Q2 2022 CVB Financial Corp Earnings Call
I'm as lids and I'll be your operator for today.
At this time all participants are in a listen only mode.
Later, we will conduct a question and answer period.
Please note this call is being recorded.
I would now like to turn the presentation over to your host for today's call Christina Caribbean You May proceed.
Thank you Brad and good morning, everyone. Thank you for joining us today to review our financial results for the second quarter of 2020 to joining me. This morning are Dave Brager, President and Chief Executive Officer, and Allen Nicholson Executive Vice President and Chief Financial Officer, our comments today will refer to the financial information that was included in the Earth.
[noise] announcement released yesterday to obtain a copy please visit our website at www Dot CB bank Dot com and click on the investor's tab.
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 31st 2021, and in particular, the information set forth in item one a 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 Brager, Dave.
Thank you Christina and good morning, everyone.
For the second quarter of 2022, we reported net earnings of $59 $1 million or 42 per share representing a 180 <unk> consecutive quarter of profitability. We previously declared a <unk> 19 per share dividend for the second quarter of 2022, an increase of 6% compared to the first.
Of this year at.
It represented our 130 <unk> consecutive quarter of paying a cash dividend to our shareholders.
Second quarter net earnings of $59 1 million or 42 per share compared to a $45 $6 million for the first quarter of 2022, or <unk> 31 per share and $51 $2 million for the year ago quarter or <unk> 38 per share.
The second quarter of 2022 represents a full quarter of financial results, including the assets and liabilities acquired from Suntrust Bank on January seven 2022, the integration of Sunquest was completed with the consolidation of two banking centers during the second quarter. We previously completed the systems conversion in February .
Through the first six months of 2022, we earned $104 6 million or <unk> 74 per share compared with $115 million or <unk> 85 per share for the first six months of 2021 for.
For the second quarter of 2022, our pre tax pre provision income was at a record level of $85 $7 million compared with $65 $9 million for the prior quarter and $70 million for the year ago quarter. After excluding acquisition expense, our second quarter of 2022 generated 14%.
Operating leverage over the first quarter of this year and 9% operating leverage over the same quarter last year.
Our net interest margin grew by 26 basis points compared to the first quarter, although our earning assets benefited from the general increase in interest rates. We also had strong growth in loans and investment securities with loans growing by $134 million on average and investments growing by $328 million on average.
When compared to the first quarter as an overall result, our earning asset yield grew from 293% in the first quarter to three 2% in the second quarter, while only experiencing a one basis point increase in our cost of funds to four basis points in the second quarter.
We recorded a provision for credit losses of $3 6 million in the second quarter compared to $2 $5 million in the first quarter and a recapture of provision for credit losses of $2 million in the year ago quarter in February we initiated initiated a $70 million accelerated share repurchase program.
Which resulted in the repurchase of approximately 3 million shares through the program termination date of June 2nd 2022.
In addition, we repurchased almost one 7 million shares through June 32022 under a <unk> one share repurchase program that became effective at the beginning of March.
Now, let's discuss bonds in more detail our new loan production was very strong in the second quarter, new loan commitments were approximately $560 million, which is higher than the same period of last year by greater than 40% when.
When excluding PPP loans generated in 2021.
I'm, sorry, when excluding PPP loans generated in 2021 total loans at quarter end were $8 7 billion, a $105 million or one 2% increase from the end of the first quarter. However, after excluding PPP loan forgiveness second quarter loan growth was 155.
Or approximately 7% annualized.
The core loan growth in the second quarter was led by continued growth in commercial real estate loans, which grew by $173 million or 11% annualized C&I loans increased by $17 million would compare when compared with the end of the first quarter or approximately 7% annualized the line.
Nation rate for C&I loans was 32% at the end of the second quarter compared with 31% for the first quarter and 27% for the year ago quarter.
Dairy and livestock loans decreased by approximately $21 million from the prior quarter as loan Utilizations declined from 69% in the first quarter to 66% at the end of the second quarter continued loan forgiveness for PPP loans resulted in a decline of $54 million in comparison to the first quarter.
At quarter end nonperforming assets defined as nonaccrual loans, plus other real estate owned were $13 million compared with $13 $3 million for the prior quarter and $8 $5 million for the year ago quarter at quarter end, we had no our EEO properties and the $13 million in nonperforming loans.
Represented eight basis points of total assets.
During the second quarter, we had net recoveries of $503000 compared with net loan charge offs of $5000 for the first quarter of 2022.
At June 32022, we have loans delinquent 30 to 89 days of $559000 compared with $2 6 million at March 31 2022.
Classified loans for the second quarter were $76 million compared with $64 million for the prior quarter and 40 $49 million for the year ago quarter.
As of June 32022 classified loans include $17 8 million in loans acquired from Sunquest now I would like to discuss our deposits at June 32022, our total deposits and customer repurchase agreements were $14 6 billion compared.
Compared with $15 1 billion at March 31, 2021, and $13 $2 billion for the same period a year ago.
At June 32022, our noninterest bearing deposits were $8 9 billion.
Compared with $9 1 billion for the prior quarter and $8 1 billion for the year ago quarter.
During the second quarter noninterest bearing deposits averaged $8 9 billion, a $200 million increase from the average balance in the first quarter.
Non interest bearing deposits were approximately 63% of our average deposits for the second quarter of 2022 compared to 62% for both the prior quarter and the second quarter of 2021.
The bank's funding is entirely core customer deposits and customer repos, which combined had a total cost of just four basis points in the second quarter. This four basis point cost of funds compares with three basis points in the prior quarter and five basis points for the year ago quarter.
I will now turn the call over to Alan to discuss our investments the allowance for credit losses and capital Alan.
Thanks, Dave Good morning, everyone.
Continuing to deploy some of our excess liquidity during the second quarter and two additional securities by purchasing more than $350 million of new securities with yields on average of approximately 375%.
Investment securities available for sale or <unk> Securities totaled $3 6 billion inclusive of our pre tax net unrealized loss of $346 million.
Investment Securities held to maturity or HTM securities totaled approximately $2 4 billion at June 32022.
The growth in our investment portfolio over the last year resulted in investments increasing from 28% of average earning assets in the second quarter of 2021% to 36% in the first quarter of 2022 and now to 39% on average in this most recent quarter.
In addition to the increase in the size of our securities portfolio. The tax equivalent yield on the portfolio grew from one 7% in the first quarter of 2022% to 193% in the second quarter.
Although we grew the investment portfolio, we continue to mine a significant amount of funds at the federal reserve.
Our fed balance averaged approximately $800 million for the second quarter compared to more than one 6 billion in the first quarter of this year.
At June 32022, our ending allowance for credit losses was $82 million.
92% of total loans.
When excluding PPP loans, our allowance as a percentage of the remaining loans was <unk>, 93%, which.
Which compares to <unk> nine zero percent at March 31, 2022.
In addition to the allowance for credit losses, we had $11 million in remaining fair value credit discounts from acquisitions as the most recent quarter end.
For the quarter ended June 32022, we recorded a provision for credit losses of $3 $6 million.
Compared to $2 5 million for the quarter ended March 31, 2022, and a $2 million recapture provision for credit losses in the year ago quarter.
The provision for credit losses in the second quarter was primarily driven by loan growth as well as an increase in our projected life of loan loss rates due to the deteriorating economic forecast that assumes very modest growth in GDP lower commercial real estate values and an increase in unemployment.
Our economic forecast continues to be a blend of multiple forecast produced by Moody's. These U S. Economic forecasts include a baseline forecast as well as downside forecasts.
We continue to have the largest individual scenario weighting on the baseline forecast with downside risk weighted among multiple forecasts are.
Our weighted forecast assumes GDP will increase by 5% in the second half of 2022.
8% for 2023, and then grow by two 5% in 2024.
The unemployment rate is forecasted to be four 6% in the second half of 2020, 254% in 2023, and then declines of 5% in 2024.
Now turning to our capital position.
From the end of 2021 shareholders equity decreased by $99 million to $2 billion at June 32022.
Equity increased from the end of 2021 by $197 million for the issuance of eight 6 million shares to the former shareholders of Sunquest.
Equity also increased due to year to date income of $104 6 million.
Which was offset by $52 2 million in dividends, representing a 50% dividend payout ratio.
Interest rates increased increase through the end of the second quarter.
Resulting in an increase in the unrealized loss on our available for sale securities and a $243 million decline in equity due to the associated decrease in other comprehensive income.
On February one we announced that our board of directors authorized a share repurchase plan to repurchase up to 10 million shares of the company's common stock.
And the execution of a $70 million accelerated share repurchase or ASR plan.
In combination the ASR and a <unk> one stock repurchase plan resulted in the repurchase of approximately $4 7 million shares at an average share price of $23 38.
Which reduced our common stock by $109 million.
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 June 32020 to our common equity tier one capital ratio was 13, 4% and our total risk based capital ratio was 14, 2%.
<unk>.
I'll now turn the call back to Dave further discussion on our second quarter earnings.
Thank you Alan net interest income before provision for credit losses was $121 $9 million for the second quarter compared with $112 8 million for the first quarter and $105 $4 million for the year ago quarter second quarter, earning assets decreased by $400 million on average.
From the first quarter due to a decrease of $860 million in average funds on deposit at the Federal reserve offset by an increase in investment securities of $328 million and a $134 million increase in average loans outstanding.
Our earning asset yield increased by 27 basis points compared to the prior quarter.
The increase in our earning asset yield was a result of a 24 basis point increase in investment yields a four basis point increase in loan yields and a shift in the composition of our earning assets with average loans growing from 53% to 55% of average, earning assets and investments growing from 36% to 39%.
While our average amount of funds at the fed declined from 10% to 5% of earning assets our balance sheet continues to be well positioned for rising interest rates with significant liquidity, including $523 million on deposit with the fed at the end of the second quarter and approximately $175 million of.
Expected quarterly cash flows from our investment portfolio.
Our tax equivalent net interest margin was 3131, 6% for the second quarter of 2022, compared with 2.90% for the first quarter and 3.06% for the second quarter of 2021.
The increase in our net interest margin was the result of the increase in our earning asset yield while maintaining our very low cost of funds that migrated from three basis points in the first quarter to four basis points in the second quarter. During a period of time that the federal reserve increased fed funds by 150 basis points.
Loan yields were $4 three 1% for the second quarter of 2022, compared with $4 two 7% for the first quarter of 2022, and 446% for the year ago quarter total interest and fee income from PPP loans was approximately $1 4 million in the second quarter compared with $3 million in.
The first quarter.
Excluding the impact of PPP loans and interest income related to purchase discount accretion.
Loan yields were four 2% for the second quarter of 2020 to $4 one 1% for the first quarter of 2022 and 433% for the second quarter of 2021.
New loan production at the end of the second quarter began to exceed the average yields on the loan portfolio.
Our cost of deposits and customer repos as well as our cost our total cost of funds for the second quarter was four basis points interest bearing deposits and customer repos decreased by an average of $314 million from the first quarter, while noninterest bearing deposits grew by approximately $200 million on average.
To date, we have experienced limited pressure to increase deposit rates. Despite the recent increases in market interest rates. However, during the fed's aggressive rate hiking, however, the fed's aggressive rate hiking may impact future customer expectations. During the last rising rate cycle short term.
<unk> grew at a gradual pace by 225 basis points from 2014 to 2018 and our cost of funds increased by only eight basis points during that same period.
Moving on to noninterest income noninterest income was $14 7 million for the second quarter of 2022, compared with $11 3 million for the prior quarter and $10 8 million for the year ago quarter. The second quarter of 2022 included $2 7 million and net gains on the sale of properties associated with Bacon.
<unk> centers. In addition, the second quarter of 2022.
Reflects a $1 million increase in income on our CRA investments, including a $1 $3 million gain from a distribution related to one of these investments.
Deposit service charges were $5 3 million in the second quarter, which was a $274000 increase compared with the first quarter and were higher than our second quarter of 2021 by 28% or $1 $2 million.
Our trust and investment services fee income increased by approximately $140000 compared with the prior quarter will be in $205000 or approximately 6% lower when compared with the year ago quarter.
Market conditions have negatively impacted assets under management and our trust fee income.
Now expenses noninterest expense for the second quarter was $50 9 million compared with $58 2 million for the first quarter of 2022, and $46 $5 million for the year ago quarter.
Excluding acquisition expense noninterest expense decreased by $2 $1 million over the first quarter of 2022 and increased by $4 million over the second quarter of 2021.
Staff related expenses declined by $1 $1 million compared to the first quarter of 2022, primarily due to lower payroll tax expense, which peaks in the first quarter of every year.
The $4 million year over year increase is primarily attributable to the additional banking centers and associates acquired in the Suntrust merger.
We have completed the integration and consolidations associated with the Sunquest acquisition. The third quarter of 2022 will reflect the full benefit of our expense savings. However, the impact from the second to third quarter will be minimal.
Noninterest expense totaled one 2% of average assets for the second quarter of 2022.
This compares to 136% for the first quarter of 2022, and one 3% for the second quarter of 2021, our efficiency ratio was 37, 2% for the second quarter of 2022.
This compares with 46, 9% for the prior quarter and 40% for the first quarter of 2021.
Now to the economy.
The California economy continues to improve but challenges remain.
Fly chain issues, a tight labor market and inflationary pressures continue to impact our customers and the bank.
Covid transmission levels in California, recently increased and continue to create an uncertain business environment.
We remain committed to our associates customers and shareholders. During these challenging times in closing despite the previously mentioned headwinds we produced approximately $86 million in pre tax pre provision income during the second quarter, which is a 30% increase from the first quarter. The combination of strong loan growth expansion of our <unk>.
Net interest margin and our continuing efforts to closely manage expenses resulted in a record level of quarterly pre tax pre provision income. This growth supported a 6% increase in our quarterly dividend, which represents a dividend payout ratio of approximately 45%. We continue to focus on executing on our core strategies and support.
Our customers through these unpredictable times and I would like to thank our associates customers and shareholders for their commitment and support please stay healthy and safe.
That concludes today's presentation now Alan and I will be happy to take any questions that you might have.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone.
Please standby, while we compile the Q&A roster.
Our first question comes from Matthew Clark with Piper Sandler Your line is now open.
Hey, good morning.
Good morning, good morning, Matthew.
Maybe first on deposits down a little bit here I know there.
Up on average at least noninterest bearing but what are your thoughts on deposit growth from here.
And.
How would you what are your updated thoughts around the deposit beta and you can take the over or under on that basis points from last cycle.
Yes, some of that depends obviously on how much the fed how aggressive that that is in continuing to raise rates but.
Like I said, we're seeing limited.
Requests for higher rates, although it is happening the one thing I would say on our point to point total deposits.
The Sunquest acquisition, they had a number of relationships that we identified during due diligence and after that well I would say more hot money relationships that we're earning rates that we wouldn't normally pay and so we made the individual decision on each of those to let them go or to keep them and as you can as you saw in.
The number of some of that was going there is a little seasonality in between the first quarter in the second quarter as well.
Optimistic are relatively optimistic on deposit I think we do have a higher.
A higher percentage of noninterest bearing which are primarily operating accounts and that was stable and grew by $200 million on average. So we're going to compete for relationships, we're not going to let the hot money.
The positive sort of drive our cost of funds up so I think we will see a little more pressure I mean, this this rising rate cycle.
Is different than the last cycle. It took four years to raise 225 basis points it might take.
Three months to raise 225 basis points at this time, so we'll have to see how that plays out but relatively optimistic and look we're still winning.
Good deposit relationships out in the marketplace, but as you know we focus on the total relationship and not just growing total deposits by paying higher rates.
Great.
And then shifting to the expense run rate youre going to get the full realization of the cost saves from Suntrust.
I mean is it fair to assume that run rate could drift a little bit lower here in <unk> before starting to grow again.
Matthew I think we accomplished most of what we wanted to do in the second quarter. So I think from from an acquisition standpoint, it's not going to be material in Q2 to Q3.
I think we talked last quarter as well there are some inflationary pressures in terms of staff.
Staff expense vendor expenses so.
I think more than likely we may see pressure on expenses growing modestly throughout the rest of the year.
I don't I don't foresee them going down.
Okay.
And then the uptick in classified I know, it's still a relatively low number but given health.
Our hyper focused everybody is on credit can you just discuss what drove that increase.
And classified I think it was CRE related.
Yes, there was.
Very candidly it was one loan.
Drove most of that increase in that one loan we are very well secured and there is no. There is no issue there.
No.
We still remain very confident overall the credit metrics are better today than they were pre pandemic and really pretty much straight anytime I know, there's that little uptick, but it was really related to one loan secured by two properties.
But we're at a very low loan to value sub 55%.
We just wanted to we always great a little more cautiously maybe than than others, but I don't feel that there's any any big movement in the overall credit.
Of the bank.
Okay, and then last one from me just on share.
Share repurchase activity should we assume you remain active despite.
Despite growing economic uncertainty here.
Well, yes.
The board announced a $10 million share back earlier this year. So we've not quite 50% of that but ASR did make a big part of that which is closed.
We have an active <unk>, one, but it's going to be dictated by share price. So.
Don't really know what will happen in the rest of the year, but I think.
We accomplished a fair amount of what we wanted to do you think about the $8 6 million that was issued Kurt.
Sunquest and the fact that we bought more than half of that back so.
Great. Thank you.
Thank you.
Our next question comes from Kelly Motta with <unk>. Your line is now open.
Oh, Hi, everyone. Good morning. This is ellen on for Kelly.
Good morning, <unk> good morning.
Thanks for the question, so I guess I'll start.
<unk> was pretty solid and you've always had a kind of steady solid loan growth.
But I think we like Omar as there've been others is that a function of activity in your market or like conservatism plus.
Competition.
Well, so just to kind of go to the basics for US I mean, we are we want to make the top 25% of clients in their respective industries and by doing that the pie isn't as big as everybody else and we want to maintain pristine credit quality, which is an important factor we've grown in the last two quarters.
And 7% annualized more than I think we've grown I cant even go back where we've had two consecutive quarters of that level of loan growth. Our pipeline still remains strong and we don't give guidance here, but I will say our goal is kind of that mid single digit.
I do think although our pipelines still remain pretty strong they have softened a little bit from the first quarter and I do think depending on what happens with rates and the economic picture there could be.
There could be some slowdown there, but that 7% to 8% or eight 7%. The last two quarters was pretty robust for us, but that was due to the hard work of our teams and I think we're probably trending back to where we normally would be which is in that kind of 4% to 5% range.
<unk>.
Got it that's helpful and then.
But I was just thinking about how is competition and you're making right now are players rationally.
Are you starting to see people certain compromise on terms of standards I guess I guess, it's all perspective, we always think they are acting irrationally.
Just joking, but we're just very disciplined in how we underwrite and so we're not going to.
We will compete on price, we're not going to complete compete on structure and so for us it's more important to maintain that I would say the competition generally.
It hasn't been as bad as it was maybe.
Two to six quarters ago, I think for the most part people are seeing that there might be going into a more challenging economic times. So there are less willing to make exceptions.
But we're still seeing some pricing irrationality with the recent increases in rates, but for the most part we've been able to originate loans, where we.
As we mentioned kind of in that.
Plus that four five plus range, which are significantly better than previous quarters.
Got it that's helpful. I'll step back. Thank you. Thank you.
Okay.
Thank you.
Our next question comes from David Feaster with Raymond James Your line is now open.
Hey, good morning, everybody. Good morning, David maybe just kind of digging in a bit more into the growth question.
I mean, how.
How much of this expected slow obviously, we talked about competition, a little bit, but I mean whats your appetite for growth here I mean, we've touched on some of the in your prepared remarks, some of the challenges in the economy.
What is your appetite for credit here, just given the economic backdrop, how much of the deceleration is strategic versus your client.
Slower demand for credit and maybe just any color you have into the pulse of your clients at this point or are they still pretty optimistic or are you starting to hear a more cautious tone.
So I'll take the second question first and I think Youre right you're spot on I think our clients are definitely more cautious.
As you and I have discussed in the past, we do customer lunch and myself.
And our banking division manager and.
The regional manager along with different centers in different locations and I would say the last couple we've had has definitely been much more cautious the customers have been so I think there is some of that that's going to impact that David the one thing I would say to the growth I mean look we want to continue to move the mix of our balance sheet. We wanted to do more loans, but we're going.
Do them under our underwriting guidelines and I think some of that is going to impact growth because we're just not willing to make exceptions to the credit policy. We have never really had I mean, our credit underwriting guidelines have remained the same pre pandemic during the pandemic and today and going forward. So we can we're going to remain consistent in how we look.
Good deals and if it doesn't meet our criteria, we're not going to try and make it fit.
So I think youre on the right track, where I think some of that growth will be.
Will be some headwinds just based on the fact number one people are going to maybe want to not invest like they would do to their cautious nature were going to underwrite in the same manner and not allow for.
For degradation on the on the origination side as far as credit quality is concerned. So there is definitely some headwinds, but we still want to get quality relationships and we're going to work hard to do that and I think thats one of the things that's differentiated us over the history of the bank and.
And just more recently during the last few few quarters, where we've had pretty solid loan growth that we feel is as high quality.
That's helpful. And then maybe just kind of taking that at a high level I'll just on asset quality I mean, you've got a really good pulse on the economy again like you said, we talked about some of the challenges talked about some of the.
Changes in the tone of your client base, just as you look out I mean, when we talk about where we are strategically heading I mean are there any segments that you are more cautious on or maybe we're starting to see some early signs of concern that we might be starting to avoid.
Just curious any high level thoughts on asset quality, obviously, you talked about I mean, you guys are are pristine, but just any comments would be helpful. Yes.
Yes no.
Again, I think Theres, a couple of areas that I am a little more concerned about one of those is just C&I in general, but all narrow it down.
With the fed increases that's impacting.
Those operating lines, specifically for smaller companies in a greater way.
And I think that that's one of the things I think there could be a number of little ankle biter problems that we have to deal with on smaller lines of credit and things like that.
I feel very I, Shouldnt say very I feel relatively confident in our in our office commercial real estate would be the one collateral types that I think.
Most people would say is an issue, but we underwrite it the right way and we monitor it very closely.
SBA seven eight.
A lot of those SBA seven loans, which we don't have a lot of it but a lot of those SBA seven loans or our loans that adjust their based on prime many of them adjust quarterly so a lot of a lot of those loans really haven't.
Experienced this increase in rate yet and they will start to see that especially after beginning in July .
So I think.
If I had to rank it I would just say.
Kind of smaller company smaller loan size C&I SBA seven eight with office a distant third.
Okay.
That all makes sense.
And then just last one for me.
Any thoughts on M&A I mean, you've obviously got a strong currency youre a disciplined acquirer just just curious whether the.
Uncertainty in the economy and some of the stuff that we've talked about changes your appetite for M&A at all and any color on how conversations are going seller expectations and what you'd be interested in obviously the.
The high level Hasnt changed, but I don't know given where we are would we be more focused on the smaller end of the spectrum.
Just curious any commentary on the M&A environment.
No. It's a great question, it's something we talk about quite a bit and I think for the most part the overall as you mentioned the high level hasn't changed we're still looking for opportunities in that 1% to $10 billion range within or adjacent to our market. We want those banks to be a similar to us as possible, which.
No one's exactly like us, we want to be able to make.
Whoever we're talking to kind of CBD that and turn them into citizens business Bank and we think we can make more money on their customers then they can make on their customers. So that's sort of the high level kind of narrowing it down conversations are still there, but conversations have definitely slowed I think based on a generally good.
They get sold and what happens is especially when.
Prices the share prices are down for most banks, they don't want to sell at a low point right and they all think they're worth more and I think the credit thing as a part of it.
I think the other thing that we have been talking a lot about also right now with the tight labor markets.
<unk>.
What can we get from a people perspective, and so it might not be kind of our typical 40% cost save deal it might be 25% or 30% cost save deal because you might keep a few more people just to make sure that we have the team and the people that we need but generally speaking we do have.
We traded at a pretty high multiple to book at a pretty high multiple p/e multiple so those are advantages for us, but just because we can pay more doesn't mean, we will pay more so we're going to be cautious about that and any due diligence that we would do going forward.
That sort of economic slowdown and the credit quality would be.
<unk> Park, it always is but it might even be bigger now.
That makes sense alright, thanks for all the color.
Thank you David.
Thank you.
Our next question comes from Ben Garlinger without the group. Your line is now open.
Hey, good morning, guys good morning, Ben.
So this of course is kind of more philosophical in nature.
Fox with all time high today.
Pretty notable revenue uptick.
With thoughtful growth Andrew was obviously moving interest rates coming.
With this newfound revenue is there any new initiatives that are now on the table and kind of juxtaposed against that.
What are kind of priorities, one two and three year.
Done a pretty good job managing costs, which is the one thing you can fully managed but.
Just kind of more granular priorities.
Yeah. So I mean look our number one priority is to continue to banks about small to medium sized businesses in California, we want to grow what we call. Our same store sales, which is kind of priority number. One we always are looking at that we evaluate that and inspect that every single month.
I do think she your question about investing.
Some revenue upticks.
We are going to remain disciplined we will always look on the investment side.
Or the I'll say the optimization of how we do things side Thats something that we talk about a lot.
And so we're going to continue to invest invest in things that can make us more efficient and create capacity for us to do more and I think that's been a hallmark of our organization.
And look if the right opportunity came along there is nothing eminent but if the right opportunity came along we are ready to do that and open to do that we just have to be the right opportunity. So I think look we had one of our if not our best quarter in history and I think.
The consistency in what we do is really the key and so there is not anything that is sort of off that path that we're looking to do but we are always looking to improve our efficiency. We're always looking at how we can deliver to our customers in a better way, we're always looking at our product array. So all of those are things that we.
We're going to go into our strategic planning session with our board in August the <unk>.
Management team is.
Is preparing for for those presentations and I think at the end of the day, it's nothing Thats really different it's again, just honing and continuing to improve on how we do things. So it's kind of boring, but it's very consistent.
We will then we might have you might be a little bit more focused on de novo's, which has been consistently part of our strategy, but there may be more opportunities on the near term on some things like that.
If we can find the right teams for sure a good point al.
That's very fair.
Clearly in the catbird seat here our optionality.
And then sorry.
Anil question kind of more towards the margin itself, obviously you guys have.
Very clear line of sight on.
Whether it be hot money or people asking for higher rates, but with the fed moving.
75% late in the quarter and now are likely to do another 75 in July which would be early in the quarter.
150 years or so.
A better term youre going to feel that almost the entirety of the respect for throughout the third quarter.
I think it's safe to say you're going to get another 25 26 basis points of margin expansion.
Well, we don't actually give guidance as you know Ben I would say couple of things one the benefit on the asset side of some of that certainly is also delayed.
When you compare yields as of the last day of a quarter to the prior quarter versus the averages.
<unk>.
But I think we took a little bit of our liquidity off the table and so I think from a modeling standpoint.
Our asset sensitivity is probably diminished a little bit.
15%, maybe from what we've disclosed in the past, but it's still we still think.
Fairly robust.
The Big question of course is going to be the deposits but.
We're going to continue to grow through relationships and transactional hot money, we won't focus on yes, and I'll just add to that real fast and you and I have talked about this before as well, but when you have 63% of your of your deposits and operating funds noninterest bearing.
Zero beta on that it doesn't mean that the mix can change a little bit which is possible.
But for the most part we focus and look at where we're going to increase rates on relationships based on the relationship. So if you have a $10 million customer that has $5 million in noninterest bearing and $5 million in money market, 50% of that relationship is going to remain at zero. The other 50%, even if we have to increase the rates a bit.
It's still overall going to be a very low cost.
Relationship so we that's.
That's how we evaluate it and that's how we look at it and it's it's relationship by relationship. So I think your point is right there will be more pressure.
But we're in a very good spot and I think the one thing we didn't mention and Nobody's really asked is I think with the inflationary pressures theres just going to be a little more burned on everybody's.
Cash that they have not just our bank, but other banks as well everything is costing more so some of that burn that's going to happen we didn't see it in our operating deposits, but I do think that that is also a factor in going forward here over at least the next couple of quarters.
I don't I don't I don't think we're going to be able to maintain a one basis point on a 150 basis point increase but.
We're going to do our best.
Yes.
So.
I think it's pretty much it for me congrats on a great quarter best political latter half of the year. Thank.
Thank you Ben.
Thank you.
A reminder to ask a question you will need to press star one on your telephone.
Our next question comes from Clark <unk> with D. A Davidson your line is now open.
Hi, This is clarke great for Gary Tenner.
First off just a clarification on slide 13 here.
The core loan growth at 7%, but it looks like Suntrust acquired loans were flat quarter to quarter. So it was the net loan growth. This quarter, then constrained at all by any runoff on the acquired Suntrust loans.
Yeah, well, a little bit and the one thing about the $775 million that included PPP loans as well, we just separated if youre looking on slide 13.
You can see the PPP loans for our shrinking, but yes. The Suntrust loans, there is impact, but the sunquest centers have also been generating new loans. So the net net was the numbers that show that it was very close.
Got it appreciate that.
And then my next item would be looking at industrial CRE given that it's been a sizable driver of production over the last.
Two years are you seeing any shift in demand for the warehouse space, where you're pulling back and at least given economic slowdown that we pursue.
<unk> here in the next few quarters.
No we feel industrial is one of the strongest in primarily where we're located in southern California, specifically is as a distribution hub.
And very infrastructure mature so it's not like they can just go down the street and build another 1 million square foot warehouse. So we feel very strong about that it is the largest of our CRE concentration and when you look at it at $2 $2 billion, 50% of that is owner occupied.
And we underwrote that at origination of 51% loan to value and it's pretty granular for us with an average loan size of about $1 $5 50 or so.
We.
We would want to do more industrial if we could especially in the markets that we serve.
Thank you for that color and then lastly for me as.
If you look at the cash cash equivalents, just under 700 million now or 5% of earning assets is that a level you're comfortable with holding for the foreseeable future.
Ultimately, we'd like to see that lower.
Every quarter, we said, we're trying to balance deploying some of that as well as maintaining flexibility on the balance sheet. So it could decline as we go out through the rest of the year. So I would say historically, it's still more than we would normally like but in the current environment. We're also probably a cautious.
Got it thank you.
Youre welcome.
At this time there are no more questions. So I'd like to turn the call back to Mr. Brager.
Thank you.
I want to thank everybody for joining us this quarter. We appreciate your interest and look forward to speaking with you in October for our third quarter 2022 earnings call. Please let Alan and I know if you have any questions have a great day, and we'll talk to you soon.
This concludes today's conference call. Thank you for participating you may now disconnect.
I mean I wanted to say.
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