CVB Financial - Q2 2024

Executive Summary

• Q2 2024 delivered diluted EPS of $0.36, up vs Q1 ($0.35) but down vs prior year ($0.40), with NIM compressing to 3.05% and efficiency ratio improving to 45.1% quarter-over-quarter.
• Average deposits rose $245.3M Q/Q; mix remained strong with 60% noninterest-bearing, while cost of deposits climbed to 0.88% and cost of funds to 1.38%, pressuring NIM.
• Asset quality remained solid with minimal net charge-offs ($31K) but nonperforming assets increased to 0.16% of total assets due to new nonperforming CRE loans; ACL held at 0.95% of loans.
• Management is executing targeted sale-leasebacks (first closed in July with >$3M gain) and planning to repay BTFP borrowings via cash, security cash flows, core deposits, and selective wholesale funding—key capital/funding catalysts for the stock.
• No formal quantitative guidance; management reiterated a low single‑digit loan growth objective from here and indicated possible buybacks depending on M&A opportunities and capital mix.

What Went Well and What Went Wrong

• What Went Well

  • Expense discipline: Noninterest expense fell $3.3M Q/Q, largely due to FDIC special assessment accrual reversal; efficiency ratio improved to 45.1% from 47.22% Q/Q.
  • Deposit stability and mix: Average deposits +$245.3M Q/Q, with noninterest-bearing deposits ~60% of total, supporting funding resilience despite higher rates.
  • Capital strength: CET1 15.3%, total risk-based 16.1%, TCE 8.7%; tangible book value per share rose to $9.55.
  • Management quote: “The second quarter financial results represent our 189th consecutive quarter of profitability… steady and stable performance in the face of a challenging environment.” — CEO David Brager.

• What Went Wrong

  • Margin pressure: NIM declined 5 bps Q/Q to 3.05% as cost of funds rose 7 bps; time deposit costs spiked 79 bps with higher brokered CDs.
  • Nonperforming loans increased: NPLs rose to $25.6M (0.16% of assets), driven by three nonperforming CRE loans (~$10.9M), and classified loans increased Q/Q (to $124.7M) with ag exposures.
  • Loan balances contracted: Total loans fell $88.9M Q/Q; weaker CRE demand and low utilization on new C&I commitments limited growth.

Transcript

Operator (participant)

Good morning, ladies and gentlemen, and welcome to the second quarter of 2024 CVB Financial Corporation and its subsidiary, Citizens Business Bank Earnings Conference Call. My name is Cherie, and I'm your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note this call is being recorded. I would now like to turn the presentation over to your host for today's call, Allen Nicholson, Executive Vice President and Chief Financial Officer. You may proceed.

Allen Nicholson (EVP and CFO)

Thank you, Cherie, and good morning, everyone. Thank you for joining us today to review our financial results for the second quarter of 2024. Joining me this morning is Dave Brager, President and Chief Executive Officer. Our 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 31st, 2023, and in particular, the information set forth in Item 1A, Risk Factors, therein.

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

David Brager (President and CEO)

Thank you, Allen. Good morning, everyone. For the second quarter of 2024, we reported net earnings of $50 million or $0.36 per share, representing our 189th consecutive quarter of profitability. We previously declared a $0.20 per share dividend for the second quarter of 2024, representing our 139th consecutive quarter of paying a cash dividend to our shareholders. We produced a return on average tangible common equity of 15.51% and a return on average assets of 1.24% for the second quarter of 2024. Our net earnings of $50 million or $0.36 per share compares with $48.6 million for the first quarter of 2024, or $0.35 per share, and $55.8 million or $0.40 per share for the prior year quarter. The $1.4 million increase in earnings compared to the first quarter of 2024 was primarily due to a $3.3 million decrease in non-interest expense.

Non-interest expense was impacted by the change in the estimated cost for the FDIC Special Assessment. Compared to the first quarter of 2024, non-interest expense related to the Special Assessment declined by $3 million. Net interest income declined by $1.6 million when compared to the first quarter of 2024. This decrease resulted from a five basis point decline in our net interest margin from 3.10% in the first quarter to 3.05% in the second quarter of 2024. Our earning assets remained stable compared to the first quarter of 2024. Interest income grew by $1.4 million over the prior quarter.

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 second quarter. Interest expense increased by $3 million 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 second quarter 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 second quarter of 2024. In terms of wholesale funds, second quarter borrowing costs decreased as average borrowings declined by $142 million. However, a $300 million increase in average brokered deposits drove a 79 basis point increase in the cost of our time deposits. Average total deposits for the second quarter increased by approximately $245 million compared to the first quarter of 2024. Non-maturity deposits declined modestly by $40 million, including a $29 million decrease in non-interest-bearing deposits. On average, non-interest-bearing deposits continued to be greater than 60% of our average total deposits for the second quarter of 2024.

At June 30th, 2024, our total deposits and customer repurchase agreements totaled $12.1 billion, a $111 million decrease from March 31st, 2024, and a $354 million increase from December 31, 2023. The increase in total deposits and customer repos from the end of 2023 includes the addition of $400 million in brokered time deposits. For the first six months of 2024, approximately $170 million of deposits were moved to CitizensTrust, including $100 million during the second quarter. These funds were invested in higher-yielding liquid assets such as Treasury notes. This compares to $800 million that was transferred during 2023. Our cost of deposits was 88 basis points on average for the second quarter of 2024, which compares to 74 basis points for the first quarter of 2024.

Our cost of non-maturity deposits has grown from 60 basis points in December of 2023 to 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. From the first quarter of 2022 through the second quarter of 2024, our cost of deposits has increased by 85 basis points, representing a deposit rate of 16% compared to the 525 basis point increase in the Fed funds rate during the Federal Reserve's current tightening cycle. Now, let's discuss loans. Total loans at June 30th, 2024, were $8.7 billion, an $89 million, or 1% decrease from the end of the first quarter and a $223 million decline from December 31st, 2023. The quarter-over-quarter decrease was led by a $56 million decline in commercial real estate loans.

All other loan categories declined modestly from the end of the first quarter of 2024. The decrease in loans from the end of 2023 included a $71 million decrease in dairy and livestock loans. Dairy and livestock loans see higher line utilization at year-end, which is reflected in the 80% utilization rate at the end of the fourth quarter compared to the 74% utilization rate at June 30th, 2024. Commercial real estate loans declined by $120 million from December 31st, 2023. As commercial real estate loan demand has weakened, our CRE loan production for the first six months of 2024 has lagged the same period in 2023 by more than 50%. Construction loans declined by $15 million over the same period, as we have experienced minimal borrowings from newly originated construction loans.

C&I loans declined by $14 million when comparing the June 30th, 2024 period in balance to December 31st, 2023, even though we have generally seen higher average loan balances over the first two quarters of 2024. This generally reflects the growth in new relationships as C&I line utilization continues to be at a rate at 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&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 six-month period in 2023. Although loan demand continues to be slower than past years, we continue to be optimistic about growth and future line utilization from our pipeline of C&I loans. We believe our asset quality remains strong, even though we have experienced an increase in non-performing and classified loans. Our allowance for credit losses totaled approximately $83 million at June 30th, the same as March 31st, 2024. Net charge-offs in the second quarter were $31,000 compared to $4 million in the first quarter of this year. At quarter-end, non-performing assets defined as non-accrual loans plus other real estate owned were $25.6 million, or 16 basis points of total assets. The $25.6 million in non-performing loans compares with $14.5 million for the prior quarter.

Classified loans for the second quarter were $125 million compared with $103 million for the prior quarter. Classified loans as a percentage of total loans was 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. 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 to 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 Allen to discuss additional aspects of our balance sheet. Allen.

Allen Nicholson (EVP and CFO)

Thanks, Dave. Good morning again, everyone. As of June 30th, 2024, the $82.8 million allowance for credit losses was equal to the ACL as of March 31st, 2024. At the end of the second quarter, our ACL was 0.95% of total loans compared to 0.94% on March 31st, 2024. Our ACL at December 31st, 2023, was $86.8 million, including $5.9 million of reserves for specifically identified non-performing loans. Our reserves for specific loans have been zero since the end of the first quarter. We did not record a provision in the first or second quarter of 2024. Our economic forecast continues to be a blend of multiple forecasts produced by Moody's. We continue to have the largest individual scenario weighting on Moody's baseline forecast, with downside risks weighted among multiple forecasts.

The resulting economic forecast resulted in real GDP declining slightly in the second half of 2024 and continuing to be negative in the first quarter of 2025. 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 million from the end of the first quarter of 2024 and by $245 million from December 31st, 2023, as cash flows generated from the portfolio have not been reinvested during this year. Investment securities held to maturity, or HTM securities, totaled approximately $2.43 billion at June 30th, 2024. The HTM portfolio declined by approximately $25 million from March 31st, 2024.

Investment securities available for sale, or AFS securities, totaled approximately $2.75 billion at June 30th, 2024. The AFS portfolio declined by approximately $91 million from March 31st, 2024, including the impact of the unrealized loss in AFS securities increasing by $2.3 million from the prior quarter-end. The tax equivalent yield on the entire investment portfolio was 2.71% for the second quarter of 2024 compared to 2.64% for the prior quarter. We continue to have positive carry on the fair value hedges we executed in late June of 2023. We received daily SOFR on these pay-fixed swaps, which have a weighted average fixed rate of approximately 3.8%. We recorded $4.1 million of interest income in the second quarter related to these swaps, which was $400,000 higher than the first quarter of this year.

Our fair value hedges, combined with our cash flow hedges, had a market value of $15.3 million as of June 30th, 2024, which reflects a $3.6 million increase from the end of the prior quarter. Cash and cash equivalents declined by approximately $105 million from $950 million at March 31st, 2024, to $844 million at June 30th. Approximately $700 million of BTFP borrowings matured in May, while we added FHLB advances totaling $500 million during the second quarter. These FHLB advances include $300 million at an average cost of 4.73%, maturing in May of 2026, and $200 million at a cost of 4.27%, maturing in May of 2027. Borrowings from the Bank Term Funding Program at the end of the second quarter totaled $1.3 billion, with a borrowing rate at 4.75%. These advances mature in January of 2025.

We anticipate that the Bank Term Funding Program borrowings will be repaid through a combination of our existing cash, future principal and interest payments from our securities portfolio, core deposit growth, and additional wholesale funding sources, which may consist of new borrowings and/or additional broker deposits. Another source of funds to pay off the BTFP borrowings is the possibility of targeted sale-leasebacks of certain buildings we own, combined with the sale of our investment, a portion of our investment portfolio. We have started a marketing process to potentially execute a handful of targeted sale-leasebacks to unlock value from certain buildings we own. We expect to utilize gains from these sales to offset losses from selling some securities within our AFS portfolio. The first of these sale-leaseback transactions closed a few days ago, resulting in a gain of greater than $3 million.

We are not expecting material gains from sale leasebacks in the third quarter of 2024 or material levels of AFS security sales. Now, turning to the capital position, at June 30th, 2024, our shareholders' equity increased from the fourth quarter of 2023 by $34.5 million-$2.11 billion. The company's tangible common equity ratio at June 30th, 2024, was 8.7%, compared with 8.3% at March 31st, 2024, and 8.5% at December 31st, 2023. Our regulatory capital ratios continue to grow and are among the highest in the industry. At June 30th, 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 second quarter earnings.

David Brager (President and CEO)

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

Noninterest expense for the second quarter was $56.5 million, compared with $59.8 million for the first quarter of 2024 and $54 million for the year-ago quarter. The $3.3 million increase quarter over, excuse me, the $3.3 million quarter-over-quarter decrease was primarily due to the expense associated with the FDIC Special Assessment. In total, regulatory assessment expense was $1.4 million in the second quarter of 2024, a $3 million decrease from the prior quarter. We initially accrued $9.2 million in the fourth quarter of 2023 for this special assessment, which we supplemented with the addition of $2.3 million of accrued expense in the first quarter of 2024. The first quarter increase in the accrual was the result of the FDIC revising 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 second quarter 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 $1.5 million in higher payroll taxes paid in the first quarter as a result of the annual reset of salary caps on payroll taxes and the payment of annual bonuses. The decrease in payroll taxes was offset by a $600,000 increase in bonus and profit-sharing accruals compared to the first quarter of this year. 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 first quarter of this year as we increased donations by almost $600,000. The second quarter of 2024 included $500,000 in recapture provision for unfunded loan commitments compared to no provision or recapture in the first quarter of 2024. Non-interest expense totaled 1.4% of average assets for the second quarter of 2024, compared with 1.48% for the prior quarter. Our efficiency ratio was 45.1% for the second quarter of 2024. This compares with 47.22% for the first quarter. This concludes today's presentation. Now, Allen and I will be happy to take any questions you might have.

Operator (participant)

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

Matthew Clark (Managing Director)

Hey, good morning.

David Brager (President and CEO)

Good morning.

Matthew Clark (Managing Director)

I want to just get 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?

David Brager (President and CEO)

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

Matthew Clark (Managing Director)

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

David Brager (President and CEO)

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

Matthew Clark (Managing Director)

Okay. Then just on capital, updated thoughts on M&A, what you might be seeing of late given the move in bank stocks and whether or not something might be, whether or not you might be able to get something done before year-end?

David Brager (President and CEO)

Yeah. 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. 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 love to do an M&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. We sort of, that 8.5%-9% range is a good spot for us. We ended up there in the third quarter. There are definitely things that we're talking about, but at this point, nothing to announce.

Matthew Clark (Managing Director)

Okay. Great. Thank you.

Operator (participant)

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

Andrew Terrell (Managing Director)

Hey, good morning.

David Brager (President and CEO)

Morning, Andrew.

Andrew Terrell (Managing Director)

Maybe just to start on that last point around capital and kind of what you're contemplating there, I guess we get to the sale lease specs in a minute. But are you interested in 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 the capital discussion there.

Allen Nicholson (EVP and CFO)

So, Andrew, I think over the next two, three, four 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 is going to show some pretty strong capital ratios. They're already pretty strong. And we'll be definitely looking at the opportunities from M&A compared to whether we want to be more aggressive in terms of buybacks. So we'll see what the M&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.

Andrew Terrell (Managing Director)

Yep. Got it. Okay. And then on the point of the sale-leasebacks, I think you've mentioned $3 million or so in the third quarter. Can you just maybe frame for us the timeline in which the sale-leaseback transactions can occur? Is that something that is primarily completed in the back half of the year? Is there a longer kind of tail to you guys looking to complete those transactions?

David Brager (President and CEO)

So we are doing transactions sort of one 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 are certainly some unknowns. 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'll depend on whether market conditions really give us the cap rate we want.

Andrew Terrell (Managing Director)

Okay. Got it. Now, if I could sneak one more in, just.

David Brager (President and CEO)

Sure.

Andrew Terrell (Managing Director)

A couple of the CRE data aggregators put out some data that kind of 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?

David Brager (President and CEO)

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 size buildings. And it's impacted, obviously, greater when you have a 2-, 3-, or 4-million sq ft 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. We've been very disciplined in how we've underwritten it. 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 historically, the last few quarters anyway, we've only put the office portfolio.

So there is a lot more detail both from an origination loan-to-value perspective, the size of the loans that we have in each of our asset classes. So it does provide a lot more detail, I think, for you and others to look at. We're not really experiencing it. The largest classified loan we have in our industrial portfolio is a 15-year fully amortizing 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.

Andrew Terrell (Managing Director)

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

David Brager (President and CEO)

Yeah, you're welcome.

Operator (participant)

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

Kelly Motta (Managing Director)

Hi. Good morning. Thanks for the question.

David Brager (President and CEO)

Morning, Kelly.

Kelly Motta (Managing Director)

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.

Allen Nicholson (EVP and CFO)

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

Kelly Motta (Managing Director)

Okay. That's helpful. And then as a follow-up with the brokered 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?

Allen Nicholson (EVP and CFO)

The wholesale side is a combination of a couple of things, Kelly. One, depending on how the rest of the balance sheet plays out, do we need more funding? That will depend. 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 we try to manage. And we are a little bit asset-sensitive right now, particularly because of those pay-fix swaps we put on. And that is one way to mitigate it, among others, is to put on some fixed debt, so.

Kelly Motta (Managing Director)

Got it. Thank you so much.

Operator (participant)

Thank you. One moment for our next question. That will come from the line of Ahmad Hasan with D.A. Davidson. Your line is open.

Ahmad Hasan (Equity Research Associate)

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

David Brager (President and CEO)

Yeah. So look, I mean, the loan pipelines are definitely slower. We are seeing great opportunities. When we do a C&I loan, we've funded a large amount of commitments this year. There just hasn't been a large amount of borrowings on those commitments. And so that obviously is different than doing commercial real estate, whether owner or investor. But I still believe that we can grow loans through the end of the year. That's been a struggle. The first six months is evidenced by some of our prepared comments. But I do believe that we can grow loans. And I think there are some people sitting on the sidelines. I don't think the rate thing is as big of an impediment to doing loans.

But if things break a little bit more or things improve a little bit more, that should be a catalyst to start seeing some more activity there. And we're going to err on the side of credit quality always. We've had a lot of opportunities to look at deals that we have passed on because 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 first quarter. That is still our goal. We don't guide specifically, but pipelines are a little bit lower, but they're solid. And we just need to keep executing there.

The good thing about it is on the C&I loans that we're doing, we're getting full relationships and able to monetize those relationships in many other ways: treasury management, international, bank card, all of the things that we do for an operating company that we wouldn't really be doing for an investor commercial real estate borrower.

Ahmad Hasan (Equity Research Associate)

Thanks for that. I'll step back.

Operator (participant)

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

David Feaster (Managing Director)

Good morning, everybody.

David Brager (President and CEO)

Good morning.

David Feaster (Managing Director)

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 if you could help us think through maybe some of the trends in the quarter on the core deposit front and what you saw, especially late into the quarter and into early July?

David Brager (President and CEO)

Yeah. So 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 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 run through the system. But that's still happening to a degree, as evidenced by the money that moved to trust. So I feel good about deposits.

Normally, in the second quarter, we have grown deposits historically. We were relatively flat. Averages were up. But I do think that if we can execute on the pipeline that we have, that we should start to see that stabilize maybe even a little bit more, notwithstanding, obviously, any broker deposit acquisition. But I feel generally good about it. We bank operating companies. I mean, so we should maintain a high level of non-interest-bearing.

David Feaster (Managing Director)

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. 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 of it?

David Brager (President and CEO)

Yeah. I think generally you're on the right track. And look, we can grow earnings per share without necessarily growing the bank in the short term. Our goal is to grow the bank long-term. We want to grow the bank. But the exact circumstance we're in right now with the BTFP and building the cash, there could be some of that that occurs over the next few quarters. But I do think that we can definitely grow EPS, improve ROA, do something with the capital. All of those things should get us to where we want to be ultimately. 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. So I don't know, Allen, if you have anything to add to that. Yeah. I mean, we want to grow core deposits. But in terms of other aspects of the balance sheet, as I've talked about, reducing the borrowings, the balance sheet in total could certainly shrink in the near term. And not a bad thing. Certainly, that will help return on assets and free up additional capital, frankly.

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 sevens at best and low eights 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 if we get the price that we want to get, then we'll be able to hit another single here or there. So that's sort of the thought process.

David Feaster (Managing Director)

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

David Brager (President and CEO)

Yeah. Well, you broke up a little bit. I just want to make sure I heard you correctly. What are the underlying trends on the CitizensTrust side?

David Feaster (Managing Director)

Yeah.

Yeah.

David Brager (President and CEO)

So look, I mean, last year for the total year, we had $800 million of deposits go there. The first six months, we had $170 million of deposits go there. So it's definitely slowed down. But our customers still, I mean, we do have smart customers, and they are wanting to earn what they can earn. And so we work with them, and we want to keep it in the family. So ultimately, those relationships, we're not losing the relationship. There's potentially excess deposits that are going there to earn something. And I think that's the key thing. And just keeping it in the family is important. But our trust group has grown to $4.5 billion-ish in assets under administration and management, which is up about $1 billion from last year. So we'll continue to see a little bit of that, I think.

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

David Feaster (Managing Director)

Yeah. Thanks, everybody.

David Brager (President and CEO)

You're welcome. Thank you.

Operator (participant)

Thank you. We do have a follow-up question.

David Brager (President and CEO)

Sure.

Operator (participant)

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

Kelly Motta (Managing Director)

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 single or mid-single digits. I was wondering if that is for the balance of the year or how you're thinking about net growth in the second half.

Yeah. I definitely didn't say mid-single digits, so just to clarify. 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 have done a couple of larger C&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. So I think a combination of what we've already put on the books that hasn't really been advanced, plus if there's any improvement in the pipelines and just our normal sort of, and I'm excluding the seasonality in the fourth quarter with dairy. So excluding that, I do think that we can grow in the low single digits from this point forward.

Right. Thanks for the clarification.

David Brager (President and CEO)

You're welcome.

Operator (participant)

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.

David Brager (President and CEO)

Thank you, Cherie. Citizens Business Bank continues to perform consistently in a challenging operating environment. Our solid financial performance is highlighted by our 189 consecutive quarters or more than 47 years of profitability and 139 consecutive quarters of paying cash dividends. We remain focused on our mission of banking the best small to medium-sized businesses and their owners through all economic cycles. I'd like to thank our customers and our associates for their commitment and loyalty. Thank you for joining us this quarter. We appreciate your interest and look forward to speaking with you in October for our third quarter 2024 earnings call. Please let Alan or I know if you have any additional questions. Have a great day.

Operator (participant)

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