Q3 2022 CVB Financial Corp Earnings Call
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Good morning, ladies and gentlemen, and welcome to the third quarter of 2022 C V Financial Corporation and its subsidiary citizens business Bank Earnings Conference call. My name is to water and I am your operator for today.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer period.
Please note that this call is being recorded.
I would now like to turn the presentation over to your host for today. Your speaker for today is Dave Rogers you may begin.
Good morning, everybody and I apologize for the delay alan's going to start us off and then he'll turn it over to me. Thank you.
Alright, good morning, everyone and thanks for joining today, we're going to be reviewing our financial results for the third quarter of 2022.
Our comments today will refer to the financial information that was included in the earnings announcement released yesterday to.
To obtain a copy please visit our website at www Dot CEB banks dot com and click on the investor's 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 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.
<unk> 31, 2021 and in particular, the information set forth in item one a risk factors there.
For more complete version of the company's Safe Harbor disclosure. Please see the company's earnings release issued in connection with this call I'm now going to turn the call back over Dave Brager, Dave. Thank you Allen and good morning, everyone for the third quarter of 2022, we reported net earnings of $64 $6 million or <unk> 46 per share.
<unk> are 182nd consecutive quarter of profitability. We previously declared a <unk> 20 per share dividend for the third quarter of 2022, an increase of 5% compared to the second quarter of this year, which represented a dividend payout ratio of 43% of earnings.
This dividend represented our 130 <unk> consecutive quarter of paying a cash dividend to our shareholders.
Third quarter net earnings of $64 $6 million or <unk> 46 per share compared with $59 1 million for the second quarter of 2022, or <unk> 42 per share and $49 8 million for the year ago quarter or <unk> 37 per share through the first nine months of 2022, we earn.
$169 $3 million or $1 20 per share compared with $164 8 million or $1 21 per share for the first nine months of 2021.
For the third quarter of 2022, our pretax pre provision income was 91 nine.
$9 million compared with $85 7 million for the prior quarter and $65 $7 million for the year ago quarter.
Our net interest margin grew by 30 basis points compared to the second quarter.
Our earning assets benefited from the general increase in interest rates, including a 25 basis point increase in loan yields and a 19 basis point increase in the yield on our investment portfolio.
As an overall result already naphtha yield grew from three 2% in the second quarter to $3 five 1% in the third quarter.
Only experiencing a one basis point increase in our cost of funds to five basis points.
We recorded a provision for credit losses of $2 million for the third quarter compared to $3 $6 million for the second quarter and a recapture.
Excuse me a recapture of provision for credit losses of $4 million for the year ago quarter.
In February of this year, our board authorized a $10 million share repurchase program during the third quarter, we repurchased 232000 shares bringing our total repurchase under the <unk> five one plan to approximately one 9 million shares through September 32022. This is an addition.
Two to 3 million shares we repurchased during the first half of the year through our accelerated share repurchase program.
Now, let's discuss loans in more detail.
Our new loan production continued to remain strong for 2022, however, new loan commitments were approximately $450 million in the third quarter, which compares with approximately $560 million in the second quarter.
The decline in the third quarter is primarily due to higher rates and economic uncertainty weighing on our borrowers.
Total loans at quarter end were $8 $8 billion, and $81 $9 million or about a 1% increase from the end of the second quarter.
After excluding PPP loan forgiveness third quarter loan growth was $131 million or approximately 6% annualized.
The core loan growth in the third quarter when compared with the end of the second quarter was led by continued growth in commercial real estate loans, which grew by $41 $6 million or two 5% annualized C&I loans increased by $10 $6 million or approximately four 5% annualized.
The line utilization rate for C&I loans was 32% at the end of the third quarter the same as the second quarter.
Dairy and livestock loans increased by approximately $43 $5 million from the prior quarter due to new loan originations and a small increase in the line utilization rate from 66% in the second quarter to 67% at the end of the third quarter.
Continued loan forgiveness for PPP loans resulted in a decline of $49 $6 million in comparison to the second quarter at the end of the third quarter, we had $17 million remaining in PPP loans.
At quarter end nonperforming assets defined as nonaccrual loans plus other real estate owned were $10 1 million.
Compared with $13 million for the prior quarter and $8 4 million for the year ago quarter at quarter end, we had no Oreo properties and the $10 1 million in nonperforming loans represented six basis points of total assets.
During the third quarter, we experienced credit charge offs of $46000 and total recoveries of $425000, resulting in net recoveries of $379000 compared with charge offs of $8000 in total recoveries of $511000, resulting in net recoveries of 500.
<unk> $3000 for the second quarter of 2022.
For the first nine months of 2022, we experienced charge offs of $70000 and total recoveries of $947000, resulting in net recoveries of $877000.
Classified loans for the third quarter were $64 million compared.
Compared with <unk> $76 million for the prior quarter and $49 8 million for the year ago quarter.
As of September 32022 classified loans included $14 4 million in loans acquired from Sunquest now I would like to discuss our deposits.
During the third quarter noninterest bearing deposits averaged $9 billion and $86 $9 million increase from the average balance in the second quarter and a $1 billion increase in the average balance from the third quarter of 2021.
Total deposits and customer repurchase agreements were $14 7 billion on average for the third quarter, essentially flat compared to the prior quarter and $1 $4 billion higher than the third quarter of 2021.
Noninterest bearing deposits were approximately 63, 4% of our average deposits for the third quarter of 2022 compared to 63% for both the prior quarter and the third quarter of 2021.
At September 32022, our total deposits and customer repurchase agreements were $14 3 billion.
Compared with $14 6 billion at June 32022, and $13 6 billion for the same period a year ago.
At September 32022, our noninterest bearing deposits were $8 $8 billion compared with $8 9 billion for the prior quarter and $8 3 billion from the year ago quarter.
The bank's funding is entirely core customer deposits and customer repos, which combined had a total cost of just five basis points in the third quarter.
This five basis point cost of funds compared to four basis points in the prior quarter and four basis points for the year ago quarter, we closely manage rates on deposits at a granular level with our focus continuing to be on deposits from core relationships and not a purely transactional accounts.
I'll now turn the call over to Alan to discuss our investments the allowance for credit losses and capital Alan.
Thanks, Dave Good morning again, everyone.
Our investment portfolio declined by $159 million from the end of the second quarter to five 9 billion.
Due to the decline in market value of investment securities available for sale or <unk> Securities.
<unk> Securities totaled $3 3 billion at the end of the third quarter inclusive of our pre tax net unrealized loss of $540 million.
Compared to the prior quarter the market value decline in <unk> securities was $194 million.
Investment Securities held to maturity or HTM securities totaled approximately $2 $5 6 billion at September 32022.
Which represents a $146 million increase from the second quarter.
We purchased more than $197 million of new securities during the quarter, including $182 million of HTM securities with a yield of approximately 4%.
The growth in our investment portfolio over the last year resulted in investments increasing by $1 $2 billion and increasing as a percentage of average earning assets from 28% in the third quarter of 2021% to 39% on average in the third quarter of 2022.
In addition to the increase in the size of our securities portfolio. The tax equivalent yield on the portfolio grew from 154% in the third quarter of 2021% to 193% in the second quarter of 2022 and now the 212% in the third quarter.
Our fed balance average approximately $625 million for the third quarter compared to $800 million in the second quarter of this year.
At September 32022, our ending allowance for credit losses was $82 6 million.
94% of total allowance, which compares to $82 million or <unk>, 92% for total loans at June 32022.
For the quarter ended September 32022, we recorded a provision for credit losses of $2 million.
Compared to $3 $6 million for the quarter ended June 32022, and a $4 million recapture provision for credit losses in the year ago quarter.
The provision for credit losses in the third quarter was driven by loan growth, which was approximately $132 million when excluding PPP loans as well as an increase in our projected life of loan loss rates.
The two basis point increase in loss rates was a combination of a decrease in the expected loss on an individually evaluated loans, which were identified as purchase credit deteriorated or <unk> at the time of the acquisition of Sunquest and an economic forecast that assumes a lower growth in GDP lower commercial real estate values and an unknown.
Employment rate of over 5% in both 2023 and 2024.
Our economic forecast continues to be a blend of multiple forecasts produced by Moody's. These U S. Economic forecast include a baseline forecast as well as downside forecasts we.
We continue to have the largest individual scenario weighting on the baseline forecast with downside risk weighted among multiple forecast as of September 30, the resulting forecast included a higher weighting for the stagflation scenario due to continued inflationary pressures observed in the economy.
Our weighted forecast assumes GDP will increase by 4% in 2020, 316% for 2024, and then grow by two 5% in 2025 the.
The unemployment rate is forecasted to be 5% in 2020, 353% from 2024, and then declined to five 1% for 2025.
Now looking at our capital position from the end of 2020, while shareholders' equity decreased by $202 $6 million to $1 9 billion.
As of September 32022.
Equity increased from the end of 2021 by $197 million for the issuance of eight 6 million shares to the former shareholders of Sunquest equity also increased due to year to date income of $169 $3 million, which was offset by $82 million in dividends representing.
A 47% dividend payout ratio year to date.
Interest rates increased through the end of the third quarter, resulting in an increase in the unrealized loss on our available for sale securities and a $137 million decline in equity quarter over quarter due to the associated decrease in other comprehensive income.
In combination the ASR and the <unk> one stock repurchase plan have resulted in the year to date repurchase of approximately $4 9 million shares at an average share price of $23 40.
Which reduced our common stock by $115 million during the early part of the third quarter, we repurchased 232000 shares at an average share price of $23 88.
Our overall capital position continues to be very strong our regulatory capital ratios are well above regulatory requirements to be considered well capitalized and above the majority of our peers at September 32020 to our common equity tier one capital ratio was 13, 5% and our total risk based capital ratio was 14, 3%.
The company's tangible common equity ratio at September 30 was 7% I'll now turn the call back to Dave for further discussion of our third quarter earnings.
Thank you Alan.
Net interest income before provision for credit losses was $133 3 million for the third quarter compared with $121 9 million for the second quarter at $103 $3 million for the year ago quarter.
Third quarter, earning assets decreased by $176 $6 million on average from the second quarter due to a decrease of $172 million in average funds on deposit at the Federal reserve.
Our earning asset yield increased by 31 basis points compared to the prior quarter the.
The increase in our earning asset yield was the result of a 19 basis point increase in investment yields a 25 basis point increase in loan yields and a shift in the composition of earning assets with average loans growing from 55, 5% to 56, 6% of average earning assets, while our average amount of funds at the federal reserve.
From 5% to 4% of earning assets our balance sheet continues to be well positioned for rising interest rates, although less sensitive to changing interest rates with fewer dollars on deposit at the federal reserve.
Our loan to deposit ratio continued to be 63% at the quarter end and we anticipate funding future loan growth with cash flows from our investment portfolio, which are approximately $175 million per quarter.
Our tax equivalent net interest margin was 346% for the third quarter of 2022, compared with $3, one 6% for the second quarter and $2, 89% for the third quarter of 2021 the.
The increase in our net interest margin was the result of the increase in our earning asset yield while maintaining our very low cost of funds that migrated from four basis points in the second quarter to five basis points in the third quarter. During a period of time that the federal reserve increase the fed funds rate by 150 basis points.
Loan yields were 456% for the third quarter compared with $4 three 1% for the second quarter and $4, 43% for the year ago quarter.
Total interest and fee income from PPP loans was approximately $1 million in the third quarter compared with $1 4 million in the second quarter, excluding the impact of PPP loans and interest income related to the purchase discount accretion loan yields were $4 four 2% for the third quarter of 2020 242.
<unk> for the second quarter and $4, one 4% for the third quarter of 2021.
Yields on new production during the third quarter exceeded the overall loan yields and most recent production has average greater than 5%.
Our cost of deposits and customer repos as well as our total cost of funds for the third quarter was five basis points interest bearing deposits and customer repos decreased on average by $22 $4 million from the second quarter, while noninterest bearing deposits grew by approximately $87 million on average.
We are beginning to experience some pressure to increase deposit rates due to the recent increases in market rates.
During the last rate rising cycle short term rates grew at a gradual pace by 225 basis points from 2014 to 2018, while our cost of funds increased by only eight basis points during that same period over.
Over the last four quarters. The vet has raise short term interest rates by 300 basis points, while our cost of funds has increased by one basis point.
Now moving on to noninterest income.
Noninterest income was $11 6 million for the third quarter of 2022, compared with $14 7 million for the prior quarter and $10 $5 million for the year ago quarter.
Customer related fees, including deposit services International and merchant Bankcard services were essentially flat when comparing the third and second quarters of 2022, but these fees increased by approximately $800000 or 13% compared to the third quarter of 2021, our trust and wealth management fees declined by.
$95000 compared to the prior quarter, but increased by 7% or $186000 year over year.
Market conditions continue to negatively impact assets under management and trust fee income.
As we discussed earlier this year, a large trust relationship with more than $800 million in assets has recently transitioned to a financial institution outside of California.
The transition is expected to be completed by the end of this year and will have the impact of decreasing our trust fees by approximately $425000 next year.
The overall decrease in noninterest income in the third quarter compared to the second quarter was driven by variances in our income on bank owned life insurance returns on investments made under the community Reinvestment Act and the $2 $7 million gain on the sale of fixed assets realized in the second quarter of 2022.
Revenue from bank owned life insurance or bully increased by $1 $4 million as a $2 million increase in death benefits was offset by a $600000 decline in the market value of separate account life insurance policies that are related to our deferred compensation plans.
Income on our CRA investments declined by $2 $1 million from the second quarter due both due to both valuation changes and a $1 $3 million gain from a distribution relating to one of those investments during the second quarter now expenses noninterest expense for the third quarter was $53 million compared with 50.
$9 million for the second quarter, and $48 1 million for the year ago quarter noninterest expense totaled $1 two 5% of average assets for the third quarter of 2022.
This compares with one 2% for the second quarter and one point to 2% for the third quarter of 2021, our efficiency ratio was 30, 659% for the third quarter of 2022, compared with 30, 724% for the prior quarter and 40, 227% for the third quarter of 2021.
Staff related expenses increased by $1 $7 million or 5% compared to the second quarter of 2022 salaries.
Salary expense grew approximately 5% or $1 2 million at the annual salary increases were effective at the beginning of the quarter and our vacancy rate improved modestly.
Although we continue to invest in technology to further automate and scale processes within the bank, we continue to be mindful mindful of inflationary pressures and associated turnover. Additionally.
The contra expense for loan origination cost contributed more than $300000 of the increase from the prior quarter due to lower loan originations.
The growth in noninterest expense over the third quarter of 2021 was $4 $9 million, which includes the impact of acquiring sunquest at the beginning of 2022.
The $3 $5 million increase in salary and employee expense includes the impact of adding associates from sunquest as well as the salary increases and expense and increased expense for stock grants.
Occupancy and equipment expense grew by $657000, including the net addition of the remaining five banking centers from Suntrust.
With the pandemic proceeding marketing expenses grew by $631000 over the third quarter of 2021 professional services increased by $813000, including a $250000 increase in employee recruiting fees and more than $500000 increase in consulting expense supporting system upgrades and new tech.
Knowledge implementations. In addition software expense grew by 7% or $223000 for the same quarter last year.
The California economy continues to face challenges related to supply chain issues.
Labor market wage inflation, and overall inflationary pressures, which have contributed to an uncertain business environment.
Our customers and the bank had been impacted and we will continue to focus on supporting those customers our customers associates and shareholders. Despite the challenging times, we are thankful and excited about our results for the third quarter, while remaining cautiously optimistic about the future we.
We reported record quarterly earnings and strong loan growth in the third quarter and produced a record $91 9 million in quarterly pre tax pre provision income, which is 7% increase from the second quarter. Our net interest margin increased by 30 basis points from the second quarter and we continued to manage expenses by searching for efficiencies in our process.
Through technology.
Our earnings growth in the third quarter supported a 5% increase in our quarterly dividend, which represented a dividend payout ratio of approximately 43% for the quarter. We remain committed to our five core values of financial strength superior people customer focus cost effective operations and having fun.
This concludes today's presentation now Alan and I will be happy to take any questions that you might have.
<unk>.
Thank you.
Ladies and gentlemen.
To ask a question you may do so by pressing star one one on your telephone.
Ask the question you will need to press star one on your telephone.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Kelly muscle with K VW. Your line is open.
Hi, good morning, Thanks, so much for the question great quarter.
Good morning Kelly.
Good morning.
I thought maybe we could start with margin, which expanded really nicely.
Could you remind us.
End of.
The percentage of loans that.
Flow versus sacs and.
Thank you your loan yields increased 25 basis points this quarter.
Any any floor you got through and kind of how we should be thinking about loan data.
On a go forward basis.
Yes, Kelly I would say approximately 30% of our loans are truly variable.
They would reset immediately or within about three months.
And the remaining 770% is either adjustable or fixed.
And so I would say.
For the most part when we look at how the loan portfolios on the short end is change we've probably we didn't have a lot of words in place and we've probably broken through a majority if not all of those at this point.
But.
Obviously, theres a lot of optionality in our balance sheet.
I would continue to point to our disclosures in the 10-Q in terms of our asset entity.
Yeah, Kelly the one thing I would add to that also is that when you have a 32% utilization rate on your C&I loans.
The impact obviously is not felt unless theyre borrowing so that low utilization also impacted that number that Alan mentioned of the 30% that's truly variable.
Got it Okay. That's really helpful and I appreciate the comments that youre going to.
But loan growth out of.
When the cash flows out of the securities portfolio, just wondering about the size of the balance sheet and.
The potential for continued deposit outflow, you, obviously have plenty of liquidity and deposit costs.
Cebit negligible just wondering if there.
Kind of any more earmarked for.
Outflow in the deposits or potentially.
Potentially.
Could be running off.
<unk> quarter.
Higher higher cost elsewhere.
Yes.
It is definitely something that we're focused on and as I mentioned in the prepared remarks, we are focused on relationships and so where we have deposit customers that.
Both noninterest bearing deposits and interest bearing deposits with us we're going to we're going to fight hard to keep all of those deposits.
There is the issue of this inflationary world we're living in.
And just the cash burn of our existing customers accounts, that's something that's harder for US account for two account for we're still driving to bring new deposit relationships to the bank and we are doing that.
And so our goal is to remain flat to slightly up.
But I can obviously estimate what's going to happen with peoples deposits and the advantages. We also have our citizens Trust group. So we have the ability to flip those that are searching for those much higher rates to our trust group to for them to be able to take advantage of the market mark market rates today.
So we have a lot of levers to pull but we're still focused on attracting the best deposit relationships and protecting our existing relationships. So youll start to see I think some more.
Some more impact of the rising rates. This is really unprecedented 300 basis points in a short period of time definitely has an impact but I think for the most part we have we've done a really good job at keeping we haven't lost deposit relationships. There has been some that's flipped to trust. There has been some that we've had to increase.
The rates, but so far.
It's just starting to pick up I would say.
Got it that's helpful. I'll step back thanks, so much for the questions. Thank you. Thanks, Doug.
Thank you please standby for our next question.
Our next question comes from the line of David Feaster with Raymond James Your line is open.
Hey, good morning, everybody good morning, David Good morning.
I just wanted to touch on on growth I mean growth has been really solid but just curious as you as you look at your pipeline and think about growth going forward. I mean have you started to see maybe a slowing in some some demand as projects.
Sorry don't pencil with higher rates.
Just just curious.
Overall thoughts on on growth.
Given where we are in the economic cycle in.
How things are trending.
Yes, no. It's a great question and if you would have asked me this in the middle of the quarter.
I definitely saw a slowdown but our pipeline today is stronger than I would have anticipated, but I do think there is going to be and I would still sort of stated that our goal is to be in that 4% to 5% loan growth arena that doesn't necessarily mean that the balance sheet will be growing but we.
Definitely we can move the mix of the assets from more investments to higher yielding loans and as I mentioned in my prepared remarks, we are seeing.
Loans that are in the in the <unk>, we have a five handle for the first time in quite some time.
And maybe even some <unk> here and again, but but for the most part I think that kind of mid single digit goal is what we're shooting for and at least so far early into this quarter or the first month.
We haven't seen an enormous slowdown, but there's definitely been a slowdown.
Okay.
Okay and then.
Obviously, we just talked about youre extremely rate sensitive right and it's in large part due to the strength of your core deposit franchise.
I guess, just how do you think about managing your rate sensitivity and at what point do you start thinking about potentially taking some rate sensitivity off the table.
And if and when you are interested in that how would you look to do it would you would you look to do more fixed rate lending or maybe look at some consider some synthetic options. Just curious how you think about it.
So David I would say.
Model wise, our sensitivity is fairly modest now.
And.
If you look at our last Q I think we're pretty well positioned I think it will be a slightly better position.
When you look at our next two but we're we think we're very well positioned I mean, obviously, if you go back a while payout rates going down was our biggest risk and we tried to address that through the structure of our investment portfolio. Most likely previously so I think we like where we're positioned I don't really see us putting on any synthetic derivatives or anything like that.
We do have the ability to start doing back to back swaps and alongside to create more variable loans nip that it made more sense economically for us and you might see that in next year or later, but thats really the only thing we do from a derivative standpoint, but I feel very comfortable where we're positioned right now and I think we are well balanced.
Okay that makes sense and then maybe you've always got a good good pulse on kind of the backdrop and have a extremely conservative approach, but just curious as you look at the loans that are coming across your desk in thinking about asset quality and managing credit I mean, what do you see.
Is there anything that's causing you concern or.
But you guys are watching closely.
Just from a competitive landscape is there anything that.
As more head scratching or the.
The market remained relatively rational.
That's a great question I'm not sure that I would describe the overall market as rational there are still people doing things that I do not understand im not so much I would say from the credit structure perspective, but more from the pricing.
Perspective, I'll give you an example of larger banks than US we just lost a deal on a 10 year fixed at three 5%.
I don't understand it.
Aye.
I just said well that's.
That's 200 basis points below where we would be so we're not going to compete.
But I think the.
It's kind of a combination of things David So I think I think customers are definitely more uncertain and they are cautious I think obviously with the rising rates, that's going to begin to impact our pipelines more.
Everything is held up really well as evidenced by our numbers you know last quarter, we have that kind of tick up in our classified loans in and out.
Wish I could have mentioned, but I couldn't.
The one deal that was that caused it to go up we got we had already solve that by the time, we had the earnings call, but I Couldnt say that.
So.
We.
We are I believe are feeling pretty cautiously optimistic about credit I still believe that and we don't have a lot of consumer, but just macro I would say consumer.
And then for us where it's more impactful I would say small business C&I lending and that just because I feel like it's going to be a death by 1000 cuts I mean, we've modified our debt yields on our commercial real estate up with the rising rates.
<unk> drives a little bit lower sizes, the loan to the cash flow, which is what we care about.
And so we've done some things in our discipline and conservative salespeople say conservative in credit people say disciplined so.
We drive that drive.
Drive that discipline throughout the organization to make sure that we're not going to be a problem if things continued.
To go down, which I have a feeling they will so I hope that answered your question, but that's sort of where I see it.
Yes, no that's great color I appreciate it thanks guys.
<unk>.
Thank you.
Please standby for our next question.
Our next question comes from the line of Matthew Clark with Piper Sandler Your line is open.
Hi, Matthew good morning.
We have Matthew.
Check with you beyond mute Matthew.
Matthew Your line is open.
I think he's having phone issues.
We can move on to the next one and come back to them Okay.
Please standby for our next question.
Our next question comes from the line of Gary Tenner with D. A Davidson your line is open.
Hi, there. This is clarke on for Gary Tenner. This morning, I just had one most of my questions were answered, but in terms of AG and kind of your outlook on seasonality seasonality heading into <unk>, where do you see business shaping up in that regard.
Yes, so we always have an increase in our dairy and livestock loans in the fourth quarter due to deferrals and we anticipate to have that again this year.
We don't really.
Guide to a specific number in that area, but we will see I would say similar.
Type growth that we experienced last quarter or last year fourth quarter to this year fourth quarter, we did bring on a couple of new relationships and Gary.
And in agribusiness, which they're very strong relationships, so that could impact it a little bit, but I would say, it's probably we anticipate it to be pretty similar and may be slightly higher just due to some increased costs.
But but that's where I would say we would we should end up and keep in mind, Mark I mean that really impacts our point in time balance sheet at year end more than anything because the runoff. So late in the year that the average balance of meeting.
Meaningfully change I would say so and then it goes away in the first couple of weeks of the following year. So now.
Very suffering.
Got it thank you for that additional color I appreciate it.
Youre welcome.
Q.
Please standby for our next question.
Our next question comes from the line of Tim Coffey with Janney Montgomery. Your line is open.
Thank you good morning, gentlemen.
Good morning, Tim I had.
A question on a not noninterest expenses going forward.
If loan growth is pulling back.
Just pull back the squares, you've kind of indicated you've seen already does that mean that expenses could be at a similar level to the <unk>.
Well I mean, I would certainly say Q3 to Q2 was unusual obviously because of our midyear salary increases.
Both Fas 91 deferrals declining but.
I don't know if those are directly tied I think we continue to manage expenses.
Growing at a very low rate, but still we want to continue to invest in technology for.
For the long term so.
For <unk> being flat if that was the question Tim Yeah, Okay. Okay.
Kevin Tim One thing I will say that we.
We haven't said anywhere yet, but next Friday, we are consolidating one of our offices as well.
That.
It will be consolidated into an office that's within three miles and so we just continue to look at opportunities to streamline and operate in an efficient manner and so that's not something that's going to happen all the time, but thats definitely something that we will be reporting on in the fourth quarter that we will be doing this is public knowledge, we haven't sent out.
Customer notifications and everything, but we will be consolidated in one of our offices as well, which should provide some savings but not huge.
Okay. Okay. That's helpful. Thank you.
I got a question on deposit growth.
Last 12 months deposits have grown about 7%. If we look out 12 months would you think that deposits would grow more or less than that.
I think my guess would be that it would be less it doesn't mean that we're not going to strive to grow deposits at that same level, but I just think the inflationary pressures the cash burn.
The other alternatives all of those things are headwinds for us for sure.
Okay.
And then a question on construction loans could.
Could you kind of talk a little bit about your appetite for additional construction credits and then some color on the net growth that we saw this quarter.
Yes, so the growth this quarter was existing relationships and some drawdowns on existing lines.
It did.
It's not something that we're really going out and trying to attract although it is an important part of what we do with some of our larger real estate investors and developers and most of the projects. We look at our infill projects multifamily our industrial so that is something that we want to continue.
To do but I don't think it's an area that's going to drive our loan growth by any means and I think last quarter was sort of a pretty low point for us in terms of that portfolio correct.
Understood.
I will say, Ken we're seeing more construction request because I think there are fewer banks out there that we will do them.
Going into this economic cycle, but I do think that we will.
Remain.
Focused on our existing relationships, where the opportunity for deals that fit our box, which is much more narrow from the perspective of the the credit underwriting.
Okay.
And then I had a question the last question on commercial real estate.
Vacancy rates tick up in commercial real estate office, mostly in the central business districts, but not necessarily in the adjacent markets of the suburban markets given that your footprint is fairly wide throughout southern California can you kind of describe what youre, saying.
Yes, no I think thats exactly right and I've been saying this for some time I think that the suburban slash Rural office market has remained relatively strong.
We're not seeing that stress in our office portfolio.
We actually I think we have zero loans that are classified loans in office. So I think we're in a pretty good spot there.
I definitely agree with what you're what you just stated and what Youre seeing I think it's a much more impactful situation for the money centers large cities La San Francisco downtown San Diego than it is for Ontario or.
More suburban markets.
Okay, great well. Thank you very much those are my questions.
Have a good day.
Thank you.
Please standby for our next question.
Our next question comes from the line of Adam Butler with Piper Sandler Your line is open.
Hey, Good morning, this is Adam calling in for Matthew Clark.
Hi, Adam how are you.
Good how are you.
Good thank you.
I was wondering whats the if you guys have it the weighted average rate on new loans during the quarter was.
Okay.
Yes.
We don't ever quote the exact weighted average rate, but I will say that as I mentioned in the prepared remarks.
We were in.
In the in the high fours low fives.
Throughout the quarter.
And we are seeing loans now.
I would say the vast vast majority of them have five handles.
And hopefully we'll start to recognize maybe even some fixes if rates.
Rates continue to go the way they're going.
Okay, great. Thank you.
Also.
You guys have it as well.
What were the what was the spot rate.
Deposits at the end of September .
The five basis points are you asking about our cost of deposits are quite a balance, which obviously is on our earnings.
But the cost of deposits.
At.
Ed.
September 30th.
Not meaningfully different in the quarter is how I would characterize that.
Okay. Thank you.
Youre welcome.
The buybacks slowed during the quarter.
Should we assume you will remain active buying back stock.
Going forward.
Well the <unk> one is still in place, but it's priced at a we're obviously trading at a pretty significant multiple so.
Early in the quarter.
I think as what we mentioned in our press release and you saw the average price I think at $23 88 of the buyback. So we're trading significantly higher than that so it just depends on where the market is and what happens but.
Assuming we stay where we are I wouldn't anticipate any share repurchases.
Okay. Thank you.
Youre welcome.
Thank you.
I'm showing no further questions in the queue I would now like to turn the call back over to Dave for closing remarks.
Thank you I want to thank everybody for joining us this quarter. We appreciate your interest and we look forward to speaking with you in January for our fourth quarter 2022 earnings call. Please let Alan or I know if you have any questions have a great day and thanks for listening.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
Yeah.
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