CVB Financial Corp (CVBF) Q3 2021 Earnings Call Transcript

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CVB Financial Corp (CVBF 2.44%)
Q3 2021 Earnings Call
Oct 21, 2021, 10:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Third Quarter 2021 CVB Financial Corporation and its subsidiary, Citizens Business Bank Earnings Conference Call. My name is Katherine, and I'll be your operator for today. [Operator Instructions]

I would now like to turn the presentation over to your host for today's call, Christina Carrabino. Please proceed.

Christina L. Carrabino -- Investor Relations

Thank you, Katherine, and good morning, everyone. Thank you for joining us today to review our financial results for the third quarter of 2021. Joining me this morning are Dave Brager, Chief Executive Officer; and Allen Nicholson, Executive Vice President and Chief Financial Officer. Our comments today will refer to the financial information that was included in the earnings announcement released yesterday. To obtain a copy, please visit our website at www.cbbank.com and click on the Investors tab.

While the COVID-19 pandemic has receded from peak level since over -- seen over the past year and business conditions continue to improve as the U.S. economy reopens, the pandemic is still ongoing and more contagious and virulent variants of the COVID-19 virus have surfaced and spread throughout the U.S., including in the companies, markets in California. As a result, the COVID-19 pandemic may still carry the potential to significantly affect the banking industry in California and the company's business prospects. The ultimate impact on our business and financial results and on the health and safety of our employees will depend on future developments, which are uncertain and cannot be predicted, including the infectious and pathogenic properties of COVID-19 variants as they develop, the safety, effectiveness, distribution and public acceptance of vaccines developed to mitigate the pandemic and actions taken by governmental authorities in response to the pandemic.

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-Q for the year ended December 31, 2020 and in particular, the information set forth in Item 1A, Risk Factors therein.

Now, I will turn the call over to Dave Brager. Dave?

David A. Brager -- Chief Executive Officer

Thank you, Christina. Good morning, everyone. Thank you for joining us. We reported net earnings of $49.8 million for the third quarter of 2021 or $0.37 per share, representing our 178th consecutive quarter of profitability. We previously declared an $0.18 per share dividend for the third quarter of 2021, which represented our 128th consecutive quarter of paying a cash dividend to our shareholders.

Third quarter net earnings of $49.8 million or $0.37 per share compared with $51.2 million for the second quarter of 2021 or $0.38 per share and $47.5 million for the year-ago quarter or $0.35 per share. Through the first nine months of 2021, we earned $164.8 million or $1.21 per share compared to $127.1 million or $0.93 per share for the first nine months of 2020.

For the third quarter of 2021, our pre-tax pre-provision income was $65.7 million compared with $69.7 million for the prior quarter and $66.9 million for the year-ago quarter. The third quarter included relatively strong core loan growth as well as strong credit metrics and a declining allowance for credit losses. In addition, greater than 99% of our customers $1.1 billion in PPP round one loans were forgiven as of quarter end. We recorded a recapture of provision for credit losses of $4 million for the third quarter of 2021. And in comparison, we recorded a recapture of provision for credit losses of $2 million for the second quarter of 2021.

The recapture provision was primarily the result of our forecast of continuing improvements in macroeconomic variables, including GDP growth and decreasing unemployment. For the 9 months ended September 30, 2021, we recaptured $25.5 million of provision for credit losses, which reverses the $23.5 million in provision expense recorded during the first nine months of 2020.

During the third quarter, we had net loan recoveries of $22,000 compared with net charge-offs of $463,000 for the second quarter of 2021 and $114,000 for the year-ago quarter. At quarter end, nonperforming assets defined as non-accrual loans plus other real estate owned were $8.4 million, equal to the prior quarter and approximately $9 million lower than year-end 2020.

At quarter end, we had no OREO properties and the $8.4 million in nonperforming loans represented 11 basis points of total loans. At September 30, 2021, we had loans delinquent 30 to 89 days of $1.1 million compared with $415,000 at June 30, 2021. Classified loans for the third quarter were $49.8 million equal to the prior quarter and approximately $23 million lower than year-end 2020.

Now moving on to loans. Our loan production continue to be strong in the third quarter and our current loan pipeline remains robust. Total loans at quarter end were $7.85 billion. Core loans excluding PPP loans grew by $105 million or approximately 6% annualized when compared to the second quarter. When including PPP loan forgiveness, our loans decreased by $222 million. Loan growth in the third quarter was led by continued growth in commercial real estate loans, which grew by $64 million compared to the end of the second quarter and by $233 million year-to-date.

C&I loans and dairy livestock loans also grew by approximately $20 million each compared to the second quarter. As we look at core loan trends over the past year, CRE loan growth has continued to be strong with an increase of $306 million or almost 6% from the third quarter of 2020 to the third quarter of 2021. In addition, our dairy livestock loans have grown by $32 million or 15% over the past year. C&I loans, however, continue to be impacted by low utilization rates, which is the primary driver of the decline in C&I loans, which declined $47 million in comparison to the third quarter of 2020.

C&I utilization rates were 27% on average in the third quarter, which compares to the pre-pandemic level of 39% in the first quarter of 2020 and 28% for the third quarter of 2020. Single-family mortgage loans have been declining due to high refinance activity from the low-rate environment, resulting in a year-over-year decrease of $43 million. Construction loans were $77 million at the end of the quarter, which is lower than recent quarters and almost $25 million lower than a year ago. We continue to remain optimistic that we can grow loans during the fourth quarter of 2021, excluding the impact of PPP loan forgiveness in the seasonal dairy and livestock advances as we strive to overcome headwinds from low line utilization rates and continued higher prepayment activity.

Through September 30, 2021, of the over 4,000 PPP loans we originated during round one, more than 99% of our borrowers representing more than $1 billion in loans have received forgiveness from the SBA. Of the $420 million of loans originated in PPP round two, we had remaining loans outstanding of $287 million as of September 30, 2021.

Now, I would like to discuss our deposits. At September 30, 2021, our noninterest-bearing deposits were $8.3 billion compared with $8.07 billion for the prior quarter and $6.92 billion for the year-ago quarter. Noninterest-bearing deposits remain a key differentiator for the bank with over 64% of our deposits being noninterest-bearing at the end of the quarter. Furthermore, by executing on our long-term strategy of banking the best small to medium-sized businesses and their owners in our markets, the bank is completely funded by core deposits.

We continued to see strong deposit growth for the third quarter, as total deposits and customer repurchase agreements increased by $343 million or 3% from the second quarter of 2021 at $1.9 billion or 17% higher than the prior year. At September 30, 2021, our total deposits and customer repurchase agreements were $13.6 billion compared with $13.2 billion at June 30, 2021, and $11.7 billion for the same period a year ago.

Average noninterest bearing deposits were $8 billion for the third quarter of 2021 compared with $7.7 billion for the prior quarter and $6.7 billion for the year-ago quarter. Our average total deposits and customer repurchase agreements of $13.3 billion for the third quarter grew by $417 million or 3% from the second quarter.

Our net interest income declined this quarter as our net interest margin declined to 2.89%. Net interest income before recapture of provision for credit losses was $103.3 million for the third quarter compared with $105.4 million for the second quarter and $103.3 million from the year-ago quarter. Earning assets grew by $471 million on average from the second quarter, including a $187 million increase in investment securities and more than $600 million increase in average funds on deposit at the Federal Reserve.

Average loans for the third quarter decreased by $333 million compared with the second quarter of 2021, while decreasing by $466 million compared with the year ago quarter. During the third quarter of 2021, PPP loans had an average balance of $502 million compared with $838 million for the second quarter of 2021. Our earning asset yield decreased by 19 basis points compared to the prior quarter. 45% of our earning assets are in the combination of liquid investments and cash on deposit at the Federal Reserve.

Our tax equivalent net interest margin was 2.89% for the third quarter of 2021 compared with 3.06% for the second quarter and 3.34% for the third quarter of 2020. When the impact of PPP loans, discount accretion on acquired loans and non-accrual interest paid is excluded, our adjusted tax equivalent net interest margin was 2.68% for the third quarter, down from 2.89% for the prior quarter and 3.18% for the year-ago quarter. Our net interest margin continued to be negatively impacted by excess liquidity. During the third quarter, we had approximately $2.3 billion on average on deposit at the Federal Reserve, earning 15 basis points. The net interest margin in the third quarter would have been approximately 56 basis points higher without the $2.3 billion on average on deposit at the Federal Reserve.

We continue to be asset sensitive as noted in our June 30th Form 10-Q. If rates were to ramp up over 200 basis points over a 12-month time horizon, our net interest income would grow by approximately 21%. Loan yields were 4.43% in the third quarter of 2021 compared with 4.46% for the second quarter of 2021 and 4.47% for the year-ago quarter. Total interest and fee income from PPP loans were $7.9 million in the third quarter compared to $8.1 million in the second quarter.

The decrease in loan yields from the year-ago quarter was partly due to the impact of the Federal Reserves rate decreases on our core loan yields, the impact of PPP loans as well as a decline in discount accretion income on acquired loans. Excluding the impact of PPP loans, interest income related to purchase discount accretion and non-accrual interest paid, loan yields were 4.14% for the third quarter 2021, 4.3% for the second quarter of 2021 and 4.37% for the third quarter of 2020.

Prepayment penalty income decreased by $1.4 million quarter-over-quarter, while increasing by $243,000 compared with the year-ago quarter. Our cost of deposits and customer repos as well as our cost of funds for the third quarter was 4 basis points. Interest-bearing deposits and customer repos increased on average by $124 million for the second quarter, but interest expense declined as the cost of interest-bearing deposits and customer repurchase agreements decreased from 12 basis points in the second quarter to 9 basis points in the third quarter. Our cost of funds declined by 1 basis point from the prior quarter and 7 basis points compared to the third quarter of 2020.

Moving to noninterest -- excuse me, moving to noninterest income. Noninterest income was $10.5 million for the third quarter of 2021 compared with $10.8 million for the prior quarter and $13.2 million for the year-ago quarter. The third quarter of 2020 included a $1.7 million gain on the sale of a bank-owned building. Our trust and investment service income decreased by approximately $500,000 or more than 15% compared with the prior quarter, albeit $276,000 or approximately 12% higher when compared with the year-ago quarter.

Deposit service charges increased by 8% or $344,000 from the second quarter and were higher than the third quarter of 2020 by 14% or $543,000. Fees from interest rate swaps were $167,000 for the third quarter, which was $1.4 million lower than a year ago. In July, we announced that we entered into a merger agreement with Suncrest Bank, pursuant to which Suncrest Bank will merge into Citizens Business Bank. We're excited to be joining forces with the successful bank that serves California's Central Valley as well as Sacramento, a sizable and important new market for our bank that present additional growth opportunities. The closing of the merger is expected to occur at the end of the current quarter or the first quarter of 2022.

Now on to expenses. Noninterest expense for the third quarter was $48.1 million compared with $46.5 million for the second quarter of 2021 and $49.6 million for the year-ago quarter. We incurred $809,000 in acquisition-related expenses. Salary and benefit expenses decreased by $905,000 compared to the second quarter. The second quarter benefited from a one-time adjustment to the benefit expense of approximately $1 million. Marketing and promotion expense decreased by $942,000 compared to the second quarter of 2021, primarily due to the timing of donations made during the second quarter to the community groups throughout our geographic footprint.

Noninterest expense also increased by $1 million as we recaptured provision for unfunded loan commitments of $1 million in the second quarter of 2021. Noninterest expense totaled 1.22% of average assets for the third quarter of 2021 compared with 1.23% for the second quarter of 2021 and 1.44% for the third quarter of 2020. Our efficiency ratio was 42.27% for the third quarter of 2021 compared with 40.05% for the prior quarter and 42.57% for the third quarter of 2020.

I will now turn the call over to Allen Nicholson to discuss our effective tax rate, our allowance for credit losses, investments and capital levels. Allen?

E. Allen Nicholson -- Executive Vice President and Chief Financial Officer

Thanks, Dave. Good morning, everyone. Our effective tax rate was unchanged at 28.6% when compared to the second quarter of 2021 and 29% for the year-ago quarter. Our effective tax rate can vary depending on the level of tax advantaged income as well as available tax credits. Our allowance for credit losses decreased by $4 million for the second quarter of 2021, as a result of $4 million recapture provision for credit loss. At September 30, 2021, our ending allowance for credit losses was $65.4 million or 0.83% of total loans. When excluding PPP loans, our allowance as a percentage of the remaining loans was 0.87%, which compares to 0.91% at the pre-pandemic period and the December 31, 2019.

In addition to the allowance for credit losses, we had $21 million in remaining fair value discounts from acquisitions at September 30, 2021. The recapture provision for credit loss was primarily the result of continued improvement in our forecast of certain macroeconomic variables, including the unemployment rate and GDP growth. For the nine months ended September 30, 2021, we have recorded a recapture of provision for credit losses of $25.5 million. This compares to the provision for credit losses of $23.5 million we recorded in the first half of 2020, due to the estimated impact on loan losses from the economic forecast of a significant downturn in the economy resulting from COVID-19 pandemic.

Based on the magnitude of government economic stimulus and the wide availability of vaccines, our latest economic forecast continues to reflect improvements in key macroeconomic variables and therefore, lower projected loan losses, which resulted in a decrease in our allowance for credit losses to $65.4 million. Our economic forecast continues to be a blend of multiple forecasts produced by Moody's. These U.S. economic forecasts include a baseline forecast as well as upside and downside forecast with a largest weighting on the baseline. Our weighted forecast assumes GDP will increase by 5.7% in 2021 and then grows by more than 2% in both 2022 and 2023. The unemployment rate is forecasted to be 5.7% in 2021 and then 5.6% in 2022, before declining to 5.3% in 2023.

Looking at our investment portfolio. Our total investment securities increased by approximately $667 million from the end of the second quarter. As of September 30, 2021, investment securities available-for-sale or AFS securities totaled $2.9 billion, inclusive of a pre-tax net unrealized gain of $8.8 million. Investment securities held-to-maturity or HTM securities totaled approximately $1.7 billion at September 30th. During the third quarter, we purchased approximately $187 million in new AFS securities with an expected tax equivalent yield of 1.49% and $705 million in new HTM securities with an expected tax equivalent yield of 1.75%.

Now turning to our capital position. For the first nine months, shareholders' equity increased by $55.9 million to $2.06 billion. The increase was primarily due to net earnings of $164.8 million, a $32.3 million decrease in other comprehensive income from the tax-effected impact of the decrease in market value of available for sale securities and $73.4 million in cash dividends. During the third quarter, we repurchased 390,000 shares of common stock at an average price of $18.97. We terminated our 10b5-1 stock buyback plan on September 23rd, as a result of the company's perspective issuance of common stock related to the acquisition of Suncrest Bank.

Our overall capital position continues to be very strong. Our tangible common equity ratio was 8.9% at the end of the third quarter and our regulatory capital ratios are well above regulatory requirements to be considered well capitalized. At September 30th, our common equity Tier 1 capital ratio was 14.9% and our total risk-based capital ratio was 15.7%.

I'll now turn the call back to Dave for some closing remarks.

David A. Brager -- Chief Executive Officer

Thank you, Allen. Citizens Business Bank remains well positioned to take advantage of the improving economic environment in California. According to various economic reports, many parts of the Californian economy have recovered to their pre-pandemic levels. However, over the past three to six months, supply chain interruptions and labor shortages have impacted many of the businesses and industries that we serve. We continue to remain focused on assisting our customers with any negative impact of these issues on their businesses.

Our pre-tax pre-provision earnings remain strong despite the impact of the low interest rate environment and prevailing lower line utilization rates due to the strong customer liquidity. We believe that our net interest margin will increase in a rising rate environment and we are seeing the steady improvement in our loan pipeline from previous quarters translate into solid loan growth. We are excited about our announced acquisition of Suncrest Bank and the opportunities it provides to expand in the Sacramento market as well as to solidify our significant position in the Central Valley. Please stay healthy and safe. That concludes today's presentation. Now, Allen and I will be happy to take any questions that you might have.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Brett Rabatin with Hovde Group. Your line is open.

Brett Rabatin -- Hovde Group -- Analyst

Hey, good morning, everyone.

David A. Brager -- Chief Executive Officer

Good morning, Brett.

Brett Rabatin -- Hovde Group -- Analyst

Wanted to first ask just looking at the balance sheet, can you talk maybe about the security purchases during the quarter when those were done? And just thinking about 4Q, how much liquidity you might deploy and how we should think about the absolute level of NII, obviously 3Q was a margin compression story?

David A. Brager -- Chief Executive Officer

Sure. If you look at the point-to-point from June 30th to September 30th growth, that was about $667 million, but on an average balance perspective, we only grew by about $187 million. So that obviously reflects that some of those purchases happened later in the quarter. We were seeing better attractive yields as the quarter was coming to a close. So we'll continue to buy securities, but we'll continue to be very balanced and I think, we are sort of coming to the expectation that interest rates should be growing next year and then we certainly want to keep some of our powder dry to take advantage of that. So we'll continue to invest, but we're not going to turn the $2.3 million -- $2.3 billion in few securities overnight.

Brett Rabatin -- Hovde Group -- Analyst

Okay. Any color on the size you might do in the fourth quarter?

David A. Brager -- Chief Executive Officer

It really will depend on where rates go. We try to be very to be opportunistic in the marketplace when we see rates are rising, and we will continue to take that approach.

Brett Rabatin -- Hovde Group -- Analyst

Okay. Fair enough. And then was curious, trust was a little bit softer this quarter, was there any fundamental change there or can you maybe comment on trust in 3Q?

David A. Brager -- Chief Executive Officer

Yeah. There wasn't any fundamental change. There were just a couple of things have happened in the second quarter that really sort of jumped those numbers up, but I think, we have a big focus on trust and the opportunities there, especially with all of this excess liquidity that's on our balance sheet. So we're very focused on continuing to grow that. No big issue, just some timing, some other things. So yeah, the fees are that are driven off of assets under management were relatively flat, I would say and we do have some extra income in the second quarter when our customers pay for their tax. So there's a little bit of noise sometimes in the second quarter as well.

Brett Rabatin -- Hovde Group -- Analyst

Okay. And then just lastly from me, you talked about earlier, the loan pipeline strengthening and obviously, you had good core growth in 3Q from a couple of different aspects of the loan portfolio. Obviously, there is some seasonality with ag. Can you talk maybe about the outlook? Could it become more of a high single-digit story from here and maybe how we should think about the loan growth prospects over the next year maybe?

David A. Brager -- Chief Executive Officer

Yeah, I mean, we -- as I've said in the past, I mean, we actually have had two very strong years in a row of loan production. Last year was a record year for us. This year, our loan production is up over last year's production. We look to continue to have a strong fourth quarter here. Our pipelines remain strong. So we want to bank the best businesses. We bank the top 25% of clients in the respective industries and build long-term relationships. So that pie -- that amount of opportunity there is somewhat limited, as evidenced by the credit quality we have. So I think in that range where we've been and where we ended the third quarter are probably fair. So the mid range of single digits is probably where we are going to perform going forward. If we can get the best customers and grow faster, great, but we're not going to sacrifice credit quality to grow loans.

Brett Rabatin -- Hovde Group -- Analyst

Okay, that's great color. Appreciate it.

Operator

Thank you. Our next question comes from Gary Tenner with D.A. Davidson. Your line is open.

Gary Tenner -- D.A. Davidson -- Analyst

Thanks. Good morning.

David A. Brager -- Chief Executive Officer

Good morning.

Gary Tenner -- D.A. Davidson -- Analyst

Just a couple of questions from me. In terms of the new loan production yields during the quarter. Allen, could you give us a sense of where those came in?

E. Allen Nicholson -- Executive Vice President and Chief Financial Officer

I mean, I would say, as we've talked about before, at a call it a coupon level, Gary no fees, nothing like that. You're still looking at something in the 3.50% to 3.60% range. It's been fairly consistent.

Gary Tenner -- D.A. Davidson -- Analyst

Okay, great. And with regard to the 10b5, is that just a technical reason that you had to suspend it, given the shares that will be issued. I guess, ultimately my question is, post Suncrest, it would seem that you'd still be continuing to build capital at the pace that outpaces the organic growth need. So once that deal settles, would you expect to be back in the market on by that?

David A. Brager -- Chief Executive Officer

So it was a regulatory requirement for us to terminate it. And if you look back through our history, by going back the last two acquisitions, when we've been issuing shares, we've had to terminate it. We typically put it back in place after those mergers have been completed. Certainly, the Board will evaluate that after we do the acquisition with Suncrest. So we'll see, but historically, yes, we have put those back in place.

Gary Tenner -- D.A. Davidson -- Analyst

Thanks very much.

Operator

Thank you. Our next question comes with -- comes from Matthew Clark with Piper Sandler. Your line is open.

Matthew Clark -- Piper Sandler -- Analyst

Hey, good morning guys.

David A. Brager -- Chief Executive Officer

Morning.

Matthew Clark -- Piper Sandler -- Analyst

Maybe first one, do you happen to have the average PPP balance in the quarter?

David A. Brager -- Chief Executive Officer

I believe we...

E. Allen Nicholson -- Executive Vice President and Chief Financial Officer

Do you want to follow up with another question? We will get it to you here in a second.

Matthew Clark -- Piper Sandler -- Analyst

Sure. Yeah, it looks like your earning assets at the -- on the end-of-period basis are up over $15 billion, which bodes well for NII in the upcoming quarter, but your NIM, I would think would take another leg down. What are your expectations on the NIM kind of stabilizing? I would think it would be the second half of next year with the additional PPP running off maybe over the next couple of quarters, but what are your thoughts around the overall NIM?

David A. Brager -- Chief Executive Officer

Yeah, I think there's a couple of different aspects to that. Number one, obviously it depends on what happens with rates and the 10-year treasury has gone up a little bit, that's one of the indices that we price on, obviously, depending on what happens with the Fed and raising rates. The excess liquidity, we're going to be cautious and we're going to invest. Hopefully, we invest that in loans, but at the end of the day, we're also not going to just overload on the investment side. So I think that if we don't necessarily forecast where NIM is going to be -- at least publicly forecast where we think our NIM is going to be, but I hope that we are in a position as we continue to grow loans and our customers utilize some of that excess liquidity that the NIM stabilizes. As I mentioned, I think we had an over 55 basis point difference in our NIM based on just the $2.3 billion we had overnight at the Fed. So some of that liquidity -- our customers' liquidity starts to go away, we should be in a much better position. I think, we have the number for the average PPP loans for you as well.

E. Allen Nicholson -- Executive Vice President and Chief Financial Officer

Matthew, net of deferred fees, we had about $502 million on an average in the third quarter, which would compare to about $838 million in the second quarter of this year.

Matthew Clark -- Piper Sandler -- Analyst

Great.

David A. Brager -- Chief Executive Officer

And Matthew, I'm sorry, just one quick addition to that. We have done a really outstanding job. I mean, over 99% of PPP 1 balances are gone. I think, the national average is 70%. So our efficiency in getting those loans forgiven has created some of that excess liquidity too. So we are happy that we were able to help our customers and get it done. And now, we hope that as the economy opens up, they'll start to utilize some of that excess liquidity as well. So sorry, I just wanted to add that.

Matthew Clark -- Piper Sandler -- Analyst

Great. And then just on your outlook for hiring additional producers, what's your outlook there and how would you say the ones that you've hired over the last 12 to 18 months are contributing to loan growth listing?

David A. Brager -- Chief Executive Officer

Yeah, right now, we're focused on the integration and getting the Suncrest deal close, which we're acquiring a number of producers, and we believe that they are great people that will be able to contribute to the growth of our bank. We're really focused on that right now, but to answer the second part of your question, the people that we have hired in the past 12 months, I think, are doing a very good job. They've been a big part of why our loan production is up. They've been a big part of why we've grow loans at a 6% clip annualized in the last quarter. So I'm very opportunistic about what that looks for -- what that bodes going forward, bodes well I believe for us to continue to see some positive loan growth. So they've done a good job.

Matthew Clark -- Piper Sandler -- Analyst

Okay. And then last one for me, just around M&A. I guess how are your discussions with other banks going? Would you say it's been more active since you announced the Suncrest deal or less active?

David A. Brager -- Chief Executive Officer

That's a really good question. I think, it's been about the same, maybe slightly more active. We obviously have proven that we can integrate and we have a good currency and people want our stock, so I get a lot of phone calls. There are some that I'm interested in, and some that I'm not. But at the end of the day, I would say it's -- those conversations are at a minimum, the same and maybe even slightly higher, slightly more conversations.

Matthew Clark -- Piper Sandler -- Analyst

Okay. Great, thanks a lot.

Operator

Thank you. [Operator Instructions] Our next question comes from David Feaster with Raymond James. Your line is open.

David Feaster -- Raymond James -- Analyst

Hey, good morning everybody.

David A. Brager -- Chief Executive Officer

Good morning, David.

David Feaster -- Raymond James -- Analyst

I just wanted to start on the CRE growth, that was pretty impressive. Just wanted to get a sense of maybe where you're seeing strength and whether if there is any certain segments or markets that's driving that? And then just on the competitive landscape within CRE, from an underwriting perspective, are you seeing more non-recourse or more aggressive underwriting that's causing you any concern at this point?

David A. Brager -- Chief Executive Officer

I'll answer your second part of that question first. So I don't think we're really seeing any difference over the last couple of quarters on the underwriting. I think, it's been pretty consistent. We obviously have not modified our underwriting guidelines and they're still focused on top quality properties. And as evidenced in our investor deck, we have some information on LTVs at origination and average loan sizes and that told a pretty good story, but where we're seeing the growth is really across all segments. I'd say with retail being the lowest, but industrial, multifamily then office, then retail, I'd probably say in that order as far as where we're seeing the opportunities. And the values and everything going on, I mean, we underwrite the cash flow, so that's part of the reason why our loan-to-values are lower, because we have to know that the cash flow supports the loan amount that we're doing, even though the value -- the market value might be significantly higher. So I think, we're seeing kind of similar underwriting from most banks. I mean, there's always a few out there that do things a little bit differently. Where we probably competed more so in most situations is on rate and that's been something that I think we've sort of equity-esque and done to Allen's point point earlier that he made kind of in that 3.50% to 3.60% range, whereas maybe a few years back, we might not have been as aggressive on the pricing, but we want to get the best deals, and so we're having to price for those. We are still seeing some very outrageous pricing from some institutions and where there is a relationship as I've always said we'll compete. If it's transaction, we're less interested in going to the bottom of the barrel there.

David Feaster -- Raymond James -- Analyst

That makes sense. And then maybe switching gears to the ag portfolio, obviously we're in a seasonally stronger quarter. Just wanted to get a sense of what you're seeing in the ag book and whether you've seen any impacts from the drought? Has that impacted demand at all or are there any concerns on the credit front as a result of that?

David A. Brager -- Chief Executive Officer

Yeah. That's a good question. So again, just a couple of things on the ag and by Ag I'm speaking of dairy & livestock and our agribusiness group, which is more production ag. The dairy & livestock group increase is combination of new relationships that we've brought on-board are probably most of that increase and advances are a small part. So we really haven't seen the seasonal uptick in the dairy & livestock that we normally see yet, that normally occurs in the fourth quarter. So we still anticipate that to happen, but the third quarter was really us attracting a couple of new relationships to the bank. So that has been a positive. The second thing I would say is as far as the drought or any other risk that's out there, we've always underwritten the same, we underwrite for true sources of water. The drought is something that we're very aware of and very conscious of. Our customers or prospects that we're talking to want to make sure that they understand the risk involved with that. And so it is impacting probably what we potentially might do, but it's not impacting our existing customers, because when we underwrote them, we made sure that they had the appropriate sources of water.

David Feaster -- Raymond James -- Analyst

Got it. That makes sense. And then last one for me. Just wanted to touch on kind of one of the prongs of growth, you've got clearly the organic side, the M&A side, and we've done some de novo expansion, just wanted to get an update on the Modesto office, kind of what's the early read on that? How has that contributed to growth? And then just any appetite for additional de novo opportunities and if you do, where would you be interested?

David A. Brager -- Chief Executive Officer

Yeah. That's a good question. We -- so if I -- Modesto technically just opened a couple of months ago, although we've had the manager on-board since almost the beginning of the year, I believe. So I'm happy with what's happening in Modesto. We're still building up the team. We have, I think, one more position to hire there and I believe we're -- that's going to be filled here very shortly. So their pipelines are strong. They're starting to book loans. So it takes a little bit to get that going. But I'm very, very opportunistic about Modesto. What I've asked Brian Mauntel, our President to do is meet with each of the regional managers, identify de novo opportunity within their market and let's take a look and evaluate which ones we want to prioritize. And so those are generally within the markets that we serve already, but could be adjacent to, it just depends on the opportunity to hire talent. And so we're going to -- now that we're getting toward the closure of the Suncrest deal, we're going to be focused on looking at de novo teams. Our method of operation there is we get the de novo making money. Once the last de novo is making money, we look to do another one. So we don't want to have a drag on earnings of more than one at a time, but Modesto will be there, I believe, in the next couple of months, and then we'll be ready to do another one.

David Feaster -- Raymond James -- Analyst

Okay. That makes sense. Thanks everybody.

David A. Brager -- Chief Executive Officer

Thank you.

Operator

Thank you. [Operator Instructions] And I'm showing no further questions in the queue. I like to turn the call back to David Brager for closing comments.

David A. Brager -- Chief Executive Officer

Great. Thank you. 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 and year-end 2021 earnings call. Please let Allen or I know if you have any questions. Have a great day, and thanks for listening. Bye-bye.

Operator

[Operator Closing Remarks]

Duration: 42 minutes

Call participants:

Christina L. Carrabino -- Investor Relations

David A. Brager -- Chief Executive Officer

E. Allen Nicholson -- Executive Vice President and Chief Financial Officer

Brett Rabatin -- Hovde Group -- Analyst

Gary Tenner -- D.A. Davidson -- Analyst

Matthew Clark -- Piper Sandler -- Analyst

David Feaster -- Raymond James -- Analyst

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