CVB Financial Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
July 24, 2025

Key Takeaways

  • Positive Sentiment: 193rd consecutive quarter of profitability and 143rd quarter of dividends, reporting net earnings of $50.6 million ($0.36/share).
  • Positive Sentiment: Net interest income rose by $1.2 million quarter-over-quarter, with net interest margin holding at 3.31% and a 26 bps year-over-year improvement.
  • Negative Sentiment: Total loans declined by $5 million QoQ and $178 million YoY, as reduced line utilization in C&I and dairy/livestock offset a 58% increase in loan originations.
  • Positive Sentiment: Total deposits reached $12.4 billion, up $123 million QoQ and $330 million YoY, with non-interest bearing deposits growing 2.2% YoY and cost of deposits at 87 bps.
  • Positive Sentiment: Asset quality remained strong with classified loans at 0.9% of total loans and allowance for credit losses at 0.93% of gross loans.
AI Generated. May Contain Errors.
Earnings Conference Call
CVB Financial Q2 2025
00:00 / 00:00

There are 8 speakers on the call.

Speaker 5

Good morning, ladies and gentlemen, and welcome to the second quarter of 2025 CVB Financial Corp. and its subsidiary Citizens Business Bank Earnings Conference Call. My name is Cherie and I am 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, E. Allen Nicholson, Executive Vice President and Chief Financial Officer. You may proceed.

Speaker 3

Thank you, Sri, and good morning everyone. Thank you for joining us today to review our financial results for the second quarter of 2025. Joining me this morning is David A. 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.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, 2024, and in particular the information set forth in Item 1A, Risk Factors therein.

Speaker 3

For a more complete version of the Company's safe harbor disclosure, please see the Company's earnings release issued in connection with the call. I'll now turn the call over to David A. Brager.

Operator

Thank you, Allen.

Speaker 3

Good morning, everyone. For the second quarter of 2025, we.

Operator

Reported net earnings of $50.6 million, or $0.36 per share, representing our 193rd consecutive quarter of profitability, which equates to more.

Speaker 3

than 48 years of consecutive quarters of profitability.

Operator

We previously declared a $0.20 per share dividend for the second quarter of 2025, representing our 143rd consecutive quarter of paying a cash dividend to our shareholders.

Speaker 3

We produced a return on average tangible.

Operator

tier 1 capital ratio of 14.08% and a return.

Speaker 3

On average assets of 1.34% for the second quarter of 2025, our.

Operator

Net earnings of $50.6 million, or $0.36.

Speaker 3

Per share, compares with $51.1 million.

Operator

The first quarter of 2025, or $0.36.

Speaker 3

Per share, and $50 million, or $0.36.

Operator

Per share for the prior year quarter.

Speaker 3

The $540,000 decline in net income in the first quarter.

Operator

In the second quarter compared to the prior quarter, was a result of the first quarter, including both a $2.2 million gain from the sale of OREO properties.

Speaker 3

A recapture of allowance of credit.

Operator

Losses of $2 million.

Speaker 3

Pretax pre-provision income in the second quarter of 2025 was $68.8 million.

Operator

Was $1.3 million higher than the first.

Speaker 3

Quarter of 2025 and remained flat compared.

Operator

To the second quarter of 2024, net interest income for the second quarter of 2025 was $1.2 million higher than the prior quarter and $760,000 higher than the second quarter of 2024.

Speaker 3

Our earning assets remained stable between the.

Operator

First and second quarters of 2025, and our net interest margin remained at 3.31%. The increase in net interest income was primarily due to an additional day of interest income in the second quarter compared to the first quarter of the year, as a result of our deleveraging strategy.

Speaker 3

Executed during the second half of 2024.

Operator

Our net interest margin increased by 26 basis points from 3.05% in the second quarter of 2024, while earning assets declined by $1.1 billion from the prior year.

Speaker 3

Quarter noninterest income was $14.7 million.

Operator

The second quarter, which was $1.5 million lower than the first quarter.

Speaker 3

We realized a $2.2 million net gain.

Operator

From the sale of $19.3 million of OREO assets in the first quarter of this year. Excluding this gain, second quarter noninterest.

Speaker 3

Income increased by $700,000 from the prior quarter, driven by higher trust and international fee income. Noninterest expense was $57 million.

Operator

The second quarter, which was $1.6 million lower than the first quarter.

Speaker 3

Salary and benefits were lower by $1.5 million.

Operator

Million, and there was a $500,000 provision for off-balance sheet reserves in the first quarter.

Speaker 3

This improved the efficiency ratio to 45.6% in the second quarter compared to 46.9%.

Operator

In the first quarter.

Speaker 3

At June 30, 2025, our total deposits and customer repurchase agreements totaled $12.4 billion.

Operator

A $123 million increase from March 31.

Speaker 3

2025 and $330 million higher than June 30, 2024.

Operator

The year-over-year net growth was net of a $200 million decrease in brokered CDs.

Speaker 3

Our noninterest-bearing deposits grew by.

Operator

$63 million compared to the first quarter and were $157 million or 2.2% higher than the end of the second quarter of 2024. On average, noninterest-bearing deposits were.

Speaker 3

60.5% of total deposits for the second quarter of 2025, compared to 59.9% for.

Operator

The first quarter of 2025.

Speaker 3

Second quarter average deposits and customer repos.

Operator

Were basically flat from both the prior quarter and the same quarter of last year.

Speaker 3

However, core deposits excluding brokered CDs grew.

Operator

On average by $173 million over the prior year. Our cost of deposits and repos remained at 87 basis points for the second quarter, which is the same as the first quarter of 2025 and the year ago quarter. Our current deposit pipelines are strong and focused on operating companies.

Speaker 3

In addition, the deposit pipeline in our.

Operator

Specialty banking group, which is focused on.

Speaker 3

Title escrow, property management, and fiduciaries continues to be strong.

Operator

Now let's discuss loans.

Speaker 3

Total loans at June 30, 2025, were.

Operator

$8.36 billion, a $5 million decline from the end of the first quarter of 2023.

Speaker 3

2025 and a $178 million or 2.1%.

Operator

Decline from December 31, 2024.

Speaker 3

Commercial real estate and single family loans grew by $27 million and $19 million.

Operator

Respectively from the end of the first quarter. The quarter-over-quarter decrease in total loans was largely due to reductions in line utilization for C&I and dairy and livestock lines of credit. A quarter-over-quarter decrease of $30 million in C&I reflects a decrease in line utilization from 29% at March 31, 2025 to 26% at June 30.

Speaker 3

In addition, dairy and livestock loans declined by.

Operator

$18 million compared to the first quarter.

Speaker 3

Driven by a reduction in line utilization.

Operator

From 64% at the end of the first quarter to 62% at the end of the second quarter. The $178 million decrease in loans from the end of 2024 was driven by.

Speaker 3

Dairy and livestock loans declining by $186 million.

Operator

Million as these lines experienced their seasonally high utilization at year end. C&I loans declined over the period by $13 million as line utilization decreased from 30% at the end of 2024 to 26% at June 30, commercial real estate.

Speaker 3

Loans and single family loans increased.

Operator

$10 million and $19 million, respectively, from the end of 2024.

Speaker 3

Although we have seen a relative increase in loan originations so far in 2025, we also experienced a higher level of unscheduled loan payoffs. In addition to the reduced line utilization, we've experienced an uptick in recent loan.

Operator

Originations and our loan pipelines remain strong, although rate competition for the quality of loans we focus on has been intense.

Speaker 3

Loan originations in the second quarter of 2025 were approximately 58% higher than the first quarter of 2025 and 79% higher.

Operator

Than the second quarter of 2024, the increase in loan originations was across.

Speaker 3

Both C&I and commercial real estate loans.

Operator

With a notable increase in investor commercial real estate.

Speaker 3

We averaged yields of 6.6% on new.

Operator

Originations during the second quarter.

Speaker 3

Although loan yields were 5.22% in both the second and first quarters of 2025.

Operator

The yield on our loan portfolio would have expanded by 5 basis points if.

Speaker 3

Not for lower line utilization during the.

Operator

Second quarter of higher yielding ABL.

Speaker 3

Dairy and livestock loans as well as lower prepayment penalty income in the second.

Operator

Quarter of this year.

Speaker 3

We experienced $249,000 of net charge-offs for the second quarter of 2025.

Operator

To net recoveries in the first quarter of $180,000. Total nonperforming and delinquent loans increased by $3.2 million to $30 million at June 30, 2025. This increase was primarily due to an SBA loan that was greater than 30 days past due on June 30.

Speaker 3

Nonperforming and delinquent loans were $17.6 million lower than the $47.6 million.

Operator

At the end of 2024.

Speaker 3

Classified loans were $73.42 million at June 30, 2025, compared to $94.2 million at.

Operator

March 31, 2025, and $89.5 million at December 31, 2024. Classified loans as a percentage of total loans was 0.9% at June 30, 2025. The decrease from the first quarter of 2025 was primarily due to a $17 million decline in classified owner occupied commercial real estate loans resulting from these loans being upgraded.

Speaker 3

I will now turn the call over.

Operator

To Allen to further discuss additional aspects of our balance sheet and our net interest income. Allen, thanks Dave.

Speaker 3

Net interest income was $111.6 million in the second quarter of 2025. This compares to $110.4 million in the first quarter of 2025 and $110.8 million in the second quarter of 2024. Interest income was $144.2 million in the second quarter of 2025 compared to $143 million in the first quarter and $159.1 million in the second quarter of last year. Average earning assets increased by a modest $1.7 million in the second quarter in comparison to the first quarter, while the earning asset yield remained constant at 4.28%. Compared to the second quarter of 2024, our earning assets decreased by $1.1 billion and the earning asset yield declined by 9 basis points. Interest expense was $32.6 million in both the second and first quarters. Our cost of funds decreased from 1.04% for the first quarter of 2025 to 1.03% in the second quarter of 2025.

Speaker 3

The average balances of deposits and repos decreased slightly by $6 million over the prior quarter while increasing by $15 million over 2Q20. Interest expense decreased from 2Q20 by $15.6 million, primarily due to a $1.34 billion decline in average borrowings. With this reduction in borrowings, our cost of funds decreased by 35 basis points from the second quarter of last year. Our allowance for credit loss was $78 million at June 30, 2025, or 0.93% of gross loans. In comparison, our allowance for credit losses as of March 31, 2025 was $78.3 million, or 0.94% of gross loans. The decrease was due to net charge-offs of $249,000. Comparatively, we had a $2 million recapture provision for credit losses during the first.

Operator

Quarter of the year.

Speaker 3

Our economic forecast continues to be a blend of multiple forecasts produced by Moody’s. We continue to have the largest individual scenario weighting on Moody’s baseline forecast with both upside and downside risks weighted among multiple forecasts. The resulting economic forecast of June 30, 2025, was marginally different from our forecast at the end of the first quarter of 2025. The updated economic forecast reflects lower GDP growth, higher unemployment, and lower commercial real estate prices. Real GDP is forecasted to stay below 1% until the second half of 2026 and not reach 2% until the end of 2027. The unemployment rate is forecasted to reach 5% by the beginning of 2026 and remain above 5% until 2028. Commercial real estate prices are forecasted to continue their decline through the second half of 2026 before experiencing growth through the year 2028.

Speaker 3

Switching to our investment portfolio available for sale or AFS, investment securities were approximately $2.49 billion at June 30, 2025. The unrealized loss on AFS securities decreased by $24.7 million from $388 million as of March 31, 2025, to $364 million on June 30, 2025. Hedging the market risk of our AFS portfolio, we have $700 million of fair value hedges. The net after-tax impact of changes in both the fair value of our AFS securities and our derivatives resulted in a $9.7 million increase in other comprehensive income for the second quarter.

Speaker 3

In May of this year, we terminated pay fix swaps with a total nominal value of $700 million that was issued in June of 2023 and were scheduled to mature in June of 2028 and replaced them for the same $700 million nominal value with new pay fixed swaps that mature in May of 2029, 2030, and 2031. The swap replacement resulted in a 3 basis point lower weighted average fixed rate. The positive carry on receiving daily SOFR compared to the fixed rate paid on the swaps generated $1.3 million of interest income in the second quarter of 2025. Our held to maturity investments totaled $2.33 billion at June 30, 2025, which is a $31.9 million lower balance than the.

Operator

End of the first quarter.

Speaker 3

Our level of wholesale funding at June 30, 2025, did not change from the prior period.

Operator

End of the first quarter.

Speaker 3

Our wholesale funds consisted of $300 million of brokered CDs that had been swapped as cash flow hedges and $500 million of Federal Home Loan Bank advances. As of June 30, 2025, the $500 million of Federal Home Loan Bank advances had a weighted average rate of 4.55% and the $300 million of brokered CDs had an average rate of 4.4%. Now I'm going to turn to the capital position. At June 30, 2025, our shareholders' equity was $2.24 billion, an $11 million increase from the end of March 2025, including a $9 million increase in other comprehensive income. Retained earnings was $23 million for the second quarter. Our Board of Directors authorized a new $10 million share repurchase plan in November of 2024. In conjunction with the share repurchase, we also approved a 10b5-1 plan.

Speaker 3

There were 1.28 million shares repurchased during the second quarter of 2025 at an average purchase price of $17.30. Year to date we repurchased 2.06 million shares at an average share price of $18.15. The company's tangible common equity ratio remained at 10% at June 30, 2025, the same as March 31, 2025. At June 30, 2025, our common equity tier 1 capital ratio was 16.5% and our total risk-based capital ratio was 17.3%. I'll now turn the call back to Dave for some further discussion of our second quarter earnings.

Speaker 3

Thanks, Allen. Moving on to noninterest income, our non.

Operator

Interest income was $14.7 million for the.

Speaker 3

Second quarter of 2025 compared to $16.2 million.

Operator

Million for the first quarter and $14.4 million.

Speaker 3

Million in the second quarter of 2024. The first quarter of 2025 included the $2.2 million gain on sale of OREO BOLI. Income increased by $397,000 from the first quarter of 2025 and increased by $285,000.

Operator

Compared to the second quarter of 2024.

Speaker 3

Our trust and wealth management fees increased by $304,000, or 8.9%, and $287,000, or.

Operator

8.4% from the first quarter of 2024 and the second quarter of 2024 respectively.

Speaker 3

International fees also increased from the first.

Operator

Quarter by more than $150,000.

Speaker 3

Now expenses, noninterest expense for the second quarter of 2025 was $57.6 million, compared to $59.1 million in the first quarter of 2025 and $56.5 million in.

Operator

The second quarter of 2024. The first quarter of 2025 included a $500,000 provision for off-balance sheet reserves. There was no provision or recapture of off-balance sheet reserves in the second quarter of 2025. The second quarter of 2024 also included.

Speaker 3

Approximately $700,000 of lower expense related to.

Operator

An accrual adjustment for the estimated cost of the FDIC special assessment.

Speaker 3

Staff related expenses decreased by $1.5 million.

Operator

4.05% over the first quarter of.

Speaker 3

2025, primarily due to higher payroll taxes.

Operator

That occur at the beginning of each calendar year.

Speaker 3

Staff expense decreased by $430,000, or 1.2%.

Operator

Compared to the second quarter of 2024.

Speaker 3

Occupancy and equipment expenses grew by $108,000.

Operator

When compared with the first quarter.

Speaker 3

Of 2025 and by $335,000 compared to.

Operator

The second quarter of 2024. The increase in occupancy expense includes the.

Speaker 3

Impact of the higher rent expense.

Operator

The four offices involved in the sale.

Speaker 3

Leaseback transactions in the second half of 2024. We continue to invest in technology, infrastructure.

Operator

Automation as reflected in our growth.

Speaker 3

In software expense of 4.5% or $190,000.

Operator

Higher than the first quarter.

Speaker 3

2025 and 12%, or $460,000 higher than.

Operator

The second quarter of 2024.

Speaker 3

Noninterest expense totaled 1.52% as a percentage of average assets in the second.

Operator

Quarter of 2025, compared to 1.58% for.

Speaker 3

The first quarter of 2025 and 1.4%.

Operator

For the second quarter of 2024.

Speaker 3

Our efficiency ratio of 45.6% was lower in the second quarter of 2025 compared.

Operator

To 46.7% for the first quarter.

Speaker 3

2025, slightly higher than the 45.1%.

Operator

In the second quarter of 2024, this concludes today's presentation.

Speaker 3

Now Allen and I will be happy.

Operator

To take any questions.

Speaker 5

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. Please stand by while we compile the Q&A roster. Our first question will come from the line of Matthew Clark from Piper Sandler. Your line is open.

Speaker 5

Good morning.

Speaker 3

Good morning, Matthew.

Speaker 3

Sounds like the prepays and line utilization weighed on your loan yields this quarter. Can you quantify the prepay income this quarter versus last? You know how that compares to kind of a typical quarter, and then the pickup in activity you're seeing in July, whether or not you've seen some increase in line utilization to date.

Speaker 3

I'll take the first part of it and then Alan can. I'll take your second question and Alan.

Operator

will take part of the first question there.

Speaker 3

We're not seeing any changes in.

Operator

Line utilization at this point.

Speaker 3

In some ways it's a good thing. It means our customers are doing well, particularly in dairy and livestock. On the C&I side, people have cash.

Operator

Most of those lines are priced at.

Speaker 3

At prime or SOFR plus the spread, it's just a better financial decision for them to utilize their cash or pay down the line if they have excess cash. We're not seeing an increase in the line utilization. I do expect that in the fourth quarter, specifically on the dairy and livestock loans, we'll see how everything goes relative to the C&I side of that. I think, Allen, you want to.

Operator

Take the prepayment penalty vis-à-vis the payoffs?

Speaker 3

Yeah, I mean, Matthew, I guess maybe the best way to answer the beginning of your question is that we did see really throughout the year, but particularly in the second quarter, we have seen elevated payoffs that's impacted more the volume than I would say the yield. If the yield impact is really our higher yielding loans, asset based loans, dairy and livestock, the utilization has.

Operator

Dropped quite a bit.

Speaker 3

That's been very impactful on the overall mix of the loans from a yield perspective. Without that and without prepayment penalties were down as well. I think Dave indicated that we would have been up about 5 basis points on loan yields.

Operator

Everything else equal.

Speaker 3

The repricing of the portfolio is just from the natural payoff.

Operator

Resets of adjustables is really a couple.

Speaker 3

Six basis points a month is what I would expect. The mix of the assets and some of the timing of some of the fee income, as I said for prepayments, sort of offset that and did not see that come through in the financials this quarter.

Speaker 3

Okay. On the repurchase agreements that were up, I think on an ended period basis, can you just remind us of the cost of those and the outlook there?

Operator

Whether or not there was anything unusual?

Speaker 3

Are you referring to our customer repos? Yes, we view those as deposits.

Speaker 3

I would first say these are basically.

Speaker 3

Customers have a peg balance on their checking account, and anything over that gets swept into the repos. I think on average it was a couple $400 million for the quarter, and the cost of that was probably around $170 million.

Speaker 3

Okay, thanks again.

Operator

You're welcome.

Speaker 5

Thank you. One moment for our next question. That will come from the line of Gary Tenner with DA Davidson. Your line is open.

Speaker 3

Thanks.

Speaker 3

Good morning. I wanted to go back to the C&I comments you made on the non dairy and livestock loans. You've always talked about how your customers are the best business owners and operators, and you kind of reiterated that in your comments a few minutes ago.

Operator

I'm just curious.

Operator

It seems like the headwind there maybe remains a little bit higher than what we've seen through this earnings season. The commentary has generally been a bit more positive. Do you think that some of kind of the lag perhaps is more customer specific, or do you think it is a little more regional in terms of California business opportunities?

Speaker 3

Yeah, I don't think it's a regional impact. I think we have obviously high credit quality customers that have low balance sheet leverage and have a lot of excess deposits. I think that's probably been the headwind for us relative to the utilization on the lines. It doesn't mean that they won't take advantage of opportunities or there aren't opportunities in California. I do think that is just a little bit of a, I'll say temporary. I mean we've never had a high utilization rate, but that point to $0.5.

Operator

million decrease in loans, if we would have just kept the same utilization rate that we had in the first quarter, we would have grown loans from point to point.

Speaker 3

I think that will turn around a little bit. Gary, I don't think it's indicative of a lack of confidence or a lack of anything. I mean, our customers are feeling relatively positive about everything. I don't think it's indicative of the entire portfolio. I think it is more customer specific, and just the fact that they're sitting on a lot of cash and the cost of that from their perspective is better to utilize their cash as evidenced by our 87 basis points cost of deposits. I mean, all things being equal, it's cheaper for them to give up the 87 basis points than pay 7.5% on borrowings on a line of prime plus something. I just think that's something that is hopefully something temporary. Dairy, I know you said excluding dairy, but dairy is an important part of this.

Speaker 3

They're making a lot of money right now and I think we may even.

Operator

Start to see on the dairy and livestock in the third quarter.

Speaker 3

See some of those deferral loans.

Operator

They would normally do in the fourth quarter. We should start to see some of that in the third quarter.

Speaker 3

Because they are making so much money.

Operator

For tax planning, they need to expense.

Speaker 3

Things and they're going to borrow to do that. I think the outlook is positive from that perspective and I do think.

Operator

That our customers will utilize their lines more.

Speaker 3

I think this was just, I'll say a blip in some ways in that sitting on a lot of cash, still taking advantage of things. I mean we had, as I mentioned, we had the highest month in the history or an increase in our international group. I mean that's basically foreign transactions, that's importing, exporting, so people are doing things.

Operator

It's just that they're utilizing their cash first.

Operator

Thank you for that color. Certainly a high-class problem for you.

Speaker 3

Customers at this point.

Speaker 3

Just on the deposit side, real quickly, I think your interest-bearing deposit beta through the first 100 basis points sits right around 30%. Without knowing when the next or series of additional rate cuts will come, do you think you could continue that kind of pace? Given how low your funding costs already are, do you think the next leg is a little bit lighter from a beta perspective?

Speaker 3

I actually think it's going to be a little bit better from a beta perspective. Just to refresh everybody's memory, in.

Operator

The first 50 basis point rate cut.

Speaker 3

We basically reduced our special price money.

Operator

Market accounts by only 25 bps.

Speaker 3

We only did that on deposit accounts over 2.5%. It didn't capture anything below 2.5%. On the second and third cuts of 25 basis points, we did 100% of it. We went down to 2% on the second cut and we went down to.

Operator

1.5% on the third cut.

Speaker 3

If we have another cut, we will capture, for the most part, everything over.

Operator

1% with 100% decrease.

Speaker 3

There may be some people that come back and push back a little bit on that. All in all, I think we'll do better than 30% beta on that.

Operator

Appreciate it. You're welcome.

Speaker 5

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

Speaker 5

Hey, good morning.

Speaker 3

Good morning.

Speaker 3

Maybe sticking with high class problems to have. You guys had a pretty big build in cash at end of period. Just wanted to get your thoughts on any interest in putting cash to work in the bond book, barring a pickup in loan growth or any kind of FHLB reduction or deposit optimization that could take place in the back half of the year.

Speaker 3

Andrew, I would think the most likely scenario would be building the investment book at this point. Just the way we're managing interest rate risk, I don't see us reducing the wholesale funding. We've built up some cash.

Operator

We're.

Speaker 3

will be judicious about utilizing it because there is a lot of seasonality to our assets and our liabilities. You know, it's probably more likely than anything we do start to grow the investment book.

Speaker 3

Got it. Okay, thanks. Maybe for Dave, I think you mentioned in some of the prepared comments just the competitive environment today was, I think you said, fierce. I was hoping you could just talk a little bit more about what you're seeing from a competitive standpoint today. Any pockets where you're seeing more or less competition, and how's that impacting new loan origination yields? I'd love to tie that in with do you feel like the competitive environment could at least partially offset that static kind of fixed repricing benefit you guys are anticipating?

Speaker 3

Yeah, I think I said intense.

Operator

I should have used fierce.

Speaker 3

That sounds better. I'll have my speech writers work.

Operator

On that for next quarter.

Speaker 3

No, it has been intense. We're seeing spreads anywhere from 130 to 170 over treasuries on fixed rate stuff. You know, it's in some ways kind of ridiculous that people are willing to do that, and maybe they believe rates are coming down, longer term rates are coming down. I'm not sure I share that same feeling. We'll see how that plays out. You know, we try and stick to at least 2% to 2.5% over indexes for the right relationship, for the right customer. Obviously, we have to be competitive. When we're looking at new relationships to the bank, the focus is really on what's the overall relationship: loan deposits, fee income opportunities, all of those things. We just have to price it based on that. We're absolutely seeing things priced at 130 to 170 over treasuries. In the mid 5s, I do think our origination yields will.

Operator

Come down a little bit in the.

Speaker 3

Third quarter, and we'll see how that.

Operator

Plays out as we get to the fourth quarter.

Speaker 3

We're probably somewhere closer to 6.25% to 6.5% origination rate so far this quarter. We'll see how that all plays out. It's across the board. It's big banks, it's a lot of people, and we're going to be disciplined.

Operator

In our underwriting, first and foremost, we're going to choose the best.

Speaker 3

Customers and they're hopefully going to choose us as well. We are also seeing competition on the underwriting side, on the structure side. We just were competing for a deal that was a restaurant that wanted money, basically unsecured money to remodel their locations. They have multiple locations, and a bank came in and did that.

Operator

Totally unsecured, unguaranteed.

Speaker 3

It is a restaurant, and it's a good restaurant, but it's still a restaurant.

Operator

Those are the kinds of things we're seeing.

Speaker 3

I think some of that is just pressure based on people saying that they can grow loans 10% or whatever.

Operator

The case may be.

Speaker 3

I'm still confident in the production that we have.

Operator

The pipelines look good for the.

Speaker 3

Next couple of years, months at least. I do believe we'll still be able to grow, notwithstanding the seasonality in the dairy, and we'll see how the rest of the year plays out. We'll compete where we need to compete for the right relationship. To Allen's point about growing the investment book, if we can get 5% plus on an investment security versus 5.5% on a loan, the math says do the investment security.

Speaker 3

Great.

Speaker 3

I really appreciate all the color there. Thanks for taking the questions.

Operator

Of course.

Speaker 5

Thank you. One moment for our next question. That will come from the line of David Feaster with Raymond James. Your line is open.

Speaker 5

Hi, good morning, everybody.

Speaker 3

Good morning.

Speaker 3

Maybe just kind of staying on the competitive side. First off, where are you seeing the most competition from? Is it the larger banks, is it non-banks? Just kind of curious where this competition is coming from. Given a bit more competitive pricing on your side, do you think originations can start outpacing these elevated payoffs and pay downs in the back half of the year?

Speaker 3

I'll take the last part first. Yes, I still believe that originations can outpace the payoffs and that type of thing. I think we'll get some more normalization in our utilization, which I think will help. Obviously, we have the seasonality of dairy. To answer your question, as far as the competition, it's not coming from private credit.

Operator

Most of the private credit stuff is.

Speaker 3

Not stuff we would necessarily want to do anyway. I think that that's something that we're not seeing. I would say that the, I'll use Andrew's word, the fiercest competition is coming.

Operator

From sort of the regional banks to.

Speaker 3

some degree, the larger banks. It's not really the smaller banks that.

Operator

We're seeing the ridiculous pricing from.

Speaker 3

That's more of a structure challenge, I would say. I think the combination of all of those things, if I had to sort of characterize it, I would say it's more of the regional bank, kind of the bank that's, you know, $100 billion to $250 billion in assets. Okay, that's helpful.

Speaker 3

We've talked in the past about the success that your specialty banking groups had. I'm curious how that group's contributed this quarter to some of the solid deposit trends that you're seeing and more broadly the competitive side for funding. I mean, just curious what you're seeing there, especially as industry growth seems to be improving.

Speaker 3

Yeah, look, they had a record year last year. They're not quite at record year pace this year, but they're still having a good year. Very candidly, we could be even doing better there. It's similar to the loan pricing. We're very conscientious about the cost of third party vendor payments and the related ECR rate, the earnings credit rate that.

Operator

We would have to pay.

Speaker 3

There are people out there that are paying extremely high ECR rates and then subsequently writing big checks through.

Operator

Third-party vendor payments.

Speaker 3

That is not our model. Our model is more relationship based, service based, all of those things. We've been successful. I think I've mentioned this in the past, our ECR beta was lower than our deposit beta in the up cycle and has remained that. We are seeing competition. There are banks that are willing to pay up, and I can tell you of the customers that have left in that group, I would say at least 40% to 50% of them come back to us because people are just throwing it out there to get deposits. There's a lot to that business, and we have a great team that does a great job and has competed very well without having to give away the bank.

Speaker 3

That's helpful.

Speaker 3

Maybe just last one for me, just always interested to hear your thoughts on the M&A side. I mean, we've seen some more, maybe transactions happening, stronger currencies. Curious how conversations are going and just kind of what you're seeing on the M&A front.

Speaker 3

Yeah, conversations are still happening. I agree with you that we are seeing more transactions. I think most of the transactions I'm seeing are being done at very reasonable pricing. I do believe that most of the conversations I'm having with people, there are expectations of better pricing, and in some cases pricing that makes it a little more challenging for us. I do think that I still believe that we can announce something by.

Operator

The end of the year.

Speaker 3

It will probably take us pushing a little further outside of our box than we would want to in order to make that happen. For the right organization, that's something we would consider. I just think that we've had opportunities, we've looked at stuff, there's nuances to the stuff we've looked at that would include reasons on why we didn't do something. At the end of the day, we want to make sure that we keep Citizens Business Bank, Citizens Business Bank and do a good job at integrating.

Operator

And.

Speaker 3

There are nuances. David, most of those deals have been outside of California. I mean, sans the PPBI deal, there really hasn't been anything in California, at least California.

Operator

Centric.

Operator

Yeah, that's a good point.

Operator

All right, thanks everybody for the call.

Speaker 3

Appreciate it.

Speaker 5

Thank you. As a reminder, if you would like to ask a question, please press one moment for our next question. That will come from the line of Kelly Motta with KBW. Your line is open.

Speaker 5

Hey, good morning. Thanks for the question. Maybe piggybacking on that last point, the economic environment in California has had some headwinds. You are a California-based bank and bank the best businesses in your footprint. Wondering, just given the macro challenges, would you consider going out of state or have you started to have those discussions more now relative to maybe a couple years ago? Thanks.

Speaker 3

You're welcome, Kelly. It's a great question. In our investor presentation, I don't know if you guys noticed.

Operator

This or not.

Speaker 3

We did sort of modify our acquisition strategy, which is on page 10. You will notice that it now says in market and new geographic markets, and we removed the word California. I think for the most part we would still be looking for a California-centric bank. I would say in the past we've been more hesitant to look at banks that have locations outside of California. I just think from a strategic perspective, we're sort of opening the window a little bit more to look at other things as well. Obviously, there's nothing imminent or nothing that, you know, it's just more of a strategic decision to consider expanding beyond our borders currently. To your point about California economic headwinds, I think there is some truth to that.

Speaker 3

I also think there's still so much opportunity here, and the environment we're in with the diversity of industry and the diversity of things here still allows us to take advantage of that from a market share perspective.

Operator

Looking at de novo teams as well.

Speaker 3

It is all on the table.

Operator

I would answer your question.

Operator

Thanks for the color and pointing that out. I really appreciate it.

Speaker 5

Maybe.

Speaker 5

Last question from me. Your expenses are really well controlled, and it seems like the growth environment, there's been a couple things that have been working in the wrong direction. Even though your clients remain really healthy and you've been able to control expenses very well. In light of that, wondering, given the step down this quarter, if there's any nuances around that that we should be mindful of when thinking about the run rate ahead and any flex there. Thank you.

Speaker 5

Sure.

Operator

Kelly.

Speaker 3

I would think about run.

Operator

Rate a couple ways.

Speaker 3

Dave mentioned Q1 to Q2 is always a little noisy because payroll taxes are always higher in the first quarter as you get into the second half of the year. We do mid year salary increases for our associates in July, and so staff expense should grow a little bit from that perspective. We have done a really good job of, I think, utilizing technology to automate things, and it's allowed us to manage expenses on the staff side pretty well. We'll continue to see, I would say, probably double digit 10% growth in our technology side. That would be the one area that.

Operator

Should continue to grow.

Speaker 3

Overall expense growth should still be.

Operator

Low single digits as it typically is.

Speaker 3

For us and will continue to be. Obviously, we monitor that very, very closely.

Speaker 3

Kelly, I'm just going to add one little piece to that.

Operator

think it's an important piece.

Speaker 3

There are a lot of moving parts in some of these numbers. Even if you look at occupancy expense, when we did the sale leaseback transactions, the rental expense, the actual occupancy expense of the properties, were increasing by $2.2 to $2.4 million. If you look at the numbers, they've only, I think they went up $335,000 in the second quarter. We are consistently looking at our locations, how much space we're in. We just relocated one of our offices. We were in 7,500 square feet.

Operator

We moved to 2,500 square feet.

Speaker 3

Every lease renewal is an opportunity for us to look at that. With the perceived softness in office and a good tenant, we've been able to negotiate reductions in lease rates on the remaining properties. We're working hard to maintain that. I think Allen would normally say it's low single digit expense growth per year, and I think that's something that we can continue to execute on. We have had positive operating leverage the last two quarters and we're working.

Operator

Hard to do that.

Speaker 3

There are two parts to that, obviously growing revenue and keeping expenses in line or decreasing.

Operator

We are working on all those things.

Speaker 5

Got it.

Speaker 5

Thanks so much for the color there.

Speaker 5

I'll step back. 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.

Operator

Thank you, Cherie.

Speaker 3

Citizens Business Bank continues to perform consistently in all operating environments. Our solid financial performance is highlighted by our 193 consecutive quarters, or more than 48 years, of profitability and 143 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 again for joining us this quarter.

Operator

We appreciate the interest and look forward to speaking with you in October.

Speaker 3

For our third quarter 2025 earnings call, please let Allen or I know if you have any questions.

Operator

Have a great day.

Speaker 5

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

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