CVB Financial Corporation

Good morning, ladies and gentlemen, and welcome to the second quarter of 2022 CVB Financial Corporation and its subsidiary, Citizens Business Bank Earnings Conference Call. My name is Liz, and I will 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 Carabino. You may proceed.

Thank you, Liz, and good morning, everyone. Thank you for joining us today to review our financial results for the second quarter of 2022. Joining me this morning are Dave Brigger, President and Chief Executive Officer, and Alan Nicholson, Executive Vice President and Chief Financial Officer. Our comments today will refer to the financial information that was included in the earnings announcement released 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 Securities Litigation Reform Act of 1995. For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from our forward-looking statements, please see the company's annual report on Form 10-K for the year ended December 31, 2021, and in particular, the information set forth in Item 1A, Risk Factors Therein. For a more complete version of the company's Safe Harbor disclosure, please see the company's earnings release issued in connection with this call. Now I will turn the call over to Dave Breger. Dave?

Thank you, Christina. Good morning, everyone. For the second quarter of 2022, we reported net earnings of $59.1 million, or 42 cents per share, representing our 181st consecutive quarter of profitability. We previously declared a 19 cents per share dividend for the second quarter of 2022, an increase of 6% compared to the first quarter of this year. It represented our 131st consecutive quarter of paying a cash dividend to our shareholders. Second quarter net earnings of $59.1 million, or 42 cents per share, compared with $45.6 million for the first quarter of 2022, or 31 cents per share, and $51.2 million for the year-ago quarter, or 38 cents per share. The second quarter of 2022 represents a full quarter of financial results, including the assets and liabilities acquired from Suncrest Bank on January 7, 2022. The integration of Suncrest 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 74 cents per share, compared with $115 million, or 85 cents per share, for the first six months of 2021. 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 2.93% in the first quarter to 3.2% 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 provision for credit losses of $2 million in the year-ago quarter. In February, we 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 1.7 million shares through June 30, 2022 under a 10B51 share repurchase program that became effective at the beginning of March. Now let's discuss loans 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 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 $100.5 million or 1.2% increase from the end of the first quarter. However, after excluding PPP loan forgiveness, second quarter loan growth was $155 million, 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. CNI loans increased by $17 million when compared with the end of the first quarter, or approximately 7% annualized. The line utilization 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 utilization 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, non-performing assets defined as non-accrual 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 OREO properties and the $13 million in non-performing loans represented eight basis points of total assets. During the second quarter, we had net recoveries of $503,000 compared with net loan charge-offs of $5,000 for the first quarter of 2022. At June 30th, 2022, we had loans delinquent 30 to 89 days of $559,000 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 $49 million for the year-ago quarter. As of June 30, 2022, classified loans include $17.8 million in loans acquired from Suncrest. Now, I would like to discuss our deposits. At June 30, 2022, our total deposits and customer repurchase agreements were $14.6 billion, compared with $15.1 billion at March 31, 2021, and $13.2 billion for the same period a year ago. At June 30, 2022, our non-interest-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. Noninterest-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. We continued to deploy some of our excess liquidity during the second quarter into additional securities by purchasing more than $350 million in new securities with yields on average of approximately 3.75%. Investment securities available for sale or AFS securities totaled $3.6 billion inclusive of a pre-tax net unrealized loss of $346 million. investment securities held to maturity or HTM securities totaled approximately $2.4 billion at June 30th, 2022. 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 1.7% in the first quarter of 2022 to 1.93% in the second quarter. Although we grew the investment portfolio, we continued to make a significant amount of funds at the Federal Reserve. Our Fed balance averaged approximately $800 million for the second quarter compared to more than $1.6 billion in the first quarter of this year. At June 30, 2022, our ending allowance for credit losses was $80.2 million, or 0.92% of total loans. When excluding PPP loans, our allowance as a percentage of the remaining loans was 0.93%, which compares to 0.90% at March 31, 2022. In addition to the allowance for credit losses, we had $11 million in remaining fair value credit discounts acquisitions as the most recent quarter end. For the quarter ended June 30th, 2022, we recorded a provision for credit losses of $3.6 million compared to $2.5 million for the quarter ended March 31st, 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 forecasts 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 risks weighted among multiple forecasts. Our weighted forecast assumes GDP will increase by 0.5% in the second half of 2022, 0.8% for 2023, and then grow by 2.5% in 2024. The unemployment rate is forecasted to be 4.6% in the second half of 2022, 5.4% in 2023 and then declined to 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 30, 2022. Equity increased from the end of 2021 by $197 million for the issuance of 8.6 million shares to the former shareholders of Suncrest. Equity also increased through the 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 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 1st, we announced that our board of directors authorized the 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 10B51 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 30, 2022, our common equity Tier 1 capital ratio was 13.4% and our total risk-based capital ratio was 14.2%. I'll now turn the call back to Dave for 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 4 basis point increase in loan yields, and a shift in the composition of 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 3.16% 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 4.31% for the second quarter of 2022 compared with 4.27% for the first quarter of 2022 and 4.46% 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 4.2% for the second quarter of 2022, 4.11% for the first quarter of 2022, and 4.33% 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 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 non-interest-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 rates 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 non-interest income. Non-interest 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 in net gains on the sale of properties associated with banking 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 $274,000 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 $140,000 compared with the prior quarter will be in $205,000 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. Non-interest 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, Non-interest 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 Suncrest merger. We have completed the integration and consolidations associated with the Suncrest 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. Non-interest expense totaled 1.2% of average assets for the second quarter of 2022. This compares with 1.36% for the first quarter of 2022 and 1.23% 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. Supply chain issues, a tight labor market, and inflationary pressures continue to impact our customers and the banks. 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-provisioned income during the second quarter, which is a 30% increase from the first quarter. The combination of strong loan growth, expansion of our 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 supporting 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'll need to press star 1 on your telephone. Please stand by 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, Matthew. Good morning, Matthew.

Maybe first on deposits down a little bit here. I know they were up on average, at least non-interest bearing. But what are your thoughts on deposit growth from here? And what are your updated thoughts around the deposit data? And you take the over or under on that basis points from last cycle.

Yeah, some of that depends obviously on how much the Fed, how aggressive the Fed 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 Suncrest acquisition, they had a number of relationships that we identified during due diligence and after that, well, I'd say more hot money relationships that were 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 saw in the numbers, some of that was going. There's a little seasonality between the first quarter and the second quarter as well. I'm optimistic or relatively optimistic on deposits. I think we do have a higher percentage of non-interest 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 depositors sort of drive our cost of funds up. So I think we'll see a little more pressure. I mean, this rising rate cycle is different than the last cycle. It took four years to raise 225 basis points. It might take, you know, three months to raise 225 basis points this time. So we'll have to see how that plays out. But relatively optimistic. And look, we're still winning very 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, you're going to get the full realization of the cost saves from Suncrest. I mean, is it fair to assume that run rate could drift a little bit lower here in 3Q 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 an acquisition standpoint, it's not going to be material Q2 to Q3. I think we talked last quarter as well. There are some inflationary pressures in terms of of staff expense, vendor expenses. So I think more than likely we may see pressure on expenses growing modestly throughout the rest of the year. Yeah, 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 how hyper-focused everybody is on credit, can you just discuss which row of that increase in In classified, I think it was CRE related.

Yeah, there was, very candidly, it was one loan that drove most of that increase. And that one loan, we are very well secured. And, you know, there's no issue there. We, you know, we still remain very confident overall. The credit matrix are better today than they were pre-pandemic and really pretty much during any time. I know there's that little uptick, but it was really related to one loan secured by two properties that were at a very low loan to value, sub 55%. We just wanted to, we always grade a little more cautiously maybe 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 for me, just on share repurchase activity, should we assume you remain active despite kind of growing economic uncertainty here?

Well, you know, the board announced a $10 million share back earlier this year, so we've not quite 50% of that. But, you know, ASR did make up a big part of that, which is closed. We have an active 10B51, but it's going to be dictated by share price. So don't really know what will happen the rest of the year, but I think we accomplished a fair amount of what we wanted, if you think about the $8.6 million that was issued for SunCrest and the fact that we bought more than half of that back. Great.

Thank you.

Thank you. Our next question comes from Kelly Motta with KBW. Your line is now open.

Oh, hi, everyone. Good morning. This is Eleanor on for Kelly today.

Good morning, Eleanor. Good morning.

Thanks for the question. So I guess to start, loan growth was pretty solid, and you've always had kind of steady, solid loan growth. but it seems to be like a little more reserved than others. Is that a function of activity in your market or like conservatism slash competition?

Well, so just to kind of go to the basics for us, I mean, we want to bank the top 25% of clients in their respective industries. And by doing that, you know, the pie isn't as big as everybody else. And we want to maintain, you know, pristine credit quality, which is an important factor. We've grown the last two quarters, you know, at 8% and 7% annualized. more than I think we've grown. I can't 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'll say our goal is kind of that mid single digit. I do think, although our pipelines still remain, you know, 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, you know, There could be some slowdown there, but that 7% and 8% or 8% and 7% the last two quarters was pretty robust for us, but that was due to the hard work of our teams. I think we're probably trending back to where we normally would be, which is in that 4% to 5% range.

Got it. That's helpful. Also, just thinking about how is competition in your market right now? Are players acting rationally, or are you starting to see people sort of compromise on terms or standards?

I guess it's all perspective. We always think they're acting irrationally. Just joking. But we're just very disciplined in how we underwrite. And so, you know, we're not going to – We will compete on price, we're not going to compete on structure. 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 we might be going into a more challenging economic time so they're 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, you know, as we mentioned, kind of in that plus, that four and a half plus range, which is significantly better than previous quarters.

Got it. That's helpful. I'll step back. Thank you.

Thank you.

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 a bit more into the growth question. You know, I mean, how much of this expected – obviously, we talked about competition a little bit. But, I mean, what's 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 here. What is your appetite for credit here, just given the economic backdrop? How much of the deceleration is strategic versus your client's slower demand for credit? And maybe just any color you have into the pulse of your clients at this point. Are they still pretty optimistic, or are you starting to hear a more cautious tone?

I'll take the second question first, and I think you're 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 luncheons, myself and and our banking division manager and the regional manager along with different centers and different locations. I would say the last couple we've had have definitely been much more cautious, the customers have been. I think there is some of that that's going to impact that, David. The one thing I would say to the growth, look, we want to continue to move the mix of our balance sheet. We want to do more loans, but we're going to 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've 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're going to remain consistent in how we look at deals. And if it doesn't meet our criteria, we're not going to try and make it fit. So, I think you're on the right track where I think some of that growth will be, you know, there'll be some headwinds just based on the fact, number one, people are going to maybe want to not invest like they would due to their cautious nature. We're going to underwrite in the same manner and, you know, not allow for degradation on the origination side as far as credit quality is concerned. So, there's definitely some headwinds, but we still want to get quality relationships and we're going to work hard to do that. And I think that's one of the things that's differentiated us, you know, over the history of the bank and just more recently, you know, during the last few quarters where we've had, you know, pretty solid loan growth that we feel is high quality.

That's helpful. And then maybe just kind of taking that at a high level 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're 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 pristine, but just any comments would be helpful.

Yeah, no. Again, I think there's a couple of areas that I'm a little more concerned about. One of those is just CNI in general, but I'll 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, you know, smaller lines of credit and things like that. I feel very – I shouldn't say very. I feel relatively confident in our office. Commercial real estate would be the one. collateral type that I think most people would say is an issue, but we underwrite it the right way and we monitor it very closely. SBA 7A, a lot of those SBA 7A loans, which we don't have a lot of, but a lot of those SBA 7A loans are loans that adjust. They're based on prime. Many of them adjust quarterly, so a lot of those loans really haven't experienced this increase in rate yet. And they'll start to see that, especially after, you know, beginning in July. So I think if I had to rank it, I'd just say, you know, kind of smaller company, smaller loan size C&I, SBA 7A with office a distant third.

Okay. That all makes sense. And then just last one for me, Any thoughts on M&A? You've obviously got a strong currency. You're a disciplined acquirer. 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 high level hasn't changed, but I don't know. Given where we are, would we be more focused on the smaller end of the spectrum or Just curious, any commentary on the M&A environment?

Yeah, 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 as similar to us as possible, which no one's exactly like us. We want to be able to make... uh, whoever we're talking to kind of CBB them, turn them into citizens business bank. And we think we can make more money on their customers than they can make on their customers. So, uh, that's sort of the high level kind of narrowing it down. Conversations are still there, but conversations have definitely slowed. I think, you know, banks don't generally get bought, they get sold. And what happens is especially when, you know, uh, Prices, you know, 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 is a part of it. I think the other thing that, you know, we have been talking a lot about also right now with the tight labor markets is, you know, what can we get from a people perspective? And so it might not be kind of our typical 40% cost safe deal. It might be a 25 or 30% cost safe 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 a, you know, we traded a pretty high multiple to book and a pretty high multiple PE 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, you know, that sort of economic slowdown and the credit quality would be an enormous part. It always is, but it might even be bigger now.

That makes sense. All right. Thanks for all the color.

Thank you, David.

Thank you. Our next question comes from Ben Gerlinger with Hubby Group. Your line is now open.

Hey, good morning, guys. Morning, Ben. Morning, Beth. So this question is kind of more philosophical in nature. I mean, your stocks are at an all-time high today. You know, pretty notable revenue uptick with both Lundros and with obviously looming interest rates coming. With this newfound revenue, is there any new initiatives that are now on the table and kind of juxtapose against that? What are kind of priorities one, two, and three here? I mean, you've done a pretty good job managing costs, which is the one thing you can fully manage, but just kind of get a little more granular on priorities.

Yeah, so, I mean, look, our number one priority is to continue to bank the best 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, to your question about investing with, you know, some revenue upticks going We are going to remain disciplined. We always look on the investment side or I'll say the optimization of how we do things side. That's something that we talk about a lot. We're going to continue to invest in things that can make us more efficient and create capacity for us to do more. I think that's been a hallmark of our organization. And look, if the right opportunity came along, there's nothing imminent, but if the right opportunity came along, we're ready to do that and open to do that. It would just have to be the right opportunity. So I think, you know, 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's not anything that sort of you know 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 those are things that we evaluate we're going to go into our strategic planning session with our board in August the management team is is preparing for those presentations. I think at the end of the day, it's nothing that's really different. It's again just honing and continuing to improve on how we do things. It's kind of boring, but it's very consistent.

Ben, we might be a little bit more focused on de novo, which has been consistently part of our strategy, but there may be more opportunities in the near term on some things like that.

If we can find the right teams, for sure. Good point, Alan.

That's very fair. It's clearly in the catbird seat here on optionality. My second and final question, kind of more towards the margin itself. Obviously, you guys have a 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 likely to do another 75 in July, which would be early in the quarter, that 150 or so you're going to feel almost the entirety of the effect throughout the third quarter. Do you 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 guys, as you know, Ben, I would say a couple things. One, the benefit on the asset side of some of that certainly is also delayed when you compare, you know, yield as of the last day of a quarter to the prior quarter versus the averages. 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 has probably diminished a little bit, 15% maybe from what we've disclosed in the past. But we still think it's fairly robust and the big question of course is going to be those deposits. We're going to continue to grow through relationships and transactional hot money we won't focus on.

Yeah, Ben, 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 deposits in operating funds, non-interest bearing, there's a zero beta on that. It doesn't mean that the mix can't 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 non-interest-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 that's how we evaluate it, and that's how we look at it, and 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, you know, the one thing we didn't mention and nobody's really asked is I think with the inflationary pressures, there's just going to be a little more burn on everybody's, you know, cash that they have. Not just our bank, but other banks as well. Everything is costing more. So, you know, some of that burn is going to happen. We didn't see it in our operating deposits. But I do think that that is also a factor in, you know, going forward here over at least the next couple of quarters. I don't think we're going to be able to maintain a one basis point on 150 basis point increase, but, you know, we're going to do our best.

Gotcha. Yeah, no, that makes sense. So I think it's pretty much it for me. Congrats on a great quarter and best of luck with a lot of after years.

Thank you, Ben.

Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. Our next question comes from Clark Wright with DA Davidson. Your line is now open.

Hi there. This is Clark Wright for Gary Tenner. First off, just a clarification on slide 13 here. You have the core loan growth at 7%, but it looks like the Suncrest acquired loans are flat quarter to quarter. So is the net loan growth this quarter then constrained at all by any runoff on the acquired Suncrest loans?

Yeah, well, a little bit. And the one thing about the $775 million, that included PPP loans as well. We just separated, if you're looking on slide 13, you can see the PPP loans for us shrinking significantly. But, yeah, the Suncrest loans, there is impact, but the Suncrest centers have also been generating new loans. So the net-net was the numbers that show there was very close.

Got it. Appreciate that. And then my next item would be looking at industrial theory, and 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, or are you pulling back in that space given – economic slowdown that we could perceive here in the next few quarters?

No, we feel industrial is one of the strongest and primarily where we're located in Southern California specifically is a distribution hub and very infrastructure mature. So it's not like they can just go down the street and build another 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 at 51% loan-to-value. And it's pretty granular for us with an average loan size of about $1.5 million. So we would want to do more industrial if we could, especially in the markets that we serve.

Thank you for that, Keller. And then lastly for me, as we look at the cash, cash equivalents, it's just under $700 million now or 5% of earning assets. Is that a level that you're comfortable with holding for the foreseeable future?

Ultimately, we'd like to see that lower. In every quarter, we've 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 cautious. Got it.

Thank you.

You're welcome.

At this time, there are no more questions, so I'd like to turn the call back to Mr. Breger.

Thank you, Iz. 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.