Earnings Call Transcript
CVB FINANCIAL CORP (CVBF)
Earnings Call Transcript - CVBF Q2 2022
Operator, Operator
Good morning, ladies and gentlemen, and welcome to the Second Quarter of 2022 CVB Financial Corporation and its subsidiary, Citizens Business Bank, Earnings Conference Call. My name is Liz, and I will be 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, Christina Carrabino. You may proceed.
Christina Carrabino, Host
Thank you, Liz, and good morning, everyone. Thank you for joining us today to review our financial results for the second quarter of 2022. Joining me this morning are Dave Brager, President and 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. 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, 2021, 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. Now I will turn the call over to Dave Brager. Dave?
David Brager, CEO
Thank you, Christina. Good morning, everyone. For the second quarter of 2022, we reported net earnings of $59.1 million or $0.42 per share, representing our 181st consecutive quarter of profitability. We previously declared a $0.19 per share dividend for the second quarter of 2022, an increase of 6% compared to the first quarter of this year. It represented our 131st consecutive quarter of paying a cash dividend to our shareholders. Second quarter net earnings of $59.1 million or $0.42 per share compared with $45.6 million for the first quarter of 2022, or $0.31 per share and $51.2 million for the year-ago quarter or $0.38 per share. The second quarter of 2022 represents a full quarter of financial results, including the assets and liabilities acquired from Suncrest Bank on January 7, 2022. The integration of Suncrest was completed with the consolidation of two banking centers during the second quarter. We previously completed the systems conversion in February. Through the first 6 months of 2022, we earned $104.6 million or $0.74 per share compared with $115 million or $0.85 per share for the first 6 months of 2021. For the second quarter of 2022, our pretax pre-provision income was at a record level of $85.7 million compared with $65.9 million for the prior quarter and $70 million for the year-ago quarter. After excluding acquisition expense, our second quarter of 2022 generated 14% operating leverage over the first quarter of this year and 9% operating leverage over the same quarter last year. Our net interest margin grew by 26 basis points compared to the first quarter. Although our earning assets benefited from the general increase in interest rates, we also had strong growth in loans and investment securities, with loans growing by $134 million on average and investments growing by $328 million on average when compared to the first quarter. As an overall result, our earning asset yield grew from 2.93% in the first quarter to 3.2% in the second quarter while only experiencing a 1 basis point increase in our cost of funds to 4 basis points in the second quarter. We recorded a provision for credit losses of $3.6 million in the second quarter compared to $2.5 million in the first quarter and a recapture of provision for credit losses of $2 million in the year-ago quarter. In February, we initiated a $70 million accelerated share repurchase program, which resulted in the repurchase of approximately 3 million shares through the program termination date of June 2, 2022. In addition, we repurchased almost 1.7 million shares through June 30, 2022, under a 10b5-1 share repurchase program that became effective at the beginning of March. Now let's discuss loans in more detail. Our new loan production was very strong in the second quarter. New loan commitments were approximately $560 million, which is higher than the same period of last year by greater than 40%. When excluding PPP loans generated in 2021, total loans at quarter end were $8.7 billion, a $100.5 million or 1.2% increase from the end of the first quarter. However, after excluding PPP loan forgiveness, second quarter loan growth was $155 million or approximately 7% annualized. The core loan growth in the second quarter was led by continued growth in commercial real estate loans, which grew by $173 million or 11% annualized. C&I loans increased by $17 million when compared with the end of the first quarter or approximately 7% annualized. The line utilization rate for C&I loans was 32% at the end of the second quarter compared with 31% for the first quarter and 27% for the year-ago quarter. Dairy and livestock loans decreased by approximately $21 million from the prior quarter as loan utilizations declined from 69% in the first quarter to 66% at the end of the second quarter. Continued loan forgiveness for PPP loans resulted in a decline of $54 million in comparison to the first quarter. At quarter end, non-performing assets, defined as non-accrual loans plus other real estate owned, were $13 million compared with $13.3 million for the prior quarter and $8.5 million for the year-ago quarter. At quarter end, we had no OREO properties and the $13 million in non-performing loans represented 8 basis points of total assets. During the second quarter, we had net recoveries of $503,000 compared with net loan charge-offs of $5,000 for the first quarter of 2022. At June 30, 2022, we had loans delinquent 30 to 89 days of $559,000 compared with $2.6 million at March 31, 2022. Classified loans for the second quarter were $76 million compared with $64 million for the prior quarter and $49 million for the year-ago quarter. As of June 30, 2022, classified loans include $17.8 million in loans acquired from Suncrest. Now I would like to discuss our deposits. At June 30, 2022, our total deposits and customer repurchase agreements were $14.6 billion compared with $15.1 billion at March 31, 2021, and $13.2 billion for the same period a year ago. At June 30, 2022, our noninterest-bearing deposits were $8.9 billion compared with $9.1 billion for the prior quarter and $8.1 billion for the year-ago quarter. During the second quarter, noninterest-bearing deposits averaged $8.9 billion, a $200 million increase from the average balance in the first quarter. Noninterest-bearing deposits were approximately 63% of our average deposits for the second quarter of 2022 compared to 62% for both the prior quarter and the second quarter of 2021. The bank's funding is entirely core customer deposits and customer repos, which combined had a total cost of just 4 basis points in the second quarter. This 4 basis point cost of funds compares with 3 basis points in the prior quarter and 5 basis points for the year-ago quarter. I will now turn the call over to Allen to discuss our investments, the allowance for credit losses, and capital.
Allen Nicholson, CFO
Thanks, Dave. Good morning, everyone. We continue to deploy some of our excess liquidity during the second quarter into additional securities by purchasing more than $350 million in new securities with yields on average of approximately 3.75%. Investment securities available for sale, or AFS securities, totaled $3.6 billion, inclusive of a pretax net unrealized loss of $346 million. Investment securities held to maturity, or HTM securities, totaled approximately $2.4 billion at June 30, 2022. The growth in our investment portfolio over the last year resulted in investments increasing from 28% of average earning assets in the second quarter of 2021 to 36% in the first quarter of 2022 and now to 39% on average in this most recent quarter. In addition to the increase in the size of our securities portfolio, the tax equivalent yield on the portfolio grew from 1.7% in the first quarter of 2022 to 1.93% in the second quarter. Although we grew the investment portfolio, we continue to maintain a significant amount of funds at the Federal Reserve. Our Fed balance averaged approximately $800 million for the second quarter compared to more than $1.6 billion in the first quarter of this year. At June 30, 2022, our ending allowance for credit losses was $80.2 million or 0.92% of total loans. When excluding PPP loans, our allowance as a percentage of the remaining loans was 0.93%, which compares to 0.90% at March 31, 2022. In addition to the allowance for credit losses, we had $11 million in remaining fair value credit discounts from acquisitions at the most recent quarter end. For the quarter ended June 30, 2022, we recorded a provision for credit losses of $3.6 million compared to $2.5 million for the quarter ended March 31, 2022, and a $2 million recapture provision for credit losses in the year-ago quarter. The provision for credit losses in the second quarter was primarily driven by loan growth as well as an increase in our projected life of loan loss rates due to the deteriorating economic forecast that assumes very modest growth in GDP, lower commercial real estate values, and an increase in unemployment. 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 downside forecasts. We continue to have the largest individual scenario weighting on the baseline forecast, with downside risk weighted among multiple forecasts. Our weighted forecast assumes GDP will increase by 0.5% in the second half of 2022, 0.8% for 2023, and then grow by 2.5% in 2024. The unemployment rate is forecasted to be 4.6% in the second half of 2022, 5.4% in 2023, and then decline to 5% in 2024. Now turning to our capital position. From the end of 2021, shareholders' equity decreased by $99 million to $2 billion at June 30, 2022. The equity increased from the end of 2021 by $197 million for the issuance of 8.6 million shares to the former shareholders of Suncrest. Equity also increased due to year-to-date income of $104.6 million, which was offset by $52.2 million in dividends, representing a 50% dividend payout ratio. Interest rates increased through the end of the second quarter, resulting in an increase in the unrealized loss on our available-for-sale securities and a $243 million decline in equity due to the associated decrease in other comprehensive income. On February 1, we announced that our Board of Directors authorized a share repurchase plan to repurchase up to 10 million shares of the company's common stock and the execution of a $70 million accelerated share repurchase or ASR plan. In combination, the ASR and a 10b5-1 stock repurchase plan resulted in the repurchase of approximately 4.7 million shares at an average share price of $23.38, which reduced our common stock by $109 million. Our overall capital position continues to be very strong. Our regulatory capital ratio is well above regulatory requirements to be considered well-capitalized and above the majority of our peers. At June 30, 2022, our common equity Tier 1 capital ratio was 13.4% and our total risk-based capital ratio was 14.2%. I'll now turn the call back to Dave for further discussion on our second quarter earnings.
David Brager, CEO
Thank you, Allen. Net interest income before provision for credit losses was $121.9 million for the second quarter compared with $112.8 million for the first quarter and $105.4 million for the year-ago quarter. Second quarter earning assets decreased by $400 million on average from the first quarter due to a decrease of $860 million in average funds on deposit at the Federal Reserve, offset by an increase in investment securities of $328 million and a $134 million increase in average loans outstanding. Our earning asset yield increased by 27 basis points compared to the prior quarter. The increase in our earning asset yield was a result of a 24 basis point increase in investment yields, a 4 basis point increase in loan yields, and a shift in the composition of earning assets with average loans growing from 53% to 55% of average earning assets and investments growing from 36% to 39% while our average amount of funds at the Fed declined from 10% to 5% of earning assets. Our balance sheet continues to be well positioned for rising interest rates with significant liquidity, including $523 million on deposit with the Fed at the end of the second quarter and approximately $175 million of expected quarterly cash flows from our investment portfolio. Our tax equivalent net interest margin was 3.16% for the second quarter of 2022 compared with 2.90% for the first quarter and 3.06% for the second quarter of 2021. The increase in our net interest margin was a result of the increase in our earning asset yield while maintaining our very low cost of funds that migrated from 3 basis points in the first quarter to 4 basis points in the second quarter during a period of time that the Federal Reserve increased Fed funds by 150 basis points. Loan yields were 4.31% for the second quarter of 2022 compared with 4.27% for the first quarter of 2022 and 4.46% for the year-ago quarter. Total interest and fee income from PPP loans was approximately $1.4 million in the second quarter compared with $3 million in the first quarter. Excluding the impact of PPP loans and interest income related to purchase discount accretion, loan yields were 4.2% for the second quarter of 2022, 4.11% for the first quarter of 2022, and 4.33% for the second quarter of 2021. New loan production at the end of the second quarter began to exceed the average yields on the loan portfolio. Our cost of deposits and customer repos as well as our total cost of funds for the second quarter was 4 basis points. Interest-bearing deposits and customer repos decreased by an average of $314 million from the first quarter, while noninterest-bearing deposits grew by approximately $200 million on average. To date, we have experienced limited pressure to increase deposit rates despite the recent increases in market interest rates. However, during the Federal Reserve's aggressive rate hiking, pressure may impact future customer expectations. During the last rising rate cycle, short-term rates grew at a gradual pace by 225 basis points from 2014 to 2018, and our cost of funds increased by only 8 basis points during that same period. Moving on to non-interest income. Non-interest income was $14.7 million for the second quarter of 2022 compared with $11.3 million for the prior quarter and $10.8 million for the year-ago quarter. The second quarter of 2022 included $2.7 million in net gains on the sale of properties associated with banking centers. In addition, the second quarter of 2022 reflects a $1 million increase in income on our CRE investments, including a $1.3 million gain from a distribution related to one of these investments. Deposit service charges were $5.3 million in the second quarter, which was a $274,000 increase compared with the first quarter and were higher than our second quarter of 2021 by 28% or $1.2 million. Our trust and investment services fee income increased by approximately $140,000 compared with the prior quarter while being $205,000 or approximately 6% lower when compared with the year-ago quarter. Market conditions have negatively impacted assets under management and our trust fee income. Now, expenses. Non-interest expense for the second quarter was $50.9 million compared with $58.2 million for the first quarter of 2022 and $46.5 million for the year-ago quarter. Excluding acquisition expense, non-interest expense decreased by $2.1 million over the first quarter of 2022 and increased by $4 million over the second quarter of 2021. Staff-related expenses declined by $1.1 million compared to the first quarter of 2022, primarily due to lower payroll tax expense, which peaks in the first quarter of every year. The $4 million year-over-year increase is primarily attributable to the additional banking centers and associates acquired in the Suncrest merger. We have completed the integration and consolidations associated with the Suncrest acquisition. The third quarter of 2022 will reflect the full benefit of savings. However, the impact from the second to third quarter will be minimal. Non-interest expense totaled 1.2% of average assets for the second quarter of 2022. This compares with 1.36% for the first quarter of 2022 and 1.23% for the second quarter of 2021. Our efficiency ratio was 37.2% for the second quarter of 2022. This compares with 46.9% for the prior quarter and 40% for the first quarter of 2021. Now to the economy. The California economy continues to improve, but challenges remain. Supply chain issues, a tight labor market, and inflationary pressures continue to impact our customers and the bank. COVID transmission levels in California have recently increased and continue to create an uncertain business environment. We remain committed to our associates, customers, and shareholders during these challenging times. In closing, despite the previously mentioned headwinds, we produced approximately $86 million in pretax pre-provision income during the second quarter, which is a 30% increase from the first quarter. The combination of strong loan growth, expansion of our net interest margin, and our continuing efforts to closely manage expenses resulted in a record level of quarterly pretax pre-provision income. This growth supported a 6% increase in our quarterly dividend, which represents a dividend payout ratio of approximately 45%. We continue to focus on executing our core strategies and supporting our customers through these unpredictable times, and I would like to thank our associates, customers, and shareholders for their commitment and support. 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.
Operator, Operator
Our first question comes from Matthew Clark with Piper Sandler.
Matthew Clark, Analyst
Maybe first on deposits, down a little bit here. I know they're up, on average, at least noninterest-bearing. But what are your thoughts on deposit growth from here? And what are your updated thoughts around the deposit beta, and would you take the over or under on that 8 basis points from the last cycle?
David Brager, CEO
Yes. Some of that depends, obviously, on how aggressive the Fed is in continuing to raise rates. But like I said, we're seeing limited requests for higher rates, although it is happening. The one thing I would say on our point-to-point total deposits, the Suncrest acquisition had a number of relationships that we identified during due diligence and after the acquisition, more hot money relationships that were earning rates that we wouldn't normally pay. And so we made the individual decision on each of those to let them go or to keep them. And as you can see in the numbers, some of that was going. There's a little seasonality between the first quarter and the second quarter as well. I'm relatively optimistic on deposits. We have a higher percentage of noninterest-bearing, which are primarily operating accounts, and that was stable and grew by $200 million on average. So we're going to compete for relationships. We're not going to let the hot money depositors drive our cost of funds up. So I think we'll see a little more pressure. I mean this rising rate cycle is different than the last cycle. It took four years to raise 225 basis points. It might take three months to raise 225 basis points this time. So we'll have to see how that plays out. But I am relatively optimistic. And look, we're still winning good deposit relationships in the marketplace. But as you know, we focus on the total relationship and not just growing total deposits by paying higher rates.
Matthew Clark, Analyst
Great. And then shifting to the expense run rate you're going to get the full realization of the cost savings from Suncrest. Is it fair to assume that run rate could drift a little bit lower here in Q3 before starting to grow again?
Allen Nicholson, CFO
Matthew, I think we pushed most of what we wanted to do in the second quarter. So I think from an acquisition standpoint, it's not going to be material, Q2 to Q3. I think we talked last quarter as well, there are some inflationary pressures in terms of staff expense and vendor expenses. So I think more than likely, we may see pressure and expenses growing modestly throughout the rest of the year. I don't foresee them going down.
Matthew Clark, Analyst
Okay. And then the uptick in classified, I know it's still a relatively low number. But given how hyper-focused everybody is on credit, can you just discuss what drove that increase in classified? I think it was CRE-related?
David Brager, CEO
Yes. To be completely transparent, there was one loan that accounted for most of that increase. We are very well secured on that loan, and there are no concerns there. Overall, we remain very confident. The credit metrics are currently better than they were before the pandemic and during pretty much any prior time. There was a slight uptick, but it was really tied to one loan secured by two properties with a very low loan-to-value ratio, below 55%. We tend to be a bit more cautious than others, but I don't believe there is any significant change in the overall credit quality of the bank.
Matthew Clark, Analyst
Okay. And then last one for me, just on share repurchase activity. Should we assume you remain active despite the growing economic uncertainty here?
Allen Nicholson, CFO
Well, the Board announced a $10 million share repurchase earlier this year. We've not quite hit 50% of that yet. The ASR did make up a big part of that, which is close. We have an active 10b5-1, but it's going to be dictated by share price. So I don't really know what will happen for the rest of the year. But I think we accomplished a fair amount of what we wanted as you think about the $8.6 million that was issued for Suncrest and the fact that we bought more than half of that back.
Operator, Operator
Our next question comes from Kelly Motta with KBW.
Eleanor Yuan, Analyst
This is Eleanor on for Kelly today. So I guess to start, loan growth was pretty solid, and you've always had kind of steady solid loan growth. But it seems to be like a little more reserved than others. Is that a function of activity in your market or like conservatism/competition?
David Brager, CEO
To summarize, we aim to serve the top 25% of clients within their industries, which limits our market size compared to others. Maintaining high credit quality is crucial for us. Over the past two quarters, we have experienced annualized growth rates of 8% and 7%, which is significant for our company, as I cannot recall a previous instance of such consistent loan growth. Our pipeline is still healthy, and while we don't provide specific guidance, we are targeting mid-single-digit growth. However, I’ve noticed that there has been a slight softening in our pipeline since the first quarter. Depending on future interest rates and the overall economic situation, we may see a slowdown. Nonetheless, the 7% and 8% growth we achieved recently reflects the commitment of our teams. Moving forward, we are likely to align back to our usual growth range of 4% to 5%.
Eleanor Yuan, Analyst
Got it. That's helpful. And then also on the loan growth, just thinking about how is competition in your market right now? Are players acting rationally? Or are you starting to see people sort of compromise on terms or standards?
David Brager, CEO
From our perspective, we often believe that competitors are acting irrationally, though I'm just joking. We maintain a disciplined approach to underwriting. We will compete on price but not on structure, which is crucial for us. Overall, the competition hasn't been as intense as it was two to six quarters ago. Most participants seem aware that we might be entering a more challenging economic period, which has made them less willing to make exceptions. However, we are still witnessing some irrational pricing due to recent rate increases. For the most part, we have been able to originate loans at rates around 4.5% or higher, which is a significant improvement compared to previous quarters.
Operator, Operator
Our next question comes from David Feaster with Raymond James.
David Feaster, Analyst
Can you elaborate a bit more on the growth question? Specifically, how significant is this expected slowdown, especially considering the competition we've mentioned? What is your appetite for growth in this environment? We've discussed some economic challenges, but how do you feel about credit opportunities given the current economic landscape? How much of the deceleration is due to strategy versus your clients' reduced demand for credit? Also, do you have any insights into how your clients are feeling at this moment? Are they still quite optimistic, or do you sense a more cautious sentiment?
David Brager, CEO
I'll address the second question first, and you are absolutely right. Our clients are definitely exercising more caution. As we've discussed before, we hold customer luncheons with our banking division manager and regional manager at various centers and locations. In the last couple of these events, I've noticed that customers have been particularly cautious. This mindset will likely have some impact, David. Regarding growth, we aim to adjust our balance sheet mix. We want to increase our lending, but we will strictly adhere to our underwriting guidelines. This adherence will affect growth because we are not willing to make exceptions to our credit policy. Our credit underwriting guidelines have remained consistent pre-pandemic, during the pandemic, and continuing forward. We will evaluate deals consistently, and if they don’t meet our criteria, we won't force them to fit. You are correct that some of our growth may face headwinds due to clients' cautious nature, leading them to invest less than they might otherwise. We will underwrite in the same manner and will not compromise on credit quality in our originations. While we do face some headwinds, we are still focused on establishing quality relationships, and we will work diligently to achieve that. This focus on quality has historically differentiated us, and in recent quarters, we have experienced solid loan growth that we consider to be of high quality.
David Feaster, Analyst
That's helpful. Taking a high-level view on asset quality, you have a good understanding of the economy. As you've mentioned, we've discussed some challenges and changes in client sentiment. Looking ahead, are there any segments you are particularly cautious about or any early signs of concern that you might be avoiding? I’m interested in your high-level thoughts on asset quality. You mentioned that your positions are solid, but any additional comments would be appreciated.
David Brager, CEO
Yes, I have some concerns in a couple of areas. One of those is commercial and industrial lending in general, particularly for smaller companies. The Federal Reserve's rate increases are affecting operating lines for these smaller businesses more significantly. This presents several challenges with smaller lines of credit. However, I feel relatively confident about our office. Commercial real estate is a collateral type that many would acknowledge as problematic, but we underwrite it properly and monitor it closely. Regarding SBA 7(a) loans, we don't have a large number, but many of these loans are tied to prime rates and adjust quarterly. Therefore, they haven't yet felt the impact of the recent rate hikes, but that will start to happen, especially after July. If I were to rank my concerns, I would place smaller companies and smaller loan sizes at the top, followed by commercial and industrial, and SBA 7(a) loans, with office loans being a distant third.
David Feaster, Analyst
Okay. That all makes sense. And then just last one for me. Any thoughts on M&A? I mean, you've obviously got a strong currency. You're a disciplined acquirer. Just curious whether the uncertainty in the economy and some of the stuff that we've talked about changes your appetite for M&A at all? And any color on how conversations are going, seller expectations and what you'd be interested in? Obviously, the high level hasn't changed. But I don't know, given where we are, would we be more focused on the smaller end of the spectrum? Just curious, any commentary on the M&A environment.
David Brager, CEO
Yes, it's a great question. We discuss this topic frequently. Overall, as you mentioned, our high-level strategy remains consistent. We are still seeking opportunities in the $1 billion to $10 billion range within or near our market. We prefer banks that are similar to us, although no bank is exactly like us. Our goal is to integrate these banks into Citizens Business Bank and believe we can generate more profit from their customers than they can. While discussions are ongoing, they have slowed down. Typically, banks are sold rather than bought, and with share prices down for many banks, sellers are reluctant to sell at a low point as they believe they are worth more. The current credit situation also plays a role. Additionally, with tight labor markets, we are considering what we can achieve from a workforce standpoint. This may lead to cost savings that are lower than our usual 40% target, possibly around 25% or 30%, as we may need to retain more staff to ensure we have the necessary team in place. Generally, we do trade at high multiples to book value and P/E ratios, which is advantageous for us. However, just because we have the capability to pay more doesn't mean we will. We will proceed with caution. Any future due diligence we conduct will heavily weigh the economic slowdown and credit quality, which is always important, but may be even more critical now.
Operator, Operator
Our next question comes from Ben Gerlinger with Hovde Group.
Benjamin Gerlinger, Analyst
So this question is kind of more philosophical in nature. I mean the stocks are at all-time high today. You have a pretty notable revenue uptick with loan growth and was obviously moving interest rates coming. With this newfound revenue, is there any new initiatives that are now on the table? And kind of juxtapose against that? What are kind of priorities 1, 2, and 3 for you? I mean, you've done a pretty good job managing costs, which is the one thing you can fully manage, but just kind of get a little more granular on priorities.
David Brager, CEO
Our top priority is to continue to serve the best small- and medium-sized businesses in California. We aim to grow our same-store sales, which is our main focus. We monitor this closely on a monthly basis. Regarding your question about investing with increased revenue, we will remain disciplined. We consistently evaluate our investments and how we can optimize our operations. We are committed to investing in ways that enhance our efficiency and capacity. This has been a fundamental aspect of our organization. If the right opportunity arises, we are prepared and willing to act, though nothing is currently imminent. We recently had one of our best quarters, which underscores the importance of maintaining consistency in our operations. We are continuously seeking to improve our efficiency, better serve our customers, and assess our product offerings. We will be engaging in strategic planning sessions with our Board in August, and the management team is preparing for those discussions. Ultimately, there are no significant changes; we are focused on refining and enhancing our processes, which may seem uneventful but is essential for our success.
Allen Nicholson, CFO
Ben, we might be a little bit more focused on de novo, which has been consistently part of our strategy, but there may be more opportunities in the near term on some things like that.
David Brager, CEO
And we can find the right teams, for sure, a good point, Allen.
Benjamin Gerlinger, Analyst
Got you. That makes sense. It's clear that you're in a strong position regarding optionality. My next question is more about margin. You have a solid understanding of market dynamics, whether it's hot money or demands for higher rates. With the Fed increasing rates by 75 basis points this quarter and likely doing the same in July, which will be early in the next quarter, you're looking at about 150 basis points total. You're going to experience most of that impact throughout the third quarter. Do you think it's reasonable to anticipate an additional 25 to 26 basis points of margin expansion?
Allen Nicholson, CFO
We do not provide guidance, as you know, Ben. I would like to mention a couple of points. Firstly, the benefits on the asset side are somewhat delayed when comparing yield at the end of a quarter to the previous one against the averages. Additionally, we have reduced some of our liquidity, which means our asset sensitivity has likely decreased by about 15% compared to what we reported before. However, we still consider it to be relatively strong. The main concern is the deposits, but we will continue to grow through building relationships and will not focus on short-term transactional money.
David Brager, CEO
Yes, Ben, I'll just add to that real fast, and you and I have talked about this before as well. But when you have 63% of your deposits and operating funds, noninterest-bearing, there's a zero beta on that. It doesn't mean that the mix can't change a little bit, which is possible. But for the most part, we focus and look at where we're going to increase rates on relationships based on the relationship. So if you have a $10 million customer that has $5 million in noninterest-bearing and $5 million in money market, 50% that relationship is going to remain at zero. The other 50%, even if we have to increase the rates a bit, it's still overall going to be a very low-cost relationship. So that's how we evaluate it and that's how we look at it, and it's relationship by relationship. So I think your point is right, there will be more pressure but we're in a very good spot. And I think the one thing we didn't mention and nobody has really asked is I think with the inflationary pressures, there's just going to be a little more burden on everybody's cash that they have, not just our bank, but other banks as well. Everything is costing more. So some of that burn is going to happen. We didn't see it in our operating deposits, but I do think that that is also a factor in going forward here over, at least the next couple of quarters. I don't think we're going to be able to maintain a 1 basis point on a 150 basis point increase, but we're going to do our best.
Benjamin Gerlinger, Analyst
Yes, that makes sense. So I think it's pretty much for me, congrats on a great quarter and best of luck for the other half of the year.
Operator, Operator
Our next question comes from Clark Wright with D.A. Davidson.
Clark Wright, Analyst
This is Clark Wright right for Gary Tenner. First off, just a clarification on Slide 13 here. You have the core loan growth at 7%, but it looks like the Suncrest acquired loans are flat quarter-to-quarter. So is the net loan growth this quarter then constrained at all by any runoff on the acquired Suncrest loans?
David Brager, CEO
Yes, to some extent. The $775 million figure includes PPP loans as well. If you check Slide 13, you’ll notice that the PPP loans are decreasing. As for the Suncrest loans, while there is some impact, the Suncrest centers have also been generating new loans. Overall, the numbers shown are quite similar.
Clark Wright, Analyst
Got it. Appreciate that. And then my next item would be, looking at industrial CRE and given that it's been a sizable driver of production over the last two years, are you seeing any shift in demand for the warehouse space? Or are you pulling back in that space given economic slowdown that we could perceive here in the next few quarters?
David Brager, CEO
No. We feel industrial is one of the strongest that primarily where we're located in Southern California specifically is a distribution hub and very infrastructure mature. So it's not like they can just go down the street and build another 1 million square foot warehouse. So we feel very strong about that. It is the largest of our CRE concentration. And when you look at it at $2.2 billion, 50% of that is owner-occupied, and we underwrote that at origination of 51% loan-to-value. It's pretty granular for us with an average loan size of about $1.550 million. So we would want to do more industrial if we could, especially in the markets that we serve.
Clark Wright, Analyst
And then lastly for me, if you look at the cash or cash equivalents, it's just under $700 million now or 5% of earning assets. Is that a level that you're comfortable with holding for the foreseeable future?
Allen Nicholson, CFO
Ultimately, we'd like to see that lower. And every quarter, we've said we're trying to balance deploying some of that as well as maintaining flexibility on the balance sheet. So it could decline as we go out through the rest of the year. So I would say, historically, it's still more than we would normally like. But in the current environment, we're also probably cautious.
Operator, Operator
At this time, there are no more questions. So I'd like to turn the call back to Mr. Brager.
David Brager, CEO
Thank you, Liz. 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 2022 earnings call. Please let Allen and I know if you have questions. Have a great day, and we'll talk to you soon.
Operator, Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.