CVB Financial Second Quarter 2026 Earnings Conference Call

Good morning, ladies and gentlemen, and welcome to the second quarter of 2026 Earnings Conference Call for CVB Financial Corporation and its subsidiary, Citizens Business Bank. My name is Cherie, 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 call is being recorded. I would now like to turn the presentation over to your host for today's call, Alan Nicholson, Executive Vice President and Chief Financial Officer. You may proceed.

And good morning, everyone. Financial results for the 26th contained in the private to differ materially from our forward-looking statements on Form 10-K for the year ended December 31, 2025, 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.

Thank you, Alan. Good morning, everyone. For the second quarter of 2026, we reported net earnings of $48.3 million, or 29 cents per share, representing our 197th consecutive quarter of profitability, which is every quarter for over 49 years. We previously declared a 20 cents per share dividend for the second quarter of 2026, representing our 147th consecutive quarter of paying a cash dividend to our shareholders. So $48.3 million or 29 cents per share compares with $51 million for the first quarter of 2026 or 38 cents per share and $50.6 million or 37 cents per share for the prior year quarter. Pre-tax income in the second quarter of 2026 was $65 million compared to $68.6 million in the first quarter of 2026. Results for the second quarter of 2026 reflect the impact of the acquisition of Heritage Bank of Commerce, which closed on April 17. The core banking systems of the two banks were integrated at the end of the second quarter. During the second quarter, we incurred 31.4 million dollars in acquisition expenses, which was 30.3 million dollars greater than the first quarter. In addition, we incurred a provision for unfunded commitments of 4.25 million dollars for the acquired Heritage unfunded loan commitments.

Excluding these unusual items, pre-tax income would have been 100.7 million dollars and thus additional aspects of the merger, including the acquisition of Heritage Bank of Commerce, our total Total assets grew from $15.5 billion at March 31, 2026 to $21.2 billion at June 30. Total consideration for the acquisition of Heritage was approximately $845 million and resulted in total intangible assets of approximately $450 million, including $334 million of goodwill. The acquisition of Heritage included $1 billion of investment securities, of which we sold $490 million at the close of the merger and subsequently purchased $500 million of new securities with an average yield of approximately 4.7%. The fair value of the acquired Heritage loans was $3.48 billion, and the initial allowance for credit losses on the acquired loans was $46.6 million. dollars. To further optimize the balance sheet, we also sold the SFR mortgage pools acquired from Heritage at their fair value of 327 million dollars. The sale of these loans settled on June 10th. After the merger, average earning assets for the second quarter of 2026 were 17.6 billion dollars, an increase over the first quarter of 3.7 billion dollars. The growth in earning assets combined with a 28 basis point expansion in our net interest margin, drove a $44.6 million increase in net interest income in the second quarter when compared to the first quarter of 2026. During the second quarter, we also adjusted our wholesale funding. In connection with our cash flow hedges, we replaced $300 million of maturing broker CDs that were hedged with the pay six swaps with 90-day federal home loan advances. In the month of May, we also chose not to replace $300 million of maturing puttable FHLB advances that had a borrowing rate of 4.73%. Of these changes, we no longer have brokered CDs and our FHLB advances total $500 million, comprised of the $300 million of 90-day cash flow hedge advances and a $200 million puttable advance maturing in May of 2027 at a rate of 4.27%. As a result of the merger we acquired Heritage $40 million of 5% fixed rate sub-debt which had a market value of $38.7 million at the close and a market rate of interest of 6.7%. This debt is expected to be redeemed at the earliest possible date which is May 2027. The deposits increased modestly from the first quarter to the second quarter of 2026. These changes in borrowings resulted in a decrease in our overall cost of funds from 0.97% for the first quarter of this year to 0.96% in the second quarter of 2026. Increased from $80.2 million at March 31st, 2026 to $126.7 million at June 30th with the additional ACL from the acquisition of Heritage. The ACL as a percentage of loans increased from 0.93% at March 31st, 2026 to 1.05% at June 30th, 2026. Our ACL is based on our economic forecast that is 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 June 30th, 2026 was generally consistent with our first quarter forecast. Real GDP growth is forecasted to stay below 2% through the end of 2027. The unemployment rate is forecasted to reach 5% by the beginning of 2027 and remain above 5% through 2028. Commercial real estate prices are forecasted to continue their decline through the end of 2027 before experiencing some growth in 2028. Now turning to our capital position. At June 30th, 2026, our shareholders' equity was $3.2 billion, compared to $2.3 billion at March 31st, 2026. The acquisition of Heritage resulted in issuance of 40.6 million shares of common stock. In June, our board authorized a new 15 million share repurchase plan. From June 18th Through July 21st, we repurchased 409,000 shares for $8.9 million at an average share price of $21.72. Tangible book value per share at June 30th, 2026 was $11.07 compared to $11.42 at March 31st, 2026. The company's tangible common equity ratio was 9.8% at June 30, 2026, compared to 10.5% at March 31, 2026, while our common equity Tier 1 capital ratio was 14.7% at June 30, 2026, compared to 16.3% at March 31. We're back today for further discussion of our loans and deposits.

Thank you, Alan. Loan originations continued at a strong pace in the second quarter, as originations for the second quarter of 2026 were approximately 85 percent higher than the second quarter of 2025 and 40 percent higher than the first quarter of 2026. Our loan pipelines remain relatively strong, although rate competition for high-quality loans continues to be intense. Loan originations in the second quarter had average yields of approximately six 46%, which was in line with the first $1 billion at June 30, 2026, compared to $8.64 billion at $0.37 billion increase, includes $3.15 billion of loans acquired from the merger with Heritage net of the SFR loan pools that were sold. loan yield was 5.53% for the second quarter of 2026 compared to 5.32% for the first quarter of 2026 and 5.22% for the second quarter of 2025. Excluding loan fees and discount accretion on acquired loans, our base loan yield increased from 5.14% at March 31st to 5.37% at June 30th, The overall line utilization rate at June 30, 2026 was 41%. The CNI line utilization increased quarter over quarter. 42% at the end of the second quarter. Livestock loan utilization decreased from 69% at March 31, 2026 to 63% at June 30th, which is in line with the typical patterns for these types of loans. We experienced $137,000 of net charge in 2026, and there was no provision for credit losses during the quarter. Performing assets increased by $10.5 million to $16.8 million at June 30th, 2026, which represents 8 basis point $7 million at June 30th, 2026, or 0.91% of total loans. The $26.6 million increase from March 31, 2026 was due to the addition of $29 million in classified heritage loans. Deposits and customer repurchase agreements as of June 30, 2026 were $16.9 billion, which compares to $12.4 billion on March 31, 2026. The $4 million increase was the result of $4.75 billion of deposits acquired from Heritage upon the close of the merger in April and the reduction in deposits from $300 million of brokered CDs that matured and were not rolled over during the second quarter. were 53% of total deposits on June 30th compared to the pre-merger percentage of 59% on March 31st. Deposits and repos was 86 basis points for the second quarter of 2026 compared to 82 basis points for the first quarter of 2026 and 87 basis points for the year-ago quarter. The non-interest income and give an update on the merger integration. Thank you, Dave.

Non-interest income was $17 million in the second quarter of 2026, compared to $14.3 million in the first quarter of this year. The $2.7 million quarter-over-quarter increase in non-interest income was the result of increased fee income across almost all categories. Deposit and other banking service fees grew by $850,000, and trust and investment services income grew by $460,000, or 12% from the first quarter of 2026. International banking income grew by $200,000, and income from bank-owned life insurance increased by $350,000, with the additional policies for the brief update on our merger integration and the revenue opportunities we see from the heritage combination. We completed the conversion of heritage into citizens operating in 21st and a significant undertaking supported by strong execution across our teams and dedicated internal and external resources focused on customer readiness and support through individual customer transition items and we're already seeing our enhanced online banking platform. We're also beginning to see the strategic benefits of bringing the two banks together. The combined company gives us greater lending capacity and has created additional opportunities across including trust and wealth management, home mortgage, and international services. Today we are operating as one bank with a stronger presence across California's major economic markets and a broader platform to serve our customers. I'll back up to Dave for further discussion of our non-interest expense. Thank you, Clay.

Non-interest expense for the second quarter of 2026 was $114.4 million, including $31.4 million of acquisition expense related to the Heritage merger. Core non-interest expense, which excludes acquisition expense, amortization of intangible assets and provision for unfunded commitments, was $75.2 million in the second quarter of 2026, compared to $58.1 million in the first quarter and $56.4 million in the second quarter of 2025. After excluding acquisition expense and provision for unfunded commitments, our adjusted efficiency ratio was 43.9% in the second quarter of 2026, compared to 44.6% in the first quarter of 2026, and 45.5% in the second quarter of 2025. In conclusion, we continue to focus on the successful integration of the merge companies and the opportunities for accelerated growth in the Bay Area while achieving the projected returns we outlined for this acquisition. Our current outlook continues to align with our stated objectives of achieving EPS accretion of 13% or greater in 2027 while generating a return on average assets of 1.50% and a return on tangible common equity of 17%. This concludes today's presentation. We are now happy to take any questions that you might...

Thank you. If you'd like to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, press star 11 again. Due to time restraints, we ask that you please limit yourself to one question and one follow-up question. Please stand by while we compile the Q&A roster. And our first question will come from the line of Matthew Clark with Piper Sandler. Your line is open.

Hey, good morning, guys.

Good morning.

First one for me, just on the accretion, wanted to confirm the number that was in the net interest income. I've got the loan piece based on the core loan yield comment, but wanted to see if there was some additional securities marks in there. Got it. Okay, so roughly $4.6 million of accretion this quarter in total for the quarter, for the 74 days. In net interest income. Okay, thanks.

It's 2.7, by the way, Matt.

2.7, okay. And then just on the cost saves, how far along are you, just so we can get a sense for what might be left coming out of the run rate?

The same level as Q2.

Okay, okay, got it. And then if I can just sneak one in here, on the pipeline and just the overall integration, getting into the Bay Area, given the rebound that's happening there? Any updated thoughts on, you know, loan growth going forward, whether or not you might be able to step it up relative to your legacy DBB?

Organizations and function teams.

Yeah, the only thing I would say for Straits right now, you know, with the five-year, ten-year treasuries, you know, rising pretty substantially, so we'll see if that impacts, you know, customer prospect behaviors. You know, the things that we mentioned and Clay mentioned with respect to the integration and the, you know, the combined organizations, which will really have an impact on, you know, the opportunities that we're seeing in the former HBC offices and our pipelines, you know, for the legacy CBB offices continue to remain strong. So, you know, look, we want to deal in, you know, the top 25% of relationships out there. And so we're going to, all quality, we'll compete on price for the full. At the end of the day, I think, you know, at least what we're seeing today, it's pretty positive going forward.

Great. Thanks again.

One moment for our next question. And that will come from the line of Kelly Motta with KBW. Your line is open.

Hey, good morning. Thanks for the question and congrats on getting the deal done quickly. and the conversion done quickly. I'm sure that's a great feeling. Well, it's a good feeling.

It's a lot of work in the interim.

Yeah. I hope you guys all get a vacation after this. I guess building off, you know, what really stood out to me in your slides was just like a remarkable amount of organic growth to kick it off. Can you provide additional color as to like the drivers of that and if there was anything? I imagine, you know, some of it is chunky, but if you could provide additional color, given that it was quite notable, the organic growth you highlighted.

Yeah, so I'll answer that, and Clay can jump in if he has anything to add. I think just generally, you know, when you look at the last five or six quarters, four or five quarters, you know, we've had very strong pipelines, and with the combination of the two organizations, you know, that opportunity has just continued. So with the increased capacity, you know, and round numbers, you know, Heritage had their, you know, sort of house limit, and our house limit is two and a half times bigger than their house limit was. So, you know, relationships that maybe, and I don't, you know, use the term outgrow is probably overstating it, but, you know, they may have had to participate on a deal that it was growing, whereas now we don't have to, and we can consider that. So I think the increases in loan growth, as I've said the last couple of years, we had solid with CNI and a 31% utilization rate, you just don't get the totals. So I think with investor commercial real estate coming back, I think it's really helped us sort of fill that gap of what was missing sort of through 23 and 20.

Clay, do you have anything to add? Yeah, just two things to add there. I think, you know, both organizations pre-close had strong momentum going into the close. And so the momentum of both organizations combined really was very powerful. And then secondly, what I would say is the collaboration of the teams moving loans from origination through boarding worked very well. So we really didn't see any, delays or hiccups through that pathing. So the momentum, including the hard work and making sure that the throughput came through, really worked.

Great. That's super helpful. A balance sheet question perhaps for Alan. Cash is elevated at the end of the quarter. You obviously sold the HFS book from Heritage that you had planned that announcement. I know you had mentioned in your prepared remarks you know some um repayment of um uh some borrowings down the pike um you have an active buyback just like how should we be thinking about the reinvestment of of the liquidity off that that book and um yeah i'll leave it at that thank you so you know as i said in the prepared remarks we we did sell a billion dollar portfolio we reinvested that so we didn't get the full benefit it from an average perspective.

We did settle the sale of the SFR mortgages sort of late in the quarter on June 10th and did not deploy that cash during the quarter, but we have subsequently deployed that. And so Fed going forward, but certainly it'll be higher than pre-merger. We'll keep something north of what we typically did prior to the merger just because of the overall increase in the balance sheet size.

Kelly, the only thing where it's at is the new slide in our deck that traded from that and $150 to $200 million a quarter. And so that's additional, assuming the loan demand stays where it's at, that's additional pickup for us if we can reinvest that in loans at, you know, at least 200 basis points over the Lake Treasury, you know, that should be a good pickup for us as well. combined with the runoff on the loan portfolio, there's another slide in the deck that shows what those average yields are too. So, you know, there is opportunity for pickup if the loan demand stays where it's at.

Got it. I'll step back. Thank you so much.

Thank you. And our next question will come from the line of Gary Tenner with DA Davidson. Your line is open.

Thanks, Maureen, everybody.

So it sounds like, you know, things are going really well on the loan front.

And I'm just wondering, maybe from Clay's perspective, anything that your lenders have needed to kind of change or adjust the approach as it relates to kind of fitting with the citizen's style and philosophy and underwriting and sourcing?

Yeah, and selection, you know, so the combination of the two. We didn't see any imbalancing view and look at in client selection, but no question about it, you know, there's a change and we fully integrated into the citizens operating model as a former heritage process and are navigating that through with their credit rate of that and are continuing that. I would expect to see us kind of at the very conclusion of all of the integration on the loan processing side be somewhere around September time period, but the former Heritage team members are contributing at their proportion.

Great. Appreciate that. And then, Alan, I wonder if you could just put a little finer dime on kind of expectations for expenses in the third quarter, just given kind of the full quarter, you know, now post-Heritage, you know, semi-degree cost saves, post-conversion, just to give us a little bit of a guide, if you will, in terms of the third quarter expense run rate.

But, as I said, 90 cost saves, and then we'll have it fully loaded by the beginning of 2020.

Thank you. And our next question will come from the line of Andrew Terrell with Stevens. Your line is open.

Hey, good morning. Just wanted to ask, Dave, I think right at the end of your prepared remarks, So you just reminded the kind of earnings accretion, the 150 ROA and 17% ROTC expectations. I mean, you're kind of pretty darn close, if not there, on ROA on an operating basis. You know, this quarter, you feel like there's a chance to outperform the ROA expectation with this deal. And then on the ROTC specifically, you know, I feel like it could be tough given how profitable you are and where capital is at. unless you leverage capital a bit more or more active on the buyback. So I guess I'm just kind of curious, like, should we lean on the ROA target more or the ROTC target more? And it's kind of a question around how much capital you're willing to leverage.

Yeah, look, I mean, the question is, do I think we can outperform it? That's always the goal. I'm continuing to evaluate all capital, you know, deployment management aspects of what we're doing. with the share repurchase program. You know, we'll be evaluating dividends once we get a more clear run rate. I mean, there's a number of things that we're gonna be doing from the capital perspective. And we do have a, you know, it's a good problem to have. I mean, we generate an enormous amount of capital. And so we'll be evaluating that to ensure that, you know, the ROTC projections, we can get there as well. So, I mean, all in all, as I mentioned in the prepared remarks, I believe that we can outperform it. We're already on a strong pathway towards outperforming it. And as Alan mentioned, we projected certain cost save recognition of that within a year, within this year, and then 100% going forward. And I think that's still accurate. So we'll see how it all plays out. I mean, the market for financial stocks has been pretty strong. I mean, there's been one off days and we are buying back shares as I as we mentioned we gave you the number through yesterday or excuse me through Tuesday so we'll continue to be in the market from a share repurchase program perspective and we'll evaluate the other ways that we return share shareholder capital as well I don't know do you have anything to add to that no I mean I think we are currently fairly confident about reaching all those goals.

The ROTC number, you know, maybe that takes a little bit more time because there's more moving parts. But, you know, we are definitely focused on striving data to all of those, Andrews.

Okay, fair enough. I appreciate the color. And then I wanted to go back and see if you're, you know, maybe willing to put a little more of a fine point on the margin. But the 372 this quarter, you know, definitely better than where I was at and where consensus was at. There's obviously a lot of moving pieces, but it sounds like maybe a little bit of headwind from just competitive dynamics in the market, but you've got, I would say, more unique tailwinds versus some tiers as well with the acquisition. Can you just maybe frame for us general kind of expectations on the margin at 3Q?

Some additional information towards the end of the quarter to at least prop to everyone. So if you start on page 24, we actually provided what the, what I'll call the base yield or coupon of our loan portfolio as June 30th, which was 5.37%. The accretion from purchase loans, any fees, any prepayment penalties, anything like that. So it's not the reported number and you can tell it's, you know, there's a lot that goes into that, but you can see the difference between March 31st and 514 to see the sort of the the lift of both the loans we acquired and what we've seen over the quarter in terms of improvements. You know on page 25 we gave a lot more color around our organic growth in there and as we mentioned we've been generating loans that yields approximately six percent. If you go to page 29 in the investment portfolio we're demonstrating what the book yields were at the end of the quarter as well as the principal runoff and the coupons on that runoff on that chart for you as well. The deposit side on page 30 you'll see the point in time cost of deposits and repos at the end of the month so hopefully that will help you as well and you also see that on page 32. And so we also provided a little more color around interest rate risk on page 34 and I think you can get a sense from there of some of the back book, and there's the same chart we had from last quarter in our appendix, which shows the scheduled payments of our loans over the next number of periods and what the runoff coupons are. Of course, we see a lot more prepayments in that, so it'll probably be larger than that. So hopefully, you can utilize that information to help you with your forecast.

Yeah, all very helpful. Thank you guys so much. Appreciate it.

Thank you. As a reminder, if you would like to ask a question, please press star one one. And our next question will come from the line of David Feaster with Raymond James. Your line is open.

Hey, good morning, everybody. You know, I wanted to start out, you know, with the integration completed now, I wanted to, I was hoping you guys could elaborate a bit about what's on the docket for the Heritage team. You know, you touched on some opportunities maybe in the trust and wealth side, some increasing capacity with existing clients as you deepen the relationships there and some lending opportunities. But I'm just kind of curious, with the integration completed now, like what are you focused on and where do you see the most opportunity near term?

Yeah, I'll start and then Clay can work to be done, and we're still working on those things. There are some, as Clay mentioned, just process stuff that we'll continue to work on through, you know, it's businesses. usual. You know, they're dealing with one-off customer situations and those types of things, and there's still work to be done there. But all in all, I think, you know, it's gone pretty well. And, you know, Heritage previously ships in their markets, you know, in our original credit due diligence and moving forward now that everything's on our platform, you know, we can see that, you know, the very similar, you know, there are differences in how we do things, and they're still learning that it doesn't happen magically on June 22nd but at the end of the day we'll continue just to integrate you know not only from a process standpoint but from a culture standpoint and how we view all of this so I do think that you know for the former heritage associates there's going to be a lot of opportunities for them to do things that they maybe couldn't have done before so we have to get through this initial stage but we'll continue to work on the integration, both process, culture, everything else, so.

Yeah, no, David, the only things I would add is, you know, there's a number of things that we had on the map that were accelerated through the mission, and those things included everything from sourcing, production tools, not least of which there are revenue synergies around wealth management, international mortgage, those that I touched on before that, you know, we did not have in our toolbox, and so now we've got those full set of tools ready for And we've already seen, as David said, there's a lot of things in front of us today, but also are in front of us in terms of opportunities 27 and beyond.

That's awesome. And then, you know, obviously, look, there's a lot of moving parts on the deposit side. You talked about some of the intentional moves, broker deposits, you know, kind of curious, how do you think about deposit growth opportunities across the footprint and the deposit pipeline today? And how do you balance defending deposit costs in your low cost core deposit base versus growing deposits, growing core deposits, especially as competition is kind of intensifying?

Yeah, I think there's a couple of pieces there. And, you know, most of the questions are always around loans and that process. But historically, we've grown, you know, core deposits, non-interest-bearing deposits in that kind of 3% range. So I don't think there's really that much difference in what's going to be happening going forward. I think it's just making sure that we continue to focus on, you know, the strength of our organization which is our deposit book and we'll continue to streamline that. Look, we customized every solution. Heritage customized every solution. The way we did it was slightly different but But ultimately, that business bank looks at it, but we want to protect relationships at the same time. So, you know, it's not like we just flip the switch and do it. There'll be a process that we go over, you know, both with the deposit side, the loan side, everything that we're doing from a revenue side. So I think the simple answer to your question is I don't foresee it changing from what's been historically going to compete on high-priced CDs or, you know, just be the highest provider out there. Clay's disappointed in that. Just kidding. But we aren't going to compete on that stuff. And the bankers are incented to bring operating companies and operating deposits. And so once they figure out all of the moving parts, we'll be back to full strength on that side as well. Our deposit pipeline still remains strong as well. So there is good momentum for us, deposit relationship, and we'll just continue to work towards that. So I don't know if you have anything to add.

Yeah, no, only anything in deposits, and yes, need to defend those that are valued clients in the book, but I think, you know, our discipline approach continues pre- and post-conversion Last thing I would just say is, you know, through the integration and conversion, we did move to an enhanced online banking system. The legacy Heritage customers are receiving the benefit of a very more, a very deeper, more robust online banking platform. So, you know, we have, you know, deep integration into our customers from a full service banking.

That's awesome. And maybe just last one. Look, you guys have been active managing the securities book. You've done that in the past. You've been investing. We talked about some of the investment of the excess liquidity. I know there's really no optimization included in the initial pro forma guidance, but I'm curious, how do you think about additional balance sheet optimization opportunities? as you think about capital deployment and supporting the NIM just in addition to maybe some more of the mechanical tailwinds that, Alan, you talked about.

Yeah, David, we need it better likely not to replace those wholesale funding, so that would improve our cost of funds slightly. I think on the investment side, it's just really a function of how we're doing on loan and deposit growth. We have a lot of cash flow coming out of that portfolio that can be redeployed in much higher yields than what the portfolio is currently. But we've also been focused in one of the reasons we put a chart in our IP deck is reducing the duration of that portfolio. And so we've been adding more variable securities, more hybrid arms, things like that to overall reduce the duration of the bond portfolio.

That's great. Thanks, everybody.

Thank you. I'm showing no further questions at this time. I would not like to turn the call back over to Mr. Brager for any closing remarks.

There's integration behind us. We will continue to focus on our vision of serving the comprehensive financial needs of small to medium sized businesses and their owners. We now operate in every major economic market of California and will continue to deliver our relationship bank relationship focused banking model throughout the state. The citizens business bank team remains focused on building long term relationships within the communities we serve. Our consistent financial performance is highlighted by the 197 consecutive quarters of profitability and the 147 consecutive quarters of paying cash dividends. I would like to thank our associates for their outstanding efforts and commitment during the systems conversion. I would also like to thank our customers for their continuing loyalty. Thank you for joining us this quarter. Appreciate your interest and look forward to speaking with you in October for our third quarter 2026 earnings call. Have a great day.

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