Cvb Financial Corp (CVBF) Q3 2026 Earnings Call Transcript

Good morning, ladies and gentlemen, and welcome to the third quarter of 2026 Earnings Conference Call for CVB Financial Corporation and its subsidiary, Citizens Business Bank. My name is Sheree, 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.

Item 1A, RISB-98, 2026, $52.6 million, or 38 cents. The tax income in the third quarter of 2026 was $106.1 million, compared to $65 million in the simple benefit of the acquisition of Heritage Bank in the quarter of 2026, reflected 74 days of combined operations with Heritage. The core banking systems of the two banks were integrated at the end of the second quarter, and we incurred $31.4 million in acquisition expenses during the second quarter, compared to $8.1 million for them. We've completed a full quarter post-merger, and systems come from key financial measurements we have achieved at this time, 2026, to the same quarter of 2025. We announced with the merger that we would generate EPS growth of 13% through by 6 cents, or 16%. Upon announcement, we had targeted to exceed 150 basis points by 2027. For the third quarter of 2026, the reported return on average assets was 1.48%, but after adjusting for acquisition expense, it was 1.59%. We also achieved a 16.2% return on average tangible common equity in the third quarter of 2026, which compares to the 17% target we announced and to discuss loans and deposits.

Thank you, Dave. Total loans were $12.1 billion at September 30, 2026, an increase of $105 million from June 30. Loan originations continued at a strong pace in the third quarter. However, originations decreased by 15% from the second quarter of 2026, but were approximately 20% higher than the first quarter of this year. Third quarter loan origination yields were approximately 20 basis points higher than the prior quarter, with new loan origination yields approaching 6.25%. Rate competition for high-quality loans continues to be intense, and the recent rise in interest rates has resulted in some customers rethinking transactions or just utilizing internal cash funds. Our loan pipelines remain relatively strong, but demand is slowing down among our customers and prospect portfolio yield was 5.66% for the third quarter of 2026, compared to 5.53% for the second quarter of 2026 and 5.25% for the third quarter of 2025. Excluding loan fees and discount accretion on acquired loans, our base loan yield increased from 5.37% at June 30th to 5.46% at September 30th. The overall line utilization rate at September 30th, 2026 was 42% compared to 41% at June 30th, 2026. However, the CNI line utilization decreased quarter over quarter to 31%. Dairy and livestock line utilization increased from 53% at the end of the prior quarter to 66% at September 30th, which compares to 64% in the second quarter of last year. We experienced $20,000 of net charge-offs during the third quarter compared to $137,000 of net charge-offs during the second quarter of 2026. Performing assets increased from $16.8 million to $18.7 million at September 30, 2026, which represents nine basis points for $113.9 million at September 30, $9.7 million at June 30, 2026. The $4.2 million increase from June 30, 2026 was due to the addition of two classified CRE loans totaling approximately $5 million, $16.3 billion, which compares to $16.9 billion on June 30, 2026. The $550 million decrease was the result of interest-bearing deposits and repos declining by $360 million and non-interest-bearing deposits decreasing by $190 million. Our non-interest-bearing deposits were 53.5% of total deposits on September 30th compared to 52.8% on June 30th, 2026. Deposits and customer repurchase agreements increased on average by $578 million from the second quarter of 2026. Net of a $256 million decline in average time deposits concentrated in the $240 million average decrease in... If the second quarter is adjusted on a pro forma basis to include the deposits acquired from Heritage for the full 91 days in the quarter, total deposits and customer repurchase agreements would have decreased in the third quarter by approximately $300 million, including the $240 million average decrease in brokerage. Non-interest-bearing deposits have been stable. On a pro forma basis, they would have increased by $100 million on average in the third quarter. However, we did experience some late quarter drawdowns on interest-bearing deposits that on a pro forma basis reflect an average decrease in customer interest-bearing deposits and repos of $170 million. Interest-bearing deposit levels have stabilized in October to date, while non-interest-bearing deposit levels have strengthened modestly. With the Fed increasing interest rates, we anticipate continued deposit pressure, which could impact our near-term level of interest-bearing deposits. Our cost of deposits and repos was 83 basis points for the third quarter of 2026, compared to 86 basis points for the second quarter of 2026, and 90 basis points for the year-ago quarter.

And to further discuss balance sheet and net interest income, that decreased from $21.2 billion at June 30, of 2026 to $20.5 billion has average earning assets for the third quarter of 2026 for $18.5 billion, an increase over the second quarter of $900 million. The growth in earning assets combined with a 16 basis point expansion in our earning asset yield drove a 9% or $18.5 million increase in interest income compared to the second quarter of 2026. Our cost of funds was 0.96% for both the third and second quarters of this year. Interest expense for the third quarter increased by $1.9 million from the second quarter of this year as average interest bearing deposits grew by $213 million and borrowings increased by $116 million related to the transition of our cash flow hedges from brokered CDs to FHLB advances during the second quarter. Our allowance for credit loss decreased from $126.7 million at June 30, 2026 to $125.6 million at September 30, resulting from a $1 million recapture of credit losses. The ACL as a percentage of loans decreased from 1.05% at June 30 to 1.04% at September 30. 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 of September 30, 2026 was generally consistent with our second quarter forecast. Real GDP growth is forecasted to stay below 2% through the first half of 2028. 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 growth in 2028. Now, turning to our capital position, at September 30, 2026, our shareholders' equity was $3.13 billion compared to $3.17 billion at June 30, 2026. The $39 million decrease in shareholder equity includes a $67 million decline in accumulated other comprehensive income resulting from rising interest rates at the end of the third quarter. We also repurchased 775,000 shares for approximately $17.5 million during the third quarter, compared to 241,000 shares repurchased in the second quarter of this year. From June 18th through October 19th of this year, we repurchased 1.8 million shares for approximately $40 million at an average share price of $22.05. Our tangible book value per share at September 30th, 2026 was $10.92 compared to $11.07 at June 30th, 2026. Our equity ratio was 9.9% at September 30th compared to 9.8% at June 30th, 2026, while our common equity tier 1 capital ratio was 14.8% at September 30th, 2026. I'll now turn the call back to Dave for further discussion of non-interest income and expense. Thank you, Alan.

$5 million in the third quarter of 2026 compared to $17 million in the second quarter of this year. The quarter-over-quarter decrease of $500,000 includes a $509,000 decrease in the fair value of a CRA bond investment fund, a $360,000 decrease in trust and investment fees, and losses on the sale of two OREO properties totaling $134,000. Upsetting these decreases in non-interest income were increases in deposit service fees of $226,000 and BOLI income of $580,000. Non-interest expense for the third quarter of 2026 was 90.5 million dollars compared to 114.4 million dollars acquisition expense related to the heritage merger was 8.1 million dollars in the third quarter compared to 31.4 million dollars in the second quarter of this year first expense which excludes acquisition expense and provision for unfunded commitments increased from the second quarter of 2026 2026 by 3.6 600 000 in acquisition expense and provision for unfunded commitments our adjusted efficiency ratio is 42.1 percent compared to 43.9 percent in the second quarter of 20 in the third quarter of 2025. in conclusion we continue to focus on increased opportunities for growth in the bay area while achieving the projected returns we outlined for this acquisition This concludes today's presentation. We are now happy to take any questions that you might have.

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Due to time restraints, we ask that you please limit yourself to one question and one follow-up. 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.

Good morning, guys. Just a couple questions embedded in one around the margin. Can you update us on the securities cash flows that you expect on a quarterly basis and kind of the roll off, roll on rates? And then as a follow on to that, the deposit beta assumption you're making, assuming we get, you know, a couple more rate hikes here.

Matthew, if you look at the investor presentation that's out on the website, you'll see the conversation with any of our relationships.

I'm planning to do anything, and we'll see what happens.

Okay, and then just on expenses, how much in cost saves do you have left that might come out of the run rate, just trying to get a good sense for the run rate going forward?

There'll still be some technology. There's a few people sides. It's still the run rate. So it won't be significantly different than the third quarter. We will have minimal acquisition expense came down throughout normalized by the end of the year.

Okay, thanks again.

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

Hey, good morning, everybody. I wanted to start on the deposit side. Obviously, there are a lot of moving parts here. It sounds like this is more strategic actions, you know, just with some broker deposit declines versus true client outflows. I was hoping you could maybe just touch on the deposit flows that you are seeing, what you're hearing from clients on pricing and money movement, and just how you think about defending deposit costs today versus, you know, retaining and growing deposit balances as rates rise and competition intensifies.

Yeah, all the time, and I think it's pretty typical when you look at the deals we've done, you know, in our history, and specifically those deals we've done over the last 10, 15 years, you see a little bit of this movement. We can really focus on growing again. So most there, from that perspective, lifting by the teams during the second and third quarter, and we'll continue to work on that. I think the the other bigger thing that is how Clay mentioned in the prepared remarks, you know, what's happening right now is there are a lot of people that are deciding, hey, I'm not gonna pay a salary when I can, you know, utilize my cash. And so there has not been any significant deposit relationships that have left the bank. As a matter of fact, relationships as measured by the top 150 have grown slightly from the second to third quarter so that gives me some comfort I think as you you know you look forward with where we're going to be you know there is some seasonality that's going to start to hit probably in the fourth quarter in the first quarter like typical are so you know I don't play anything you want I think I would add David is you know we're now in 90 days weekend.

And so we've done a lot of work to make sure that those customers and relationships have kind of put themselves in a good position from a costing standpoint. And yes, when interest rates do rise, it does bring attention to the interest bearing account load and pricing on those. But it's really only a handful. We have true relationships with deep operating relationships. So we just don't feel the interest bearing.

That's helpful. And then maybe I just want to follow up on your comments, Dave, like when you concluded, you talked about a focus on growth opportunities in the Bay Area. And I think the strength of that market is underappreciated broadly. So first off, I'm just curious what you're seeing in that market, how client reception has been thus far, like what you're talking about, we're 90 days in. And then just broadly, it sounds like we're seeing some pressure on loan demand. Pipelines are holding up. Obviously, some push and pull with rising rates as demand may be slowing, but payoffs and paydowns may slow just um curious how you think about growth uh as we look look forward yeah so i you know whether that's in you know uh some lending limit unity in all of those areas has a really good

spot uh we have the capacity we have a product array we have the ability to um you know do more than they could do with heritage and bring all of that in-house so i think there's a lot of a lot of tailwinds for us there, and we still need to do the things and the hard work as far as getting our name out there, but we've done a really good job in that, and I know Clay and the team that's up in those 16 offices, it always takes a little bit of time to compete in that market in a much bigger way than Heritage did independently. Clay, anything like that?

Yeah, the only thing I would add is just economically, the Bay Area has rebounded very nicely. We continue to see good growth there. I would add to that just the process throughput of accelerating and moving the pipeline to conversion and onto the boarding and booking stage really went very seamlessly through the conversion process. And the team should be commended on just making sure they converted that existing very strong pipeline and continuing the pipeline.

So economically very strong and continual momentum on the conversion. okay that's great and then maybe just touching on on the credit side quickly as as rates rise I mean y'all are very good at aggressively managing credit and being proactive and you've got you've always had a good pulse so I'm curious what what are you seeing on the credit front I mean obviously there's a slight increase in NPAs and a little bit of migration in classified but broadly I'm just curious as you look at your book is there anything that you're watching closely are you seeing any more any pressure in certain areas and just you know kind of how or how's the health of your clients is as you talk to those those folks as rates are rising yeah so it seems that the

charge-offs never material classifieds or the non-performing assets you know very good about origination of these loans it doesn't mean things won't happen there could always and i would characterize those areas as attention to that uh you know there's pros and cons sometimes when people look at the overall loan portfolio and say, oh yeah, 77, 78% of your loans are secured by real estate. We don't view that as a bad thing, especially when we originate loans that are below 50% loan to value at origination. That gives us a lot of cushion for some of these challenges, especially on rate resets if rates are going up and that service coverage is challenged or whatever the case may be. So I feel pretty good about it. I think that, you know, as we look forward, we do annual term loan reviews on every loan over a million dollars every year. We get updated information in the interim period, depending on the annual cycle. So there's a management that goes on with our bankers and our credit management team to make sure that we are ahead of any of those problems. And there's always movement and stuff, but all in all, I feel pretty good about it. I don't know, Clay, if you want to add anything to that.

Yeah, no, it's well said. Based on our underwriting criteria and client selection on the front end, disciplined credit management, I mean, that's the hallmarks of how we run credit here.

Yeah, and David, just one more anecdotal thing. Clay and I have finished visiting all 79 locations, and while we've been doing that, we've also been doing customer receptions, throughout the bank. We do customer luncheons a couple times a month. Candidly, I'd say the majority of people still think things are going to be better six months from now. Maybe that's just how people say they're doing pretty well. I mean, there are some that have been impacted more by rising prices, whether that's energy, whether that's other things. But I think all in all, on the street are still pretty positive.

That's terrific. Thanks, everybody.

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

Hey, good morning. Maybe just to start on the margin, not necessarily looking for a guide, but, you know, it seems like you were 389 this quarter, obviously a very, very strong quarter. It seems like there's a lot of tailwinds, especially given your commentary about, you know, the deposit costs and not much move so far. And then you've got a little more in floating rate assets now, and a good repricing story overall. Just help us understand any headwinds we should be thinking about as it relates to the margin, either kind of going into the fourth quarter or as we work in the next year.

It's rolling off. It gives a lot of information on the loan resets or maturities and at what rates it's rolling off. And we are, as Alan mentioned, slightly asset sensitive. So I think there are a lot of tailwinds for us. The only thing that I could see as a headwind would be just depending on how many rate increases they are and how, you know, the demands that our customers might put on us from a pricing perspective, the major headwind. But assuming everything sort of stays around in the next, you know, four months or something, I think we're in a really good spot.

Great. I appreciate it. And then, you know, thanks for calling it out. But you guys are clearly outperforming the ROA expectation you set originally with the Heritage Commerce merger. Any interest in rehashing or refreshing that ROA target now that you're past 150?

You mean lower? Which way do you want to go? Whatever conclusion you want from that.

Okay, great. Thanks for having the questions.

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

Thanks. Good morning, guys. A couple of questions. you talked about the bay area opportunities already from an organic perspective you talked a little about kind of your acquisition appetite now you know three plus months from the uh heritage deal you know you get into early 2027 or six months out just thoughts around uh kind of the market and an appetite the great the heritage relationships and we'll continue to do that

uh as we go forward if an opportunity presented itself opportunity and sort of lead to you know a deal perspective depends on the size of any opportunity so all of those things would go into any equation but we are open for business he's presented itself thanks for that and then just want to make sure I'm looking

at this correctly in the slide deck looks like you've already repurchase as many shares roughly in in the first half of October as you did in all the second quarter or excuse me the third quarter so just kind of asking also follow up there in terms of the ongoing appetite, given how much you've already looks like you've done in October.

We were doing proposition, talking about with Dave.

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 Tim Coffey with Breen Capital. Your line is open.

Morning, everybody. uh dave just kind of come back to the deposit questions a little bit uh are you seeing any movement of customer funds from the bank to the wealth management unit you know flat over other than 2023 and early activities so uh the simple answer is no there hasn't just getting everything based that you know look at that and for relationships will protect it if the top money

banking through seeking the ultimate in high yield deposit accounts just want to be deep into the relationship initially and if that's an option then but not in

a material okay okay I appreciate that understood and then as we roll forward you're gonna be a little your deposits me a little more sensitive to tax payments and partnership distributions in the beginning part of next year do you see the loan deposit ratio going higher and what is your comfort level on that ratio we agree them certainly at the end of the year and into the seasonal lows around all those things bonus payments but that will parted about 80 or okay

and then follow on what kind of the offered the interest in remixing the earning assets because you are carrying a bit more liquidity than you have historically doing anything in terms of the bomb they take the opportunity to take some lobby lifting was done positioning the the bond portfolio from heritage as well as selling those mortgage pools and reinvesting and then

higher yielding securities so most of that's complete there could be little little opportunities here and there though yeah and then what about loans as a percentage of earning assets because that's been higher historically than it is right now is there interest in taking that back to kind of the 70% range Maintain a little significant securities, we mix it and keep the, and contend as another tailwind to our net interest margin as well.

That's somewhat dependent on loan demand and the cash flow from the investment portfolio and, you know, all those moving, and deposits and all those moving parts. But, yes, I mean, just generally speaking, we believe that we can continue to move that a little bit higher. especially if demand states work.

Okay, I appreciate it. Those are my questions.

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

We'd like solid financial performance, including increased profitability, net interest margin expansion, and disciplined expense management following the Heritage Bank of Commerce acquisition. The third quarter represented our 198th consecutive quarter of profitability, and we remain focused on the integration, serving our customers, supporting our communities and associates as we extend our relationship-focused banking model across California's major economic centers. We're grateful for the continued trust of our customers and the dedication of our associates. Thank you for joining us this quarter. We appreciate your interest and look forward to speaking with you in January of 2027 for our fourth quarter 2026 earnings call. Have a great day.

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