ConnectOne Bancorp - Q1 2023

Transcript

Operator (participant)

Good morning, and welcome to the ConnectOne Bancorp, Inc. first quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Siya Vansia, Chief Brand and Innovation Officer. Please go ahead.

Siya Vansia (Chief Brand and Innovation Officer)

Good morning, and welcome to today's conference call to review ConnectOne's results for the first quarter of 2023 and to update you on recent developments. On today's conference call will be Frank Sorrentino, Chairman and Chief Executive Officer, and Bill Burns, Senior Executive Vice President and Chief Financial Officer. Also with us is Elizabeth Magennis, President of ConnectOne Bank, and Steve Primiano, EVP and Treasurer. I'd also like to caution you that we may make forward-looking statements during today's conference call that are subject to risks and uncertainties. Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings. The forward-looking statements included in this conference call are only made as of the date of this call. The company is not obligated to publicly update or revise them.

In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in the company's earnings release and accompanying tables or schedules, which have been filed today on Form 8-K with the SEC and may also be accessed through the company's website. I will now turn the call over to Frank Sorrentino. Frank, please go ahead.

Frank Sorrentino (Chairman and CEO)

Thank you, Siya, and good morning, everyone. We appreciate you joining our earnings call today. Let's get started and kick it off with what you've seen in our earnings release this morning. We're in a strong and solid position today, reflecting continued success in growing our deposits and enhancing our liquidity base with over 250% coverage of uninsured, uncollateralized deposits. I began last earnings call by reiterating ConnectOne's commitment to serving our clients despite the cyclical ups and downs of the economy, and never before has our focus on client relationship banking been so important. While the industry was surprised by the specific events of mid-March, we at ConnectOne anticipated the repercussions of quantitative tightening, and our team began to take intentional actions as early as the fourth quarter of last year.

Those efforts have positioned us well with a relationship-driven deposit base, increased total available liquidity, a diversified loan portfolio of quality assets and sponsors, solid credit metrics, and a strong overall balance sheet and capital position. Looking back a few weeks to March, I'm proud of the way our team responded with sense of urgency, proactively reaching out to our clients to provide them with peace-of-mind solutions while diligently enhancing our liquidity position and securing our deposit base even further. In fact, for the fifth quarter in a row, we've now realized net deposit inflows. That success is a credit to a few things. First, a relentless continuation of our ongoing efforts towards onboarding new client relationships and expanding into deposit-rich verticals, while many others have allowed their deposits to leave their balance sheets.

Second, part of our focus of our business development team continues in non-CRE type verticals in order to further diversify our loan portfolio and provide additional sources of deposit growth. In this regard, our C&I division has grown at a consistent pace over the past decade, and our expertise has continued to evolve over that time, notably in the private school, healthcare, and franchise segments, providing deeper and attractive market opportunities for our team. Third, our investments in technology, such as our partnership with MANTL, play a key role in accelerating these efforts. We have now deployed the first phase of this omni-channel deposit origination platform, which has already led to seamlessly onboarding of new client relationships. Now for some color on the significant improvement in our uninsured deposit %.

An operating advantage for ConnectOne was our existing knowledge and use of the IntraFi reciprocal deposit product, facilitating immediate availability to our existing client base and new clients. ConnectOne is one of the longest and most established banks in the IntraFi network, having utilized the product for over a decade, predominantly to meet the needs of some of our more sophisticated client fiduciaries, such as in the private school business segment. Through the efforts of our team, our uninsured and uncollateralized deposits improved to just 20% of total deposits. Shifting to our margin, on our last earnings call, we laid out our strategic rationale for being more aggressive toward maintaining our client relationships despite deposit rate competition resulting in increasing our unique client count and total deposits. That said, we experienced and expected what I believe is temporary net interest margin compressions during the quarter.

That's the near-term cost of successfully achieving our goal of preserving and building our banking relationships. That should not obscure the fact that the underlying fundamentals and returns of our business remain solid. Bill will talk a little bit more about the net interest margin and its impact on our reported results for the quarter and the outlook in detail in a little bit. In regards to our commercial real estate office portfolio, first off, office represents today a very small amount of our portfolio. Our total office exposure is approximately 5% of total loans, but a majority of that is represented by specialty services such as medical or other service-oriented businesses where multi-use buildings where tenancy is very high and leases are very secure. New York City is even lower at less than 1% of total loans.

In addition, loans in this segment were underwritten with LTVs that average below 50% and are to strong borrowers with 80% of them personally guaranteed. A recent review of this portfolio indicates vacancy rates are near zero and the stressed renewal rollover risk is low. Turning to our multifamily portfolio, as I mentioned before, our focus is predominantly on purchase money loans to large generational owners and skilled operators based in more suburban and commuter-oriented areas. Our multifamily portfolio in Manhattan is less than 2.5% of total loans and 5.8% in the other four boroughs. Back to the focus on purchase money mortgages, this ensures significant equity in these projects and underwriting that includes stressed DSCRs and minimum cap rates with tremendous upside from better management.

We're always happy to see our clients create significant value and refinance us out to one of the life companies or Freddie Mac or Fannie Mae or some other institution. As a result of these prudent lending standards, including minimum realistic cap rates, when we stress the portfolio for renewal pricing, the potential for significant increase in impaired loans was very limited. Our stress testing considered increases in debt servicing, changes in property NOI, and amortization of principals since origination. Multifamily loans repricing or renewing in 2023 total only 6% of the multifamily portfolio, with only another 15% through the end of 2025. Overall, ConnectOne's credit performance remained solid during the first quarter. Delinquencies and non-accruals remain low. As they are identified, we're proactively managing through those credits.

Looking ahead, we'll maintain reserve levels commensurate with our growth and aligned with the changing macroeconomic forecast. With that, we expect our loan portfolio to remain essentially flat this year, with originations mostly offset by amortization, maturities, and paydowns. In addition, we could see a slight change in composition away from some CRE, including multifamily, and towards C&I and construction, where we remain very opportunistic. Given the strength of our earnings and capital position, we have a great deal of financial flexibility and confidence in our trajectory forward. To that end, earlier today, we announced a 9.7% increase to our quarterly dividend to $0.17 per share, which is consistent with dividend increases over the past few years. Our payout ratio remains at a conservative level below 30%.

In summary, we remain focused on serving our clients, supporting our staff, creating long-term value to our shareholders, and improving and building upon a distinctive operating platform. Further, while maintaining our long-standing financial discipline, we're well-positioned to take advantage of possibly once-in-a-generation market opportunities that could produce strong returns for our shareholders and be very beneficial to our franchise. With all that, I'll now turn it over to Bill.

Bill Burns (Senior EVP and CFO)

Okay. Thank you, Frank. Good morning, everyone. I'd like to start out with some color around our enhanced and fortified liquidity position, which provides ConnectOne with readily accessible liquidity that is now actually in excess of 250% of our total uninsured and uncollateralized deposits. That position resulted from efforts on both sides of this equation. On the deposit side, by reaching out proactively to our clients, we're able to both restructure accounts and also facilitate the transfer of deposits to the amplified reciprocal network. Combined, we're able to reduce our uninsured deposits by approximately $1 billion. Now, uninsured together with uncollateralized are just 20% of total deposits. Now on the liquidity side, we pledged additional loans, thus adding to our already existing capacity at the Fed and at the Federal Home Loan Bank.

Those actions resulted in an additional $2 billion in available liquidity. Just to give you a rough breakdown of our current borrowing base and overall liquidity, we now have an approximately $3 billion secured line with the Federal Home Loan Bank. We have another $1 billion secured by loans and securities at the Fed's discount window, including the new BTF. We then have an additional $1 billion in on-balance sheet cash, unpledged securities at market value and various unsecured lines of credit. We have a strong position today, which is more than adequate, but still, we could increase this space by another $1 billion-$2 billion if ever needed. Utilization of the current $5 billion base today is solely from the Federal Home Loan Bank, where we have drawn down about $1 billion.

The other lines have been successfully tested but are untapped, leaving us with available liquidity of roughly $4 billion. Frank mentioned earlier our success with net deposit inflows. Wanted to give you some color on that. The total deposit increase point to point from year-end was about $400 million. Of that, approximately $200 million were core client net inflows, and that occurred over the course of the first quarter. We did see approximately $100 million of 1031 escrow deposit balances leave the bank during mid-March. Other than this particular decrease, there were no significant outflows. We added about $300 million in broker deposits with a weighted average cost of a little over 5%. We landed those maturities across the year for a weighted average duration of just over 6 months. These will run off fairly quickly.

Let's now turn to the margin. There are several factors that I believe will continue to compress margins across the industry. I'm confident you know what they are. First, a further reduction in the money supply, which can intensify competition among banks even further than we have today. You've got continued high short-term rates which provides a hard-to-pass-up incentive for non-interest-bearing depositors to transfer their balance to interest-bearing accounts. Finally, this is an increasingly important factor, a continued inverted yield curve environment which negatively impacts net interest margins more than most realize. In terms of our net interest margin, it did compress more than we previously expected due to the intense competition. Our cycle-to-date beta is now 40%, pretty high versus the industry averages.

That was caused in part by the fact that our core deposit base is weighted 2 to 1 to sophisticated commercial accounts. In addition, as Frank mentioned earlier, this was not just yesterday, but towards the end of last year, we made a strategic decision to be more aggressive with deposit rates in order to both retain our existing clients and grow our core commercial client base. That strategy is working well in terms of deposit growth and liquidity, but has put an added pressure on our net interest margin. In addition, like most of the industry, but not worse than most, we have experienced an accelerated decline in non-interest-bearing balances. Looking forward, we believe we are closer to a terminal beta than most.

Although deposit costs will likely increase further to some degree, primarily due to CD rollovers, we have no current plans to raise rates more than we stand today. Margin compression on this point, if any, is likely to be slow. Our forecast is that when short-term rates subside and the yield curve takes a more traditional shape, our NIM and profitability will return to historical levels, say in the 3.30%-3.50% range. This is consistent with what our models say about our current liability-sensitive position. Now, notwithstanding this extraordinarily challenging interest rate environment that's created a near-term pullback on our net interest margin, our performance metrics for the quarter still surpassed 1% of the return on assets and approximately 1.5% PPNR ratio and an efficiency ratio below 50%.

Even with dividends and share repurchases, my forecast calls for maintaining or improving capital ratios and increasing tangible book value per share. For the quarter, our sequential loan growth was below 1%, while deposits grew by more than 5%, resulting in an improvement in the loan-to-deposit ratio to less than 105. Let me turn to non-interest income for the quarter. It was down from recent levels. There were a couple of non-recurring items in there, some SBA sales had been delayed. Those sales are scheduled to close in the second quarter. I'm hopeful in the second quarter we'll close on about $500,000 in gains in SBAs. By the fourth quarter, I expect we should get close to a $4 million run rate for non-interest income. Going to expenses.

As I anticipated, expenses increased sequentially, largely resulting from normal salary increases in this inflationary environment, as well as an increase in staff. Increased costs related to technology also were a factor. For the rest of the year, given the anticipated slowdown in the economy, I'm going to guide you to flat expense growth. Let me move on to the ACL and credit. Our CECL modeling resulted in a relatively small provision in the quarter. That reflects no material changes to Moody's economic forecast. A slight increase in our qualitative factors. There was flat loan growth and no material changes to specific reserves. We did have about $4 million in charge-offs in the quarter that had no impact on provision expense, that they had already been reserved for.

A little more than half of that was related to the resolution of a handful of taxi medallion loans. We sold them for a little bit in excess of the carrying value. The other was a one-off commercial real estate loan that was originated by an acquired bank that had also been reserved for previously and therefore had no impact on provisioning for this quarter. In terms of non-performing assets, we had a slight uptick in non-accrual loans. It relates to one multi-family property. It too was part of an acquisition. That loan is 90 days past due, but the current loan-to-value is 85%, and that's expected to be worked out successfully.

I'd also like to take a moment now to remind everyone that we have only limited unrealized losses in our available-for-sale securities portfolio, and our tangible common equity and tangible book value per share were largely unaffected by higher rates. As such, it is unlikely, unless the economics are overwhelmingly compelling, that we would undertake a restructuring transaction that would dilute tangible book value. By the way, our tangible book value per share at quarter end was $22.07, up from year-end, and this is the 12th consecutive quarter it has increased. Before turning the call back over to Frank, I want to close with these thoughts. I believe current ConnectOne Bancorp shareholders will be significantly rewarded in the year ahead for the following reasons. First, our liquidity position is extraordinary with more than 2 and a half times coverage ratio.

Our credit exposures to office and New York City multifamily segments are small. We've stressed our portfolio for renewal rollover risk, and any risk we have is very limited. Maybe our margin is now depressed, in our view, we'll return to historical levels and our performance metrics will get back to best in class. Our capital remains sound, unaffected by the AOCI issue, the current earnings loan rate is more than adequate to support our plans. Finally, we are trading at just 70% of tangible book value. A return of our stock price to tangible book value would imply a greater than 40% shareholder return. At these levels, we will be back in the market repurchasing stock. Now, turn it back over to you, Frank.

Frank Sorrentino (Chairman and CEO)

Thanks, Bill. In closing, although the industry remains burdened by near-term headwinds, ConnectOne continues to perform well.

Our deep experienced team continues to successfully manage through these turbulent times much as they have in many prior cycles. The actions we've taken to focus on deposits and enhance our balance sheet and capital base positions ConnectOne for the challenges ahead and the flexibility to continue to invest in our valuable franchise. I firmly believe that our conservative client-centric model, diversified balance sheet, solid liquidity, and our track record of profitability positions us to successfully navigate any near-term challenges. Allows ConnectOne to fully capitalize on both the near-term and long-term growth opportunities that will arise. We're excited about our future, as Bill just mentioned, by focusing on our strategic priorities, we will drive shareholder value. As we move through the rest of 2023, the temporary decline in profitability is not impacting our ability to fire on all cylinders and take advantage of the market.

Thanks again, and we're happy to take your questions. Operator?

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Once again, that was star then one to ask a question. At this time, we will pause momentarily to assemble the roster. Our first question will come from Daniel Tamayo of Raymond James. Please go ahead.

Daniel Tamayo (Director, Banking (Equity Research Analyst))

Hey, good morning, guys.

Bill Burns (Senior EVP and CFO)

Good morning, Daniel.

Daniel Tamayo (Director, Banking (Equity Research Analyst))

Thanks for taking my question. I guess first, just a follow-up on your, on your net interest margin discussion, Bill. You know, first, you know, what do you think happens with, you know, with the mix of the non-interest bearing? What is in your kind of thoughts there, assumptions for the rest of the year? I guess when you say you think you can get back to that normalized 3.30%-3.50%, what goes into that thought process? What does it take to get you there? Thanks.

Bill Burns (Senior EVP and CFO)

On the non-interest bearing, I think it's slowing down. We're noticing that it's slowing down the transfer of non-interest bearing deposits. I would imagine that will still continue and to drag down margins across the industry a little bit. Hard for me to say exactly how much, but I do believe it's slowing down. As far as getting back to our margin, I mean, you can just it's a pretty simple exercise, but it takes some assumptions that you have to make in terms of the speed of rate cutting, which I think is now projected to take place towards the end of this year.

You know, as rates come down, as the short end comes down and more deposits are interest bearing, we are more liability sensitive than ever, and I think that's a good position to be in. As you know, you know, the beta on the way down is, tends to be faster than the beta on the way up.

Daniel Tamayo (Director, Banking (Equity Research Analyst))

Okay. And I guess more near term, you talked about the pressure here at 3%. Just wondering if you could give us a little more detail on how you're thinking about, you know, the magnitude of pressure that may be evident this year, and what the rate environment does. I mean, if we're flat for the rest of the year, kind of what you're thinking versus the-

Bill Burns (Senior EVP and CFO)

Yeah. Like I said, look, I think we can remain flat, it's hard to guide that way when you know that there's pressure on liquidity out in the marketplace. We do have some CDs that are repricing, it's not that much. We don't have plans to raise rates anymore, the asset side will continue to reprice higher. You know, it really comes down to how fast or whether it stops the outflow of non-interest bearing balances. I think we're going to be, I think I said in my remarks that, you know, we're closer to the terminal multiple, terminal beta than most are. I can't say for sure we won't have a little bit more margin compression, I would expect it to be lower than the rest.

Daniel Tamayo (Director, Banking (Equity Research Analyst))

Okay. Understood. Last question, maybe for you, Frank, on the repurchases. You know, I hear you on the fact that you will be repurchasing at current prices. Just curious if you could remind us on what limits you have in place right now and how much you think you'd actually be willing to do given the price and at what price that starts to wane.

Bill Burns (Senior EVP and CFO)

Well, this is Bill.

Operator (participant)

Yeah.

Bill Burns (Senior EVP and CFO)

First, you know, when the price is below tangible book, it's actually accretive to tangible book. The analysis works out very smoothly. Certainly at these levels and above these levels, we would be buyers. We bought back 205,000 last quarter. We could go a little bit faster than that, but that's sort of our typical run rate, you know, is, when market conditions permit, you know, the $300,000-$350,000 per share, so per quarter, activity.

Daniel Tamayo (Director, Banking (Equity Research Analyst))

Got it. Well, thanks for all the color, guys. I'll step back.

Bill Burns (Senior EVP and CFO)

Sure. Thanks, Dan.

Frank Sorrentino (Chairman and CEO)

Thank you, Dan.

Operator (participant)

The next question comes from Matt Breese of Stephens. Please go ahead.

Matt Breese (Managing Director, Equity Research Analyst)

Hey, good morning.

Bill Burns (Senior EVP and CFO)

Morning, Matt.

Matt Breese (Managing Director, Equity Research Analyst)

You know, over the years, there's been a lot of disruption in your market, but obviously with what happened with Signature Bank and then, you know, dislocation at some of the other institutions. I was hoping you can give us some sense for with the increased disruption in your markets, have you seen any inflow of depositors or, or, uh, you know, lending teams, things like that have come your way? To what extent do you think you can take advantage of further disruption?

Frank Sorrentino (Chairman and CEO)

Well, I think I said, in my comments, Matt, that this could be a once in a generation opportunity for us. As you said, we are used to disruption in the marketplace, but never like this. And never of, you know, pretty highly esteemed and respected competitors that have built, really tremendous teams to see those broken down the way that we've seen them. While I do feel bad for some of those folks, on the other hand, it just presents us with an enormous opportunity. We've actually executed on a number of those. We have a really nice pipeline in front of us of folks that have reached out to us, folks that we're reaching out proactively, and I think that's gonna go on for quite a while.

There's a real opportunity here for us, notwithstanding all the negativity that's in the market. You know, people seem to forget that, yeah, we're in the New York marketplace, but that means we're in the New York marketplace. You know, this was ground zero for a lot of that disruption, and we're gonna be best suited to take advantage of it.

Matt Breese (Managing Director, Equity Research Analyst)

Maybe, you know, I understand loan growth guidance is flat for the year, but there will be some new originations. What is the new roll-on yield blended, or if you wanna provide for CRE and C&I, that'd be helpful, versus what's rolling off?

Frank Sorrentino (Chairman and CEO)

I would say the average loan coming on the books today is around 7.5%. It depends on where it is. Some of our floating rate loans that are coming on are coming on even a little bit higher than that. It's a really good opportunity to, you know, keep that pressure off the margin for the new loans that we do bring on board. We did guide to a flattish year. It really is hard from where we sit right now to predict, you know, where we're gonna be relative to all the originations that are taking place. Keep in mind, we still have a pretty big loan portfolio, which has a lot of amortization and payoffs and pay downs. We do a lot of construction.

We have a lot of bridge loans, lines of credits. It takes an awful lot of origination just to stay flat. Being flat, in my opinion, in this economic cycle with our credit discipline, I would say that's a win. If we were to grow a few percentage points, that wouldn't shock me either.

Matt Breese (Managing Director, Equity Research Analyst)

Great. Last one for me is, you know, obviously, there's a lot of concern and heightened concern around all things commercial real estate, particularly office. You know, you know, given your portfolio, you have, you know, $5.8 billion of CRE. Obviously, you're going through valuation appraisals and deals all the time. For stuff that is either selling from pre-COVID or being newly appraised, what is kind of the change in valuations for commercial real estate across your markets? Does it vary within New York City versus North Jersey? We'd love just some color on that.

Frank Sorrentino (Chairman and CEO)

Matt, you know, it's so interesting to me that everyone takes out this enormously broad brush and calls it all CRE. I'm looking across the street at one of the assets that we've lent on, and it's a, you know, a multi-tenanted doctor's office. I mean, they've got like 110% occupancy. He's got a line out the door of people who want to get in that space because of where it's located and the condition of the building and everything else. I mean, that loan is 100% secured. There are office towers in New York City that are near vacant. You can't put those two things in the same bucket.

You can't look at multifamily that's in suburban markets with transit, you know, oriented locations, you know, the same way you look at, you know, rent-stabilized apartments in New York City and some of the boroughs. When I like to think about our CRE exposure, I like to think about all the various segments that we're in, and we've been very careful and disciplined about what we lend to. We look at more than just the asset itself. We're looking at the sponsors. We're looking at track records. We're looking at growth trends. Each of the sub-markets, each of the categories, and each of the different types of real estate have a completely different complexion.

When you look across some of the larger, aspects of our portfolio, things like multifamily in general, I would say from a peak, which that peak got there very quickly, I would say we're probably down somewhere between 15% and 20% from a valuation perspective.

Matt Breese (Managing Director, Equity Research Analyst)

Understood. Okay. All right. I'll leave it there. Thanks for taking my questions.

Frank Sorrentino (Chairman and CEO)

You're welcome, Matt.

Operator (participant)

Once again, if you would like to ask a question, please press star then one. The next question comes from Frank Schiraldi of Piper Sandler. Please go ahead.

Frank Schiraldi (Managing Director, Senior Research Analyst)

Morning.

Frank Sorrentino (Chairman and CEO)

Hey, Frank.

Frank Schiraldi (Managing Director, Senior Research Analyst)

I just had really one question left on my list here. In terms of the, Bill, you talked about the expense guidance pretty flat going forward. You know, just given the inflationary environment, given some of the things Frank talked about in terms of opportunities here in the marketplace, can you talk a little bit more about how do you have the opportunity to hold that back or cut elsewhere to kinda, you know, think about that being flattish through year-end?

Bill Burns (Senior EVP and CFO)

Yeah. Well, a good question. I'll answer that. Frank had a few comments. You know, seasonally, we generally have the way we do our accounting. The first quarter has more expense in it because of the way compensation is paid out. You know, last year we had a lot of hiring and growth throughout the year. It's possible that our staff count goes down a little bit. The combination of those two things that we're seasonally higher in the first quarter, plus the potential for less staff going forward could lead, you know. I'm just projecting approximately a half, sorry, flat growth in expenses.

Frank Sorrentino (Chairman and CEO)

For Frank, part of that flat projection, I know we said what seems to be contradictory, which is there's opportunities to hire some really great talent in the market. We're gonna seize on those opportunities. At the same time we're gonna optimize our existing staff count, branch count, you know, everything else that we look at. Utilize technology to, you know, reduce the human capital that we have in certain areas and really be able to invest in high-performing revenue producing people instead.

Frank Schiraldi (Managing Director, Senior Research Analyst)

Okay, great. I guess just.

Frank Sorrentino (Chairman and CEO)

By the way, that's something that's been going on here for years. I just think there's more opportunity for it today.

Frank Schiraldi (Managing Director, Senior Research Analyst)

Gotcha. I guess just a clarification, just wanna make sure I heard correctly. Frank, during your prepared remarks, I believe you said LTV is under 50%. But I missed what that. Was that on office? Was that on the office portfolio or?

Frank Sorrentino (Chairman and CEO)

Yes, that's correct. That's the office portfolio.

Frank Schiraldi (Managing Director, Senior Research Analyst)

I think in you talked about some valuation contraction in different property types. What are you seeing in terms of New York City office? I mean, either anecdotally, or through, you know, some updated appraisals you've been able to see. Just kind of curious what the valuation contraction you think has been on that property type?

Frank Sorrentino (Chairman and CEO)

I don't think you can apply any sort of average contraction in the New York City office portfolio. We have very little of it, so I can't really speak to it, based on appraisals I've seen. I can only tell you anecdotally what I've seen, either because it's been presented to us or, you know, we've spoken to folks 'cause we're in the market. It's really a hit-or-miss situation. Like, I'll tell you where our office is located, at 50th and Madison, I think that building is pretty much 100% occupied. So he doesn't have an issue there. But across the street, there's a, you know, a newer, more modern building where I don't think they're 50% occupied.

Those are two completely different dynamics that are literally, I won't even say walking distance, you could hold hands if you stuck your hands out the windows, office type buildings. There are buildings in New York that are under 20% occupied. There are buildings that are 100% occupied with waiting lists. It is asset specific, and that's one of the things I really don't love about the way CRE is being portrayed. Yes, there are issues, you know, strategic and structural issues around back to work and everything else, but it is very specific. It's specific to locations, it's specific to building type, it's specific to tenants. There are tenants looking to expand their presences. There are tenants looking to reduce their presences.

If you have more of the latter and less of the former, you're gonna have a building that's in trouble. It depends on how much debt's on the building too. Hard to say, like, you know, is there an average decrease in the value of office portfolios in the city? I think there would still be a lot of interest in those, you know, those transactions and those buildings that have long-term tenants, solid tenants that are looking to expand. They'll still be able to find capital.

Frank Schiraldi (Managing Director, Senior Research Analyst)

Okay. All right. I appreciate it. Thanks.

Bill Burns (Senior EVP and CFO)

All right, Frank. Speak to you soon.

Operator (participant)

The next question is a follow-up from Matt Breese of Stephens. Please go ahead.

Matt Breese (Managing Director, Equity Research Analyst)

Hey, good morning again.

Bill Burns (Senior EVP and CFO)

Hi, Matt.

Matt Breese (Managing Director, Equity Research Analyst)

We didn't touch on this. I know we discussed a little bit of the mix shift, but wanted to get your thoughts on what you expect in terms of total deposit growth for the rest of the year.

Frank Sorrentino (Chairman and CEO)

Well, Matt, that's a hard thing to forecast. Again, I think if we end the year with a flattish type balance sheet, I would say that we've done a really great job. I do think that we will see continued inflows of deposits over time, again, there is some seasonality to some of the deposits, so we'd have to, you know, take out some of that noise. The efforts here are mostly around either complete organic deposit origination of the types of credits that bring deposits with them, the reinforcement and the expansion of verticals here that are generally deposit rich, and a lot of other programs that continue to bring deposits out, whether they're digital or whether they're, you know, built with human capital.

My expectation is deposits continue to grow. What percentage they grow over the size of the portfolio, sort of hard for me to assess at this point, but I would believe we would be in a positive mode as opposed to.

Bill Burns (Senior EVP and CFO)

What I think most of the industry has either been saying or talking about, which I find somewhat strange, is that they're you know, willing, able, and ready to let their deposits roll off their balance sheet because they're trying to protect their NIM. We're gonna be in the opposite of that, we are looking to bring on high-quality clients that bring solid depository relationships, and we'll do what we can about the NIM, but it's much more important that we build a great franchise here of clients who appreciate and value the services that we provide.

Matt Breese (Managing Director, Equity Research Analyst)

Great. Just one other. You know, obviously cash balances, liquidity, bolstered during the quarter. Do you have a time frame for when that might normalize? How do you expect the securities portfolio to play out for the rest of the year as well?

Bill Burns (Senior EVP and CFO)

Matt, it's already coming off the balance sheet a little bit, that excess cash. You know, to me, having those readily accessible lines is the equivalent of having cash. We just have to press a button to get the cash. As far as the securities portfolio goes, that's part of the whole equation. You know, part of that portfolio has been pledged for loans. Part of it has been used for collateralization of deposits, but there's also another couple hundred million that's available for sale at market. It's just part of the whole. The whole liquidity equation is more than just cash on the balance sheet, although people talk for lots of press releases, you know, bolstering their liquidity, but it's not just cash on the balance sheet.

Matt Breese (Managing Director, Equity Research Analyst)

Understood. Okay.

Bill Burns (Senior EVP and CFO)

I hope I-

Matt Breese (Managing Director, Equity Research Analyst)

I'll leave it there.

Bill Burns (Senior EVP and CFO)

I can talk to you more about it after, okay?

Matt Breese (Managing Director, Equity Research Analyst)

Appreciate it very much, guys. Talk to you.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

Bill Burns (Senior EVP and CFO)

Well, again, I want to thank everyone for joining us here for our first quarter conference call. Look forward to seeing you all at our next meeting in July. Enjoy. Thank you.

Operator (participant)

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.