact this quarter on significantly more income. If you look year over year and we're happy with it, it's doing what we wanted to do.

David Feaster

Okay. So it's fully reflected in this quarter. Got it. Yes. Perfect. Thanks, everybody.

David Brager

Thank you, David.

Operator

Thank you. Gary Tenner, D.A. Davidson.

Gary Tenner

Thanks. Good morning, guys. Graham, a lot of my questions asked and answered, but just curious from a bigger picture perspective in terms of M&A. I think last time we spoke you kind of suggested maybe post NYCB., there have been a little bit more discussion or conversations around M&A. Obviously, you're in a great position from a capital and a valuation perspective. So curious kind of how that trend has gone in terms of conversations has tended to be more kind of the smaller end of the size spectrum in terms of who might be more willing as a seller today and your broad thoughts on that?

David Brager

Yes, I would say conversations are still active. I mean there is a lot of conversations. I think with the recent move in rates and some of the marks and the challenges on the math that it always becomes challenging when you get down to really talking about what you can or are willing to do. But there's still a lot of conversations going on. And look, we're in a good spot of we're going to be selective, like we always are we need to really find somebody that wants to be a partner with us and really look at the combination of whatever banks are. And I think you part of your question was sort of the size. I mean, they're all with all the conversations we're having are. And again, these are all preliminary, nothing imminent. But all the conversations we're having are really driven between that one to $10 billion in asset size bank. I think there's Geno could be potentially the larger you get the more regulatory pushback you might get. I mean, there's a lot of factors, maybe some more factors than than there would have been a couple of years ago today. So you just have to really make sure that you're, you know, you're picking and choosing the right partners and that you can can do it in a way that you don't dilute your existing shareholders too much on you earn it back relatively quickly. So we're still still on conversations. I I would love to say that we want to get something done, but you know, we don't really buy banks, they sell. So we're kind of we know they have to agree to what we're willing to do. So that's sort of where we are appreciate that.

Gary Tenner

And since you broached the topic of kind of regulatory pushback potentially on deals, have your regulators as you've been in communication with them, have they been able to give you any kind of visibility or guidance on what to expect in the scenario where you announced the deal? I mean, there seems to be a lot of uncertainty out there. I'm curious what it has been communicated to you?

David Brager

Yes. I mean, look, we've had a very good relationship with our with our regulators historically, and we continue that good relationship today. We're always upfront with them. If we're looking at some centers, sometimes sort of maybe getting closer to fruition. And the only thing I would say they haven't given any specific and we haven't asked any specific questions around that. But there's been a number of proposed rules that have come out from those TC. as well as the SDIC., which you know does add some complexity to the process. And but outside of that, we haven't had really any specific conversations around.
Hey, here's an opportunity. What do you guys think, but I do think there's a number of things that have been added also to their checklist of what they're looking at. And so we just take that into consideration if we're getting closer to looking at something.

Gary Tenner

Thank you for the welcome.

Operator

Thank you. (Operator Instructions) Matthew Clark, Piper Sandler.

Matthew Clark

Thank you. Good morning from Nordea. And just first one for me on the NIM. and NII., do you have the average margin in the month of March and then the spot rate on deposits at the end of March and then as a follow-up to that, what's your expectation for when you think the NIM. and I. bottom start to inflect?

E. Allen Nicholson

We can answer part of your question. I think the spot rate is in our Investor Day. Now in terms of the cost of deposits, we don't have in there. We don't disclose that. As you know, we don't really provide for guidance. I would say, Matthew, that the main variable that will continue on next quarter is really going to be the funding side and what transpires there between our as Dave alluded to earlier, we typically see deposits naturally naturally grow in the second quarter. We have a good pipeline on to the extent we're able to execute on that and minimize the wholesale funds that will be positive and we'll see how that plays out. And that's you the spot cost of interest-bearing deposits and repos was 1.95% mark.

Matthew Clark

Got it. Thank you. And then just on the owned securities portfolio, I mean CT. ones up another 30 bps to 14.9%. Why not bite the bullet and just restructure the AFS book, you can clearly afford it proven profitability from here? Yes. Any change in appetite there?

David Brager

Yes. Look, we still continue to evaluate a lot of different options relative to restructuring. There's other. There's other things that we could we could look at do it as well. We will at this point, we haven't made the decision to do anything, but I do think we're continuing to evaluate it. Like I said, there's some other things we can do around it. And we've made the decision not to do it yet, but it doesn't mean we never will do it, and we'll just continue to evaluate it. So I think as we get through the next couple of quarters and the next couple of quarters, we'll see what rates do we'll see what what happens as far as our deposits, I think like I said historically, we basically, as I say, gotten rid of the excess deposits at this point but we historically have seen some growth. So there's a lot of different things that we can do from the funding side to improve the end. And we'll continue to evaluate that I don't know, Alan, if you have anything you want to add to that?

E. Allen Nicholson

No, no, I don't think we'll it's something we, you know, we've talked to you about before, and we'll continue to evaluate more. We have nothing imminent or.

David Brager

Yes. And look, I would say part of that decision making is not all just math, right? I mean, it's the perception of our customers or customers have been very satisfied with us. The deposits, the relationships have been stable, albeit, you know, some some money has moved to higher yielding stuff. We haven't lost relationships through the fear of anything. But if you if you did a big restructure and you had a loss in a quarter that could could spark more fierce than we need to fear. So that reputational headline risk is something that we also evaluate in that as well.
Got it. And then last one for me, just on if it's likely you're not able to get an M&A deal this year. Is it fair to assume you'll get active buying back stock at some point this year?
Yes. I mean, look, we're going to have to evaluate every situation, but we do have a lot of capital. And, you know, it's really driven sort of I'd say one of the limiting factors on that is just the ITCE., we want to make sure we maintain a solid PC. That allows us to do a deal if it were going to impact that. So there's a lot of different aspects there. But yes, I mean that's something that we also discussed pretty regularly and we are building capital and we do have, you know, cost 15% CET1. So we have good regulatory capital, but we're also sort of managing to that TCE ratio as well. And so wind down a little bit because of the movement in interest rates. But as we get through the year, that's definitely something that we'll continue to look at.

Matthew Clark

Great. Thanks a lot.

Operator

Thank you. (Operator instructions) I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Brager for closing remarks.

David Brager

Great. Thank you. Citizens Business Bank continues to perform consistently in a challenging operating environment. Our solid financial performance is highlighted by our 188 consecutive quarters of profitability and 138 consecutive quarters of paying cash dividends. We remain focused on our mission of banking, the best small to medium-sized businesses and their owners through all economic cycles. So I'd like to thank our customers and our associates for their commitment and loyalty. Thanks for joining us again this quarter. We appreciate your interest and look forward to speaking with you in July for our second quarter 2024 earnings call. Please let Alan and I know if you have any questions. Have a great day.

Operator

This concludes today's program. We thank you all for participating. You may now disconnect.