CVB Financial Corp (CVBF) 2015 Q2 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Second Quarter 2015 CVB Financial Corp and its subsidiary Citizens Business Bank Earnings Conference Call. My name is Mike and I'm 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 event is being recorded.

I would now like to turn the presentation over to your host for today's call Ms. 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 second quarter of 2015. 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 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 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, 2014 and in particular, the information set forth in item 1A, 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 in this quarter. Yesterday, we reported $26.8 million for the second quarter of 2015, our second highest quarter of earnings on record. This compares to $15.8 million for the first quarter of 2015 and $25.5 million for the second quarter of 2014. Our second quarter pre-tax earnings were positively impacted by a $2 million release of our allowance for loan losses. Earnings per share were $0.25 for the second quarter compared with $0.15 for the first quarter and $0.24 for the year-ago quarter. Through the first six months of 2015, we earned $42.6 million compared with $54.1 million for the first six months of 2014. Earnings per share were $0.40 for the six-month period ended June 30, 2015 compared with $0.51 for the same period in 2014. The second quarter represented our 153rd consecutive quarter of profitability and our 103rd consecutive quarter of paying a cash dividend to our shareholders. Our tax equivalent net interest margin was 3.65% for the second quarter compared with 3.59% for the first quarter of 2015 and 3.55% for the year-ago quarter. Total loans grew by $68.2 million or 1.84% for the second quarter to $3.78 billion. Our new loan productivity for the second quarter was stronger compared to the first quarter. During the second quarter, our commercial real-estate loans increased by $61 million, our commercial and industrial loans increased by $2 million, our single-family residential mortgage loans increased by $9.4 million, and our dairy and livestock loan portfolio increased by $10 million. In terms of loan quality nonperforming assets defined as non-accrual loans plus OREO were $30.1 million for the second quarter of 2015, unchanged from the prior quarter. Nonperforming commercial real-estate loans decreased $1.8 million during the second quarter, offset by an increase of $1.2 million in nonperforming single-family residential mortgage loans and $713,000 in OREO.

The allowance for loan and lease losses was $59.6 million or 1.57% of total loans at June 30, 2015 compared with $60.7 million or 1.63% of total loans at March 31, 2015. The reduction in allowance was due to improved credit quality and net recoveries of $845,000 for the quarter. At June 30, 2015, we have loans delinquent 30 to 89 days of $1.9 million or 0.05% of total loans. Classified loans for the second quarter totaled $118.3 million. This was a $10.9 million decrease from the prior quarter. We will have more detailed information on classified loans available in our second quarter Form 10-Q.

Now, I'd like to discuss deposits. For the second quarter of 2015, our noninterest-bearing deposits increased to $3.25 billion, compared to $3.13 billion for the prior quarter and $2.96 billion for the same quarter a year ago. This represents a $288.4 million or 9.74% increase year-over-year and a 3.95% increase quarter-over-quarter. Average noninterest-bearing deposits were $3.12 billion for the second quarter of 2015, compared with $2.97 billion for the prior quarter and $2.74 billion for the same quarter a year ago.

Noninterest-bearing deposits now represent 54.23% of our total deposits. This is an all-time high. Our total cost of deposits and customer repurchase agreements was 10 basis points for the second quarter compared with 11 basis points for the prior quarter. At June 30, 2015, our total deposits and customer repurchase agreements were $6.66 billion compared with $6.24 billion for the same period a year ago and $6.46 billion at March 31, 2015. Average total deposits and customer repurchase agreements were $6.46 billion for the second quarter of 2015, compared with $6.36 billion for the prior quarter and $5.92 billion for the year-ago quarter. Our ongoing objective remains to maintain a low cost stable source of funding for our loans and securities.

Interest income. Interest income for the second quarter of 2015 totaled $64.5 million compared with $64.2 million for the first quarter of 2015. Noninterest income was $8.3 million for the second quarter of 2015, compared with $8 million for the first quarter of 2015.

Now expenses. We continue to closely monitor and manage our expenses. Non-interest expense for the second quarter was $31.5 million compared with $44.5 million for the first quarter. The decrease was principally due to the $13.9 million debt termination expense resulting from the repayment of a $200 million Federal Home Loan Bank advance during the first quarter. Noninterest expense was 1.69% of average assets for the second quarter, compared with 1.67% of average assets for the first quarter, excluding the Federal Home Loan Bank debt termination expense.

Now I'd 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 remained at 35.5% for the second quarter. Our effective tax rate varies depending upon tax-advantaged income as well as available tax credits.

Now to our investment portfolio. During the second quarter of 2015, we sold an average of approximately $296 million in average funds through the Federal Reserve and received a yield of approximately 25 basis points on collected balances. We also maintained an average of $24.9 million in short-term CDs with other financial institutions yielding approximately 86 basis points. At June 30, 2015, investment securities totaled $3.16 billion up $125.9 million from the first quarter of 2015. Investment securities represented 41% of our total assets at quarter end. At June 30, 2015, we had an unrealized gain of $40.9 million in our total investment portfolio compared with an unrealized gain of $73.8 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 continue to monitor the interest rate environment carefully weighing current rates and overall interest rate risk. During the second quarter, we purchased $109 million in mortgage-backed securities with an average yield of 2.06% and an average duration of approximately four years. We also purchased about $144 million of collateralized mortgage obligations with an average yield of about 2.10% and $9 million in municipal securities with an average tax equivalent yield of about 3.63%. Despite the continued low interest rate environment, prepayment speeds in our investment portfolio appear to have somewhat stabilized. And based upon current interest rates, we anticipate receiving approximately $35 million in monthly cash flows from our portfolio. However, if rates remain low, we may see faster prepayment speeds, which could increase our estimated monthly cash flows.

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 June 30, 2015 capital ratios will be released soon concurrently with our quarter end Form 10-Q. For the six months ended June 30, 2015, shareholders' equity increased by $15.9 million to $894 million from December 31, 2014. The increase was due to $42.6 million in net earnings and $6.1 million in various stock-based compensation items, offset by $25.5 million in cash dividends and a $7.3 million decrease in unrealized gain on available for sale investment securities.

I will now 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 future prices continued to decline, but appeared to be bottoming out and stabilizing. The National Milk Producers Federation attributed the market stabilization to signs of milk production slowing down to better match consumption needs. It remains to be seen how 2015 will ultimately pan out for the US dairy industry as international demand, domestic supplies, and weather remain as important determining factors. According to the California Department of Food and Agriculture, feed costs in California represented 61.1% of total milk production costs for the first quarter of 2015. That's flat when compared to the fourth quarter of 2014. There continues to be much discussion about the California drought and its impact on the agricultural sector. According to economic research, the impact of the 2015 drought is not as severe as initially anticipated, but remains a huge concern of lack of rainfall continues. Researchers found for the most part, farmers have been able to supplement water cuts by pumping groundwater and digging deeper wells. We are watching the drought situation closely and as of yet have seen little effect on the prepayment of our loans.

Turning to other items related to the California economy. According to various economic reports, California's Employment Development Division reported the unemployment rate was 6.4% in May 2015 compared with 6.3% in April 2015 and 7.6% back in May 2014. Unemployment is expected to dip below 6% by late 2016. California is on firm footing as it enters year six of the current economic expansion, jobs are up. California accounts for 16.2% of all new jobs created in the United States since 2010. Job growth has been very broad-based with every major region in most major industries in California, continuing to post significant job gains.

Home prices are rising. New construction activity is occurring across the state. California also remains a top tourist destination and businesses and consumers are still driving growth in spending. These are all good things for California.

In closing, we are pleased with our second quarter financial results. We remain focused on quality loan growth, fee income expansion, continued strong core deposits and overall operating efficiency. We believe a balanced growth plan including organic growth and strategic acquisitions remains the right corporate strategy for CVBF. That concludes today's presentation and now Rich and I will be happy to take any questions that you might have.

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Aaron Deer, Sandler O'Neill Partners. Please go ahead.

Hi. Good morning, everyone.

Good morning, Aaron.

Good Morning Aaron.

Chris, the loan growth this quarter is nice to see that pick back up again. I'm just wondering if we could get an update for the remainder of year; it sounds like given that the California economy trends that you're seeing that may sound pretty positive on the outlook. Can you just give us a sense of what kind of growth might we'd be looking for, for the overall portfolio by year end?

Yes, we are pretty positive, we had a good quarter and the quarter would have even been better, but if you see once again our prepayment penalties were elevated and this is the second quarter in a row that we've had over a million dollars in prepayment penalties. And it's a little frustrating on the competition side because I think we have a lot -- we feel our quality loans, we have a lot of quality loans and everybody and their brother is chasing those quality loans. And so, it presents a lot of competition especially from the big banks. And so, just as much as our production, which is far ahead of last year's production, but we're still battling to keep some of these loans that we have and sometimes we're letting these things go and taking prepayment penalties, because we simply are having a tough time competing with the longer-term fixed rates that are out there. Some -- we're seeing sometimes 25 and 30 year amortizations fixed for ten years at sub 4% and that's hard for us to want to compete with that and feel like we're doing the best thing for our shareholders.

Okay. That brings up another question I had, given the -- it looks to me like the FHLBs special dividend added about $0.05 to margin. And then given the -- and Rich, you can correct my math if I'm off there, but, and then given the prepay penalties and the FHLB borrowings that were paid down in the quarter, I would have expected to see a little better core margin. Can you give us kind of thoughts on what's happening on the asset side there and what we should expect?

Well, Rich you jump in, but there's a lot of things. First of all, prepayment penalties are -- they've been running anywhere the last five quarters that they've been $740,000 to $1.4 million, this quarter was a $1.78 million. So it's a little elevated, but it's not that much money. I think where we saw some stuff, but we saw a lot of growth in the loan portfolio in the last month of the quarter. So, I think that's going to help us in terms of our interest income for the third quarter. And then the other part is we have a lot of money going overnight to the Fed right now. And the reason that is, is because we just haven't reinvested that cash. So we have strong deposit growth and we're holding on to that cash, which I think also suppresses some of our topline net interest income. But we feel pretty good about the third quarter, we have invested some of those dollars. We're looking to invest more, but we're waiting for interest rates to pop-up. The difference between us investing now a lot of mortgage-backed securities and buying them at 2% or we're hoping that we can wait a few months

and rates will go up a little bit and if we can invest those at 2.5% and that's a big difference for us because we're holding on those

securities for an average of four plus years. And, if we get 2.5% on $300 million, that's another $7.5 million dollars in pre-tax income. So we're suppressing that a little bit. So I get your comments, I think they are good comments but I think we're pretty positive about it and the only thing I would say that we're less positive about is the competition and we put two loans on and one falls off and so we're working hard to try to retain as much as we can, but there's an interest rate component to that.

Sure. Okay. That's good color. Thank you, Chris.

The next question we have comes from Matthew Clark of Piper Jaffray.

Hi. Good morning, guys.

Good morning.

Chris, can you maybe quantify the production you had in the quarter? How that compared with the prior quarter. And then maybe the payoffs as well, just to try to get a better sense of the magnitude here?

Yes, I'll talk in general terms about that, but I don't want to get into something where every quarter I'm reporting what this is and so forth because it can be a little choppy. But our production is, in terms of loan outstanding this year is over a $100 million higher than it was a year ago to the first six months. So we feel good about that number. The prepayment side of that is definitely higher than it was a year ago in terms of what we've lost through prepayments. But I think just a little bump in interest rates here is going to slow down that prepayment side considerably and our production is running pretty solid. The other thing that really happened in the second quarter that we haven't seen is, our team up in Ventura, which is our, we call our Oxnard commercial banking center -- Ventura accounting for you investors. It's got a great pipeline and we really saw none of that book of any substance in the second quarter and we're going to see some of that kick-in in the third quarter, along with our revitalized team that we have in Downtown Los Angles that's got some production coming on the third quarter. So those are add-ons to our normal book, if you will, and we're feeling good about that. So I think the only thing I am hedging my bets on here is prepayment pressure on some of our mostly fixed rate commercial real-estate loans.

Okay. And then in terms of the pipeline, can you also give us maybe a percentage change on the pipeline, maybe relative to the

first quarter or even a year ago?

A year ago our pipeline kicked-in pretty well during the summer and I think we're running pretty parallel with where we were last year,

maybe a little bit better this year in terms of just kind of -- last year I think our third quarter was our fastest growing loan quarter in terms of growth and we'll have -- it remains to be -- we're seeing. Well this third quarter will be our fastest this year, but we're certainly working hard towards that.

2% a quarter, is probably fair for the back half of the year here?

You know what, that's our goal. But again, lot of factors come into that. So our goal is to produce that 2% in organic growth per quarter and we have not been able -- if you look it back -- we just did -- in fact I'm doing a presentation to our sales team this afternoon and I'll give you some rough numbers from June 30, 2014 to June 30, 2015. Our noninterest bearing deposits grew just under 10% and this is pure organic, so it's about 9.7%, 9.8%, somewhere in there from June 30, 2014 to June 30, 2015. Our loans were up 4.5% from June 30, 2014 to June 30, 2015. So, in as much as our goal is to grow 2% a quarter, we only grew 1.1% to 5% per quarter for the last year. So we're hoping to do better than that and we're pursuing it hard. A lot of factors go into that.

Okay. And then just last one on loan pricing. I know, we've talked in the past more recently with weighted average loans. New loans going on around 4%, have you seen any relief given -- I know competition obviously remains fierce, but there's been some relief in the curve, stability of the curve and I'm just curious whether or not that ticked up at all?

Yes. A little bit, but it's -- the ten-year treasury bounced up close to [200, 250] and then it's come back down again and so, but it's still elevated from what it was up to, so that's a good thing. But yes, we have seen a little uptick in those rates and that's a positive for us. But I mean, we're not talking anything hugely substantial, but every basis point helps, right?

Yes. Okay. I'll step back. Thanks.

Okay.

Julianna Balicka, Keefe Bruyette & Woods Inc.

Good morning. I have a couple of follow-ups. You had discussed that you still have excess cash and liquidity for redeployment once rates rise a little bit more. So in terms of having seen you go back to purchasing MBS' and securities this quarter, should we think about maybe a cost for the third quarter before you resume as rates continue to tick-up or should we kind of think about continuing level of purchases and then maybe an increase in the volume of purchases once rates come up?

I think, we want to deploy our deposits into assets and certainly our first choice is loans. And so, we're working hard to deploy as much of that is possible into those loans. In the absence of that, we buy securities, which is what we say every quarter. As those securities ebb and flow and the rates ebb and flow, we'll hold cash back when we feel rates are a little bit disproportionately lower than where they've historically been and then we'll try to deploy it when the rates go up a little bit. So, I don't think that strategy is changing going forward. I do think our deposit growth is like a -- it's a building wave that keeps coming and we actually are trying to look in our portfolio at non-sticky deposits that we think are going to be rate sensitive they're going up and shed ourselves off those things right now. And so, if you look at year-over-year, I just talked about the 9.7%-ish growth year-over-year from June-to-June 2014 to 2015, our total deposits only grew about 6.5%, so the noninterest bearing goes up 9.7%, total deposits go up about 6.5%. I think that's about right, Rich. You correct me if I'm wrong. But, so I think that's what we're trying to make sure that when -- so when rates start moving up and the competition for these non-core deposits elevates and people start paying more and more, banks that aren't as well funded as we are, are going to have to chase up rates. And so, we're trying to make sure that we really think about how we're dealing with that now. So, we don't get any false deposits that are funding securities that create an issue on the margin side down the line.

And have you quantified that dollar amount of these excess deposit so to speak?

Yes. I don't think we have a ton of excess deposits, I really don't. And I don't know, I have the numbers saying these are excess deposits. Some of these we'll have to see how they perform. But I can tell you, we had a situation where we had a substantial money market account in the bank, call it $20 million. And we can borrow overnight at the Fed. We have $300 million-ish going to the Fed overnight, getting 25 basis points. And the client wanted 35 basis points in their money market. And we look at and said, why would we do this? And you know what that same client when rates go up 25 or 50 basis points, it's only a transactional client who wants to get 50 or 75 basis points. So, we know we're going to be chasing that one-up. So we said no, we're not going to go ahead and pay that. If you want your 25 basis points, we'll give you 25 basis points, but we're not giving you the 35 basis points. So those kind of decisions we're making along the way.

Now, if that company had an operating deposit relationship with us and we could dollar average those deposit costs lower, then we probably would have stretched maybe as high as that 35 basis points.

Okay. That makes sense. And then, one more question and I'll step back. In terms of your reserve levels, I know you discussed previously that given your lack of loss performance you're getting some pressure on releasing reserves. So, can you update us maybe where that is going?

Yes. I think we released $2 million this quarter. And my dream is not to release any reserves and grow loans so we grow into our improving credit metrics. I think you could see a continuation of our improving credit metrics. I think you'll see recoveries be very strong throughout the remainder of the year and into 2016. And as we recovered loans, that's going to feed into our allowance and build up our loan loss reserve. And then we have to figure out what we're going to do with that loan loss reserve, are we going to use that for loan growth or are we going to have to unwind some more reserves along the way. But remember that with net recoveries of over a $1.7 million so far this year, year-to-date, we released $2 million in reserves, that's almost dollar-for-dollar there. We're getting more recovery, we're getting net recoveries and we're just releasing them.

Got it. Makes sense. Thank you very much.

Great.

(Operator Instructions). Well, at this time, we're showing no further questions. We'll then conclude today's question and answer session. Actually I'll pause, gentlemen, we do have a follow-up from Matthew Clark of Piper Jaffray.

Hi. Sorry. We got to ask about M&A before the call ends. Any updates on that front? Whether or not you've seen more books of business or whether or not conversations have increased since last quarter?

Yes. You know, we're having conversations, no question about it, nothing to announce at this point. But we are, I said earlier, I think the previous quarter that my goal was to have a deal announced in 2015 and that remains a goal. And I think it's a realistic goal, but nothing at this time to announce. We are having conversations and so forth and both proactively and somewhat reactively to different situations. And we're working hard on that part of that, but meanwhile, it's business as usual building the bank organically through what we call our same-store sales, which as each office needs to increase their loans, deposits and fee income, that's our goal. And also building out these new teams that we've built out in the last year plus. San Diego, Ventura county. We also have just hired a team into Santa Barbara, which I wanted to make sure everybody knew, that we don't have a permanent office location, so we haven't officially announced that, but we just hired a three-person team in Santa Barbara, so we'll be -- our objective is to be opening in Santa Barbara, either late third quarter or early fourth quarter. So we continue to have good organic and de novo growth and we'd love to supplement that with an acquisition announced before the end of the year. But no news on that yet.

Okay. And then on the C&I portfolio obviously, been languishing here a little bit, was line utilization down at all in the quarter, just curious whether or not that masked some of the production?

No. It was pretty flat. And some of our new teams are building more C&I teams. So I think you're going to see our C&I pick up in the third quarter and fourth quarter of this year. So we were a little bit underwhelmed by only growing at, I think it was $2.2 million in the quarter and we hope to do better than that, at faster pace than that. But I think we're poised to grow C&I, I really do and the teams that we're hiring both in Ventura and Santa Barbara are middle market C&I teams and we think they're going to produce some decent balances for us that will help us with our normal growth trend.

Okay. Thanks, guys.

All right.

Next we have a follow-up from Julia Smith.

I got a question. Is it Julianna Balicka?

It is. I think the operator decided that my [fullish] last name was too much to spell and I agree.

Okay.

I did not change my last name.

All right. In terms of the securities purchases that has now become -- or late in the quarter. So that should I'll see it could be a positive NIM factor to think about going forward into the next quarter?

Yes. Rich, do we -- security purchases were in the latter portion of the quarter, is that correct?

They were. They were, Julianna.

And I don't think we purchase anything until I want to say conservatively May 15 or after. And it's probably more late May and after. Is that right?

It is. You've seen the yield curve, I mean as Chris indicated earlier, it bounced up and has bounced down. At yesterday's close, I think a 232 or so.

(inaudible) your treasury.

Yes. I mean that gets us below a 2% coupon on a 15-year MBS, and that's pretty painful when you're thinking about four-year duration walking into something like that.

Got it. Okay. Thank you very much.

But we love to see interest rates go up. We just -- we're a little concerned that the short-term interest rates go up and the long-term interest rates do nothing and that will be painful for all banks, but we're hoping that the yield curve just shifts up.

Got it. All right. Thank you very much.

Thanks.

Thank you Ms. Balicka. Sorry about that Ma'am. Looks that we have no further questions at this time. I'd like to hand the conference back over to Mr. Myers.

Well, thank you all very much for joining us on our call today and we appreciate your interest and look forward to speaking with you again on our third quarter 2015 earnings conference call in October. In the meantime feel free to call Rich Thomas or myself. Have a great day, and thank you very much. Have a good day.

And we thank you, sir and to the rest of the management team for your time also today. The conference call has now concluded. At this time you may disconnect your lines. Thank you again everyone and have a great day.