CVB Financial Corp (CVBF) 2013 Q4 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the fourth quarter and year end 2013 CVB Financial Corporation and its subsidiary, Citizens Business Bank, earnings conference call. My name is Mike, 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. As a reminder, today's conference call is being recorded. I would like to turn the presentation over to your host for today's call, Christina Carrabino. Ms. Carrabino, the floor is yours, ma'am.

Thank you Mike, and good morning everyone. Thank you for joining us today to review our financial results for the fourth quarter and year end 2013. Joining me this morning are Chris Myers, President and Chief Executive Officer, and Rich Thomas, 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.cvbank.com and click on the Our Investors tab.

Before we get started, let me remind you that today's conference call will include some forward-looking statements. These forward-looking statements relate to, among other things, current plans, expectations, events and industry trends that may affect the Company's future operating results and financial position. Such statements involve risks and uncertainties, and future activities and results may differ materially from these expectations. The statements 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, [2012], and in particular the information set forth in item 1-A, Risk factors therein. Now I will turn the call over to Chris Myers.

Thank you Christina. Good morning everyone, and thank you for joining us again this quarter. Yesterday we reported earnings of $25.3 million for the fourth quarter of 2013, compared with $24.2 million for the third quarter of 2013, and $22.1 million for the fourth quarter of 2012. This quarter represents the most profitable quarter in Company history. Highlights for the quarter included over $100 million in organic loan growth, and a $6.8 million recapture of loan loss provision primarily due to improved credit metrics. Earnings per share were $0.24 for the fourth quarter, compared with $0.23 for the third quarter and $0.21 for the year ago quarter.

For the year ended December 31, 2013, we earned $95.6 million compared with $77.3 million for the year ended December 31, 2012. Earnings per share were $0.91 for 2013 compared with $0.74 for 2012. 2013 represents the most profitable year in CVB Financial history. The fourth quarter represented our 147th consecutive quarter of profitability, and 97th consecutive quarter of paying a cash dividend to our shareholders. Excluding the impact of the yield adjustment on covered loans, our tax exempt net interest margin was 3.49% for the fourth quarter, compared with 3.48% for the third quarter, and down from 3.60% for the year-ago quarter.

At December 31, 2013, we had $3.55 billion in total loans net of deferred fees and discount, compared with $3.44 billion at September 30, 2013. Overall noncovered loans increased by $108.2 million, and covered loans decreased by $3 million quarter-over-quarter. During the fourth quarter, our commercial real estate loan portfolio increased by $75 million, and our dairy and livestock loan portfolio increased by $33 million. The dairy and livestock loan portfolio typically increases during the fourth quarter, as many dairies draw down on their line of credit to prepay feed expenses. We therefore regard the fourth quarter increase in dairy loans as temporary. Our recent growth in total loans can be attributed to a combination of a strength in new pipeline and reduced loan runoff.

In terms of loan quality, nonperforming assets defined as noncovered nonaccrual loans plus OREO decreased in the fourth quarter to $46 million, compared with $56 million for the prior quarter. The allowance for loan and lease losses was $75.2 million, or 2.22% of total noncovered loans at December 31, 2013, compared with $80.7 million, or 2.46% of outstanding loans at September 30, 2013. Net recoveries for the fourth quarter were $1.3 million, compared with net chargeoffs of $994,000 for the third quarter of 2013. At December 31, 2013 we had loans delinquent 30 to 89 days of $3.3 million, or 0.10% of total noncovered loans. The $3.3 million included $1.7 million of single family residential mortgage pool loans.

Classified loans for the fourth quarter were $245.6 million, compared with $264.1 million for the prior quarter. This represents a 7% decrease in classified loans quarter-over-quarter. Our classified loans decreased due to improvements in our commercial real estate, commercial and industrial, and dairy loan portfolios. We will have more detailed information on classified loans available in our year end Form 10-K.

Moving on to covered loans. Covered loans represent loans in which we have loss sharing protection from the FDIC as a result of our acquisition of San Joaquin Bank in October 2009. At December 31, 2013, we had $173.1 million in total covered loans with a carrying value of $160.3 million, compared with $177.9 million with a carrying value of $163.3 million at September 30, 2013. As of fourth quarter end our remaining purchase discount was $12.8 million. As a reminder, our loss sharing agreement with the FDIC expires this year in October.

Now I would like to discuss deposits. For the fourth quarter of 2013, our noninterest bearing deposits increased to $2.56 billion, compared with $2.54 billion for the prior quarter, and $2.42 billion for the same quarter a year ago. This represents a $142 million, or 5.9% increase year-over-year completely organic. Noninterest bearing deposits now represent 52.41% of our total deposits. Our total cost of deposits and customer repurchase agreements for the fourth quarter was 12 basis points compared with 12 basis points for the prior quarter.

At December 31, 2013, our total deposits and customer repurchase agreements were $5.53 billion, compared with $5.25 billion for the same period a year ago, and $5.46 billion at September 30, 2013. Our ongoing objective is to maintain a low cost stable source of funding for our loans and securities. Interest income. Interest income for the fourth quarter totaled $59.3 million, compared with $58.1 million for the third quarter of 2013. The $59.3 million for the fourth quarter included $2.1 million of discount accretion from principal reductions and payoffs, as well as the improved credit loss experienced on covered loans. This compares to $2.9 million of discount accretion for the prior quarter. So if the discount accretion was eliminated, total interest income for the fourth quarter increased by $2.1 million, or about 3.8% from the third quarter of 2013. Total investment income of $14.5 million increased $1.9 million, or 15.3% from $12.6 million for the third quarter of 2013. Noninterest income was $5.9 million for the fourth quarter, compared with $5 million for the third quarter of 2013.

Now expenses. We continue to closely monitor and manage our expenses. Noninterest expense for the fourth quarter was $29.3 million, compared with $25.7 million for the third quarter. The quarter-over-quarter increase was due to $3.7 million in insurance reimbursements for previous years legal costs recorded in the third quarter of 2013. Noninterest expense excluding the $20.4 million FHLB debt termination expense recorded back in 2012 declined by $3.8 million in 2013. This decline was primarily due to an increase of $3.2 million in insurance reimbursements for legal costs. Also contributing to this year-over-year decrease were reductions of $1.4 million in legal expenses, $1.3 million in OREO related costs, $1 million in occupancy and equipment expenses, and a $1 million decrease in the amortization of intangible assets. The aforementioned decreases in noninterest expenses were partially offset by a $2.5 million increase in salaries and employee benefits, and a $500,000 provision for unfunded loan commitments in 2013.

Now I would like to turn the call over to Rich Thomas, our CFO, to discuss our effective tax rate, investment portfolio, and overall capital position. Rich.

Thanks Chris. Good morning everyone. Our effective tax rate was 34.4% for this third and fourth quarters. The overall tax rate for the full year 2013 was 33.7%. Now to our investment portfolio. During the fourth quarter of 2013, we sold an average of approximately $99.3 million in overnight funds to the Federal Reserve, and received a yield of approximately 25 basis points on collected balances. We also maintained $70 million in short-term CDs with other financial institutions, yielding approximately 70 basis points. At December 31, 2013, investment securities totaled $2.67 billion, up $46.3 million from the third quarter of 2013. Investment securities represented approximately 40% of our total assets at quarter end. At December 31, 2013, we had an unrealized loss of $16.1 million in our investment portfolio, compared to an unrealized gain of $7.3 million for the prior quarter.

Virtually all of our mortgage-backed securities are issued by Freddie Mac or Fannie Mae, which have the implied guarantee of the US Government. We also have three private label collateralized mortgage-backed securities totaling $560,000. We have been strategically reinvesting our cash flow runoff from our investment portfolio. Carefully weighing current rates and overall interest rate risk. During the fourth quarter, we purchased $160.6 million in mortgage-backed securities with an average yield of 2.19%, and an average duration of approximately four years. We also purchased $4 million in municipal securities during the fourth quarter, with an average tax equivalent yield of 3.86%. We elected to utilize short term borrowings to facilitate a portion of these purchases. However, we regard these borrowings as temporary, as we intend to pay them back through cash flow from our investment portfolio and/or future deposit growth.

For the year 2013, we purchased $860.9 million of mortgage-backed securities, with an average yield of 2.15% and $19.8 million of municipal securities with an average tax equivalent yield of 3.64%. Prepayment speeds in our investment portfolio have decreased, and based upon current interest rates, we anticipate receiving approximately $25 million to $30 million in monthly cash flow from this portfolio.

Now turning to our capital position. Our capital ratios are well above regulatory standards, and we believe they still remain above our peer group average. Our December 31, 2013 capital ratios will be released soon concurrently with our year end Form 10-K. Shareholders equity increased $8.9 million for the year 2013. The year-over-year increase was due to an increase of $95.6 million in net earnings, $6.4 million of various stock-based compensation items, this was offset by $52.6 million in an unrealized loss on available for sale investment securities, and $40.5 million in cash dividends.

Now I will turn the call back to Chris for some closing remarks.

Thanks Rich. Now, let's talk about economic conditions. In terms of the dairy industry, milk prices increased, while feed costs continued to decrease. According to the California Department of Food and Agriculture, the CDFA, feed costs in California represented 65.4% of total milk production costs at the end of the third quarter of 2013, down from 66.8% of total milk production costs for the second quarter of 2013. Thanks to a reported bumper US corn crop during 2013 and slowing exports, dairy farmers saw a significant drop in corn prices. This downward trend may help to lower the cost of other feed products as well. It remains difficult, however, to project the future cost of feed as it will continue to be dependent on many factors, one of which is weather.

Turning to the California economy. Although its overall recovery has not progressed at a rapid pace, California's economy continues to gets stronger each month. According to the State's employment development division the California unemployment rate was 8.5% in November of 2013, compared with 8.7% in October, and 9.9% back in November of 2012 over a year ago. Through August 2013, California had recovered just shy of 830,000 of the nearly 1.37 million jobs lost during the recession.

The real estate market which is strengthening is expected to continue to perform well over the next several quarters. Local economists forecast home price appreciation to remain in the double-digits into mid-2014.Not only are home prices rising, but California's housing inventory remains undersupplied. The longer development and permitting processes along with the regulatory climate have been keeping the new supply of housing comparatively muted. The tight supply keeps home prices high relative to other states, and makes it more difficult for individuals to afford the cost of housing while still maintaining their overall quality of life. Individual incomes, overall consumer spending, and exports of key commodities and products continue to be positive economic factors. Hotel occupancy and other tourism have also strengthened.

With 2013 now in the books, I would like to thank our employees for their continued hard work and commitment, our customers for their loyalty, our shareholders for their continued support, and our Board of Directors for their ongoing guidance. As we move into 2014 we remain focused on quality loan growth, fee income expansion, stronger core deposits, and overall operating efficiencies. We also continue to actively focus on acquisition opportunities with respect to community banks in or adjacent to our geographic footprint. That concludes today's presentation, and now Rich and I will be happy to take any questions that you might have.

Thank you sir. (Operator Instructions). The first question we have comes from Hugh Miller with Sidoti & Company. Please go ahead.

Good morning.

Good morning.

I guess the first question was just with regards to kind of the loan yields which we continue to see some pressure on in this particular quarter, quarter-over-quarter. Can you just comment about kind of the competitive landscape and whether or not that is really pressuring things, and what we should be thinking going forward?

It is interesting, it is interesting because back in March and April we felt that the environment for loan pricing was the most competitive we have seen, and that is really a product of the ten year treasury being down as low as it was. Now, that ten year treasury has come back up, I think it is running at 285, or something like that, so some of that pressure has moderated in terms of the real low, low pricing for really primarily what we are talking about here is fixed rate commercial real estate lending. We have seen some of that back off, it is still a very competitive environment particularly for the loans that we are chasing. We are chasing the higher quality, typically a little bit lower loan to value loans. We are not trying to stretch on the credit side, I would rather win a deal with a little bit lower pricing that is better quality, than stretch for a tougher loan to get more yield. So it is still a very competitive environment, but it is not like it was. And some of that is also reflected in our prepayment penalties, and that bleeds into net interest margin as well. If you look at prepayment penalty income for the fourth quarter it was $273,000-ish for us. That compares to $856,000 for the third quarter, $1.1 million for the second quarter, and $950,000 for the first quarter of 2013. So you can see that the competitive pressure for refinancing some of our existing commercial real estate loans has subsided some. The good news is that we are getting a little bit better pricing on our loans and our securities, right, we are buying securities at higher yields. But we have lost some of that prepayment income, which kind of caused our net interest margin to flatten quarter-over-quarter, but we are hoping that if we can continue to get good loan demand and keep these prices or get a little higher yields on our loans that that NIM will start going back up.

And I guess some of that, too, you are benefiting to an extent from lower levels of nonperforming assets being a positive. Some of it just also is a shift towards, or would you say that you are shifting your portfolio even more towards higher quality loans? I know you guys are always very conservative on the underwriting side. Has there been I guess a mix shift where you are willing to take a lower yield just to have a higher quality loan than you were several quarters ago?

I think we are pretty consistent. I don't think we are any different than we were before. We have always tried to drive quality and we are continuing in that. I guess the point I am trying to make more is that I don't think we are stepping off our quality drive because we are trying to grow loans. We are marketing very hard, and trying to keep that quality focus.

Okay. Then the follow-up question I had was with regards to what we are reading out of the beige book reports for the San Francisco district and the California area is kind of a divergence of some banks seeing a pickup in kind of interest and loan demand, while others are still seeing borrowers that are cautious on the environment going forward. Can you talk about what you guys are seeing with regards to demand outside of kind of the seasonal aspect of the dairy side of the business, but what you are seeing from our business borrowers, and whether or not you anticipate that you will see kind of a tail wind to the loan demand in 2014?

On the commercial real estate side we have had a pretty good pipeline, and we have had a good pipeline for a while, the last couple of quarters. If you look at the last two quarters our loans are up $200 million since June 30, 2013 through December 31, 2013, about $200 million. Most of that growth is commercial real estate. What is not seen in there is that we also have a significant increase in our lines of credit on the commercial side. The problem is that we are not seeing a lot of borrowings on those lines of credit. And again that may be some of our own fault because we focus on quality, quality, quality, and some quality borrowers are still cautious and they are pretty liquid and they are not borrowing, they are not growing as rapidly as we would like them to. But the relationships are there and the facilities are there, and when that business confidence comes back we feel like they will start drawing on some of those lines of credit. I think we are doing the right things along the way.

The other thing is we have added several new teams. Our San Diego team is now onboard. We have got them actually temporary facilities. We haven't officially opened a San Diego center yet. That is probably going to happen in the early part of spring. We are working on the leasing stuff and getting them in there, and all of that stuff. But that is exciting for us. We also hired a couple of people down in Orange County, those are good add-ons for us, and then we also hired a new head of agri business in the Central Valley, and we are really excited about that opportunity to expand our AGRI business lending. We have made investment in a lot of de novo things. We have a new Head of Construction Lending here that we just hired a month or two ago, and a new Head of Citizens Home Loans that we hired three or four months ago. So we are really putting a lot of effort into growing organically, and one of the things that we think is that we can grow organically, and we can grow through acquisitions. We have kind of got those two things going for us. We look at some of the competition out there, and we don't see them growing organically, not the big banks, the smaller banks. And so they are doing a lot of M&A, because that is the way they are going to need to grow. We feel like we don't have to do M&A to grow, but we want to do M&A.

Okay. Appreciate the color. Thank you.

The next question we have comes from Aaron Deer of Sandler and Partners.

Thank you. Good morning everyone.

Aaron.

Question on the reserve releases. You have had three quarters of consecutive releases now, and given the improving credit trends and with the reserve still above 2% of loans, is there any reason we shouldn't expect to see a continuation of that, and maybe $5 million or $10 million in negative provisions here in 2014?

That is a great question. And I think that is a little bit of a double-edged sword question, because we would love to keep our reserves as strong as possible. But we have a methodology and a science that is really behind this, in terms of how we calculate our reserves, and there are a whole bunch of factors that go into that. Really the thing that you are seeing at the end of each quarter is just the result of our formulas and our calculations, and then we come out and say, okay this is what our reserve should be, and then we either unwind or don't unwind, or whatever we do to make that number. That is the product of what you are seeing, and that is why you are seeing three quarters in a row that we have unwound reserves, and then previously to that you saw eight quarters where we didn't take any reserve. It is really a product of that formula, and the economy has something to do with that formula, and improving credit trends has something to do with that formula, and all kinds of other stuff in there.

I guess that is just it. All of the inputs into that formula are soon to be moving in the right direction. Seems reasonable that continued negative provisions at least here for a little while would seem reasonable?

Yes. Hard for me to answer that question. I mean three quarters in a row. We have seen that trend, but it is hard to forecast going forward. We will put it in the formula and it will spit something out at the end of the third quarter and then we will be off and running.

A quick question on the fees. The other noninterest income line has been bleeding a bit lower. Can you talk about what is in that, and is that going to continue in that direction, or has that stabilized here?

The other noninterest income for the year 2013 was down a little bit. And one of the things that we didn't do a lot of swaps income. We didn't do any swap income in 2013, and that was really a function of the yield in terms of what we would get on a variable rate versus the yield that we get on the fixed rate, so I think the year before we had about $1.2 million in swap fee income for 2012, and 2013 we didn't have any fee income in that area, so we didn't do any new swaps in 2013. We are still looking to do swaps. The other thing is as our noninterest bearing deposits increase, some of those customers we are not seeing as much as we were before. Because they are keeping higher deposit balances in their noninterest bearing accounts, so they don't want to get fees, so it is a bill bit of a tradeoff there. We also had an increase in the FDIC loss sharing asset, which impacts that as well. Sorry, the decrease in FDIC.

Okay. Great. Chris, that is helpful, I appreciate you taking my question.

The decrease in FDIC.

Right, I got that. Great. Thank you.

The next question we have comes from Tim Coffey with FIG Partners.

Good morning, gentlemen.

Hi, Tim.

Good morning, Tim.

Chris, can you talk about how you feel about your efficiencies right now and opportunities, if any, to control expenses going forward?

Our efficiency ratio has been kind of holding in that 45% to mid to high-40s percentage. I think that is a good place for us. Although I don't wake up every morning and say I want my efficiency rating to be 45%, or something like that. Right now I think we are operating in an efficient manner. We have consolidated a few offices. We consolidated two offices in 2013, because brick and mortar is not as necessary to banking as it was before. But we are spending more money in technology and products and so forth, so people can bank online and can bank remotely. There is a little bit of a tradeoff there. On the other side on expenses, we are investing in some of these new teams, so that does cost us money. When we are building out San Diego, we are hiring people in Orange County, we are bringing a new person on in the agri business sector, and he is going to build out a team, and so forth and so on. That is we are investing in people. Because we are in a growth mode. Right now we feel like we have been able to grow loans for two consecutive quarters, $100 million in each quarter, and we are excited about that. We are reinvesting in our business, and trying to get as much growth as reasonably possible. We don't want to overgrow and take too much risk, but at the same time we are controlling our growth but investing in our business.

Okay, great. Thanks. That was my question.

The next question we have comes from Julianna Balicka of KBW. Please go ahead.

This is actually David [Gon] for Julianna.

Okay.

So I have been reading a lot of articles about the dry season and lack of water for the dairy industry, and just wondering if that has affected the farmers in your market?

It was interesting, I was just talking to George Borba Jr., one of our Directors, who is a dairyman about that yesterday at our Board meeting, and I said so George, do you feel like this is affecting us yet, and George's comment was, we are watching it. No affect yet but it is something that we are watching closely. You look at the rain and so forth in California, and the apparent drought that we are facing, we don't know what is going to happen with that. But then you look at across the country, and it is snowing and raining, and all of this stuff. So it is going to be interesting to see how that plays out. We really don't know the impact on that at this point.

Okay. And just as a follow-up question, so you said prepayment penalties are coming down significantly, so would you say like for 2014 that the 270 level would be a good run rate for the year?

It is hard to project that. I think that the 270 is a more normalized level, I think, than what we were seeing before. It just depends. I think you are going to see just depends on what interest rates do. If interest rates, if the ten-year treasury goes to 3% and beyond, I think you will see moderate pressure on prepayment penalties, so I think it will stay down. If the 10-year treasury goes back to 250 or below, I think you will see there will be more prepayment pressure, and that will drive more prepayment income. It is really I think a product of that. Because the prepayment penalties are coming from our commercial real estate loans, that we either have to refinance and we keep the loan and charge them a prepayment penalty, or we lose the loan and they pay it off and pay us a prepayment penalty. The less pressure on that the more normalized it becomes.

Thanks for the color.

(Operator Instructions). The next question we have comes from Gary Tenner of D.A. Davidson.

Thanks, good morning. I just had a follow-up question on the expense side on the personnel line in particular. Last quarter I believe that the spike in personnel costs was related to some true-up on the bonus incentive side. This quarter personnel remained over $18 million. Should we think of fourth quarter as more a loaded number for the new hires it seems that you brought on, or was there some additional true-up in the fourth quarter?

The fourth quarter was pretty normalized for the most part, although some of those teams were hired midway through the fourth quarter, so we don't have the full impact of them being in there. And there are times when you are hiring people, though, you are paying them a sign-on bonus, or something like that, which tends to be a little lumpy along the way. If you look at our last four quarters of salary and benefits, the highest being the third quarter at $18.4 million, we were $18.2 million in the fourth quarter, $17.1 million in the second quarter, and $17.3 million in the first quarter. No question we are reinvesting in our business. We also typically do our merit increases for our employees in the first part of the year, and that will affect, that does if we do raises if you will for our people, that will affect us in the second and third quarter by a few percent.

Okay. Thank you.

(Operator Instructions). The next question comes from Hugh Miller of Sidoti & Company.

I just had a follow-up question just on the acquisition landscape that you guys had kind of alluded to earlier. Previously you guys I think talked about kind of seeing a window of opportunity while some of your peers were sidelined integrating some larger deals, and obviously in the past there has been a little bit of a pricing disconnect between buyers and sellers expectations. Can you just talk about where things stand right now and whether or not you are seeing more or less deal flow coming your way, things that you could be looking at?

We are actively having a lot of discussions, and I think we are hoping those discussions will lead to a deal, to announcing a deal in 2013. The climate out there is active, there is no question along there are a lot of discussions going on. What we saw before was were banks that we felt like were more need to sells, in terms of they weren't going to make it, or they were going to just sluggishly go along. Now we are seeing more banks considering more want to sell, or would consider merging. That is why I think you have seen some of these merger of equal deals go along. Because I think they are looking at, hey if we put ourselves together, we can get some good efficiencies out of this, and it is good for the investors. We are looking at everything we can, but we are focused on quality, and something, and we are looking at deals that are in or adjacent to our geographic markets.

Okay. And would you say that the lack of kind of moving forward with things, is that a function more on kind of pricing, or is it more on finding the right opportunity for a franchise?

I think it is more the right opportunity than pricing. I think considering where our, we are trading at a pretty good multiple right now, so we have good currency. I think even though that is going to, the high tide is going to raise all boats, I think that is going to help us as the tide has risen our boat a little more than some of the other people.

Okay, appreciate the insight, thank you.

I don't know if that is a good analogy or not, Hugh.

It is certainly helpful. I appreciate it. Thank you.

Alright.

Mr. Miller, did you have any further questions, sir?

Not from me.

Yes, sir. (Operator Instructions). At this time there are no more questions. I would now like to the turn the call back over to Mr. Myers for any closing remarks, sir.

Great, thank you very much. I want to thank you all very much for joining us on our call today. We certainly appreciate your interest, and look forward to speaking with you again on our first quarter 2014 earnings conference call in April. In the meantime, please feel free to contact me or Rich Thomas, and have a great day. 2014, here we go.

We thank you, sir, and to the rest of management for your time. The conference call has now concluded. We thank you all for attending today's presentation. At this time you may disconnect your lines. Thank you, and take care everyone.