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 Fourth Quarter and Year Ended 2019 CVB Financial Corporation and its Subsidiary Citizens Business Bank Earnings Conference Call. My name is Andria 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, Andria and good morning, everyone. Thank you for joining us today to review our financial results for the fourth quarter and year ended 2019. 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 website 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, 2018 and in particular the information set forth in item 1A, Risk Factors therein.
Now, I'll turn the call over to Chris Myers.
Thank you, Christina. Before we get rolling today, I just want to do a special thanks for the last 10 years to Christina Carrabino and to Francene LaPoint our controller for putting all this together and making the hopefully you guys have found our communications very good and there's a ton of information and the script and everything that goes into this and they've done a fantastic job. So I want to thank them for the 10 years back to business.
Good morning, everyone and thank you for joining us again this quarter. Yesterday, we reported net earnings of $51.3 million for the fourth quarter of 2019 compared with $50.4 million for the third quarter of 2019 and $43.2 million for the year ago quarter.
Earnings per share were $0.37 for the fourth quarter compared with $0.36 for the third quarter and $0.31 for the year ago quarter. The fourth quarter of 2019 represented our171st consecutive quarter of profitability, and our 121st consecutive quarter of paying a cash dividend to shareholders.
I also want to mention that yesterday Forbes came out with their ranking in terms of financial performance of the 100 largest banks in the United States and CVBF was rated number one. This is the second time in five years we've been rated number one is a good way for me to go out so to speak.
Net earnings were $207.8 million for the year ended 2019 compared with $152 million for 2018 and $104.4 million for 2017. We have essentially doubled our earnings over the past two fiscal years.
Diluted earnings per share $1.48 for 2019, compared with $1.24 for 2018 and $0.95 for 2017. Our tax equivalent net interest margin was 4.24% for the fourth quarter, compared with 4.34% for the third quarter of 2019 and 4.40% for the year ago quarter.
Total loans increased by $70.1 million for the fourth quarter, or about 1% to $7.56 billion. The increase was primarily due to a $72.5 million increase in dairy &livestock and agricultural loans. Average loans for the quarter were essentially flat from the prior quarter. The majority of the increase in dairy & livestock loans was seasonal and occurred near the end of the quarter, as many of our dairy owners choose to defer their milk checks into the first quarter of the following year, and or prepay their feed expenses.
Loan yields were 5.15% in the fourth quarter of 2019 compared with 5.23% for the third quarter of 2019, and 5.22% for the year ago quarter. Excluding interest income related to purchase discount accretion and non-accrual interest paid, loan yields were 5 basis points lower than the third quarter of 2019. This decline was primarily due to the impact of the Federal Reserve's three rate decreases. After excluding interest income related to purchase discount accretion and non-accrual interest paid, our loan yields actually increased by 3 basis points over the fourth quarter of 2018.
At December 31, 2019, the allowance for loan and lease losses was $68.7 million or 0.91% of total loans, compared with $68.7 million or 0.92% of total loans at September 30, 2019. The allowance for loan losses as a percentage of non-acquired loans was 1.30% in December 31, 2019, compared with 1.37% in September 30, 2019, and 1.32% at the end of 2018.
At quarter end, non-performing assets, defined as non-accrual loans plus other real estate loans were $10.2 million, compared with $16.1 million for the prior quarter, and $20.4 million at December 31, 2018. Total loans non-performing assets included $5.8 million in non-performing loans and OREO originated by Community Bank.
At December 31, 2019, we have loans to linked with 30 days to 89 days at $1.7 million, or 0.02%. Classified loans for the fourth quarter were $73.4 million, a $13.4 million increase in the prior quarter. The increase is primarily due to a $7 million increase in dairy & livestock loans and a $5.5 million increase in commercial real estate loans. Total classified loans included $27 million of loans acquired from Community Bank.
We will have more detailed information on classified loans available on year-end Form 10-K.
Now, I'd like to discuss deposits. Average non-interest bearing deposits were $5.30 billion for the fourth quarter 2019, compared with $5.23 billion for the prior quarter, and $5.31 billion for the year ago quarter. At December 31, 2019, our non-interest bearing deposits total $5.25 billion, compared with $5.39 billion for the prior quarter and $5.20 billion for year ago quarter.
Non-interest bearing deposits were 60.3% of those deposits in the end of the fourth quarter, compared with 61.2% for the prior quarter, and 59% for the year ago quarter. Our average total deposits and customer repurchase agreements of $9.21 billion for the fourth quarter grew by $109 million or 1.2% from the third quarter. At December 31, 2019, our total deposits and customer repurchase agreements were $9.13 billion, compared with $9.20 billion at September 30, 2019 and $9.27 billion for the same period a year ago.
Our cost of deposits and customer repurchase agreements for the fourth quarter were 21 basis points, and our total cost of funds were 22 basis points, both slightly down in the prior quarter. Interest income. Interest income for the fourth quarter of 2019 total $112.2 million, compared with $113.6 million for the third quarter, and $117.7 million for the same period a year ago.
The decrease in interest income from the third quarter of 2018 was primarily due to $474,000 in lower discount accretion on acquired loans and non-accrual interest paid.
We also experience an additional 5 basis points decline in load yields. The decline in loan yields was primarily due to the three Federal Reserve rate decreases during the third and fourth quarter. The $5.5 million year-over-year quarter decrease in interest income was the result of $160 million, and lower average earning assets and a decrease in yield on earnings asset of 14 basis points.
The fourth quarter 2019 reflected a $1.7 million decrease in loan discounted accretion and nonaccrual interest paid over the fourth quarter 2018. The tax equivalent yield on earning assets for the fourth quarter was 4.44% compared with 4.55% for the prior quarter and 4.58% for the year ago quarter, when loan discounted accretion and non-accrual interest paying are excluded the tax equivalent yield on earnings assets for the fourth quarter decreased by 10 basis points compared to the prior quarter and decreased by 8 basis points compared to the fourth quarter of 2019.
Interest expense. Interest expense for the fourth quarter 2019 totaled $5.2 million. A $200,000 decrease over the third quarter and a $500,000 increase over the fourth quarter of 2018. Average interest-bearing liabilities increased by $31 million compared with the third quarter, while the cost of interest-bearing liabilities decreased by 3 basis points. The $500,000 increase in interest expense from the fourth quarter 2018 can be attributed to a 12 basis points increase in the cost of interest-bearing deposit.
Net interest margin. Our tax equivalent net interest margin was 4.24% for the fourth quarter of 2019, compared with 4.34% for the third quarter. When the impact of discount accretion on acquired loans and non-accrual interest paid is excluded, the adjusted tax equivalent and net interest margin was 3.95% for the fourth quarter, down from 4.02% from the prior quarter.
Non-interest income. Non-interest income was $12.6 million for the fourth quarter of 2019 compared with the $11.9 million for the prior quarter and $10.8 million for the year ago quarter. The $746,000 increase from the third quarter include the $293,000 increase in fees from interest rate swap. Non-interest income grew by $1.9 million compared to the fourth quarter of 2018.
Feeincome from trust and investment services grew by $525,000. Banks service charges increased by $332,000, international services fee income grew by approximately $175,000 and interest rate swap fees increased by $671,000. Conversely fourth quarter 2019 debit card interchange income declined by approximately $300,000 from the fourth quarter of 2018 due to the Durbin amendment and us reaching the $10 billion mark in assets.
Now expenses. Non-interest expense for the fourth quarter was $49.1 million compared with $47.5 million for the third quarter 2019, and $60.8 million for the year ago quarter. Salary and benefit expense grew by $1.1 million compared to third quarter of which there was a $430,000 increased in bonus and profit-sharing expense.
The $11.8 million decrease in expense for the fourth quarter 2019, include a $8 million decrease in acquisition expense related to the Community Bank merger and a $2.1 million decrease in occupancy and expense from the consolidation of 10 banking offices.
Non-interest expense totaled 1.71% of average assets for the fourth quarter, compared with 1.68% for the third quarter, and 2.10% for the fourth quarter of 2018. Our efficiency ratio was 41% for the fourth quarter of 2019, compared with 39.6% for the prior quarter, and 49.2% for the fourth quarter of 2018.
Now, I'd like to turn the call over to Allen, our CFO, to discuss our effective tax rate, investment portfolio and overall capital position. Allen?
Thanks, Chris. Good morning, everyone. Our effective tax rate was 27.4% for the fourth quarter, and 28.6% for the full year. This compared to 28% for the fourth quarter of 2019 and the full year 2019. The slight increase from the prior year was due to the greater relative increase in taxable income compare to the level of tax-advantaged income.
Looking to our investment portfolio. At December 31, 2019, our combined available for sale and held-to-maturity investment securities, totaled $2.4 billion, a $140 million increase from the third quarter and $64 million decreased from December 31, 2018.
At quarter end, investment securities available for sale totaled $1.74 billion. The portfolio had a pre-tax unrealized gain of $22 million at December 31, 2019. In addition, we own held-to-maturity investment securities totaling $674 million.
The tax equivalent yield on the total securities portfolio was 2.43% for the fourth quarter, compared with 2.47% for the third quarter, and 2.55% for the fourth quarter of 2018. During the fourth quarter, we purchased $272 million or mortgage tax securities, with an average expected yield of approximately 2.52%.
Now, turning to our capital position. Shareholders' equity increased by $142.9 million to $1.99 billion at the end of 2019. The increase was primarily due to $207.8 million in net earnings and a $31 million increase in other comprehensive income from the tax-affected impact of the increase in market value of available for sales securities. Partially offsetting these increases equity were $101 million in cash dividends.
And I'll now turn the call back to Chris for some closing remarks.
Thanks, Allen. Now, let's talk about economic conditions. Turning to the California economy, according to various economic reports. California's unemployment rate was 3.9% for November 2019, 3.9% in October 2019 and 4.1% a year ago in November 2018.
The California GDP grew by 2.6% in 2019. California's GDP growth is expected to outpace the U.S. GDP growth for 2020. Approximately 40% of California is job growth over the past year was concentrated in two sectors, healthcare and social assistance, and leisure and hospitality.
Overall, the outlook for California's economy remains bright for 2020. As job gains have continued on a sustained basis, and two job sectors are likely to grow faster than those and the rest of the nation. Logistics, which is propelled by the giant Southern California ports and technology.
In terms of the dairy industry, milk prices are predicted to be somewhat higher in 2020, due to the strong economy and increase demand for non-fat dry milk exports.
In closing, we are proud of our accomplishments and record earnings for 2019 and believe we are well positioned for future efficiency and growth. We remain committed to growing the bank in a balanced way utilizing all three of our growth initiatives. Same-store sales, opening de novo centers and acquisitions.
Today is my last earnings conference call with the company. As we previously announced this past July, I am retiring effective March 15, 2020. After March 15, I will remain as a consultant through December 31, 2020 to help facilitate a smooth and orderly transition to the next Chief Executive Officer.
As I look back in my 13.5 years as CEO of this great organization. I would like to thank our former Board Members George Borba Senior, Ron Cruz, Johnny Barber, Linn Wiley, Jim Seley, Bob Jacoby and San Vaccaro for giving me this opportunity.
I would also like to thank my four named Executive Dave Brager, Dave Harvey, Allen Nicholson and Dave Farnsworth, for the relentless commitment to success.
I would also like to thank my Senior Leadership Team as a whole. And especially thank those that have been side-by-side with me over the past 10 years, executing on my in closed 10-year vision. Dave Brager, Dave Harvey, Yamynn De Angelis, Elsa Zavala, Ted Dondanville, Tim Noone, Larry Zivelonghi, Mike Mulcahy, Bob Zeltner and Mark Richardson. And I would like to thank all of my employees. They have consistently strived for excellence and take ownership and pride in our history and accomplishment.
As you can tell, I'm proud of all we've accomplished over the past 13 plus years. I'm proud of the fact that our net income has grown from $61 million in 2007 to $208 million for 2019. And further proud that we've done it while taking only moderate risk, no shortcuts. We continue to focus our efforts on quality business that is repeatable, scalable and transparent.
In closing, I thank our customers for their business and ongoing loyalty. I thank you, our shareholders for their continued -- for your continued support and trust. And I think our Board of Directors for their leadership and guidance.
Well, that concludes today's presentation. And now Allen and I will be happy to take any questions that you might have.
We will now begin the question-and-answer session. [Operator Instructions]. And our first question will come from Jackie Bohlen of KBW. Please go ahead.
I wanted to touch base first on the decline in OREO that you had in the quarter. I know in the past, we talked about the larger single-family residence that was added in the third quarter and I'm wondering if that was sold during the quarter and that did the drop?
Yes. We actually, that OREO, the largest single-family residence was actually a Community Bank loan and it was secured by two pieces of property that are adjacent to each other. So what we ended up doing is keeping the land piece of the property, which is mark at $1.8 million, and then we gave back the residence to the initial first trust deed holder. And so that was the reduction in the OREO. So we still hold the land it's mark at $1.8 million. And we feel -- at this point in time, we feel confident that we will get our money back and hopefully a little more.
Okay. So there was no associated OREO gain or anything that was noticeable with the transfer that took place?
Not on that piece. No.
Okay. And then just looking at the provision expense in general. Charge-off haven't fluctuated much throughout the year, it's been de minimis charge-off, recovery and there is been a positive expenses associated with that and you have a zero expense in the fourth quarter. So just wondering how you are thinking about that going forward, understanding off course that in a world starting now basically.
As you know we had net recoveries for the last five or six years in a row. Now the good news is that over that period of time further most part, gross charge-off have trended down, actually gross charge-off were little bit up year-over-year in 2019 from '18. But our recoveries still exceeded the gross charge-off, both are more a $0.5 million. I think net recoveries were down $500,000 and gross charge-off are about $450,000 to $460,000 somewhere in that.
So as we’re going into 2020, I do think that’s going to start reversing itself. We actually will have a net charge-off that is not a negative number, or if you know what I mean, we will have a real net charge-off as we go forward but credit is running very well for us right now.
If you look at our 30 days to 89 days passed through, I think it was $1.7 million or something low like that. I mean let look out for $7.5 billion in loans. So we feel good about it but credit is not perfect and we're seeing little choppiness. If you look at our classified loans, they are up quarter-over-quarter and some of that due to dairy particular one dairy, and then some of that due to commercial real estate, which was a form of Community Bank loan. But we're not seeing a lot of loss content potential in that classified loan pool, at least at this time.
So the good news if those classified loans that are performing well market, I mean we're not marketing but we're reserving for. So we're feeling good about where we stand right now. But, I do think Jackie, that credit starting to slowly inch, I think it can’t get better right, where is it going to go, so it's going to get little worse. And we're starting to see just very small size of that but nothing major.
Okay. And do you have any guidance on when you might provide any sort of an update on CECL's impact?
I'm going to let Allen answer that question.
So Jackie, at this point, our day one, adjustment to equity for CECL is expected to be immaterial. And -- but we will provide a lot more information obviously in our 10-K.
Okay, great thank you. I will step back now. And congratulations on everything Chris.
And Jackie, when it come to CECL I’m sure Allen won't like me saying this is we got to go through that process, but I think that Chris Myers just set the low loss reserve and we should go on from there. But they don’t let me do that. Chris joined that before when he is retiring.
I'll let Chris join the Feds before when he's retiring.
[Operator Instructions] And our next question will come from Aaron Deer of Sandler O’Neill and Partners. Please go ahead.
Just to come to maybe get the exact amount of discount accretion in the quarter if you have that handy.
Yes. Aaron, it was $6.5 million.
Okay. And what is the remaining unaccredited discount that -- at year-end?
The total remaining discount, I think, is up about $30 million.
Okay. And the accelerated restricted stock expense, is that running at about the same level? And should that end after this quarter?
Yes, this quarter was very similar to last quarter. And as it relates particularly that to Chris's situation and it will decline a bit into the third quarter. However, obviously, we'll have a new CEO, so we'll probably have some digital stock issued for that person.
Okay. And then it looked like there was a small amount of share repurchases. What do you thoughts on that front at this point?
Well, we have a 10b5-1 plan in place. And so that is kind of like an automatic thing at a certain level and as it kicked in during the quarter. I think the average price that we bought stock wasn't a lot of stock, but it was about 45,000 shares in October. In October and it was, so I think, in the high 90s, $19.99 or $20, or something like that.
Okay. So it's just, it really depends on where that threshold is that's going to trigger that?
Yes, and we don't disclose that threshold.
Okay. And then the -- was there any FDIC assessment credit utilized in the quarter?
Yes, there was. It was 750,000 and we have remaining $1.5 million.
Okay. Alright. That, it is all my questions and Chris, congratulations again on your retirement and hopefully we'll get a chance to see you again before you ride off into the sunset. So, take care and thanks so much.
Our next question will come from Gary Tenner of D.A. Davidson.
This is Jake Stern on for Gary Tenner. So thinking about NIM, is the core loan yield for the quarter capture the majority of loan re-pricing from the most recent rate cuts in LIBOR? Or is there another quarter or more re-pricing still to come?
Can you repeat the question? We didn't hear you very well?
Yes, of course. Just thinking about NIM, does the core loan yield for the quarter capture the majority of loan re-pricing from the most recent rate cuts and moves in LIBOR? Or is there another quarter or more re-pricing still to come?
No, in terms of the actions by the Fed in terms of prime and LIBOR, I think the quarter has most of that reflected.
Okay. And just referring to loan growth, it's seems it's been a challenge for some time. With the backdrop of slowing sector growth, where do you project loan growth to 2020?
It's, some of this recycling of our -- through our acquisition -- and is really, I'd say 95% done. So if you looked in the fourth quarter, loans were really flat. We're down, I think if you take out the dairy, we're down about $3 million or something like that. So loans were flat quarter-over-quarter.
We have positive loan growth budgeted in for 2020 for the bank. I think that loan growth, the goal is certainly mid-single-digits. And if we can do a little better than that, it'd be great,but that's kind of where we are right now, in terms of what we're trying to achieve and what we think is realistic given the economy and given the pricing competition.
I've been a little bit surprised at some of the banks and the margin that they're willing to take on some of these loans. And we're very much relationship bank-oriented. So we don't have a good deposit relation so forth. We're not going to give them any pricing that we might give those clients to do a lot of progress with us. And, I think that's the right way to run your business, because the funding aspect is still critical.
And just to kind of follow-up on that. Are you guys through the runoff on our Community Bank loans that have been headwind for the net loan growth in recent quarters?
We still have -- again, there are still a lot of pricing re-pressure because of the flat yield curve. So we still are having to retain a lot of loans, but those are both Community Bank and Citizens Business Bank well, just normal competition. But yes, we're through kind of the, I think were through the acquisition stages we're all one team now. I mean, I'm not even thinking or I think our team is not even thinking whether somebody was an ex-community employee or citizens we're all one. So and I think that's pretty true. As I said before, 95% plus true for the -- on the financial side as well.
[Operator Instructions]. And our next question will come from Tim Coffey with Janney.
Chris, I just had a question about the competition for your deposit customers. You've done a great job building this and maintaining the strong deposit portfolio, but you are surrounded by a lot of competitors that are willing to waive fees on the deposits to retain those customers or attract them. So I'm wondering, have you seen the pressure from the competition on deposit side intensifiers has been kind of a steady state?
Yes, it's interesting, because if you asked me that question 6 months ago, or maybe 8 months ago, I'd say, yes, it's pretty intense and we're really having to make decision-by-decision. That pricing -- deposit-pricing pressure has moderated tremendously with the three Fed funds rate drops. So right now, we feel confident that we can grow deposits in 2020. And with the same kind of ratios that we're showing right now that 60% is non-interest bearing deposits, and that's our goal is that kind of mid-single-digit, maybe a little bit better growth for deposits as well and in the same ratio of non-interest bearing to interest bearing.
So actually, it's moderated. We're feeling really good on the deposit side. And we have a great mousetrap here we build here. We provide a lot of technology to our clients and we have a lot of individual personal support from our service team, who does a fabulous job. One of the things I want to remind all of you is the average checking account balance in Citizens Business Bank checking account right now, at least last month was over $140,000 per account.
So think about the extra service, we can provide each client with that kind of scale, if you will. And I think that's a real benefit to our clients that's we're not there dealing with the masses. We're not a retail consumer bank. We're a business bank that banks to principles and key executives of the company that we provide financing for and then provides deposit services for. So small and medium sized businesses, the business owners and principals. That's what we do.
Our next question is a follow-up from Jackie Bohlen of KBW. Please go ahead.
Just a quick question on the tax rate. Allen, I understand there were some moving points surrounding compensation in the quarter and stock vesting and all that. Do you expect normalized rate outside of that activity in 2020 go back to a -- the historic norm?
I’m sorry. Were you asking about our tax rate?
Yes, that's in the tax rate in the quarter. I'm assuming that was impacted by stock testing and stuff that caused a positive benefit in the quarter. So I’m wondering it will go back to the regular level in 2020, absent more of that activity.
Yes. I think -- our full year tax rate of 28.6% is really reflective of run rate.
And Jackie, a lot of the year, we're running at 29% and then in the fourth quarter we were able to balance that out to what we think now is the run rate, which is 28.6%. So the 28.6% is our best judgment for 2020 but it could go up to 29%, I think that’s kind of where we peak right?
Yes. I mean, it will range from 29% to 28.5%.
And then just as you had you know as we say less than 2 months from your retirement. Chris, if you have any update on how the search for your replacement is going and when we might hear an announcement about that?
I think the Board is doing a very thoughtful and through job of looking exactly for the right person to lead this company or right person. And in that regard, there is been an extensive process to go out there and look for that across the United States. And I think its narrowing down, I think we're getting closer, but I have nothing to announce for you guys at this time.
[Operator Instructions] At this time, there are no more questions. So, I would like to turn the call back to Mr. Myers.
Thanks very much. I want to thank everybody for joining us again this quarter. We appreciate your interest. Have a great day. Thanks for listening, and god bless CVBF.
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.