CVB Financial Q2 2026 Earnings Call Transcript

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Provided by Quartr
July 23, 2026

Key Takeaways

  • Positive Sentiment: CVB Financial reported net income of $48.3 million and continued its long track record of profitability, marking its 197th consecutive profitable quarter. The company also maintained its dividend, with the 147th consecutive quarter of paying a cash dividend.
  • Neutral Sentiment: The quarter was heavily shaped by the Heritage Bank of Commerce acquisition, which closed on April 17 and was fully integrated by quarter-end. Management said the deal added significant assets and deposits, but it also created sizable acquisition-related costs and intangibles.
  • Positive Sentiment: Core banking metrics improved meaningfully, with net interest income up $44.6 million from the prior quarter and the net interest margin expanding by 28 basis points. Management also said base loan yields rose and funding costs edged lower overall.
  • Neutral Sentiment: Loan growth was strong, driven largely by the combined platform and investor commercial real estate, while originations were 85% higher than a year ago and 40% higher sequentially. However, executives noted that pricing competition remains intense for high-quality loans.
  • Positive Sentiment: Management emphasized that the merger is creating revenue and operating synergies across lending, trust and wealth, mortgage, and international banking. The company reiterated its goal of achieving 13%+ EPS accretion in 2027 along with a 1.50% ROA and 17% ROTCE.
AI Generated. May Contain Errors.
Earnings Conference Call
CVB Financial Q2 2026
00:00 / 00:00

There are 9 speakers on the call.

Operator

Good morning, ladies and gentlemen, welcome to the second quarter of 2026 earnings conference call for CVB Financial Corp. and its subsidiary, Citizens Business Bank. My name is Cherie, and I'm your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer period. Please note this call is being recorded. I would now like to turn the presentation over to your host for today's call, Allen Nicholson, Executive Vice President and Chief Financial Officer. You may proceed.

Speaker 1

Thank you, Cherie, good morning, everyone. Thank you for joining us today to review our financial results for the second quarter of 2026. Joining me this morning is our Chief Executive Officer, Dave Brager, and our President, Clay Jones. 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 the 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, 2025, and in particular, the information set forth in Item 1A Risk Factors therein.

Speaker 1

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

Speaker 2

Thank you, Allen. Good morning, everyone. For the second quarter of 2026, we reported net earnings of $48.3 million or $0.29 per share, representing our 197th consecutive quarter of profitability, which is every quarter for over 49 years. We previously declared a $0.20 per share dividend for the second quarter of 2026, representing our 147th consecutive quarter of paying a cash dividend to our shareholders. Our net earnings of $48.3 million or $0.29 per share compares with $51 million for the first quarter of 2026 or $0.38 per share and $50.6 million or $0.37 per share for the prior year quarter. Pre-tax income in the second quarter of 2026 was $65 million compared to $68.6 million in the first quarter of 2026. Results for the second quarter of 2026 reflect the impact of the acquisition of Heritage Bank of Commerce, which closed on April 17.

Speaker 2

The core banking systems of the two banks were integrated at the end of the second quarter. During the second quarter, we incurred $31.4 million in acquisition expenses, which was $30.3 million greater than the first quarter. In addition, we incurred a provision for unfunded commitments of $4.25 million for the acquired Heritage unfunded loan commitments. Excluding these unusual items, pre-tax income would've been $100.7 million in the second quarter. I'll now turn the call over to Alan to further discuss additional aspects of the merger and our balance sheet.

Speaker 1

Thanks, Dave. Including the acquisition of Heritage Bank of Commerce, our total assets grew from $15.5 billion at March 31, 2026 to $21.2 billion at June 30th. Total consideration for the acquisition of Heritage was approximately $845 million and resulted in total intangible assets of approximately $450 million, including $334 million of goodwill. The acquisition of Heritage included $1 billion of investment securities, of which we sold $490 million at the close of merger and subsequently purchased $500 million of new securities with an average yield of approximately 4.7%. The fair value of the acquired Heritage loans was $3.48 billion, and the initial allowance for credit losses on the acquired loans was $46.6 million. To further optimize the balance sheet, we also sold the SFR mortgage pools acquired from Heritage at their fair value of $327 million. The sale of these loans settled on June 10th.

Speaker 1

With the benefit of the merger, average earning assets for the second quarter of 2026 were $17.6 billion, an increase over the first quarter of $3.7 billion. The growth in earning assets, combined with a 28-basis point expansion in our net interest margin, drove a $44.6 million increase in net interest income in the second quarter when compared to the first quarter of 2026. During the second quarter, we also adjusted our wholesale funding. In connection with our cash flow hedges, we replaced $300 million of maturing brokered CDs that were hedged with a pay fix swaps with 90-day Federal Home Loan advances. In the month of May, we also chose not to replace $300 million of maturing putable FHLB advances that had a borrowing rate of 4.73%.

Speaker 1

As a result of these changes, we no longer have brokered CDs, and our FHLB advances total $500 million, comprised of the $300 million of 90-day cash flow hedge advances and a $200 million putable advance maturing in May of 2027 at a rate of 4.27%. As a result of the merger, we acquired Heritage's $40 million of 5% fixed-rate sub-debt, which had a market value of $38.7 million at the close and a market rate of interest of 6.7%. This debt is expected to be redeemed at the earliest possible date, which is May 2027. Although our cost of deposits increased modestly from the first quarter to the second quarter of 2026, these changes in borrowings resulted in a decrease in our overall cost of funds from 0.97% for the first quarter of this year to 0.96% in the second quarter of 2026.

Speaker 1

Our allowance for credit loss increased from $80.2 million at March 31st, 2026 to $126.7 million at June 30th, with the additional ACL from the acquisition of Heritage. The ACL as a percentage of loans increased from 0.93% at March 31st, 2026 to 1.05% at June 30th, 2026. Our ACL is based on our economic forecast that is 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 at June 30th, 2026 was generally consistent with our first quarter forecast. Real GDP growth is forecasted to stay below 2% through the end of 2027. The unemployment rate is forecasted to reach 5% by the beginning of 2027 and remain above 5% through 2028.

Speaker 1

Commercial real estate prices are forecasted to continue their decline through the end of 2027 before experiencing some growth in 2028. Now turning to our capital position. At June 30th, 2026, our shareholders' equity was $3.2 billion, compared to $2.3 billion at March 31st, 2026. The acquisition of Heritage resulted in the issuance of 40.6 million shares of common stock. In June, our board authorized a new 50 million share repurchase plan. From June 18th through July 21st, we repurchased 409,000 shares for $8.9 million at an average share price of $21.72. Our tangible book value per share at June 30th, 2026 was $11.07, compared to $11.42 at March 31st, 2026. The company's tangible common equity ratio was 9.8% at June 30th, 2026, compared to 10.5% at March 31st, 2026. While our common equity Tier 1 capital ratio was 14.7% at June 30th, 2026, compared to 16.3% at March 31st.

Speaker 1

I'll now turn the call back to Dave for further discussion of our loans and deposits.

Speaker 2

Thank you, Alan. Loan originations continued at a strong pace in the second quarter as originations for the second quarter of 2026 were approximately 85% higher than the second quarter of 2025 and 40% higher than the first quarter of 2026. Our loan pipelines remain relatively strong, although rate competition for high-quality loans continues to be intense. Loan originations in the second quarter had average yields of approximately 6%, which was in line with the first quarter. Total loans were $12.1 billion at June 30th, 2026, compared to $8.64 billion at March 31st, 2026. The $3.37 billion increase includes $3.15 billion of loans acquired from the merger with Heritage, net of the SFR loan pools that were sold prior to quarter end.

Speaker 2

Our average loan yield was 5.53% for the second quarter of 2026, compared to 5.32% for the first quarter of 2026 and 5.22% for the second quarter of 2025. Excluding loan fees and discount accretion on acquired loans, our base loan yield increased from 5.14% at March 31st to 5.37% at June 30th, 2026. The overall line utilization rate at June 30th, 2026, was 41%, compared to 44% at March 31st, 2026. However, the C&I line utilization increased quarter-over-quarter from 30% at March 31st to 32% at the end of the second quarter. Dairy and livestock loan utilization decreased from 69% at March 31st, 2026 to 63% at June 30th, which is in line with the typical patterns for these types of loans. We experienced $137,000 of net charge-offs during the second quarter of 2026, and there was no provision for credit losses during the quarter.

Speaker 2

Total non-performing assets increased by $10.5 million to $16.8 million at June 30th, 2026, which represents eight basis points of total assets. Classified loans were $109.7 million at June 30th, 2026, or 0.91% of total loans. The $26.6 million increase from March 31st, 2026, was due to the addition of $29 million in classified Heritage loans. Now, onto deposits. Our total deposits and customer repurchase agreements as of June 30th, 2026, were $16.9 billion. Which compares to $12.4 billion on March 31st, 2026. The $4.4 billion increase was the result of $4.75 billion of deposits acquired from Heritage upon the close of the merger in April, and the reduction in deposits from $300 million of brokered CDs that matured and were not rolled over during the second quarter. Our non-interest-bearing deposits were 53% of total deposits on June 30th, compared to the pre-merger percentage of 59% on March 31st, 2026.

Speaker 2

Our cost of deposits and repos was 86 basis points for the second quarter of 2026, compared to 82 basis points for the first quarter of 2026 and 87 basis points for the year ago quarter. Clay will now highlight the growth in non-interest income and give an update on the merger integration.

Speaker 3

Thank you, Dave. Non-interest income was $17 million in the second quarter of 2026 compared to $14.3 million in the first quarter of this year. The $2.7 million quarter-over-quarter increase in non-interest income was the result of increased fee income across almost all categories. Deposit and other banking service fees grew by $850,000, and trust and investment services income grew by $460,000 or 12% from the first quarter of 2026. International banking income grew by $200,000, and income from bank-owned life insurance increased by $350,000 with the additional policies for the merger. I also want to provide a brief update on our merger integration and the revenue opportunities we see from the Heritage combination. We completed the conversion of Heritage into Citizens operating the June 19th through June 21st weekend.

Speaker 3

This was an important milestone and a significant undertaking, supported by strong execution across our teams and dedicated internal and external resources focused on customer readiness and support. Overall, the conversion was successful. As we expected, we worked through individual customer transition items, and we're already seeing customers benefit from our enhanced online banking platform. We're also beginning to see the strategic benefits of bringing the two banks together. The combined company gives us greater lending capacity and has created additional opportunities across our broader banking platform, including trust and wealth management, home mortgage, and international services. Today, we are operating as one bank with a stronger presence across California's major economic markets and a broader platform to serve our customers. I will now turn the call back over to Dave for further discussion of our non-interest expense.

Speaker 2

Thank you, Clay. Non-interest expense for the second quarter of 2026 was $114.4 million, including $31.4 million of acquisition expense related to the Heritage merger. Core non-interest expense, which excludes acquisition expense, amortization of intangible assets, and provision for unfunded commitments, was $75.2 million in the second quarter of 2026 compared to $58.1 million in the first quarter and $56.4 million in the second quarter of 2025. After excluding acquisition expense and provision for unfunded commitments, our adjusted efficiency ratio was 43.9% in the second quarter of 2026 compared to 44.6% in the first quarter of 2026 and 45.5% in the second quarter of 2025. In conclusion, we continue to focus on the successful integration of the merged companies and the opportunities for accelerated growth in the Bay Area while achieving the projected returns we outlined for this acquisition.

Speaker 2

Our current outlook continues to align with our stated objectives of achieving EPS accretion of 13% or greater in 2027, while generating a return on average assets of 1.50% and a return on tangible common equity of 17%. This concludes today's presentation. We are now happy to take any questions that you might have.

Operator

Thank you. If you'd like to ask a question, please press *11 on your telephone and wait for your name to be announced. To withdraw your question, press *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 with Piper Sandler. Your line is open.

Speaker 4

Hey, good morning, guys.

Speaker 2

Good morning.

Speaker 3

Morning.

Speaker 4

First one for me, just on the accretion. I wanted to confirm the number that was in the net interest income. I've got the loan piece based on the core loan yield comment, but wanted to see if there was some additional securities marks in there.

Speaker 2

From the security standpoint, I guess I don't really distinguish that, Matt, because it's all AFS. Everything we acquired is AFS, so it'll change as the market value changes every quarter.

Speaker 4

Got it. Yep. Okay. Roughly $4.6 million of accretion this quarter?

Speaker 2

Are you talking about exclusive or in total?

Speaker 4

In total for the quarter, for the 74 days in net interest income.

Speaker 2

Let me check that. Any follow-up questions, I'll take a look at that.

Speaker 4

Okay, thanks.

Speaker 2

It's 2.7, by the way, Matt, specifically for the merger.

Speaker 4

2.7, okay.

Speaker 2

Yeah.

Speaker 4

All right. Just on the cost saves, how far along are you? Just so we can get a sense for what might be left coming out of the run rate.

Speaker 2

Of course, Q3 will still have some noise. There'll still be a heightened level of acquisition expense, but not the same level as Q2. That'll trickle down into Q4. I think Q4 will be fairly clean, but the full impact of the expense synergies won't be seen till the beginning of 2027.

Speaker 4

Okay. Got it. If I can just sneak one in here. On the pipeline and just the overall integration, getting into the Bay Area given the rebound that's happening there, any updated thoughts on loan growth going forward, whether or not you might be able to step it up relative to the legacy CBB?

Speaker 3

Yeah. Thanks, Matthew. Clay here. I think the pipelines look very good. As noted in the presentation here, no question about it, we still see continued pricing pressure and lots of competition. Loan demand is strong, and we continue to execute on that. With the combination of the two organizations and full integration of the production teams, we're full steam ahead as one bank here and are looking for all those opportunities going forward.

Speaker 2

Yeah. The only thing I would add, Matt, obviously we feel good about looking out 90-ish days or so. There's a lot of pressure on interest rates right now with the 5-year, 10-year Treasuries rising pretty substantially. We'll see if that impacts customer prospect behaviors just with rates. That would be potentially the only tailwind. The things that we mentioned and Clay mentioned with respect to the integration and the combined capacity of the two organizations, which will really have an impact on the opportunities that we're seeing in the former HBC offices. Our pipelines for the legacy CBB offices continue to remain strong. Look, we want a deal in the top 25% of relationships out there, we're going to always side on credit quality. We'll compete on price for the full relationship.

Speaker 2

At the end of the day, I think at least what we're seeing today is it's pretty positive going forward.

Speaker 4

Great. Thanks again.

Operator

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, and congrats on getting the deal done quickly and the conversion done quickly. I'm sure that's a great feeling.

Speaker 2

Well, it's a good feeling most of the time. It's a lot of work internally.

Speaker 5

Yeah.

Speaker 2

Yeah.

Speaker 5

I hope you guys all get a vacation after this. I guess, building off, what really stood out to me in your slides was just a remarkable amount of organic growth to kick it off. Can you provide additional color as to the drivers of that and if there was anything. I imagine some of it is chunky, but if you could provide additional color given that it was quite notable, the organic growth you highlighted. Thank you.

Speaker 2

Yeah. I'll answer that and Clay can jump in if he has anything to add. I think just generally when you look at the last four or five quarters, we've had very strong pipelines. With the combination of the two organizations, that opportunity has just continued. With the increased capacity and round numbers, Heritage had their sort of house limit, and our house limit is two and a half times bigger than their house limit was. Relationships that maybe, and to use the term outgrow is probably overstating it, but they may have had to participate on a deal that was growing, whereas now we don't have to, and we can consider that. I think the loan growth is primarily the increases in loan growth, as I've said the last couple of quarters, has primarily come from investor commercial real estate.

Speaker 2

All the other asset classes we had solid production. With C&I and a 31% utilization rate, you just don't get the totals. I think with investor commercial real estate coming back, I think it's really helped us fill that gap of what was missing through 2023 and 2024. I don't know, Clay, if you have anything to add.

Speaker 3

Yeah. Just two things to add there. I think both organizations pre-close had strong momentum going into the close, so the momentum of both organizations combined really was very powerful. Then secondly, what I would say is the collaboration of the teams in terms of the credit sales partnership, moving loans from origination through boarding worked very well in terms of the passing of those loans. We really didn't see any delays or hiccups through that passing. The momentum, including the hard work and making sure that the throughput came through, really worked.

Speaker 5

Great. That's super helpful. A balance sheet question perhaps for Alan. Cash is elevated at the end of the quarter. You obviously sold the HFS book from Heritage that you had planned that announcement. I know you had mentioned in your prepared remarks some repayment of some borrowings down the pike. You have an active buyback. Just how should we be thinking about the reinvestment of the liquidity off that book? Yeah, I'll leave it at that. Thank you.

Speaker 1

Sure, Kelly. As I said in the prepared remarks, we did sell at close about half of the billion-dollar portfolio we inherited, and we reinvested that pretty much throughout the quarter. We didn't get the full benefit from an average perspective. We did settle the sale of the SFR mortgages sort of late in the quarter on June 10th, and did not deploy that cash during the quarter. We have subsequently deployed that. We don't anticipate carrying as much balances at the Fed going forward, but certainly it'll be higher than pre-merger. We'll keep something north of what we typically did prior to the merger, just because of the overall increase in the balance sheet size.

Speaker 2

Yeah, Kelly. The only thing I would add to that, and Alan can opine as well. Obviously, with the combined investment securities portfolio, the runoff of the loans, if loan demand stays where it's at, we're averaging, and we put a new slide in our deck that talked about the investment portfolio and the cash flow that's generated from that. Round numbers, it ranges from $150 million-$200 million a quarter. That's additional, assuming the loan demand stays where it's at, that's additional pickup for us if we can reinvest that in loans at least 200 basis points over the light treasury. That should be a good pickup for us as well. Combined with the runoff on the loan portfolio, there's another slide in the deck that shows what those average yields are too.

Speaker 2

There is opportunity for pickup if the loan demand stays where it's at.

Speaker 5

Got it. I'll step back. Thank you so much.

Operator

Thank you. Our next question will come from the line of Gary Tenner with D.A. Davidson. Your line is open.

Speaker 6

Thanks. Morning, everybody.

Speaker 3

Morning.

Speaker 6

It sounds like things are going really well on the loan front. I'm just wondering maybe from Clay's perspective, anything that your lenders have needed to kind of change or adjust the approach as it relates to kind of fitting with the Citizens style and philosophy in underwriting and sourcing business?

Speaker 3

Thanks, Gary. Yeah, no question about it. Both organizations had a very like-minded credit culture, client selection. The combination of the two, we didn't see any imbalances in terms of how we view and look at customer onboarding and client selection. No question about it, there's a change, and we fully integrated into the Citizens operating model as well as the loan pathing and loan processes. Yes, the former Heritage team members have learned the new process and are navigating that through with their credit administrators and loan underwriters. We fully integrated that and are continuing that. I would expect to see us kind of at the very conclusion of all of the integration on the loan processing side be somewhere around the September time period. Contribution-wise, the former Heritage team members are contributing at their proportion.

Speaker 6

Great. Appreciate that. Then Allen, I wonder if you could just put a little finer dime on kind of expectations for expenses in the third quarter, just given kind of the full quarter now post-Heritage, some degree of cost saves, post-conversion, just to give us a little bit of a guide if you will, in terms of the third quarter expense run rate.

Speaker 1

Well, I think from Q2, obviously, we mentioned more than $30 million in acquisition expense. That'll come down at least by half, probably more than half of that. We also don't anticipate having a $4 million provision for off-balance sheet. That was a Day 2 entry. That'll go back to what is typical. We'll see some cost saves. I can't quantify them for you at this point necessarily, Q3 will look a little better. As I said, Q4 will be a truer run rate in line with what we talked about in announcement. We'll probably achieve by the fourth quarter 90%-95% of what we said we would achieve in terms of cost saves, and then we'll have it fully loaded by the beginning of 2027.

Speaker 6

All right, great. Thank you.

Operator

Thank you. Our next question will come from the line of Andrew Terrell with Stephens. Your line is open.

Speaker 7

Hey, good morning.

Speaker 3

Morning.

Speaker 2

Morning.

Speaker 7

Just wanted to ask on, Dave, I think right at the end of your prepared remarks, you just reminded the kind of earnings accretion, the 150 ROA and 17% ROTCE expectations. You're pretty darn close, if not there, on ROA on an operating basis. This quarter, do you feel like there's a chance to outperform the ROA expectation with this deal? Then on the ROTCE specifically, it feels like it could be tough given how profitable you are and where capital is at, unless you leverage capital a bit more or are more active on the buyback. I guess I'm just kind of curious Should we lean on the ROA target more or the ROTCE target more? It's kind of a question around how much capital you're willing to leverage.

Speaker 2

Look, the question is, do I think we can outperform it? That's always the goal. I'm talking about the ROA. I absolutely think we can outperform it. We'll be continuing to evaluate all capital deployment management aspects of what we're doing. With the share repurchase program, we'll be evaluating dividends once we get a more clear run rate. There's a number of things that we're going to be doing from the capital perspective. It's a good problem to have. We generated an enormous amount of capital. We'll be evaluating that to ensure that the ROTCE projections we can get there as well. All in all, as I mentioned in the prepared remarks, I believe that we can outperform it. We're already on a strong pathway towards outperforming it.

Speaker 2

As Alan mentioned, we projected a certain cost save recognition of that within this year and then 100% going forward. I think that's still accurate. We'll see how it all plays out. The market for financial stocks has been pretty strong. There's been one-off days. We are buying back shares as we mentioned. We gave you the number through yesterday, or excuse me, through Tuesday. We'll continue to be in the market from a share repurchase program perspective, and we'll evaluate the other ways that we return shareholder capital as well. I don't know, Alan, do you have anything to add to that?

Speaker 1

No, I think we are currently fairly confident about reaching all those goals. The ROTCE number, maybe that takes a little bit more time because there's more moving parts. We are definitely focused on striving to get to all of those, Andrew.

Speaker 7

Okay. Fair enough. I appreciate the color. Then I wanted to go back and see if you're maybe willing to put a little more of a fine point on the margin. The 372 this quarter, definitely better than where I was at and where consensus was at, and there's obviously a lot of moving pieces. It sounds like maybe a little bit of headwind from just competitive dynamics in the market, but you've got I would say more unique tailwinds versus some peers as well with the acquisition. Can you just maybe frame for us general kind of expectations on the margin into 3Q?

Speaker 1

If you have our investor deck, we tried to provide some additional information towards the end of the quarter to at least provide a little more context to everyone. If you start on page 24, we actually provided what I'll call the base yield or coupon of our loan portfolio as June 30th, which was 5.37%. That excludes any accretion from purchase loans, any fees, any prepayment penalties, anything like that. It's not the reported number, and you can tell there's a lot that goes into that. But you can see the difference between March 31st at 514 to see the sort of the lift of both the loans we acquired and what we've seen over the quarter in terms of improvements. On page 25, we gave a lot more color around our organic growth in there.

Speaker 1

As we mentioned, we've been generating loans at yields approximately 6%. If you go to page 29 in the investment portfolio, we're demonstrating what the book yields were at the end of the quarter, as well as the principal runoff and the coupons on that runoff on that chart for you as well. The deposit side on page 30, you'll see the point-in-time cost of deposits and repos at the end of the month. Hopefully that will help you as well, and you also see that on page 32. We also provided a little more color around interest rate risk on page 34. I think you can get a sense from there of some of the back book.

Speaker 1

There's the same chart we had from last quarter in our appendix, which shows the scheduled payments of our loans over the next number of periods and what the runoff coupons are. Of course, we see a lot more prepayment than that, so it'll probably be larger than that. Hopefully you can utilize that information to help you with your forecast.

Speaker 7

Yep. All very helpful. Thank you guys so much. Appreciate it.

Speaker 2

Thank you.

Operator

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

Speaker 8

Hey, good morning, everybody.

Speaker 2

Good morning.

Speaker 1

Morning.

Speaker 8

I wanted to start out with the integration completed now. I was hoping you guys could elaborate a bit about what's on the docket for the Heritage team. You touched on some opportunities maybe in the Trust and wealth side. Some increasing capacity with existing clients as you deepen the relationships there and some lending opportunities. I'm just kind of curious, with the integration completed now, what are you focused on, and where do you see the most opportunity near term?

Speaker 2

Yeah, I'll start, and then Clay can add on. Just a couple of things. Obviously, the systems conversion was an important step to bring them onto the CBB platform. There's still work to be done, and we're still working on those things. There are some, as Clay mentioned, just process stuff that we'll continue to work on through September or October timeframe. All in all, it's business as usual. They're dealing with one-off customer situations and those types of things, and there's still work to be done there. All in all, I think, it's gone pretty well. Heritage previously, like us, as Clay mentioned, they went after the best customers, the best relationships in their markets. It's very similar to us.

Speaker 2

I mentioned previously in calls that in our original credit due diligence and moving forward, now that everything's on our platform, we can see that the book was very similar. The type of relationship was very similar. There are differences in how we do things, and they're still learning that. It doesn't happen magically on June 22nd. At the end of the day, we'll continue just to integrate, not only from a process standpoint, but from a culture standpoint and how we view all of this. I do think that for the former Heritage associates, there's going to be a lot of opportunities for them to do things that they maybe couldn't have done before. We have to get through this initial stage, but we'll continue to work on the integration, both process, culture, everything else.

Speaker 3

Yeah. No, David, the only things I would add is, there's a number of things that we had on the former Heritage roadmap that were accelerated through the merger and integration. Those things included everything from CRM tools to sourcing production tools, not least of which their revenue synergies around wealth management, international mortgage, those that I touched on before that we did not have in our toolbox prior to the integration. Now we've got this full set of tools ready for the team, and we've already seen revenue benefits from those that obviously weren't in the model, but are revenue synergies going forward. As David said, there is good momentum in there, but there's a lot of things in front of us that we're still working through today, but also are in front of us in terms of opportunities 2027 and beyond.

Speaker 8

That's awesome. Obviously, look, there's a lot of moving parts on the deposit side. You talked about some of the intentional moves, broker deposits. Kind of curious, how do you think about deposit growth opportunities across the footprint and the deposit pipeline today, and how do you balance defending deposit costs in your low-cost core deposit base versus growing core deposits, especially as competition is kind of intensifying?

Speaker 2

Yeah, I think there's a couple of pieces there, as you said, there are a lot of moving parts on the deposit side. Most of the questions are always around loans and that process. Historically, we've grown core deposits, non-interest-bearing deposits in that kind of 3% range. I don't think there's really that much difference in what's going to be happening going forward. I think it's just making sure that we continue to focus on the strength of our organization, which is our deposit book, and we'll continue to streamline that. Look, we customize every solution. Heritage customized every solution. The way we did it was slightly different. Ultimately, that will align with how Citizens Business Bank looks at it. We want to protect relationships at the same time. It's not like we just flip the switch and do it.

Speaker 2

There'll be a process that we go over both with the deposit side, the loan side, everything that we're doing from a revenue side. I think the simple answer to your question is I don't foresee it changing from what's been historical for us. We're not going to compete on high-priced CDs or just be the highest provider out there. Clay's disappointed in that. Just kidding. We aren't going to compete on that stuff. The bankers are incented to bring operating companies and operating deposits. Once they figure out all of the moving parts, we'll be back to full strength on that side as well. Our deposit pipeline still remains strong as well. There is good momentum for us with our type of deposit relationship, and we'll just continue to work towards that. I don't know if you have anything to add.

Speaker 3

Yeah, no. The only thing I would add is, we have a very disciplined approach to relationship pricing and deposits. Yes, need to defend those that are valued clients in the book. I think our disciplined approach continues pre- and post-conversion here. Last thing I would just say is, through the integration and conversion, we did move to an enhanced online banking system here at Citizens, so the legacy Heritage customers are receiving the benefit of a very deeper, more robust online banking platform. We have deep integration into our customers from a full-service banking platform.

Speaker 8

That's awesome. Maybe just last one. Look, you guys have been active managing the securities book. You've done that in the past. You've been investing. We talked about some of the investment of the excess liquidity. I know there's really no optimization included in the initial pro forma guidance, I'm curious, how do you think about additional balance sheet optimization opportunities as you think about capital deployment and supporting the NIM, just in addition to maybe some more of the mechanical tailwinds that, Allen, you talked about?

Speaker 1

Yeah, David. On the wholesale funding side, we did some things in the quarter. I alluded to the fact that we have some of those also maturing through early 2027, We'll evaluate it, I think we'll continue to, unless there's an opportunity to better position us from an interest rate risk perspective, we're likely not to replace those wholesale funding. That would improve our cost of funds slightly. I think on the investment side, it's just really a function of how we're doing on loan and deposit growth. We have a lot of cash flow coming out of that portfolio that can be redeployed in much higher yields than what the portfolio is currently. We've also been focused, and one of the reasons we put a chart in our IR deck is reducing the duration of that portfolio.

Speaker 1

We've been adding more variable securities, more hybrid arms, things like that to overall reduce the duration of the bond portfolio.

Speaker 8

That's great. Thanks, everybody.

Operator

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

Speaker 2

Thank you, Cherie. With the systems integration behind us, we will continue to focus on our vision of serving the comprehensive financial needs of small to medium-sized businesses and their owners. We now operate in every major economic market of California and will continue to deliver our relationship-focused banking model throughout the state. The Citizens Business Bank team remains focused on building long-term relationships within the communities we serve. Our consistent financial performance is highlighted by the 197 consecutive quarters of profitability and the 147 consecutive quarters of paying cash dividends. I would like to thank our associates for their outstanding efforts and commitment during the systems conversion. I would also like to thank our customers for their continuing loyalty. Thank you for joining us this quarter. Appreciate your interest and look forward to speaking with you in October for our third quarter 2026 earnings call. Have a great day.

Operator

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

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