CVB Financial Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2024

Key Takeaways

  • CVB Financial reported Q2 net earnings of $50 million ($0.36 per share), marking its 189th consecutive quarter of profitability and declared a $0.20 dividend (139th straight quarter), with a 15.51% return on average tangible common equity.
  • Net interest income fell 1% from Q1 as the net interest margin dipped from 3.10% to 3.05%, driven by a 7 bp rise in funding costs and an 88 bp average cost of deposits.
  • Total loans declined 1% sequentially to $8.7 billion, led by decreases in commercial real estate and dairy & livestock loans, while new loans skewed toward higher-yielding C&I and owner-occupied credits averaging yields above 7.25%.
  • Asset quality remains solid with an $83 million allowance for credit losses (0.95% of loans), nonperforming assets at 16 bps of total assets, and a modest rise in classified agricultural loans amid signs of industry recovery.
  • Management is reducing high-cost borrowings and optimizing the securities portfolio through targeted sale-leasebacks (first deal generated a >$3 million gain), supporting strong capital ratios (15.3% CET1, 8.7% tangible common equity).
AI Generated. May Contain Errors.
Earnings Conference Call
CVB Financial Q2 2024
00:00 / 00:00

There are 8 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the 2nd Quarter of 2024 CVB Financial Corporation and its subsidiary, Citizens Business Bank Earnings Conference Call. My name is Sherry, 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.

Operator

I would now like to turn the presentation over to your host for today's call, Alan Nicholson, Executive Vice President and Chief Financial Officer. You may proceed.

Speaker 1

Thank you, Sherry, and good morning, everyone. Thank you for joining us today to review our financial results for the Q2 of 2024. 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. To obtain a copy, please visit our website at www.

Speaker 1

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 ks for the year ended December 31, 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 this call. I'll now turn the call over to Dave Brager.

Speaker 1

Dave? Thank you, Alan. Good morning, everyone.

Speaker 2

For the Q2 of 2024, we reported net earnings of $50,000,000 or $0.36 per share, representing our 189th consecutive quarter of profitability. We previously declared a $0.20 per share dividend for the Q2 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 percent for the Q2 of 2024. Our net earnings of $50,000,000 or $0.36 per share compared with $48,600,000 for the Q1 of 2024 or $0.35 per share and $55,800,000 or $0.40 per share for the prior year quarter. The $1,400,000 increase in earnings compared to the Q1 of 2024 was primarily due to a $3,300,000 decrease in non interest expense.

Speaker 2

Non interest expense was impacted by the change in the estimated cost for the FDIC special assessment. Compared to the Q1 of 2024, non interest expense related to the special assessment declined by $3,000,000 Net interest income declined by 1 point compared to the Q1 of 2024. This decrease resulted from a 5 basis point decline in our net interest margin from 3.10% in the Q1 to 3.05% in the Q2 of 2024. Our earning assets remained stable compared to the Q1 of 2024. Interest income grew by $1,400,000 over the prior quarter.

Speaker 2

Earning asset yields improved by 3 basis points compared to the prior quarter as investment yields increased by 7 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 2nd quarter. Interest expense increased by $3,000,000 over the prior quarter, reflecting a 7 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 non interest bearing deposits continued to be greater than 60% of total deposits for the Q2 of 2024. This 13 basis point 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 1.86% in the prior quarter to 2% in the Q2 of 2024. In terms of wholesale funds, 2nd quarter borrowing costs decreased as average borrowings declined by $142,000,000 However, a $300,000,000 increase in average brokered deposits drove a 79 basis point increase in the cost of our time deposits.

Speaker 2

Average total deposits for the Q2 increased by approximately $245,000,000 compared to the Q1 of 2024. Non maturity deposits declined modestly by $40,000,000 including a $29,000,000 decrease in non interest bearing deposits. On average, non interest bearing deposits continued to be greater than 60% of our average total deposits for the Q2 of 2024. At June 30, 2024, our total deposits and customer repurchase agreements totaled $12,100,000,000 a $111,000,000 decrease from March 31, 2024 and a $354,000,000 increase from December 31, 2023. The increase in total deposits and customer repos from the end of 2023 includes the addition of $400,000,000 in brokered time deposits.

Speaker 2

For the 1st 6 months of 2024, approximately $170,000,000 of deposits were moved to Citizens Trust, including $100,000,000 during the Q2. These funds were invested in higher yielding liquid assets such as treasury notes. This compares to $800,000,000 that was transferred during 2023. Our cost of deposits was 88 basis points on average for the Q2 of 2024, which compares 74 basis points for the Q1 of 2024. Our cost of non maturity deposits has grown from 60 basis points in December of 2023 to 74 basis points in June of 2024, while our cost of time deposits has grown from 1.84% in December of 2023 to 3.44% in June of 2024.

Speaker 2

From the Q1 of 2022 through the Q2 of 2024, our cost of deposits has increased by 85 basis points, representing a deposit beta of 16% compared to the 5 25 basis point increase in the Fed funds rate during the Federal Reserve's current tightening cycle. Now let's discuss loans. Total loans at June 30, 2024 were $8,700,000,000 an $89,000,000 or 1 percent decrease from the end of the first quarter and a $223,000,000 decline from December 30 1, 2023. The quarter over quarter decrease was led by a $56,000,000 decline in commercial real estate loans. All other loan categories declined modestly from the end of the Q1 of 2024.

Speaker 2

The decrease in loans from the end of 2023 included a $71,000,000 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 4th quarter compared to the 74% utilization rate at June 30, declined by $120,000,000 from December 31, 2023. As commercial real estate loan demand is weakened, our CRE loan production for the 1st 6 months of 2024 has lagged the same period in 2023 by more than 50%. Construction loans declined by $15,000,000 over the same period as we have experienced minimal borrowings from newly originated construction loans. C and I loans declined by $14,000,000 when comparing to June 30, 2024 period in balance to December 31, 2023, even though we have generally seen higher average loan balances over the 1st 2 quarters of 2024.

Speaker 2

This generally reflects the growth in new relationships as C and I line utilization continues to be at a rate of less than 30%. 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 7.25%. 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 and I loans. Non owner occupied loan originations in 2024 have been less than 20% of the total loan originations, which compares to 35% for the same 6 month period in 2023.

Speaker 2

Although loan demands continues to be slower than past years, we continue to be optimistic about growth and future line utilization from our pipeline of C and I loans. We believe our asset quality remains strong, even though we have experienced an increase in non performing and classified loans. Our allowance for credit losses totaled approximately $83,000,000 at June 30, the same as March 31, 2024. Net charge offs in the 2nd quarter were $31,000 compared to $4,000,000 in the Q1 of this year. At quarter end, non performing assets defined as non accrual loans plus other real estate owned were $25,600,000 or 16 basis points of total assets.

Speaker 2

The $25,600,000 in non performing loans compares to $14,500,000 for the prior quarter. Classified loans for the 2nd quarter were $125,000,000 compared with $103,000,000 for the prior quarter. Classified loans as a percentage of total loans was 1.44% at quarter end. 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.

Speaker 2

Widespread losses for our customers in 2023 resulted in recent downgrades in the bank's dairy lending portfolio, but a recovery in the industry appears to be underway in 2024 with feed costs down by 25% and milk prices rising due into falling supplies. 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 lower market value of farmland. I will now turn the call over to Alan to discuss additional aspects of our balance sheet. Alan?

Speaker 1

Thanks, Dave. Good morning again, everyone. As of June 30, 2024, the $82,800,000 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 31, 2024. Our ACL at December 31, 2023 was $86,800,000 including $5,900,000 of reserves for specifically identified non performing loans.

Speaker 1

Our reserves for specific loans have been 0 since the end of the Q1. We did not record a provision in the first or Q2 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 resulted in real GDP declining slightly in the second half of twenty twenty four and continuing to be negative in the Q1 of 2025.

Speaker 1

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. Our total investment portfolio declined by $116,000,000 from the end of the Q1 of 2024 and by $245,000,000 from December 31, 2023, as cash flows generated from the portfolio have not been reinvested during this year. Investment securities held to maturity or HCM securities totaled approximately 2.4 $3,000,000,000 at June 30, 2024.

Speaker 1

The HTM portfolio declined by approximately $25,000,000 from March 31, 2024. Investment securities available for sale or AFS securities totaled approximately $2,750,000,000 at June 30, 2024. The AFS portfolio declined by approximately $91,000,000 from March 31, 2024, including the impact of the unrealized loss in AFS securities increasing by $2,300,000 from the prior quarter end. The tax equivalent yield on the entire investment portfolio was 2.71% for the Q2 of 2024 compared to 2.64% for the prior quarter. We continue to have positive carry on the fair value hedges we executed in late June of 2023.

Speaker 1

We received daily SOFR on these pay fixed swaps, which have a weighted average fixed rate of approximately 3.8%. We recorded $4,100,000 of interest income in the 2nd quarter related to these swaps, which was $400,000 higher than the Q1 of this year. Our fair value hedges combined with our cash flow hedges had a market value of $15,300,000 as of June 30, 2024, which reflects a $3,600,000 increase from the end of the prior quarter. Cash and cash equivalents declined by approximately $105,000,000 from $950,000,000 at March 31, 2024, to $844,000,000 at June 30. Approximately $700,000,000 of BTFP borrowings matured in May, while we added FHLB advances totaling $500,000,000 during the Q2.

Speaker 1

These FHLB advances include $300,000,000 at an average cost of 4.73 percent maturing in May of 2026 $200,000,000 at a cost of 4.27 percent maturing in May of 2027. Borrowings from the bank term funding program at the end of the second quarter totaled $1,300,000,000 with a borrowing rate at 4.75. These advances mature in January of 2025. We anticipate 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.

Speaker 1

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 $3,000,000 We are not expecting material gains from sale leasebacks in the Q3 of 2024 or material levels of AFS security sales. Now turning to the capital position. At June 30, 2024, our shareholders' equity increased from the Q4 of 2023 by $34,500,000 to $2,110,000,000 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.

Speaker 1

Our regulatory capital ratios continue to grow and are among the highest in the industry. At 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 further discussion of our 2nd quarter earnings.

Speaker 2

Thank you, Alan. Moving on to non interest income. Our non interest income was $14,400,000 for the Q2 of 2024 compared with $14,100,000 for the prior quarter. Our customer related banking fees, including deposit services, prior quarter. In addition, our trust and wealth management fees increased by approximately $200,000 compared to the prior quarter.

Speaker 2

2nd quarter BOLI income decreased by $650,000 quarter over quarter, primarily due to the receipt of $530,000 in debt benefits that exceeded the cash surrender value

Speaker 1

in the

Speaker 2

Q1. Conversely, we had miscellaneous income in the 2nd quarter related to previously acquired charged off loans and a building sale more than a decade ago that totaled more than $500,000 Now expenses. Non interest expense for the 2nd quarter was $56,500,000 compared with $59,800,000 for the Q1 of 2024 $54,000,000 for the year ago quarter. The $3,300,000 increase quarter over excuse me, the $3,300,000 quarter over quarter decrease was primarily due to the expense associated with the FDIC special assessment. In total, regulatory assessment expense was $1,400,000 in the Q2 of 2024, a $3,000,000 decrease from the prior quarter.

Speaker 2

We initially accrued $9,200,000 in the Q4 of 2023 for the special assessment, which we supplemented with the addition of $2,300,000 of accrued expense in the Q1 of 2024. The Q1 increase in the accrual was the result of the FDIC revising upwards its initial estimate 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 Q2 of 2024, resulting in a $700,000 decrease in this accrual. Salaries and employee benefit costs decreased $975,000 quarter over quarter. This decrease included $1,500,000 in higher payroll taxes paid in the Q1 as a result of the annual reset of salary caps on payroll taxes and the payment of annual bonuses.

Speaker 2

The decrease in payroll taxes was offset by a $600,000 increase in bonus and profit sharing accruals compared to the Q1 of this year. Expense 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 promotion expense increased by $326,000 compared to the Q1 of this year as we increased donations by almost $600,000 The Q2 of 2024 included $500,000 in recapture provision for unfunded loan commitments compared to no provision or recapture in the Q1 of 2024. Non interest expense totaled 1.4 percent of average assets for the Q2 of 2024 compared with 1 point 4 8% for the prior quarter.

Speaker 2

Our efficiency ratio was 45.1% for the Q2 of 2024. This compares with 47.22 percent for the Q1. This concludes today's presentation. Now Alan and I will be happy to take any questions you might have.

Operator

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

Speaker 2

Hey, good morning. Good morning.

Speaker 3

I want to just get

Speaker 4

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

Speaker 1

You can. If you look at our IP, you'll see the cost of interest bearing deposits and repos in June was 2.21%. 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 3.44. So that will give you sort of where we finished at the end of the quarter.

Speaker 4

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? What drove that?

Speaker 4

Just trying to get a sense for that if there's anything unusual there going forward?

Speaker 1

Nothing really unusual, Matthew. I mean, when we look at our what I would call the core loan yield over the 6 months of the first half of this year, it was up about 10 basis points. There's other things that go into that reported loan yield, prepayment penalties, discount accretion, those things can loan fees, those can be a little volatile quarter to quarter, but nothing significant. So but the underlying core trends have generally been 1 to 2 basis point increases per month.

Speaker 4

Okay. And then just on capital updated thoughts on M and 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?

Speaker 2

Yes. Well, first of all, 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 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 and the marks that we have to take. And so we're going to be disciplined in how we look at that.

Speaker 2

So there are conversations that are going on. There are opportunities for us and we continue to evaluate those and talk about those both externally and internally. 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 we'd

Speaker 1

love to

Speaker 2

do an M and A deal. There are also other things that we could consider going forward from a capital management perspective. 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 that 8.5% to 9% range is a good spot for us and we ended up there in the Q3. So, there are definitely things that we're talking about, but at this point nothing to announce.

Speaker 4

Okay, great. Thank you.

Operator

Thank you. One moment for our next question. And that will come from the line of Andrew Terrell with Stephens. Your line is open.

Speaker 5

Hey, good morning.

Speaker 2

Morning, Andrew.

Speaker 5

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 leasebacks in a minute, but are you interested in kind of buyback in the back half of the year? Does the kind of move in valuation potentially preclude you from doing that? Would the preference be incremental securities repositioning? Just maybe a little more thought on capital discussion there?

Speaker 1

Andrew, I think over the next 2, 3, 4 quarters, our focus is to really reduce the level of borrowings we have on the balance sheet as well as reducing the securities portfolio. And that combined with the fact that we continue to accrete capital every quarter, I think it's going to show some pretty strong capital ratios. They're already pretty strong, but and we'll be definitely looking at the opportunities from M and A compared to whether we want to be more aggressive in terms of buybacks. So we'll see what the M and A 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 put a 10b5-1 back in place.

Speaker 5

Yes, got it. Okay. And then on the point of the sale leasebacks, I think you've mentioned $3,000,000 or so in the Q3. Can you just maybe frame for us like the timeline in which the sale leaseback transactions can occur? Is that something that is primarily completed in the back half of the year?

Speaker 5

Is there a longer kind of tail to you guys looking to complete those transactions?

Speaker 1

So we are doing transactions sort of 1 at a time. These are not a lot of things in the market you've seen is 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 won't sell them. So there is certainly some unknowns.

Speaker 1

One sold already. I think there's possibilities 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.

Speaker 5

Okay, got it. And then if I could sneak one more in just a couple of the CRE like data aggregators put out some data that industrial commercial real estate in the Inland Empire specifically had seen kind of a 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?

Speaker 2

So a couple of things. I think the latest data I saw, when you go from a 1% or 2% vacancy rate to a 6% or 7% vacancy rate, That is a large percentage increase, but it's still very concentrated at the larger square footage sized buildings. And it's impacted obviously greater when you have a 2,000,000 or 3,000,000 or 4,000,000 square foot building that goes vacant. That's not the type of deal that we're lending on. So we haven't seen really any changes in the industrial market with our customers.

Speaker 2

We've been very disciplined in how we've underwritten it. Half of it is about half of it is owner occupied. We did put a lot more detail in our investor presentation this time around related to all CRE asset classes, whereas historic 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.

Speaker 2

We're not really experiencing it. The largest classified loan we have in our industrial portfolio is a 15 year fully advertising loan with less than a 30% loan to value, all payments being made. 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 in the investor industrial portfolio at any significant level.

Speaker 5

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

Speaker 1

Yes, you're welcome.

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.

Speaker 6

Hi, good morning. Thanks for the question.

Speaker 2

Good morning, Kelly.

Speaker 6

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. Wondering, if there's a particular size of the securities portfolio we should be managing to or how you're thinking about what an optimized size of a securities portfolio looks for you at this stage as we are thinking about kind of shifting around the balance sheet? Thanks.

Speaker 1

We don't have, I'd say, a near term target per se. I think more importantly, our focus is more paying down the debt more than anything. And so obviously other aspects of the balance sheet come into play. I think 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 wholesale funds on the other side of the balance sheet. So that is the long term strategy, of course.

Speaker 1

But near term, I think the investment portfolio, we want to accelerate it maybe with some of these targeted sale leasebacks. But in general, it's not we're not targeting a number per se, Kelly.

Speaker 6

Okay. That's helpful. And then as a follow-up with the broker CDs you put on, wondering how you're weighing that versus other wholesale costs and if you're looking to potentially add to that wholesale CD position or if the security sales and the cash flows off that support what you need at this point?

Speaker 1

The wholesale side is a combination of a couple of things, Kelly. 1, depending on how the rest of the balance sheet plays out, do we need more funding? That will depend if that's the case, we will look to in some ways what's the least expensive, whether it be brokered, whether it be borrowing. 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 to try to manage.

Speaker 1

And we are a little bit asset sensitive right now, particularly because of those pay fixed swaps we put on. And that is one way to mitigate it, among others, is to put on some fixed debt down.

Speaker 6

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 D. A. Davidson.

Operator

Your line is open.

Speaker 3

Good morning, guys. Ahmad Hassan on for Gary Tenner. I would like to touch on the loan pipeline. I know you mentioned the C and I line utilization. And just how should we be thinking about the back half of the year in terms of loan pipelines and loan growth and all?

Speaker 2

Yes. So look, I mean the loan pipelines are definitely slower. We are seeing great opportunities. When we do a C and I loan, we funded a large amount of commitments this year. There just hasn't been a large amount of borrowings on those commitments.

Speaker 2

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. That's been a struggle. The 1st 6 months is evidenced by some of our prepared comments. But I do believe that we can grow loans.

Speaker 2

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 because there's either other lenders aren't doing it, because there's either other lenders aren't doing it or other lenders are doing things a little more aggressively than we would do. So I do feel confident sort of in our low single digit growth sort of talk that we had at the beginning of the year, at the end of the Q1. That is still our goal.

Speaker 2

We don't guide specifically, but pipelines are a little bit lower, but they're solid and we just need to keep executing there. And the good thing about it is on the C and I loans that we're doing, we're getting full relationships enabled 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.

Speaker 3

Thanks for that. I'll start back.

Operator

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

Speaker 2

Good morning, everybody. Good morning.

Speaker 7

Let's start with deposits. Obviously, it's a seasonally challenging quarter. The deposit migration has been a headwind. But the NIB balances is pretty encouraging. I'm just curious you can help us think through maybe some of the trends in the quarter on the core deposit front and what you saw especially late into the quarter into early

Speaker 2

July? Yes. So I think look, I think overall deposits have been very stable. I've been saying this for 5 or 6 quarters that our operating model does allow for non interest bearing deposits to remain high. If they can remain at 60%, I mean, that will continue to be a challenge.

Speaker 2

If rates stay higher longer, if there's some rate movement down, it might be easier. But we are bringing on very good deposit relationships, operating companies that do maintain non interest bearing deposits. So the deposit pipeline has been solid, but we still are running into the headwinds of 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 have thought most of that would have ran through the system, but that's still happening to a degree as evidenced by the money that moved to trust.

Speaker 2

So I feel good about deposits. Normally in the second quarter, we have grown deposits historically. We were relatively flat, averages were up. That we should start to see that stabilize maybe even a little 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.

Speaker 2

I mean, so we should maintain a high level of non interest bearing.

Speaker 7

Okay. That's helpful. And then maybe just kind of going back to I'm curious how you think about the size of the balance sheet. It sounds like we're preparing basically to especially with the BTFP maturity, we'll probably shrink the balance sheet. You've built up some cash in advance of that.

Speaker 7

But it sounds like probably 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 about it?

Speaker 2

Yes. 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.

Speaker 2

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. And with 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 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.

Speaker 2

So I don't know Alan, if you have anything to add to that.

Speaker 1

Yes, I mean we want to grow core loans, core deposits, but in terms of other aspects of the balance sheet, as I've talked about reducing the borrowing, the balance sheet in total could certainly shrink in the near term, and not a bad thing, certainly that will help return on assets and free up additional capital, frankly.

Speaker 2

And David, just to give you an idea, a lot of these sale leaseback transactions that have occurred with the larger private equity firms, These banks have been selling these properties at high 7s at best and low 8s at 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 if we don't sell, we don't sell those properties, but we're going to if we get a 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.

Speaker 2

Okay.

Speaker 7

That's great. And then maybe switching gears just to the truck business. I mean that's been a huge benefit just as you've been able to first clients, maintain relationships and all that. What are some of the underlying trends you're seeing on the trust side?

Speaker 2

Well, on the 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?

Speaker 1

Yes.

Speaker 2

Yes. So look, I mean, last year for the total year, we had $800,000,000 of deposits go there. The 1st 6 months, we had $170,000,000 of deposits go there. So it's definitely slowed down. But our customers still I mean, we do have smart customers and they are wanting to earn what they can earn.

Speaker 2

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. But trust, our trust group has grown to 4,500,000,000 ish in assets under administration and management, which is up about $1,000,000,000 from last year.

Speaker 2

So we'll continue to see a little bit of that, I think, but that's definitely slowed down as well. And we're still working to bring on those new relationships, which includes trust assets in many cases. So we'll continue to do that. We'll probably continue to see it, but definitely at a slower pace.

Speaker 7

Yes. Thanks everybody.

Speaker 1

You're welcome. Thanks, David.

Operator

Thank you. And we do have a follow-up question.

Speaker 1

Sure.

Operator

That will come from the line of Kelly Motta with KBW. Your line is open.

Speaker 6

Hey, thank you so much for letting me jump back on. I just was hoping to clarify your point about your outlook for loan growth. I think you reiterated low singleormidsingledigits. I was wondering if that is for the balance of the year or how you're thinking about net growth in the second half?

Speaker 2

Yes. I definitely didn't say mid single digits, just to clarify. I do think I just think for the balance of the year, I think we can grow loans in that low single digit range from this point. And some of that I mean, we've done a couple of larger C and I loans that have about a 5% or 6% utilization on them. I mean, at some point, these people are going to start to utilize this money.

Speaker 2

So I think combination of what we've already put on the books, it hasn't really been advanced. Plus if there's any improvement in the pipelines and just our normal sort of and I'm excluding the seasonality in the Q4 with dairy. So excluding that, I do think that we can grow in the low single digits from this point forward.

Speaker 6

Great. Thanks for the clarification.

Speaker 1

You're welcome.

Operator

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.

Speaker 2

Thank you, Sherry. 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.

Speaker 2

Thank you for joining us this quarter. We appreciate your interest and look forward to speaking with you in October for our Q3 2024 earnings call. Please let Alan or I know if you have any additional questions. Have a great day.

Operator

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

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