Good morning, ladies and gentlemen, and welcome to the Q2 of 2021 CVB Financial Corporation and its subsidiary Citizens Business Bank Earnings Conference Call. My name is Shallon, 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, Christina Carabino. You may proceed.
Thank you, Shalon, and good morning, everyone. Thank you for joining us today to review our financial results for the Q2 of 2021. Joining me this morning are Dave Brager, Chief Executive Officer and Alan Nicholson, Executive Vice President and Chief Financial Officer. Our comments today will refer to the financial information that was included in the earnings announcement released yesterday. To obtain a copy, please visit our website at www.cbbank.com and click on the Investors tab.
While the COVID-nineteen pandemic has receded from peak levels seen over the past year and business conditions continue to improve as the U. S. Economy reopens, the pandemic is still ongoing and more contagious and virulent variants of the COVID-nineteen virus have surfaced and spread throughout the U. S, including in the company's markets in California. As a result, the COVID-nineteen pandemic may still carry the potential to significantly affect the banking industry in California and the company's business prospects.
The ultimate impact on our business and financial results and on the health and safety of our employees will depend on future developments, which are uncertain and cannot be predicted, including the infectious and pathogenic properties of COVID-nineteen, various as they develop, the safety, effectiveness, distribution and public acceptance of vaccines developed to mitigate the pandemic and actions taken by government authorities in response to the pandemic. The speakers on this call claim the protection of the Safe Harbor provisions contained in the Private Securities Litigation Reform Act of 1995. For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from our forward looking statements, please see the company's annual report on Form 10 ks for the year ended December 31, 2020, and in particular, the information set forth in Item 1A, Risk Factors therein. Now I will turn the call over to Dave Reager. Dave?
Thank you, Christina. Good morning, everyone. Thank you for joining us again this quarter. We reported net earnings of $51,200,000 for the Q2 of 2021 or $0.38 per share, representing our 177th consecutive quarter of profitability. We previously declared an $0.18 per share dividend for the Q2 of 2021, which represented our 127th consecutive quarter of paying a cash dividend to our shareholders.
2nd quarter net earnings of $51,200,000 or $0.38 per share compares with $63,900,000 for the Q1 of 2021 or $0.47 per share and $41,600,000 for the year ago quarter or $0.31 per share. Through the 1st 6 months of 2021, we earned $115,100,000 or $0.85 per share compared with $79,600,000 or $0.58 per share for the 1st 6 months of 2020. We recorded a recapture provision for credit losses of $2,000,000 for the Q2 of 2021. In comparison, we recorded a recapture provision for credit losses of $19,500,000 for the Q1 of 2021. The recapture provision was primarily the result of our forecast of continuing improvements in macroeconomic variables, including GDP growth and decreasing unemployment.
For the 6 months ended June 30, 2021, we recaptured $21,500,000 of provision for credit losses, which essentially reverses the $23,500,000 in provision expense recorded during the 1st 6 months of 2020. For the Q2 of 2021, our pretax pre provision income was $69,700,000 compared with $70,000,000 for the prior quarter and $70,300,000 for the year ago quarter. Now I would like to discuss our deposits and loans. At June 30, 2021, our non interest bearing deposits were $8,070,000,000 compared with 7 point $58,000,000,000 for the prior quarter $6,900,000,000 for the year ago quarter. Non interest bearing deposits were 63.7 percent of total deposits at the end of the 2nd quarter compared with 62.7% for the prior quarter 63% for the year ago quarter.
We continue to see strong deposit growth for the 2nd quarter as total deposits and customer repurchase agreements increased by $662,000,000 or 5.3 percent from the Q1 of 2021 $1,800,000,000 or 15.7 percent higher than the prior year. At June 30, 2021, our total deposits and customer repurchase agreements were $13,200,000,000 compared with $12,600,000,000 at March 31, 2021 and $11,500,000,000 for the same period a year ago. Average non interest bearing deposits were $7,700,000,000 for the Q2 of 2021 compared with $7,200,000,000 for the prior quarter and $6,200,000,000 for the year ago quarter. Our average total deposits and customer repurchase agreements of $12,900,000,000 for the 2nd quarter grew by $682,000,000 or 5.6 percent from the Q1. Now moving on to loans.
Total loans, including PPP loan forgiveness, decreased by $222,000,000 from the end of the Q1. When compared to the Q1, adjusting for the decrease in Paycheck Protection Program loans, our loans grew by $18,000,000 or at a 1% annualized rate. Compared to the prior quarter end, commercial real estate loans grew by $74,000,000 or by more than 5% annualized. Year to date CRE loans have grown by $169,000,000 or more than 6% annualized. As we look at core loan trends, CRE loan growth has continued to be strong with an increase of $306,000,000 or 6% between the Q2 of 2021 and the Q2 of 2020.
Our dairy and livestock and agribusiness loans, excluding seasonal changes, have grown modestly by $6,000,000 C and I loans, however, continue to be impacted by low utilization rates, which is the primary driver of the continued decline in C and I loans, which was $92,000,000 compared to the Q2 of 2020. C and I utilization rates were 27% on average in the Q2, which compares to the pre pandemic level of 39% in the Q1 of 2020 and 31% for the Q2 of 2020. Single family mortgage loans have been declining due to high refinance activity from the low rate environment resulting in a year over year decrease of $49,000,000 Finally, all other loan categories have also decreased in total by $62,000,000 over the past 12 months. Our loan production continued to be strong in the Q2 as is our current loan pipeline. We continue to remain optimistic that we can grow loans in 2021 exclusive of the impact related to PPP loans as we overcome headwinds from low line utilization rates and continued high prepayment activity.
Average loans for the Q2 decreased by $21,000,000 compared with the Q1 of 2021, while increasing by $202,000,000 compared with the year ago quarter. During the Q2 of 2021, PPP loans had an average balance of $838,000,000 compared with $881,000,000 for the Q1 of 2021. Through June 30, 2021 of the 4,000 PPP loans we originated during round 1, more than 80% of our borrowers representing 853 $3,000,000 in loans have received forgiveness from the SBA. To date, our borrowers PPP forgiveness requests have been completely processed by the that have been completely processed by the SBA have received greater than 99% forgiveness based on the customer's forgiveness application. As of June 30, 2021, we originated over 1900 PPP loans in round 2 for more than $400,000,000 Net interest income before recapture or provision for credit losses was $105,400,000 for the 2nd quarter compared with $103,500,000 for the 1st quarter and $104,600,000 from the year ago quarter.
Earning assets grew by $646,000,000 on average from the Q1 with more than $590,000,000 of the growth coming from an increase in the investment securities. Our earning asset yield decreased by 13 basis points compared to the prior quarter. Interest bearing deposits and customer repos increased on average by $223,000,000 from the Q1, but interest expense declined as the cost of interest bearing deposits and customer repurchase agreements decreased from 6 basis points in the Q1 to 5 basis points in this recent quarter. Our tax equivalent net interest margin was 3.06% for the Q2 of 2021 compared with 3.18% for the Q1 and 3.7% for the Q2 of 2020. When the impact of PPP loans, discount accretion on acquired loans and non accrual interest paid is excluded, our adjusted tax equivalent net interest margin was 2.89 percent for the 2nd quarter, down from 2.93% for the prior quarter and 3.42% for the year ago quarter.
Our net interest margin continued to be negatively impacted by excess liquidity. During the Q2, we had approximately $1,700,000,000 on average on deposit at the Federal Reserve earning 11 basis points. The net interest margin in the 2nd quarter would have been approximately 40 basis points higher without the $1,700,000,000 on average on deposit at the Federal Reserve. Loan yields were 4.46% for the Q2 of 2021 compared with 4.5% for the Q1 of 2021 and 4.77% for the year ago quarter. Total interest and fee income from PPP loans was $8,100,000 in the 2nd quarter compared to $10,400,000 in the 1st quarter.
The decrease in loan yields from the year ago quarter was partly due to the impact of the Federal Reserve's rate decreases on our core loan yields and the impact of PPP loans as well as the decline in discount accretion income for acquired loans. Excluding the impact of PPP loans, interest income related to the purchase discount accretion and non accrual interest paid, loan yields were 4.3% for the Q2 of 2021, 4.23% for the Q1 of 2021 and 4.44 percent the Q2 of 2020. Prepaid and total income increased by $1,800,000 quarter over quarter and by $1,300,000 compared with the year ago quarter. Our cost of deposits and customer repos as well as our cost of funds for the 2nd quarter was 5 basis points. We redeemed our $25,800,000 junior subordinated debentures on June 15, which had a borrowing cost of approximately 1.6 percent.
Our cost of funds declined by 8 basis points compared to the Q2 of 2020. Now moving on to non interest income. Non interest income was $10,800,000 for the Q2 of 2021 compared with $13,700,000 for the prior quarter and $12,200,000 for the year ago quarter. 2nd quarter income from bank owned life insurance or BOLI decreased by $3,400,000 from the Q1 of 2021 $443,000 from the Q2 of 2020. The Q1 of 2021 included a $3,500,000 in debt benefits that exceeded the asset value of certain BOLI policies, while the Q2 of 2020 included $450,000 in debt benefits.
Fees from interest rate swaps were lower than the prior quarter by 200 and $15,000 and were $2,200,000 less than the Q2 of 2020. The steepening of the yield curve during the Q2 made it less attractive for our customers to enter into interest rate swaps that convert floating rate loans to fixed rate instruments compared to a conventional fixed rate loan. Deposit service charges increased by 5% or $184,000 from the Q1 and were higher than the Q2 of 2020 by $360,000 or more than a 9% increase. Our trust and investment services income increased by approximately $550,000 or more than 21% compared with the prior quarter and almost $700,000 or approximately 28% compared with the year ago quarter. Now expenses.
Non interest expense for the Q2 was $46,500,000 compared with $47,200,000 for the Q1 of 2021 $46,400,000 for the year ago quarter. Total salary and benefit expenses decreased by $870,000 compared to the Q1, including a $1,000,000 decrease in payroll taxes. Higher payroll taxes are typical for the Q1 of every year. Salary and benefit expense increased by $130,000 from the Q2 of 2020. Marketing and promotion expense increased by $1,100,000 $544,000 compared to the Q1 of 2021 Q2 of 2020 respectively.
The increase was primarily due to the timing of donations made during the Q2 to community groups throughout our geographic footprint. During the Q2 of 2021, we recaptured provision for unfunded commitments of $1,000,000 as a result of our improving forecast for macroeconomic variables that project losses from unfunded commitments. Non interest expense totaled 1.23 percent of average assets for the Q2 of 2021 compared with 1.32% for the Q1 of 2021 and 1.48% for the Q2 of 2020. Our efficiency ratio was 40.05% for the Q2 of 2021 compared with 40.26% for the prior quarter and 39.75 percent for the Q2 of 2020. Now turning to our asset quality metrics.
During the Q2, we had net loan charge offs of $463,000 compared with $2,400,000 for the Q1 of 2021 $158,000 for the year ago quarter. At quarter end, non performing assets defined as non accrual loans plus other real estate owned were $8,500,000 down from $15,300,000 for the prior quarter and $11,700,000 at June 30, 2020. At June 30, 2021, we had loans delinquent 30 to 89 days of $415,000 compared with $1,700,000 at March 31, 2021. Classified loans for the Q2 were $49,000,000 a $20,100,000 decrease from the prior quarter. As of June 30, we had no loans remaining on deferment related to the CARES Act.
We will have more detailed information on classified loans available on our Q2 Form 10 Q. I will now turn the call over to Alan Nicholson to discuss our effective tax rate, our allowance for credit losses, investments and capital levels. Alan?
Thanks, Dave. Good morning, everyone. Our effective tax rate was 28.6 percent for the 2nd quarter compared to 28.6 percent for the Q1 of 2021 29.23
percent for the year ago quarter.
Our effective tax rate can vary depending on the level of tax advantaged income as well as available tax credits. Our allowance for credit losses decreased by $2,500,000 from the Q1 of 2021 as a result of the $2,000,000 recapture provision of credit losses and net loan charge offs of $463,000 At June 30, 2021, our ending allowance for credit losses was $69,300,000 or 0.86 percent of total loans. When excluding PPP loans, our allowance as a percentage of the remaining loans is 0.94%, which compares to 0.91% at the pre pandemic period end of December 31, 2019. In addition to the allowance for credit losses, we have $23,000,000 in remaining fair value discounts from acquisitions. We previously recorded provision of credit losses of $23,500,000 in the first half of twenty twenty due to the estimated impact on loan losses from the economic forecast of a significant downturn in the economy resulting from the COVID-nineteen pandemic.
Based on the magnitude of government economic stimulus and the wide availability of vaccines, our latest economic forecast continues to reflect improvements in key macroeconomic variables and therefore lower projected loan losses, which resulted in a decrease in our allowance for credit losses. For the 6 months ended June 30, 2021, we have recorded a recapture provision for credit losses of $21,500,000 and our allowance for credit losses of $69,300,000 has closely returned to the pre pandemic level we had at December 31, 2019
of $68,700,000
Our economic forecast continues to be a blend of multiple forecasts produced by Moody's. These U. S. Economic forecasts include a baseline forecast as well as an upside and downside forecast. With the largest weighting on the baseline.
Our weighted forecast assumes GDP will increase by more than 6% in 2021 and then grow at approximately 2.5% to 3% for 2022 2023. The unemployment rate is forecast to be slightly higher than 6% in both 2021 2022 before declining to 5.3% in 2023. Our total investment securities increased by approximately $70,000,000 from the end of the Q1. As of June 30, 2021, investment securities available for sale, or AFS securities, totaled $2,930,000,000 inclusive of a pre tax net unrealized gain of $23,300,000 Investment securities held to maturity or HCM securities totaled approximately $1,000,000,000 at June 30. During the Q2, we purchased approximately $317,000,000 in new AFS securities with an expected tax equivalent yield of 1.7%.
Now turning to our capital position. For the 6 months, shareholders' equity increased by $47,100,000 to $2,060,000,000 The increase was primarily due to net earnings of $115,000,000 a $22,000,000 decrease in other comprehensive income from the tax effected impact of the decrease in market value available for sale securities and $49,000,000 in cash dividends. Our overall capital position continues to be very strong. Our tangible common equity ratio was 9.2% at the end of the Q2 and our regulatory capital ratios are well above regulatory requirements to be considered well capitalized. At June 30, our common equity Tier 1 capital ratio was 15.1% and our total risk based capital ratio was 15.9%.
I'll now turn the call back to Dave for some closing remarks.
Thank you, Alan. Despite the ongoing impact of the COVID-nineteen pandemic and the continuation of the low interest rate environment, we believe our bank remains well positioned to succeed now and in the future. Our strong capital, consistent earnings, low cost funding and solid credit all put the bank in a position to execute on our time tested strategy of banking the best small to medium sized businesses and their owners in our local markets. California's economy fully reopened on June 15, thanks to the effective COVID-nineteen vaccines and falling transmission rates. Although there have been obviously some issues due to the spike of the Delta variant of COVID-nineteen.
As California's economy continues to recover, we are confident that our customers will begin to invest in their businesses again. I'm proud of our associates and their dedication to the bank and our customers over the past 15 months. Over 300 of our associates were involved in providing more than 6,000 paycheck protection loans totaling over $1,500,000,000 to our customers in support of their businesses. As of June 30, 2021, we have received forgiveness on over $860,000,000 of the loans. In closing, we're pleased with our financial results for the 1st 6 months of 2021, particularly as we navigate through unprecedented times.
Our strategy remains unchanged as we are committed to our existing relationship banking model and operating our business in an efficient and focused way. We will continue to focus on increasing our same store sales, opening de novo locations in new geographies and finding acquisition opportunities in our geographic footprint. Please stay healthy and safe. That concludes today's presentation. Now Alan and I will be happy to take any questions that you might have.
Thank you. Your first question comes from the line of Jackie Bohlen from KBW.
Hi, good morning guys.
Good morning, Jackie.
I wanted to start with loan growth and just see what you're seeing in the CRE market. You've been having some good expansion there that I think gets a little bit overshadowed by some of the other I apologize for the program in the background, I can't figure out how to turn it off. So it gets overshadowed. And I just wanted to see where you're seeing that, if there are any particular geographies, where it's coming from or if it's more broad based across the footprint?
Yes, Jackie, it's definitely broad based across the footprint and we continue to see very solid pipelines. Obviously, that 6% growth in CRE is great. It is the largest amount of loans on our balance sheet, but it is overshadowed by some of the items I mentioned such as C and I line utilization, some smaller declines in some of the other areas. But I do believe that as our businesses feel confident in reinvesting in themselves and utilizing some of the excess liquidity that we will start to see the line utilization rates increase. I mean, we're hearing a little bit about that.
I mean, unfortunately for our borrowers, supply chain issues and disruptions are it's costing them more money to get things shipped and to receive things. And so they're going to start to use money in kind of this whether transitory or not inflationary period.
So is C and I line utilization, assuming that that is at a minimum stable, is growth necessary to see net portfolio growth or could CRE alone drive overall growth?
I mean, the simple answer to that is CRE did drive net loan growth excluding PPP by a very small percentage. So if we can combine that with a little line utilization, obviously, it would improve our growth prospects.
Okay, understood. And then just one last one for me and then I'll step back. Just in terms of deposit behavior, I guess when is it going to stop flowing in? Do you have a sense for that?
Can you help me with that? No, it's interesting. I mean, we are still seeing opportunities to bring on great new deposit relationships. Our existing customers are still growing their deposits, but we are seeing opportunities in some of our specialty lending areas, in other operating companies. So we're still focused on the total relationship and some day deposits will be worth something again.
But Alan and I talk about this almost every day about where we see deposits going and we're winning new relationships, but we need our customers to start investing a little bit of that liquidity, so that we can do something about the excess liquidity at the Fed.
And do you have a sense relative to the growth as to what percentage is from existing customer liquidity versus new customers? And I don't need exact numbers, just kind of a general sense that you have.
Yes. I'd say, I mean, this is anecdotal and not exact, but just looking at our top 150 depositors in the bank, that's represented a little more than half of the growth. So there is growth in the other customers in the bank. But I'd say overall, it's probably more 80% of our existing customers and 20% of the growth from new relationships.
Your next question comes from the line of Brett Rabatin from Holt Group.
This is actually Ben Gerlinger on for Brett.
Hi, Ben. How are you?
Doing well. Thanks for taking the question. I was curious, kind of running off of the same theme that Jackie just asked. If you look at growth in general, you seem to be posting positive numbers ex PPP. And then you also have a good insight to your clients and the PPP forgiveness.
I was kind of curious, especially with the M and A throughout California between public and private banks, I think there's double digit deals already year to date. I was curious on what you think growth potential could be in terms of loans? And then with that, are you guys actively looking to hire outside talent that might be displaced through M and A?
Yes. It's interesting. So there I just want to make sure I understand the question. Part of it is like you're asking us where is the growth coming from, I guess. And we have hired new teams.
We have hired new bankers. I mentioned that last quarter. We are opening we actually have officially opened, but the real opening is in the middle of August, our Modesto office. We hired a team out of Wells Fargo. So we are seeing opportunities for de novo team pickups and even within our adjacent footprint, bankers that have been displaced.
It's primarily from the larger banks, not as much from banks that have been acquired in California. It's more a function of the disruption at some of the larger banks and maybe their reorganizations that have created those opportunities for us. But we are looking and still always actively looking at opportunities on the M and A front as well.
Got you. And then just kind of switching gears to that M and A topic. You guys seem to have
a great strategy for growth and your credit
looks great. You have a very healthy valuation. And most importantly, there's a strategy. So any acquisition by would be no means defensive. So if you think of it as an offensive perspective, especially with your valuation, is there a need or a want to get something done this year?
Or is it more opportunistic? And then kind of juxtapose against that, I know you laid out that slide, you cast a pretty wide net. Is there something you can drill in a little further on and kind of narrow the targets?
Yes. I mean, I think that's pretty narrow. I mean, we want to make sure in any potential M and A deal that we would do that their strategy pretty closely aligns with our strategy, that the opportunities that we would consider would be within and adjacent to our footprint. There is value in moving into newer markets. But at the end of the day, we want to make sure that, that as you mentioned, our strategy that we execute on that.
And I'm hopeful that something will happen and we've had a lot of conversations, but you have to get to the finish line on these things. And so hopefully, we'll be able to do something sooner rather than later.
Okay, great. I appreciate the answers. I'll step back in queue.
Your next question comes from the line from Matthew Clark from Piper Sandler.
Hey, good morning.
Good morning, Matthew.
Maybe first, on the securities purchases this quarter, I guess, how do you think about redeploying that excess liquidity into securities given what the curve has done more recently? Just want to get a sense for your latest appetite and what you might be able to get and whether or not you might be changing your strategy slightly?
Matthew, you're correct and where rates have moved down more recently is probably below where we would target purchases. So we're probably in the very near term on pause, but as rates move up a little bit, we would probably be more active and deploy more of that liquidity, similarly to what we did both in the Q2, earlier part of the Q2 as well as in the Q1.
Okay. And on the prepaid fees, I know they were up at $1,800,000 but can you let us know what they were up to and what you think kind of a normal contribution from prepaid fees might be going forward?
It was about $3,400,000 in the quarter. Over the last five quarters, we've probably averaged to close to $2,500,000 $2,400,000 somewhere in that range. So Q1 was probably below average and this was a little bit over average.
And Matthew, this is Dave. Just to add one quick comment to that. I mean, it's a blessing and a curse on the prepayment penalty fee income because what that means is we're either having to fight off a refinance from another lender at in a lower rate environment. And so we can if we can keep that deal and modify it, there are situations where we get to recognize that prepayment penalty income and there are other situations where it's just amortized back into the loan if we do keep the loan. The more challenging part is if it leaves, we have prepayment penalties in all of our fixed rate loans and that gives us at least the opportunity to have the last look at any deal in many cases.
And so while it's a good thing to have, I mean, we wish the rate environment was a little bit different so that we wouldn't have the level of prepayment penalty that we would have. I mean, that's compared with our $306,000,000 of CRE growth, I mean, again, if we could stem the tide a little bit or rates went up a little bit, it would help slow that down. So just add a little color to Alan's answer.
Okay, great. And then just on new money yields on loans, I think we talked during the quarter, and they were kind of in that 3.50%, 3.75% range. I assume that's ex fees. Any change in that range of loans?
That range is still accurate. Obviously, in the last week or so, there has been some change in some of the rates from origination rates. But overall, in the Q2, that was definitely the range of which we were originating new loans.
Okay. And then last one for me, just on non interest expense, thinking about the run rate, I think we should obviously add back that $1,000,000 provision reversal for unfunded commitments. But, what are your thoughts on expense growth? I think also in light of your Slide 32 around tech investments?
I guess, two things. 1, you're right. I mean, we would not foresee a reversal of unfunded in the near term after the $1,000,000 this past quarter. Our marketing dollars, particularly our donations were lumpy. They were higher than normal this quarter.
So that would probably normalize a little bit as well. But as we've said, our goal is to try to keep our non interest expense relatively flat to very small increases. In terms of technology, we do have a lot of projects going on to increase automation and efficiency and scalable processes. And generally speaking, we are reinvesting savings into those projects to try to keep things relatively flat.
Okay. Thank you.
Your next question comes from the line of Gary Tenner from D. A. Davidson.
Thanks. Good morning.
Good morning.
I wanted to ask about kind of just broadly the impact as you see it currently or down the road from the drought in California and the challenges that it's beginning to develop in kind of the Northern Valley or just the Valley area in general and how that can impact your customers and the outlook there?
Yes, I mean it's definitely an issue. We do a very thorough analysis on water every time we're doing an agricultural based loan and water availability. And so it is definitely an issue that we're aware of. It's creating some cost increases, particularly for our dairy portfolio on the feed side, because the cost of growing has gone up. Thankfully, feed price or milk prices have remained at a level that our dairy farms can operate at least to breakeven, if not a slight profit.
The agribusiness side is definitely impacted by that as well. So I mean the deals and the customers that have the right water situation is very important to us and a big part of our analysis. But the drought is something we're watching closely and we are hopeful that we'll be able to figure something out and it rains a lot. So but it is definitely an issue.
Thanks. And then just kind of on the topic of the excess liquidity, especially the challenges now with the rate environment, we've seen other banks go down the path of kind of augmenting their single family portfolio with some purchases of some product that would have obviously better yield than buying mortgage backs, etcetera. So given that your single family portfolio has declined quite a bit the last couple of years, would you consider that as an alternative to securities purchases at some point?
We don't typically buy loans, as you know, and I think I don't foresee that really changing. It's not part of our strategy.
Okay. Thank you.
Our next question comes from the line of Tim Coffey from Janney.
Thank you. Good morning, gentlemen. Good morning. Hey, Dave, if I can just follow-up on the drought question. Have you recently stressed the portfolio, the ag portfolio for higher water costs or making sure everybody's got access to multiple water sources?
Yes, we do that every time we underwrite a loan. We stress for cost and not just water, but other issues. I think the important part about that as well is that the dairy and livestock group and our Central Valley Agribusiness group, when you look at the combined amount of those loans on our balance sheet, it's less than 4% of our total loans. So we keep a very close eye on dairy. We have monthly meetings where we talk about all of the issues of the I'll say the less than stellar performing deals we have, which we consider all of our deals good, but the kind of lower end ones, we review that.
We look at that from a stress perspective and interest rates, we look at that as stress perspective from their operating costs, which includes water and obviously feed. So yes, we do that regularly as a regular course of business. This is not something that we just started doing. We've been doing this in for our history.
No, no, for sure. And then maybe if we can kind of if we look at the reserves, given the kind of seasonality that you typically see in your loan portfolio in the second half of the year and the current level of reserves, Do you feel that you're kind of near the point where releasing reserves are complete?
It's hard to predict. You're correct, we have some seasonality, but also remember, seasonal growth sometimes are based on fairly short commitments. And this is a life of a loan type of an accounting methodology. So that by itself may not have that big of an impact. I would just indicate that if you look at the forecast, our economic forecast, you look at where our credit metrics are, they're all very strong, but it's hard to see a future at this point in time.
Sure. No, I understand. And then just absorbing the liquidity that you have on balance sheet, is the number one goal, perhaps number 2 and 3, just loan growth?
Yes. I mean loan growth, obviously, we want to make quality loans and we want to grow loans. So that would be our primary goal is growing loans. It's an enormous amount of liquidity. Our loan pipelines and I didn't mention this number in my prepared remarks, but our loan production this year through the 1st 6 months is up about 15%.
So we are over last year, which was a very good year for us. So we are producing an enormous amount of new opportunities. We got to shore up the back end and hopefully see some line utilization. But yes, the number one priority would be to make loans. But we also focus on relationships and we're not going to pass on an opportunity that's a great deposit opportunity that can lead to additional monetization, whether that's services, other treasury management services, fee income opportunities, all of those things are part of our relationship banking strategy.
Right.
Okay, great. Those are my questions. I appreciate your time.
Thank you.
Okay. At this time, there are no further questions. I will turn the call back over to Mr. Borrego for closing remarks.
Great. Thank you. I want to thank everybody for joining us this quarter. We appreciate your interest and look forward to speaking with you in October for our Q3 2021 earnings call. Please let Alan or I know if you have any questions.
Have a great day and thank you for listening.
This concludes today's conference. You may now disconnect.