Q2 2021 CVB Financial Corp Earnings Call
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Good morning, ladies and gentlemen, and welcome to the second quarter of 2021 see the B Financial Corp, and its subsidiary citizens business Bank Earnings Conference call. My name is Sean and Al and I'm. Your operator for today at this time all participants are in a listen only mode. Later, we will conduct a question.
The answer period. Please note. This call is being recorded I would now like to turn the presentation over to your host for today's call. Christina Carabiner line you May proceed.
Thank you Sharon and good morning, everyone.
Thank you for joining us today to review our financial results for the second quarter of 2021. Joining me. This morning are day, 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 Dot C V Bank Dot com and click on the investors' tab, while the COVID-19 pandemic has receded from peak levels 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 variance of the COVID-19 virus.
Have surface of spread throughout the U S, including on the Companys markets in California. As a result of COVID-19 pandemic may still carry of 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.
In the infectious pathogenic properties of COVID-19 variances they develop the safety effectiveness distribution and public acceptance of vaccines developed to mitigate the pandemic and actions taken by the government authorities in response to the pandemic.
Speakers on this call claim the protection of the Safe Harbor provisions contained in the private Securities Litigation Reform Act of 1995 for a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from our forward looking statements. Please see the company's annual report on form 10-K for the.
Year ended December 31, 2020, and in particular, the information set forth in item 1 a risk factors there and now I will turn the call over to Dave Brager, Dave. Thank.
Thank you Christina good morning, everyone and thank you for joining US again this quarter, we reported net earnings of $51.2 million for the second quarter of 2021, or <unk> 38 per share representing a 177th consecutive quarter of profitability. We previously declared an <unk> 18 cents per <unk>.
Share dividend for the second quarter of 2021, which represented our 127th consecutive quarter of paying a cash dividend to our shareholders.
Second quarter net earnings of $51.2 million or 38 cents per share compares with $63.9 million for the first quarter of 2021, or <unk> 47 per share and $41.6 million for the year ago quarter or <unk> 31 per share through.
Through the first 6 months of 2021 we earned $115.1 million or <unk> 85 per share compared with $79.6 million or 58 cents per share for the first 6 months of 2020.
We recorded a recapture of provision for credit losses of $2 million for the second quarter of 2021 in comparison, we recorded a recapture of provision for credit losses of $19.5 million for the first quarter of 2021 the.
The recapture of provision was primarily the result of our forecast of continuing improvements in macroeconomic variables, including GDP growth and decreasing the unemployment.
For the 6 months ended June 30 of 2021, we recaptured $21.5 million of provision for credit losses, which assists the essentially reverses the $23.5 million in provision expense recorded during the first 6 months of 2020.
For the second quarter of 2021 of our pretax pre provision income was $69.7 million compared with $70 million for the prior quarter and $73 million for the year ago quarter.
Now I would like to discuss our deposits and loans.
At June 32021, our noninterest bearing deposits were $8.07 billion compared with $758 billion for the prior quarter and $6.9 billion for the year ago quarter noninterest bearing deposits were 63, 7% of total deposits at the end of the second quarter.
Compared with 62, 7% for the prior quarter and 63% for the year ago quarter. We continued to see strong deposit growth for the second quarter as total deposits and customer repurchase agreements increased by $662 million or 5.3% from the first quarter of 2021.
And $1.8 billion or 15, 7% higher than the prior year at.
At June 32021, our total deposits and customer repurchase agreements were $13.2 billion compared with $12.6 billion at March 31, 2021, and $11.5 billion for the same period a year ago.
Average noninterest bearing deposits were $7.7 billion for the second quarter of 2021, compared with $7.2 billion for the prior quarter and $6.2 billion for the year ago quarter.
Our average total deposits and customer repurchase agreements of $12.9 billion for the second quarter grew by $682 million or 5.6% from the first quarter.
Now moving on the loans total loans, including PPP loan forgiveness decreased by $222 million from the end of the first quarter.
When compared to the first quarter adjusting for the decrease in Paycheck protection program loans, our loans grew by $18 million or at a 1% annualized rate compared to the prior quarter in commercial real estate loans grew by $74 million.
Or by more than 5% annualized year to date, CRE loans have grown by $169 million or more than 6% annualize.
As we look at core loan trends CRE loan growth has continued to be strong with an increase of $306 million or 6% between the second quarter of 2021 in the second quarter of 2020 our.
Our dairy and livestock and agribusiness loans, excluding seasonal changes have grown modestly by $6 million.
C&I loans, however continued to be impacted by low utilization rates, which is the primary driver of the continued decline in C&I loans, which was $92 million compared to the second quarter of 2020.
C&I utilization rates were 27% on average in the second quarter, which compares to the pre pandemic level of 39% in the first quarter of 2020 and 31% for the second 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 $49 million. Finally, all other loan categories of also decreased in total by $62 million over the past 12 months of.
Our loan production continues to be strong in the second quarter as is our current loan pipeline. We continue to remain optimistic that we can grow loans in 2021 exclusive of the impact related to PPP loans as we overcome headwinds from low line utilization rates and continued high prepayment activity.
Average loans for the second quarter decreased by $21 million comp.
Compared with the first quarter of 2021, while increasing by $202 million compared with the year ago quarter during.
During the second quarter of 2021, PPP loans had an average balance of $838 million compared with $881 million for the first quarter of 2021.
Through June 32021 of the for PPP loans, we originated during round 1 more than 80% of our borrowers representing $853 million of loans have receive forgiveness from the SBA to date, our borrowers PPP forgiveness requests have been completely process by the <unk> that have been.
Completely processed by the SBA have received greater than 99% forgiveness based on the customer's forgiveness application.
As of June 32021, we originated over 900, PPP loans PPP loans in round 2 for more than $400 million.
Net interest income before recapture of our provision for credit losses was $105.4 million for the second quarter compared with $103.5 million for the first quarter and 100 for $6 million from the year ago quarter, earning assets grew by $646 million on average from the.
First quarter with more than $590 million of the growth.
From an increase in the investment securities.
Our earning asset yield decreased by 13 basis points compared to the prior quarter.
Interest bearing deposits and customer repos increased on average by $223 million from the first quarter, but interest expense declined as the cost of interest bearing deposits and customer repurchase agreements decreased from 6 basis points in the first quarter the 5 basis points in this recent quarter.
Our tax equivalent net interest margin was 3.06% for the second quarter of 2021, compared with 3.1% to 8% for the first quarter and 3.7% for the second 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 289% for the second quarter down from 293% for the prior quarter and 3 for 2% for the year ago quarter, Our net interest margin continued to.
Negatively impacted by excess liquidity during the second quarter, we had approximately $1.7 billion on average on deposits at the federal reserve, earning of 11 basis points. The net interest margin in the second quarter would've been approximately 40 basis points higher without the $1.7 billion.
On average on deposits at the Federal Reserve.
Loan yields were for 46% for the second quarter of 2021, compared with 4.5% for the first quarter of 2021 and for 77% for the year ago quarter.
Total interest and fee income from PPP loans was $8.1 million in the second quarter compared to $10.4 million in the first quarter. The decrease in loan yields from the year ago quarter was partly due to the impact of the federal reserve's rate decreases on our core loan yields and the impact of PPP loans as well as the decline in.
Accretion income for acquired loans, excluding the impact of PPP loans interest income related to the purchase discount accretion and nonaccrual interest paid loan yields were 4.3% for the second quarter of 2021 for 2.3% for the first quarter of 2021 and for 4.4% the second.
<unk> of 2020.
Prepayment penalty income increased by $1.8 million quarter over quarter, and by $1.3 million compared with the year ago quarter.
Our cost of deposits and customer repos as well as our cost of funds for the second quarter was 5 basis points.
We redeemed our $25.8 million junior subordinated debentures on June 15th which had a borrowing cost of approximately 1.6% or cash.
Cost of funds declined by 8 basis points compared to the second quarter of 2020.
Now moving on to noninterest income non.
Non interest income was $10.8 million for the second quarter of 2021, compared with $13.7 million for the prior quarter and $12.2 million for the year ago quarter second quarter income from bank owned life insurance or bully decreased by $3.4 million from the first quarter of 2021 and $443000.
From the second quarter of 2020.
The first quarter of 2021 included a $3.5 million of death benefits that exceeded the asset value of certain bully policies, while the second quarter of 2020 included $450000 in death benefits fees.
Fees from interest rate swaps were lower than the prior quarter by $215000 and were $2.2 million less in the second quarter of 2020 the.
The steepening of the yield curve during the second quarter made it less attractive for our customers to enter into interest rate swaps, the convert floating rate loans to fixed rate instruments compared to a conventional fixed rate loans.
Deposit service charges increased by 5% or $184000 from the first quarter and were higher than the second quarter of 2020 by $360000 or more than a 9% increase.
Our trust and investment services income increased by approximately $550000 or more than 21% compared with the prior quarter and almost $700000 of approximately 28% compared with the year ago quarter.
Now of expenses.
Noninterest expense for the second quarter was $46.5 million.
Compared with $47.2 million for the first quarter of 2021, and $46.4 million for the year ago quarter.
Total salary and benefit expenses decreased by $870000 compared to the first quarter, including a $1 million decrease in payroll taxes.
Higher payroll taxes were typical for the first quarter of every year.
I'll return benefit expense increased by $130000 from the second quarter of 2020.
Marketing and promotion expense increased by $1.1 million from $544000 compared to the first quarter of 2021, and the second quarter of 2020, respectively. The <unk>.
Increase was primarily due to the timing of donations made during the second quarter to community groups throughout our geographic footprint.
During the second quarter of 2021, we recaptured provision for unfunded commitments of $1 million as a result of our improving forecast for macroeconomic variables of project losses from unfunded commitments.
Noninterest expense totaled 123% of average assets for the second quarter of 2021, compared with $1.3 2% for the first quarter of 2021, and 1 for 8% for the second quarter of 2020.
Our efficiency ratio was $40 zero of 5% for the second quarter of 2021, compared with 42, 6% for the prior quarter and 39, 75% for the second quarter of 2020.
Now turning to our asset quality metrics during the second quarter, we had net loan charge offs of $463000 compared with $2.4 million for the first quarter of 2021 and $158000 for the year ago quarter.
At quarter end nonperforming assets defined as non accrual loans plus other real estate owned were $8.5 million down from $15.3 million for the prior quarter and $11.7 million at June 32020.
At June 32021, we had loans delinquent 30 to 89 days of $415000 compared with $1.7 million at March 31.2021.
Phosphide loans for the second quarter were $49 million, a $21 million decrease from the prior quarter.
As of June 30, we had no loans remaining on the permit related to the cares Act.
We will have more detailed information on classified loans available on our second quarter form 10-Q.
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 Alan.
Thanks, Dave Good morning, everyone. Our effective tax rate was 28, 6% for the second quarter compared to 28, 6% for the first quarter of 2021, and 29, 3% for the year ago quarter on.
The 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 $2.5 million from the first quarter of 2021.
As a result of the 2 point the <unk>.
$2 million recapture provision of credit losses, and net loan charge offs of $463000.
At June 32021, our ending allowance for credit losses was $69.3 million of 8.6% of total loans.
When excluding PPP loans, our allowances of percentage of the remaining loans is 94%.
Which compares to <unk>, 91% at the pre pandemic period end of December 31, 2019.
In addition to the allowance for credit losses, we have $23 million in remaining fair value discounts from acquisitions.
We previously recorded a provision of credit losses of $23.5 million in the first half of 2020 due to the estimated impact on loan losses from the economic forecast of the significant downturn in the economy, resulting from the COVID-19 patent debit.
Based on the magnitude of government economic stimulus on the wide availability of vaccines. Our latest economic forecast continues to reflect improvements in key macroeconomic variables and therefore, a lower projected loan losses, which resulted in a decrease in our allowance for credit losses.
For the 6 months ended June 32021, we have recorded a recapture provision for credit losses of $21.5 million on on our allowance for credit losses of $69.3 million has closely return to the pre pandemic level. We had at December 31, 2019 of $68.7 million.
Our economic forecast continues to be a blend of multiple forecasts produced by Moody's. These.
Of these U S. Economic forecast include the baseline forecast as well as an upside and downside forecast.
With the largest weighting on the baseline of weighted forecast assumes GDP will increase by more than 6% in 2021, and then grow at approximately 2.5% of 3% for 2022 and 2.2023.
The unemployment rate is forecasted to be slightly higher than the 6% in both 2021 and 2022 before declining to 5.3% in 2023.
Our total investment securities increased by approximately $70 million from the end of the first quarter.
As of June 32021 investment securities available for sale or assets securities totaled $2.93 billion.
<unk> of of pretax net unrealized.
<unk> gain of $23.3 million.
Investment Securities held the maturity or HTM securities totaled of approximately $1 billion at June 30 of.
During the second quarter, we purchased approximately $317 million of new <unk> securities with an expected tax equivalent yield of 1.7%.
Now turning to our capital position for the 6 months shareholders' equity increased by $47.1 million to $2.06 billion increase was primarily due to net earnings of $115 million.
A $22 million decrease in other comprehensive income for.
On the tax effected impact of the decrease of market value of available for sale of securities and $49 million on cash dividend.
Our overall capital position continues to be very strong our tangible common equity ratio was 9.2% at the end of the second quarter.
On our regulatory capital ratios are well above regulatory requirements to be considered well capitalized at.
At June 30, our common equity tier 1 capital ratio was 15, 1% and our total risk based capital ratio was 15, 9%.
I'll now turn the call back Dave for some closing remarks, Thank you Allen.
Despite the ongoing impact of the COVID-19, pandemic and the continuation of the low interest rate environment. We believe our bank remains well positioned to succeed now and in the future our strong capital consistent earnings low cost funding and solid credit I'll put the bank in a position to execute on our time tested strategy of banking.
The best small to medium sized businesses and their owners in our local markets.
California's economy fully reopened on June 15, thanks to the effect of COVID-19, vaccines and falling transmission rates on.
So there have been obviously some issues due to the spike of the Delta variance of COVID-19.
California's economy continues to recover we are confident that our customers will begin to invest in their businesses again.
I am proud of our associates and their dedication to the bank and our customers over the past 15 months over 300 of our associates, who are involved in providing more than 6000 paycheck protection protection loans totaling over $1.5 billion to our customers in support of their businesses as of June 32021, we've received forgiveness on <unk>.
Over $860 million of the loans and.
In closing, we're pleased with our financial results for the first 6 months of 2021, particularly as we navigate through unprecedented times. Our strategy remains unchanged as we are committed to our existing existing relationship banking model and operating our business in an efficient and focused way we will continue to focus on increasing our same store.
Sales opening de novo locations in new geographies, and finding acquisition opportunities and our geographic footprint.
Please stay healthy and safe that concludes today's presentation now on and I will be happy to take any questions that you might have.
Thank you as a reminder for the question. Please press star 1 on your telephone keypad.
I'll pause for just a moment ago part of the Q&A roster.
Your first question comes from the line of from Jackie Bohlen from K B W.
Hey, Good morning day, good morning Jody.
Oh, sorry, that's the loan growth.
What youre seeing in the CRE market.
For you you've been having some good expansion there that I think you kept the little bit overshadowed by some of the the other I apologize for the partner in the background of can't figure out how to turn Bob.
I think I've never shadow.
And I just wanted to see you know where are you seeing that is there any particular geographies, where it's coming from more of it's more broad based across the book right.
Yes, Jack it's definitely broad based across the footprint and we continue to see very solid pipelines, obviously that 6% growth in CRE is great. It is the largest amount of loans on our balance sheet, but it is overshadowed by some of the items I mentioned, such as CA C&I line utilization.
Some smaller declines in some of the other areas, but I do believe that as our businesses feel confident and reinvesting in themselves.
Utilizing some of the excess liquidity that we will start to see the line utilization rates increase I mean, we're hearing a little bit about that.
Unfortunately for our borrowers.
The supply chain issues and disruptions or it's costing them more money to get things shift and the receive things and so theyre going to be to start to use money and kind of this weather transitory or not inflationary period.
So in C&I line utilization.
Assuming that that is at a minimum stable gross.
The gross necessary to the net portfolio growth or could CRE loans drive overall gross.
Prospects.
Okay, Okay understood.
And then just 1 last 1 for me and then I'll step back on just in terms of the.
That behavior.
And I guess, when I think kind of start flowing in.
Can you help me with that.
No I didn't.
Christine I mean, we are still seeing opportunities to bring on great new deposit relationships.
Of our existing customers.
Are still growing their deposits, but we are we are seeing opportunities in some of our specialty lending areas and other operating companies. So we're still we're still focused on the total relationship and some day deposits will be worth something again, but.
I I talked about this almost every day about where we see deposits going on and we're winning new relationships, but we need we need our customers to start investing a little bit of that liquidity so that.
We can do something about the excess liquidity at the fed.
And then Rob.
And for the gross adds to what percentage of it Brian.
The thing customer liquidity versus new customers and I don't need exact numbers, just kind of a general sense the cheese out yeah.
Yeah, I'd say I mean, this is anecdotal and not exact but just looking at our top 150 depositors in the bank. That's represented a little more than half of the gross so there is growth in the other customers in the bank, but I'd say overall, it's probably more of <unk>, 80% of our existing customers and and 20% of the growth for.
New relationships so.
Okay, great. Thank you that's very helpful I'll step back now.
Thank you. Your next question comes from the line of Brad Robinson from home.
Hey, Good morning, guys. This is actually Ben on for Brett.
Hi, Dan how are you.
Doing well.
Thanks for taking the question of I was curious kind of running out of them. The same day and the Jack just asked if you look at gross in general.
To be posting positive numbers ex P. P. T. And then you also have a good insight to your clients in the P. P. P forgiveness.
I was kind of curious for.
Especially with the M&A throughout California between public and private.
So I think there's double digit deals already year to date I was curious.
What do you think of gross potential could be in terms of loans and then with the are you guys actively looking to hire talent that might be just place through M&A.
Yeah.
It's interesting.
I just wanted to make sure I understand the question part of it is like you are asking is where is the growth coming from I guess.
We have hired new teams, we have hired new bankers I mentioned that last quarter, we are opening.
We actually of officially opened but the real opening is in the middle of August our Modesto office, we hired.
The team out of Wells Fargo. So we are seeing opportunities for de Novo team pickups, and even within our adjacent footprint bankers that have been displaced it's primarily from the larger banks not as much from banks that have been acquired in California, It's more a function of the disruption at some of the larger banks.
And maybe the reorganizations that have created those opportunities for us.
But we are looking and it still always actively looking at opportunities on the M&A front as well.
Got you and then just kind of switching gears to the M&A topic.
You guys came out of a great strategy for gross credit looks great.
Very healthy valuation of most importantly, there or the strategy.
Alright, any acquisition would be no means.
So if you think of it as an offensive perspective, especially with your valuation is there a need or want to get something done this year or is it more opportunistic.
The kind of juxtaposed against the I know you've laid out that slide kind of stuff.
Pretty wide either something you could drill line a little further out in the kind of narrow on the targets.
Yeah, I mean, I think thats pretty narrow I mean, we want to make sure in any potential M&A.
Deal that we would do that that their strategy pretty closely aligns with our strategy that the the opportunities that we would consider would be within and adjacent to our footprint there is value in.
And moving into newer markets, but at the end of the day.
We want to make sure that debt.
As you mentioned our strategy that we execute on that and I'm hopeful that something will happen and we've had a lot of conversations but.
You have to get to the finish line on these things and so hopefully we'll be able to do something sooner rather than later.
Okay, Great appreciate the answers from stepped back from Q.
Your next question comes from the line from Matthew Clark from Piper Sandler.
Hey, good morning.
Hey, Matthew.
Maybe first.
On the securities purchases this quarter.
I guess, how do you think about redeploying.
Redeploying that excess liquidity into securities given what the curve has done more recently.
Just wanted to get the sense for your.
Latest appetite and what you might be able to get and whether or not you might be changing your strategy of slightly.
Matthew.
Correct, and where rates have moved down more recently, it's probably below where we would target purchases.
So we're probably on the very near term on pause, but but.
As rates move up a little bit we would probably be more active.
The point where that liquidity similarly.
Similarly to what we did.
In the second quarter earlier part of the second quarter as well as on the first quarter.
Okay and on the prepay fees I know they were up a $1.8 million, but can you, let us know what they're up to and what do you think kind of a normal contribution from prepay fees might be going forward.
It was about $3.4 million in the quarter.
Over the last 5 quarters, we'd probably average at the close to 2 and a half of 2 point for us somewhere in that range. So.
Q1 was probably the low average and this was a little bit over average.
And Matthew this is Dave just to add 1 quick comment to that I mean, it's a.
A blessing it occurs on the prepayment penalty fee income because what that means is we're either having to fight off of refinance from another lender at a lower rate environment and so we can if we can keep that deal of modify it there are situations, where we get to recognize that prepayment penalty income and there are other situations, where it's just.
<unk> back into the loan if we do keep the loan the.
On the more challenging part of it that leaves we of prepayment penalties and all of our all of our fixed rate loans and that gives us at least the opportunity to have the last look at any deal in many cases and so while it's.
It's a good thing to have I mean, we wish the rate environment was a little bit different so that we wouldn't have the level of prepayment penalty that we would have I mean that's.
Compared with our $306 million of see CRE growth I mean again, if we could.
The stem the tide of little bit of of rates went up a little bit it would help slow that down so just out of a little color to alan's answer.
Okay.
Great.
And then just on.
New money yields on.
On loans I think we talked during the quarter and they were kind of at $3.50, 375 range I assume that's ex fees.
Any change in that range of the range that range is still accurate.
Obviously in the last week or so there has been there's been some change in some of the rates.
From origination rates, but overall in the second quarter that was that was definitely the range of which we were originating new loans.
Okay, and then last 1 for me just on noninterest expense.
What about the run rate I think we should obviously you add back that millions of dollar a provision reversal for unfunded commitments.
What are your thoughts on expense gross I think also in light of your slide 30 to around 10.
The tech investments.
I guess 2 things 1 you're right I mean, we would not foresee.
A reversal of unfunded in the near term after the the $1 million this past quarter.
Our our marketing dollars, particularly our donations were lumpy you know.
They were higher than normal this quarter.
So that would probably normalize a little bit as well.
But as we've said our goal is to try to keep our noninterest expense relatively flat to 2 very small increases.
In terms of technology, we do have a lot of projects going on.
The increase automation and efficiency and scalable processes.
And generally speaking we are reinvesting.
Reinvesting savings into the projects to try to keep things relatively flat.
Okay. Thank you.
Yes.
Your next question comes from the line of Gary Tenner from D. A Davidson.
Thanks, Good morning, good morning.
1 of the that's good kind of.
Just broadly the impact.
You know as you see it currently we're down the road from the drought in California, and the challenges debt.
The beginning to develop.
Kind of the northern value or just the valley area on General Uh Huh.
For the past your customers.
I'll look there.
I mean, it's definitely an issue we do a very thorough analysis on water every time, we're doing an aggregate of agricultural base loan and water availability and so it is definitely an issue that we're aware of its creating some cost increases, particularly for our dairy portfolio on the on the <unk>.
Fees side, because the cost of growing has gone up.
Thankfully the price or of milk prices have remained at a level that our dairy farmers can operate at least of breakeven if not a slight profit the app.
AG business side is definitely impacted by that as well so finding the deals in the the customers that have the right water situation is very important to us and a big part of our analysis, but the drought is something we're watching closely and.
We are hopeful that we'll be able to figure some out something out in that range a lot. So.
But it is definitely an issue.
Thanks.
And then just kind of on the topic of the.
On the excess liquidity, especially of the challenges now with the rate environment, we've seen.
The other banished go down the path of of you know.
And of augmenting their share.
The family portfolio with some purchases.
No of some part of that would have obviously better yield than buying mortgage backs et cetera. So.
Given that your single family portfolio declining for quite a bit the last couple of years.
You consider that as an alternative to securities purchases at some point.
Okay.
We don't typically buy loans as you know and I think I don't foresee that really changing.
It's not part of our strategy.
Okay. Thank you.
As a reminder of a question. Please press star 1 on your telephone keypad once again the star 1.
Our next question comes from the line of Tim Coffey from Janney.
Hey, good morning, gentlemen, good morning.
If I can follow up on the on the drought question Hum of U S Bank recently stress of the portfolio the AG.
The portfolio for higher water costs or.
Making sure everyone's kind of access to multiple water sources.
Yes, we do that every time, we underwrite alone we stress for cost and not just water, but other issues.
The important part about that as well as the the dairy and livestock.
Group and our Central Valley Agribusiness group when you look at the combined amount of those loans on our on our balance sheet, it's less than 4% of our total loans. So we keep a very close eye on dairy we have monthly meetings, where we talk about all of the the issues of the I'll say the the less than stellar.
The deals we have which we consider all of our deals good but the kind of lower end ones. We review that we look at that from a stress perspective and interest rates. We look at that of stress perspective from from their operating costs, which includes water.
And obviously feed so yes, we do that regularly as a regular of course of business. This is not something that we just started doing we've been doing this in for our history.
No no for sure.
And then.
Maybe if you can kind of look of the reserves given the kind of the seasonality that you typically see the loan portfolio in the second half of the year.
And the current level of reserves do you feel like the kind of near the point, where the releasing reserves.
Complete.
It's hard to predict.
Yes, Youre correct me out of some seasonality, but but also remember.
Seasonal growth sometimes are are based on fairly short commitments and this is the life of a loan type of.
On the methodology, so that by itself may not.
Of that big of an impact I would just indicate that look on the forecast our economic forecast you look at where our credit metrics are they're all very strong, but it's hard to see of the future at this point in time.
Sure No I understand and then just thoughts on.
Absorbing the liquidity that you have on balance sheet.
As the number 1 Goldman perhaps the number 2 and 3 just a loan growth.
Yeah, I mean loan growth, obviously, we want to make quality loans and we want to grow loans, so that would be our.
Primary goal is growing loans.
On the enormous amount of liquidity our loan pipelines. The night I Didnt mentioned this number in my prepared remarks, but our loan production. This year for the first 6 months is up about 15%. So we are produced over last year, which was a very good year for us. So we are producing an enormous amount of new.
The opportunities, we got a sharp the backend and and hopefully see some line utilization, but yeah. The number 1 priority would be to make loans, but right, but we also focus on relationships and we're not going to pass on an opportunity that's of great deposit opportunity that can lead to additional monetization.
<unk>, whether thats <unk>.
Services other Treasury management services fee income opportunities all of those things are part of our relationship banking strategy right.
Right.
Oh, great because of my questions I appreciate your time. Thank you.
Once again I think of a question. Please press star 1 on your telephone keypad.
Okay. At this time there are no further questions I will turn the call back over to Mr. Berger for closing remarks.
Great. Thank you I want to thank everybody for joining us this quarter. We appreciate your interest and look forward to speaking you within with you in our October <unk>.
In October for our third quarter 2021 earnings call. Please on Alan or I know if you have any questions have a great day and thank you for listening.
This concludes today's conference you may now disconnect.
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