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CVB Financial Corp (NASDAQ:CVBF)
Q2 2021 Earnings Call
Jul 22, 2021, 10:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Second Quarter of 2021 CVB Financial Corporation and its subsidiary Citizens Business Bank Earnings Conference Call. My name is Shalon, and I am your operator for today. [Operator Instructions]

I would now like to turn the presentation over to your host for today's call, Christina Carrabino. You may proceed.

Christina L. Carrabino -- Principal

Thank you, Shalon, and good morning everyone. Thank you for joining us today to review our financial results for the second quarter of 2021.

Joining me this morning are, Dave Brager, Chief Executive Officer; and Allen 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-19 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-19 virus have surfaced and spread throughout the U.S. including in the company's markets in California. As a result, the COVID-19 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-19 variants 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-K 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 Brager. Dave?

David A. Brager -- Chief Executive Officer

Thank you, Christina. Good morning everyone. Thank you for joining us again this quarter. We reported net earnings of $51.2 million for the second quarter 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 second quarter of 2021, which represented our 127th consecutive quarter of paying a cash dividend to our shareholders.

Second quarter net earnings of $51.2 million or $0.38 per share compared $63.9 million for the first quarter of 2021 or $0.47 per share, and $41.6 million for the year-ago quarter or $0.31 per share. Through the first six months of 2021, we are $115.1 million or $0.85 per share compared with $79.6 million or $0.58 per share for the first six months of 2020. We recorded a recapture of provision for credit losses of $2 million for the second quarter of 2021. In comparison, we recorded a recapture of provision for credit losses of $19.5 million for the first quarter of 2021. The recapture of provision was primarily the result of our forecast of continuing improvements in macroeconomic variables, including GDP growth and decreasing unemployment.

For the six months ended June 30, 2021, we recaptured $21.5 million of provision for credit losses, which essentially reverses the $23.5 million in provision expense recorded during the first six months of 2020. For the second quarter of 2021, our pre-tax pre-provision income was $69.7 million compared with $70 million for the prior quarter and $70.3 million 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 $8.07 billion compared with $7.58 billion for the prior quarter and $6.9 billion for the year-ago quarter. Non-interest-bearing deposits were 63.7% of total deposits at the end of the second quarter compared with 62.7% for the prior quarter and 63% for the year-ago quarter. We continue to see strong deposit growth for the second quarter as total deposits and customer repurchase agreements increased by $662 million or 5.3% from the first quarter of 2021 and $1.8 billion or 15.7% higher than the prior year.

At June 30, 2021, our total deposits and customer repurchase agreements were $13.2 billion compared with $12.6 billion at March 31, 2021 and $11.5 billion for the same period a year ago. Average non-interest-bearing deposits were $7.7 billion for the second quarter of 2021 compared with $7.2 billion for the prior quarter and $6.2 billion for the year-ago quarter. Our average total deposits and customer repurchase agreements of $12.9 billion for the second quarter grew by $682 million or 5.6% from the first quarter.

Now, moving on to loans. Total loans, including PPP loan forgiveness, decreased by $222 million from the end of the first quarter. When compared to the first quarter, adjusting for the decrease in Paycheck Protection Program loans, our loans grew by $18 million or at a 1% annualized rate. Compared to the prior quarter end, commercial real estate loans grew by $74 million or by more than 5% annualized. Year-to-date, CRE loans have grown by $169 million 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 million or 6% between the second quarter of 2021 and the second quarter of 2020.

Our dairy & livestock and agribusiness loans excluding seasonal changes have grown modestly by $6 million. C&I loans, however, continue to be impacted by low utilization rates, which is a primary driver of the continued decline in C&I loans, which was $92 million compared to the second quarter of 2020. C&I utilization rates were 27% on average in the second quarter, which compares to the pre-pandemic level of 39% in the first quarter of 2020 and 31% for the second quarter 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 million.

Finally, all other loan categories have also decreased in total by $62 million over the past 12 months. Our loan production continue to be strong in the second quarter 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 second quarter decreased by $21 million compared with the first quarter of 2021, while increasing by $202 million compared with the year-ago quarter. During the second quarter of 2021, PPP loans had an average balance of $838 million compared with $881 million for the first quarter of 2021. Through June 30, 2021 of the 4,000 PPP loans we originated during round one, more than 80% of our borrowers representing $853 million in loans have received forgiveness from the SBA. Today, our borrowers PPP forgiveness requests have been completely processed by the SB -- that having completely processed by the SBA have received greater than 99% forgiveness based on the customers' forgiveness application. As of June 30, 2021, we originated over 1,900 PPP loans in round two for more than $400 million.

Net interest income before recapture or provision for credit losses was $105.4 million for the second quarter compared with $103.5 million for the first quarter and $104.6 million from the year-ago quarter. Earning assets grew by $646 million on average from the first quarter with more than $590 million 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 million from the first quarter, but interest expense declined as the cost of interest bearing deposits and customer repurchase agreements decreased from 6 basis points in the first quarter to 5 basis points in this recent quarter.

Our tax equivalent net interest margin was 3.06% for the second quarter of 2021 compared with 3.18% for the first quarter and 3.7% for the second quarter 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% for the second quarter, down from 2.93% for the prior quarter and 3.42% for the year-ago quarter. Our net interest margin continue to be negatively impacted by excess liquidity.

During the second quarter, we had approximately $1.7 billion on average on deposit at the Federal Reserve, earning 11 basis points. The net interest margin in the second quarter would have been approximately 40 basis points higher without the $1.7 billion on average on deposit at the Federal Reserve. Loan yields were 4.46% for the second quarter of 2021 compared with 4.5% for the first quarter of 2021 and 4.77% for the year-ago quarter.

Total interest and fee income from PPP loans was $8.1 million in the second quarter compared to $10.4 million in the first 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 second quarter of 2021, 4.23% for the first quarter of 2021 and 4.4% for the second quarter of 2020.

Prepayment income increased by $1.8 million quarter-over-quarter and by $1.3 million compared with the year-ago quarter. Our cost of deposits and customer repos as well as our cost of funds for the second quarter was 5 basis points. We redeemed our $25.8 million junior subordinated debentures on June 15, which had a borrowing cost of approximately 1.6%. Our cost of funds declined by 8 basis points compared to the second quarter of 2020.

Now moving on to non-interest income. Non-interest income was $10.8 million for the second quarter of 2021 compared with $13.7 million for the prior quarter and $12.2 million for the year-ago quarter. Second quarter income from bank-owned life insurance or BOLI decreased by $3.4 million from the first quarter of 2021 and $443,000 from the second quarter of 2020. The first quarter of 2021 included a $3.5 million in debt benefits that exceeded the asset value of certain BOLI policies, while the second quarter of 2020 included $450,000 in death benefits.

Fees from interest rate swaps were lower than the prior quarter by $215,000 and were $2.2 million less in the second quarter of 2020. The steepening of the yield curve during the second quarter 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 first quarter and were higher than the second quarter 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 second quarter was $46.5 million compared with $47.2 million for the first quarter of 2021 and $46.4 million for the year-ago quarter. Total salary and benefit expenses decreased by $870,000 compared to the first quarter, including a $1 million decrease in payroll taxes. Higher payroll taxes are typical for the first quarter of every year. Salary and benefit expense increased by $130,000 from the second quarter of 2020. Marketing and promotion expense increased by $1.1 million and $544,000 compared to the first quarter of 2021 and the second quarter of 2020 respectively. The increase was primarily due to the timing of donations made during the second quarter to community groups throughout our geographic footprint.

During the second quarter of 2021, we recaptured provision for unfunded commitments of $1 million as a result of our improving forecast for macroeconomic variables that project losses from unfunded commitments. Non-interest expense totaled 1.23% of average assets for the second quarter of 2021 compared with 1.32% for the first quarter of 2021 and 1.48% for the second quarter of 2020. Our efficiency ratio was 40.05% for the second quarter of 2021 compared with 40.26% for the prior quarter and 39.75% for the second quarter of 2020.

Now turning to our asset quality metrics. During the second quarter, we had net loan charge-offs of $463,000 compared with $2.4 million for the first quarter of 2021 and $158,000 for the year-ago quarter. At quarter end, nonperforming assets defined as non-accrual loans plus other real estate owned, were $8.5 million, down from $15.3 million for the prior quarter and $11.7 million at June 30, 2020. At June 30, 2021, we had loans delinquent 30 to 89 days of $415,000 compared with $1.7 million at March 31, 2021. Classified loans for the second quarter were $49 million, a $20.1 million decrease from the prior quarter. As of June 30th, we had no loans remaining on deferment related to the CARES Act. We will have more detailed information on classified loans available on our second quarter Form 10-Q.

I will now turn the call over to Allen Nicholson to discuss our effective tax rate, our allowance for credit losses, investments and capital levels. Allen?

E. Allen Nicholson -- Executive Vice President Chief Financial Officer

Thanks, Dave. Good morning, everyone.

Our effective tax rate was 28.6% for the second quarter compared to 28.6% for the first quarter of 2021 and 29.23% 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 $2.5 million in the first quarter of 2021, as a result of the $2 million recapture provision of credit losses and net loan charge-offs of $463,000. At June 30, 2021, our ending allowance for credit losses was $69.3 million or 0.86% of total loans, but 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 million in remaining fair value discounts from acquisitions.

We previously recorded provision of credit losses of $23.5 million in the first half of 2020 due to the estimated impact on loan losses from the economic forecast of the significant downturn in the economy, resulting from the COVID-19 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 loss which resulted in a decrease in our allowance for credit losses. For the six months ended June 30, 2020 we have recorded a recapture provision for credit losses of $21.5 million and our allowance for credit losses of $69.3 million has closely returned to the pre-pandemic level we had at December 31, 2019 of $68.7 million.

Our economic forecast continues to be a blend of multiple forecasts produced by Moody's. These U.S. economic forecasts included 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 and 2023. The unemployment rate is forecast to be slightly higher than 6% in both 2021 and 2022 before declining to 5.3% in 2023. Our total investment securities increased by approximately $70 million from the end of the first quarter. As of June 30, 2021, investment securities available for sale or AFS securities totaled $2.93 billion inclusive of a pre-tax net unrealized gain of $23.3 million. Investment securities held-to-maturity or HTM securities totaled approximately $1 billion at June 30th. During the second quarter, we purchased approximately $317 million in new AFS securities with an expected tax equivalent yield of 1.7%.

Now turning to our capital position. For the six months shareholders' equity increased by $47.1 million to $2.06 billion. The increase was primarily due to net earnings of $115 million dollars, a $22 million decrease in other comprehensive income from the tax-effected impact of the decrease in market value available for sale securities and $49 million 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 second quarter and our regulatory capital ratios are well above regulatory requirements to be considered well capitalized. At June 30th, 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.

David A. Brager -- Chief Executive Officer

Thank you, Allen. Despite the ongoing impact of the COVID-19 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 will reopen on June 15, thanks to the effective COVID-19 vaccines and falling transmission rates, although there have been obviously some issues due to the spike of the Delta variant of COVID-19. 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 $1.5 billion to our customers in support of their businesses. As of June 30, 2021, we have received forgiveness on over $860 million of the loans.

In closing, we are pleased with our financial results for the first six 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, Allen and I will be happy to take any questions that you might have.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Jackie Bohlen from KBW.

Jacquelynne Bohlen -- KBW -- Analyst

Hi, good morning guys.

David A. Brager -- Chief Executive Officer

Good morning, Jackie.

Jacquelynne Bohlen -- KBW -- Analyst

I want to start with loan growth. Just seeing -- 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 printer in the background, I can't figure out how to turn it off. 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.

David A. Brager -- Chief Executive Officer

Yeah. 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&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, it's costing them more money to get things shipped and to receive things. And so they're going to be starting to use money and kind of this whether transitory or not inflationary period.

Jacquelynne Chimera -- Keefe Bruyette & Woods Inc. -- Analyst

So C&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?

David A. Brager -- Chief Executive Officer

I mean, the simple answer to that is CRE did drive net loan growth excluding PPP by very small percentage. So if we can combine that with a little line utilization, obviously it would improve our growth prospects.

Jacquelynne Chimera -- Keefe Bruyette & Woods Inc. -- Analyst

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 are they going to stop flowing in, do you have a sense for that?

David A. Brager -- Chief Executive Officer

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 someday deposits will be worth something again, but I-- Allen 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.

Jacquelynne Chimera -- Keefe Bruyette & Woods Inc. -- Analyst

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?

David A. Brager -- Chief Executive Officer

Yeah, 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, so.

Jacquelynne Chimera -- Keefe Bruyette & Woods Inc. -- Analyst

Okay, great. Thank you. That's very helpful. I'll step back now.

David A. Brager -- Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Brett Rabatin from Hovde Group.

Ben Gerlinger -- Hovde Group -- Analyst

Hey, good morning, guys this is actually Ben Gerlinger on for Brett.

David A. Brager -- Chief Executive Officer

Hi, Ben. How are you?

Ben Gerlinger -- Hovde Group -- Analyst

Doing well. Thanks for taking the question. I was curious kind of running out the same theme that Jackie just asked. If you look at growth, in general, it 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&A throughout California between public and private banks, I think there is double-digit deals already, year-to-date. I was curious on what you think a 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&A?

David A. Brager -- Chief Executive Officer

Yeah, 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&A front as well.

Ben Gerlinger -- Hovde Group -- Analyst

Got you. And then just kind of switching gears to the M&A topic, you guys seem to have a great strategy for growth, your credit looks great, you have a very healthy valuation and most importantly there is a strategy. So any acquisition by would be no means defensive. So if you think of it is 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 cast a pretty wide net, is there something you could drill in a little further on kind of narrow the targets?

David A. Brager -- Chief Executive Officer

Yeah, I mean I think that's pretty narrow. I mean we want to make sure in any potential M&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 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.

Ben Gerlinger -- Hovde Group -- Analyst

Okay, great. I appreciate the answers. So I'll step get back in queue.

Operator

Your next question comes from the line from Matthew Clark from Piper Sandler.

Matthew Clark -- Piper Sandler -- Analyst

Hey, good morning.

David A. Brager -- Chief Executive Officer

Good morning, Matthew.

Matthew Clark -- Piper Sandler -- Analyst

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.

E. Allen Nicholson -- Executive Vice President Chief Financial Officer

Matthew, you're correct and wear rates have moved down more recently, it's 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 second quarter, earlier part of the second quarter as well as in the first quarter.

Matthew Clark -- Piper Sandler -- Analyst

Okay. And on the prepay fees, I know they were up $1.8 million. But can you let us know what they're up to and what you think kind of a normal contribution from prepaid fees might be going forward?

E. Allen Nicholson -- Executive Vice President Chief Financial Officer

It was about $3.4 million in the quarter. Over the last five quarters, we've probably averaged to close to $2.5 million, $2.4 million somewhere in that range. So Q1 was probably below average and this was a little bit over average.

David A. Brager -- Chief Executive Officer

And Mathew, I just -- 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 in a lower rate environment and so we can, if we can keep that deal or modify it there are situations where we get to recognize that prepay until the income and there are other situations, or just amortize back into the loan. If we do keep the loan. The more challenging part is if that 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 million of CRE growth. I mean, again, if we could stem or tie a little bit or our rates went up a little bit, it would help slow that down. So just to add a little color to Allen's answer.

Matthew Clark -- Piper Sandler -- Analyst

Okay, great. And then just on new money yields on loans. I think we talked during the quarter, and they were coming in at 3.50, 3.75 range. I assume that's ex-fees. Any change in that range of loan?

David A. Brager -- Chief Executive Officer

That range is still accurate. Obviously, in the last week or so there has been some change in some of the rates that -- from origination rates, but overall, in the second quarter that was definitely the range of which we were originating new loans.

Matthew Clark -- Piper Sandler -- Analyst

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 million provision reversals for unfunded commitments, but what are your thoughts on expense growth. I think also in light of your Slide 32 around tech investments.

E. Allen Nicholson -- Executive Vice President Chief Financial Officer

There are two things. One, you're right. I mean, we would not foresee a reversal of unfunded in the near term after the $1 million 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, increased automation and efficiency in scalable processes, and generally speaking, we are reinvesting savings into those projects to try to keep things relatively flat.

Matthew Clark -- Piper Sandler -- Analyst

Okay. Thank you.

Operator

Your next question comes from the line of Gary Tenner from D.A. Davidson.

Gary Tenner -- D.A. Davidson -- Analyst

Thanks, good morning.

David A. Brager -- Chief Executive Officer

Good morning.

Gary Tenner -- D.A. Davidson -- Analyst

I wanted to ask you 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 could impact your customers and the outlook there?

David A. Brager -- Chief Executive Officer

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 is gone up. Thankfully, milk prices have remained at a level that our dairy farms can operate as at least a break-even, if not a slight profit. The agribusiness side is definitely impacted by that as well. So finding 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.

Gary Tenner -- D.A. Davidson -- Analyst

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, etc. So, given that your single-family portfolio is declining quite a bit in the last couple of years, would you consider that as an alternative to securities purchases at some point?

David A. Brager -- Chief Executive Officer

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.

Gary Tenner -- D.A. Davidson -- Analyst

Thank you.

Operator

[Operator Instructions] Our next question comes from the line of Tim Coffey from Janney.

Timothy N. Coffey -- Janney -- Analyst

Thank you. Good morning, gentlemen.

David A. Brager -- Chief Executive Officer

Good morning.

Timothy N. Coffey -- Janney -- Analyst

Dave, if I can just follow up on the drought question, have you -- has the bank recently stressed the portfolio, the ag portfolio for higher water costs or making sure everybody's got access to multiple water sources?

David A. Brager -- Chief Executive Officer

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 point 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 our deals good, but the kind of lower end ones, we review that. We look at that from a trust perspective and interest rates. We look at that as trust 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 through our history.

Timothy N. Coffey -- Janney -- Analyst

No, for sure. And then maybe if you can kind of -- if you look at the reserves, given the kind of seasonality that you typically see in a loan portfolio in the second half of the year and the current level of reserves, do you feel like you're kind of near the point where releasing reserves is complete?

David A. Brager -- Chief Executive Officer

It's hard to predict. You're correct, we had 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 foresee in the future at this point in time.

Timothy N. Coffey -- Janney -- Analyst

Sure. No, I understand. And then just absorbing the liquidity that you have on balance sheet, is the number one goal that's number 2 and 3, just loan growth?

David A. Brager -- Chief Executive Officer

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 mentioned this number in my prepared remarks, but our loan production this year through the first six 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, it'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.

Timothy N. Coffey -- Janney -- Analyst

Right. Okay, great. Those are my questions. I appreciate your time.

David A. Brager -- Chief Executive Officer

Thank you.

Operator

[Operator Instructions] Okay, at this time there are no further questions. I would like to turn the call back over to Mr. Brager for closing remarks.

David A. Brager -- Chief Executive Officer

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 third quarter 2021 earnings call. Please let Allen or I know if you have any questions. Have a great day, and thank you for listening.

Operator

[Operator Closing Remarks]

Duration: 41 minutes

Call participants:

Christina L. Carrabino -- Principal

David A. Brager -- Chief Executive Officer

E. Allen Nicholson -- Executive Vice President Chief Financial Officer

Jacquelynne Bohlen -- KBW -- Analyst

Jacquelynne Chimera -- Keefe Bruyette & Woods Inc. -- Analyst

Ben Gerlinger -- Hovde Group -- Analyst

Matthew Clark -- Piper Sandler -- Analyst

Gary Tenner -- D.A. Davidson -- Analyst

Timothy N. Coffey -- Janney -- Analyst

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