Old Second Bancorp Inc (OSBC) 2023 Q1 法說會逐字稿

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 also 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.

Good morning, and thank you for joining us today. I have several prepared opening remarks and will 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 pretax securities losses and fair value adjustments for mortgage servicing rights. The combinations of these 2 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 like quarter, 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 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, 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 nonperformers that was essentially 3 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 is value here, but some work needs to be done either on the leasing front or the credit needs a significant principal curtailment. The second credit is also an acquired asset and is 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 have 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 CRE and office specifically. We've stressed all maturing credits under renewal rates, and we believe we don't see broad-based risk. 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 CRE exposure is owner-occupied, which we believe is unusual for a bank 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 ACL 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 and questions are the same ones that we have been watching and working for quite some time now.

Noninterest income continued to perform well, and excluding losses on security sales and MSR valuations discussed earlier, noninterest income was relatively flat compared to the fourth quarter. Pretax losses of $1.7 million on security sales were incurred related to strategic positioning within certain types of our portfolio.

On the noninterest 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 doing a lot more of the same: managing 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.

Thank you, Jim. Net interest income was flat at $64.1 million relative to last quarter and increased $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 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 NIM over the last quarter to 4.74%, which we believe is exceptional margin performance. Once again, as has become trend, this quarter saw a significant move in market rates. The collapse of a few large regional banks which had the curve cratered 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 monologue today, will, I guess, focus largely on deposits and why we believe we're a bit different than most. Almost 2/3 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 in the bank, given hard address, if you will.

Over 90% of these unique identifiers are retail. And this is as granular as it gets. And 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 and 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 base 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 and understand how remarkable that is and requires you to consider how rarely you hear about such a metric. The average age of a retail checking 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, at least 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 got 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 2 dynamics, the granularity and maturity explain the deposit beta performance you have seen from Old Second.

So why have we seen deposit leakage of approximately 10% over the last year plus? The answer there is a bit complicated, but I think 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 ridiculous deposit growth in late 2020 through 2021 was either permanent or organic.

I continue to believe that money fled fixed income and hid in the 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 right back in long bonds and have endured those losses in place of smarter investors.

These banks have no choice but to pay fixed income like deposit rates in order to finance assets they cannot afford to sell. Old Second investors know that we were a bit more prudent with those deposit flows the most, buying variable credit protected securities in large part.

A large chunk of those bonds remain 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 tumult of large bank failures and the need to be in a very conservative liquidity position should problem spread downstream.

We expect to resume the 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 a terrible news flow for banks other than JPMorgan.

This is all a bit long-winded, and I apologize for that, but I think it's important. The implications for Old Second investors is 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 has served us so well and the addition of received fixed swaps.

Effective duration on the bond portfolio has slowly climbed over the last 6 months and is now at 3.2 years. I would be remiss if I didn't mention that we had not moved a single dollar to held to maturity and that our overall asset sensitivity has been halved in the last 2 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 to ours given the sharp inversion from the short end.

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 TCE ratio linked quarter, which combined with the 57 basis points last quarter, means we've added 116 basis points of TCE in just 6 months.

As we sit here today, we have approximately $840 million in undrawn borrowing capacity and an additional $460 million in unpledged securities. 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.

Noninterest expense declined $3.8 million from the previous quarter, driven by lower salaries and employee benefits as well as computer and data processing expenses. Wage pressure continues to remain very real in our markets, but 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, more dynamic company.

Our efforts in the coming quarters will be continuing to bring additional talent on board, helping our customers and funding quality loan growth with excellent overall core profitability. We 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.

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 Instructions) Our first question is coming from Nathan Race with Piper Sandler.

I was hoping to just start on credit. Jim, I appreciate all your comments in terms of some of the drivers for the increase in nonaccrual 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 cost] and expectations as you guys continue to work through these handful of credits going forward?

Sure, Nate. Let me -- I guess, let me start off, I will give overall color on our office exposure. I think it's important. Overall office exposure is about 5% of the loan portfolio that's right at our concentration cap. So we've been disciplined with concentration discipline.

The primarily low-rise assets, all of them are under 10 stories. There's no high-rise exposure. The majority of the office CRE is allocated in loan-to-value. Overall weighted loan-to-value with mostly refreshed appraisals of 68%. 82% of our office CRE was originated, while 18% was purchased.

West Suburban purchased a higher percentage of their exposure, and that purchase portfolio is under more stress than the originated portfolio. Old Second has purchased 1 asset and that is classified, and I'll get to that in a moment.

About 25% of the office portfolio is located in Chicago and 20% is located downtown. The Chicago exposure is under more stress compared to the suburban portfolio as weighted loan to values reflect that as we analyze each asset. Weighted loan to values in the downtown Chicago portfolio is over 90% compared to 64% in the suburban markets.

And as I mentioned, about 75% of the portfolio is in our suburban markets and is fairly well distributed throughout Kane, DuPage and Wolf Counties. Getting into a little more detail on the classified portion, our largest classified office is about a $12 million asset -- purchased assets, an 8-story building in Chicago that was 93% occupied in 2019 pre-pandemic.

It was heavily impacted by COVID, but remains over 60% occupied as the owner navigates remote work schedules and hybrid work schedules. We are encouraged as of late that we're starting to see leasing activity pick up. The sponsor behind this asset is working to secure a new equity sponsor to assist with TI and CapEx.

So we feel this credit is cautiously trending in the right direction. The second largest is a $9 million 5-story asset in the suburbs that was also purchased. This represents our most deteriorated asset. It is largely vacant due to COVID and the owners shutting down one of their companies that had 40% of the space. The sponsors are liquidating other assets in an effort to right size or potentially pay off our loan in full.

Again, our exposure to suburban office is much higher than downtown Chicago. And aside from this asset is performing well. Suburban office exposure, as I said, has varied across different suburban markets with a weighted loan-to-value of 64%. I think it's important also to note, Nate, that the total office CRE exposure outside of these loans that are classified is just over $190 million, but the average loan size is $2 million.

So with regard to the 2 sizable ones, we certainly took appropriate allocations to the reserve, we feel like we're well reserved for those if they do deteriorate. But it's too early for us to determine if we have real loss exposure at this point.

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.

Okay. Great. I appreciate all that color. And maybe changing gears just thinking about kind of the NII 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 the 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 NII trajects from 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?

Man, that would be nice. 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 look to remain very liquid and cautious on that front. I had said last quarter that we would see earning asset growth about kind of 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. And 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, and it started well before the March blow-ups with 4.5% and even 5% rates on relatively short-term money.

We haven't played. We're in the 3s and 4s 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, but we won't get there. But I do think that the bias is still modestly higher at this point.

Okay. Great. And does that kind of contemplate a flat earning asset balance from here as you...

I think we'll see a little bit of growth, but it won't be -- it will be significantly below the level of loan growth. So at 2%, 3%.

And to the extent loan growth remains mid-single digits or so, does 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 rates...

Yes. We've got another $300 million to $400 million that are within reasonable distance of par. And it's -- I realize it's a little bit confusing on who considers securities losses core versus noncore or anything like that. But I've tried to be very transparent that we would do this.

I would like for asset securities that are yielding 5%-plus to be at par, but because there's no bank buyer paper -- buyers of bank 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 2 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 this is -- 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 is credits that were marked down much earlier. And I feel good about where we are.

Okay. Great. And if I could just ask 1 more going back to the office portfolio. Are there any other kind of shared or club deals within the office book apart from the 1 that we discussed earlier?

Yes. I mean 18% of the book, Nate, is purchased and all but 1 credit was -- that 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.

Our next question is coming from Jeff Rulis with D.A. Davidson.

This is Andrew on for Jeff this morning. Just a question on the credit side. Just seeing nonperforming assets, the balance has been pretty volatile over the last couple of quarters. And looking at this quarter, we see that nonaccruals, those were deal related. But can you briefly touch on -- or briefly cover the comings and goings in nonaccrual balance over the last 2 quarters and if they were related?

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 the -- largely the credits I touched on the office credits and then 1 large health care credit that's been on our radar for a couple of years now.

We did have -- I mean we did have some outflows as well to the tune of about $11 million. That was mostly a combination of other office retail investment-grade real estate. So we have seen some volatility but not unexpected, right, in this environment.

Right. 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?

We just took a -- they were stable for the first 2 weeks of the month. And then you saw what you always see, which is people paying their taxes around the 15th or the 18th as those direct debits and checks clear to the IRS. And we can all commiserate on that, I think.

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 bearish individual anyway, I was walking down 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.

Let me know how many people wanted $10,000 in cash and all that stuff. And quite frankly, we saw none of it. It looked like a normal week. 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, nothing unusual.

Got it. That's great to hear. Okay. That's helpful as well. And just 1 more item from me. Just to kind of check off the fee income and expense outlook. Just excluding one-timers, how do those run rates look going forward?

So I had said last quarter that on the expense side that 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 and raises being in the first quarter numbers.

So you'll see kind of a 3% to 4% type growth from what is kind of we're at run rate 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 to good. Exactly what you'd expect in this environment.

Our next question is coming from Terry McEvoy with Stephens.

Thanks for all the disclosures on office and the conversation on your deposit base, I 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? And is it as simple as what's going up must come down? Or would you push back on that?

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 and 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 of 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 have liked to have had not an explosion and more of a softer fall in rates, but the troubles in the banking industry mean that we lost 100 basis points and the kind of fat part of the curve between 1 and 3 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 and overnight borrowing levels and that would insulate us.

I think that a couple of things, I don't think we're going back to 0 rates anytime soon. I think that a 1% rate world is the new 0 given the amount of inequity 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 that is around 4. 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.

And what are your thoughts on this mix shift away from noninterest 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?

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, difference to the depositors 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. I think, certainly, people can see we were telling the truth at this point...

And maybe 1 last question. I should ask a credit question given the nonaccruals. But outside of office and health care, when you're stress testing maturing loan balances, and that's a quote from the release, what are you seeing in kind of other CRE areas outside of those 2 that were mentioned?

Yes. I mean -- Terry, jump in. 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 stress tested 500 basis points in rate hikes in a calendar year.

But I will say, outside of health care and office, the portfolio is behaving like we thought it would, but we'll know a lot more here in the next quarter or 2.

(Operator Instructions) Our next question is coming from Chris McGratty with KBW.

This is Nick Moutafakis on for Chris McGratty. Maybe just on the deposits to start, I believe your deposit base is like 2/3 retail. Just for like the outflows in the first quarter, was that primarily in the commercial segment? Or was it broader based across the portfolio, particularly on noninterest?

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 say had $5 million 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. And 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 we are in.

Right. And I mean just on the loan-to-deposit ratio ticked up the, I think, it was like 82%. I mean is there any discomfort with that going much higher from here if deposit outflows continue or you got plenty of...

I'm not concerned at this point, and I wouldn't be concerned until it's 95%-plus.

Okay. And then maybe just on the runoff yields for securities versus new volume of loans kind of spot rates or maybe in the first quarter for runoff you have those figures?

200 basis points for -- to the good for loan replacing securities.

Our next question is coming from Brian Martin with Janney.

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 a little bit more color on that would be helpful.

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 has 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's certainly recession fears out there.

Our borrowers are being very cautious. I think those factors more so than our really shift in underwriting is going to drive slower growth, not only for us, but I think for the industry. So looking at our first quarter growth, we're 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.

Got you. Okay. And just the originations. I mean if you think about how much of a haircut you have in '23 versus what you did in '22, 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 a slowing world today?

As far as haircuts, what are you referring to, Brian?

Yes, as far as total origination, you talked about getting the originations up significantly and that happened when we saw '22 numbers. Just trying to get an idea of how much they may come down year-over-year.

So I think we originated $1.2 billion-ish last year. I think that we'll be somewhere around $1 billion would be my guess.

Yes. Okay. It's still a healthy level. Okay. And just the -- as far as, I guess, the new loan origination rates, are they -- it sounds like, Brad, they're about 200 basis points higher than where we sit today on the balance sheet?

Yes, they're around 7%.

7%. okay. Okay. And then you guys talked about -- Brad, I think you talked about possibly some debt repayment. I guess what are you thinking about in terms of that here, I guess, over the balance of the year?

We've got $45 million in senior debt outstanding that has a yield of 9%. I'm looking at that.

Okay. And that -- when is that up for?

It is callable now.

Okay. So that's more of a near-term event is how you would think about it?

I'm sorry. Say that again, Brian?

Do you expect that to be -- is that likely going to be a second quarter event or near term? Is there a reason, I guess, to go beyond that or think you wait on that?

I would say sometime in the next 2 to 4 months.

Got you. Okay. And then just last 1 was on -- Jim, you talked about -- or Brad, the granularity of the deposit base and that office book. I guess, are there any larger credits out there that, I guess, would 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 become possibly an issue going forward?

Yes. Brian, I think the ones -- most of our focus is certainly in office and health care. 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.

Generally pretty paranoid people, our eyes are always looking up...

Well, I mean, Brian, I think 1 thing that's important, I think investors had to understand. Historically, we have run much higher classifieds relative to peers. And I think that goes to our underwriting culture. But our historical charge-off rates are significantly lower than peers. And so I think that will hold true going forward.

Yes. No, I totally agree. And I guess that just goes to the granularity of the book's health. And last one, Brad, what was the end of the March noninterest margin, do you have that or that was it?

Perfectly flat with what we reported.

Our next question is coming from [Eric Grubelich], who is an investor.

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...

No. Absolutely not. No.

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 have...

No, we don't have that -- for 5.5 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. We got enough bank exposure.

We have reached the end of our question-and-answer session. So I will now turn the call back over to Mr. Eccher for closing remarks.

Okay. Thanks, everyone, for joining us this morning. We'll look forward to speaking to you again after the second quarter. Thank you.

Thank you. This does conclude today's conference, and you may disconnect your lines at this time, and we thank you for your participation.