CVB Financial Corp
NASDAQ:CVBF
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CVB Financial Corp
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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 Shailene and I am your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer period. Please note, this call is being recorded.
I would now like to turn the presentation over to your host for today's call, Christina Carrabino. You may proceed.
Thank you Shailene 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 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?
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 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 compares with $63.9 million for the first quarter of 2021 or $0.47 per share and $41.6 million for the year-ago quarter $0.31 per share. Through the six months of 2021, we earned $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 provision for credit losses of $2 million for the second quarter of 2021. In comparison, we recorded a recapture provision for credit losses of $19.5 million for the first quarter of 2021. The recapture provision was primarily the result of our forecast of continuing improvements in macroeconomic variables, including GDP growth and decreasing unemployment. For the 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 2021, our pretax 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 continued 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 million 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 and 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 the 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 continued to be strong 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. To-date, our borrowers PPP forgiveness requests that have been completely processed by the SBA have received greater than 99% forgiveness based on the customer's forgiveness application. As of June 30, 2021, we originated over 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 six basis points in the first quarter to five 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, 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 4.44% 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 five 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 eight 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 for the second quarter of 2020. The first quarter of 2021 included $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 debt benefits.
Fees from interest rate swaps lower than the prior quarter by $215,000 and were $2.2 million less than the second quarter of 2020. The steeping of 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 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 for 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 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 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 $150,000 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 30, we had no loans remaining on deferment related to the CARES Act. We will have more detailed information on classified loans available on our 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?
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 from the first quarter of 2021 as a result of the $2 million recapture of provision of credit losses and net loan charge-offs of $163,000. At June 30, 2021, our ending allowance for credit losses was $69.3 million or 0.86% of total loans. When excluding PPP loans, our allowance as a percentage of the remaining loans is 0.94%, which compares to 0.91% at the pre-pandemic period end of December 31, 2019. In addition to the allowance for credit losses, we have $23 million in remaining fair value discounts from acquisitions.
We previously recorded a 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 losses, which resulted in a decrease in our allowance for credit losses.
For the six months ended June 30, 2021, we 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 include a baseline forecast as well as an upside and downside forecast, with the largest weighting on the baseline. Our weighted forecast assumes GDP will increase by more than 6% in 2021 and then grow at approximately 2.5% to 3% for 2022 and 2023.
The unemployment rate is forecasted 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 pretax net unrealized gain of $23.3 million. Investment securities held to maturity or HTM securities totaled approximately $1 billion at June 30. 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, a $22 million decrease in other comprehensive income from the tax affected impact to the decrease in market value of 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 30, our Common Equity Tier 1 capital ratio was 15.1% and our total risk-based capital ratio was 15.9%.
I will now turn the call back to Dave for some closing remarks.
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 puts the bank in a position to execute on our time tested strategy of banking to best small and medium-sized businesses and their owners in our local markets.
California's economy fully reopened 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 am 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 million to our customers in support for their businesses. As of June 30, 2021, we 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.
[Operator Instructions]. Your first question comes from the line of Jackie Bohlen from KBW.
Hi. Good morning guys.
Good morning Jackie.
I wanted to start with loan growth and just see what you are seeing on the CRE market. You have been having some good expansion there that I think gets a little bit overshadowed by some of the other, I apologize for the print on the background, I can't figure out how to turn it off. So it's just overshadowed and I just wanted to see where you are seeing that? Is there are any particular geographies where it's coming from? Or if it's more broad based across the footprint?
Yes. Jackie, it's definitely broad based across the footprint and we continue to see very solid pipelines. Obviously, that 6% growth in CRE is great. It is the largest amount of loans on our balance sheet. But it is overshadowed by some of the items I mentioned such as C&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 are 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 are going to start to use money in kind of this, whether transitory or not, inflationary period.
So is 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?
I mean, the simple answer to that is, CRE did drive net loan growth, excluding PPP, by a very small percentage. So if we can combine that with a little line utilization, obviously it would improve our growth prospects.
Okay. Understood. And then just one last one for me and then I will step back. Just in terms of deposit behavior, I guess when is it going to stop flowing in. Do you have a sense for that?
Yes. Can you help me with that? No. I mean, 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 are still focused on the total relationship. And someday, deposits will be worth something again. But Allen and I talk about this almost every day about where we see deposits going. And we are winning new relationships. But we need our customers to start investing a little bit of that liquidity so that we can do something about the excess liquidity at the Fed.
And do you have sense relative to the growth as to what percentage is from existing customer liquidity versus new customers? And I don't need exact numbers, just kind of a general sense that you have.
Yes. I would say, I mean this is anecdotal and not exact. But just looking at our top 150 depositors in the bank, that represented a little more than half of the growth. So there is growth in the other customers in the bank. But I would say, overall it's probably more 80% of our existing customers and 20% of the growth from new relationships.
Okay. Great. Thank you. That's very helpful. I will step back now.
Thank you.
Your next question comes the line of Brett Rabatin from Hovde Group.
Hi. Good morning guys. It's actually Ben Gerlinger, on for Brett.
Hi Ben. How are you?
Doing well. Thanks for taking the question. I was curious, kind of riding off on the same theme that Jackie just asked. If you look at growth in general, you seem to be posting positive numbers ex-PPP. And then you also have a good insight to your clients and the PPP forgiveness. I was kind of curious, especially with the M&A throughout California between public and private bankers double digit deals already year-to-date, I was curious on what you think growth potential could be in terms of loans? And then with that, are you guys actively looking to hire outside talent that might be displaced through M&A?
Yes. It's interesting. So I just want to make sure I understand the question. Part of it is like you are 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.
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 you would be no mean 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, you have cast a pretty wide net. Is there something you could drill in a little further on to kind of narrow the targets?
Yes. I mean I think that's pretty narrow. I mean we want to make sure in any potential M&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 am hopeful that something will happen and we have had a lot of conversations. But you have to get to the finish line on these things. And so hopefully, we will be able to do something sooner rather than later.
Okay. Great. I appreciate the answers. So I will step get back in queue.
Your next question comes from the line from Matthew Clark from Piper Sandler.
Hi. Good morning.
Good morning Matthew.
Maybe first on the securities purchases this quarter. I guess how do you think about redeploying that excess liquidity into securities, given what the curve has done more recently? Just want to get a sense for your latest appetite and what you might be able to get and whether or not you might be changing your strategy slightly?
Matthew, you are correct. And where rates have moved down more recently, it's probably below where we would target purchases. So we are 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.
Okay. And on the prepay fees, I know they were up $1.8 million. But can you let us know what they are up to? And what do you think kind of a normal contribution from prepay fees might be going forward?
It was about $3.4 million in the quarter. Over the last five quarters, we have 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.
And Mathew, 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 are either having to fight off a refinance from another lender in a lower rate environment. And so 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 where it's just amortized 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 the tide 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.
Okay. Great. And then just on new money yields on loans. I think we talked during the quarter, they were coming in at 3.50%, 3.75% range. I assume that's ex-fees. Any change in that range of loan?
That range is still accurate. Obviously, in the last week or so there has been some change in some of the rates from origination rates. But overall, in the second quarter that was definitely the range of which we were originating new loans.
Okay. And then last one for me, just on non-interest expense. Thinking about the run rate, I think we should obviously add back that $1 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?
There are two things. One, you are right. I mean, we would not foresee reversals 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 have said, our goal is to try to keep our non-interest expense relatively flat to very small increases. In terms of technology, we do have a lot of projects going on to increase automation and efficiency in scalable processes. And generally speaking, we are reinvesting savings into those projects to try to keep things relatively flat.
Okay. Thank you.
Your next question comes from the line of Gary Tenner from D.A. Davidson.
Thanks. Good morning.
Good morning.
I wanted to ask 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?
Yes. I mean it's definitely an issue. We do a very thorough analysis on water every time we are doing an agricultural-based loan and water availability. And so it is definitely an issue that we are aware of. It's creating some cost increases, particularly for our dairy portfolio on the feed side because the cost of growing has gone up. Thankfully, milk prices have remained at a level that our dairy farms can operate as at least at breakeven, 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 are watching closely. And we are hopeful that we will be able to figure something out and it rains a lot. But it is definitely an issue.
Thanks. And then just kind of on the topic of the excess liquidity, especially the challenges now with the rate environment, we have 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, et cetera. 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?
We don't typically buy loans as you know. And I think I don't foresee that really changing. It's not part of our strategy.
Okay. Thank you.
[Operator Instructions]. Our next question comes from the line of Tim Coffey from Janney.
Thank you. Good morning gentlemen.
Good morning.
Dave, if I can just follow up on the drought question. 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?
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, I will 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 stress perspective and interest rates. We look at that as stress perspective from their operating costs, which includes water and obviously feed. So yes, we do that regularly as a regular course of business. This is not something that we just started doing. We have been doing this through our history.
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 are kind of near the point where releasing reserves is complete?
It's hard to predict. You are correct. We have some seasonality. But also remember, seasonal growth sometimes are based on fairly short commitments. And this is a life of a loan type of an accounting methodology. So that, by itself, may not have that big of an impact. I would just indicate that if you look at the forecast, our economic forecast, if you look at where our credit metrics are, they are all very strong. But it's hard to foresee the future at this point in time.
Sure. No, I understand. And then just absorbing the liquidity that you have on balance sheet, is the number one goal, perhaps number two and three, just loan growth?
Yes. I mean loan growth, obviously, we want to make quality loans and we want to grow loans. So that would be our primary goal is growing loans. It's an enormous amount of liquidity. Our loan pipelines and I didn't mention this number in my prepared remarks. But our loan production this year through the first six months is up about 15% 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 are 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.
Right. Okay. Great. Those are my questions. I appreciate your time.
Thank you.
[Operator Instructions]. Okay. At this time, there are no further questions. I would turn the call back over to Mr. Brager for closing remarks.
Great. Thank you. I want to thank everybody for joining us this quarter. We appreciate your interest and look forward to speaking with you in October for our 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.
This concludes today's conference. You may now disconnect.