Cvb Financial Corp Q4 FY2025 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Fourth Quarter of 2025 CVB Financial Corporation and its subsidiary, Citizens Business Bank Earnings Conference Call. My name is Sherry, and I'm your operator for today. Please note, this call is being recorded. I would now like to turn the presentation over to your host for today's call, Allen Nicholson, Executive Vice President and Chief Financial Officer.

Thank you, Sherry, and good morning, everyone. Thank you for joining us today to review our financial results for the fourth quarter of 2025. Joining me this morning is Dave Brager, President and Chief Executive 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. 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, 2024, and in particular, the information set forth in Item 1A, Risk Factors therein. For a more complete version of the company's safe harbor disclosure, please see the company's earnings release issued in connection with this call. I'll now turn the call over to Dave Brager. Dave?

Thank you, Allen. Good morning, everyone. For the fourth quarter of 2025, we reported net earnings of $55 million or $0.40 per share, representing our 195th consecutive quarter of profitability, which equates to more than 48 years. We previously declared a $0.20 per share dividend for the fourth quarter of 2025, representing our 145th consecutive quarter of paying a cash dividend to our shareholders. We produced a return on average tangible common equity of 14.4% and a return on average assets of 1.40% for the fourth quarter of 2025. Our net earnings of $55 million or $0.40 per share compares with $52.6 million for the third quarter of 2025 or $0.38 per share and $50.9 million or $0.36 per share for the prior year quarter. Pretax income grew by $5.4 million quarter-over-quarter and $6.3 million over the prior year quarter. Both the quarter-over-quarter increase in pretax income as well as the increase from the fourth quarter of 2024 were primarily the result of growth in net interest income. Net interest income grew by $7 million or 6% over the third quarter of 2025 and by $12.2 million or 11% over the fourth quarter of 2024. During the fourth quarter, we collected $3.2 million of interest on a nonperforming loan that was paid off during the quarter and incurred a $2.8 million loss on sale of investment securities. We also incurred $1.6 million of acquisition expense related to the pending merger with Heritage Bank of Commerce. Changes during the first quarter to our allowance for credit losses and reserve for unfunded loan commitments had the net impact of increasing pretax income by $3 million compared to the prior quarter and pretax income decreasing by $1.5 million compared to the fourth quarter of 2024. Noninterest income was $11.2 million in the fourth quarter, which was $1.8 million lower than the third quarter and $1.9 million lower than the fourth quarter of 2024. Trust and investment services income grew by $156,000 or 4% from the third quarter of 2025 and grew by $519,000 or 15% over the fourth quarter of 2024. Bank-owned life insurance income decreased by $1.1 million from the third to fourth quarters due to the annual amortization of revenue enhancements. In addition, other income declined by $800,000 from the prior quarter. This decrease in other income was the result of a smaller loss on sale of investments during the fourth quarter as we incurred a $2.8 million loss during the fourth quarter compared to the $8 million loss on sale incurred in the third quarter and the $6 million of income earned in the third quarter from a legal settlement. Now let's discuss loans. Total loans at December 31, 2025, were $8.7 billion, a $228 million or 2.7% increase from the end of the third quarter of 2025 and a $163 million or 2% increase from the end of 2024. The quarter-over-quarter increase in total loans was due to growth in nearly all loan categories. As typically happens at year-end, we experienced seasonal increases in dairy and livestock borrowings. Dairy and livestock loans grew by $139 million compared to the end of the third quarter, driven by higher line utilization from 64% at the end of the third quarter to 78% at the end of the fourth quarter. Loan growth was also positively impacted by increases in line utilization for C&I lines of credit, increasing from 28% at the end of the third quarter to 32% at the end of the year. Compared to the end of the third quarter, C&I loans grew by $34 million, CRE loans grew by more than $39 million and SBA 504 loans grew by $17 million. The $163 million year-over-year increase in loans includes growth of CRE loans of $67 million, $49 million of growth in C&I loans, $25 million of growth in SBA 504 loans and $22 million of growth in construction loans. Loan originations were approximately 70% higher in 2025 than 2024, and the fourth quarter production was approximately 15% higher than the third quarter of 2025. Our loan pipelines remain strong going into 2026, although rate competition for the quality of loans we compete for continues to be intense. Loan originations in the fourth quarter had average yields of approximately 6.25%, which was consistent with the prior quarter. We experienced $325,000 of net recoveries during the fourth quarter compared to $333,000 of net recoveries for the third quarter of 2025. Net recoveries for the full year of 2025 were $539,000. Total nonperforming and delinquent loans decreased by $20 million to $8 million at December 31, 2025. A $20 million nonperforming loan was paid in full at the beginning of the fourth quarter. The sale of the building collateralizing this loan resulted in the bank receiving all principal and $3.2 million of interest income. Classified loans were $52.7 million at December 31, 2025, compared to $78.2 million at September 30, 2025, and $89.5 million at December 31, 2024. Classified loans as a percentage of total loans were 0.6% at December 31, 2025. Now on to deposits. Our average total deposits and customer repurchase agreements were $12.6 billion during the fourth quarter, which compares to $12.5 billion for the third quarter. Our noninterest-bearing deposits declined on average by $122 million compared to the third quarter of 2025, while interest-bearing nonmaturity deposits and customer repos grew by $234 million. On average, noninterest-bearing deposits were 58% of total deposits for the fourth quarter of 2025 compared to 59% for both the third quarter of 2025 and the fourth quarter of 2024. At December 31, 2025, our total deposits and customer repurchase agreements totaled $12.6 billion. Noninterest-bearing deposits declined from the end of the third quarter to the end of the year by approximately $440 million as we typically experience seasonal deposit declines at year-end. However, interest-bearing deposits and customer repurchase agreements increased by $430 million between the third and fourth quarter. Our cost of deposits and repos was 86 basis points for the fourth quarter compared to 90 basis points in the third quarter of 2025 and 97 basis points for the year ago quarter. I will now turn the call over to Allen to further discuss additional aspects of our balance sheet and our net interest income.

Thanks, Dave. Net interest income was $122.7 million in the fourth quarter of 2025. This compares to $115.6 million in the third quarter of 2025 and $110.4 million in the fourth quarter of 2024. Interest income was $156 million in the fourth quarter of 2025 compared to $150.1 million in the third quarter and $147.6 million in the fourth quarter of last year. Average earning assets increased by $153 million in the fourth quarter when compared to the third quarter, and the earning asset yield increased by 11 basis points from 4.32% to 4.43%. The fourth quarter loan yield was 5.47% compared to 5.25% in the prior quarter. Excluding the $3.2 million of interest income on the nonperforming loan we previously discussed, the yield on loans would have increased quarter-over-quarter by 7 basis points. Interest expense was $33.3 million in the fourth quarter and $34.5 million in the third quarter of 2025. Our cost of funds decreased from 1.05% for the third quarter of 2025 to 1.01% in the fourth quarter of 2025. The average balances of interest-bearing deposits and repos increased by $232 million over the prior quarter. However, interest expense decreased as interest-bearing deposit costs declined by 17 basis points and the cost of customer repurchase agreements decreased by 24 basis points. Our allowance for credit loss was $77 million at December 31, 2025, or 0.89% of gross loans. In comparison, our allowance for credit losses as of September 30, 2025, was $79 million or 0.94% of gross loans. The decrease in the ACL resulted from a $2.5 million recapture of credit loss and net recoveries of $325,000. Our $77 million ACL is 133% of our combined nonperforming assets and classified loans. Our economic forecast continues to be a blend of multiple forecasts produced by Moody's. We continue to have the largest individual scenario weighting on Moody's baseline forecast with both upside and downside risks weighted among multiple forecasts. The resulting economic forecast at December 31, 2025, was modestly different from our forecast at the end of the third quarter, with loss rate assumptions for C&I loans experiencing a negative impact from the economic forecast. Real GDP is forecasted to stay below 1.5% through 2027 and not reach 2% until 2029. The unemployment rate is forecasted to reach 5% by the beginning of 2026 and remain above 5% through 2028. Commercial real estate prices are forecasted to continue their decline through the third quarter of 2026 before experiencing growth through 2029. So now switching to our investment portfolio. Available for sale or AFS investment securities were $2.68 billion at December 31, 2025. During the fourth quarter, we sold $30 million of securities with an average book yield of 1.5%, realizing a $2.8 million loss and then purchased $239 million of new securities at an average book value yield of approximately 4.75%. The unrealized loss on AFS securities decreased by $26 million from $334 million at September 30, 2025, to $308 million on December 31, 2025. The net after-tax impact of changes in both the fair value of our AFS securities and our derivatives resulted in a $20 million increase in other comprehensive income for the fourth quarter. Our held-to-maturity investments totaled $2.27 billion at December 31, 2025, which is $109 million lower than the balance at December 31, 2024. Now turning to the capital position. At December 31, 2025, our shareholders' equity was $2.3 billion, a $109 million increase from the end of 2024, including the $84 million increase in other comprehensive income. There were 1.96 million shares of common stock repurchased during the fourth quarter of 2025 at an average purchase price of $18.80. For all of 2025, we repurchased 4.3 million shares at an average share price of $18.60. The company's tangible common equity ratio was 10.3% at December 31, 2025, while our common equity Tier 1 capital ratio was 15.9%, and our total risk-based capital ratio was 16.7%. I'll now turn the call back to Dave for further discussion of our expenses.

Thank you, Allen. Noninterest expense for the fourth quarter of 2025 was $62 million compared to $58.6 million in the third quarter of 2025 and $58.5 million in the fourth quarter of 2024. During the fourth quarter, we incurred $1.6 million of one-time merger-related expenses associated with the pending merger with Heritage Bank of Commerce. The fourth quarter of 2025 also included a $1 million provision for off-balance sheet reserves compared to a $500,000 provision in the third quarter. Excluding acquisition expense and the provision for off-balance sheet reserves, operating expenses grew by 2.3% or $1.4 million over the third quarter of 2025 and by 1.6% or $1 million over the fourth quarter of 2024. Excluding the impact of acquisition expense and the provision for off-balance sheet reserves, we achieved positive operating leverage from both the prior quarter and the year ago quarter of 2% and 6%, respectively. Noninterest expense, excluding acquisition expense, totaled 1.53% as a percentage of average assets in the fourth quarter of 2025 compared to 1.50% for the third quarter of 2025 and 1.49% for the fourth quarter of 2024. This concludes today's presentation. Now Allen and I will be happy to take any questions that you may have.

And our first question will come from Matthew Clark with Piper Sandler.

Good morning, Matthew. I just want to start on the interest-bearing deposits. You mentioned some seasonality. It looked also like some mix change towards savings money market. Can you just speak to what you saw there and maybe whether or not there was some behavioral change among customers seeking rate.

Yes. No, I don't think there was any behavioral change. It's pretty standard for us. People pay bonuses, accrue for taxes, do different things. So I don't really think there was any major change. There wasn't any movement of any large relationships or deposits from noninterest-bearing to interest bearing. I think for the most part, it just was normal seasonality. The part that was different was that we actually grew the noninterest-bearing deposits, and that is something that is a little different, but it wasn't necessarily coming from the noninterest-bearing and moving to the interest-bearing.

I mean, Matthew, I would just consistently say look at quarterly averages. Our deposit customers move fairly large amounts of money at any point in time. So point in time balances don't necessarily reflect exactly what's going on. So average balances, I think, are just more important.

Yes. Yes. Okay. And then just on the non-dairy and livestock loan growth. If you exclude it, it's up over 4% annualized this quarter. I know some of it was higher line utilization. But maybe speak to the higher line utilization, whether or not you think that might be more sustainable? And your thoughts overall on kind of non-dairy and livestock loan growth this year.

Yes. It's kind of interesting. I think we ended the year year-over-year up about 2% in total loans. And it's kind of in line with what I thought at the beginning of the year. It just took us a little while to get their point-to-point. But loan pipelines remain strong. I think the utilization is normalizing I think people are a little more positive, I mean, as evidenced by just some of the GDP growth that we're seeing. So I think that that's probably going to remain a little more stable than it has been over the last 1.5 years or so. And candidly, that's anecdotal, but everybody we talk to is basically saying that they're ready to go and they think things are going to be okay. So that's a good sign. That's also evidenced, obviously, by the classified loans and the nonperforming loans that we reported at the end of the quarter. So I think all in all, the pipelines are strong, at least for the foreseeable future. And I believe that we'll be able to do more with our existing customers, and we're still attracting some pretty good relationships going forward. So all in all, I'm cautiously optimistic, maybe even positive and optimistic about 2026 so far.

Great. And then last one for me. Just on the Heritage deal. Any update on how it's progressing?

Everything is going well. We've toured their offices and headquarters, and we're preparing from both an application and proxy perspective. Everything is on track, and we still expect to close in the second quarter and complete the systems conversion then. While there’s still progress to be made, things are looking good so far.

One moment for our next question, and that will come from the line of David Feaster with Raymond James.

I wanted to revisit the core deposit area. We discussed the seasonal dynamics within NIB, but I’d like to hear your views on the competitive landscape for deposits. Where do you see success in gaining deposit business? Additionally, I’d like your thoughts on the recent growth in interest-bearing deposits and your outlook on managing the effects of Fed cuts and expectations for near-term betas.

Yes, regarding the first part of your question, we primarily target operating companies. Most of the new deposit relationships we’re establishing are over 75% noninterest bearing. Historically, we have experienced some fluctuations in deposits, and as Allen mentioned, funds can move in and out for various reasons. This is why we believe focusing on average numbers is more insightful. We are successfully forming relationships, but we do not compete by offering the highest rates on our deposit accounts, nor do we aim to attract that kind of customer. Our relationships tend to be fairly standard. When it comes to Federal Reserve rates, we reduced all accounts earning over 1% by 25% during the last cut, aiming to capture as much as we can from that. We’re also trying to manage our interest-bearing deposits while offsetting the impact of those rate cuts on the asset side. It's encouraging that our loan yield increased despite the Fed rate cut. We included a slide in our investor presentation detailing the repricing timelines for both variable and fixed-rate accounts, covering up to 10 years. While the number maturing in the next decade is small, we’ve added more detail compared to our previous materials. On the deposit front, things remain consistent. We're observing increased competition, with some banks offering incentives like earnings credits to attract deposits. For instance, we had a situation where a bank was presenting a 3% guaranteed ETR rate for five years, which included covering their accounting costs as part of the deal. We won’t engage in such practices. It’s unclear whether this is a strategy to drive noninterest-bearing deposits specifically, but loan growth is present, indicating potential funding pressures. Despite this, our operations continue as usual.

That's helpful. Regarding growth, can you discuss the competitive landscape? It seems that pricing is the main focus, but are you experiencing increased competitiveness from rivals in underwriting as well? Also, how do you view payoffs and paydowns? There's notable repricing in your existing portfolio, but with competition and possible Fed rate cuts ahead, do you foresee payoffs and paydowns as a potential challenge next year?

Yes, while it always presents some challenges, the payoff and prepayment penalty activity in the fourth quarter was lower than in the third quarter. It's a consistent factor that we have to consider, and we account for it in our internal modeling and forecasting by looking at those figures historically. In terms of back book repricing, one of the issues we’re facing is that during resets, clients are receiving quotes from competitors which may be lower than ours. I often question the accuracy of those quotes since I don’t always see the actual numbers. There seems to be competition out there offering loans at rates lower than our repricing or reset rates. We do have some protection with prepayment penalties, but there’s none on the maturing book, which means we have to adopt a more aggressive stance. I was actually pleased that our average yield for the fourth quarter was 6.25%, especially since much of our current activity is falling around the 6% range just to remain competitive. With treasury rates rising recently, I hope clients stay disciplined. Ultimately, our focus is more on pricing rather than credit; we won't compromise on credit underwriting, but in order to maintain relationships, we’ll be a bit more aggressive on pricing.

Are you seeing more...

We're seeing more short-term loans as well. So people are doing 5, 3-year instead of going out 7 or 10 years. So I think that's also part of the yield we're seeing.

Okay. Have you started to see...

I'm sorry, David, I wanted to add one point, and it's a valid point that Allen raised. I'm not sure it's a good strategy to try to maintain things for 2 or 3 years. We'll see, but if you look at the forward rates, especially on the longer end, they could be higher due to various factors.

If I could just start maybe asking on expenses, I think, post the adjustments you guys call out, it's around $59 million or so. But compensation up this quarter. Was any of that incentive accrual adjustments kind of at year-end? And then maybe just looking for a little bit of help around thoughts on organic expense growth into 2026 or kind of run rate expectations you guys have?

Yes, Andrew, you're correct. There were some adjustments to our private bonus share accruals that elevated the expense quarter-over-quarter. Additionally, every fourth quarter with the holiday season involves extra benefit expense. Therefore, comparing Q4 to Q4 might give a better indication of our dense growth, which I believe was less than 2%. If we look at the full-year numbers, the only expense line that is really growing more than very low single digits is the technology side, specifically the software expense. We will continue to invest in that area. While the percentage growth may not be as high as 24% to 25%, it remains a focus for our investment.

Yes. Okay. And then just on the margin overall, I appreciate the slide you guys gave on the loan repricing in the presentation. But if we look at margins for the industry right now, a lot of the banks out there approaching kind of that peak level or fairly close from back in 2019, you guys are still 50 or 75 basis points light versus the 4.25 level from 2019. So I guess the kind of question is, has anything structurally changed preventing you from getting back there? And then just keeping that loan repricing in mind, I know some of it looks decently far out there up to 10 years. How long does it take you guys to get margin back to what you would view as a normalized level?

Well, of course, the yield environment plays a lot into that, Andrew. But yes, I mean, obviously, if you go back pre-pandemic, our securities book still has a much lower yield than it would have had back then. And so that's obviously going to play into it. And the loan book still as well. So it will take a little time for both cash flows and the security book to reprice as well as the loan book to reprice. And that's why we added that slide. So I mean it's hard to tell. I don't know if I would comment on it knowing that there's so many variables, but I wouldn't be surprised if we get there over the next couple of years, but there's a lot of things that could change that.

Yes. And the only thing I would add to that, Andrew, is to the point that we have not done any large restructuring loss trade type transactions. And so in the fourth quarter, with the gain that we had or with the recapture of the interest income that we had, use that to take advantage of. So sort of all these one-time things that happen, we will still look at that and make determinations. And that's really part of the reason that we looked at the loss trade to utilize that $3.2 million where we recaptured an interest. So we'll just continue to do that. It's more singles. We're not planning on doing anything like we've said all along, anything larger than that.

I had just a follow-up on the loan yields in the quarter. Even excluding the interest recovery, as you pointed out, Allen, the loan yield was up 7 basis points. Was that pretty exclusively driven by the increased C&I outstandings between general C&I and the ag portfolio? I just wanted to make sure there weren't any other dynamics during the quarter that impacted.

I wouldn't highlight anything specific. Dairy has increased, but the higher percentage of dairy in our overall loans likely contributed about a basis point improvement in loan yields. It’s a little bit related to the mix. However, the majority of our loans are in commercial real estate, which ties back to the back book discussion. Those loans are gradually repricing, and as payoffs occur, we are replacing them with loans that have higher yields. This concept is probably the primary factor driving our results.

And new production.

Okay. Great. And then just looking forward to the HCP transaction, any expectations at this point of kind of any day 1 restructuring of their balance sheet or otherwise?

We have announced that we plan to sell around $400 million of single-family loans that were purchased by Heritage. These loans have a very long duration. Although we will mark them to market and there is substantial accretion if we kept them, they are still low-coupon, 30-year mortgages. We do not want to manage for the long duration, and since they are not linked to any customers, we will sell them and reinvest in assets with shorter durations.

Okay. I participated in the merger announcement, but beyond that, there is nothing else at this point.

Good morning. Thanks for the question. Apologies. I joined a little bit late. I may have missed this. But just circling back to the noninterest-bearing flows. With those balances down a bit, can you just elaborate? I know you guys sold an NPL if there was any attrition of customers related to exits or anything that? Or if it was just normal seasonal movements post COVID getting back to more normal trends.

Yes. I think you might be double-checking me, Kelly, but there was no loss of relationships. The comment we made was really just about the situation on December 31. There’s a lot of fluctuation with deposits coming in and out, which is actually quite standard. What was slightly surprising, though perhaps not entirely unexpected, is that we did see an increase in noninterest-bearing deposits. The new relationships we are bringing to the bank are likely around 75% noninterest-bearing. This is really just normal behavior. Looking back over the past decade, we typically see seasonality in the fourth and first quarters. In the fourth quarter, we usually lose about 4% of our deposits on average, but that didn’t happen this year. We experienced the usual noninterest-bearing withdrawals for taxes, bonuses, or other reasons. However, there was nothing unusual about it, and we didn’t lose any significant relationships or see any material changes.

I mentioned that it's better to look at average balances, as they are more indicative. Our customers transfer a significant amount of money, and there are patterns based on the day of the week. Depending on how a quarter ends, you might not get the full picture.

Got it. That's helpful. Maybe switching to the buyback. You were really this quarter. And then obviously, you had announced Heritage Commerce site in the quarter. Wondering, is it fair to say that you're out of the market at least until the deal closes, just wondering...

Yes. We'll be issuing an S-4 prospectus. We have been out of the market since the beginning of December, and the Board will reevaluate that once we close the merger.

Is there anything unusual affecting the balances in that category?

Go ahead, Allen. I would have small on to say...

I wouldn't say there's anything abnormal about it.

Okay. What causes somebody to fall into that bucket?

Yes, it depends. There are several reasons someone might fall into that category. One possibility is if they come to us seeking assistance and need to make a payment. Another reason could occur during our annual term loan reviews, where we identify inaccuracies or instances where they're not meeting our minimum debt service coverage or other covenants. That figure is still significant when considering the total loan portfolio, but there are multiple factors that could lead to someone being classified in that category.

Okay. And then post the closed deal with Heritage Commerce Bank, we look out back half of this year and the next year. Dave, do you anticipate the addition of Heritage Commerce to materially change your outlook for loan growth?

Yes, I believe it depends on a few different factors. As you know, we believe in a slow and steady approach. Heritage has been growing a bit faster than we have, and I expect there will be some interplay between that. We are entering new markets, and this will enable us to better support their clients, allowing them to achieve more than they currently do. There are definitely positive trends associated with this. However, we need to ensure we successfully close the deal, integrate operations, and address cultural aspects to ensure everyone understands our methods. Overall, I see potential benefits for our loan growth, but we will uphold the same credit quality standards that we and they have maintained. We'll need to assess everything during the integration process to understand our position. I believe there is significant opportunity in those markets for our offerings, not just in terms of loans but also in the broader range of products we provide compared to what they currently have.

Sure. Yes. And a bigger balance sheet will help them a lot.

And that will come from the line of Andrew Terrell with Stephens.

If I could just start maybe asking on expenses, I think, post the adjustments you guys call out, it's around $59 million or so. But compensation up this quarter. Was any of that incentive accrual adjustments kind of at year-end? And then maybe just looking for a little bit of help around thoughts on organic expense growth into 2026 or kind of run rate expectations you guys have?

Yes, Andrew, you're correct. There were some adjustments to our private bonus share accruals that increased the expense compared to the previous quarter. Additionally, every fourth quarter during the holiday season brings extra benefit expenses. Therefore, comparing Q4 to Q4 might better reflect where dense growth is, and I believe that was less than 2%. If we look at the full-year numbers, the only expense line that is really growing more than low single digits is the technology side, specifically the software expense. We will continue to invest in that area. While the growth percentages may not reach the previous levels of 24% to 25%, we will maintain our investments there.

Thank you. I'm showing no further questions in the queue this time. I would now like to turn the call back over to Mr. Brager for any closing remarks.

Great. Thank you. Citizens Business Bank continues to perform consistently in all operating environments. Our solid financial performance is highlighted by our 195 consecutive quarters or more than 48 years of profitability and 145 consecutive quarters of paying cash dividends. We remain focused on our mission of banking the best small- to medium-sized businesses and their owners through all economic cycles. I'd like to thank our customers and associates for their commitment and loyalty, and we look forward to a successful 2026 and the pending merger with Heritage Bank Commerce. Thank you for joining us this quarter. We appreciate your interest and look forward to speaking to you in April for our first quarter 2026 earnings call. You can always let Allen and I know if you have any questions. Have a great day. Thank you.

This concludes today's program. Thank you all for participating. You may now disconnect.