CVB Financial Corp
NASDAQ:CVBF
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
15.75
23.83
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
CVB Financial Corp
You don't have any saved screeners yet
Good morning, ladies and gentlemen. And welcome to the Fourth Quarter and Year-Ended 2017 CVB Financial Corporation 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 also 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. Carrabinoa, the floor is your 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-ended 2017. Joining me this morning are Chris Myers, President and Chief Executive Officer, and Allen Nicholson, Executive Vice President and Chief Financial Officer.
Our comments today will refer to the financial information that was included in the earnings announcement released yesterday. To obtain a copy, please visit our Web site at www.cbbank.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, 2016, 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 this quarter. Yesterday, we reported net earnings of $17.9 million for the fourth quarter compared with $29.7 million for the third quarter of 2017, and $27.1 million for the year ago quarter. The fourth quarter’s net earnings were impacted by $13.2 million increase in tax provision due to a revaluation of our deferred tax asset as a result of the enactment of the Tax Cuts and Jobs Act of 2017 that reduces the federal tax rate from 35% to 21%. Without the adjustment, net earnings were $31.1 million, the highest quarterly earnings in CVBF’s history.
Earnings per share were $0.16 for the fourth quarter compared to $0.27 for the third quarter and $0.25 for the year ago quarter. Excluding the impact of the deferred tax asset valuation adjustment, earnings per share were $0.28 for the quarter. The fourth quarter’s earnings were also impacted by a $2.9 million gain from an imminent domain condemnation of one of our business financial centers in Bakersfield. A $900,000 gain on sales of a branch acquired from the merger with Valley Business Bank and a $1.5 million loan loss provision recapture.
Comparatively, the third quarter of 2017 included loan loss provision recapture of $1.5 million and a $542,000 gain on sale of our former operation center.
The fourth quarter represented our 163rd consecutive quarter of profitability and 113th consecutive quarter of paying a cash dividend to our shareholders. Net earnings were $104.4 million for the year-ended 2017 compared with a $101.4 million for 2016. The $104.4 million represents the highest net earnings in CVB history despite the $13.2 million deferred tax asset charge. Diluted earnings per share were $0.95 for 2017 compared with $0.94 for 2016. Without the impact of the adjustment to the deferred tax asset in the fourth quarter, we would have reported record annual net earnings of $117.6 million and diluted earnings per share of $1.07.
Our tax equivalent net interest margin was 3.68% for the fourth quarter compared with 3.70% for the third quarter, and 3.47% for the year ago quarter. The net interest margin declined modestly from the prior quarter due to lower prepayment income and lower interest income from discount accretion on PCI loans and interest recaptured on non-accrual loans. Total loans increased by $84.2 million to $4.83 billion for the fourth quarter of 2017, or about 1.77%.
Commercial real estate loans increased by $37.8 million. Dairy & livestock and agri business loans increased by $77.2 million, commercial and industrial loans declined by $15.4 million and all other loans decreased by $15.4 million in aggregate. The majority of the increase in dairy and livestock loans was seasonal as most dairy owners choose to defer their note-checks into the first quarter of following year and/or prepaid or feed expenses. Average loans grew by $43.5 million over the prior quarter or about 1%.
Loan yields were 4.66% for the fourth quarter of 2017 compared with 4.72% for the third quarter of 2017, and 4.53% for the year ago quarter. When interest recaptured on non-accrual loans and discount accretion on PCI loans are excluded, the fourth quarter loan yields were 4.60% compared with 4.63% in the prior quarter, and 4.46% in the year ago quarter.
For 2017, total loans increased $436 million or 10% compared with 2016. Organic loan growth accounted for $126 million of the growth or about 3%, while the acquisition of Valley Business Bank accounted for approximately $309 million of total loan growth or 7%. At December 31, 2017, the allowance for loan and lease losses was $59.6 million or 1.23% of total loans compared with $60.6 million or 1.28% of total loans at September 30, 2017.
Net recoveries on loans for the fourth quarter were $454,000. When the loan loss allowances combined with the remaining fair market value loan discounts from our acquisitions, the allowance for loan and lease loss ratio was 1.44% as of December 31, 2017 compared with 1.48% for the prior quarter.
At quarter end, non-performing assets, defined as non-accrual loans plus Other Real Estate Owned OREO, were $15.2 million or 0.18% of total assets compared with $16.1 million or 0.19% of total assets for the prior quarter and $11.7 million or 0.14% of total assets at December 31, 2016. At December 31, 2017, we have loans delinquent 30 to 89 days of $1.2 million or 0.02% of total loans. Classified loans for the fourth quarter were $57.3 million, a $17.8 million decrease from the prior quarter. The decrease was primarily due to an $11.6 million decrease in commercial real-estate loans. We’ll have more information on classified loans available on our year-end form 10-K.
Now, I would like to discuss deposits. For the fourth quarter of 2017, our non-interest-bearing deposits totaled $3.85 billion compared to $3.91 billion for the prior quarter, and $3.67 billion for the year ago quarter. For the year, this represents a $173 million increase or 5%. Average non-interest-bearing deposits were $3.94 billion for the fourth quarter of 2017 compared with $3.89 billion for the third quarter of 2017.
Average non-interest bearing deposits represented about 59% of our total deposits for the fourth quarter, 59%. Our cost of interest bearing deposits and customer repurchase agreements for the fourth quarter was 10 basis points, which is the same as the prior quarter. Our total cost of funds actually declined by 1 basis point to 11 basis points for the fourth quarter.
At December 31, 2017, our total deposits and customer repurchase agreements were $7.10 billion compared with $7.06 billion at September 30, 2017 and $6.91 billion for the same period a year ago. The sale of our branch, which was acquired from Valley Business Bank, included $27 million in deposits that were sold during the fourth quarter. We continue to focus on deposits that limited interest rate sensitivity, core deposits. 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 of 2017 totaled $73.3 million compared with $73.9 million for the third quarter and $67.4 million for the same period a year ago. The tax equivalent yield on earnings assets was 3.79% compared to 3.81% the prior quarter and 3.57% in the year ago quarter. The yield on loans decreased by 6 basis points over the third quarter or 3 basis points when interest recapture and discount accretion is excluded. The decline in loan yields includes the impact of lower income from prepayment penalties and the lower yield on dairy and live stock loans when compared to the rest of the portfolio quarter-over-quarter.
Non-interest income was $12.6 million for the fourth quarter of 2017 compared with $10 million for the prior quarter and $8.4 million for the fourth quarter of 2016. The $2.6 million quarter-over-quarter increase was due to $2.9 million gain from the imminent domain condemnation of a business financial center during the fourth quarter compared to a $542,000 gain from the sale of our former operations and technology center during the third quarter. The fourth quarter also included $906,000 gain from the sale of our former Valley Business Bank branch.
Now expenses. Non-interest expense for the fourth quarter was $35.1 million compared with $34.7 million for the third quarter of 2017, and $34.9 million for the year ago quarter. Non-interest expense totaled 1.67% of average assets for the fourth quarter compared to 1.65% to the third quarter, and 1.72% for the fourth quarter of 2016. Our ongoing goal is to keep this range show at or under 1.70%.
Now, I’d like to turn the call over to Allen Nicholson, our CFO to discuss our effective tax rate, investment portfolio and overall capital position. Allen?
Thanks, Chris. Good morning everyone. Our tax provision in the fourth quarter includes $13.2 million revaluation of our net deferred tax asset to reflect the legislation in the past to reduce the federal tax rate from 35% to 21%. Excluding the impact of the deferred tax asset valuation, our effective tax rate was 38.3% for the fourth quarter and 37.7% for the full year. This compares with 37.5% for 2016. Going forward, our effective tax rate is estimated to be within the range of 27% to 29% as our effective tax rate can vary depending upon the amount of tax advantage income, tax credits and discrete items such as stock compensation.
Looking to our investment portfolio. During the fourth quarter of 2017, our average interest earning balances at other financial institutions and the Federal Reserve totaled $76 million. During the fourth quarter, these balances represented only 1% of our average earning assets compared with 0.6% for the prior quarter and 2.5% for the fourth quarter of 2016.
At December 31, 2017, our combined available-for-sale and held-to-maturity investment securities totaled $2.91 billion, a $113.2 million decrease from the third quarter. Investment securities represented 38% of our average earning assets during the fourth quarter compared to 39% in the prior quarter.
At quarter end, investment securities available for sale totaled $2.08 billion, which included a pre-tax unrealized gain of $2.9 million. In addition, we had held-to-maturity investment securities totaling $830 million. The tax equivalent yield on the total securities portfolio was 2.42% for the fourth quarter, which was equal to the prior quarter. During the fourth quarter, we purchased $43.8 million of securities with a tax equivalent yield of 2.41%. All of the security purchases were available-for-sale securities comprised mortgage-backed securities with an expected average life of approximately five years.
Now, turning to our capital position. Shareholders' equity increased $78.4 million to $1.07 billion in 2017. The year-over-year increase was due to $104.4 million in net earnings, $37.6 million for the issuance of common stock for the acquisition of Valley Commerce Bancorp and Valley Business Bank, and a $4.6 million of various stock-based compensation as well as other items. This was offset by $59.5 million in cash dividends and a decrease of $8.7 million in other comprehensive income.
I'll now turn the call back to Chris for some closing remarks.
Thank you, Allen. Now let's talk about economic conditions, turning to the California's economy. California's unemployment rate fell to 4.3% in December 2017. This is a record low in a data series dating back to the beginning of 1976. California has now gained a total of 2.8 million jobs since the economic expansion began in February 2010.
The state and its regions are expected to continue to experience growth in economic activity and jobs in 2018. Most of the job gains are anticipated to be in the healthcare, leisure and hospitality, and construction industries. There was a continued demand for housing in California. The supply of existing homes has increased slightly but remains lean and new home construction continues to increase at a modest pace.
In terms of the dairy industry, profitable operations are expected to continue, albeit at modest. New prices for the next three months are projected to be slightly under the cost of production, but maybe increasing. These prices should remain flat.
In closing, we are pleased with 2017 as a whole and feel we are well positioned to continue to grow our business. Our new operations and technology building is now fully functioning and well situated to support future growth. We remain internally focused on same-store sales growth and acquiring new banking teams to expand our footprint. And with our strong earnings power and robust capital position, we are uniquely positioned to take advantage of potential acquisition opportunities that may come along, both small and large. All three of our growth initiatives, same-store sales, opening de novo locations and bank acquisitions, are consistent with our strategic objective, which is to increase our market share and expand our geographic footprint.
In closing and wrapping up 2017, our most successful year in company history; I thank our employees for their continued hard work and dedication; I thank our customers for their business and ongoing loyalty; I thank our shareholders for their continued support and trust; and finally, I thank our Board of Directors for their leadership and guidance.
That concludes today’s presentation. Now, Allen 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]. The first question we have comes from Jacky Bolan of KBW. Please go ahead.
This is actually Schalise Vancura on for Jacky. Touching on tax reform just going forward, can you guys talk to what capital management planning might be given the new op?
In terms of capital management, are you asking at all…
Yes, dividends and buyback, how that might impact those decisions, going forward?
As we’ve discussed in prior calls, we’re always -- the board is always evaluating our dividend. And it’s something we’ll continue to evaluate certainly with lower tax rate and something that we’ll be looking at very closely.
And then deposit costs have held flat since rates have begun to rise. Have you seen any pressure at all with the December rate hike?
We are seeing deposit pressure and that’s why you’ve seen some -- we’ve allowed some deposits to run-off that we think are non-core or more price sensitive deposits that we’ll trade up with the fed fund rates as we go along. Anticipating that if we have three or four more rate increases this year those deposits going to be our expensive deposits by the end of the year, especially if the 10 year treasury doesn’t do anything, or moderates. So we really focused on our core clients and making sure we take care of real good service with those clients.
And so I think that’s why you’re seeing our deposit flatten some. But I think it’s a great testament to our company that we have not seen deposit rate increase of any magnitude. But yes, we’re feeling pressured here and there but so far I think because of our relationship banking strategy, we’ve been able to hold the line pretty well. And we don’t have a lot of deposits that just sit out there that aren’t part of a relationship. And I think those tend to be large deposits that can be easily moved sometimes private banking type deposits are the most notable of all.
Business deposits, I mean we have 59% of our deposits in non-interest bearing deposits. A lot of those deposits support all the products and services that they’re using in our bank and pay for those, if you will, because we give them earnings credit rate. And if they move those deposits, they get charge fees. So I think that's been the secret sauce so to speak for us been able to hold the line on deposit costs.
[Operator Instructions] Next we have Matthew Clark of Piper Jaffray.
I am startling a couple of calls here, so I thought if I've missed it. But any discussion around your appetite on the M&A front with the tax cuts and the ability to generate more capital or cash internally? Just want to get an update on your on that front.
Well, I'll say this, but certainly with the tax law change and where stocks are trading today, I do think M&A is going to heat up in 2018. I think both smaller and larger deals are going to start to accelerate. If you’re a bank and you've been thinking about selling, this is the best opportunity in terms of price, in terms of the strength of the buyers that you've seen since pre-2006, 2007. So I do think we’re going to see some acceleration there. And yes, we are focused on that.
And then just the outlook on loan growth and you may have mentioned there, but the 8% or 2% a quarter your full year – your goal or have you -- do you think you need to tweak that?
I mean, if you want to set a big goal and that's turned to a goal that we didn’t -- organically we didn’t make in 2017. Our goal is still to grow that 6% to 8% organic loan growth. We’re pushing hard for that. But I can tell you out there with the yield curve flattening, pricing is very competitive and structuring is very competitive out there. So we’re making sure we hold the line and do the right thing for our company. And in fact it doesn’t, for some reason, we do that and we can't grow our loans 8% then we’ll live with that.
We don’t want to do things that we don’t think are smart and we’ll stand the test of time. So I do think that price competition, and to some extent structure competition, has accelerated in the last couple of months. I'm hoping that’s just an anomaly. I'm also hoping the 10 year treasury keeps on going up more and more, so we have a better yield curve. So the compelling nature, if the long term curve doesn’t go up, your desired borrowings will be more short-term variable interest rate borrowings as opposed to long-term fixed rate borrowings.
And just on honing in on the margin a little bit with loan yields down 5 basis points, I mean the decline in the loan yield is really a function of what you just mentioned, the competitive environment or is there anything else in there that was unusual.
The loan yields in the fourth quarter always get a little skewed by the dairy loans. The dairy loans are lower yielding loans with the rest of our portfolio, so that was worth a couple of basis points of that decline right there, that will correct itself. It should correct itself in the first quarter. And the other pieces are prepayment penalties, were down by over 200,000 quarter-over-quarter, that's another basis point there. So I think from a margin standpoint, I don’t think there is a lot of downward pressure on o our margin at this point. Our margin should be able to hold and I am hoping to be able to increase our margin certainly as rates go up.
And how much of that -- you have a nice remix going on, on the earning call assets, securities and the loan based in that that will help and support that margin and continue?
Yes. So I mean that’s the promise land for us. If we can put on loans that are yielding 4.5%, 5% and as opposed to buying securities that are yielding 2.5%, that’s a 2% pick up for us. But again, we have to look at quality. We have to make sure these loans are going to stand the test of time and that we’re not doing anything that’s outside of what our core confidence is. And I think we’ve had a long recovery here. And so we’re making sure we’re staying disciplined so that when and if a recession comes, and you know what, if the yield curve flattens completely and it stays that way, we could have a recession.
So we’re trying to position ourselves for all possibilities. And as always, we’re very focused on quality. I mean, I can tell you that -- I mean, you look at our classified loan levels and our non-performing asset levels, we’re really getting down to very low levels. And we still have some recoveries left. You’re going to see some more recovering in the first two quarters of the year. But we’re running out of that, there is no question about that, because way back when we hung on to more of our loans, so we’ve had a longer ride with the recoveries at a lot of other banks. And we hung under our loans because we ran our company correctly, and we didn’t have to sell a lot of our loans. And we were able to work with those things through all the way, because we’re making money along the way and we had strong capital. So we didn’t have to discount and sell loans for $0.70 on the $1.
A great example of that was in the third quarter. We had a large participation, it was actually our last national share credit. We had numerous opportunities to sell that at $0.70 on the $1 along the way. We hung on to it for eight years tragically, but fortunately and got every penny of ours back on that, interest, principle. And in the third quarter, you saw a large legal cost recovery and we got our legal cost back on that deal, $405,000 or something like that. So that kind of thing is what a great company does. You work things out to the long-term benefit of your clients and not to the -- and actually the short-term to make the next quarter look great.
And then effective tax rate guide for ‘18?
As we were talking about earlier in the discussion, it will probably range between 27% and 29% based on the variability of some discrete items and lower income that’s tax advantaged.
We set it over under at 28%, and we’re making that.
And next we have Brian Zabora of Hovde Group.
Just a question on, again on loan side with CRE. Are you seeing slower originations given that competitive dynamic, or are you also being impacted by elevated pay downs and pay-offs?
Pay-downs and pay-offs have moderate a little bit, because rates have come up, that’s why our prepayment penalties were down quarter-over-quarter. Our pipeline is pretty good. We’re seeing things. We’re just -- there are times that we’re starting to see things that are getting a little bit aggressive for us, so we’re choosing to pass on things. So I would say loan looks are good. Our pipeline is pretty good. But sometimes to be get down the stretch, people are released -- other banks are releasing guarantees or doing something that we think is getting a little bit off the beaten path on a few pricing things or situations that we’ve seen that we were surprised to see in the last month or two.
And then also you’ve pruned your locations a bit. How do you look out to 2018? Is there any thought to further -- maybe some reductions, or is there any areas you like to expand in?
I mean, we are looking at different areas that we would like to expand. And there are some markets, like West Los Angeles and other places we would like to be in that we’re not in right now. We were pleased to be able to go from 54 locations back to 50 locations after the Valley Business Bank merger. That all made sense, because we had offices that were close to each other, so there was no disruption in service and no loss of clients.
So that's other than the one branch that we sold, I guess we lost all those clients, which was $27 million. So we sold the branch in $27 million in deposits. But that branch was 20-30 miles outside of our core territory, the Fresno/Visalia area. So it was little bit off the beaten path for us, we would like to be in more major markets.
So we are always going to continue to look at our offices and the efficiency of those offices. Some of our offices have too much footprint size and so we’re going to try to save some money to reduce that footprint here and there. Fewer and fewer people are coming into the bank to do their banking business. But I don’t see it -- I don’t think you'll see anything dramatic in 2018 happen because we’ve already been doing a lot of this along the way.
But there are some tweakings that we’ll continue to do and that will help us to save some money on the brick and mortar side. And most of those brick and mortar savings are going to go right back into technology and cyber security and all those kinds of things, because the evolution from brick and mortar to the cloud and software and cyber security is still going.
[Operator Instructions] At this time, we were showing no further questions. We’ll go ahead and conclude today's question-and-answer session. At this time, I would like to hand the conference back over to Mr. Myers for any closing remarks. Sir?
I want to thank everybody for joining us again this quarter. This concludes today's presentation, and we wish you a very successful 2018. And we’re very confident that 2018 is going to be another great for Citizens Business Bank and CVB Financial. Thank you very much.
And we thank you sir and to the rest of the management team for your time with us today. Again, we thank you all for attending today's presentation. At this time, you may disconnect your lines. Thank you again, everyone. Take care, and have a great day.