CVB Financial Q3 2023 Earnings Call Transcript

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Provided by Quartr
October 26, 2023

Key Takeaways

  • Record profitability: Net earnings of $57.9 M (US$ 0.42/share) marked the 186th consecutive profitable quarter with an 18.82% return on average tangible common equity.
  • Net interest margin expanded to 3.31% (+9 bps QoQ), driven by a 17 bps increase in earning asset yields and positive carry from fair value hedges.
  • Loan balances declined $30 M QoQ to $8.88 B amid slower demand, with new loan commitments down to $217 M in Q3 versus $443 M a year ago.
  • Average deposit cost jumped to 52 bps in Q3 (from 35 bps in Q2), applying pressure on future net interest margin expansion.
  • Credit quality remains stable: nonperforming assets held at 0.06% of total assets and allowance for credit losses rose to $89 M (1% of loans) due to updated economic forecasts.
AI Generated. May Contain Errors.
Earnings Conference Call
CVB Financial Q3 2023
00:00 / 00:00

There are 8 speakers on the call.

Operator

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. Later, we will conduct a question and answer session. To withdraw your question, please press star 11 again.

Operator

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. You may proceed.

Speaker 1

It looks like Christina may have some technical difficulties. Sherry, can you hear us okay?

Speaker 2

I'm on the line now.

Speaker 1

Okay. Go ahead, Christina.

Speaker 2

Thank you, Sherry, and good morning, everyone. Thank you for joining us today to review our financial results for the Q3 of 2023. Joining me this morning are Dave Brager, 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 obtain a copy, please visit our website at www.cvbank.com and click on the Investors tab.

Speaker 2

The speakers on this call claim the protection of the Safe Harbor provisions contained in the Private Securities Litigation Reform Act of 1995. For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from our forward looking statements. Please see the company's annual report on Form 10 ks for the year ended December 31, 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 release issued in connection with this call. Now I will turn the call over to Dave Rager.

Speaker 2

Dave?

Speaker 1

Thank you, Christina, and good morning, everyone. For the Q3 of 2023, we reported net earnings of $57,900,000 or $0.42 per share, representing our 186th consecutive quarter of profitability. We previously declared a $0.20 per share dividend for the Q3 of 2023, representing our 136th consecutive quarter of paying a cash dividend to our shareholders. Our net earnings of $57,900,000 or $0.42 per share compares with $55,800,000 for the Q2 of 2023 or $0.40 per share $64,600,000 for the year ago quarter or $0.46 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 3rd quarter.

Speaker 1

We produced a return on average tangible common equity of 18.82% and a return on average assets of 1.4% for the Q3. Our pre tax pre provision income growth over the Q2 of 2023 was 5.7% as our pre tax pre provision income for the Q3 of 2023 was $82,600,000 compared with $78,000,000 for the Q2 of 2023. 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 Q3 and full year 2023. Our net interest margin grew by 9 basis points from the Q2 of 2023 to 3.31% for the 3rd quarter, reversing the trend of a declining net interest margin from the prior two quarters.

Speaker 1

The expansion of our net interest margin was a net result of a 17 basis point increase in our earning asset yield, which offset a 9 basis point increase in our cost of funds. Total loans outstanding declined from the Q2 of 2023 by approximately $30,000,000 to $8,880,000,000 at the end in the Q3. Our allowance for credit losses increased to approximately $89,000,000 on September 30, based on net recoveries of $28,000 and a $2,000,000 in provision for credit losses for the Q3 of 2023. Average total deposits for the Q3 increased by approximately $278,000,000 compared to the Q2 of 2023. Our average non interest bearing deposits continue to be greater than 62% of our average total deposits.

Speaker 1

At September 30, 2023, our total deposits were $12,400,000,000 a $7,000,000 decrease from June 30, 2023. I would highlight that we continue to have 0 brokered deposits. Non interest bearing deposits declined by $292,000,000 while interest bearing deposits increased by $253,000,000 from the end of the Q2 of this year. The velocity of deposits moving to Citizens Trust continued to decline in the 3rd quarter with approximately $170,000,000 transferred off balance in the quarter compared to $180,000,000 in the 2nd quarter $370,000,000 in the Q1 of 2023. Customer repos were $270,000,000 at the end of the 3rd quarter, which was $183,000,000 lower than the balance at June 30, 2023.

Speaker 1

We've experienced a $773,000,000 decline in deposits and customer repos from the end of 2022, which includes, as I just noted, the $720,000,000 that was moved to Citizens Trust, where these funds were invested in higher yielding liquid assets such as treasury notes. The bank continues to acquire new deposit customers. New accounts opened during the 1st 9 months of 2023 totaled $867,000,000 of new average deposits. 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 Q3 of 2023, which compares to 35 basis points for the Q2 of 2023 and 5 basis points for the Q3 of 2022.

Speaker 1

From the Q1 of 2022 through the Q3 of 2023, our cost of deposits has increased by 49 basis points, representing a deposit beta of less than 7% since the Federal Reserve began this tightening cycle by increasing rates by 5 25 basis points. Now let's discuss loans. Total loans at September 30, 2023 were $8,900,000,000 a $30,000,000 decrease from June 30, 2023 and a $202,000,000 or 2.2 percent decrease from the end of 2022. The quarter over quarter decline was led by a $61,000,000 decline in commercial real estate loans. We also experienced an $18,000,000 increase in C and I loans as the line utilization declined from 31% at the end of the second quarter to 27% at the end of September 2020 3.

Speaker 1

Partially offsetting the decrease in commercial and real estate loans was a $49,000,000 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. From December 31, 2022, loans declined by $109,000,000 after excluding the seasonal increase in dairy and livestock loans from year end and PPP loan forgiveness. Dairy and Livestock Loans decreased by $87,000,000 from December 31, 2022, as we experienced a seasonal peak in line utilization in the Q4 of each peers. Commercial real estate loans decreased by $42,000,000 from the end of 2022 to September 30, 2023 and C and I loans decreased by approximately $11,000,000 over the same period as line utilization decreased from 33% to 27%.

Speaker 1

In addition, construction loans declined by $25,000,000 and consumer loans are lower by $23,000,000 Loan growth continues to be impacted by a slowdown in loan demand. Our new loan production weakened in the 3rd quarter. New loan commitments were approximately $288,000,000 in the Q2 of 2023 and approximately $217,000,000 in the Q3 of 2023. In comparison, we originated $443,000,000 of new loans in the Q3 of 2022. New loan production at the end of the Q3 of 2023 was generated at average yields of approximately 7%.

Speaker 1

Although loans declined at quarter end from the end of the second quarter, we recorded a provision for credit losses of $2,000,000 for the Q3 of 2023 to reflect a further deterioration in our economic forecast. Asset quality continues to be strong and the trends remain stable. At quarter end, non performing assets defined as non accrual loans plus other real estate owned were $10,000,000 or 6 basis points of total assets. The $10,000,000 in non performing loans compares with $6,500,000 for the prior quarter and $10,100,000 for the year ago quarter. The increase from the prior quarter was primarily due to a C and I loan that was placed on non accrual at the end of the 3rd quarter.

Speaker 1

During the Q3, we experienced credit charge offs $26,000 and total recoveries of $54,000 resulting in net recoveries of $28,000 compared with net charge offs of $73,000 for the Q2 of 2023. Year to date net charge offs were 100 and $22,000 Classified loans for the 2nd quarter were $92,000,000 compared with $78,000,000 for the prior quarter and $64,000,000 for the year ago quarter. Classified loans as a percentage of total loans was 1.04% at quarter end. The $14,400,000 increase in classified loans quarter over quarter was primarily due to a $24,400,000 increase in classified commercial real estate loans, partially offset by a $10,200,000 decrease in classified dairy and livestock and agribusiness loans. The increase in classified loans for the commercial real estate category was primarily due to one relationship in which approximately $20,000,000 of non owner by commercial real estate loans were downgraded due to the death of a borrower during the Q3.

Speaker 1

This loan is well collateralized and the property is currently listed for sale. We anticipate no loss once the property is sold. I will now turn the call over to Alan to discuss the allowance for credit losses, investments, borrowings and capital. Alan? Thanks, Dave.

Speaker 1

Good morning, everyone.

Speaker 3

As of September 30, 2023, Our ending allowance for credit losses was $89,000,000 or 1% of total loans, which compares to $87,000,000 or 0.98% of total loans at June 30, 2023 $85,100,000 4.94 percent of total loans at December 31, 2022. For the quarter ended September 30, 2023, we recorded a provision for credit losses of $2,000,000 compared to $500,000 for the quarter ended June 30, 2023 $2,000,000 for the Q3 of 2022.

Speaker 4

The provision for credit losses

Speaker 3

in the 3rd 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 the 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 early 2025. The resulting economic forecast reflects a modest decline in GDP in the first half of twenty twenty four, 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 assumes GDP will increase by 2.1% in 2020 3 followed by a modest recession at the beginning of 2024 and full year GDP growth of just 0.3% for all of 2024.

Speaker 3

GDP then grows at 1.1% in 2025. The unemployment rate is forecasted to be 3.8% in 2023 and 5.2% in 2024 with peak unemployment of 5.7 percent in 2025. Total borrowings declined by $375,000,000 in June 30, 2023, as cash balances were drawn down by $378,000,000 over that same time period. Borrowings as of September 30, 2023 consisted of $870,000,000 from the bank term funding program that mature in 2024 with a weighted average rate of 4.87 percent as well as $250,000,000 of remaining short term advances from Federal Home Loan Bank. As of September 30, the cost of these FHLB advances were 5.05%.

Speaker 3

All of the FHLB borrowings will mature within the Q4 of this year. We continue to shrink our investment portfolio. Our total investment portfolio declined by $218,000,000 from June 30, 2023 to $5,400,000,000 as of September 30. Of the approximately $120,000,000 of cash flows generated by our investments during the Q3 of 2023, we reinvested approximately $30,000,000 in short term treasuries. The overall decrease in our investment portfolio was primarily due to $195,000,000 decline in investment securities available for sale or AFS securities.

Speaker 3

AFS Securities totaled $2,870,000,000 at the end of the 3rd quarter, inclusive of a pre tax net unrealized loss of $628,000,000 Investment securities held to maturity or HCM securities totaled approximately $2,490,000,000 at September 30, 2023, the HCM portfolio declined by approximately $23,000,000 from June 30, as cash flows were not reinvested during the quarter. The tax equivalent yield on the entire investment portfolio was 2.6 4% for the Q3 of 2023 compared to 2.37% for the prior quarter. The increase in yield for the 3rd quarter benefited from a $3,800,000 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 approximately 3.8%. Now turning to our capital position.

Speaker 3

The company's tangible common equity ratio at September 30, 2023 was 7.73%, consistent with the prior quarter's ratio of 7.75% while being higher than the 7% at September 30, 2022. Shareholders' equity decreased from 2nd quarter by $50,000,000 to $1,950,000,000 at the end of the 3rd quarter. Our OCI declined by $82,000,000 due to the impact of higher interest rates that increased the unrealized loss on our AFS portfolio. At the end of the Q2 of 2023, we entered into $1,000,000,000 in notional pay fixed rate swaps as fair value hedges to mitigate the risks of rising interest rates on our capital. These pay pick swaps have maturities ranging from 4 to 5 years.

Speaker 3

At September 30, 2023, we recorded a fair value adjustment associated with these swap derivatives, which increased other comprehensive income by $17,600,000 partially mitigating the impact to OCI of the decline in the fair value of our AFS portfolio. Equity increased for the 1st 9 months of 2023 by $3,000,000 Retained earnings increased as year to date income of $173,000,000 was offset by $84,000,000 in dividends for the 9 months of this year. The resulting year to date dividend payout ratio was 48.4%. The 10b5-1 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.

Speaker 3

During the Q1 of this year, we did repurchase approximately 792,000 shares of common stock at an average price of $23.43 totaling $18,500,000 in stock repurchases. 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 1 capital ratio was 14.4% and our total risk based capital ratio was 15.3%. I'll now turn the call back to Dave for further discussion of the 3rd quarter earnings.

Speaker 1

Thank you, Alan. Net interest income before provision for credit losses was $123,400,000 for the 3rd quarter compared with $119,500,000 for the 2nd quarter and $133,300,000 for the year ago quarter. Our tax equivalent net interest margin was 3.31 percent for the Q3 of 2023 compared with 3 point to 2% for the 2nd quarter and 3.46% for the Q3 of 2022. Interest income grew by nearly $7,000,000 over the prior quarter as our earning asset yield increased 17 basis points quarter over quarter based on the combination of 6 basis point increase in loan yields and the impact of $3,800,000 a positive carry on PayFac's swap derivative in the Q3. 3rd quarter average earning assets decreased by $68,000,000 from the 2nd quarter due to an increase in both average investment securities of $147,000,000 and average loans outstanding of $30,000,000 The decline in those assets was offset by an increase $121,000,000 in average funds on deposit at the Federal Reserve.

Speaker 1

Interest expense increased by $3,200,000 over the prior quarter as our cost of funds increased by 9 basis points from the Q2 of 2023. Interest expense on deposits increased by $5,700,000 due to the combination of a $288,000,000 increase in average interest bearing deposits in the 3rd 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 3rd quarter compared to 96 basis points in the prior quarter. Interest expense on borrowings, however, declined by $2,600,000 as average borrowings declined by $209,000,000 The $10,000,000 decline in net interest income from the year ago quarter resulted 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 the Q3 of 2023 compared to the Q3 of 2022, as well as an improved asset mix in which average loans grew from approximately 56% of earning assets in the Q3 of 2022 to 59% in the Q3 of 2023.

Speaker 1

Loan yields were 5.07% for the Q3 of 2023 compared with 4.56 percent for the year ago quarter. Investment security yields increased 52 basis points from a yield of 2.12 2% in the prior year quarter to 2.64% in the Q3 of 2023. Moving on to non interest income. Non interest income was $14,300,000 for the Q3 of 2023 compared with $12,700,000 for the prior quarter and $11,600,000 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 2nd quarter and declined by $171,000 when compared to the Q3 of 2020 2.

Speaker 1

Although our trust and wealth management fees decreased by $69,000 compared to the Q2 of 2023, Year over year these fees grew by $379,000 3rd quarter fully income declined by $549,000 as the Q2 of 2023 included $806,000 in debt benefits that exceeded the asset value of certain BOLI policies. Fully income decreased by $439,000 compared to the Q3 of 2022. The Q3 of 2022 included $1,800,000 in debt benefits received, which was partially offset by more favorable market impacts on separate account policies during the Q3 of 2023. Compared to the Q2 of 2023, CRA Investment income increased as the 3rd quarter included $2,600,000 of income from an equity fund distribution related to one of our CRA investments. Now expenses.

Speaker 1

Non interest expense for the Q3 was $55,000,000 compared with $54,000,000 for the Q2 of 2023 $53,000,000 for the year ago quarter. The Q3 of 2023 included $900,000 in recapture of provision for unfunded loan commitments compared to $400,000 in provision for the Q2 of 2023. There was no provision for the Q3 of 2022. Salaries and employee benefit costs increased $1,200,000 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 was $800,000 or 3.3 percent higher than the 2nd quarter.

Speaker 1

As loan originations were lower in the 3rd quarter, the contra expense from deferred loan origination costs declined, therefore increasing staff expense by almost $300,000 The $2,000,000 increase in non interest expense year over year included an increase of $1,500,000 or 4.6 percent in salaries and employee benefits. Salary expense grew by 3.5% or approximately $800,000 over the Q2 of 2022. Deferred 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 totaled 1.33 percent of average assets for the Q3 of 2023. This compares with 1.32% for the 2nd quarter at 1.25% for the Q3 of 2022.

Speaker 1

Our efficiency ratio was 39.99% for the Q3 of 2023. This compares with 40.86 percent for the prior quarter and 36.59% for the Q3 of 2022. This concludes today's presentation. Now Alan and I will be happy to take any questions you may have.

Operator

Thank you. One moment while we compile the Q and A roster. And our first question will come from the line of Matthew Clark with Piper Sandler. Your line is open.

Speaker 5

Hey, good morning, guys.

Speaker 3

Good morning.

Speaker 5

I want to first touch on the BTFP, the $850,000,000 I think comes due next year. What's your plan for that? Are you going to just pay it off? Are you going to refinance some portion of it?

Speaker 3

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. So but we'll see what the future brings.

Speaker 5

Okay. And then just along those lines on the deposit side, can you just touch on the pipeline there. I think when we were together a couple of months ago, I mean, it sounded like things had increased quite a bit just given all the disruption in the markets and how since the turmoil. And I think end of period non interest bearing deposits were down, but the average was relatively flat. So just any color around the movement there in the pipeline?

Speaker 1

Yes. The pipeline is still strong. I mean, when you're working on operating companies, it does take quite some time to moves 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 sales cycle is a little bit longer.

Speaker 1

It's not like there's a closed escrow on a commercial real estate loan. And so we're continuing to focus on deposit growth. As you know, the 4th 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 the month of September, Our deposits went down by $283,000,000 and that was a result primarily of the payment of taxes. And I think that that sort of got moved around and the timing just because of the fact that People could pay their taxes later in the year 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.

Speaker 1

So prior to the last 10 days, We were very stable on the deposit side 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 to go forward, but we do have some historical seasonality in the Q4 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 and we have to execute.

Speaker 5

Got it. Okay. And then on the securities portfolio, I mean your CET1 is up another 30 basis points to 14.4 And it seems like we're in a higher for longer environment. I guess what can you give us an update on your appetite to restructure that portfolio given your ability To easily absorb those losses?

Speaker 3

We always evaluate opportunities, but at this point, I don't foresee anything of significance.

Speaker 5

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 and owner occupied commercial real estate. Just any color there and your plans to kind of deal with those credits?

Speaker 1

Yes. So the majority of the increase was really one relation Ship alone is paying its current. It's a mixed use property across the street from UCLA that is listed for sale. They have an offer apparently on the property. We're well collateralized.

Speaker 1

I anticipate that it should close in the Q4. We don't anticipate any charge off. Actually, The proposed sales price is significantly higher than our loan amount by 3 or 4 times. So I don't anticipate any problem there. I mean, obviously, the loan has closed.

Speaker 1

But it's been the credit trends have been very stable as well. The borrower died in the Q3 and we downgraded the loan. But his errors are in the process of that's listed and it should sell in the 4th quarter barring Any big problem.

Speaker 5

Okay, great. Thank you.

Operator

Thank you. One moment for our next question. And that question will come from the line of Kelly Motta with KBW. Your line is open.

Speaker 6

Hi, good morning. Thank you so much for the question.

Speaker 1

Good morning. Good morning.

Speaker 6

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?

Speaker 1

Yes. So at the end of the 4th or at the end of the 3rd quarter, excuse me, new loan originations were up over 7%. The pipelines, I would say, remained challenged. However, there are some things that we're working on. The Q4 is always a good quarter for us if you just look at the gross amount because we have dairy advances.

Speaker 1

We anticipate that being pretty close to seasonal averages They thought being pretty close to seasonal averages over looking back over the years. But I still the pipelines are definitely smaller than they were a year ago. Pricing is impacting people's decisions. 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 Turn ugly where they can take advantage of those opportunities. So I'm still aiming for that low Single digit growth, we didn't hit it this quarter obviously.

Speaker 1

We were down $30,000,000 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 today.

Speaker 6

Sorry, that

Speaker 1

was like a 5 parter.

Speaker 6

I appreciate the color on your appetite for a securities restructuring and how you're approaching that. Just wondering The billing swaps you put on really nicely helped the margin this quarter. Can you remind us, I think you said the rate on amount was 3.8%. Just remind us what the 10 year duration is on that and what your appetite could be about potentially adding more to swap out more of your securities disclosure?

Speaker 3

Yes. Kelly, you're correct. The average the weighted average cost on those fixed swaps is 3.8%. And they're 4 5 year tenors, I would say weighted more towards 5. We'll continue to evaluate.

Speaker 3

I don't know that we think immediately that we need to do more in that space. We're happy with how it positioned the balance sheet, but we will continue to evaluate that and other hedging opportunities.

Speaker 6

Maybe a last, maybe 2 parter from me. Do you have where your spot deposit rate was at the end of the quarter? And 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 do you think this inflection can continue?

Speaker 3

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%. And then if you go to, I think it's page sorry, page 40, you'll see in the upper right That the cost of deposits in total was 56 basis points. So, and I think if you look at the trend line there, The increase in both of those has continued to go up, but I think at a slower pace for the last couple of months.

Speaker 6

Got it. Thanks. I'll step back. Appreciate all the color. Thanks, guys.

Speaker 1

Thank you.

Operator

Thank you. One moment for our next question. And that will come from the line of Gary Tenner with D. A. Davidson.

Operator

Your line is open.

Speaker 4

Thanks. Good morning. Just wanted to hey, I just wanted to ask prospectively about loan yields. Assuming the Fed is not changing rates from here. This is kind of 6 basis point increase in loan yields in the Q3.

Speaker 4

Just with ongoing kind of repricing within the book 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?

Speaker 3

Not sure if I quite understood the full question, Gary. But in general, if the Fed is on hold, we'll see a continuation of loans that were adjustable, repricing at higher rates certainly. And so that will be a catalyst, but it won't be the what we saw earlier this year and in the last year when the Fed was doing all the variable loans were repricing. 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. That might give you a sense of how quickly that will turn.

Speaker 1

Yes. And Gary, the only thing I would add to that, most of the repricing on the commercial real estate portfolio is based off of a 5 year treasury rate. So if you look at the 5 year treasury 5 years ago compared to today, It's not a 500 basis point increase. It might be a 220 basis point or 230 basis point increase. And so from a credit perspective, that's good.

Speaker 1

From a asset yield growth perspective, it's not as meaningful. But I do think that we'll 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 is probably pretty similar as far as the maturities and the repricing. But yes, we'll continue to see that and we are originating loans above 7% and higher later because the 5 10 year treasury have gone up pretty significantly in the last month or so. And so that's That and or the incremental borrowing cost is how we're pricing the loans today.

Speaker 4

Okay. Well, I appreciate the answer to the question. Apparently, it was not phrased well, but you And then just really quick on the M and 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 deal was pretty well received by the market initially the 1st couple of days after it was announced.

Speaker 4

Just wondering if you've kind of seen any change in kind of the stance of prospective sellers willingness to kind of Take what the market is potentially giving them in the expectation that it would be received well or better at least by the market.

Speaker 1

Yes. 1st and foremost, I think conversations have definitely picked up. There are some math issues with marks and different things to consummate a deal. And I believe that deal closed below book value. So sellers that are willing to sell below book value that Could be of interest to us depending on the bank obviously.

Speaker 1

But I do think that the conversations have picked up. I do think that there's going to be opportunities That's sort of been our position 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, I think we are actively interested in looking at opportunities.

Speaker 1

And I think there's going to be opportunities in the short to mid term here. And We'll just keep looking for the right opportunity for us that meets our criteria.

Speaker 4

Appreciate it.

Operator

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

Speaker 7

Good morning, gentlemen.

Speaker 1

Good morning, Kevin.

Speaker 7

Hey, Dave, back in the Q1, the $370,000,000 ish in deposits that left the balance sheet, I think 2 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?

Speaker 1

So the $370,000,000 was actually the amount that went to Citizens Trust. Okay. 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 rate environment, I think that those Treasury securities that they purchased might stick at Citizens Trust for a little while. Citizens Trust is working on moving those relationships to more managed relationships and in a different fee structure than just buying treasuries.

Speaker 1

But I do believe some of that will ultimately come back. I do think that we our Trust Group are bankers that manage those relationships. I would rather keep it in the family at Citizens Trust than let it go somewhere else and potentially never get it back. But I don't anticipate any of it really coming back anytime soon barring somebody's individual need for The liquidity or the cash to do something. So I think we're still a little ways away from starting to see some of that roll back on.

Speaker 7

Okay. And then the your non interest bearing percentage to total deposits is pretty much right on top of

Speaker 1

where you were pre COVID.

Speaker 7

Do you expect there to be more downward pressure on the deposit mix?

Speaker 1

Yes. I mean, there's always that risk. I mean, we as We've talked about for years years years, we sell deep into the relationships with a lot of treasury management products. The cost of maintaining a free account is pretty high, which is the type of client we go after. There's still some psychology there.

Speaker 1

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 ECRs. So they would just do that. But that's not the way that it works. And Operating companies need to keep larger especially larger operating companies need to keep larger balances. So I mean we work hard at going after that type of client.

Speaker 1

It's been built over the 49 years of our company, been doing sort of the same thing, especially in the last 13 to 15 years, while my predecessor was here and even when Lynn Wiley was here. So We've built 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 trust have impacted that. But there could be changes in the mix, but so far we've been hanging in there pretty well.

Speaker 7

Okay. And then if I could switch to credit quality and your outlook, I mean in normal times, deaths, divorce, Business to solution, 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?

Speaker 1

Yes. 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 In the call and answered the question on earlier, I mean, really the number stayed pretty flat. I mean, there were other ins and outs. But I mean, generally speaking, Things have held up pretty well.

Speaker 1

I still always get concerned just sort of about the small C and I type borrower, the SBA 7 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 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 pretty stable.

Speaker 1

It doesn't mean that things can't change, but so far so good. Okay. All right, great. Well, those are

Speaker 7

my questions. Thank you very much for your time.

Speaker 1

Thanks, Tim.

Operator

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

Speaker 1

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 Q4 2023 earnings call. As always, just let Alan or I know if you have any questions. Have a great day and thanks for listening.

Speaker 1

Bye bye.

Operator

Thank you for participating. This concludes today's program. You may now disconnect.

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