Earnings Call Transcript - CVBF Q3 2025

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the Third Quarter of 2025 CVB Financial Corporation and its Subsidiary Citizens Business Bank Earnings Conference Call. My name is Sherry, and I am 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. You may proceed.

Allen Nicholson, CFO

Thank you, Sherry, and good morning, everyone. Thank you for joining us today to review our financial results for the third 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 will now turn the call over to Dave Brager.

Dave Brager, CEO

Thank you, Allen. Good morning, everyone. For the third quarter of 2025, we reported net earnings of $52.6 million, or $0.38 per share, representing our 194th consecutive quarter of profitability, which equates to more than 48 years of consecutive quarters of profitability. We previously declared a $0.20 per share dividend for the third quarter of 2025, representing our 144th consecutive quarter of paying a cash dividend to our shareholders. We produced a return on average tangible common equity of 14.11% and a return on average assets of 1.35% for the third quarter of 2025. Our net earnings of $52.6 million, or $0.38 per share, compares with $50.6 million for the second quarter of 2025, or $0.37 per share, and $51.2 million, or $0.37 per share for the prior year quarter. The $2 million quarter-over-quarter increase in net income was primarily the result of growth in net interest income of $4 million that was partially offset by a $1.5 million increase in provision for credit losses and unfunded loan commitments. Pretax, preprovision income in the third quarter of 2025 was $70 million, an increase of $1.2 million, or 2% compared to the second quarter of 2025 and $2.4 million, or 3.5% higher compared to the third quarter of 2024. During the third quarter of 2025, we received a $6 million legal settlement which was more than offset by an $8.2 million loss on the sale of $65 million of low-yielding AFS securities that were reinvested at yields of approximately 5%. The growth in PPNR over the third quarter of last year was the net result of a $2 million increase in net interest income and a $1.5 million decrease in operating expenses that were partially offset by a $1.25 million increase in provision for unfunded commitments. Net interest income for the third quarter of 2025 was $4 million higher than the prior quarter and $2 million higher than the third quarter of 2024. Our average earning assets grew by $315 million between the second and third quarters of 2025, and our net interest margin increased from 3.31% to 3.33%. As a result of our deleveraging strategy that was executed during the second half of 2024, our earning assets declined by $1.1 billion from the prior-year quarter while our net interest margin increased by 28 basis points from 3.05% in the third quarter of 2024. Noninterest income was $13 million in the third quarter, which was $1.7 million lower than the second quarter. Excluding the legal settlement and loss on sale of AFS, third quarter noninterest income increased by $260,000 from the prior quarter, driven primarily by higher trust and investment service fee income. Noninterest expense was $58.6 million in the third quarter, which was $1 million higher than the second quarter of 2025. Our efficiency ratio remained at 45.6% in the third quarter. At September 30, 2025, our total deposits and customer repurchase agreements totaled $12.6 billion, a $170 million increase from June 30, 2025, and $108 million higher than September 30, 2024. The quarter-over-quarter growth was driven by growth in money market and customer repurchase balances. The year-over-year growth was a net $100 million decrease in time deposits. Our noninterest-bearing deposits grew by $108 million compared to the third quarter of 2024, while interest-bearing nonmaturity deposits and customer repos grew by an additional $100 million. On average, noninterest-bearing deposits were 59.8% of total deposits for the third quarter of 2025 compared to 59.1% for the third quarter of 2024. Our cost of deposits and repos was 90 basis points for the third quarter compared to 87 basis points in the second quarter of 2025 and 101 basis points for the year-ago quarter. Now let's discuss loans. Total loans at September 30, 2025, were $8.47 billion, a $112 million, or 5% annualized increase from the end of the second quarter of 2025. The quarter-over-quarter increase in total loans was due to growth in nearly all loan categories. Loan growth was positively impacted by increases in line utilization for C&I and dairy and livestock lines of credit. A quarter-over-quarter increase of $27 million in C&I loans reflects an increase in line utilization from 26% at June 30, 2025, to 28% at September 30. In addition, dairy and livestock loans also grew by $47 million compared to the second quarter driven by higher line utilization from 62% at the end of the second quarter to 64% at the end of the third quarter. Agribusiness loans grew by $12 million, while commercial real estate and construction loans grew by $18 million and $12 million, respectively, from the end of the second quarter. Total loans decreased by $66 million from the end of 2024, driven by dairy and livestock loans declining by $139 million as these lines experienced their seasonal high utilization at calendar year-end. Excluding small declines in SBA and municipal loans as well as decreases in dairy and livestock loans, our loans grew by $85 million from the end of 2024. We have experienced an increase in loan originations, and our loan pipelines remain strong, although rate competition for the quality of loans we focus on has continued to be intense. Loan originations in the third quarter of 2025 were approximately 55% higher than the third quarter of 2024, and year-to-date loan originations have been 57% higher than the same period in 2024. We had average yields of approximately 6.5% on new loan originations during 2025, but the third quarter average was lower at about 6.25%. We experienced $333,000 of net recoveries for the third quarter of 2025 compared to $249,000 in net charge-offs in the second quarter. Total nonperforming and delinquent loans decreased by $1.5 million to $28.5 million at September 30, 2025. Nonperforming and delinquent loans were $24.8 million lower than the $53.3 million at the end of the third quarter of 2024. Subsequent to the close of the third quarter, a $20 million nonperforming loan was paid off in full. The sale of the building collateralizing this loan resulted in the bank receiving all principal and approximately $3 million of interest which will be included in interest income in the fourth quarter of 2025. Classified loans were $78.2 million at September 30, 2025, compared to $73.4 million at June 30, 2025, and $89.5 million at December 31, 2024. Classified loans as a percentage of total loans was 0.9% at September 30, 2025.

Allen Nicholson, CFO

Thanks, Dave. Net interest income was $115.6 million in the third quarter of 2025. This compares to $111.6 million in the second quarter of 2025 and $113.6 million in the third quarter of 2024. Interest income was $150.1 million in the third quarter of 2025 compared to $144.2 million in the second quarter and $165.8 million in the third quarter of last year. Average earning assets increased by $315 million in the third quarter when compared to the second quarter and the earning asset yield increased from 4.28% to 4.32%. Compared to the third quarter of 2024, earning assets decreased by $1.1 billion and the earning asset yield declined by 11 basis points. Interest expense was $34.5 million in the third quarter and $32.6 million in the second quarter of 2025. Our cost of funds increased from 1.03% for the second quarter of 2025 to 1.05% in the third quarter of '25. The average balances of interest-bearing deposits and repos increased by $217 million over the prior quarter. Interest expense decreased from the third quarter of 2024 by $17.6 million, primarily due to a $1.23 billion decline in average borrowings that resulted in approximately a $15 million decline in interest expense. Interest-bearing deposits and customer repos increased by $53 million over the third quarter of 2024, while the total cost of deposits and repos decreased by 11 basis points. With this reduction in borrowings and lower cost of deposits, our cost of funds decreased by 41 basis points from the third quarter of last year. Our allowance for credit loss was $79 million at September 30, 2025, or 0.94% of gross loans. In comparison, our allowance for credit losses at June 30, 2025, was $78 million, or 0.93% of gross loans. The increase in the ACL resulted from $1 million provision for credit loss and net recoveries of $333,000. 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 September 30, 2025, was modestly different from our forecast at the end of the second quarter of 2025. The comparative change from the previous economic forecast reflects lower GDP growth, a slightly lower unemployment rate, and lower commercial real estate prices. Real GDP is forecasted to stay below 1.5% until the end of 2027 and not reach 2% until 2028. 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 to decline through the second quarter of 2026 before experiencing growth through 2028. Switching to our investment portfolio. Available for sale, or AFS, investment securities were $2.58 billion at September 30, 2025. During the third quarter, we sold $65 million of securities with an average book yield of 1.3%, realizing an $8.2 million loss, and purchased $214 million of new securities at an average book yield of 5%. The unrealized loss on AFS securities decreased by $31.6 million from $364 million at June 30, 2025, to $334 million on September 30, 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 third quarter. Our held-to-maturity investments totaled $2.3 billion at September 30, 2025, which is $82 million lower than the balance at December 31, 2024. Now turning to the capital position. At September 30, 2025, our shareholders equity was $2.28 billion, a $42 million increase from the end of June 2025, including the $20 million increase in other comprehensive income. There were 290,000 shares repurchased during the third quarter of 2025 at an average price of $20.30. Year to date we have repurchased 2.4 million shares at an average share price of $18.43. The company's tangible common equity ratio was 10.1% at September 30, 2025, while our common equity Tier 1 capital ratio was 16.3% and our total risk-based capital ratio was 17.1%. I'll now turn the call back to Dave for further discussion of our expenses.

Dave Brager, CEO

Thank you, Allen. Noninterest expense for the third quarter of 2025 was $58.6 million compared to $57.6 million in the second quarter of 2025 and $58.8 million in the third quarter of 2024. The third quarter of 2025 included a $500,000 provision for off balance sheet reserves. Excluding this $500,000 provision, operating expenses grew by $500,000 over the second quarter of 2025. This growth in operating expense was due to an $877,000 increase in salary and benefits from our annual midyear salary increases. Noninterest expense, including the provision for unfunded loan commitments, decreased from the third quarter of 2024 by approximately $1.5 million. Almost all expense categories declined, led by a $770,000 decrease in salary and benefit expense. We also experienced a $430,000 decrease in legal expense, and a $380,000 decline in occupancy and equipment expense. One area of expense growth is our continued investment in technology, infrastructure, and automation, which resulted in $440,000, or 11% growth, in software expense from the third quarter of 2024. Noninterest expense totaled 1.5% as a percentage of average assets in the third quarter of 2025 compared to 1.52% for the second quarter of 2025 and 1.40% for the third quarter of 2024. This concludes today's presentation. Now Allen and I will be happy to take any questions that you might have.

Operator, Operator

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

Matthew Clark, Analyst

On your interest-bearing deposit costs up a few basis points this quarter caused your beta cycle to date to slow a little bit to, I think, 28%. How should we think about the beta through the cycle from here and maybe remind us what portion of your deposit base do you feel like you can be more aggressive with?

Dave Brager, CEO

Yes. The last rate cut occurred towards the end of the third quarter, so we did not fully benefit from it due to some variations in individual accounts. In our repurchase agreement sweep, one of our largest depositors increased their deposits significantly. However, we did lower every money market rate and repo rate over 1.25% by a full 25 basis points the day after the Fed's move. We are just trying to align with that. It does depend somewhat on the mix of higher paying and lower paying accounts that were also reduced. Ultimately, our plan is to continue matching any decreases in Fed funds with reductions in money market rates above 1%. Do you have anything to add to that, Allen?

Allen Nicholson, CFO

No, I think there is a small portion of our deposit base that has higher yields, and there was a slight increase compared to the rest of the deposits during the quarter. However, as Dave mentioned, we will be reducing all of them as the market and the Federal Reserve adjusts downward.

Matthew Clark, Analyst

Since we're limited to 2, I'm just going to jump to M&A. Any increase in dialog there on the M&A front? I guess where do we stand?

Dave Brager, CEO

Yes, there has been a lot of discussions, but not much has changed yet. I feel a bit like Allen Iverson when he talked about practice. We keep having conversations, and I still believe that something significant will happen soon. However, there’s nothing immediate on the horizon, and we continue to talk. I want to mention that in the third quarter and following that, we hired a team of four bankers from City National Bank and are starting a new office in the Temecula, Murrieta area. They began yesterday, and we are enthusiastic about this. We think we've brought on four excellent bankers, each coming from different sectors of City National, but all residing in that area. We’re excited to establish a presence there and are eager to see how they perform moving forward. Ultimately, we will keep looking to attract the right bankers and the right opportunities in terms of mergers and acquisitions.

Operator, Operator

One moment for our next question, and that will come from the line of Andrew Terrell with Stephens.

Andrew Terrell, Analyst

I wanted to start by discussing loan growth. You had a very strong quarter. Dave, your prepared remarks indicated that originations have increased significantly this year and the pipeline remains solid. I understand there is a seasonal benefit in the fourth quarter, but I’d like to hear your expectations for loan growth in the near term. Do you believe you can maintain this mid-single-digit growth rate?

Dave Brager, CEO

Yes. At the beginning of the year and pretty much for as long as I've been CEO, I've said kind of that low single-digit growth. And I think we can still hit that for the year. The pipelines are still strong. I feel pretty confident over the next quarter that that should continue. We'll see how it plays out. I mean, excluding the dairy, obviously, because the dairy is the seasonal aspect of it. But we're still not back to our normal utilization rate. We still have a lot in the pipeline. We're seeing many opportunities and some larger opportunities as well. So I do feel confident. The mid-single digits might be a little aggressive for the annualized, but I do think that we're in a good spot from that perspective. And we'll see how it plays out, but I'm sticking to my low single-digit growth rate for the year.

Andrew Terrell, Analyst

I appreciate it. I wanted to ask about the pricing competition in the market. It seems that your new origination yields decreased a bit this quarter compared to the first half of the year, and with rates going down, that will have an impact. I'm curious if you're open to being more competitive on pricing now, given the current market conditions, or has your strategy for new loan pricing remained mostly the same?

Dave Brager, CEO

Yes, we are always open to competing on price when it comes to the right partnerships. This has been a factor in our continued opportunities in loan origination. While the competition is intense, we recently encountered a significant equipment deal where we were up against a large bank offering competitive rates. We are doing our best to maintain our standards while remaining willing to adjust our pricing as long as the credit quality meets our expectations.

Operator, Operator

One moment for our next question, and that will come from the line of Gary Tenner with D.A. Davidson.

Gary Tenner, Analyst

I wanted to ask on the loan side, it looks like you had a little earlier than typical increase in dairy and livestock line utilization. So just as we're thinking about the fourth quarter and what's usually a pretty large spike there, is that spike muted a bit because you had some drawdown here in the third quarter?

Dave Brager, CEO

No. We actually formed two new dairy relationships in the third quarter, which had an impact. Interestingly, at the start of the year, they were performing quite well. Although milk prices have slightly decreased, they're still doing fine, just not as well as in the first couple of quarters. I believe we'll continue to see some of that, but I wouldn't necessarily describe it as muted. The small increase in utilization likely relates more to the new relationships than to people acting earlier than usual. Therefore, we should expect a normal increase in that line item for the fourth quarter.

Gary Tenner, Analyst

Great. And then just a question about the $700 million of interest rate swaps that you kind of updated back in May. I think the outlook for short-term rates is probably pointing to more lowering over the next 12 months or so than maybe what was contemplated back in May. So any thoughts about that swap arrangement and making any changes there?

Dave Brager, CEO

So Gary, you're correct. If the market and the Fed's forecast is true, it will probably become a negative drag on our net interest income next year. But we put those on and continue to look to them as a true fair value hedge and hedging really our equity, our tangible common equity ratio and our large AFS portfolio. So I don't think we have any plans on changing that. We extended them last quarter out for that same reason to be better aligned with the duration of the AFS portfolio.

Operator, Operator

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

Liam Coohill, Analyst

It's Liam on for David. You guys have highlighted the intense rate competition on the lending side. You called out that one regional competitor offering the four handle on the equipment loan. Is that who you're seeing the most competition from on both the loan and deposit side today? And how difficult is deposit gathering given this intense loan growth?

Dave Brager, CEO

The deposit gathering has remained relatively strong, although it's not quite as robust as it was towards the end of 2024 and the start of this year. There has been a slight slowdown. We are targeting operating companies, which has become a bit more competitive, but I don't think the situation has changed significantly. We are not pursuing high-rate CDs or high-rate money market accounts; our focus is on building full relationships, and that remains unchanged. Loan pricing seems to be largely influenced by larger banks and larger regional banks instead of those that are our size or smaller. I anticipate that this trend will persist. Additionally, there is substantial market disruption due to recent acquisitions and the removal of Wells Fargo's asset cap, among other factors, contributing to the presence of more aggressive competitors. However, our primary focus remains on operating companies, and most of our new deposit gathering, which includes deposits, is coming in at a higher percentage of noninterest-bearing than our overall portfolio. We feel optimistic about this. In the last quarter, most of the deposit activity was attributed to one significant customer in the bank with a higher mix at a higher rate. As the Fed continues to lower rates, we expect to see a decrease in deposit costs. While there is competition on both fronts, we are prepared to compete, but we want to ensure we are pursuing the right relationships.

Liam Coohill, Analyst

I appreciate the color there. And I'm excited to hear about the team lift out. What lending verticals do you expect them to focus on? And what are some of the opportunities that you see in that particular market?

Dave Brager, CEO

They have been concentrating on more operating companies and affluent individuals. They did not previously have the chance to engage in investor commercial real estate, which is now something they can manage internally rather than outsourcing. They are all based in that region and cover various parts of Southern California, from Orange County to Riverside County, allowing them to expand their reach in those markets. Additionally, it helps bridge the geography between our San Diego and Riverside regions, which is beneficial. Temecula and Murrieta are rapidly growing markets, and we are enthusiastic about the potential there. The team consists of experienced bankers who have a long track record, and we look forward to seeing their contributions.

Operator, Operator

And one moment for our next question from the line of Charlie Driscoll with KBW.

Charlie Driscoll, Analyst

This is Charlie on for Kelly. You guys continue to build cash balances again this quarter. Just wondering if there's any updated message there regarding any potential areas to deploy that? Are you kind of viewing it as dry powder for a seasonally strong Q4? Just any color on how you're thinking of utilizing it?

Allen Nicholson, CFO

A couple of quick things. You're right. In the fourth quarter, we will see a fairly large increase in the dairy. We also expect more impact from year-end versus quarterly averages, but we are experiencing deposit outflows due to tax reasons and bonuses. So we are preparing for that. However, if the Fed continues to cut rates, we will evaluate where bond yields are. They are lower than when we were buying early in the quarter, but we may decide to invest some of that depending on our assessment of the bond market in the quarter. Not really any change there. I mean, we continue to manage it very closely, low single-digit type of growth is our expectation. Third quarter is always when we do our annual increases. So of course, quarter-over-quarter, that impacts. But year-over-year, actually, salary expense by itself was essentially flat. The one area we'll continue to invest in, as we noted in the prepared remarks, is technology. That includes automation as well as just sort of the standard stuff to keep us safe from cyber and all the other issues.

Operator, Operator

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.

Dave Brager, CEO

Thank you, Sherry. Citizens Business Bank continues to perform consistently in all operating environments. Our solid financial performance is highlighted by our 194 consecutive quarters or more than 48 years of profitability and 144 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 our associates for their commitment and loyalty and would like to thank all of you for joining us this quarter. We appreciate your interest and look forward to speaking with you in January for our fourth quarter 2025 earnings call. Please let Allen or I know if you have any questions. Have a great day.

Operator, Operator

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