Q3 2023 CVB Financial Corp Earnings Call
Okay.
Speaker 1: opponents.
Chance.
Speaker 2: Good morning ladies and gentlemen and welcome to the third quarter 2023 CVB Financial Corporation and its subsidiary Citizens Business Bank Earnings Conference call.
Yeah.
Good morning, ladies and gentlemen, and welcome to the third quarter 2023, <unk> Financial Corporation and its subsidiary citizens business Bank earnings Conference call.
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My name is Sherry and I'm your operator for today.
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Speaker 2: Please note, this call is being recorded. I would now like to turn the presentation over to your host for today's call, Christina Carabino.
Please note this call is being recorded I would now.
Now I'd like to turn the presentation over to your host for today's call Christina Caribbean.
You May proceed.
Speaker 3: It looks like Christina may have some technical difficulties. Sheree, can you hear us OK? I'm on the line now.
It looks like Christiana may have some technical.
Difficulty shrink and you hear us okay.
Hi, I'm on the line now.
Okay.
Go ahead Christina.
Speaker 4: Thank you, Sheree, and good morning, everyone. Thank you for joining us today to review our financial results for the third quarter of 2023. Joining me this morning are Dave Breger, President and Chief Executive Officer, and Alan 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 today. To gain a copy, please visit our website at www.tvbank.com and click on the Investors tab.
Thank you Shari and good morning, everyone. Thank you for joining us today to review our financial results for the third quarter of 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 today to obtain a copy. Please visit our website at www dot dot com and click on the investors' tab speaker.
Speaker 4: The speakers on this call claim the protection of the safe harbor provisions contained in the Private Security Litigation Reform Act of 1995.
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 restaurant 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 31st one.
Speaker 4: For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially, from our forward-looking statement,
Speaker 4: Please see the company's annual report on Form 10-K for the year ended December 31st, 2022. And in particular, the information set forth in item 1 a. Risk factors they're in.
22, and in particular, the information set forth in item one a risk factors they're in 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. Thank.
Speaker 4: For a more complete version of the company's safe harbor disclosure, please do the company's earnings release issued in connection with this call. Now I will turn the call over to Dave Rager. Dave?
Speaker 5: Thank you, Christina, and good morning, everyone. For the third quarter of 2023, we reported net earnings of $57.9 million or 42 cents per share, representing our 186 consecutive quarter of profitability. We previously declared a 20 cent per share dividend for the third quarter of 2023, representing our 136 consecutive quarter of paying a cash dividend to our shareholders.
Thank you Christina and good morning, everyone.
Quarter of 2023, we reported net earnings of $57 $9 million were 42 cents per share representing a 186 consecutive quarter of profitability. We previously declared a <unk> 20 per share dividend for the third quarter of 2023, representing a 136 consecutive.
I can give quarter of paying a cash dividend to our shareholders.
Speaker 5: Our net earnings of $57.9 million for 42 cents per share compares with $55.8 million for the second quarter of 2023, or 40 cents per share, and $64.6 million for the year-ago quarter, or 46 cents per share. Although headwinds exist in the current operating environment, we continued our long history of producing solid quarterly earnings and returns on capital in the third quarter.
Our net earnings of $57 9 million or 42 per share compared with $55 8 million for the second quarter of 2023, or <unk> 40 per share and $64 $6 million for the year ago quarter or 46 cents per share although headwinds exist in the current operating environment. We.
Our long history of producing solid quarterly earnings and returns on capital in the third quarter.
Speaker 5: We produced a return on average tangible common equity of 18.82% and a return on average assets of 1.4% for the third quarter. Our pre-cax pre-provision income growth over the second quarter of 2023 was 5.7%. As our pre-cax pre-provision income for the third quarter of 2023 was $82.6 million compared with $78 million for the second quarter of 2023.
We produced a return on average tangible common equity of $18 eight 2% and our return on average assets of one 4% for the third quarter, our pre tax pre provision income growth over the second quarter of 2023 was five 7% as our pre tax pre provision income for the third quarter of 2000.
23 was $82 6 million compared with $78 million for the second quarter of 2023.
Speaker 5: This growth in earnings reflects the positive operating leverage we generated this quarter, with total revenue growing by 4.2%, compared to expense growth of 1.9%. We continue to be among the industry leaders with respect to expense control, with a 40% efficiency ratio for the third quarter and full year 2023.
This growth in earnings reflects the positive operating leverage we generated this quarter with total revenue growing by four 2% compared to expense growth of one 9%. We continue to be among the industry leaders with respect to expense control with a 40% efficiency ratio for the third quarter and full year.
<unk> 2023.
Speaker 5: Our net interest margin grew by nine basis points from the second quarter of 2023 to 3.31% for the third quarter, reversing the trend of a declining net interest margin from the prior two quarters.
Our net interest margin grew by nine basis points from the second quarter of 2023% to 331% for the third quarter reversing the trend of a declining net interest margin from the prior two quarters.
Speaker 5: The expansion of our net interest margin was the net result of a 17 basis point increase in our earnings asset yield, which offsets a 9 basis point increase in our cost of funds.
Expansion of our net interest margin was the net result of a 17 basis point increase in our earning asset yield, which offset a nine basis point increase in our cost of funds.
Speaker 5: Total loans outstanding declined from the second quarter of 2023 by approximately $30 million to $8.88 billion at the end of the third quarter.
Total loans outstanding declined from the second quarter of 2023 by approximately $30 million to $8 $88 billion at the end of the third quarter.
Speaker 5: Our allowance for credit losses increased to approximately $89 million on September 30th based on net recoveries of $28,000 and a $2 million in provision for credit losses for the third quarter of 2023.
Our allowance for credit losses increased to approximately $89 million on September 30, based on net recoveries of $28000 and a $2 million and provision for credit losses.
For the third quarter of 2023.
Speaker 5: Average total deposits for the third quarter increased by approximately $278 million compared to the second quarter of 2023. Our average non-interest bearing deposits continue to be greater than 62% of our average total deposit.
Average total deposits for the third quarter increased by approximately $278 million compared to the second quarter of 2023, our average noninterest bearing deposits continued to be greater than 62% of our average total deposits.
Speaker 5: As set 10th or 30th, 2023, our total deposits were $12.4 billion, $17 million decrease from June 30th, 2023. I would highlight that we continue to have zero broker deposit.
Timber 30 of 2023, our total deposits were $12 4 billion.
Decrease from June 32023.
I would highlight that we continue to have zero brokered deposits.
Speaker 5: Non-intersparing deposits declined by $292 million, while intersparing deposits increased by $253 million from the end of the second quarter of this year. The velocity and deposits moving to citizens' trust continue to decline in the third quarter with approximately $170 million transferred off-balance sheet in the quarter compared to $180 million in the second quarter and $370 million in the first quarter of 2023.
Noninterest bearing deposits declined by $292 million, while interest bearing deposits increased by $253 million from the end of the second quarter of this year.
The velocity of deposits moving to citizens Trust continued to decline in the third quarter with approximately $170 million transferred off balance sheet in the quarter compared to $180 million in the second quarter and $370 million in the first quarter of 2023.
Speaker 5: Customer repos for $270 million at the end of the third quarter, which was $183 million lower than the balance at June 30th, 2023.
Customer repos were $270 million at the end of the third quarter, which was $183 million lower than the balance at June 32023.
Speaker 5: We've experienced a $773 million to coin into deposits and customer repos from the end of 2022, which includes, as I just noted, the $720 million that was moved to Citizens Trust, where these funds were invested in higher yielding liquid assets, that's just treachery now.
We've experienced a $773 million decline in deposits and customer repos from the end of 2022, which includes as I. Just noted the $720 million that was moved to citizens Trust, where these funds were invested in higher yielding liquid assets such as treasury notes.
Speaker 5: The bank continues to acquire new deposit customers, new accounts opened during the first time on some 2023 totaled approximately $867 million of new average deposit.
The bank continues to acquire new deposit customers New accounts opened during the first nine months of 2023 totaled approximately $867 million of new average deposits.
Speaker 5: We have historically maintained one of the lowest cost of deposits in the industry based on the customers we target and our business model. Our cost of deposits was 52 basis points on average for the third quarter of 2023, which compares to 35 basis points for the second quarter of 2023 and five basis points for the third quarter of 2022.
We have historically maintained one of the lowest cost of deposits in the industry based on the customers we target in our business model our cost of deposits was 52 basis points on average for the third quarter of 2023, which compares to 35 basis points for the second quarter of 2023, and five basis points for the third quarter of <unk>.
2022 from.
Speaker 5: From the first quarter of 2022, through the third quarter of 2023, our cost of deposits has increased by 49 basis points, representing the deposit beta of less than 7%, since the Federal Reserve began this tightening cycle by increasing rates by 525 basis points.
From the first quarter of 2022 during the third quarter of 2023, our cost of deposits has increased by 49 basis points, representing a deposit beta of less than 7% since the federal reserve again, thats tightening cycle by increasing rates by 525 basis points.
Now, let's discuss lumps.
Speaker 5: Total loans at September 30, 2023 were $8.9 billion, a $30 million decrease from June 30, 2023, and a $202 million or 2.2% decrease from the end of 2022.
Total loans at September 32023 were $8 9 billion, a $30 million decrease from June 32023, and a $202 million or two 2% decrease from the end of 2022.
Speaker 5: The quarter of a quarter decline was led by a $61 million decline in commercial real estate loans.
The quarter over quarter decline was led by a $61 million decline in commercial real estate loans. We also experienced an $18 million decrease in C&I loans as the line utilization declined from 31% at the end of the second quarter to 27% at the end of September 2023.
Speaker 5: We also experience an $18 million decrease in CNI loans as the line utilization declined from 31% at the end of the second quarter to 27% at the end of September 2023. Partially offsetting the decrease in commercial.
Partially offsetting the decrease in commercial.
Speaker 5: and real estate loans was a $49 million increase in Darian life stock loans.
And real estate loans was a $49 million increase in dairy and livestock loans utilization on dairy and livestock loans was at 73% on September 32023, which compares to 67% at the same point last year.
Speaker 5: Utilization on Darian livestock loans was at 73% on September 30th, 2023, which compares to 67% at the same point last year.
Speaker 5: from December 31, 2022, loans declined by $109 million after excluding the seasonal increase in their A-Live stock loans from year-end MPP.
From December 31, 2022 loans declined by $109 million after excluding the seasonal increase in dairy and livestock loans.
From year end and PPP loan forgiveness.
Speaker 5: During livestock loans decreased by $87 million from December 31, 2022, as we experience a seasonal peak in line utilization in the fourth quarter of each year. Commercial real estate loans decreased by $42 million from the end of 2022 to September 30, 2023, and T and Islands decreased by approximately $11 million over the same period. As line utilization decreased from 33% to 27%.
In livestock loans decreased by $87 million from December 31, 2022, as we experienced a seasonal peak in line utilization in the fourth quarter of each year.
Commercial real estate loans decreased by $42 million from the end of 2022 to September 32023, and C&I loans decreased by approximately $11 million over the same period as line utilization decreased from 33% to 27%.
Speaker 5: In addition, construction loans to climb by $25 million and consumer loans are lower by $23 million.
In addition, construction loans declined by $25 million and consumer loans are lower by $23 million.
Speaker 5: Long growth continues to be impacted by a slowdown in loan demand. Our new loan production weakened in the third quarter. New loan commitments were approximately $288 million in the second quarter of 2023, and approximately $217 million in the third quarter of 2023. In comparison, we originated $443 million of new loans in the third quarter of 2020.
Loan growth continues to be impacted by a slowdown in loan demand our new loan production weakened in the third quarter, new loan commitments were approximately $288 million in the second quarter of 2023 and.
And approximately $217 million in the third quarter of 2023.
In comparison, we originated $443 million of new loans in the third quarter of 2022.
Speaker 5: New loan production at the end of the third quarter of 2023 was generated at average yields of approximately 7%.
New loan production at the end of the third quarter of 2023, which generated an average yields of approximately 7%.
Speaker 5: Although loans declined at quarter-and from the end of the second quarter, we recorded a provision for credit losses of $2 million for the third quarter of 2023 to reflect a further deterioration in our economic forecast.
Although loans declined at quarter end from the end of the second quarter, we recorded a provision for credit losses of $2 million for the third quarter of 2023 to reflect a further deterioration in our economic forecast.
Speaker 5: Asset quality continues to be strong and the trend remains stable. At quarter and non-performing assets defined as non-accurable loans plus other real estate owned, were $10 million or six basis points of total assets.
Asset quality continues to be strong and the trends remained stable at quarter end nonperforming assets defined as nonaccrual loans plus other real estate owned were $10 million or six basis points of total assets.
Speaker 5: $10 million in non-performing loans, compares with $6.5 million to the prior quarter, and $10.1 million for the year ago quarter. The increase from the prior quarter was primarily due to a CNI loan that was placed on non-accrual at the end of the third quarter.
The $10 million of nonperforming loans compares with $6 5 million for the prior quarter and $10 $1 million for the year ago quarter. The.
The increase from the prior quarter was primarily due to a C&I loan that was placed on non accrual at the end of the third quarter.
Speaker 5: During the third quarter, we have experienced credit charge off of $26,000 and total recoveries of $54,000. Result in in that recovery of $28,000 compared with net charge off of $73,000 for the second quarter of 2023. Year-to-date net charge offs were $122,000.
During the third quarter, we experienced credit charge offs of $26000 and total recoveries of $54000, resulting in net recoveries of $28000 compared with net charge offs of $73000 for the second quarter of 2023.
Year to date net charge offs were $122000.
Speaker 5: Classified loans for the second quarter were $92 million compared with $78 million for the prior quarter and $64 million for the year-ago quarter. Classified loans' percentage of total loans was 1.04 percent at quarter end.
Classified loans for the second quarter were $92 million compared with $78 million for the prior quarter and $64 million for the year ago quarter classified loans as a percentage of total loans was 1.04% at quarter end.
Speaker 5: The $14.4 million increase in classified loans quarter over quarter was primarily due to a $24.4 million increase in classified commercial real estate loans. Partially upset by a $10.2 million decrease in classified during livestock and agribusiness loans.
The $14 $4 million increase in classified loans quarter over quarter was primarily due to a $24 $4 million increase in classified commercial real estate loans, partially offset by a $10 $2 million decrease in classified dairy and livestock and agribusiness loans the.
Speaker 5: The increase in classified loans for the commercial real estate category was primarily due to one relationship in which approximately $20 million of non-unarchived commercial real estate loans were downgraded due to the death of a borough of during the third quarter. This loan is well collateralized and the property is currently listed for sale. We anticipate no loss once the property is sold.
The increase in classified loans for the commercial real estate category was primarily due to one relationship in which approximately $20 million of non owner occupied commercial real estate loans were downgraded due to the depth of a borrower during the third quarter. This loan is well collateralized and the property is currently listed for sale, we anticipate no loss.
Once the property is sold.
Speaker 5: I will now turn the call over to Alan to discuss the allowance for credit losses, investments, borrowings, and capital. Alan. Thanks, David.
I'll now turn the call over to Alan to discuss the allowance for credit losses investments borrowings and capital Alan.
Thanks, Dave and good morning, everyone.
Speaker 6: As of September 30th, 2023, our ending allowance for credit losses was $89 million, or 1% of total loan.
As of September 32023, our ending allowance for credit losses was $89 million or 1% of total ounce, which compares to $87 million for nine 8% of total loans at June 32023, and $85 1 million or <unk> 90.
Speaker 6: which compares to $87 million for 0.98% of total loans at June 30, 2023, and $85.1 million or 0.94% of total loans at December 31, 2020.
4% of total loans at December 31, 2022.
Speaker 6: For the quarter ended September 30th, 2023, we recorded a provision for credit losses of $2 million.
For the quarter ended September 32023, we recorded a provision for credit losses of $2 million.
Speaker 6: in the pair to $500,000 for the quarter ended June 30, 2023, and $2 million for the third quarter of 2022.
<unk> two $500000 for the quarter ended June 32023.
$2 million for the third quarter of 2022.
Speaker 6: The provision for credit losses in the third quarter was driven by the change in our economic forecast, which resulted in lower projected GDP growth, lower commercial real estate values, and higher unemployment, when compared to our forecast at both June 30th and the end of 2020.
The provision for credit losses in the third quarter was driven by the change in our economic forecast, which resulted in lower projected GDP GDP growth.
Our commercial real estate values and higher unemployment when compared to our forecast at both June 30, and the end of 2022.
Speaker 6: Our economic forecast continues to be a blend of multiple forecasts produced by Moody's.
Our economic forecast continues to be a blend of multiple forecasts produced by Moody's.
Speaker 6: We continue to have a largest individual scenario waiting on Moody's baseline forecast, with downside risk weighted among multiple forecasts, which individually reflect various degrees of economic recession in 2024 and early 2025.
We continue to have the largest individual scenario waiting on Moody's baseline forecast.
With downside risk weighted among multiple forecast, which individually reflect various degrees of economic recession in 2024 and early 2025.
Speaker 6: The resulting economic forecast reflects a modest decline in GDP in the first half of 2024, but a more significant decrease in commercial real estate values that persist through all of 2025, and an unemployment rate rising through 2025.
The resulting economic forecast reflects a modest decline in GDP in the first half of 2024, but a more significant decrease in commercial real estate values that persists through all of 2025.
And an unemployment rate rising through 2025.
Speaker 6: The resulting weighted average forecast assumes GDP will increase by 2.1% in 2023, followed by a monetary session at the beginning of 2024, and full-year GDP growth of just 0.3% for all of 2024.
The resulting weighted average forecast assumes GDP will increase by two 1% in 2023.
Followed by a modest recession at the beginning of 2024 and full year GDP growth of just <unk>, 3% for all of 2024.
Speaker 6: GDP then grows at 1.1% in 2025.
GDP then grows at one 1% in 2025.
Speaker 6: The unemployment rate is forecasted to be 3.8% in 2023 and 5.2% in 2024, with peak unemployment of 5.7% in 2025.
The unemployment rate is forecasted to be three 8% in 2023 and five 2% in 2024 with peak unemployment of five 7% in 2025.
Speaker 6: Total borrowings declined by $375 million from June 30, 2023, as cash balances were drawn down by $378 million over that same time period.
Total borrowings declined by $375 million from June 30 of 2023 as cash balances were drawn down by $378 million over that same time period.
Speaker 6: borrowings as of September 30, 2023 consisted of $870 million from the bank term funding program that mature in 2024 with a weighted average rate of 4.87 percent as well as $250 million of remaining short-term advances from the Federal Home Loan Bank.
Borrowings as of September 32023 consisted of $870 million from the bank term funding program that mature in 2024 with a weighted average rate of 487%.
As well as $250 million of remaining short term advances from the federal home loan bank as.
Speaker 6: As of September 30th, the cost of these FHLB advances were 5.05%.
As of September 30, the cost of these <unk> advances or 5.05%.
Speaker 6: all of the FHLB barons will mature within the fourth quarter of this year.
All of the <unk> borrowings mature within the fourth quarter of this year.
Speaker 6: We continue to shrink our investment portfolio. Our total investment portfolio declined by $218 million from June 30, 2023 to $5.4 billion as of September 30.
We continue to shrink our investment portfolio, our total investment portfolio declined by $218 million from June 32023 to five 4 billion.
As of September 30.
Speaker 6: Of the approximately $120 million of cash flows generated by our investments during the third quarter of 23, we reinvested approximately $30 million in short-term treasury.
Of the approximately $120 million of cash flows generated by our investments during the third quarter of 2003, we reinvested approximately $30 million in short term treasuries.
Speaker 6: The overall decrease in our investment portfolio was primarily due to a $195 million decline in investment securities available for sale, or AFS securities. AFS securities totaled $2.87 billion at the end of the third quarter, inclusive of a pre-tax net unrealized loss of $628 million.
The overall decrease in our investment portfolio was primarily due to a $195 million decline in investment securities available for sale or <unk> securities.
<unk> Securities totaled $2 $87 billion at the end of the third quarter inclusive of our pre tax net unrealized loss of $628 million.
Speaker 6: investment securities held in maturity, more H.D.M. securities, totaled approximately $2.49 billion at September 30, 2003. The H.D.M. portfolio declined by approximately $23 million from June 30. As cash flows were not reinvested during the quarter.
Investment Securities held to maturity more HTM securities.
Approximately $2 49 billion at September 32023, the HTM portfolio declined by approximately $23 million from June 30.
Cash flows were not reinvested during the quarter.
Speaker 6: The tax equivalent yield on the entire investment portfolio was 2.64% for the third quarter of 2023, compared to 2.37% for the prior quarter.
The tax equivalent yield on the entire investment portfolio was 264% for the third quarter of 2023 compared to $2 three 7% for the prior quarter.
Speaker 6: The increase in yield for the third quarter benefited from a $3.8 million of interest income from the positive carry on fair value hedges we executed in late June of this year. We received daily SOFR on these pay fixed swaps that have a weighted average fixed rate of approximately 3.8 percent.
The increase in yield for the third quarter benefited from a $3 $8 million of interest income from the positive carry on fair value hedges, we executed in late June of this year.
We receive daily so for on these pay fixed swaps that have a weighted average fixed rate of approximately three 8%.
Speaker 6: Now turning to our capital position, the company's tangible common equity ratio at September 30th, 2023 was 7.73%, consistent with the prior quarter's ratio of 7.75% while being higher than the 7% at September 30th, 2020.
Now turning to our capital position the company's tangible common equity ratio at September 32023 was 773% consistent with the prior quarters ratio of 775%, while being higher than the 7% at September 32022.
Speaker 6: Shareholders' equity decreased from the second quarter by $50 million to $1.95 billion at the end of the third quarter. Our OCI declined by $82 million due to the impact of higher interest rates that increased the unrealized loss on our AFS portfolio.
Shareholders' equity decreased from the second quarter by $50 million to $1 $95 billion at the end of the third quarter, our OCI declined by $82 million due to the impact of higher interest rates that increase the unrealized loss on our <unk> portfolio.
Speaker 6: At the end of the second quarter of 2023, we entered into one billion in no-sional pay-fixed straight swabs. As fair value hedges to mitigate the risks of rising interest rates on our capital.
At the end of the second quarter of 2023, we entered into $1 billion in notional pay fixed rate swaps.
As fair value hedges to mitigate the risks of rising interest rates on our capital.
Speaker 6: These papix swaps have maturities ranging from four to five years.
These pay fixed swaps have maturities ranging from four to five years.
Speaker 6: In September 30, 2023, we recorded a fair value adjustment associated with the swap derivatives, which increased other comprehensive income by $17.6 million. Partly mitigating impact OCI of the decline in the fair value of our AFS portfolio.
At September 32023, we recorded a fair value adjustment associated with the swap derivatives, which increased other comprehensive income by $17 $6 million, partially mitigating the impact OCI the decline in the fair value of our <unk> portfolio.
Speaker 6: Equity increased for the first nine months of 2023 by $3 million.
Equity increased for the first nine months of 2023 by $3 million.
Speaker 6: Cane earnings increased a due-to-date income of $173 million with offset by $84 million in dividends for the nine months of this year.
And earnings increased as year to date income of $173 million was offset by $84 million in dividends for the nine months of this year.
Speaker 6: The resulting year-to-date dividend payout ratio was 48.4%.
The resulting year to date dividend payout ratio was 48, 4%.
Speaker 6: The 10B51 stock repurchase plan we initiated in 2022 expired on March 2, 2023. There were no shares purchased during the second and third quarters of 2023.
The <unk> one stock repurchase plan, we initiated in 2022 expired on March <unk> 2023.
There were no shares purchased during the second and third quarters of 2023.
Speaker 6: During the first quarter of this year, we did repurchase approximately 792,000 shares of common stock at an average price of $23.43. Total length 18.5 million dollars in stock repurchase.
During the first quarter of this year, we did repurchase approximately 792000 shares of common stock at an average price of $23 43.
Totaling $18 $5 million in stock repurchases.
Speaker 6: 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 30, 2023, our common equity tier one capital ratio was 14.4 percent and our total risk-based capital ratio was 15.3 percent.
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.
At September 32023, our common equity tier one capital ratio was 14, 4% and our total risk based capital ratio was 15, 3%.
Speaker 6: And now I'll turn the call back today for further discussion of the third quarter.
I'll now turn the call back to Dave for further discussion of the third quarter earnings.
Speaker 5: Thank you, Alan. Net interest income before provision for credit losses was $123.4 million for the third quarter compared with $119.5 million for the second quarter and $133.3 million for the year ago quarter. Our tax equivalent net interest margin was 3.31% for the third quarter of 2023.
Thank you Alan net interest income before provision for credit losses was $123 4 million for the third quarter compared with $119 $5 million for the second quarter and $133 $3 million for the year ago quarter, our tax equivalent net interest margin was three <unk>.
31% for the third quarter of 2023, compared with $3 two 2% for the second quarter and $3 46 for the third quarter of 2022 inter.
Speaker 5: compared with 3.22% for the second quarter and 3.46% for the third quarter of 2022.
Speaker 5: Interest income grew by nearly $7 million over the prior quarter as our earning asset yield increased 17 basis points quarter over quarter based on the combination of a six basis point increase in loan yields and the impact of $3.8 million of positive carry on pay fixed swap derivative income in the third quarter. Third quarter average earning assets decreased by $68 million from the second quarter due to an increase in both average investment
Interest income grew by nearly $7 million over the prior quarter as our earning asset yield increased 17 basis points quarter over quarter based on the combination a six basis point increase in loan yields and the impact of $3 8 million a positive carry on pay fixed swap derivative income in the third quarter.
Third quarter average, earning assets decreased by $68 million from the second quarter due to an increase in both average investment securities.
Speaker 5: Securities of $147 million in average won't have standing of $30 million
Securities of $147 million in average loans outstanding of $30 million. The decline in those assets was offset by an increase of $121 million in average funds on deposit at the federal reserve.
Speaker 5: The decline in those assets was offset by an increase of $121 million in average funds on deposit at the Federal Reserve.
Speaker 5: Interest expense increased by $3.2 million over the prior quarter, as our cost of funds increased by nine basis points from the second quarter of 2023. Interest expense on deposits increased by $5.7 million due to the combination of a $288 million increase in average interest bearing deposits in the third quarter and a 41 basis point increase in the cost of interest bearing deposits.
Interest expense increased by $3 $2 million over the prior quarter as our cost of funds increased by nine basis points from the second quarter of 2023.
Interest expense on deposits increased by $5 $7 million due to the combination of a $288 million increase in average interest bearing deposits in the third quarter and a 41 basis point increase in the cost of interest bearing deposits.
Speaker 5: The cost of interest granted deposits was 1.37% in the third quarter compared to 96 basis points in the prior quarter. Interest expense on borrowing, however, the client by 2.6 million dollars, as average borrowing is the client by 209 million dollars.
The cost of interest bearing deposits was 137% in the third quarter compared to 96 basis points in the prior quarter.
Interest expense on borrowings however declined by $2 $6 million as average borrowings declined by $209 million the $10 million decline in net interest income from the year ago quarter resulted from a 15 basis point decrease in net interest margin and a $484 million decline in.
Speaker 5: The $10 million decline in net interest income from the year ago quarter resulted from a 15 basis point decrease in net interest margin and a $484 million decline in average earning assets.
Speaker 5: A year over a year, net interest margin decline was due to an 87 basis point increase in our cost of funds, offsetting a 67 basis point increase in earning assets.
Average, earning assets.
The year over year net interest margin decline was due to an 87 basis point increase in our cost of funds offsetting a 67 basis point increase in earning asset yields the increase in earning asset yields was the result of higher loan and investment yields in the third quarter of 2023 compared to the third quarter.
Speaker 5: The increase in earning asset yields was the result of higher loan and investment yields in the third quarter of 2023 compared to the third quarter of 2022, as well as an improved asset mix in which average loans grew from approximately 56 percent of earning assets in the third quarter of 2022 to 59 percent in the third quarter of 2020.
Of 2022 as well as them.
Well as an improved asset mix in which average loans grew from approximately 56% of earning assets in the third quarter of 2022% to 59% in the third quarter of 2023.
Speaker 5: Lone yields for 5.07% for the third quarter of 2023 compared with 4.56% for the year ago.
Loan yields were five point <unk>, 7% for the third quarter of 2023, compared with 456% for the year ago quarter <unk>.
Speaker 5: Investment security yields increased 52 basis points from a yield of 2.12% in the prior year quarter to 2.64% in the third quarter of 2023. Moving on.
Investment security yields increased 52 basis points from a yield of 212% in the prior year quarter to 264% in the third quarter of 2023.
Moving on to noninterest income.
Speaker 5: Not interesting, Combo's $14.3 million for the third quarter of 2023 compared with $12.7 million for the prior quarter and $11.6 million for the year ago quarter.
Noninterest income was $14 $3 million for the third quarter of 2023, compared with $12 7 million for the prior quarter and $11 $6 million for the year ago quarter.
Sherry: Good morning ladies and gentlemen, and welcome to the third quarter, 2023, CVB Financial Corporation and its subsidiary, Citizens Business Bank Earnings Conference Call. My name is Sherry, and I am your operator for today. At this time, all participants are in a listen only mode.
Speaker 5: Our customer-related banking fees, including deposit services, international, and merchant bank card services, increased by $224,000 compared to the second quarter and declined by $171,000 when compared to the third quarter of 2020.
Our customer related banking fees, including deposit services International and merchant Bankcard services increased by $224000 compared to the second quarter and declined by $171000 when compared to the third quarter of 2022.
Sherry: Later we will conduct a question and answer session. To ask the question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. So, withdraw your question, please press star 11 again.
Speaker 5: Although our trust and wealth management fees decreased by $69,000 compared to the second quarter of 2023, year over year, these fees grew by $379,000.
Although our trust and wealth management fees decreased by $69000 compared to the second quarter of 2023 year over year Dcs grew by $379000.
Speaker 5: Third quarter, Bully income to climb by $549,000 as the second quarter of 2023, included $806,000 in death benefits that exceeded the asset value of certain Bully pollets.
Third quarter fully income declined by $549000 as the second quarter of 2023 included $806000 in death benefits that exceeded the asset value of certain fully policies.
Sherry: Please note, this call is being recorded.
Sherry: I would now like to turn the presentation over to your host for today's call, Christina Carrabino. You may proceed. It looks like Christina may have some technical difficulties. Sherry, can you hear us, okay?
Speaker 5: Fully income decreased by $439,000 compared to the third quarter of 2020.
<unk> income decreased by $439000 compared to the third quarter of 2022.
Speaker 5: The third quarter of 2022 included $1.8 million in death benefits received, which was partially offset by more favorable market impacts on separate account policies during the third quarter of 2020.
<unk> third quarter of 2022 included $1 $8 million in death benefits received which was partially offset by more favorable market impacts on separate account policies during the third quarter of 2023.
Speaker 5: Compared to the second quarter of 2023, CRA investment income increased as the third quarter included $2.6 million of income from an equity fund distribution related to one of our CRA investments.
Compared to the second quarter of 2023, CRA investment income increased as the third quarter included $2 $6 million of income from an equity fund distribution related to one of our CRA investments.
Christina Carrabino: I'm on the line now. Okay.
Christina Carrabino: Go ahead, Christina.
Christina Carrabino: Thank you, Sherry, and good morning everyone. Thank you for joining us today to review our financial results for the third quarter of 2023. Joining me this morning are Dave Breger, President and Chief Executive Officer, and Alan Nicholson, Executive Vice President and Chief Financial Officer. Our comments today will refer to the financial information that was concluded in the earnings announcement released today. To obtain a copy, please visit our website at www.cbbank.com and click on the Investors tab.
Now expenses noninterest expense for the third quarter was $55 million compared with $54 million for the second quarter of 2023 and $53 million for the year ago quarter.
Speaker 5: Non-interest expense for the third quarter was $55 million compared with $54 million for the second quarter of 2023 and $53 million for the year-ago quarter. The third quarter of 2023 included $900,000 in recapture of provision for unfunded loan commitments.
The third quarter of 2023 included $900000 in recapture a provision for unfunded loan commitments compared to $400000 in provision for the second quarter of 2023.
Speaker 5: compared to $400,000 in provision for the second quarter of 2023. There was no provision for...
There was no provision for the third quarter of 2020 to Sal.
Christina Carrabino: The speakers on this call, claim the protection and the safe harbor provisions contained in the private security 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 four-button statements. Please see the company's annual report on form 10K for the year-end to December 31st, 2022, and in particular the information set forth in item 1A risk factors therein. For a more complete version of the company's safe harbor disclosure, please see the company's earnings released issued in connection with this call.
Speaker 5: Souries and employee benefit costs increase $1.2 million quarter over quarter, including annual salary increases. That were effective.
Salaries and employee benefit costs increased $1 $2 million quarter over quarter, including annual salary increases that were effective at the beginning of the quarter.
Speaker 5: The quarter-over-quarter increase in salary expense was approximately $800,000 or 3.3% higher than the second quarter. As loan originations were lower in the third quarter, the contra expense from deferred loan origination costs declined, therefore increasing staff expense by almost $300,000.
The quarter over quarter increase in salary expense was approximately $800000 or three 3% higher than the second quarter as loan originations were lower in the third quarter. The contra expense from deferred loan origination cost decline, therefore, increasing staff expense by almost $300000.
Speaker 5: The $2 million increase in non-interest expense year over year included an increase of $1.5 million or 4.6% in salaries and employee benefits.
The $2 million increase in noninterest expense year over year, including an increase of $1 $5 billion or four 6% in salaries and employee benefits salary expense grew by three 5% or approximately $800000 over the second quarter of 2022.
David Breager: Now I will turn the call over to Dave Breger. Dave? Thank you, Christina, and good morning everyone.
David Breager: For the third quarter of 2023, we reported net earnings of $57.9 million or 42 cents per share, representing our 186 consecutive quarter of profitability. We previously declared a 20 cent per share dividend for the third quarter of 2023, representing our 136 consecutive quarter of paying a cash dividend to our shareholders. Our net earnings of $57.9 million for 42 cents per share, compared to $55.8 million for the second quarter of 2023 or 40 cents per share and $64.6 million for the year-end go quarter or 46 cents per share.
Speaker 5: Sound rate has been screwed by 3.5% or approximately $800,000 over the second quarter of 2020.
Speaker 5: The fur loan origination costs were also lower than the prior year quarter, resulting in additional staff expense of $800,000.
Deferred loan origination costs were also lower than the prior year quarter, resulting in an additional staff expense of 800000.
Speaker 5: Regulatory assessment expense increased by more than $800,000 over the prior year of court.
Yeah.
Regulatory assessment expense increased by more than $800000 over the prior year quarter.
Speaker 5: Non-interested expense total 1.33% of average assets for the third quarter of 2023. This compared to 1.32% for the second quarter and 1.25% for the third quarter of 2020.
Noninterest expense totaled 133% of average assets for the third quarter of 2023. This compares to 132% for the second quarter and 1.2.
<unk>, 5% for the third quarter of 2022.
Speaker 5: Our efficiency ratio was 39.99% for the third quarter of 2023.
Our efficiency ratio was $39, 99% for the third quarter of 2023.
David Breager: Although headwinds exist in the current operating environment, we continued our long history of producing solid quarterly earnings and returns on capital in the third quarter. We produced a return on average tangible common equity of 18.82 percent and a return on average assets of 1.4 percent for the third quarter. Our pre-cax, pre-previsioning income growth over the second quarter of 2023 was 5.7 percent. As our pre-cax, pre-previsioning income for the third quarter of 2023 was $82.6 million, compared with $78 million for the second quarter of 2023.
Speaker 5: This compares with 40.86% for the prior quarter and 36.59% for the third quarter of 2020.
This compares with 48, 6% for the prior quarter, and 36, 5% and 9% for the third quarter of 2022.
Speaker 5: This concludes today's presentation. Now, Alan and I will be happy to take any questions you may have.
This concludes today's presentation now Alan and I will be happy to take any questions you may have.
Speaker 2: Thank you. As a reminder, to ask a question you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, press star 11 again. One moment while we compile the Q&A roster.
Thank you as a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced.
Jay Your question Press Star one again, one moment, while we compile the Q&A roster.
Okay.
David Breager: This growth in earnings reflects the positive operating leverage we generated this quarter with total revenue growing by 4.2% compared to expense growth of 1.9%. We continue to be among the industry leaders with respect to expense control with a 40% efficiency ratio for the third quarter and full year 2023. Our net interest margin grew by 9 basis points from the second quarter of 2023 to 3.31% for the third quarter reversing the trend of a declining net interest margin from the prior two quarters.
Speaker 2: And our first question will come from the line as Matthew Clark with Piper Sandler. Your line is open. It's possible.
And our first question will come from the line of Matthew Clark with Piper Sandler Your line is open.
Hey, good morning, guys.
Speaker 7: I want to first touch on the
Good morning.
I wanted to first touch on the.
Speaker 7: BTFP the $850 million I think comes to do next year. What's your plan for that? Are you gonna just pay it off? Or are you gonna reach and answer some portion of it?
Yes.
<unk> $850 million I think comes due next year, what's your plan for that or are you going to just pay it off or you're going to refinance some portion of it.
Speaker 6: Well, I mean, I think that's a fairly long time in the future. But strategically we'd love to just continue to grow deposits and pay it off with deposits as well as security pay downs over that period of time. So we'll see what the future brings.
<unk>.
Well I mean I think.
That's a fairly long time in the future.
But strategically we would love to just continue to grow deposits and pay it off with deposits.
David Breager: The expansion of our net interest margin was the net result of a 17 basis point increase in our earnings asset yield which offset a 9 basis point increase in our cost of funds. Total loans outstanding decline from the second quarter of 2023 by approximately $30 million to $8.88 billion at the end of the third quarter. Our allowance for credit losses increased to approximately $89 million on September 30 based on net recoveries of $28,000 and a $2 million in provision for credit losses for the third quarter of 2023.
As well as.
The security pay downs.
Over that period of time so.
But we'll see what the future brings.
Speaker 7: Okay. And then just along those lines on the deposit side, you just touch on the pipeline there. I think when we were together a few couple of months ago, I mean, sounded like things had...
Okay, and then just along those lines on the deposit side.
Touch on the pipeline there I think when we were together a couple of months ago, I mean, it sounded like things had.
Speaker 7: you know, increased quite a bit, just given all the disruption in the markets and how, you know, since the turmoil. And I think, you know, end of period non-interest bearing deposits were down, but the average was relatively flat. So just any color around the movement there and the pipeline.
Increased quite a bit just given all the disruption in the markets and have since the turmoil.
And I think end of period noninterest bearing deposits were down but the average was relatively flat. So just any color around the movement there in the pipeline.
Speaker 5: Yeah, the pipeline is still strong. I mean, when you're working on operating companies, it does take quite some time to move those relationships. You have to get everything set up from a Treasury management perspective. The deposit pipeline still remains strong, stronger than our loan pipeline in pure dollars.
David Breager: Average total deposits for the third quarter increased by approximately $278 million compared to the second quarter of 2023. Our average non-interest bearing deposits continued to be greater than 62% of our average total deposits. At September 30, 2023, our total deposits were $12.4 billion, $10 million decrease from June 30, 2023. I would highlight that we continue to have zero broker deposits. Non-interest bearing deposits declined by $292 million will interest bearing deposits increased by $253 million from the end of the second quarter of this year.
Yeah. The pipeline is still strong I mean, when you're when you're working on operating companies. It does take quite some time to <unk>.
Move those relationships you have to get everything set up from a treasury management perspective, the deposit pipeline still remains strong stronger than our loan pipeline in pure dollars.
Speaker 5: But the sales cycle is a little bit longer. It's not like there's a close escrow on a commercial real estate loan.
The sales cycle is a little bit longer its not like Theres, a close escrow on our commercial real estate loan and so were continuing to focus on deposit growth.
Speaker 5: And so we're continuing to focus on deposit growth.
Speaker 5: As you know, the fourth quarter is always a little bit more challenging for us, just due to some seasonality. And just to give you some color on the top.
As you know the fourth quarter is always a little bit more challenging for us just due to some seasonality and just to give you some color on the deposits.
Speaker 5: The last 10 business days of the month of September , our deposits went down by $283 million.
Last 10 business days of the month of September our deposits went down by $283 million.
David Breager: The velocity and deposits moving to citizens' trust continued to decline in the third quarter with approximately $170 million transferred off balance sheet in the quarter compared to $180 million in the second quarter and $370 million in the first quarter of 2023. Customer repos were $270 million at the end of the third quarter, which was $183 million lower than the balance at June 30, 2023. We've experienced a $773 million to coin into deposits and customer repos from the end of 2022, which includes, as I just noted, the $720 million that was moved to citizens' trust, where these funds were invested in higher yielding liquid assets such as treachery notes.
Speaker 5: and that was the result primarily of the payment of taxes.
And that was a result, primarily of the payment of taxes.
Speaker 8: And I think that, you know, that's sort of God.
And I think that that.
That sort of got moved around and the timing just because of the fact that people can pay their taxes later in the year.
Speaker 5: moved around in the timing just because of the fact that you know people could pay their taxes later in the year uh... and then ultimately now the taxes don't have to be paid until November uh... but most people are used to out their taxes prior to that so uh... you know prior to
And then ultimately now the taxes don't have to be paid until November.
Most people had already set out their taxes prior to that so.
Speaker 5: The last 10 days, you know, we were very stable on the deposit side, as evidenced by the average deposit to being up so high during the quarter.
Prior to the last 10 days, we were very stable.
On the deposit side, yes, as evidenced by the average deposits being up so high during the quarter. So I feel relatively positive about the deposit pipeline I feel relatively positive about the go forward, but we do have some historical seasonality in the fourth quarter that will.
Speaker 5: So I feel relatively positive about the deposit pipeline. I feel relatively positive about the go-forward, but we do have some historical seasonality in the fourth quarter that will challenge us a little bit there as well. So I think all in all, we're in a really good spot, but we have a lot of work to do. We have to execute.
David Breager: The bank continues to acquire new deposit customers, new accounts opened during the first time months of 2023, totaled approximately $867 million of new average deposits. We have historically maintained one of the lowest cost of deposits in the industry based on the customers we target in our business model. Our cost of deposits was 52 basis points on average for the third quarter of 2023, which compares to 35 basis points for the second quarter of 2023 and five basis points for the third quarter of 2022.
Challenge us a little bit there as well so I think all in all we're in a really good spot, but we have a lot of work to do we have to execute.
Speaker 7: Okay, and then on the security's portfolio, I mean your CT1 is up another 30 basis points to 14 for, and it seems like we're in a higher for longer environment. I guess, can you give us an update on your appetite to restructure that portfolio, giving your ability to easily absorb?
Got it Okay and then.
On the Securities portfolio I mean, your CET, one is up another 30 basis points to 14 four.
It seems like we're in a higher for longer environment. I guess, what's can you give us an update on your appetite to restructure that portfolio given your ability to.
David Breager: From the first quarter of 2022 through the third quarter of 2023, our cost of deposits has increased by 49 basis points, representing the deposit beta of less than 7%, since the Federal Reserve began this tightening cycle by increasing rates by 525 basis, and Justice Points.
So easily absorbed.
Speaker 6: You know, we always evaluate opportunity, but at this point I don't foresee any things.
Those losses.
We always evaluate opportunities, but at this point I don't foresee anything of significance.
Speaker 7: Okay, and then lastly, just any color around the uptick. I know it's still relatively small amount, but on the classified side, it looked like both non-owner and owner occupied commercial real estate, just any color there and your plans to kind of deal with those credits.
Okay, and then lastly, just any color around the uptick.
I know, it's still relatively a relatively small amount, but on the classified side. It looked like both non owner an owner occupied commercial real estate just any color there.
David Breager: Now, let's discuss loans. Total loans at September 30, 2023 were $8.9 billion, a $30 million decrease from June 30, 2023, and a $202 million or $2.2% decrease from the end of 2022. The quarter over quarter decline was led by a $61 million decline in commercial real estate loans. We also experienced an $18 million decrease in CNI loans as the line utilization declined from 31% at the end of the second quarter to 27% at the end of September 2023.
David Breager: Partially offsetting the decrease in commercial and real estate loans was a $49 million increase in dairy and livestock loans. Utilization on dairy and livestock loans was at 73% on September 30, 2023, which compares to 67% at the same point last year.
Your plans to kind of deal with those credits.
Speaker 5: Yeah, so the majority of the increase was really one relationship alone is pain, it's current.
Yes so.
The majority of the increase was really one relationship the loan is paying its current.
Speaker 5: It's a mixed-use property across the street from UCLA that is listed for sale.
It's a.
Mixed use property.
Ross the street from UCLA.
That is listed for sale.
Speaker 5: They have an offer, apparently, on the property. We're well collateralized. I anticipate that it should close in the fourth quarter. We don't anticipate any charge off. Actually, the proposed sales price is significantly higher than our loan amount by three or four times.
They have an offer apparently on the property, we're well collateralized I anticipate.
That it should close in the fourth quarter, we don't anticipate any charge off.
Actually the.
Proposed sales prices significantly higher than our loan amount by three or four times. So I don't anticipate any problem. There I mean, obviously, allowing us to close but.
Speaker 5: So I don't anticipate any problem there. I mean, obviously, it won't have to close. But I, you know,
Speaker 9: The credit trends have been very stable as well. The borrowers died in the third quarter and we downgraded the loan. But his errors are in the process of it listed and it should sell in the fourth quarter barring, any big problem. Okay, great, thank you.
It's been the credit trends have been very stable as well the borrower died in the third quarter and we downgraded the loan.
David Breager: From December 31, 2022, loans declined by $109 million after excluding the seasonal increase in dairy and livestock loans from year-end and PPP loan forgiveness. Dairy and livestock loans decreased by $87 million from December 31, 2022, as we experience a seasonal peak in line utilization in the fourth quarter of each year. Commercial real estate loans decreased by $42 million from the end of 2022 to September 30, 2023, and CNI loans decreased by approximately $11 million over the same period, as line utilization decreased from 33% to 27%. In addition, construction loans declined by $25 million and consumer loans are lower by $23 million.
But as his heirs are in the process of that's listed and it should sell in the fourth quarter barring any big problem.
Okay, great. Thank you.
Yes.
Thank you one moment for our next question.
Okay.
Speaker 2: And that question will come from the line of Kelly Mata with KBW. Your line is open. Hi, good morning.
And that question will come from the line of Kelly Motta with <unk>. Your line is open.
Hi, good morning. Thank you so much for the question good morning archive.
Speaker 10: Good morning, Mark Kelly. I was hoping you could give us a little bit of perspective on your outlook for loan growth.
Just hoping you could give us a little bit of perspective on your outlook for loan growth could you.
Speaker 10: Talk a little bit about how the pipeline is remind us of any season
Talk a little bit about how the pipeline is.
David Breager: Long growth continues to be impacted by a slowdown in loan demand. Our new loan production weakened in the third quarter. New loan commitments were approximately $288 million in the second quarter of 2023, and approximately $217 million in the third quarter of 2023. In comparison, we originated $443 million of new loans in the third quarter of 2022. New loan production at the end of the third quarter of 2023 was generated at average yields of approximately 7%.
And if there's any seasonality any areas you may be getting more cautious as well.
Speaker 10: cautious, as well as provide any color on how pricing and spread.
Provide any color on how pricing and spreads are holding up anywhere.
Loan originations are coming on.
Speaker 5: Yeah, so at the end of the fourth or the end of the third quarter, excuse me, new loan original nations were, you know, up over 7%.
Yes, so at the end of the fourth our data in the third quarter excuse me new loan originations were up over 7%.
Speaker 5: The pipelines, I would say, you know, remained challenged.
The pipeline I would say remained challenged.
Speaker 5: However, there are some things that we're working on. The fourth quarter is always a good quarter for us. If you just look at the gross amount because we have dairy advances, we anticipate that being pretty close to seasonal averages over looking back over the years. But the pipelines are definitely smaller and they were a year ago. Pricing is impacting people's decisions.
However, there are some things that we're working on the fourth quarter is always a good quarter for us. If you just look at the at the gross amount because we have dairy advances, we anticipate that being pretty close to seasonal averages over looking back over the years.
David Breager: Although loans declined at quarter and from the end of the second quarter, we recorded a provision for credit losses of $2 million for the third quarter of 2023 to reflect a further deterioration in our economic forecast. Asset quality continues to be strong and the trend remains stable. At quarter and non-performing assets defined as non-aggural loans plus other real estate out were $10 million or six basis points of total assets. The $10 million in non-performing loans compares with $6.5 million to the prior quarter and $10.1 million for the year ago quarter.
But I still have it.
The pipelines are definitely smaller than they were a year ago.
Pricing is impacting people's decisions.
Speaker 5: We still want to make quality loans, but I think there's a lot of people just sort of waiting on the sidelines to see if things, you know, turn ugly, where they can take advantage of those opportunities.
We.
Still want to make quality loans, but I think theres a lot of people just sort of waiting on the sidelines to see if things turn I believe where they can take advantage of those opportunities.
Speaker 5: So I'm still aiming for that low single digit growth. We didn't hit it this quarter, obviously. We were down $30 million quarter over quarter point to point. But we were still booking new loans, but it's a little less than half of what we were doing a year ago.
I am still aiming for that low single digit growth, we didn't hit it this quarter obviously.
David Breager: The increase from the prior quarter was primarily due to a CNI loan that was placed on non-accrual at the end of the third quarter. During the third quarter, we experienced credit chargeoffs of $26,000 and total recoveries of $54,000 resulting in net recoveries of $28,000 compared with net chargeoffs of $73,000 for the second quarter of 2023. Year-to-date net chargeoffs were $122,000.
We're down $30 million quarter over quarter point to point, but we're still booking new loans, but it's a little less than half of what we were doing a year ago.
Speaker 10: I think I got all of your questions. I'm sorry, that was like a five-parter. I appreciate the color on your appetite for security.
I think I got all your questions.
Operator.
Yeah.
I appreciate the color.
Your appetite for securities restructuring in how you approach that just wondering in the billions of swaps you put on really nicely helped the margin. This quarter can you remind us I think you said the right now.
Speaker 10: that I'm just wondering it the billion swaps you put on
David Breager: Classified loans for the second quarter were $92 million compared with $78 million for the prior quarter and $64 million for the year ago quarter. Classified loans as percentage of total loans was 1.04 percent at quarter end. The $14.4 million increase in Classified loans quarter over quarter was primarily due to a $24.4 million increase in Classified commercial real estate loans, partially offset by a $10.2 million decrease in classified during livestock and agribusiness loans.
Speaker 10: Um, can you remind us, I think you said the rate on the, on that.
Speaker 10: Just remind us what the tenure or duration is on that and what your appetite could be about potentially.
Three 8% just remind us what the tenure or duration is on that and what your appetite could be about potentially adding adding more acute.
What about more of your securities disclosure.
Speaker 6: Kelly, you're correct. The average, the weighted average cost on those fixed drops is 3.8%. And they're four and five year tenors. I would say weighted more towards five.
Yes, Kelly you are correct. The average the weighted average cost on those fixed swaps of three 8%.
And therefore in five year tenors.
David Breager: The increase in Classified loans for the commercial real estate category was primarily due to one relationship in which approximately $20 million of non-unarchived commercial real estate loans were downgraded due to the death of a borrower during the third quarter. This loan is well collateralized and the property is currently listed for sale. We anticipate no loss once the property is sold.
I'd say weighted more towards 5%.
Speaker 6: We'll continue to evaluate. I don't know that we think immediately that we need to do more in that space. We're happy with how it positions the balance sheet, but we will continue to evaluate that in other hedging opportunities.
We'll continue to evaluate I don't know that we think immediately that we need to do more in that space.
We are happy with how it positioned the balance sheet, but we will continue to evaluate that and other other hedging opportunities.
Maybe maybe a last maybe two parter from me do you have where you are.
Speaker 10: Do you have where your spot deposit rate was at the end of the quarter as you look to 4Q?
Alan Nicholson: I will now turn the call over to Alan to discuss the allowance for credit losses, investments, borrowings and capital. Alan, thanks Dave.
Hot spot deposit rate was at the end of the quarter.
As you look Q4 Q.
The margin expansion.
Alan Nicholson: Good morning everyone. As of September 30, 2023, our ending allowance for credit losses was $89 million or 1 percent of total loans, which compares to $87 million for 0.98 percent of total loans at June 30, 2023 and $85.1 million or 0.94 percent of total loans at December 31, 2022. For the quarter ended September 30, 2023, we recorded a provision for credit losses of $2 million compared to $500,000 for the quarter ended June 30, 2023 and $2 million for the third quarter of 2022.
This quarter was really nice.
Okay.
Deposit costs are and how youre thinking about margin.
Last quarter of the year.
Do you think.
Some question Kevin can continue.
Speaker 6: So Kelly, if you go to the investor presentation that we published last night on page 34, you'll see that as of September , cost of interest bearing deposits and repos was 1.39%.
So Kelly if you go to the Investor presentation that we published last night on page 34, you will see that as of September <unk>.
Cost of interest bearing deposits and repos was 139% and then if you go to.
Speaker 6: And then if you go to, I think it's page 40, you'll see in the upper right that the cost deposit in total was 56 basis points. So, and I think if you look at the trend line there, the increase in both of those is continued to go up, but I think at a slower pace, the left.
Page sorry page 40.
Youll see in the upper right that the cost of deposit and total was 56 basis points. So.
And I think if you look at the trend line there the.
Alan Nicholson: The provision for credit losses in the third quarter was driven by the change in our economic forecast, which resulted in lower projected GDP growth, lower commercial real estate values and higher unemployment when compared to our forecast at both June 30 and the end of 2022. Our economic forecast continues to be a blend of multiple forecasts produced by Moody's. We continue to have a largest individual scenario waiting on Moody's baseline forecast with downside risk weighted among multiple forecasts, which individually reflect various degrees of economic recession in 2024 and early 2025.
The increase in the in both of those has continued to go up but I think at a slower pace for the last couple of months.
Speaker 10: Got it. Thanks. I'll step back. Appreciate all the color. Thanks, guys.
Got it thanks, I'll step back and see all the color. Thanks guys.
Speaker 11: Thank you. Thank you. One moment for our next question.
Thank you.
Thank you one moment for our next question.
Alan Nicholson: The resulting economic forecast reflects a modest decline in GDP in the first half of 2024, but a more significant decrease in commercial real estate values that persists through all of 2025 and an unemployment rate rising through 2025. The resulting weighted average forecast that assumes GDP will increase by 2.1 percent in 2023, followed by a modest recession at the beginning of 2024 and full year GDP growth of just 0.3 percent for all of 2024. GDP then grows at 1.1 percent in 2025. The unemployment rate is forecasted to be 3.8 percent in 2023 and 5.2 percent in 2024 would peak unemployment of 5.7 percent in 2025.
Okay.
Speaker 2: And that will come from the line of Gary Tenor with DA Davidson, your line of though.
And that will come from the line of Gary Tenner with D. A Davidson your line is open.
Speaker 12: Thanks. Good morning. Hey, I just wanted to ask prospectively about loan yields, you know, assuming the Fed is not changing rates from here, you know, this kind of six basis point increase in loan yields in the third quarter, just with ongoing kind of repricing within the book and over the course of 2024, is that a similar sort of quarterly trajectory you would expect, assuming, again, the right environment is pretty stable from here?
Thanks, Good morning.
Just again, Hey, I just wanted to.
Prospectively about loan yields assuming the fed does not change in rates from here.
This kind of a six basis point increase in loan yields in the third quarter, just with ongoing kind of repricing within the book over the course of 'twenty 'twenty four is that a similar sort of quarterly trajectory you would expect assuming again the rate environment was pretty stable from here.
Speaker 6: I'm not sure if I quite understood the full question, Gary, but in general, you know, if the feds on hold, you know, we'll see a continuation of.
I'm not sure if I quite understood the full question, Gary but in general.
Heads on hold.
We'll see a continuation of.
Speaker 6: loans that were adjustable, repricing at higher rates, certainly, and so that will be a catalyst. But it won't be, you know.
Loans that were adjustable repricing at higher rate certainly.
So so that will be a catalyst, but it won't be.
Speaker 6: It won't be what we saw earlier this year and last year when the Fed was moving all the variable loans were repricing. So I think you can get a sense of it from some of our disclosures in the investor deck where in the appendix we show how much of our office CRE is going to reprise or mature. That might give you a sense of how quickly that will turn.
It won't be the what we saw earlier this year and last year when the fed was moving all of the variable loans were repricing. So.
So it will I think you can get a sense of it from some of our disclosures in the investor deck, where on the appendix we show how much of our office CRE is going to reprice or mature.
Alan Nicholson: Total borrowings declined by $375 million from June 30th of 2023, as cash balances were drawn down by $378 million over that same time period. Borrowings, as of September 30th, 2023, consisted of $870 million from the bank term funding program that mature in 2024 with a weighted average rate of 4.87%, as well as $250 million of remaining short-term advances from the Federal Home Loan Bank. As of September 30th, the cost of these FHLB advances were 5.05%. All of the FHLB borrowings mature within the fourth quarter of this year.
It gives you a sense of how quickly that will turn.
Speaker 5: Genghier, the only thing I would add to that most of the repricing on the commercial real estate portfolio is based off of a five year treasury rate. So if you look at five year treasury five years ago compared to today, it's not a 500 basis point increase. It might be a 220 or 230 basis point increase.
Yes, Gary the only thing I would add to that most of the re pricing on the commercial real estate portfolio is based off of a five year treasury rate. So if you look at five year Treasury five years ago compared to today. It is not a 500 basis point increase it might be a 220 or 230 basis point increase and.
Speaker 5: And so from a credit perspective, that's good. From an ass-ideal growth perspective, it's not as meaningful. But I do think that we will see the office portfolio is very similar to the rest of the portfolio as far as the repricing and maturities. We just call out the office individually, but the rest of the commercial real estate portfolio, it's probably pretty similar as far as the maturities and the repricing.
So from a credit perspective, that's good from a.
Asset yield growth perspective, it's not as meaningful but I do think that we will see the office portfolio is very similar to the rest of the portfolio as far as the repricing of maturities.
Alan Nicholson: We continue to shrink our investment portfolio. Our total investment portfolio declined by $218 million from June 30th, 2023 to $5.4 billion as of September 30th. Of the approximately $120 million of cash flows generated by our investments during the third quarter of 23, we reinvested approximately $30 million in short-term treasuries. The overall decrease in our investment portfolio was primarily due to $195 million decline in investment securities available for sale or ASS securities.
We just call out the office individually, but the rest of the commercial real estate portfolio is probably pretty similar as far as the maturities and the re pricings.
Speaker 5: But yeah, we'll continue to see that and we are originating loans above 7% and you know higher later because the five interior treasury have gone up pretty significantly in last month or so And so that's you know that and or the incremental borrowing costs is how we're pricing the loans today
But yes, we will continue to see that and we are originating loans above 7%.
And higher later, because the five and 10 year Treasury have gone up pretty significantly in the last month or so.
And so thats.
That band or the incremental borrowing cost is how we're pricing loans today.
Speaker 12: I will appreciate the answer to the question that apparently was not phrased well, but you've got me going to be. And then just really quick on the M&A environment, I mean, obviously in your footprint, recently that CBCY community, West transaction, obviously community West, pretty small relative to your size, but just, the bill was pretty well received by the market, initially the first couple days after it was announced. Just wondering if you...
Alan Nicholson: ASS securities totaled $2.87 billion at the end of the third quarter, inclusive of a pre-tax net unrealized loss of $628 million. And investment securities held the maturity, more HDM securities, totaled approximately $2.49 billion at September 30th, 2023. The HDM portfolio declined by approximately $23 million from June 30th, as cash flows were not reinvested during the quarter. The tax equivalent yield on the entire investment portfolio was 2.64% for the third quarter of 2023 compared to 2.37% for the prior quarter.
Okay, well I appreciate the answers the question that apparently was not afraid as well, but you got it right.
Alright, and then just really quick on <unk>.
M&A environment, obviously in your footprint recently that CVC why community West transaction, obviously it can be.
Pretty small relative to your size, but just.
The deal was pretty well received by the market.
Initially the first couple of days after it was announced.
Speaker 12: kind of seen any change in kind of the stance of, you know, prospective sellers, you know, willingness to kind of, you know, take what the market's, you know, potentially giving them, you know, in the expectation that it would be received well or better, at least by the market.
Wondering if you can.
Kind of seen any change in kind of the stance of prospective sellers.
Willingness to kind of.
Take what the markets potentially giving them.
Alan Nicholson: The increase in yield for the third quarter benefited from a $3.8 million of interest income from the positive carry on fair value hedges we executed in late June of this year. We received daily so-for on these pay-fix swabs that have a weighted average fixed rate of approximately 3.8%.
And the expectation that it would be received well or better at least spot market.
Speaker 5: Yeah, I, well, first and foremost, I think conversations have definitely picked up. You know, there are some...
Yes.
First and foremost I think conversations have definitely picked up.
Speaker 5: some math issues with marks and different things to consummate a deal. And I believe that deal closed below book value. So, you know, sellers that are willing to sell below book value, that could be of interest to us, depending on the bank, obviously. But I do think that the conversations have picked up. I do think that there's going to be opportunities for us that sort of been our position.
There are some some math issues with March and different things to consummate a deal.
And I believe that that deal closed below book value.
Alan Nicholson: Now turning to our capital position, the company's tangible common equity ratio at September 30th, 2023 was 7.73%, consistent with the prior quarter's ratio of 7.75% while being higher than the 7% at September 30th, 2022.
No.
Sellers that are willing to sell below book value.
That could be of interest to us.
Depending on the bank, obviously, but.
But I do think that the conversations have picked up I do think that theres going to be opportunities for us that sort of been our position.
Speaker 5: you know, sort of related to a restructure of the balance sheet and maybe potentially taking losses. We don't want to impact the capital. We'd rather have the excess capital and be prepared to do a deal where we might have to, you know, mark the other balance sheet that would impact our capital ratios. So I think, you know, we are actively interested in looking at opportunities. And I think there's going to be opportunities.
Alan Nicholson: Shareholder's equity decreased from the second quarter by $50 million to $1.95 billion at the end of the third quarter. Our OCI declined by $82 million due to the impact of higher interest rates that increased the unrealized loss on our ASS portfolio. At the end of the second quarter of 2023, we entered into 1 billion and notional pay-fixed rate swabs, as fair value hedges to mitigate the risks of rising interest rates on our capital.
Sort of related to a restructure of the balance sheet and maybe potentially taking losses, we don't want to impact the capital, we'd rather have the excess capital and be prepared to do a deal where we might have to mark the other balance sheet that would impact our capital ratios. So.
We are actively interested in looking at opportunities and I think theres going to be opportunities.
Speaker 5: uh you know in the short to mid-term here and uh
Alan Nicholson: These pay-fixed swabs have maturities ranging from 4 to 5 years. At September 30th, 2023, we recorded a fair value adjustment associated with these swabs derivatives, which increased other comprehensive income by $17.6 million. Partly mitigating impact OCI of the decline in the fair value of our ASS portfolio.
In the short to mid term here and.
Speaker 5: We'll just keep looking for the right opportunity for us that meets our criteria.
We'll just keep looking for the right opportunity for us that meets our criteria.
I appreciate it.
Speaker 11: Thank you. As a reminder, if you would like to ask a question, please press star one one. One moment for our next question.
Thank you as a reminder, if you would like to ask a question. Please press star 111 moment for our next question.
Alan Nicholson: Equity increased for the first nine months of 2023 by $3 million. Retained earnings increased a year-to-date income of $173 million with offset by $84 million in dividends for the nine months of this year. The resulting year-to-date dividend payout ratio was 48.4%.
Speaker 2: And that will come from the line of Tim Coffey with Jannie Montgomery-Scott. Your line is open.
And that will come from the line of Tim Coffey with Janney Montgomery Scott Your line is open.
Speaker 13: Good morning, gentlemen. Hey, Dave of the back in the first quarter of the 370 million ish in deposits that left the balance sheet. I think two thirds of that went to citizens trust. Have you, do you have any kind of visibility on when some of that might be able to come back.
Good morning, gentlemen.
Hey, Dave.
Back in the first quarter of the $370 million ish and deposits that left the balance sheet I think two thirds of that went to citizens Trust.
Have you do you have any kind of visibility on when some of that might be able to come back.
Alan Nicholson: The 10B51 stock repurchase plan we initiated in 2022 expired on March 2nd, 2023. There were no shares purchased during the 2nd and 3rd quarters of 2023. During the first quarter of this year, we did repurchase approximately 792,000 shares of common stock at an average price of $23.43 totaling $18.5 million in stock repurchases.
Speaker 5: So the 370 was actually the amount that went to Citizens Trust.
So the $3 70 was actually the amount that went to citizens trust okay.
Speaker 5: There was a little bit more that left in total. And look, I think if we're in this higher for longer sort of flat, high, you know, rate environment, I think that those treasury, you know, securities that they purchased might
It was a little bit more of that left in total.
And look I think if we're in this higher for longer sort of flat.
Rate environment, I think that those treasury securities that they purchased.
Speaker 5: might stick at Citizens Trust for a little while. You know, Citizens Trust is working on moving those relationships to more managed relationships and, you know, in a different fee structure than just buying treasuries.
Mike's ticket business trust for a little while.
Alan Nicholson: 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 30th, 2023, our Common Equity Tier 1 capital ratio was 14.4% and our total risk-based capital ratio was 15.3%.
Assistance Trust is working on moving those relationships to more managed relationships.
And a different fee structure than just buying treasuries.
Speaker 5: But I do believe some of that will ultimately come back. I do think that
But I do believe some of that will ultimately come back I do think that.
Speaker 5: You know, we, our trust group, our bankers that manage those relationships, I would rather keep it in the family at Citizens Trust than let it go somewhere else.
We.
Our trust group, our bankers that manage those relationships I would rather keep it in the family had citizens Trust then let it go somewhere else and.
David Breager: I'll now turn the call back today for further discussion of the third quarter earnings. Thank you, Alan. Net interest income before provision for credit losses was $123.4 million for the third quarter, compared with $119.5 million for the second quarter and $133.3 million for the year-to-go quarter.
Speaker 5: Potentially never get it back, but I don't anticipate any of it really coming back anytime soon barring You know somebody's individual need for you know the liquidity or the cash to do something
Potentially never get it back, but I don't anticipate any of them really coming back anytime soon barring.
Somebody's individual need for liquidity or the cash to do something.
Speaker 5: So I think we're still a little ways away from starting to see some of that roll back on.
I think we're still a little ways away from starting to see some of that roll back on.
Speaker 13: Okay. And then your non-interest-bearing percentage to total deposits is pretty much right on top of where you were pre-COVID. Do you expect there to be more downward pressure on the deposit mix?
David Breager: Our tax equivalent net interest margin was 3.31% for the third quarter of 2023, compared with 3.22% for the second quarter and 3.46 for the third quarter of 2022. Interest income grew by nearly $7 million over the prior quarter. As our earning asset, yields increased 17 basis points quarter over quarter based on the combination of six basis point increase and loan yields and the impact of 3.8 million of positive carrying on pay-fix swap derivative income in the third quarter.
Okay.
And then the first.
Your noninterest bearing percentage to total deposits is pretty much right on top of where you were pre COVID-19.
Do you expect there to be more downward pressure on the deposit mix.
Speaker 5: Yeah, I mean, there's always, you know, there's always that risk. I mean, we, as we've talked about for years and years and years, you know, we, we sell deep into the relationships with a lot of Treasury management products. The cost of maintaining a free account is,
Yes, I mean, there's always there's always that risk I mean, we as we've talked about for years and years and years.
We sell deep into the relationships with a lot of Treasury management products the cost of maintaining a free account.
Speaker 5: is pretty high, which is the type of client we go after. There's still some psychology there. I mean, if everybody was just doing a pure math equation, then they would get a higher money market rate than we're paying in ECR. So they would just do that. But that's not the way that it works. And operating companies need to keep.
Is.
As you know pretty high which is the type of client. We go after there is still some psychology. There I mean, if everybody was just doing a pure math equation.
David Breager: Third quarter average earning assets decreased by $68 million from the second quarter due to an increase in both average investment, securities of $147 million in average loans outstanding of $30 million. The decline in those assets was offset by an increase of $121 million in average funds on deposit at the Federal Reserve. Interest expense increased by $3.2 million over the prior quarter. As our cost of funds increased by nine basis points from the second quarter of 2023.
And then they would get a higher money market rates and we're paying an ECR. So they would just do that but thats not the way that it works in the operating companies need to keep.
Speaker 5: Larger, especially larger operating company need to keep larger balances. So, I mean, we work hard at going after that type of client. It's been built over, you know, the...
Larger, especially larger operating companies indeed keep larger balances. So I mean, we work hard at going after that type of client it's.
It's been built over the 49 years of our company.
Speaker 5: 49 years of our company, you know, been doing sort of the same thing, especially in the last, you know.
<unk> been doing sort of the same thing, especially in the last.
Speaker 5: thirty thirteen fifteen thirteen fifteen years uh... well my predecessor was here and even when linwily was here so uh... we've got this uh... this deposit base over the long haul so there's always some of that pressure uh... a lot of the excess deposits that have you know come off the balance sheet that have gone into trust have impacted that but you know there could be changes in in the mix but so far we've been hanging in there pretty well
30, <unk> <unk> <unk>.
David Breager: Interest expense on deposits increased by $5.7 million due to the combination of $288 million increase in average interest bearing deposits in the third quarter and a 41 basis point increase in the cost of interest bearing deposits. The cost of interest bearing deposits was 1.37% in the third quarter compared to 96 basis points in the prior quarter. Interest expense on borrowing, however, declined by $2.6 million as average borrowing declined by $209 million.
13% to 15 years, while my predecessor was here and even when Linn Wiley was here so.
Got this this deposit base over the long haul. So there's always some of that pressure a lot of the excess deposits that have come off the balance sheet that have gone into trusts have impacted that but there could be changes in the mix, but so far we've been hanging in there pretty well.
Speaker 13: Okay, and then if I could switch to credit quality and your outlook, I mean in normal times death, divorce, business dissolution, like those are what drive performing loans into non-performing status, but are you seeing anything in the loan book that would indicate a change in kind of the business or the economic environment?
Okay, and then if I could switch to credit quality in your outlook.
I mean in normal times death divorce business to solutions like those are what drive performing loans into nonperforming status, but are you seeing anything in the loan book that would indicate a change in kind of the business.
David Breager: The $10 million decline in that interest income from the year ago quarter resulted from a 15 basis point decrease in that interest margin and a $484 million decline in average earning assets. The year over a year, net interest margin decline was due to an 87 basis point increase in our cost of funds offsetting a 67 basis point increase in earning asset yields. The increase in earning asset yields was the result of higher loan and investment yields in the third quarter of 2023, compared to the third quarter of 2022, as well as an improved asset mix in which average loans grew from approximately 56% of earning assets in the third quarter of 2022 to 59% in the third quarter of 2023.
Speaker 5: Yeah, you know, it's interesting. I mean, if you take out the one large loan that I mentioned in the call and answered the question on earlier, I mean, really, the numbers stayed pretty flat. I mean, there were other ins and outs. But I mean, generally speaking,
Economic environment.
Yes, it's interesting I mean, if you take out the one large loan that I mentioned in the call and answer the question on earlier I mean really the number of stayed pretty flat I mean, there are other ins and outs, but I mean generally speaking things have held up pretty well I still always get concerned just sort of about the small C&I.
Speaker 5: things have held up pretty well. I still always get concerned just sort of about the small C&I type borrower, the SBA 7A stuff, which we have less and less of.
Type borrower, the SBA, <unk>, which we have less and less of.
Speaker 5: But those are sort of the areas where we're seeing some maybe hiccups, but nothing material I mean, it's it's just been sort of case-by-case basis and
But those are sort of the areas, where we're seeing some maybe hiccups, but nothing material I mean, it's just been sort of case by case basis in <unk>.
Speaker 5: and you know our our salespeople are credit team our special assets group i mean they'll work really hard to get to these things really work out you know any potential problems and and it's been
And our salespeople our credit team our special assets group I mean, they all work really hard to get to these things early and work out any potential problems and it's been.
David Breager: Lone yields for 5.07% for the third quarter of 2023, compared with 4.56% for the year ago quarter. Investment security yields increase 52 basis points from a yield of 2.12% in the prior year quarter to 2.64% in the third quarter of 2023.
Speaker 5: It's been pretty stable, doesn't mean that things can't change, but so far so good.
It's been pretty stable it doesn't mean that things can't change, but so far so good.
Speaker 13: Okay, all right, well those are my questions. Thank you very much for your time.
Okay, Alright, well those are my questions. Thank you very much for your time.
Speaker 2: Thanks, Tim. Thank you. As a reminder, if you would like to ask a question, please press star 11.
David Breager: Moving on to non-interesting income. Non-interesting income was 14.3 million dollars for the third quarter of 2023, compared with 12.7 million dollars for the prior quarter and 11.6 million dollars for the year ago quarter. Our customer-related banking fees including deposit services, international and merchant bank card services increased by $224,000 compared to the second quarter and declined by $171,000 when compared to the third quarter of 2022. Although our trust and wealth management fees decreased by $69,000 compared to the second quarter of 2023, year over year these fees grew by $379,000.
Thanks, Tim.
As a reminder, if you would like to ask a question. Please press star one one.
Speaker 2: I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Dave Braeger for closing remarks.
Okay.
I'm showing no further questions in the queue at this time I would now like to turn the call back over to Mr. Dave Brager for closing remarks.
Speaker 5: Thank you very much. I want to thank everybody for joining us this quarter. We appreciate your interest in LePore to speaking with you in January for our fourth quarter, 2023 earnings call. As always, just let Alan or I know if you have any questions. Have a great day and thanks for listening. Bye-bye.
Thank you very much I want to thank everybody for joining us this quarter. We appreciate your interest and look forward to speaking with you in January for our fourth quarter 2023 earnings call as always just let Alan or I know if you have any questions have a great day and thanks for listening bye bye.
Speaker 2: Thank you for participating. This concludes today's program. You may now disconnect.
Thank you for participating. This concludes today's program you may now disconnect.
Yes.
David Breager: Third quarter, fully income to climb by $549,000 as the second quarter of 2023 included $806,000 in death benefits that exceeded the asset value of certain bully policies. Bullying income decreased by $439,000 compared to the third quarter of 2022. The third quarter of 2022 included $1.8 million in death benefits received, which was partially offset by more favorable market impacts on separate account policies during the third quarter of 2023. Compared to the second quarter of 2023, DRA investment income increased as the third quarter included $2.6 million of income from an equity distribution related to one of our CRA investments.
Okay.
[music].
Okay.
Okay.
[music].
Yes.
Thank you.
[music].
David Breager: Now expenses, not as our sixth expense for the third quarter was $55 million compared with $54 million for the second quarter of 2023 and $53 million for the year ago quarter. The third quarter of 2023 included $900,000 in recapture a provision for unfunded loan commitments compared to $400,000 in provision for the second quarter of 2023.
David Breager: There was no provision for the third quarter of 2022. Souries and employee benefit costs increased $1.2 million in quarter over quarter including annual salary increases that were effective at the beginning of the quarter. The quarter over quarter increase in salary expense was approximately $800,000 or 3.3% higher than the second quarter. As loan originations were lower in the third quarter, the contract expense from deferred loan origination costs declined. Therefore, increasing staff expense by almost $300,000, dollars.
David Breager: The $2 million increase in non-interest expense year over year included an increase of $1.5 million or 4.6% in salaries and employee benefits, salary expense grew by 3.5% or approximately $800,000 over the second quarter of 2022. The fur loan origination costs were also lower than the prior year quarter resulting in additional staff expense of $800,000. Regulatory assessment expense increased by more than $800,000 over the prior year quarter. Non-interest expense total 1.33% of average assets for the third quarter of 2023.
Yes.
Speaker 14: director
Okay.
[music].
David Breager: This compares with 1.32% for the second quarter and 1.25% for the third quarter of 2022. Our efficiency ratio was 39.99% for the third quarter of 2023. This compares with 40.86% for the prior quarter and 36.59% for the third quarter of 2022.
David Breager: This concludes today's presentation.
David Breager: Now, Hal and I will be happy to take any questions you may have. Thank you. As a reminder to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced.
Sherry: So, withdraw your question. Press star 11 again. One moment while we compile the Q&A roster.
Matthew Clark: And our first question will come from the line of Matthew Clark with Piper Sandler. Your line is open. Good morning, guys. One of the first touch on the BTFP, the $850,000,000 I think comes to next year. What's your plan for that? Are you going to just pay it off? Are you going to reach and answer some portion of it? Well, I mean, I think that's a fairly long time in the future. But strategically, we would love to just continue to grow deposits and pay it off with deposits as well as security pay downs over that period of time. But we'll see what the future brings.
David Breager: Okay. And then just along those lines on the deposit side, you just touch on the pipeline there. I think when we were together a few a couple of months ago, I mean, sounded like things had increased quite a bit, just given all the disruption in the markets and how, you know, since the turmoil. And I think, you know, end-of-period, non-interest bearing deposits were down, but the average was relatively flat. So, just any color around the movement there and the pipeline?
David Breager: Yeah, the pipeline is still strong. I mean, when you're working on operating companies, it does take quite some time to, you know, move those relationships. You have to get everything set up from a treasury management perspective. The deposit pipeline still remains stronger than our loan pipeline in pure dollars. But the sale cycle is a little bit longer. It's not like there's a close-ass grow on a commercial real estate loan. And so, we're continuing to focus on deposit growth.
David Breager: As you know, the fourth quarter is always a little bit more challenging for us, just due to some seasonality. And just to give you some color on the deposits, the last 10 business days of September are deposits went down by $283 million. And that was a result primarily of the payment of taxes. And I think that, you know, that sort of got moved around in the timing just because of the fact that, you know, people could pay their taxes later in the year.
David Breager: And then, ultimately, now the taxes don't have to be paid until November. But most people had already sent out their taxes prior to that. So, you know, prior to the last 10 days, you know, we were very stable on the deposit side as evidenced by the average deposit being up so high during the quarter. So, I feel, you know, relatively positive about the deposit pipeline. I feel relatively positive about, you know, the go-forward.
David Breager: But we do have some historical seasonality in the fourth quarter that will, you know, challenge us a little bit there as well. So, I think all in all, we're in a really good spot. But we have a lot of work to do. We have to execute.
David Breager: Thank you. Got it. Okay.
Gary Tenner: And then on the security portfolio, I mean, your CET-1 is up another 30 basis points to 14, 4, and it seems like we're in a higher for longer environment.
David Breager: I guess, what can you give us an update on your appetite to restructure that portfolio, giving your ability to easily absorb those losses? You know, we always evaluate opportunities, but at this point, I don't foresee anything of significance. Okay.
David Breager: And then lastly, just any color around the uptick, I know it's still, you know, relatively, relatively small amount, but on the classified side, it looked like both non-owner and owner occupied commercial real estate, just any color there and, you know, your plans to kind of deal with those credits. Yeah, so the majority of the increase was really one relationship alone is paying its current, it's a mixed use property across the street from UCLA that is listed for sale.
David Breager: Well, they have an offer apparently on the property were well collateralized. I anticipate that it should close in the fourth quarter. We don't anticipate any charge off actually the proposed sales prices significantly higher than our loan amount by three or four times. So I don't anticipate any problem there.
David Breager: I mean, obviously, the loan has to close, but I, you know, it's been the credit trends have been very stable as well that the borrowers died in the third quarter and we downgraded the loan. But his, his errors are in the process of it listed and it should sell in the fourth quarter barring any big problem. Okay. Great. Thank you. One moment for our next question.
Kelly Motta: And that question will come from the line as Kelly Mata with KBW. Your line is open. Hi. Good morning. Thank you so much for the question. Good morning.
David Breager: I was hoping you could give us a little bit of perspective on your outlook for loan growth. Could you talk a little bit about how the pipeline is? Remind us of any seasonality, any areas you may be getting more cautious, as well as provide any color on how pricing and spreads are holding up and where new loan originations are coming on. Yeah. So at the end of the fourth, or at the end of the third quarter, excuse me, new loan originations were, you know, up over 7%.
David Breager: The pipelines, I would say, you know, remained challenged. However, there are some, some things that we're working on. The fourth quarter is always a good quarter for us. If you just look at the, at the gross amount because we have dairy advances, we anticipate that, you know, being, you know, pretty close to seasonal averages over looking back. Over the years. But I still, you know, the pipelines are definitely smaller and they were a year ago pricing is impacting people's decisions.
David Breager: We still want to make quality loans. But I think there's a lot of people just sort of waiting on the sidelines to see if things, you know, turn ugly where they can take advantage of those opportunities. So I'm still, you know, aiming for that, you know, low single digit growth. We didn't hit it this quarter, obviously. We were, you know, down $30 million quarter over quarter point to point. But we're still booking new loans, but it's a little less than half of what we were doing a year ago. I think I got all your questions.
David Breager: I appreciate the color on your appetite for securities, restructuring and how you're approaching that. I'm just wondering, the billion swaps you put on really nicely helped the margin this quarter. Can you remind us, I think you said the rate on that was 3.8%. Just remind us what the tenure or duration is on that and what your appetite could be about potentially adding more to swap out more of your securities disclosure. Kelly, you're correct.
David Breager: The average, the weighted average cost on those fixed drops is 3.8%. And they're four and five year tenors. I would say weighted more towards five. We'll continue to evaluate. I don't know that we think immediately that we need to do more in that space. We're happy with how it positions the balance sheet, but we will continue to evaluate that and other other hedging opportunities.
Kelly Motta: Maybe a less, maybe two barter from me. Do you have a, where your spot deposit rate was at the end of the quarter? And you know, as you look to 4Q, I think the margin expansion you had this quarter was really nice. Just how you, where deposit costs are and how you're thinking about margin for the last quarter of the year. And, you know, do you think this inflection can continue? Kelly, if you go to the investor presentation that we published last night on page 34, you'll see that as of September, cost of interest bearing deposits and repose was 1.39%.
Kelly Motta: And then if you go to, I think it's page 40, you'll see in the upper right that the cost deposit in total was 56 basis points. So, and I think if you look at the trend line there, the increase in those and both of those is continue to go up, but I think at a slower pace for last couple of months. Got it. Thanks. I'll step back and appreciate all the color. Thanks, guys. Thank you.
Sherry: One moment for our next question.
Gary Tenner: And that will come from the line of Gary Tenor with DA Davidson. Your line is open. Thanks, good morning. I just wanted to ask, prospectively, about loan yields, you know, assuming the Fed is not changing rates from here, you know, this kind of six basis point increase in loan yields in the third quarter, just with ongoing kind of repricing within the book. And over the course of 2024, is that a similar sort of quarterly trajectory you would expect assuming again the rate environment is pretty stable from here?
Gary Tenner: I'm not sure if I quite understood the full question, Gary, but in general, you know, if the Fed's on hold, you know, we'll see a continuation of, you know, loans that were adjustable repricing at higher rate certainly. And so that will be a catalyst, but it won't be, you know, it won't be what we saw earlier this year and last year, you know, when the Fed was moving all the variable loans were repricing.
Gary Tenner: So I think you can get a sense of it from some of our disclosures in the industrial deck where, you know, in the appendix, we show how much of our office CRE is going to reprise or mature. That might give you a sense of how quickly that will turn. Gary, the only thing I would add to that most of the repricing on the commercial real estate portfolio is based off of a five year treasury rate.
Gary Tenner: So if you look at five year treasury five years ago compared to today, it's not a 500 basis point increase, it might be a 220 or 230 basis point increase. And so from a credit perspective, that's good. From an asset yield growth of perspective, it's not, you know, as meaningful, but I do think that, you know, we will see the office portfolio is very similar to the rest of the portfolio as far as the repricing and maturities.
Gary Tenner: We just call out the office individually, but the rest of the commercial real estate portfolio, you know, is probably pretty similar as far as the maturities and the repricing, in the last month or so. And so that's, you know, that and or the incremental borrowing cost is how we're pricing loans today.
David Breager: Okay, well, I appreciate the answer to the question that apparently was not phrased well, but you've got me going to be.
David Breager: And then just really quick on the M&A environment. I mean, obviously in your footprint, you know, recently that CBCY community, West transaction, obviously community West, you know, pretty small relative to your size, but just, you know, the deals pretty well received by the market, you know, initially the first couple days after it was announced. Just wondering if you've kind of seen any change in kind of the stance of, you know, prospective sellers, you know, willingness to kind of, you know, take with the markets, you know, potentially giving them, you know, in the expectation that it would be received well or better at least by the market.
David Breager: Yeah, why first and foremost, I think conversations have definitely picked up, you know, there are some some math issues with Marx and different things to, you know, consummate a deal. And I believe that that deal closed below book value. So, you know, sellers that are willing to sell below book value, that could be of interest to us depending on the bank, obviously. But I do think that the conversations have picked up.
David Breager: I do think that there's going to be opportunities for us that sort of been our position, you know, sort of related to a restructure of the balance sheet and maybe potentially taking losses. We don't want to impact the capital. We'd rather have the excess capital and be prepared to do a deal where we might have to, you know, mark the other balance sheet that would impact our capital ratio. So, I think, you know, we are actively interested in looking at opportunities. And I think there's going to be opportunities, you know, in the short midterm here. And we'll just keep looking for the right opportunity for us to meet our criteria. Appreciate it.
David Breager: Thank you.
Timothy Coffey: As your 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 Tim coffee with Janie Montgomery Scott. Your line is open.
David Breager: Good morning, gentlemen. Good morning, Tim. Hey, Dave, back in the first quarter of the 370 millionish in deposits that I left the balance sheet. I think two thirds of that went to citizens trust. Have you, do you have any kind of visibility on when some of that might be able to come back? So the 370 was actually the amount that went to citizens trust. Oh, okay. There was a little bit more that left in total.
David Breager: And look, I think if we're in this higher from longer sort of flat, high, you know, rate environment, I think that those treasury, you know, securities that they purchased might might stick at systems trust for a little while. You know, citizens trust is working on moving those relationships to more managed relationships and, you know, in a different fee structure than just buying treasuries. But I do believe some of that will ultimately come back.
David Breager: I do think that, you know, we are trust group are our bankers that manage those relationships. I would rather keep it in the family and citizens trust and let it go somewhere else and potentially never get it back. But I don't anticipate any of a really coming back anytime soon and barring, you know, somebody's individual need for, you know, the liquidity or the cash to do something. So I think we're still a little ways away from start and see some of that roll back on.
David Breager: Okay. And then the person you're not experiencing percentage to total deposits is pretty much right on top of where you were pre COVID. Do you expect there to be more downward pressure on that deposit mix? Yeah, I mean, there's always, you know, there's always that risk. I mean, we, as we've talked about for years and years and years, you know, we sell deep into the relationships with a lot of Treasury management products.
David Breager: The cost of maintaining a free account is, is, you know, pretty high, which is, you know, the type of plant we go after. There's still some psychology there. I mean, if everybody was just doing a pure math equation, then they would get a higher money. And we're paying an ECR so they would just do that. But that's not the way that it works in operating companies need to keep larger, especially larger operating companies need to keep larger balances.
David Breager: So, I mean, we work hard at going after that type of client. It's been built over, you know, the 49 years of our company, you know, been doing sort of the same thing, especially in the last, you know, 13, 15, 15 years. Well, my predecessor was, you know, a year and even when Lynn Wiley was here. So, we've built this, this deposit base over the long haul. So, there's always some of that pressure.
David Breager: A lot of the excess deposits that have, you know, come off the balance sheet that have gone into trust. Have impacted that. But, you know, there could be changes in the mix, but so far we've been hanging in there pretty well.
David Breager: OK, and then if I could switch to credit quality and your outlook, I mean, normal times, deaths, divorce, business dissolution, like those are what drive performing loans into non-performing status. But are you seeing anything in the loan book that would indicate a change in kind of the business or the economic environment? Yeah, you know, it's interesting. I mean, if you take out the one large loan that I've mentioned in the call and answered the question on earlier, I mean, really the number of state pretty flat.
David Breager: I mean, there are other ins and outs. But I mean, generally speaking, things have held up pretty well. I still always get concerned just sort of about the small C&I type borrower, the SBA7A stuff, which we have less and less of. But those are sort of the areas where we're seeing some maybe hiccups, but nothing material. I mean, it's just been sort of case by case basis. And, you know, our salespeople, our credit team, our special assets group, I mean, they all work really hard to get to these things early and work out, you know, any potential problems. And it's been, you know, it's been pretty stable. It doesn't mean that things can't change, but so far so good.
Timothy Coffey: Okay. All right. Well, those are my questions. Thank you very much for your time. Thanks, Tim. Thank you. As a reminder, if you would like to ask a question, please press star 11. I'm showing no further questions in the queue at this time.
David Breager: I would now like to turn the call back over to Mr. Dave Breager for closing remarks. Thank you very much. I want to thank everybody for joining us this quarter. We appreciate your interest and look forward to speaking with you in January for our fourth quarter of 2023 earnings call. As always, just let down or I know if you have any questions. Have a great day and thanks for listening. Bye-bye. Thank you for participating.
Sherry: This concludes today's program. You may now disconnect. [inaudible] . . Thank you.