Earnings Call Transcript - CVBF Q2 2025

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the Second Quarter of 2025 CVB Financial Corporation and its subsidiary, Citizens Business Bank Earnings Conference Call. My name is Sherry, and I'm your operator for today. 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.

E. Allen Nicholson, CFO

Thank you, Sherry, and good morning, everyone. Thank you for joining us today to review our financial results for the second quarter of 2025. Joining me this morning is 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 31, 2024, 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.

David A. Brager, CEO

Thank you, Allen. Good morning, everyone. For the second quarter of 2025, we reported net earnings of $50.6 million or $0.36 per share, representing our 193rd consecutive quarter of profitability, which equates to more than 48 years of consecutive quarters of profitability. We previously declared a $0.20 per share dividend for the second quarter of 2025, representing our 143rd consecutive quarter of paying a cash dividend to our shareholders. We produced a return on average tangible common equity of 14.08% and a return on average assets of 1.34% for the second quarter of 2025. Our net earnings of $50.6 million or $0.36 per share compared with $51.1 million for the first quarter of 2025 or $0.36 per share and $50 million or $0.36 per share for the prior year quarter. The $540,000 decline in net income in the second quarter compared to the prior quarter was a result of the first quarter, including both a $2.2 million gain from the sale of OREO properties and a recapture of allowance of credit losses of $2 million. Pretax pre-provision income in the second quarter of 2025 was $68.8 million, which was $1.3 million higher than the first quarter of 2025 and remained flat compared to the second quarter of 2024. Net interest income for the second quarter of 2025 was $1.2 million higher than the prior quarter and $760,000 higher than the second quarter of 2024. Our earning assets remained stable between the first and second quarters of 2025, and our net interest margin remained at 3.31%. The increase in net interest income was primarily due to an additional day of interest income in the second quarter compared to the first quarter of the year. As a result of our deleveraging strategy executed during the second half of 2024, our net interest margin increased by 26 basis points from 3.05% in the second quarter of 2024, while earning assets declined by $1.1 billion from the prior year quarter. Noninterest income was $14.7 million in the second quarter, which was $1.5 million lower than the first quarter. We realized a $2.2 million net gain from the sale of $19.3 million of OREO in the first quarter of this year. Excluding this gain, second quarter noninterest income increased by $700,000 from the prior quarter, driven by higher trust and international fee income. Noninterest expense was $57 million in the second quarter, which was $1.6 million lower than the first quarter. Salary and benefits were lower by $1.5 million, and there was a $500,000 provision for off-balance sheet reserves in the first quarter. This improved the efficiency ratio to 45.6% in the second quarter compared to 46.9% in the first quarter. At June 30, 2025, our total deposits and customer repurchase agreements totaled $12.4 billion, a $123 million increase from March 31, 2025, and a $330 million higher than June 30, 2024. The year-over-year net growth was net of a $200 million decrease in brokered CDs. Our noninterest-bearing deposits grew by $63 million compared to the first quarter and were $157 million or 2.2% higher than the end of the second quarter of 2024. On average, noninterest-bearing deposits were 60.5% of total deposits for the second quarter of 2025 compared to 59.9% for the first quarter of 2025. Second quarter average deposits and customer repos were basically flat from both the prior quarter and the same quarter of last year. However, core deposits, excluding brokered CDs, grew on average by $173 million over the prior year. Our cost of deposits and repos remained at 87 basis points for the second quarter, which is the same as the first quarter of 2025 and the year-ago quarter. Our current deposit pipelines are strong and focused on operating companies. In addition, the deposit pipeline in our Specialty Banking group, which is focused on Title Escrow, Property Management, and Fiduciaries continues to be strong. Now let's discuss loans. Total loans at June 30, 2025, were $8.36 billion, a $5 million decline from the end of the first quarter of 2025 and a $178 million or 2.1% decline from December 31, 2024. Commercial real estate and single-family loans grew by $27 million and $19 million, respectively, from the end of the first quarter. The quarter-over-quarter decrease in total loans was largely due to reductions in line utilization for C&I and dairy and livestock lines of credit. A quarter-over-quarter decrease of $30 million in C&I reflects a decrease in line utilization from 29% at March 31, 2025, to 26% at June 30. In addition, dairy and livestock loans declined by $18 million compared to the first quarter, driven by a reduction in line utilization from 64% at the end of the first quarter to 62% at the end of the second quarter. The $178 million decrease in loans from the end of 2024 was driven by dairy and livestock loans declining by $186 million as these lines experienced their seasonally high utilization at year-end. C&I loans declined over the period by $13 million as line utilization decreased from 30% at the end of 2024 to 26% at June 30. Commercial real estate loans and single-family loans increased by $10 million and $19 million, respectively, from the end of 2024. Although we have seen a relative increase in loan originations so far in 2025, we also experienced a higher level of unscheduled loan payoffs in addition to the reduced line utilization. We've experienced an uptick in recent loan originations and our loan pipelines remain strong, although rate competition for the quality of loans we focus on has been intense. Loan originations in the second quarter of 2025 were approximately 58% higher than the first quarter of 2025 and 79% higher than the second quarter of 2024. The increase in loan originations was across both C&I and commercial real estate loans with a notable increase in investor commercial real estate. We averaged yields of 6.6% on new originations during the second quarter. Although loan yields were 5.22% in both the second and first quarters of 2025, the yield on our loan portfolio would have expanded by 5 basis points if not for lower line utilization during the second quarter of higher-yielding ABL and dairy and livestock loans as well as lower prepayment penalty income in the second quarter of this year. We experienced $249,000 of net charge-offs for the second quarter of 2025 compared to net recoveries in the first quarter of $180,000. Total nonperforming and delinquent loans increased by $3.2 million to $30 million at June 30, 2025. This increase was primarily due to an SBA loan that was greater than 30 days past due on June 30. Nonperforming and delinquent loans were $17.6 million lower than the $47.6 million at the end of 2024. Classified loans were $73.42 million at June 30, 2025, compared to $94.2 million at March 31, 2025, and $89.5 million at December 31, 2024. Classified loans as a percentage of total loans were 0.9% at June 30, 2025. The decrease from the first quarter of 2025 was primarily due to a $17 million decline in classified owner-occupied commercial real estate loans resulting from these loans being upgraded. I will now turn the call over to Allen to further discuss additional aspects of our balance sheet and our net interest income.

E. Allen Nicholson, CFO

Thanks, Dave. Net interest income was $111.6 million in the second quarter of 2025. This compares to $110.4 million in the first quarter of 2025 and $110.8 million in the second quarter of 2024. Interest income was $144.2 million in the second quarter of 2025 compared to $143 million in the first quarter and $159.1 million in the second quarter of last year. Average earning assets increased by a modest $1.7 million in the second quarter in comparison to the first quarter, while the earning asset yield remained constant at 4.28%. Compared to the second quarter of 2024, our earning assets decreased by $1.1 billion, and the earning asset yield declined by 9 basis points. Interest expense was $32.6 million in both the second and first quarters. Our cost of funds decreased from 1.04% for the first quarter of 2025 to 1.03% in the second quarter of 2025. The average balances of deposits and repos decreased slightly by $6 million over the prior quarter while increasing by $15 million over the second quarter of 2024. Interest expense decreased from the second quarter of 2024 by $15.6 million, primarily due to a $1.34 billion decline in average borrowings. With this reduction in borrowings, our cost of funds decreased by 35 basis points from the second quarter of last year. Our allowance for credit loss was $78 million at June 30, 2025, or 0.93% of gross loans. In comparison, our allowance for credit losses as of March 31, 2025, was $78.3 million or 0.94% of gross loans. The decrease was due to net charge-offs of $249,000. Comparatively, we had a $2 million recapture provision for credit losses during the first quarter of the year. Our economic forecast continues to be a blend of multiple forecasts produced by Moody's. We continue to have the largest individual scenario weighting on Moody's baseline forecast with both upside and downside risks weighted among multiple forecasts. The resulting economic forecast at June 30, 2025, was marginally different from our forecast at the end of the first quarter of 2025. The updated economic forecast reflects lower GDP growth, higher unemployment, and lower commercial real estate prices. Real GDP is forecasted to stay below 1% until the second half of 2026 and not reach 2% until the end of 2027. The unemployment rate is forecasted to reach 5% by the beginning of 2026 and remain above 5% until 2028. Commercial real estate prices are forecasted to continue their decline through the second half of 2026 before experiencing growth through the year 2028. Switching to our investment portfolio. Available-for-sale or AFS investment securities were approximately $2.49 billion at June 30, 2025. The unrealized loss on AFS securities decreased by $24.7 million from $388 million as of March 31, 2025, to $364 million on June 30, 2025. Hedging the market risk of our AFS portfolio, we have $700 million of fair value hedges. The net after-tax impact of changes in both the fair value of our AFS securities and our derivatives resulted in a $9.7 million increase in other comprehensive income for the second quarter. In May of this year, we terminated pay-fixed swaps with a total nominal value of $700 million that was issued in June of 2023 and were scheduled to mature in June of 2028 and replaced them for the same $700 million nominal value with new pay-fixed swaps that mature in May of 2029, 2030, and 2031. The swap replacement resulted in a 3 basis point lower weighted average fixed rate. The positive carry on receiving daily SOFR compared to the fixed rate paid on the swaps generated $1.3 million of interest income in the second quarter of 2025. Our held-to-maturity investments totaled $2.33 billion at June 30, 2025, which is a $31.9 million lower balance than the end of the first quarter. Our level of wholesale funding at June 30, 2025, did not change from the end of the first quarter. Our wholesale funds consisted of $300 million of brokered CDs that have been swapped as cash flow hedges and $500 million of Federal Home Loan Bank advances. As of June 30, 2025, the $500 million of Federal Home Loan Bank advances had a weighted average rate of 4.55% and the $300 million of brokered CDs at an average rate of 4.4%. Now I'm going to turn to the capital position. At June 30, 2025, our shareholders' equity was $2.24 billion, an $11 million increase from the end of March 2025, including a $9 million increase in other comprehensive income. Retained earnings were $23 million for the second quarter. Our Board of Directors authorized a new $10 million share repurchase plan in November of 2024. In conjunction with the share repurchase, we also approved a 10b5-1 plan. There were 1.28 million shares repurchased during the second quarter of 2025 at an average purchase price of $17.30. Year-to-date, we've repurchased 2.06 million shares at an average share price of $18.15. The company's tangible common equity ratio remained at 10% at June 30, 2025, the same as March 31, 2025. At June 30, 2025, our common equity Tier 1 capital ratio was 16.5% and our total risk-based capital ratio was 17.3%. I'll now turn the call back to Dave for some further discussion of our second quarter earnings.

David A. Brager, CEO

Thanks, Allen. Moving on to noninterest income. Our noninterest income was $14.7 million for the second quarter of 2025 compared to $16.2 million for the first quarter and $14.4 million in the second quarter of 2024. The first quarter of 2025 included the $2.2 million gain on sale of OREO. BOLI income increased by $397,000 from the first quarter of 2025 and increased by $285,000 compared to the second quarter of 2024. Our trust and wealth management fees increased by $304,000 or 8.9% and $287,000 or 8.4% from the first quarter of 2025 and the second quarter of 2024, respectively. International fees also increased from the first quarter by more than $150,000. Now expenses. Noninterest expense for the second quarter of 2025 was $57.6 million compared to $59.1 million in the first quarter of 2025 and $56.5 million in the second quarter of 2024. The first quarter of 2025 included a $500,000 provision for off-balance sheet reserves. There was no provision or recapture of off-balance sheet reserves in the second quarter of 2025. The second quarter of 2024 also included approximately $700,000 of lower expense related to an accrual adjustment for the estimated cost of the FDIC special assessment. Staff-related expenses decreased by $1.5 million or 4.05% over the first quarter of 2025, primarily due to higher payroll taxes that occur at the beginning of each calendar year. Staff expense decreased by $430,000 or 1.2% compared to the second quarter of 2024. Occupancy and equipment expenses grew by $108,000 when compared with the first quarter of 2025 and by $335,000 compared to the second quarter of 2024. The increase in occupancy expense includes the impact of the higher rent expense for the four offices involved in the sale-leaseback transactions in the second half of 2024. We continue to invest in technology infrastructure and automation as reflected in our growth in software expense of 4.5% or $190,000 higher than the first quarter of 2025 and 12% or $460,000 higher than the second quarter of 2024. Noninterest expense totaled 1.52% as a percentage of average assets in the second quarter of 2025 compared to 1.58% for the first quarter of 2025 and 1.4% for the second quarter of 2024. Our efficiency ratio of 45.6% was lower in the second quarter of 2025 compared to 46.7% for the first quarter of 2025, but slightly higher than the 45.1% in the second quarter of 2024. This concludes today's presentation. Now Allen and I will be happy to take any questions.

Operator, Operator

And our first question will come from Matthew Clark from Piper Sandler.

Matthew Timothy Clark, Analyst

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

David A. Brager, CEO

I'll address the first part of your question and then Allen will respond to part of it as well. We are not observing any changes in line utilization at this time, which is somewhat positive as it indicates that our customers, especially in dairy and livestock, are performing well. On the commercial and industrial side, customers have cash available; most of those lines are priced at prime or SOFR plus a spread, making it financially wiser for them to use their cash or reduce their line of credit if they have excess funds. Therefore, we are not experiencing an increase in line utilization. I anticipate that in the fourth quarter, especially regarding dairy and livestock loans, we will see how things develop on the commercial and industrial side. Allen, would you like to discuss the prepayment penalty in relation to payoffs?

E. Allen Nicholson, CFO

Yes. To address the first part of your question, we observed elevated payoffs throughout the year, particularly in the second quarter, which has affected volume more than yield. The yield impact primarily comes from our higher-yielding loans, such as asset-based loans and loans in the dairy and livestock sectors, where utilization has significantly decreased. This has notably influenced the overall loan mix from a yield standpoint. Without these factors, and with a reduction in prepayment penalties, Dave mentioned we would have seen an increase of about 5 basis points in loan yields, all other things being equal. Additionally, the portfolio repricing due to natural payoffs and adjustments is averaging around a couple of basis points per month, leading to an expected total of approximately 6 basis points. However, the mix of assets and the timing of some fee income related to prepayments offset this, preventing these gains from being reflected in our financials for the quarter.

Matthew Timothy Clark, Analyst

Okay. And on the repurchase agreements that were up, I think, on an end-of-period basis, can you just remind us of the cost of those and the outlook there, whether or not there was anything unusual?

David A. Brager, CEO

Are you referring to our customer repos?

Matthew Timothy Clark, Analyst

Yes.

David A. Brager, CEO

We consider those as deposits. Essentially, customers maintain a peg balance in their checking accounts, and any excess amount is transferred into the repos. On average, this reached about $400 million for the quarter, with a cost estimated around 170.

Operator, Operator

One moment for our next question and that will come from the line of Gary Tenner with D.A. Davidson.

Gary Peter Tenner, Analyst

I wanted to go back to the C&I comments you made on the non-dairy and livestock loans. You've always talked about how your customers or the best business owners and operators, and you kind of reiterated that in your comments a few minutes ago. I'm just curious, it seems like the headwind there maybe remains a little bit higher than what we've seen through this earnings season and the commentary has generally been a bit more positive. Do you think that some of kind of the lag perhaps is more customer specific? Or do you think it is a little more regional in terms of California business opportunities?

David A. Brager, CEO

I don't believe it's a regional issue. Our customers maintain high credit quality, low balance sheet leverage, and significant excess deposits. This situation has likely affected our utilization rates. However, this doesn't mean they won't take advantage of opportunities outside of California. I view this as somewhat temporary. We have historically had low utilization rates, but if we had maintained the same utilization from the first quarter, we would have seen an increase in loans. I anticipate this will improve. This situation is not a reflection of a lack of confidence among our customers; rather, they are generally optimistic and are sitting on a lot of cash. From their perspective, it's more cost-effective to use their cash given our deposit rates. It's cheaper for them to forgo the interest on deposits than to pay high borrowing rates. I view this as a temporary situation. Regarding dairy, despite your comment about excluding it, it plays a significant role. The dairy sector is currently profitable, and we may see some delayed loan activity shift from the fourth quarter to the third quarter as they look to make purchases for tax planning reasons. Therefore, I believe the outlook is positive, and our customers will utilize their lines more. This is just a brief moment where they are holding cash while still engaging in other opportunities. For example, we've seen record activity in our international group, which involves foreign transactions, indicating that our customers are active. They're just prioritizing their cash reserves first.

Gary Peter Tenner, Analyst

Certainly, a high-class problem for your customers at this point. Just on the deposit side, real quickly, I think your interest-bearing deposit beta through the first 100 basis points sits right around 30% without knowing when the next or a series of additional rate cuts will come, do you think you could continue at that kind of pace? Or given how low your funding costs already are, do you think it kind of the next leg is a little bit lighter from a beta perspective?

David A. Brager, CEO

I actually think it's going to be a little bit better from a beta perspective. And just to refresh everybody's memory, in the first 50 basis point rate cut, we basically reduced our special priced money market accounts by only 25 basis points, and we only did that on deposit accounts over 2.5%. So it didn't capture anything below 2.5%. On the second and third cuts of 25 basis points, we did 100% of it. We went down to 2% on the second cut, and we went down to 1.5% on the third cut. If we have another cut, we will capture, for the most part, everything over 1% with 100% decrease. There may be some people that come back and push back a little bit on that. But all in all, I think we'll do better than 30% beta on that.

Operator, Operator

One moment for our next question and that will come from the line of Andrew Terrell with Stephens.

Robert Andrew Terrell, Analyst

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

E. Allen Nicholson, CFO

So Andrew, I believe the most probable scenario is that we will focus on building the investment book. Given our current approach to managing interest rate risk, I do not anticipate reducing wholesale funding. Although we have accumulated some cash, we will be careful about how we use it due to the seasonal nature of our assets and liabilities. However, it is more likely that we will begin to grow the investment book.

Robert Andrew Terrell, Analyst

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

David A. Brager, CEO

Yes. I think I initially described it as intense, but fierce might be a more accurate term. I'll have my speechwriters adjust that for next quarter. It has been intense, with spreads ranging from 130 to 170 basis points over Treasuries for fixed-rate products. It's somewhat surprising that people are willing to accept those terms, perhaps because they believe long-term rates will decrease. I don't necessarily share that optimism, so we'll see how it unfolds. We're aiming for at least 2% to 2.5% over benchmarks. For the right relationship and customer, we need to remain competitive. However, when assessing new relationships, we focus on the overall relationship, including loans, deposits, and fee income opportunities, and we base pricing on those factors. We are indeed seeing pricing around 130 to 170 over Treasuries, translating to mid-5s. I expect our origination yields to decrease slightly in the third quarter, and we'll monitor how it evolves into the fourth quarter. So far this quarter, we're likely around a 6.25% to 6.5% origination rate. We need to be disciplined in our underwriting and select the best customers, hoping they will choose us as well. We are facing competition in underwriting and structuring deals. Recently, we competed for a deal involving an unsecured loan for a restaurant looking to remodel multiple locations. It's a well-regarded restaurant, but it's still a restaurant. Such instances illustrate the pressure from others claiming they can achieve 10% loan growth. I'm confident in our production, and the pipeline looks solid for at least the next couple of months. I believe we can still achieve growth despite seasonal challenges in the dairy sector. We'll compete where necessary for the right relationships. Regarding building the investment portfolio, if we can secure more than 5% on an investment security compared to 5.5% on a loan, the numbers clearly favor the investment security.

Operator, Operator

One moment for our next question, and that will come from the line of David Feaster with Raymond James.

David Pipkin Feaster, Analyst

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

David A. Brager, CEO

I'll address the last part first. Yes, I still believe that originations can exceed the payoffs. I think we will see some normalization in our utilization, which should help. We also have to consider the seasonality in the dairy sector. Regarding competition, it’s not primarily coming from private credit, as most of those opportunities aren't aligned with our strategy. The most intense competition is actually from regional banks, with some involvement from larger banks; however, smaller banks aren't the ones offering the most aggressive pricing. This seems to be more of a structural issue. In summary, I would characterize the competition as being mainly from regional banks with assets between $100 billion and $250 billion.

David Pipkin Feaster, Analyst

That's helpful. And we've talked in the past about the success that your Specialty Banking groups had. I'm curious kind of how that group has contributed maybe this quarter to some of the solid deposit trends that you're seeing and maybe more broadly, the competitive side for funding, right? I mean, just curious what you're seeing there, especially as industry growth seems to be improving.

David A. Brager, CEO

Yes. Look, they had a record year last year. They're not quite at record year pace this year, but they're still having a good year. And very candidly, we could be even doing better there, but it's similar to the loan pricing. We're very conscientious about the cost of third-party vendor payments and the related ECR rate, the earnings credit rate that we would have to pay. And so there are people out there that are paying extremely high ECR rates and then subsequently writing big checks through third-party vendor payments. That is not our model. Our model is more relationship-based, service-based, all of those things. And we've been successful. And I think I've mentioned this in the past, our ECR beta was lower than our deposit beta in the upcycle and has remained that. So we are seeing competition there. There are banks that are willing to pay up. And I can tell you of the customers that have left in that group, I would say at least 40% to 50% of them come back to us because people are just throwing it out there to get deposits. But there's a lot to that business, and we have a great team that does a great job and has competed very well without having to give away the bank.

David Pipkin Feaster, Analyst

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

David A. Brager, CEO

Yes, discussions are ongoing. I agree that we are observing an increase in transactions, with most of them taking place at reasonable prices. However, many of the conversations I have indicate expectations for better pricing, which can present challenges for us. I still believe we might have an announcement by the end of the year, although it may require us to step outside our usual comfort zone to achieve that. We would consider this for the right organization. We have encountered various opportunities and examined different options, but there are specific reasons for not moving forward with some. Ultimately, our priority is to ensure that we maintain Citizens Business Bank and manage integration effectively. Many of these deals have been outside of California, as there has not been much activity within California itself, except for the PPBI deal.

Operator, Operator

One moment for our next question, and that will come from the line of Kelly Motta with KBW.

Kelly Ann Motta, Analyst

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

David A. Brager, CEO

Thank you, Kelly, that's a great question. In our investor presentation, you may have noticed that we slightly changed our acquisition strategy on Page 10. It now includes in-market and new geographic markets, and we have removed the specific mention of California. Generally, we would still prefer a California-centric bank, and previously we were reluctant to consider banks outside of California. However, from a strategic standpoint, we are being more open to exploring other options. There's nothing immediate on the horizon; this is more of a strategic choice to think about expanding beyond our current borders. Regarding California's economic challenges, there is some validity to that, but I believe there are still significant opportunities here due to the diverse industries in the area, which allows us to capture market share. We are also considering the possibility of de novo teams. So, everything is on the table. I hope that answers your question.

Kelly Ann Motta, Analyst

Thanks for the color and pointing that out. I really appreciate it. Maybe last question from me. Your expenses are really well controlled. And it seems like the growth environment, there's been a couple of things that have been working in the wrong direction, even though your clients remain really healthy. And you've been able to control expenses very well in light of that. Wondering, given the step down this quarter, if there's any nuances around that, that we should be mindful of when thinking about the run rate ahead and any flex there?

E. Allen Nicholson, CFO

Sure, Kelly. I think about the run rate in a couple of ways. As Dave mentioned, there's usually some noise between Q1 and Q2 because payroll taxes tend to be higher in the first quarter. Moving into the second half of the year, we typically implement midyear salary increases for our associates in July, which means staff expenses should rise a bit. However, we've been effective in using technology for automation, allowing us to manage staffing expenses quite well. I expect to see around 10% growth in our technology sector, which should continue to expand. Overall, expense growth is likely to remain in the low single digits as it generally does for us, and we will keep a close watch on that.

David A. Brager, CEO

Kelly, I want to add an important point. There are many factors influencing these numbers. For instance, regarding occupancy expenses, following our sale-leaseback transactions, these expenses actually increased by $2.2 million to $2.4 million. In the second quarter, however, they only rose by $335,000. We're continuously assessing our office space. We recently downsized from 7,500 square feet to 2,500 square feet. Each lease renewal presents an opportunity to reassess our needs, and given the current softness in the office market, we've successfully negotiated lower lease rates for our remaining properties. We're committed to managing these expenses effectively. Allen typically mentions that our annual expense growth remains in the low single digits, and I believe we can sustain that trend. We've seen positive operating leverage in the last two quarters, and we're diligently working towards that by focusing on revenue growth while keeping expenses in check or even reducing them.

Operator, Operator

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 A. Brager, CEO

Thank you, Sherry. Citizens Business Bank continues to perform consistently in all operating environments. Our solid financial performance is highlighted by our 193 consecutive quarters or more than 48 years of profitability and 143 consecutive quarters of paying cash dividends. We remain focused on our mission of banking the best small- to medium-sized businesses and their owners through all economic cycles. I'd like to thank our customers and our associates for their commitment and loyalty. Thank you again for joining us this quarter. We appreciate the interest and look forward to speaking with you in October for our third quarter 2025 earnings call. Please let Allen or I know if you have any questions. Have a great day.

Operator, Operator

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