Q2 2024 CVB Financial Corp Earnings Call

Good morning, ladies and gentlemen, and welcome to the second quarter of 2024 CVB Financial Corporation and its subsidiary, Citizens Business Bank Earnings Conference Call.

Operator: and its subsidiary, Citizens Business Bank Earnings Conference Call. My name is Cherie, and I'm your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Please note, this call is being recorded. I would now like to turn the presentation over to your host for today, Alan Nicholson, Executive Vice President and Chief Financial Officer. You may proceed.

Alan Nicholson: Thank you, Cherie. And good morning, everyone. Thank you for joining us today to review our financial results for the second quarter of 2024. Joining me this morning is Dave Brager, President and Chief Executive Officer. Our comment 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. The speakers on this call claim the protection of the safe harbor provisions contained in the Private Security Litigation Reform Act of 1995.

Joining me this morning is Dave Brager, President and Chief Executive Officer.

Our comments today will refer to the financial information that was included in the earnings announcement released yesterday.

Obtain a copy please visit our website at <unk>.

Speaker Change: W. W. W E.

E B bank Dot com and click on the investor's tab.

Speaker Change: The speakers on this call claim the protection of the Safe Harbor provisions contained in the private Securities Litigation Reform Act of 1995.

Alan Nicholson: 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, 2023, and, in particular, information set forth in Item 1A, Risk Factors, therein. For a more complete version of the company's safe harbor disclosure, please see the company's earnings release issued in connection with I will now turn the call over to Dave Brager.

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 2023.

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.

I'll now turn the call over to Dave Brager, Dave. Thank you Alan and good morning, everyone.

David A. Brager: Thank you, Alan. Good morning, everyone.

David A. Brager: For the second quarter of 2024, we reported net earnings of $50 million or <unk> 36 per share representing our 189th consecutive quarter of profitability.

David A. Brager: For the second quarter of 2024, we reported net earnings of $50 million, or 36 cents per share, representing our 189th consecutive quarter of profitability. We previously declared a $0.20 per share dividend for the second quarter of 2024, representing our 139th consecutive quarter of paying a cash dividend to our shareholders. We produced a return on average tangible common equity of 15.51% and a return on average assets of 1.24% for the second quarter of 2024. Our net earnings of $50 million, or $0.36 per share, compared to $48.6 million for the first quarter of 2024, or $0.35 per share, and $55.8 million, or $0.40 per share, for the prior year quarter.

Speaker Change: We've previously declared a <unk> 20 per share dividend for the second quarter of 2024, representing a 139th consecutive quarter of paying a cash dividend to our shareholders. We produced a return on average tangible common equity of $15 five 1% and a return on average assets of 1.2.

4% for the second quarter of 2024.

Speaker Change: Our net earnings of $50 million were <unk> 36 per share compared with $48 $6 million for the first quarter of 2024, or <unk> 35 per share and $55 $8 million or <unk> 40 per share for the prior year quarter.

David A. Brager: The $1.4 million increase in earnings compared to the first quarter of 2024 was primarily due to a $3.3 million decrease in non-interest expense. Non-interest expense was impacted by the change in the estimated cost for the FDIC special assessment. Compared to the first quarter of 2024, non-interest expense related to the special assessment declined by $3 million. Net interest income declined by $1.6 million when compared to the first quarter of 2024. This decrease resulted from a five basis point decline in our net interest margin from 3.10% in the first quarter to 3.05% in the second quarter of 2024. However, earnings assets remained stable compared to the first quarter of 2024, and interest income grew by $1.4 million over the prior quarter.

Speaker Change: The one $4 million increase in earnings compared to the first quarter of 2024 was primarily due to a $3 $3 million decrease in noninterest expense.

Speaker Change: Noninterest expense was impacted by the change in the estimated cost for the FDIC Special assessment.

Speaker Change: Compared to the first quarter of 2020 for noninterest expense related to the specialist Testament declined by $3 million.

Speaker Change: Net interest income declined by $1 $6 million when compared to the first quarter of 2024. This decrease resulted from a five basis point decline in our net interest margin from $3. One zero percent in the first quarter to 3.05% in the second quarter of 2024.

Speaker Change: <unk> assets remained stable compared to the first quarter of 2024.

Speaker Change: Interest income grew by $1 $4 million over the prior quarter.

David A. Brager: Earning asset yields improved by three basis points compared to the prior quarter as investment yields increased by seven basis points, and we had a positive shift in asset mix, with our average balance of funds on deposit at the Federal Reserve growing from 3% of earning assets in the prior quarter to 5% for the second quarter. Interest expense increased by $3 million over the prior quarter, reflecting a seven basis point increase in our cost of funds.

Speaker Change: Earning asset yields improved by three basis points compared to the prior quarter as investment yields increased by seven basis points, and we had a positive shift in asset mix with our average balance of funds on deposit at the federal reserve borrowing from 3% of earning assets in the prior quarter to 5% for the second quarter.

Speaker Change: Interest expense increased by $3 million over the prior quarter, reflecting a seven basis point increase in our cost of funds. The increase in our cost of funds was primarily due to the 13 basis point increase in cost of interest bearing liabilities as noninterest bearing deposits continued to be greater than 60.

David A. Brager: The increase in our cost of funds was primarily due to the 13 basis point increase in the cost of interest-bearing liability, as non-interest-bearing deposits continue to be greater than 60% of total deposits for the second quarter of 2024. This 13-basis point quarterly-over-quarter increase was due to the increased interest expense associated with wholesale funds and a 14-basis point increase in the cost of interest-bearing non-maturity deposits, which increased from 1.86% in the prior quarter to 2% in the second quarter of 2024. In terms of wholesale funds, second-quarter borrowing costs decreased as average borrowings declined by $142 million.

Speaker Change: <unk> of total deposits for the second quarter of 2024.

Speaker Change: This 13 basis points quarter over quarter increase was due to the increased interest expense associated with wholesale funds and a 14 basis point increase in the cost of interest bearing non maturity deposits, which increased from 186% in the prior quarter to 2% in the second quarter of 2024.

Speaker Change: In terms of wholesale funds second quarter borrowing costs decrease as average borrowings declined by $142 million. However, a $300 million increase in average brokered deposits drove a 79 basis point increase in the cost of our time deposits.

David A. Brager: However, a $300 million increase in average broker deposits drove a 79 basis point increase in the cost of our time deposit. Average total deposits for the second quarter increased by approximately $245 million compared to the first quarter of 2024. Non-maturity deposits declined modestly by $40 million, including a $29 million decrease in non-interest-bearing deposits. However, on average, non-interest-bearing deposits continue to be greater than 60% of our average total deposit for the second quarter of 2024.

Speaker Change: Average total deposits for the second quarter increased by approximately $245 million compared to the first quarter of 2024.

Speaker Change: Non maturity deposits declined modestly by $40 million, including a 29 $29 million decrease in noninterest bearing deposits on average noninterest bearing deposits continued to be greater than 60% of our average total deposits.

Speaker Change: For the second quarter of 2024.

David A. Brager: At June 30, 2024, our total deposits and customer repurchase agreements totaled $12.1 billion, a $111 million decrease from March 31, 2024, and a $354 million increase from December 31, 2023. The increase in total deposits and customer repos from the end of 2023 includes the addition of $400 million in brokered time deposits. For the first six months of 2024, approximately $170 million of deposits were moved to Citizens Trust, including $100 million during the second quarter. These funds were invested in higher-yielding liquid assets such as Treasury notes. This compares to $800 million that was transferred in during 2023.

Speaker Change: At June 32024, our total deposits and customer repurchase agreements totaled $12 1 billion a $111 million decrease from March 31, 2024, and a $354 million increase from December 31 2023.

Speaker Change: The increase in total deposits and customer repos from the end of 2023 includes the addition of $400 million and brokered time deposits for the first six months of 2020 for approximately $170 million of deposits were moved to citizens trust, including $100 million during the second.

Speaker Change: Quarter. These funds were invested in higher yielding liquid assets such as Treasury notes. This compares to $800 million that was transferred during 2023.

David A. Brager: Our cost of deposits was 88 basis points on average for the second quarter of 2024, which compares to 74 basis points for the first quarter of 2024. Our cost of non-maturity deposits has grown from 60 basis points in December of 2023 to 274 basis points in June of 2024.

Speaker Change: Our cost of deposits was 88 basis points on average for the second quarter of 2024, which compares to 74 basis points for the first quarter of 2020 for our cost of non maturity deposits has grown from 60 basis points in December of 23 to.

Speaker Change: <unk> hundred 74 basis points in June of 2024.

David A. Brager: Well, our cost of time deposits has grown from 1.84% in December of 2023 to 3.44% in June of 2024. From the first quarter of 2022 through the second quarter of 2024, our cost of deposits has increased by 85 basis points, representing a deposit beta of 16% compared to the 525 basis point increase in the Fed funds rate during the Federal Reserve's current tightening cycle. Now, let's discuss loans.

Speaker Change: While our cost of time deposits has grown from 184% in December of 2023% to 344% in June of 2024.

Speaker Change: From the first quarter of 2022 through the second quarter of 2020 for our cost of deposits has increased by 85 basis points, representing a deposit beta of 16% compared to the 525 basis point increase in the fed funds rate.

Speaker Change: During the federal the federal Reserve's current tightening cycle now, let's discuss loans.

David A. Brager: Total loans at June 30, 2024, were $8.7 billion, an $89 million or 1% decrease from the end of the first quarter and a $223 million decline from December 31, 2023. The quarter-over-quarter decrease was led by a $56 million decline in commercial real estate loans. All other loan categories declined modestly from the end of the first quarter of 2024. The decrease in loans from the end of 2023 included a $71 million decrease in dairy and livestock loans.

Speaker Change: Total loans at June 32024 were $8 $7 billion and $89 million or 1% decrease from the end of the first quarter and a $223 million decline from December 31 2023.

Speaker Change: The quarter over quarter over quarter decrease was led by a $56 million decline in commercial real estate loans. All other loan categories declined modestly from the end of the first quarter of 2024.

Speaker Change: The decrease in loans from the end of 2023 included a $71 million decrease in dairy and livestock loans dairy and livestock loans see higher line utilization at year end, which is reflected in the 80% utilization rate at the end of the fourth quarter compared to the 74% utilization rate at June 30.

David A. Brager: During livestock loans, see higher line utilization at year end, which is reflected in the 80% utilization rate at the end of the fourth quarter, compared to the 74% utilization rate at June 30, 2024. Commercial real estate loans declined by $120 million from December 31, 2023. As commercial real estate loan demand is weakened, our CRE loan production for the first six months of 2024 lagged the same period in 2023 by more than 50%.

Speaker Change: 2024.

Speaker Change: Commercial real estate loans declined by $120 million from December 31, 2023.

As commercial real estate loan demand as weekend, our CRE loan production for the first six months of 2024 has lagged the same period in 2023 by more than 50%.

David A. Brager: Construction loans declined by $15 million over the same period as we experienced minimal borrowings from newly originated construction loans. C&I loans declined by $14 million when comparing the June 30, 2024 period in balance to December 31, 2023, even though we have generally seen higher average loan balances over the first two quarters of 2024. This generally reflects the growth in new relationships as C&I line utilization continues to be at a rate of less than 30 percent.

Speaker Change: Construction loans declined by $15 million over the same period as we have experienced minimal borrowings from newly originated construction loans.

C&I loans declined by $14 million when comparing to June 32024 period.

Speaker Change: And balance to December 31, 2023, even though we are generally seeing higher average loan balances over the first two quarters of 2024. This generally reflects the growth in new relationships as C&I line utilization continues to be at a rate at less than 30%.

David A. Brager: We compete for loans very selectively, which can impact new loan production. Even considering the high credit quality of our new loan originations, yields on new loans in 2024 have been greater than 7.25%. Our continued focus on banking the best small to medium-sized businesses and their owners, providing them with our full array of products, has resulted in a higher percentage of new loans in 2024 that are either owner-occupied or C&I loans. Non-owner occupied loan originations in 2024 have been less than 20% of the total loan origination, which compares to 35% for the same six-month period in 2023.

Speaker Change: We compete on loans, very selectively which can impact new loan production, even considering the high credit quality of our new loan originations yields on new loans in 2024 have been greater than seven 5%.

Our continued focus on banking the best small to medium sized businesses and their owners providing them. Our full array of products has resulted in a higher percentage of new loans in 2024 that are either owner occupied or C&I loans now.

Non owner occupied loan originations in 2024 have been less than 20% of the total loan originations, which compares to 35% for the same six month period in 2023.

David A. Brager: Although loan demands continue to be slower than in past years, we continue to be optimistic about growth and future line utilization from our pipeline of C&I loans. We believe our asset quality remains strong, even though we have experienced an increase in non-performing and classified loans.

Although loan demands continue continues to be slower than past years, we continue to be optimistic about growth and future line utilization from our pipeline of C&I loans, we believe our asset quality remains strong even though we have experienced an increase in nonperforming and classified loans our allowance for credit losses.

David A. Brager: Our allowance for credit losses totaled approximately $83 million at June 30th, the same as March 31st, 2024. Net charge-offs in the second quarter were $31,000 compared to $4 million in the first quarter of this year. At quarter end, non-performing assets defined as non-accrual loans plus other real estate owned were $25.6 million, or 16 basis points of total assets. The $25.6 million in non-performing loans compares to $14.5 million for the prior quarter. Classified loans for the second quarter were $125 million, compared with $103 million for the prior quarter. Classified loans as a percentage of total loans was 1.44% at quarter end.

<unk> totaled approximately $83 million at June 30.

The same as March 31, 2024, net charge offs in the second quarter were $31000 compared to $4 million in the first quarter of this year.

At quarter end nonperforming assets defined as nonaccrual loans, plus other real estate owned or $25 6 million or 16 basis points of total assets the $25 $6 million in nonperforming loans compares with $14 $5 million for the prior quarter.

Classified loans for the second quarter were $125 million compared with $103 million for the prior quarter.

Classified loans as a percentage of total loans was 144% at quarter end.

David A. Brager: Much of the growth in classified loans has been associated with agricultural lending. The dairy industry suffered a deep downturn in 2023, primarily resulting from the combined impact of lower milk prices and high feed costs. Widespread losses for our customers in 2023 resulted in recent downgrades in the bank's gerrymandering portfolio. However, a recovery in the industry appears to be underway in 2024, with feed costs down by 25% and milk prices rising due to falling supplies.

Much of the growth in classified loans has been associated with agricultural lending.

The dairy industry suffered a deep downturn in 2023, primarily resulting from the combined impact of lower milk prices and high feed costs.

Widespread losses for our customers in 2023 resulted in recent downgrades in the bank's Terry lending portfolio.

Speaker Change: But a recovery in the industry appears to be underway in 2024 with feed costs down by 25% and milk prices rising doing to falling supplies. Additionally.

David A. Brager: Additionally, production ag has been experiencing losses due to lower prices from higher supplies of commodities such as almonds and pistachios. Land appraisals are also beginning to reflect a lower market value of farmland. I will now turn the call over to Alan to discuss additional aspects of our balance sheet.

Additionally, production AG has been experiencing losses due to lower prices from higher supplies of commodities, such as almonds and pistachios.

Land appraisal rules are also beginning to reflect lower market value of farmland.

I will now turn the call over to Alan to discuss additional aspects of our balance sheet Alan.

Alan Nicholson: Thanks, Dave. Good morning again, everyone. As of June 30, 2024, the $82.8 million allowance for credit losses was equal to the ACL as of March 31, 2024. At the end of the second quarter, our ACL was 0.95% of total loans, compared to 0.94% on March 31st, 2024. Our ACL at December 31st, 2023, was $86.8 million, including $5.9 million of reserves for specifically identified non-performing loans. Our reserves for specific loans have been zero since the end of the first quarter.

Thanks, Dave and good morning, again, everyone as of June 32020 for the $82 8 million allowance for credit losses was equal to the ACL as of March 31 2024.

At the end of the second quarter, our ACL was <unk>, 95% of total loans compared to <unk>, 94% on March 31 2024.

Our ACL at December 31, 2023 was $86 $8 million, including $5 $9 million of reserved for specifically identified nonperforming loans.

Our reserves for specific loans have been zero since the end of the first quarter.

Alan Nicholson: We did not record a provision in the first or second quarter of 2024. Our economic forecast continues to be a blend of multiple forecasts produced by Moody. We continue to have the largest individual scenario weighting on Moody's baseline forecast with downside risks weighted among multiple forecasts. The resulting economic forecast resulted in real GDP declining slightly in the second half of 2024 and continuing to be negative in the first quarter of 2025.

We did not record a provision in the first or second quarter of 2024.

Our economic forecast continues to be a blend of multiple forecasts produced by Moody's.

We continue to have the largest individual scenario waiting on Moody's baseline forecast with downside risks weighted among multiple forecasts.

The resulting economic forecast, resulting in real GDP declining slightly in the second half of 2024 and continuing to be negative in the first quarter of 2025.

Alan Nicholson: GDP growth is forecast to be less than 1% for all of 2025, before rebounding to 1.9% in 2026 and then returning to higher growth of 2.78% for 2027. Unemployment is forecasted to increase, with unemployment averaging 6% for all of 2025. The unemployment rate is forecast to stay elevated until late 2027.

GDP growth is forecast to be less than 1% for all of 2025 before rebounding to one 9% in 2026, and then returning to higher growth of 278% for 2027.

Unemployment.

<unk> is forecasted to increase with unemployment averaging 6% for all of 2025, the unemployment rate is forecast.

Stay elevated until late 2027.

Alan Nicholson: Our total investment portfolio declined by $116 million from the end of the first quarter of 2024 and by $245 million from December 31, 2023, as cash flows generated from the portfolio have not been reinvested during this year. Investment securities held to maturity for HTM Securities totaled approximately $2.43 billion at June 30, 2024. The HTM portfolio declined by approximately $25 million from March 31, 2024, and investment securities available for sale, or AFS securities, totaled approximately $2.75 billion at June 30, 2024.

Our total investment portfolio declined by $116 million from the end of the first quarter of 2024 and by $245 million from December 31 2023.

As cash flows generated from the portfolio have not been reinvested during this year.

Investment Securities held to maturity or HTM securities totaled approximately $2. Four 3 billion at June 32024, the HTM portfolio declined by approximately $25 million from March 31 2024.

Investment securities available for sale or <unk> securities totaled approximately $2 $75 billion at June 32024.

Alan Nicholson: The AFS portfolio declined by approximately $91 million on March 31, 2024, including the impact of the unrealized loss in AFS securities increasing by $2.3 million from the prior quarter end. The tax equivalent yield on the entire investment portfolio was 2.71% for the second quarter of 2024, compared to 2.64% for the prior quarter.

CFS portfolio declined by approximately $91 million from March 31, 2024.

Including the impact of the unrealized loss in <unk> securities, increasing by $2 $3 million from the prior quarter end.

The tax equivalent yield on the entire investment portfolio was 271% for the second quarter of 2024 compared to $2, 64% for the prior quarter.

Alan Nicholson: We continue to have positive carry on the fair value hedges we executed in late June 2023. We receive daily SOFR on these paycheck swaps, which have a weighted average fixed rate of approximately 3.8%. We recorded $4.1 million of interest income in the second quarter related to these swaps, which was $400,000 higher than the first quarter of this year.

We continue to have positive carry on the fair value hedges, we executed in late June of 2023.

We receive daily so for on the pay fixed swaps, which have a weighted average fixed rate of approximately three 8%.

We recorded $4 $1 million of interest income in the second quarter related to these swaps, which was $400000 higher than the first quarter of this year.

Our fair value hedges combined with our cash flow hedges had a market value of $15 3 million as of June 32024, which reflects a $3 $6 million increase from the end of the prior quarter.

Alan Nicholson: Our fair value hedges combined with our cash flow hedges had a market value of $15.3 million as of June 30, 2024, which reflects a $3.6 million increase from the end of the prior quarter. Cash and cash equivalents declined by approximately $105 million, from $950 million at March 31, 2024, to $844 million at June 31, 2021. Approximately $700 million of BTFP borrowings matured in May, while we added FHLB advances totaling $500 million during the second quarter.

Cash and cash equivalents declined by approximately $105 million from $950 million at March 31, 2000, $24 million to $844 million at June 30.

Approximately $700 million of Bts.

<unk> borrowings matured in a.

While we added <unk> advances totaling $500 million during the second quarter.

Alan Nicholson: These FHLB advances include $300 million at an average cost of 4.73%, maturing in May of 2026, and $200 million at a cost of 4.27%, maturing in May of 2027. Borrowings from the bank term funding program at the end of the second quarter totaled $1.3 billion with a borrowing rate of 475. These advances mature in January of 2025.

These <unk> advances include $300 million at an average cost of $4, 73% maturing in may of 2026, and $200 million at a cost of $4 two 7% maturing in may of 2027.

Borrowings from the bank term funding program at the end of the second quarter totaled $1 $3 billion with a borrowing rate at $4 75.

These advances mature in January of 2025.

Alan Nicholson: We anticipate that the bank term funding program borrowings will be repaid through a combination of our existing cash, future principal and interest payments from our security portfolio, core deposit growth, and additional wholesale funding sources, which may consist of new borrowings and or additional broker deposits. Another source of funds to pay off the BTFP borrowings is the possibility of targeted sale leasebacks of certain buildings we own, combined with the sale of our investment, a portion of our investment portfolio.

We anticipate that the bank term funding program borrowings will be repaid through a combination of our existing cash future principal and interest payments from our security portfolio.

Core deposit growth and additional wholesale funding sources, which may consist of new borrowings and our additional broker deposits.

Another source of funds to pay off the Bts P. Borrowings is the possibility of targeted sale leasebacks of certain buildings, we own combined with the sale of our investment a portion of our investment portfolio.

Alan Nicholson: We have started a marketing process to potentially execute a handful of targeted sale leasebacks to unlock value from certain buildings we own. We expect to utilize gains from these sales to offset losses from selling some securities within our AFS portfolio. The first of these sale-leaseback transactions closed a few days ago, resulting in a gain of greater than $3 million. We are not expecting material gains from sale leasebacks in the third quarter of 2024 or material levels of AFF security sales.

We have started a marketing process to potentially execute a handful of targeted sale leasebacks to unlock value from certain buildings, we own we.

We expect to utilize gains from these sales to offset losses from selling some securities within our <unk> portfolio.

The first of these sale leaseback transactions closed a few days ago.

<unk> and a gain of greater than $3 million we.

Unknown Executive: We are not expecting material gains from sale these facts in the third quarter of 2020-24 or material levels of ASS security sales. Now, turning to the capital position, as of June 30, 2020, for our shareholders' equity increase from the fourth quarter of 2020-3 by $34.5 million to $2.11 billion. Companies' tangible common equity ratio at June 30, 2020 was 8.7% compared with 8.3% at March 31, 2020 and 8.5% at December 31, 2020. Our regulatory capital ratios continue to grow and are among the highest in the industry.

We are not expecting material gains from sale leasebacks in the third quarter of 2024 or material levels of security sales.

Alan Nicholson: Now turning to the capital position, at June 30, 2024, our shareholders' equity increased from the fourth quarter of 2023 by $34.5 million to $2.11 billion. The Company's tangible common equity ratio at June 30, 2024 was 8.7% compared with 8.3% at March 31, 2024, and 8.5% at December 31, 2023. Our regulatory capital ratios continue to grow and are among the highest in the industry. As of June 30, 2024, our common equity Tier 1 capital ratio was 15.3%, and our total risk-based capital ratio was 16.1%. I'll now turn the call back to Dave for a discussion of our second quarter earnings.

Now turning to the capital position at June 32024, our shareholders equity increased from the fourth quarter of 2023 by $34 5 million to $2 one $1 billion.

The company's tangible common equity to equity ratio at June 32024 was eight 7% compared with eight 3% at March 31, 2024, and eight 5% at December 31 2023.

Our regulatory capital ratios continue to grow and are among the highest in the industry at June 32024, our common equity tier one capital ratio was 15, 3% and our total risk based capital ratio was 16, 1%.

Unknown Executive: At June 30, 2024, our common equity tier 1 capital ratio was 15.3%, and our total risk-based capital ratio was 16.1%.

Unknown Executive: On now, turn the call back today for further discussion of our second quarter earnings.

I'll now turn the call back to Dave for further discussion of our second quarter earnings.

Unknown Executive: Thank you, Alan.

David A. Brager: Thank you, Alan. Moving on to non-interest income, our non-interest income was $14.4 million for the second quarter of 2024, compared with $14.1 million for the prior quarter. Our customer-related banking fees, including deposit services, international and merchant bank cards, increased by approximately $230,000 when compared to the prior quarter. In addition, our trust and wealth management fees increased by approximately $200,000. compared to the prior quarter. Second quarter BOLI income decreased by $650,000 quarter over quarter, primarily due to the receipt of $530,000 in death benefits that exceeded the cash surrender value in the first quarter. Conversely, we had miscellaneous income in the second quarter related to previously acquired charged-off loans and a building sale more than a decade ago that brought in more than $500,000. Now expenses.

Unknown Executive: Moving on to non-interesting income, our non-interesting income was $14.4 million for the second quarter of 2024 compared with $14.1 million for the prior quarter. Our customer-related banking fees, including deposit services, international and merchant bank card, increased by approximately $230,000 when compared to the prior quarter. In addition, our trust and wealth management fees increased by approximately $200,000 compared to the prior quarter.

Thank you Alan moving on to noninterest income our noninterest income was $14 $4 million for the second quarter of 2024, compared with $14 1 million for the prior quarter, our customer related banking fees, including deposit services International and merchant Bank card increased by.

Approximately $230000 when compared to the prior quarter.

In addition, our trust and wealth management fees increased by approximately $200000 compared to the prior quarter.

Unknown Executive: Second quarter of Bully income decreased by $650,000 quarter-over-quarter, primarily due to the receipt of $530,000 in death benefits that exceeded the cash surrender value in the first quarter. Conversely, we had miscellaneous income in the second quarter related to previously acquired charged-off loans and a building sale more than a decade ago that totaled more than $500,000.

Second quarter bully income decreased by $650000 quarter over quarter, primarily due to the receipt of $530000 in death benefits that exceeded the cash surrender value in the first quarter. Conversely, we had miscellaneous income in the second quarter related to previously acquired charged off loans.

And a building sale more than a decade ago that totaled more than $500000.

Unknown Executive: Now expenses. Non-interesting spends for the second quarter was $56.5 million, compared with $59.8 million for the first quarter of 2024 and $54 million for the year-ago quarter. The $3.3 million increased quarter, excuse me, the $3.3 million quarter-over-quarter decrease was primarily due to the expense associated with the FDIC special assessment. In total, regulatory assessment expense was $1.4 million in the second quarter of 2024, a $3 million increase from the prior quarter.

David A. Brager: Non-interest expense for the second quarter was $56.5 million, compared with $59.8 million for the first quarter of 2024 and $54 million for the year ago quarter. The $3.3 million increase quarter over, Excuse me, the $3.3 million quarter over quarter decrease was primarily due to the expense associated with the FDIC special assessment. In total, regulatory assessment expenses were $1.4 million in the second quarter of 2024, a $3 million decrease from the prior quarter.

Now expenses noninterest expense for the second quarter was $56 $5 million compared with $59 $8 million for the first quarter of 2024 and $54 million for the year ago quarter, the $3 3 million increase quarter over <unk>.

The $3 $3 million quarter over quarter decrease was primarily due to the expense associated with the FDIC special assessment in.

In total regulatory assessment expense was $1 $4 million in the second quarter of 2024 or $3 million decrease from the prior quarter we.

David A. Brager: We initially accrued $9.2 million in the fourth quarter of 2023 for this special assessment, which we supplemented with the addition of $2.3 million of accrued expense in the first quarter of 2024. The first quarter increase in the accrual was the result of the FDIC revising upward its initial estimate of losses from last year's bank failures by 25 percent. Based on the FDIC's assessment received in June of this year, our cost estimate was further revised in the second quarter of 2024, resulting in a $700,000 decrease in this accrual.

Unknown Executive: We initially accrued $9.2 million in the fourth quarter of 2023 for the Special Assessment, which we supplemented with the addition of $2.3 million of accrued expense in the first quarter of 2024. The first quarter increase in the accrual was the result of the FDIC revising upwards into initial assessment of losses from last year's bank failures by 25%. Based on the FDIC's assessment received in June of this year, our cost estimate was further revised in the second quarter of 2024, resulting in a $700,000 decrease in this accrual. Salaries and employee benefit cost decreased $975,000 for a record.

We initially accrued $9 $2 million in the fourth quarter of 2023 for this special assessment, which we supplemented with the addition of $2 $3 million of accrued expense in the first quarter of 2024.

Our first quarter increase in the accrual was the result of the FDIC revising upwards. It's initial estimate of losses from last year's bank failures by 25%.

Based on the FDIC assessment received in June of this year, our cost estimate was further revised in the second quarter of 2024, resulting in a $700000 decrease in this accrual.

David A. Brager: Salaries and employee benefit costs decreased $975,000 quarter-over-quarter. This decrease included $1.5 million in higher payroll taxes paid in the first quarter as a result of the annual reset of salary caps on payroll taxes and the payment of annual bonuses. The decrease in payroll taxes was offset by a $600,000 increase in bonus and profit-sharing accruals compared to the first quarter of this year.

Salaries and employee benefit costs decreased $975000 quarter over quarter. This decrease included $1 $5 million and higher payroll taxes paid in the first quarter as a result of the annual reset of salary caps on payroll taxes and the payment of annual bonuses.

Unknown Executive: This decrease included $1.5 million in higher payroll taxes paid in the first quarter as a result of the annual reset of salary caps on payroll taxes and the payment of the annual bonus. The decrease in payroll taxes was offset by $600,000 increase in bonus and profit-sharing accruals compared to the first quarter of this year.

The decrease in payroll taxes was offset by a $600000 increase in bonus and profit sharing accruals compared to the first quarter of this year.

David A. Brager: Expense for professional services increased by $470,000 compared to the prior quarter, primarily due to higher legal expense. Software expense also increased by 12%, or more than $400,000, as we continue to invest in data management and technology. Marketing and promotion expense increased by $326,000 compared to the first quarter of this year, as we increased donations by almost $600,000.

Unknown Executive: Expends for professional services increased by $470,000 compared to the prior quarter, primarily due to higher legal expense. Software expense also increased quarter over quarter by 12% or more than $400,000, as we continue to invest in data management and technology. Marketing and promote expense increased by $326,000 compared to the first quarter of this year, as we increased donations by almost $600,000.

Expense for professional services increased by $470000 compared to the prior quarter, primarily due to higher legal expense <unk>.

Software expense also increased quarter over quarter by 12% or more than $400000. As we continued to invest in data management and technology.

Marketing and promotion expense increased by $326000 compared to the first quarter of this year as we increased donations by almost $600000.

Unknown Executive: The second quarter of 2024 included $500,000 in recapture provision for unfunded loan commitments compared to no provision or recapture in the first quarter of 2024. Non-interference expense total 1.4% of average assets for the second quarter of 2024 compared with 1.48% for the prior quarter. Our efficiency ratio was 45.1% for the second quarter of 2024. This compares with 47.22% for the first quarter.

David A. Brager: The second quarter of 2024 included $500,000 in reCAPTCHA provision for unfunded loan commitments compared to no provision or reCAPTCHA in the first quarter of 2024. Non-interest expense totaled 1.4% of average assets for the second quarter of 2024, compared with 1.48% for the prior quarter. Our efficiency ratio was 45.1% for the second quarter of 2024. This compares with 47.22% for the first quarter.

The second quarter of 2024 included $500000 and recapture provision for unfunded loan commitments compared to no provision or recapture in the first quarter of 2024.

Noninterest expense totaled one 4% of average assets for the second quarter of 2024.

Paired with 1.48% for the prior quarter, our efficiency ratio was 45, 1% for the second quarter of 2024. This compares with 40, 722% for the first quarter.

David A. Brager: This concludes today's presentation. Now Alan and I will be happy to take any questions you might have. Thank you.

Unknown Executive: This concludes today's presentation. Now Alan and I will be happy to take any questions you might have. Thank you. To ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, press star 1-1 again.

This concludes today's presentation now Alan and I will be happy to take any questions you might have.

Operator: Thank you. To ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, press star 11 again. Due to time restraints, we ask that you please limit yourself to one question and one follow-up question. You may then return to the queue. Please stand by while we compile the Q&A roster. And our first question will come from the line of Matthew Clark with Piper Sandler. Your line is open.

Thank you to ask a question. Please press star one one on your telephone and wait for your name to be announced.

<unk> Your question Press Star one again due to time restraints. We ask you. Please limit yourself to one question and one follow up question. You May then return to the queue. Please standby, while we compile the Q&A roster.

Unknown Executive: Due to time restraints, we ask you to please limit yourself to one question and one follow-up question. You may then return to the queue. Please stand by while we compile the Q&A roster.

Matthew Clark: And our first question will come from the line of Matthew Clark with Piper Sandler. Your line is open.

Matthew Timothy Clark: Get a sense for the margin here and the related outlook. Do you have the average margin for the month of June and the spot rate on deposits at the end of June?

And our first question will come from the line of Matthew Clark with Piper Sandler Your line is open.

Unknown Executive: Hey, good morning. Good morning.

Hey, good morning, guys.

Good morning.

Matthew Clark: I want to just get a sense for the margin here and the related outlook.

I wanted to just.

Get a sense for the margin here and the related outlook.

Unknown Executive: Give the average margin in the month of June in the spot rate on deposits at the end of June. You can look at our IP. You'll see the cost of interest rates, deposits, and repose in June was 2021. You can also Matthew if you look at the IP further. We have a breakdown by the month showing nominatory deposits that were at 74 basis points in times positive to 344. So that would give you sort of where we finished at the end of that end of the quarter.

<unk>.

The average margin in the month of June and the spot rate on deposits at the end of June.

Unknown Executive: You can, if you look at our IP, you'll see the cost of interest-bearing deposits and repos in June was $221. You can also, Matthew, if you look at the IP further, we have a breakdown by month showing non-maturity deposits that were 74 basis points and time deposits of $344. That'll give you sort of where we finished at the end of the quarter.

You can if you look at our IP.

You'll see the cost of interest bearing deposits and repos.

And June was $2 21, you can also Matthew if you look at the IP. It further we have a breakdown by month showing non maturity deposits.

We're 74 basis points in time deposits of $3 44 so.

That will give you sort of where we finished at the end of that ended the quarter.

Matthew Timothy Clark: Okay, obviously didn't see that. And then just on your loan yields, they were down a few basis points this quarter. Was that interest income reversals, or what drove that? Just trying to get a sense for if there's anything unusual there.

Matthew Clark: Okay, obviously didn't see that. And then just on your loan yields, they were down a few basis points this quarter. Was that interesting cum reversals, or what drove that? Just trying to get a sense for that if there's anything unusual there.

Okay, obviously didn't see that.

And then just on your loan yields they were down a few basis points. This quarter was that in.

Interest income reversals or what drove that and.

Just trying to get a sense for if there is anything unusual there.

Unknown Executive: Going forward, nothing really unusual, Matthew. I mean, when we look at our what I would call the core loan yield over the six months of the first half of this year, it was up about 10 basis points. There are other things that go into that reported loan yield, prepayment, penalties, and discount accretion. You know, those things can affect loan fees. Those can be a little volatile quarter to quarter, but nothing significant. So the underlying core trend has generally been one to two basis point increases per month.

Unknown Executive: Go and pull.

Unknown Executive: Nothing really unusual, Matthew. I mean, when we look at our what I would call the core loan yield over the six months of the first half of this year, was up about 10 basis points. There's other things that go into that reported loan yield, pre-payment penalties, discount accretion. You know, those things can loan fees; those can be a little volatile quarter to quarter, but nothing significant.

Going forward nothing really unusual Matthew I mean, when we look at our what I would call the core loan yield.

Over the six months of the first half of this year was up about 10 basis points.

There is other things that go into that reported loan yield prepayment penalties discount accretion.

Those things can lumpy as those can be a little volatile quarter to quarter, but but nothing significant so but the underlying core trends of <unk>.

Unknown Executive: So, but the underlying core trend.

Unknown Executive: and generally been wanted to bathe his point increases per month.

Generally been one to two basis point increase as per month.

Matthew Timothy Clark: Okay. And then just on capital, updated thoughts on M&A, what you might be seeing of late, given the move in bank stocks and... Unknown Speaker, and you know whether or not something might be possible, whether or not you might be able to get something done before your end. Yeah, I

Unknown Executive: Okay, and then just on capital updated thoughts on M&A, what you might be seeing of late, given the move in bank stocks, and whether or not something might be possible, whether or not you might be able to get something done before year end. Yeah, well, I, first of all, unit there was somehow think we'd be able to get anything done by your end, but hopefully we'll be able to do it now and something by your end. There are still conversations that are going on. I do think that, you know, sort of the rebound in the bank stock prices could be a little helpful, but the math still remains a problem just, you know, the unreliable losses in the marks that we have to take, and so we're going to be disciplined in how we look at that.

Okay, and then just on.

Capital updated.

Also on M&A.

You might be seen of late given the move in bank stocks.

And whether or not something might be possible, Mike whether that you might be able to get something done before year end.

David A. Brager: Yeah, well, even if there was something, I don't think we'd be able to get anything done by year end, but hopefully, we'll be able to announce something by year end. There are still conversations that are going on. I do think that, you know, sort of the rebound in bank stock prices could be a little helpful. But the math still remains a problem, just you know, the unrealized losses and the marks that we have to take.

Yes, well first of all even if there was something that I don't think we'd be able to get anything done by year end, but hopefully we'll be able to announce something by year end.

There are still conversations that are going on I do think that.

Sort of the rebound in the bank stock prices.

Could be a little helpful, but the math still remains a problem just the unrealized losses in the March that we have to take and so we're going to be disciplined in how we look at that so there are conversations that are going on there are opportunities for us.

Unknown Executive: So there are conversations that are going on. There are opportunities for us. And we can continue to evaluate those and talk about those, both externally and internally. You know, obviously we do have a lot of capital. And that's a good thing. It does give us some flexibility to do different things. So, you know, we'd love to do an M&A deal. There are also other things that we could consider going forward from a capital management perspective. You know, we really kind of wanted our TCE to increase and sort of get half a little bit of the risk of TCE going down.

David A. Brager: And so we're going to be disciplined in how we look at that. There are conversations that are going on; there are opportunities for us. And we continue to evaluate those and talk about them both externally and internally. You know, obviously, we do have a lot of capital. And that that's a good thing. It does give us some flexibility to do different things. So, you know, we'd love to do an M&A deal.

And we continue to evaluate those and talk about those both externally and internally.

Obviously, we do have a lot of capital.

And that.

That's a good thing it does give us some flexibility to do different things so.

We'd love to do an M&A deal. There are also other things that we could consider going forward.

David A. Brager: There are also other things that we could consider going forward, from a capital management perspective. You know, we really kind of wanted our TCE to increase and sort of get past a little bit of the risk of TCE going down. And we sort of, you know, that eight and a half to 9% range is a good spot for us. And we ended up there in the third quarter. So there are definitely things that we're talking about, but at this point, I have nothing to announce.

From a capital management perspective, we really kind of one at our TCE to increase and sort of get past a little bit of.

Unknown Executive: And we sort of, you know, that eight and a half to nine percent range is a good spot for us. And we ended up there in the third quarter.

The risk of TCE gone down and we sort of that eight 5% to 9% range is a good is a good spot for us and we ended up there in the third quarter. So there are definitely things that we're talking about but at this point nothing to announce.

Unknown Executive: So there are definitely things that we're talking about, but at this point, nothing to announce.

Unknown Executive: Okay, great, thank you. Thank you.

Okay, great. Thank you.

Operator: Thank you. One moment for our next question, and that will come from the line of Andrew Terrell with Stevens. Your line is open.

Andrew Turrell: One moment for our next question. And that will come from the line of Andrew Turrell with Steven.

Sure.

Thank you one moment our next question.

And that will come from the line of Andrew <unk> with Stephens. Your line is open.

Unknown Executive: Your line is open. Hey, you're morning. Morning, Andrew.

Hey, good morning, good morning, Andrew.

Andrew Terrell: Unknown Speaker Maybe just to start on that last point around capital and kind of what you're contemplating there, I guess, we get to the sale lease specs in a minute, but are you interested in getting a buy back in the back half of the year or not?

Andrew Turrell: Maybe just to start on that last point around capital and kind of what you're contemplating there, I guess. We get to the sale lease backs in a minute. But are you interested in getting a buyback in the back half of the year? Does the kind of moving valuation potentially preclude you from doing that, with the preference be incremental securities repositioning. Just maybe a little more thought on the capital discussion there. Andrew, I think over the next two, three, four quarters, our focus is to really reduce the level of bonds. So we have on the balance sheet, as well as reducing the securities portfolio.

Maybe just to start on that last point around capital I mean kind of what's your what you're contemplating there I guess.

We get to the sale leasebacks.

In a minute but.

Are you interested in kind of buyback of about back half of the year does that kind of move in valuation potentially preclude you from doing that with the preference be incremental securities repositioning just maybe a little more thought on the capital discussion there.

David A. Brager: So, Andrew, I think over the next two, three, four quarters, our focus is to really reduce the level of bonds we have on the balance sheet, as well as reduce the securities portfolio. And that, combined with the fact that we continue to create capital every quarter, I think is going to show some pretty strong capital ratios. You know, they're already pretty strong, but... And we'll beat that.

So Andrew I think over the next 234 quarters, our focus is to really reduce the level of borrowings we have on the balance sheet as well as reducing the securities portfolio.

Unknown Executive: And that combined with the fact that we continue to create capital every quarter, I think it's going to show some pretty strong capital ratios. There are already pretty strong, but and we'll be definitely looking at, you know, the opportunities for MMA compared to whether we want to be more aggressive in terms of buybacks. So we'll see what the MMA market looks like at that point, but if it's still a little slow, I think the board will certainly evaluate whether we want to do some, you know, put it can be five one-back in place.

And that combined with the fact that we continue to accrete capital every quarter I think is going to show some pretty strong capital ratios, they're already pretty strong.

And we will be definitely looking at.

The opportunities from M&A compared to whether we want to be more aggressive in terms of buybacks. So we will see what the M&A market looks like at that point, but it is still a little slow.

The board will certainly evaluate whether we want to do some put it can be five one back in place.

David A. Brager: Yep, I got it. Okay.

Unknown Executive: Yep, got it.

Unknown Executive: Okay.

Yes got it okay.

Unknown Executive: And then on the point of the sale lease backs, I think you've mentioned three million or so.

And then on the point of the sale lease backs I think you've mentioned.

Andrew Terrell: And then on the point of the sale leasebacks, I think you've mentioned 3 million or so Unknown Speaker In the third quarter, can you maybe frame for us like the timeline in which the sale, lease back transactions can occur? Is that something that is primarily completed in the back half of the year? Or is there a longer kind of tail for you guys looking to complete those transactions? So we

$3 million or so.

In the third quarter.

Can you just maybe frame for us like the timeline in which the sale leaseback transactions can occur or is that something that is primarily completed in the back half of the year or does is there a longer kind of tailed.

Guys looking to.

David A. Brager: So we are doing these transactions sort of one at a time. These are not, you know, a lot of things in the market where you've seen they're selling a bunch of properties simultaneously. We're focused on maximizing what we can get out of these properties, and if we don't get the price we want, we don't sell them.

Complete those transactions.

So we are doing these transactions sort of one at a time these are not.

A lot of things in the market you have seen as theyre selling apartment properties simultaneously, we're focused on maximizing.

What we can get out of these properties and if we don't get the price we want we won't sell them. So there is certainly some unknowns.

David A. Brager: So there are certainly some unknowns. One has already sold. I think there's the possibility of a couple more this year. But we don't know, but in total, it's still going to be a handful at most. But it will depend on whether market conditions really give us the cap rate we want.

<unk> sold already I think there's possibilities of a couple more this year.

We don't know, but in total it's still going to be a handful at most but it will depend on whether market conditions.

It really gives us the cap rate we want.

Andrew Terrell: Okay, got it. Now, if I could sneak one more in, just, sure, a couple of the CREs, like data aggregators, put out some data that industrial commercial real estate in the Inland Empire specifically has seen kind of a pretty, pretty nice lift in vacancy rates to start this year. Curious what you guys are seeing in that market specifically, within your portfolio, whether you've seen any notable changes in the vacancy rates?

Okay got it and then if I could sneak one more and just share a couple of the CRE debt like data Aggregators put out some data that kind of industrial and commercial real estate in the inland Empire specifically.

Seen kind of a pretty pretty nice lift in vacancy rates to start. This year curious what you guys are seeing in that in that market specifically within your portfolio, whether you've seen any notable changes in the vacancy rates.

David A. Brager: So, a couple of things. I think the latest data I saw, when you go from a 1 or 2 percent vacancy rate to a 6 or 7 percent vacancy rate, that is a large percentage increase, but it's still very concentrated in the larger, you know, square-footage buildings, and it's obviously more affected when you have a 2 or 3 or 4 million square foot building that goes vacant. So, I feel very good about the credit quality. I mean, obviously, things can come up, but we're not experiencing vacancies in the investor industrial portfolio at any significant level.

So couple of things.

I think the latest data ISR when you go from a one or 2% vacancy rate to six or 7% vacancy rate.

That is a large percentage increase but it is still very concentrated at the larger square footage size buildings and it's impacted obviously greater when you have.

Two or three or 4 million square foot building that goes vacant that's not the type of deal that were lending on.

So we haven't seen really any changes in the industrial market with our customers.

Ben.

Very.

Very disciplined in how we've underwritten it half of it is about about half of it is owner occupied we did put a lot more detail in our investor presentation. This time around.

Related to all C&I CRE asset classes.

Whereas historically the last few quarters anyway, we've only put the office portfolio. So there is a lot more detail both from an origination loan to value perspective, the size of the loans that we have in each of our asset classes. So it does provide a lot more detail I think for you and others to look at we're not really experiencing.

The largest classified loan we have in our industrial portfolio as a 15 year fully amortizing loan with less than a 30% loan to value all payments being made.

Dave The operating company lost a little bit of money and so we downgraded it so I feel very good about the credit quality I mean, obviously things can come up, but we're not experiencing vacancies and the investor.

<unk> portfolio that any significant level.

Andrew Terrell: Got it. I appreciate it. Yeah, the extra color on the presentation was helpful. Thanks for the question.

Got it I appreciate it yes, the extra color on the presentation was helpful. Thanks for the questions.

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

You're welcome.

Thank you one moment our next question.

And that will come from the line of Kelly Motta with <unk>. Your line is open.

Kelly Ann Motta: Hi, good morning. Thanks for the question. I was hoping to dig in a little bit more about the sale leasebacks and the potential offsetting securities repositioning. Just wondering, it sounds like that proceeds will be used to potentially pay down some of the higher cost borrowings. I'm wondering if there's a particular size of the securities portfolio we should be managing to, or, you know, how you're thinking about what an optimized size of a securities portfolio looks like for you at this stage, as we are thinking about kind of shifting around the balance sheet. Thanks.

Hi, good morning, Thanks for the question.

I was hoping now.

Dig in a little bit more about the sale leasebacks.

The potential offsetting securities repositioning.

Just wondering.

Sounds like that the proceeds will be to potentially pay down some of the higher cost borrowings wondering.

Is there a particular size of the securities portfolio, we should be managing to or how you're thinking about what an optimized.

The securities portfolio outlook for you at this stage as we're thinking about kind of shifting around the balance sheet. Thanks.

Alan Nicholson: We don't have, I'd say, a near-term target, per se. I think, more importantly, our focus is more on paying down the debt more than anything. And so, obviously, other aspects of the balance sheet come into play. I think, you know, long-term, many years out, obviously, our objective here is to shift the asset mix to a higher percentage of loans, obviously, as we shift away from, you know, wholesale funds on the other side of the balance sheet.

But we don't have I'd say, a near term target per se I think more importantly, our focus is more on paying down the debt more than anything.

So.

Obviously other aspects of the balance sheet can come into play.

I think long term many years out obviously, our objective here is to shift the asset mix.

Two a higher percentage of loans, obviously as we shift away from wholesale funds on the other side of the balance sheet. So that is the long term strategy of course, but near term I think the investment portfolio, we want to accelerate it maybe with some of these targeted sale leasebacks, but in general.

Alan Nicholson: So, that is the long-term strategy, of course. But near-term, I think the investment portfolio we want to accelerate, maybe, with some of these targeted sale-leasebacks. But, in general, it's not, we're not targeting a number, per se, Kelly.

We're not targeting occurred a number per se Kelly.

Kelly Ann Motta: Okay, um, that's helpful. And then we have to follow up with the broker CDs you put on wondering how you're weighing that versus, you know, other wholesale costs and if you're looking to potentially add to that wholesale CD position or if the security fails and the cash flows off that support what you need at this point.

Okay.

That's that's helpful and then.

As a follow up would be.

Brokered Cds you put on wondering how you are weighing that versus other wholesale cost and if.

Youre looking at Q.

Potentially.

Yeah that wholesale CD position or at that.

Security sales the cash flow is not bad.

But at this point.

Alan Nicholson: The wholesale side is a combination of a couple of things, Kelly. One, depending on how the rest of the balance sheet plays out, do we need more funding? That will depend.

The wholesale side is a combination of a couple of things Kelly one it.

Depending on how the rest of the balance sheet plays out do we need more funding that would and if that's the case, we will look to in some ways, what's the least expensive whether it be brokered whether it'd be borrowings, but we also are managing those numbers a little bit to the extent of how we want to position our interest rate risk. So what we sell.

Alan Nicholson: If that's the case, we will look to, in some ways, what's the least expensive, whether it be brokered, whether it be lending. But we also are managing those numbers a little bit to the extent of how we want to position our interest rate risk. So what we select on the wholesale side is one of the ways we try to manage. We are a little bit asset sensitive right now, particularly because of those paycheck swaps we put on. And one way to mitigate it, among others, is to put on some fixed debt.

On the wholesale side is one of the ways, we try to manage and we are a little bit asset sensitive right now, particularly because of the pay fixed swaps, we put on and that is one way to mitigated among others is to put on some.

Some fixed debt.

Got it thank you so much.

Operator: Thank you. One moment for our next question, and that will come from the line of Ahmad Hassan with DA Davidson. Your line is open. Good morning, guys.

Thank you one moment for our next question.

Operator: Got it. Thank you so much. Thank you. One moment for our next question, and that will come from the line of Ahmad Hassan with DA Davidson. Your line is open.

And that will come from the line of Ahmad Hassan with D. A Davidson your line is open.

Good morning, guys name on the sign on for Gary Tenner.

Hi, John.

That does sound pipeline I know you mentioned the.

C&I line utilization.

And how should we be thinking about the back.

Half of the year in terms of the pipeline.

David A. Brager: Yeah, so look, I mean, the loan pipelines are definitely slower, but we are seeing great opportunities. When we do a T&I loan, you know, we've funded a large amount of commitments this year; there just hasn't been a large amount of borrowing on those commitments. And so that obviously is different than doing commercial real estate, whether owner or investor. But I still believe that we can grow loans through the end of the year.

Rosenthal.

Yes, so look I mean, the loan pipelines are definitely slower we are seeing great opportunities when we do a C&I loan.

We funded a large amount on our commitments. This year there just hasnt been a large amount of borrowings on those commitments and so that obviously is different than doing a commercial real estate, whether owner or investor, but I still believe that we can grow loans through the end of the year that's been a struggle in the first six months.

David A. Brager: That's been a struggle for the first six months, as evidenced by some of our prepared comments, but I do believe that we can grow loans. And, and I think there are some people sitting on the sidelines, I don't think the rate thing is as big of an impediment to doing loans. But if things break a little bit more, or things improve a little bit more, that should be a catalyst to start seeing some more activity there.

Evidenced by some of our prepared comments.

But I do believe that we can grow loans in and I think there are some people sitting on the sidelines I don't think the right thing is as big of an impediment.

Doing loans, but if things break a little bit more or things improve a little bit more that should be a catalyst to start seeing some more activity there and we're going to err on the side of credit quality always we've had a lot of opportunities to look at deals that we have passed on.

There is either other lenders arent doing it.

Or other lenders are doing things a little more aggressively than we would do so I do feel confidence sort of in our low single digit growth.

Talk that we had at the beginning of the year at the end of the first quarter that is still our goal.

Guide, specifically, but pipelines are little bit lower but they are solid and we just need to keep executing there and the good thing about it is on the C&I loans that we're doing we're getting full relationships enable to monetize those relationships in many other ways Treasury management International Bank.

David A. Brager: And we're going to err on the side of credit quality, always. We've had a lot of opportunities to look at deals. And the good thing about it is that on the CNI loans that we're doing, we're getting, you know, full relationships and able to monetize those relationships in many other ways, treasury management, international, bank card, all of the things that we do for an operating company that we wouldn't really be doing for an investor commercial real estate borrower.

Card all of the things that we do for an operating company that we wouldn't really be doing for an investor commercial real estate borrower.

Thanks for that I'll turn it back.

Operator: Thank you. As a reminder, if you would like to ask a question, please press star 11. Our next question will come from the line of David Feaster with Raymond James. Your line is open.

Thank you as a reminder, if you would like to ask a question. Please press star one one.

Our next question will come from the line of David Feaster with Raymond James Your line is open.

Good morning, everybody good morning.

Let's start with deposits, obviously, it's a seasonally challenging quarter the deposit migration has been a headwind.

But the niv balances pretty encouraging I'm just curious if you could help us think through maybe some of the trends in the quarter.

On the core deposit front and what you saw especially late in the quarter and into early July.

David Pipkin Feaster: Yeah, so I think, look, I think overall, the positives have been very.

Yes, so I think look I think overall deposits have been very stable.

I've been saying this for five or six quarters that our operating model does allow for noninterest bearing deposits to remain high if they can remain at 60% I mean that we will continue to be a challenges.

If rates stay higher longer if there is some rate movement down it might be easier, but we are bringing on very good deposit relationships operating companies that do maintain noninterest bearing deposit. So the deposit pipeline has been solid, but we still are running into the headwinds of the.

<unk>.

The higher for longer and surprisingly there are still some people that are saying Oh, maybe I can earn a little bit more you would've thought most of that would have run through the system, but that's still happening to a degree as evidenced by the money that moved to trust.

So.

I feel good about deposits.

Normally in the second quarter, we have grown deposits historically, we were relatively flat averages were up.

But I do think that.

If we can execute on the pipeline that we have.

That we should start to see that stabilize maybe even a little bit more notwithstanding obviously any broker deposit.

Acquisition.

But I feel generally good about it and we bank operating companies I means so we should maintain a high level of noninterest bearing.

David Pipkin Feaster: Okay, that's helpful. Um, and then maybe just kind of going back to, I'm curious, what do you think about the size of the balance? It sounds like we're basically preparing to, you know, especially with the VTFP maturity, we'll probably shrink the balance sheet. You've built up some cash in advance of that. But it sounds like we probably should expect the balance sheet to shrink a bit and, to the extent that we have deposit growth, maybe more optimization of your funding mix. Is that kind of the right way to think?

Okay. That's helpful.

And then maybe just kind of going back to how you think about the size of the balance sheet.

It sounds like.

We're basically.

Especially with the <unk> maturity will probably shrink the balance sheet you built up some cash in advance of that.

But it sounds like.

We expect the balance sheet shrink a bit into the extent that we have deposit growth maybe more optimization of your funding mix does that color.

David A. Brager: Yeah, I think generally you're on the right track. And look, we can grow earnings per share without necessarily growing the bank in the short term. Our goal is to grow the bank long term; we want to grow the bank. But the exact circumstance we're in right now with the BTFP and building the cash, there could be some of that that occurs over the next few quarters. But I do think that we can definitely grow EPS, improve ROA, do something with the capital, all of those things should get us to where we want to be, ultimately.

Okay.

Yes, I think generally you are on the right track and look we can grow earnings per share without necessarily growing the bank in the short term.

Our goal is to grow the bank long term, we want to grow the bank.

But the.

The exact circumstance, we're in right now with the <unk> and building the cash there could be some of that that occurs over the next few quarters.

But I do think that we can definitely grow EPS improve ROA.

Do something with the capital all of those things.

Should.

Get us to where we want to be ultimately and what's the targeted sale leasebacks I mean, we're just we've been saying over the last couple of quarters, we're going to hit some singles and.

David A. Brager: And with the targeted sale leasebacks, I mean, we've just, you know, we've been saying over the last couple of quarters that we're going to hit some singles and, you know, reduce the amount of the borrowings. And so obviously, all of that sort of impacts the size of the balance sheet. But I do think we can definitely grow EPS, even if we're not growing the total asset size of the bank in the short run. But ultimately, we want to grow the size of the balance sheet as well. So I don't know, Alan, if you have anything to add to that. Yeah, I mean,

To reduce the amount of the borrowings and so obviously all of that sort of impacts the size of the balance sheet, but I do think we can definitely grow EPS.

Even if we're not growing the total asset size of the bank in the short run, but ultimately we want to grow the size of the balance sheet as well. So I don't know Alan if you have anything to add to that I mean, we want to grow core loans.

Alan Nicholson: Yeah, I mean, we want to grow core loans and core deposits. But in terms of other aspects of the balance sheet, as I've talked about reducing the lending, the balance sheet in total could certainly shrink in the near term.

Core deposits, but in terms of other aspects of the balance sheet as I've talked about reducing the borrowings the balance sheet in total could certainly shrink in the near term.

And not a bad thing and certainly that will help return on assets and free up additional capital frankly.

David Pipkin Feaster: And David, just to give you an idea, you know, a lot of these sale-leaseback transactions that have occurred, you know, with the larger private equity firms, these banks have been selling these properties, you know, at high 7s at best and low 8s at worst cap rates. We're looking at selling our properties, you know, below 6% cap rates. So we're unlocking more of the value of those properties and how we're doing it.

And David just to give you an idea you know a lot of these sale leaseback transactions that have occurred.

With the larger private equity firms.

Banks have been selling these properties.

High Sevens at best and low eights of worst cap rates.

We're looking at selling our properties.

Below 6% cap rates. So we're unlocking more of the value of those properties and how we're doing it and.

David Pipkin Feaster: And, you know, if we don't sell, we don't sell those properties, but we're gonna, if we get the price that we want to get, then we'll be able to hit another single here or there. So that's sort of the thought process.

We don't sell we don't sell those properties, but we're going to if we get the price that we want to get then we'll be able to hit another single here or there. So that's sort of the thought process.

David Pipkin Feaster: Okay, that's great. And maybe switching gears just to the trust business. I mean, that's been a huge benefit just as you have been able to, you know, serve clients, maintain relationships and all that. Here are some of the underlying trends you're seeing on the trust side.

Okay.

That's great and then maybe switching gears just to the business I mean, that's been a huge benefit just as you've been able to.

As clients maintain relationships in all of that through some of the underlying trends you're seeing on the trust side.

David Pipkin Feaster: Yeah, well, on the I just you broke up a little bit. I just want to make sure I heard you correctly. What are the underlying trends on the citizens trust side? Yeah, yeah.

Yes.

Just you broke up a little bit I, just want to make sure I heard you correctly, what are the underlying trends on the citizens Trust side.

David A. Brager: So look, I mean, last year in, you know, for the whole year, we had $800 million of deposits go there. In the first six months, we had $170 million of deposits go there. So it's definitely slowed down. But our customers are still, you know, we do have smart customers, and they are wanting to, you know, earn what they can earn. And so we work with them, and we want to keep it in the family. So ultimately, those relationships, we're not losing the relationship; there's potentially excess deposits that are going there to earn something. And I think that's the key thing. And just keeping it in the family is important.

Yes, yes.

So look I mean last year in for the total year, we had $800 million of deposits go there. The first six months, we had $170 million of deposits go there. So it's definitely slowed down.

But are customers still I mean, we do have smart customers and they are wanting to earn what they can earn in so we work with them and we want to keep it in the family. So ultimately those relationships, we're not losing the relationship there is potentially excess deposits that are going there to earn something and.

I think thats the key thing and just keeping in the family is important.

David A. Brager: You know, but trust, our trust group has grown to four and a half billion ish, and assets under administration and management, which is up about a billion dollars from last year. So we'll continue to see a little bit of that, I think, but that's definitely slowed down as well. And, you know, we're still working to bring those new relationships into place, which includes trust assets in many cases. So we'll continue to do that and probably continue to see it, but definitely at a slower pace.

Trust Our trust group has grown to $4 5 billion ish in.

Assets under administration and management.

Is up about $1 billion from last year. So we will continue to see a little bit of that I think but thats definitely slowed down as well.

We're still working to.

Bring on those new relationships, which includes <unk>.

Just assets in many cases so.

We will continue to do that and probably continue to see it but definitely at a slower pace.

Unknown Executive: Thanks, everybody. You're welcome. Thank you.

David Pipkin Feaster: You're welcome. Thank you.

Okay. Thanks, everybody.

Operator: Thank you. And we do have a follow-up question. Sure. That will come from the line of Kelly Motta with KBW. Your line is open.

Thanks.

Unknown Executive: And we do have a follow-up question.

Thank you and we do have a follow up question.

Unknown Executive: Sure.

Kelly Motta: That will come from the line of Kelly Motta with KBW.

Sure that will come from the line of Kelly Motta with <unk>. Your line is open.

Unknown Executive: Your line is open. Hey, thank you so much for letting me jump back on. I just was hoping to clarify your point about your outlook for long growth. I think you've re-adrated low single or mid single digits. I was wondering if that is for the balance of the year or how you're thinking about net growth in the second half.

Kelly Ann Motta: Hey, thank you so much for letting me jump back on. I just wanted to clarify your point about your outlook for loan growth. I think you reiterated low, low single digits or mid single digits. I was wondering if that is for the balance of the year or what you're thinking about net growth in the second half?

Hey, Thank you so much for letting me jump back on a just hoping to clarify your point about your.

Outlook for loan growth I think you reiterated.

Low low single or mid single digits.

Wondering if that is for the balance of the year or how youre thinking about.

David A. Brager: Yeah, I definitely didn't say mid-single-digit, so just to clarify. I do think, for the balance of the year, you know, I think we can grow loans in that low single-digit range from this point on. So, I think a combination of what we've already put on the books that hasn't really been advanced, plus if there's any, you know, improvement in the pipelines and just our normal sort of, and I'm excluding the seasonality in the fourth quarter with dairy. So, excluding that, I do think that we can grow in the low single-digits from this point forward.

Net growth in the second half yeah, I definitely didn't say mid single digits.

Unknown Executive: Yeah, I definitely didn't say mid single digits, just to clarify. I just think for the balance of the year, you know, I think we can grow loans in that low single digit range from this point. And, you know, some of that, I mean we have done a couple of larger sea and islands that, you know, have about a five or six percent utilization on them. I mean, at some point these people are going to start to utilize this money. So I think combination of what we've already put on the books that hasn't really been advanced, plus if there's any, you know, improvement in the pipelines and just starting normal sort of.

Right.

I do think I'd, just say for the balance of the year I think we can grow loans in that low single digit range from this point.

<unk>.

And some of that.

We have done a couple of larger C&I loans.

We have about <unk>.

Five or 6% utilization on them I mean at some point. These people are going to start to utilize this money. So I think combination of what we've already put on the books. It Hasnt really been advanced plus if theres any improvement in the pipelines and just our normal sort of and I am excluding the seasonality in the fourth quarter with dairy so.

Unknown Executive: And I'm excluding the seasonality in the fourth quarter with dairy. So, excluding that, I do think that we can grow in the low single digits from this point forward.

Excluding that I do think that we can grow in the low single digits from this point forward.

Unknown Executive: Right. Thanks. Thanks for the clarification.

Kelly Ann Motta: Right. Thanks. Thanks for the clarification.

Great. Thanks, Thanks for the clarification.

Unknown Executive: You're welcome. Thank you.

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

Welcome.

Unknown Executive: I'm showing no further questions in the queue at this time.

Thank you I'm showing no further questions in the queue. At this time I would now like to turn the call back over to Mr. <unk> for any closing remarks.

David Brager: I would now like to turn the call back over to Mr. Breger for any closing remarks. Thank you, Shari. Citizens Business Bank continues to perform consistently in a challenging operating environment. Our solid financial performance is highlighted by our 189 consecutive quarters, or more than 47 years, of profitability and 139 consecutive quarters of paying cash dividends. We remain focused on our mission of banking the best small and medium sized businesses and their owners through all economic cycles. I'd like to thank our customers and our associates for their commitment and loyalty. Thank you for joining us this quarter.

David A. Brager: Thank you, Cherie. Citizens Business Bank continues to perform consistently in a challenging operating environment. Our solid financial performance is highlighted by our 189 consecutive quarters of profitability, or more than 47 years of profitability, and 139 consecutive quarters of paying cash dividends. We remain focused on our mission of banking the best small to medium-sized businesses and their owners through all economic cycles. I'd like to thank our customers and our associates for their commitment and loyalty.

Thank you sheree.

Citizens business Bank continues to perform consistently in a challenging operating environment. Our solid financial performance is highlighted by our 189 consecutive quarters or more than 47 years of profitability and 139 consecutive quarters of paying cash dividends, we remain focused on our mission.

Banking, the best small to medium sized businesses and their owners through all economic cycles I would like to thank our customers and our associates for their commitment and loyalty. Thank you for joining us this quarter. We appreciate your interest and look forward to speaking with you in October for our third quarter 2024 earnings call. Please let alan or I know.

David A. Brager: Thank you for joining us this quarter. We appreciate your interest and look forward to speaking with you in October for our third quarter 2024 earnings call. Please let Alan or I know if you have any additional questions. Have a great day.

David Brager: We appreciate your interest and look forward to speaking with you in October for our third quarter 2024 earnings call. Please vote out on, or I know if you have any additional questions. Have a great day.

If you have any additional questions have a great day.

Unknown Executive: This concludes today's program. Thank you all for participating.

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

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

Unknown Executive: You may now disconnect.

Okay.

[music].

Thank you.

[music].