CVB Financial - Q4 2023

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to the fourth quarter and year-ended 2023 CVB Financial Corporation and its subsidiary, Citizens Business Bank Earnings Conference Call. My name is Cherie, and I'm your operator for today. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, press star one one again. Please be advised that today's call is being recorded. I would now like to turn the presentation over to your host for today's call, Christina Carrabino. You may proceed.

Christina Carrabino (Investor Relations)

Thank you, Cherie, and good morning, everyone. Thank you for joining us today to review our financial results for the fourth quarter and year ended 2023. Joining me this morning are Dave Brager, President and Chief Executive Officer, and Allen Nicholson, Executive Vice President and Chief Financial Officer. Our comments today will refer to the financial information that was included in the earnings announcement released yesterday. To obtain a copy, please visit our website at www.cbbank.com and click on the Investors tab. The speakers on this call claim the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995.

For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from our forward-looking statements, please see the company's annual report on Form 10-K for the year ended December 31, 2022, and in particular, the information set forward 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?

Dave Brager (President and CEO)

Thank you, Christina, and good morning, everyone. For the fourth quarter of 2023, we reported net earnings of $48.5 million or $0.35 per share, representing our 187th consecutive quarter of profitability. We previously declared a $0.20 per share dividend for the fourth quarter of 2023, representing our 137th consecutive quarter of paying a cash dividend to our shareholders. Our net earnings of $48.5 million or $0.35 per share compares to $57.9 million for the third quarter of 2023, or $0.42 per share, and $66.2 million for the year ago quarter, or $0.47 per share. Fourth quarter earnings would have been $0.39 per share, excluding the $9 million expense related to the FDIC special assessment.

We produced a return on average tangible common equity of 16.21% and a return on average assets of 1.19% for the fourth quarter. Net income was $221.4 million for the year ended 2023, a $14 million decrease compared to 2022. When excluding the $9.2 million FDIC special assessment, the decrease would have been $7.6 million. Diluted earnings per share were $1.59 for 2023, compared to $1.67 for 2022. Our fourth quarter pre-tax, pre-provision income decreased $10 million from the third quarter of 2023, primarily due to the expense accrual for the FDIC special assessment.

We continue to be among the industry leaders with respect to expense control, as our efficiency ratio for the fourth quarter and full year 2023 was 40.98% and 40.3%, respectively, after excluding the FDIC special assessment. Our net interest margin declined by 5 basis points from the third quarter of 2023 to 3.26% for the fourth quarter. The decrease in our net interest margin was the net result of a 17 basis point increase in our cost of funds, which offset a 12 basis point increase in our earning asset yield. Our net interest margin for all of 2023 was 3.31%, essentially the same as our 2022 net interest margin of 3.3%.

Total loans outstanding at the end of 2023 increased from the end of the third quarter of 2023 by approximately $30 million to $8.9 billion. Our allowance for credit losses decreased to approximately $87 million on December 31, based on net charge-offs of $153,000 and a $2 million recapture provision for credit losses in the fourth quarter of 2023. Average total deposits for the fourth quarter decreased by approximately $429 million compared to the third quarter of 2023. Our average non-interest-bearing deposits continued to be greater than 61% of our average total deposits. At December 31, 2023, our total deposits were $11.4 billion, a $925 million decrease from September 30, 2023.

During the latter half of the fourth quarter, we experienced both the normal year-end seasonal deposit outflows as well as some unexpected deposit withdrawals that were directed to an external trust company for estate planning. Although non-interest-bearing deposits declined by $380 million from the end of the third quarter, non-interest-bearing deposits represented 63% of total deposits. Customer repos were $271 million at the end of the fourth quarter, which was consistent with the balance at September 30, 2023. We have experienced a $1.7 billion decline in deposits and customer repos from the end of 2022, which includes approximately $800 million that was moved to CitizensTrust, where these funds were invested in higher-yielding assets such as Treasury notes.

Overall, we have experienced a decline in deposit levels due to the cash burn on customer accounts, resulting from inflationary pressures, as well as the impact of higher interest rates that has led to deposits moving to higher-yielding alternatives, such as money market funds and short-term Treasury notes. Our cost of deposits was 62 basis points on average for the fourth quarter of 2023, which compares to 52 basis points for the third quarter of 2023 and 8 basis points for the fourth quarter of 2022. From the first quarter of 2022 through the fourth quarter of 2023, our cost of deposits has increased by 59 basis points, representing a deposit beta of less than 12% compared to the recent Federal Reserve tightening cycle of increasing the Fed funds rate by 525 basis points. Now, let's discuss loans.

Total loans at December 31, 2023, were $8.9 billion, a $27 million increase from September 30, 2023, and a $174 million or 1.9% decrease from the end of 2022. The quarter-over-quarter increase included $73 million increase in dairy and livestock loans. Utilization on dairy and livestock loans was at 80% at December 31, 2023, which compares to 73% at the end of the third quarter. C&I loans also increased by $32 million, as line utilization increased from 27% at the end of third quarter to 29% at the end of December 2023. These increases were partially offset by a $58 million decline in commercial real estate loans. In comparison to December 31, 2022, loans declined by $168 million after excluding PPP loans.

The majority of the decline was in commercial real estate loans, which decreased by $100 million from the end of 2022 to December 31, 2023. We saw a decline in both construction and consumer loans of $22 million and $23 million, respectively. C&I loans increased by approximately $21 million over the same period, although line utilization decreased from 33% to 29%. This aligns with our strategy of banking the best small to medium-sized businesses and their owners. Loan growth continues to be impacted by a slowdown in loan demand. Our new loan production decreased throughout the second half of 2023, and new loan production for the fourth quarter of 2023 was generated at average yields exceeding 7%.

Although loans modestly increased at quarter end from the end of the third quarter, we recorded a $2 million recapture provision for credit losses for the fourth quarter of 2023 due to an improving economic forecast. Asset quality remains strong. At the end of the quarter, non-performing assets, defined as nonaccrual loans plus other real estate owned, were $21 million or 13 basis points of total assets. The $21 million in non-performing loans compares with $10 million from the prior quarter and $4.9 million for the year-ago quarter. The increase from the prior quarter was primarily due to a CRE loan that is a loan participation acquired in the Suncrest merger that was placed on nonaccrual at the end of the fourth quarter.

During the fourth quarter, we experienced credit charge-offs of $181,000 and total recoveries of $28,000, resulting in net charge-offs of $153,000, compared with net recoveries of $28,000 for the third quarter of 2023. Year-to-date, net charge-offs were $275,000. Classified loans for the third quarter were $102 million, compared with $92 million for the prior quarter and $79 million for the year-ago quarter. Classified loans as a percentage of total loans was 1.15% at quarter end. The $10 million increase in classified loans quarter-over-quarter was primarily due to a $9.8 million increase in classified commercial real estate loans.

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 (EVP and CFO)

Thanks, Dave. Good morning, everyone. As of December 31, 2023, our allowance for credit losses was $86.8 million or 0.98% of total loans, which compares to $89 million or 1% of total loans at September 30, 2023, and $85.1 million or 0.94% of total loans at December 31, 2022. From the end of 2022 to the end of 2023, our allowance for credit losses increased by $1.7 million, while loans declined by $174 million over that same period. The changes in our allowance over the last few quarters have been primarily due to changes in our economic forecast.

For the quarter ended December 31, 2023, we recorded a $2 million recapture of provision for credit losses. This compares to $2 million in provision for the third quarter of 2023, and $2.5 million in provision for the fourth quarter of 2022. 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. The resulting economic forecast reflects a modest decline in GDP for the first three quarters of 2024.... with a return to positive GDP growth in the fourth quarter of 2024.

GDP is forecasted to increase by 0.92% in 2025 before reaching a more robust growth rate of 2.6% in 2026. Commercial real estate values are forecasted to continue their decline until reaching their lowest level in the third quarter of 2024. Unemployment is forecasted to rise in 2024 and throughout 2025. The unemployment rate is forecasted to exceed 5% in 2024, and then peak at 5.7% in the first quarter of 2025. The unemployment rate is forecasted to then decline to less than 5% by the third quarter of 2026.

Total borrowings at the end of the fourth quarter were approximately $2 billion, including $1.9 billion of advances from the Bank Term Funding Program. Our borrowings increased by $950 million from September 30, 2023, and by approximately $1.1 billion from the end of 2022. The $1.9 billion of Bank Term Funding Program borrowings, which had a weighted average borrowing rate of 4.78% at the end of 2023, will mature in May and December of 2024.

Our total investment portfolio declined by $389 million from December 31, 2022, to $5.4 billion as of December 31, 2023, as the majority of our cash flows generated from the portfolio were not reinvested during the year. The overall decrease in our investment portfolio from December 31, 2022, was primarily due to a $299 million decline in investment securities available for sale or AFS securities. AFS securities totaled $2.96 billion at the end of the fourth quarter, inclusive of a pretax net unrealized loss of $450 million.

A decrease in the unrealized loss from September 30th to December 31st of 2023 of $179 million resulted in a net increase in AFS securities of $58 million. Investment securities held to maturity or HTM securities totaled approximately $2.46 billion at December 31st, 2023. The HTM portfolio declined by approximately $25 million from September 30th and by $90 million from the end of 2022, as cash flows were not reinvested throughout 2023. The tax equivalent yield on the entire investment portfolio was 2.71% for the fourth quarter of 2023, compared to 2.64% for the prior quarter and 2.36% for the fourth quarter of 2022.

The increase in the yield has been the result of the positive carry on fair value hedges we executed on in late June 2023. The fourth quarter 2023, when compared to the year-ago quarter, had $4 million of interest income from the positive carry on the swaps. We received daily SOFR on these pay fixed swaps, which has a weighted average fixed rate of approximately 3.8%. At the end of the fourth quarter, we executed on a partial restructuring of our bank-owned life insurance, or BOLI portfolio. We surrendered $68 million of policies, which resulted in a $4.5 million market value write-down of the cash surrender value of these policies and approximately $6.5 million in additional tax expense.

The purchase of $109 million of new BOLI policies at the end of December included an increase of cash surrender value of approximately $10 million. On a net basis, non-interest income was positively impacted by $6.5 million, offsetting the $6.5 million increase in tax expense. The new policies will have an initial crediting rate that is approximately 300 basis points higher than the policies we surrendered. Now, turning to our capital position. The company's tangible common equity ratio at December 31, 2023, was 8.51%, compared with the prior quarter's ratio of 7.73% and 7.4% at December 31, 2022.

At year-end, our shareholders' equity increased from the third quarter of 2023 by $126.6 million to $2.08 billion. That increase reflects an increase in our OCI of $103.6 million due to the impact of lower interest rates that decreased the unrealized loss on our AFS portfolio. Equity increased for the 12 months of 2023 by $129.5 million. Retained earnings increased in 2023 as year-to-date income of $221 million was offset by $112 million in dividends. The resulting year-to-date dividend payout ratio was 50.4%. Our OCI increased by 31 million dollars from the end of 2022.

The 10b5-1 stock repurchase plan we initiated in 2022 expired on March 2, 2023. During the first quarter of 2023, we repurchased approximately 792,000 shares of common stock at an average price of $23.43, totaling $18.5 million in stock repurchases. There were no shares purchased during the remaining quarters of 2023. Our regulatory capital ratios are well above regulatory requirements to be considered well capitalized and above the majority of our peers. At December 31, 2023, our common equity Tier 1 capital ratio was 14.6%, and our total risk-based capital ratio was 15.5%. I'll now turn the call back to Dave for a further discussion of our fourth quarter earnings.

Dave Brager (President and CEO)

Thank you, Allen. Net interest income before provision for credit losses was $119.4 million for the fourth quarter, compared with $123.4 million for the third quarter and $137.4 million for the year ago quarter. Our tax equivalent net interest margin was 3.26% for the fourth quarter of 2023, compared with 3.31% for the third quarter of 2023. Our net interest margin has trended within a somewhat narrow range over the past three quarters, with the second quarter at 3.22% and our full year at 3.31%.

Interest income grew by nearly $2 million over the prior quarter, as interest income on loans grew by $2.5 million as a result of an 11 basis point increase in loan yields. Offsetting the growth in loan interest income was a $500,000 decline in interest on investment securities due to a $214 million decline in the average balance of the investment portfolio. Interest income from our pay fixed swaps increased by approximately $200,000 from the prior quarter. Interest expense increased by $5.9 million over the prior quarter as our cost of funds decreased by 17 basis-- increased, excuse me, by seventeen basis points from the third quarter of 2023.

Interest expense on deposits increased by $2.4 million due to a 22 basis points increase in the cost of interest-bearing deposits, while average interest-bearing deposits declined by $67 million quarter-over-quarter. The cost of interest-bearing deposits was 1.59% in the fourth quarter, compared to 1.37% in the prior quarter. Interest expense on borrowings increased by $3.5 million, as average borrowings in the fourth quarter increased by $267 million compared to the prior quarter, and the cost of borrowings rose by approximately 25 basis points. The $18 million decline in net interest income from the year-ago quarter resulted from a 43 basis points decrease in net interest margin and a $217 million decline in average earning assets.

The year-over-year net interest margin decline was due to a 96 basis point increase in our cost of funds, offsetting a 49 basis point increase in earning asset yields. The increase in earning asset yields was a result of higher loan and investment yields in the fourth quarter of 2023 compared to the fourth quarter of 2022, as well as an improved asset mix in which average loans grew from approximately 59.7% of earning assets in the fourth quarter of 2022 to 60.5% in the fourth quarter of 2023. Loan yields were 5.18% for the fourth quarter of 2023, compared with 4.78% for the year ago quarter.

Investment security yields increased by 35 basis points from a yield of 2.36% in the prior year quarter to 2.71% in the fourth quarter of 2023, including the positive carry on the pay fixed swaps. The $17.5 million decline in net interest income from 2022 was driven by a $600 million average decline in interest earning assets, as our net interest margin of 3.31% for 2023 was essentially the same as the 3.3% margin in 2022. Moving on to non-interest income. Non-interest income was $19.2 million for the fourth quarter of 2023, compared with $14.3 million for the prior quarter and $12.5 million for the year ago quarter.

Our customer-related banking fees, including deposit services, international, and merchant bank card, decreased by $87,000 compared to the third quarter and declined by $782,000 when compared to the fourth quarter of 2022. Although our trust and wealth management fees decreased by $165,000 compared to the prior quarter, year-over-year, these fees grew by $214,000. Fourth quarter BOLI income increased by $6.4 million compared to the third quarter and increased by $6.5 million compared to the fourth quarter of 2022, primarily due to the surrender and redeployment of BOLI policies Allen just described.

Fourth quarter CRA investment income increased by $1.1 million over the third quarter of 2023 and by approximately $700,000 over the fourth quarter of 2022, primarily due to underlying asset valuation increases. The third quarter also included $2.6 million of income from an equity fund distribution related to one of our CRA investments. For the entire year of 2023, non-interest income grew by $9.3 million over 2022, including $7.4 million of higher BOLI income. A $1.2 million decline in deposit service charges was offset by a $1 million increase in higher trust fees and more than $600,000 of swap fees in 2023.

CRA-related investment income was $5.4 million higher in 2023, while 2022 included a $2.4 million gain on the sale of a banking center building. Now, expenses. Noninterest expense for the fourth quarter was $66 million, compared with $55 million for the third quarter of 2023, and $54 million for the year-ago quarter. The $10.9 million quarter-over-quarter increase was primarily due to the fourth quarter expense of $9.2 million, resulting from the FDIC special assessment. Regulatory assessment expense was $11.3 million in the fourth quarter of 2023, a $10 million increase from the fourth quarter of 2022.

The fourth quarter of 2023 included $500,000 in recapture provision for unfunded loan commitments, compared to a $900,000 in recapture for the third quarter of 2023. There was no provision for the fourth quarter of 2022. Salaries and employee benefit costs increased $908,000 quarter-over-quarter. This increase includes approximately $400,000 associated with year-end employee awards. Salary expense increased by 1.3% or approximately $300,000, and bonus and profit sharing increased by another $300,000 based on full year earnings. The $11.5 million increase in non-interest expense year-over-year includes the $10 million increase in assessment expense, and an increase of $1.5 million in total salaries and employee benefits compared with the prior year quarter.

Salary expense grew by $1.1 million or 4.8% over the fourth quarter of 2022. Deferred loan origination costs were also lower than the prior year quarter, resulting in additional employee expense of $550,000. Marketing and promotion expense increased over 2022 by approximately $380,000 as these expenses returned to pre-pandemic levels. As we continue to invest in new technology, software expense increased by more than $300,000 or 9.5%. The increase in technology demonstrates our commitment to improving efficiencies and providing an excellent customer experience. Non-interest expense totaled 1.62% of average assets, or 1.39%, excluding the FDIC special assessment for the fourth quarter of 2023.

This compares with 1.33% for the third quarter and 1.32% for the fourth quarter of 2022. Our efficiency ratio is 47.6% or 40.98%, excluding the FDIC special assessment for the fourth quarter of 2023. This compares with 39.99% for the prior quarter and 36.31% for the fourth quarter of 2022. This concludes today's presentation. Now, Allen and I will be happy to take any questions that you might have.

Operator (participant)

Thank you. As a reminder to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, press star one one again. One moment while we compile the Q&A roster. And our first question will come from the line of Matthew Clark with Piper Sandler. Your line is open.

Matthew Clark (Managing Director, Senior Research Analyst)

Hey, good morning, guys.

Dave Brager (President and CEO)

Good morning.

Matthew Clark (Managing Director, Senior Research Analyst)

If we could just start with the BOLI restructuring. Can you give us a sense for how we should think about that run rate going forward?

Dave Brager (President and CEO)

Well, Matthew, I think in the prepared remarks, I noted how much we invested in new BOLI and the fact that it generates, you know, initial crediting rates are going to be 300 basis points higher than the prior income. So, I mean, I think, you know, we bought $109 million.

Matthew Clark (Managing Director, Senior Research Analyst)

Okay. $109 million is total now?

Dave Brager (President and CEO)

Yeah.

Matthew Clark (Managing Director, Senior Research Analyst)

Okay, thanks. And then just a couple of questions around the margin. Can you give us the spot rate on deposits at the end of December, and if you had the average margin in the month of December? Help us with the-

Dave Brager (President and CEO)

I can tell you what we've published. So if you look at our IR deck, the cost of deposits for the month of December was 64 basis points, which compares to, I think, 62 for the quarter. You know, and we also noted that our borrowings had an average rate at the end of the period of time of 4.78, and so those are. That would give you some good starting points.

Matthew Clark (Managing Director, Senior Research Analyst)

Okay. And then just on deposits, the outflow in noninterest-bearing, anything unusual there? And how's the overall kind of deposit pipeline given all the disruption?

Dave Brager (President and CEO)

Yeah. So, you know, as, as you know, we have normally, and maybe 2020 being the exception, but, normally we have about a 4%-6% deposit outflow in the fourth quarter due to taxes, bonuses, other things that happen. We did call out in the, prepared remarks, you know, we did have one large relationship that, moved some money to an external trust company, that was, unexpected. But outside of that, everything has been pretty stable. And you know, normally we start to, you know, see those deposits start to come back to us towards the end of the first quarter. And the deposit pipelines are strong. They remain strong. It's just the sales cycle on operating companies is, you know, a little bit longer, both from an implementation perspective.

But yeah, we continue to open new relationships and, and we haven't lost any relationships. The relationship that moved the money is still a very large depositor of the bank.

Matthew Clark (Managing Director, Senior Research Analyst)

... Okay. And then, just on the hiring side of things, what's that activity like, again, with all the consolidation and, you know, banks kind of going away in the market?

Dave Brager (President and CEO)

Yeah, it's actually it's interesting. I think it's been very good. We've been able to pick up some very good talent, I believe. You know, they're newer, but they're coming sort of from who you would expect them to come from. You know, we have some people from Western Alliance. We have some people from First Republic. We have some people from City National. So, there is some disruption there, and I do think it's going to be an advantage for us as we continue to, you know, get through this cycle.

Matthew Clark (Managing Director, Senior Research Analyst)

Okay. And then, last one for me, just around M&A. Any change in the conversations you're having with potential targets?

Dave Brager (President and CEO)

Yeah, not really any change. I, I think it has, you know, maybe intensified a little bit. But there's still, you know, some challenges, obviously, with marks and other things, but we're definitely having conversations. There's nothing imminent. But, you know, we, we are definitely looking for opportunities there.

Matthew Clark (Managing Director, Senior Research Analyst)

Okay. Thank you.

Dave Brager (President and CEO)

You're welcome.

Operator (participant)

Thank you. One moment for our next question. That will come from the line of Tim Coffey with Janney Montgomery Scott. Your line is open.

Tim Coffey (Managing Director, Depository Research)

Thank you. Morning, gentlemen.

Dave Brager (President and CEO)

Morning, Tim.

Tim Coffey (Managing Director, Depository Research)

Dave, just looking out through 2024, what do you expect with the balance sheet? Do you think we can see some additional shrinkage this year?

Dave Brager (President and CEO)

You know, look, we anticipate that we're going to be growing the balance sheet, both from a deposit acquisition perspective and then, you know, continue to move the mix. But it will continue, I mean, just based on loan demand and based on pipelines, I think it's going to be slow, just like it has been in 2023. I mean, the only change to that, and Allen can jump in here if he wants to, would be just, you know, how we manage the borrowings and how we reinvest the cash flows, and if we just pay down debt vis-a-vis invest in other opportunities. I don't know, Allen, if there's anything you want to add to that.

E. Allen Nicholson (EVP and CFO)

Yeah, I mean, Tim, we do anticipate the securities portfolio to continue to roll down, and, you know, that will fund potentially loan growth or paying down debt. And that'll really, I think, be really predicated on, on loan demand, as, as 2024 continues.

Tim Coffey (Managing Director, Depository Research)

Okay. And then Allen, if the Fed does nothing, what happens to loan yields on a, say, a quarterly basis?

E. Allen Nicholson (EVP and CFO)

They would most likely increase modestly. You know, we do have a large book of adjustable loans, and as those adjust, almost all of those will adjust upwards, as well as the fact that, yeah, as Dave alluded to in comments, new business comes on well over 7%, which is, you know, a couple hundred basis points more than the portfolio. So, it won't be significant, but, you know, we would expect modest improvements in loan yields, if everything's sort of stable.

Tim Coffey (Managing Director, Depository Research)

Okay. And do you have just how much of the book reprices this quarter?

E. Allen Nicholson (EVP and CFO)

We don't get that specific. We've tried to point out on our IP decks because we give a lot of clarity around the office CRE portfolio, and that would tell you it's probably 20%-25% of maturities and repricing as an example. It's generally, you know, in line with most of the portfolio on the CRE side.

Dave Brager (President and CEO)

Yeah, it's a good proxy for the-

Tim Coffey (Managing Director, Depository Research)

Okay.

Dave Brager (President and CEO)

It's a good proxy for the rest of the commercial real estate portfolio.

Tim Coffey (Managing Director, Depository Research)

Okay. Okay, that's, that's very helpful. Those are my questions. Thank you very much for your time.

Dave Brager (President and CEO)

Thank you.

Operator (participant)

Thank you. And as a reminder, if you would like to ask a question, please press star one, one. One moment for our next question. And that will come from the line of Matt Fedorjaka with KBW. Your line is open.

Matt Fedorjaka (Senior Equity Research Analyst)

Hey, good morning, guys.

Dave Brager (President and CEO)

Good morning, Matt.

Matt Fedorjaka (Senior Equity Research Analyst)

Just wanted to kind of touch on credit a little bit. I appreciate the commentary you gave on that NPL moving, but maybe you could just talk a little bit about the CRE portfolio as a whole, how it's holding up and what you guys are seeing in your markets.

Dave Brager (President and CEO)

Yeah. I think generally speaking, it's holding up, you know, very well. We do put some good detail in our investor presentation related to classified loans in the commercial real estate area. I think just generally speaking, we did have a little bit of movement in classified loans. We did have a little uptick in non-performing. The one uptick in non-performing is a loan I've discussed before, which is the senior living facility. That loan just matured. We moved it to non-accrual. We're still working with the borrower. You know, we believe that we'll get out of that fine. Just overall, though, I think the portfolio has been extremely resilient and, you know, we continue to have a lot of early warning signs. We do annual term loan reviews.

We review our stress testing on the commercial real estate side, as well as on the C&I side. If there's failed loans in that, we're out in front of them. But we do get updated information on any loan over $1 million in our portfolio annually, at least. And then if it fails the stress test, we have more frequent conversations with the borrower if there's something that we should, you know, be worried about. But overall, it's been very, very stable, and you know, feel pretty good about where we are there.

Matt Fedorjaka (Senior Equity Research Analyst)

Awesome. Appreciate the color on that. And then, if I could just get one more in here. I know you said growth for balance sheet's probably pretty slow. If we were to get a decent amount of cuts this year in the back half of the year, would you expect loan demand to pick up pretty heavily? And what are you guys maybe seeing, if rates start to come down there but in the pipeline?

Dave Brager (President and CEO)

Yeah, it's interesting. You know, we generally base the pricing on our loans on Treasuries if it's a, you know, term loan. If it's a C&I loan, obviously it's based on prime or SOFR, but primarily. But as far as commercial real estate is going, I think that we're starting to see a little pickup in the pipeline. It's not really material, but I think people are maybe just getting a little more accustomed to rates starting with 7s and 8s in front of them versus, you know, the shock that occurred in the last, you know, 15, 18 months as rates started going up. So people still wanna do stuff. People still are looking for opportunities. I think they were sort of waiting a little bit just to see if the world broke. And now that it hasn't, it appears pretty stable.

You know, at least today, the economy seems pretty stable. I think we'll start to see a little pickup on the loan demand side, and you know, we'll see how it plays out through the year, depending on rates. But I think rates are becoming less of a deterrent for people doing things as they get more used to, you know, the current environment.

Matt Fedorjaka (Senior Equity Research Analyst)

Yeah. Appreciate the follow on that. Thanks for taking the questions, guys.

Dave Brager (President and CEO)

Of course.

Operator (participant)

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

Dave Brager (President and CEO)

Great, thank you. During the course of 2023, Citizens Business Bank not only remained safe and sound, but also produced earnings that were the second highest in the company's history, despite the difficult operating environment. We remain committed to our strategy of banking the best small to medium-sized businesses and their owners. We work hard to earn and maintain the trust of our customers and business partners, and we wanna thank all of our customers and associates for their loyalty and dedication over the past year. I wanna thank everybody for joining us this quarter. We appreciate your interest and look forward to speaking with you in April for our first quarter of 2024 earnings call. And as always, you can let Allen and I know if you have any questions. Have a great day, and thank you for listening.