CVB Financial Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 7 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the 2nd Quarter 2023 CVB Financial Corporation and its subsidiary Citizens Business Bank and Earnings Conference Call. My name is Sherry, and I am your operator for today. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Star 11 on your telephone.

Operator

You will then hear an automated message advising that your hand is raised. To withdraw your question, press star 11 again. Please be advised that today's call is being recorded. I would now like to turn the presentation over to your host for today's call, Christina Carabino. You may proceed.

Speaker 1

Thank you, Sherry, and good morning, everyone. Thank you for joining us today to review our financial results for the Q2 of 2023. Joining me this morning are Dave Brager, President and Chief Executive Officer and Alan Nicholson, Executive Vice President and Chief Financial Officer. Our comments today will refer to the financial information that was included in the earnings announcement released yesterday. To obtain a copy, please visit our website at www.cbbank.com and click on the Investors tab.

Speaker 1

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 ks for the year ended December 31, 2022, 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. Now, I will turn the call over to Dave Breger. Dave?

Speaker 2

Thank you, Christina. Good morning, everyone. For the Q2 of 2023, we reported net earnings of $55,800,000 or 0.4 cents per share, representing our 100 and 85th consecutive quarter of profitability. We previously declared a $0.20 per share dividend for the Q2 of 2023, representing our 100 and 35th consecutive quarter of paying a cash dividend to our shareholders. Our net earnings of $55,800,000 or $0.40 per share compares with $59,300,000 for the Q1 of 2023 or $0.42 a share $59,100,000 for the year ago quarter or $0.42 per share.

Speaker 2

The Q2 demonstrated the bank's financial strength at a time where the industry has seen disruption. Although our net interest margin contracted by 23 basis points compared to the Q1 of 2023, our efficiency ratio was below 41% in the Q2 of 2023. We generated strong returns reflected by a return on average tangible common equity of 18.39% and a return on average assets of 1.36%. Our pre tax pre provision return on average was 1.91 percent for the 2nd quarter. For the 2nd quarter, our pre tax pre provision income was $78,000,000 compared with $84,000,000 for the prior quarter $85,700,000 earned in the year ago quarter.

Speaker 2

Total deposits increased by approximately $126,000,000 from the end of the Q1 of 2023 to June 30, without the benefit of brokered deposits. Our non interest bearing deposits continued to be greater than 63% of our total deposits. At June 30, 2023, our total deposits and customer repos were $12,800,000,000 an $88,000,000 increase from March 31, 2023. However, deposits and customer repos were lower than the same period a year ago by approximately $1,700,000,000 for an approximate 12% decline year over year. We've experienced $552,000,000 decline in deposits and customer repos from the end of 2022, which includes $550,000,000 that was moved into Citizens Trust where these funds were invested in higher yielding liquid assets such as treasury notes.

Speaker 2

The velocity of deposits moving to Citizens Trust declined in the second quarter with approximately $180,000,000 transferred off balance sheet in the quarter compared to $370,000,000 in the Q1 of 2023. The bank continues to acquire new deposit customers and the deposit pipeline has strengthened over the last 3 months. New accounts opened during the first half of twenty twenty three totaled approximately $650,000,000 of new average deposits. We have historically maintained one of the lowest cost of deposits in the industry based on the customers we target and our business model. Our cost of deposits was 35 basis points on average for the Q2 of 2023, which compares to 17 basis points for the Q1 of 2023 and 3 basis points for the Q2 of 2022.

Speaker 2

At June 30, 2023, our non interest bearing deposits were $7,900,000,000 compared with $7,800,000,000 for the prior quarter and $8,900,000,000 from the year ago quarter. Non interest bearing deposits were greater than 63% of total deposits as they have been for the last 5 quarters. The bank has no brokered deposits. Our deposits are 100% core customer relationships across diversified industries. More than 75% of our deposits represent customer relationships that have banked with Citizens Business Bank for 3 or more years.

Speaker 2

76% of our deposits are business deposits and our customers typically have operating accounts that by the nature of each of their businesses exceeds the FDIC insurance coverage level of $250,000 Therefore, 52% of total deposits and customer repos were uninsured and uncollateralized at June 30, 2023. As of the end of the second quarter, the Federal Reserve had increased the Fed funds rate by 500 basis points since April of 2022. The bank's cost of deposits over the same period of time have increased from 3 basis points to 41 basis points for the month of June 2023. The bank failures in March of 2023 brought greater attention to the Fed's increases in short term rates and of the 38 basis point increase in our cost of deposits from the start of the Fed's rate increase, more than 50% of the increase has been experienced since March of 2020 3. Although the pace of the increase in deposit costs slowed in June, we cannot be certain about the pace of increases in the future, especially as the Fed continues to raise rates as they did yesterday.

Speaker 2

Total loans at June 30, 2023 were $8,900,000,000 a $172,000,000 or 1.9 percent decrease from the end of 2022. From December 31, 2022, loans declined by $31,900,000 after excluding the seasonal increase in dairy and livestock loans and PPP loan forgiveness at year end. Dairy and livestock loans decreased by $136,000,000 from December 31, 2022 as we experienced pay downs in the Q1 of each as we excuse me, as paid out the Q1 of each year as a result of the temporary increase we experienced in the Q4 of each commercial real estate loans increased by $19,000,000 from the end of 2022 to June 30th, while C and I loans increased by approximately $8,000,000 over the same period. Declines in construction, SBA and consumer loans totaled $59,000,000 from December 21, 2022 to June 30, 2023. Now let's discuss loans in more detail.

Speaker 2

Loan growth during the Q2 was impacted by a slowdown in loan demand. Total loans declined by $35,000,000 from the end of the Q1 of 2023 to the end of the second quarter. Commercial real estate, construction and consumer loans declined from the prior quarter, while C and I loans increased as utilization rates improved from 28% at the end of the first quarter to 31% at the end of June. Year over year core loan growth was $277,000,000 or approximately 3%. This quarter loan growth was led by growth in commercial real estate loans, which grew by $260,000,000 or 3.9% year over year.

Speaker 2

Our new loan production weakened in the Q2. New loan commitments were approximately $240,000,000 in the Q1 of 20 $604,000,000 of new loans in the Q2 of 2022. New loan production at the end of the second quarter was generated at average yields exceeding 7%. Although we continue to strive to grow loans, our current loan pipeline is at its lowest level in the last 3 years. Although loans declined at quarter end from the end of the first quarter, we recorded a provision for credit losses of $500,000 for the Q2 of 2023 to reflect a further deterioration in our economic forecast.

Speaker 2

Asset quality continues to be strong and the trends remain stable. At quarter end, nonperforming assets defined as non accrual loans plus other real estate owned were $6,500,000 or 4 basis points of total assets. The $6,500,000 in non performing loans compared to $6,200,000 for the prior quarter and $13,000,000 from the year ago quarter. During the Q2, we experienced credit charge offs of $88,000 and total recoveries of $15,000 resulting in net charge offs of $73,000 compared with net charge offs of $77,000 for the Q1 of 2023. Classified loans for the 2nd quarter were $78,000,000 compared with $67,000,000 for the prior quarter $76,000,000 for the year ago quarter.

Speaker 2

Classified loans as a percentage of total loans over the last 5 quarters has been consistently less than 90 basis points. The $10,900,000 increase in classified loans quarter over quarter was primarily due to a $9,700,000 increase in classified commercial real estate loans and a $6,100,000 increase in classified dairy and livestock and agribusiness loans, partially offset by a $4,400,000 decrease in classified commercial and industrial loans. The increase in classified loans for the dairy and commercial real estate categories were primarily due to 1 dairy relationship in which $11,000,000 of dairy and livestock loans and $6,000,000 of owner occupied commercial real estate loans were downgraded during the 2nd quarter. Commercial real estate loans secured by office buildings has been an area of much attention recently across the banking industry. So we've included additional information related to our office exposure and our July 2023 investor presentation.

Speaker 2

A couple of data points regarding our $1,100,000,000 of office CRE includes the granular nature of the portfolio, which is highlighted by the average loan size of less than $1,700,000 87 percent of the office CRE loan balances are below $10,000,000 and we only have one loan greater than $20,000,000 Additionally, 25% of this portfolio is owner occupied and on average these loans were originated with loan to values of 55%. Approximately 13% of the office portfolio will mature over the next 24 months, while an additional 13% of the portfolio will have their interest rates reset during those same 24 months. To visualize where our office portfolio is positioned geographically, we have maps on Pages 33 through 36 of our investor presentation that show the dispersion of our loans and the minimal exposure in the city centers of Los Angeles, San Diego and San Francisco. In summary, we believe our office CRE portfolio was conservatively underwritten, very granular and not exposed to central business district areas. I'll now turn the call over to Alan to discuss the allowance for credit losses, liquidity and capital.

Speaker 2

Alan?

Speaker 3

Thanks, Dave. Good morning, everyone. At June 30, 2023, our ending allowance for credit losses was $87,000,000 or 0.98 percent of total loans, which compares to $86,500,000 or 0.97 percent of total loans at March 31, 2023 and $85,100,000 or 0.94 percent total loans at December 31, 2022. The allowance for credit losses as a percentage of classified loans was 112% as of June 30, 2023, compared to 108% as of December 31, 2022. For the quarter ended June 30, 2023, we reported we recorded a provision for credit losses of $500,000 compared to $1,500,000 for the quarter ended March 31, 2023 and $3,600,000 for the Q2 of 2022.

Speaker 3

The provision for credit losses in the 2nd quarter was driven by the change in our economic forecast, which resulted in lower projected GDP growth, lower commercial real estate values and higher unemployment when compared to our forecast at both March 31 the end of 2022. Our economic forecast also resulted in a $400,000 increase and our off balance sheet reserve at June 30 compared to an increase of $500,000 in the Q1 of 2023. Our economic forecast continues to be a blend of multiple forecasts produced by Moody's. These U. S.

Speaker 3

Economic forecasts include a baseline forecast, a more optimistic forecast as well as numerous downside forecasts. We continue to have the largest individual scenario waiting on the baseline forecast with downside risk weighted among multiple forecasts represent approximately 40% of our overall forecast. As of June 30, 2023, the resulting weighted average forecast assumes GDP will increase by 1.5% in 2023, including a decline in GDP in the second half of this year, followed by modest growth of 0.8% for 2024 and then GDP growth in 2% for 2025. The unemployment rate is forecasted to be 3.8% in 2023, followed by 5% in both 2024 and 2025. Borrowings as of June 30, 20 23 consisted of $695,000,000 from the bank term funding program that we borrowed during the Q2 of 2023 at a rate of 4 point 7%.

Speaker 3

These borrowings replaced the higher cost borrowings from the Federal Home Loan Bank. Our FHLB borrowings consist of short term advances that declined from $1,400,000,000 as of March 31, 2023 to $800,000,000 at June 30, 2023. So as of June 30, their cost was approximately 5%. These FHLB advances will mature over the next two quarters with the final maturity at the end of November. The modest growth in borrowings from the end of the Q1 of 2020 $322,000,000 increase in funds on deposits at the Federal Reserve, which earn a rate of more than 5%.

Speaker 3

In addition to having more than $600,000,000 of cash on the balance sheet as of June 30, 2023, we had substantial sources of off balance sheet liquidity. These sources of liquidity include $4,100,000,000 of secured and unused capacity with the Federal Home Loan Bank, dollars 1,300,000,000 of secured borrowing capacity at the Fed's discount window or bank term funding program, more than $550,000,000 of unpledged AFS securities that could be placed at the discount Landa or the Fed's bank term funding program and $300,000,000 of unsecured lines of credit. In addition to these borrowing sources, the bank has not utilized any broker deposits as of June 30. We continue to shrink our investment portfolio by not reinvesting approximately $120,000,000 of cash flows generated by our investments during the 2nd quarter. Our total investment portfolio declined by $160,000,000 from March 31, 2023 to $5,600,000,000 as of June 30.

Speaker 3

The decrease was primarily due to 1 $136,000,000 decline in investment securities available for sale for AFS securities. AFS securities totaled $3,070,000,000 at the end of the second quarter, inclusive of a pre tax net unrealized loss of $498,000,000 As the bank has ample balance off balance sheet sources of liquidity, it's unlikely that we would sell any of these AFS securities. Investment securities held to maturity or HCM securities totaled approximately $2,510,000,000 at June 30. The HTM portfolio declined by $23,000,000 from March 30, 2023 as cash flows were not reinvested during the quarter. The tax equivalent yield on the entire investment portfolio was 2.37% for the Q2 of 2023, essentially the same as the prior quarter, but grew by 44 basis points in comparison to the Q2 of 2022.

Speaker 3

Now turning to our capital position. Shareholders' equity increased by $53,000,000 $2,000,000,000 at the end of the 2nd quarter. The company's tangible common equity ratio at June 30 was 7.8%, consistent with the prior quarter, while higher than the 7.5% at June 30, 2022. Equity increase for the 1st 6 months of 2023 as a result of year to date income of $115,000,000 which was offset by $56,000,000 in dividends for both the 1st and second quarters of this year. The resulting year to date dividend payout ratio was 48.5%.

Speaker 3

The 10b5-1 stock repurchase plan we initiated in 2022 expired on March 2, 2023. There were no shares purchased during the Q2 of 2023. During the Q1 of this year, we repurchased approximately 792,000 shares of common stock at an average price of $23.43 totaling $18,500,000 in stock repurchases. At the end of the Q2 of 2023, we entered into $1,000,000,000 in notional pay fixed rate swaps as fair value hedges to mitigate the risk of rising interest rates on our capital. These pay fixed swaps have maturities ranging from 4 to 5 years and on average the fixed rate is approximately 3.8%.

Speaker 3

The variable rate received by the bank is daily SOFR. At June 30, 2023, we recorded a $7,800,000 fair value adjustment associated with these swap derivatives, which increased other comprehensive income, partially mitigating the impact of a $38,000,000 decline in fair value of our AFS portfolio. On a net basis, the changes in fair value from our AFS portfolio and fair value hedges resulted in a $19,000,000 decline in other comprehensive income from the end of the Q1 to June 30. Our overall capital position continues to be very strong. Our regulatory capital ratios are well above regulatory requirements to be considered well capitalized and above the majority of our peers.

Speaker 3

At June 30, 2023, our common equity Tier 1 capital ratio was 14.1 percent and our total risk based capital ratio was 14.9%. I'll now turn the call back to Dave for further discussion of our 2nd quarter earnings.

Speaker 2

Thank you, Alan. Net interest income before provision for credit losses was $119,500,000 for the 2nd quarter compared with $125,700,000 for the Q1 and $121,900,000 for the year ago quarter. Our tax equivalent net interest margin was 3.22 percent for the Q1 of 2023 compared to excuse me, 3.22 percent for the Q2 of 2023 compared with 3.45% for the Q1 of 2023. 3.16% and 3.16% for the Q2 of 2022. The 23 basis point quarter over quarter decrease in our net interest margin was a result of a 34 basis point increase in cost of funds compared to a 10 point increase in earning asset yields.

Speaker 2

The increase in cost of funds from the Q1 of 2023 to the Q2 was driven by a combination of a $555,000,000 increase in short term borrowings, which had an average cost of 4.9% in the 2nd quarter and 49 basis point increase in the cost of interest bearing deposits. Our 10 basis points quarter over quarter increase in earning asset yield was primarily the result of an 11 basis point increase in loan yields. 2nd quarter average earning assets increased by $165,000,000 from the Q1 due to an increase of $310,000,000 in average funds on deposited the Federal Reserve. The increase in our funds at the Fed offset decreases in both average investment securities of $73,000,000 and average loans outstanding of $71,000,000 The 6 basis point increase in net interest margin year over year was due to an 81 basis point increase in earning asset yields offsetting a 79 basis point increase in our cost of funds. The increase in earning asset yields was a result of higher loan and investment yields in the Q2 of 2023 compared to the Q2 of 2022, as well as an improved asset mix in which average loans grew from approximately 55% of earning assets in the Q2 of 2022 to 59% in the Q2 of 2023.

Speaker 2

Loan yields were 5.01% for the Q2 of 2023 compared with 4.31% for the year ago quarter. Investment security yields increased 44 basis points from a yield of 1.93 in the prior quarter to 2.37 in the Q2 of 2023. Earning assets for the quarter ending June 30, 2023 declined from the Q2 of 2022 by $593,000,000 Loans on average grew by $258,000,000 from the Q2 of 2022. However, our investment portfolio and deposit balance at the Federal Reserve declined by a combined $865,000,000 as total deposits declined by $1,900,000,000 year over year. Moving on to non interest income.

Speaker 2

Non interest income was $12,700,000 for the Q2 of 2023 compared with $13,200,000 for the prior quarter at $14,700,000 for the year ago quarter. Our customer related banking fees including deposit services, international and merchant bank card services decreased by approximately $506,000 compared to the Q1 and declined by approximately $495,000 when compared to the Q2 2022. However, our trust and wealth management fees grew by $401,000 compared to the Q1 of 2023 and increased by $353,000 year over year. The conversion to SOFR of all of our previously originated back to back interest rate swaps indexed to LIBOR generated approximately $100,000 of fee income during the Q2 compared to $500,000 of fee income during the Q1 of 20 3. BOLI income for the Q2 of 2023 increased from the Q1 by $908,000 including $806,000 in debt benefits that exceeded the asset value of certain BOLI policies.

Speaker 2

Fully income increased by $1,500,000 compared to the Q2 of 2022 due to both the debt benefits received in the Q2 of 2023 and higher returns for the underlying investments in separate fund life insurance policies used to fund deferred compensation plans. Compared to the Q1 of 2023, CRA investment income declined by $500,000 due to the inclusion in the Q1 of 2023, a recapture of a previous impairment charge on a CRA investment that paid in full during the Q1 of 2023, as well as a $475,000 decline in the 2nd quarter due to valuation changes in the CRA fund. Compared to the Q2 of 2022, CRA investment income declined by $716,000 as the prior quarter included gains from equity fund distributions totaling $1,300,000 The Q2 of 2022 also included $2,700,000 in net gains on the sale of properties associated with banking centers. Now expenses. Non interest expense for the 2nd quarter was $54,000,000 compared with $54,900,000 for the Q1 of 2023 and $50,900,000 for the year ago quarter.

Speaker 2

The Q2 of 2023 included $400,000 in provision for unfunded loan commitments compared to $500,000 in provision for the Q1 of 2023. There was no provision for the Q2 of 2022. Salaries and employee benefit costs decreased $1,700,000 quarter over quarter, primarily due to lower payroll taxes as the Q1 of each year typically has the highest amount of payroll taxes. The $866,000 quarter over quarter increase in professional services included increases of $357,000 in legal expense as well as other professional services that were that are associated with the timing of various projects. The $3,100,000 increase in non interest expense year over year included an increase of $2,000,000 or 6% in salaries and employee benefits due to inflationary pressures primarily experienced in the second half of twenty twenty two.

Speaker 2

FDI assessments increased by $785,000 over the prior quarter prior year quarter as higher assessment rates were effective at the beginning of 2023. Non interest expense totaled 1.32% of average assets for the Q2 of 2023. This compares with 1.36 percent for the Q1 of 2023 and 1.2% for the Q2 of 2022. Our efficiency ratio was 40.86 percent for the Q2 of 2023, which compares with 39.5% for the prior quarter and 37.2 percent for the Q1 of 2022. Since our founding in 1974, we have managed to build a safe, sound and secure institution with a strategy focused on banking the best small to medium sized businesses and their owners.

Speaker 2

We remain focused on our core values of financial strength, superior people, customer focus, cost effective operation and having fun. As the premier business bank in California, we have successfully executed on this strategy and our focus will remain steady and consistent, so we can continue to provide the best banking products and services to these businesses that represent great American success stories. Despite the challenging environment, we will remain disciplined in our approach to credit and will strive to produce and maintain consistent earnings, strong capital levels, solid credit and excellent liquidity. Please stay healthy and safe. This concludes today's presentation.

Speaker 2

Now Alan and I will be happy to take

Operator

One moment while we compile the Q and A roster. And our first question will come from the line of Ben Gurlinger with Hovde Group. Your line is open.

Speaker 4

Hi, good morning guys.

Speaker 2

Good morning, Ben.

Speaker 4

Seems like people mixed up SVB and CVB For a whole quarter. You don't have to comment on that. I'm sure you can't. But anyway, so in terms of Just the borrowings, I think that laying it out of the $800,000,000 it gets paid off in November. And then the bank term funding, When you think about the bank term funding specifically, because you do have that high fours rate and the Fed is now at 5.5, you are getting a positive spread.

Speaker 4

Is there any appetite or can you pay that down early if deposits in the back half of the year Increase?

Speaker 3

Ben, yes, I mean, what's nice about the bank term funding program is don't have any penalties if you want to pay it off. And so, there was a time where the yield curve was and the fact these are 1 year borrowings that it was just advantageous to utilize it. You get to use par value of collateral rather than fair value, Pay it off anytime you want. In fact, we paid off and reborrowed a couple of times to get better rates. Now you can't replicate 4.7 right now, But if we do continue to see growth in the deposits, we could pay that off.

Speaker 3

But More likely we'll pay down FHLB first because it is generally more expensive borrowings. But having some cash on hand that pays us what, 540 now versus the 470 is obviously some positive arbitrage for us.

Speaker 4

Got you. And then I think that's largely predicated on your normal seasonality. It seems like you have pretty good inflow of deposits in the back half of the year. So we're pretty much at a starting date for that. Just based on kind of the commentary you typically have with your customer base and I mean just I'm sure you had a lot more conversations in the 1st 6 months of this year than probably any other 6 month period.

Speaker 4

Is that still something that you should expect? You guys typically don't pay up a ton on deposits because you have really great relationships and you have another ways of rewarding your depositor base, but is that normal seasonality something that we should continue to expect?

Speaker 2

Yes, I think we should expect that. And just to make sure we're on the same page, normally we kind of grow deposits in the second and third quarter and then deposits in The Q4 go down just due to a variety of reasons, bonuses, other things, distributions to business owners. So I would expect something similar on the seasonality side. The pace of the money that left and went outside of the bank slowed pretty significantly in the Q2. And I think that, that should continue to be the case.

Speaker 2

I mean subject to a lot of different factors. Every day is a new day in the world out there. But I think the normal seasonality should be sort of anticipated.

Speaker 4

Got you. And then if I could just sneak one more in. I know that You guys aren't looking to do a transformational deal, but you guys do have a history of making some pretty good roll up or additional M and A to bolster the broader company. With the 1st 6 months being pretty quiet, you've seen not necessarily a floodgate, but we've seen a few notable deals announced this week across the country. Has there been conversational changes, maybe not necessarily you guys involved, but just has the appetite or the bid ask between the buyer and Seller materially changed over the past few months and then it's kind of juxtaposed against that.

Speaker 4

Do you think you'd be participating anytime in the next year or do you need some more economic clarity before you really get involved or want to do something?

Speaker 2

I mean, I think it's really a case by case basis. Just to your comment regarding the conversations. I think the conversations, I would say, picked up pretty significantly after the failures of the banks. People were Nervous and scared and looking for a safe haven, but I'd say they've slowed a little bit. And part of the challenge is just the economics and the marks All of the stuff that goes into looking at a deal.

Speaker 2

We would be open to looking at an opportunity if it was presented to us and it made sense for us just based on our normal criteria, but that probably would impact some of The financial matrix with the marks where they are and some of those things. But look, we're always looking and open for conversations. Obviously, yesterday the change in or the announcement of the acquisition of PacWest was Something that I think was overall good for the banking industry just from a risk perspective out there. But at the end of the day, we are open, but we will remain disciplined in how we utilize our capital for those types of things and our currency.

Speaker 4

Got you. I mean has there been more free agency of just kind of the A plus bankers because of the deals that have been announced this year in California?

Speaker 2

I mean, there's still a little bit of that. I don't think anything's really happened with the one that was announced yesterday. But that could and will, I believe, be an opportunity for us as we move forward through the next quarter or 2.

Speaker 4

Sounds good. Appreciate the color, guys.

Speaker 3

Of course.

Operator

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

Operator

Your line is open.

Speaker 4

Thanks. Good morning. Good morning. Good morning. Hey, I wanted to ask about the pickup in C and I quarter over quarter.

Speaker 4

It looks like line utilization I think 28% to 31%, which kind of correlates with the dollar increase. But can you talk about the dynamics there between increased draw downs from your existing clients versus potentially have you brought on new business as well over the last 3 months?

Speaker 2

Yes. So in towards the end of the quarter, we did bring on a new large C and I relationship that sort of impacted that to a degree. So that was probably a lot of that increase. I don't have the exact number off the top of my head, but I would say it was just anecdotally 70five-twenty 5 new relationship versus new borrowings from existing lines.

Speaker 4

Great. And then just since it's a sizable new relationship, could you kind of talk about the relative loan versus deposit impact of that relationship?

Speaker 2

Yes. So this is actually a really Alan is already laughing, Gary, sorry. This is not a new relationship to the bank. We actually acquired this relationship back in 2018 with the acquisition of Community Bank. They're an extremely large deposit maintaining over $25,000,000 in deposits with us.

Speaker 2

Back a couple of years ago, they left and went to another bank offered them a line that we were unwilling to do the size of the line. And ultimately, they never took their deposits from us. They actually left their deposit relationship with us, went to this other bank. They made the decision that they wanted to leave the other bank and bring the line back to us. So it's pretty well balanced actually.

Speaker 2

It's probably about 80% Same story just because the relationship never really left the borrowings did, but then the borrowings came back.

Speaker 4

I appreciate the color on that. And then just any commentary you could share on kind of what you're seeing almost through the 1st month of Q3 in terms of deposit trends and pricing?

Speaker 2

Yes. I didn't we didn't disclose that number, but very stable is how I would characterize it. And sort of Similar to my answer to Ben, we anticipate kind of similar trends historically kind of second and third quarter Deposit growth, obviously, a lot can influence that in today's world, but I feel relatively confident that will continue those trends between now and the end of Q3. Gary, we actually we've opened an enormous amount of new accounts. I mean, the average balances on our customers relationships have gone because I think they have taken some of that excess cash and invested it in trust and outside investments.

Speaker 2

But we are on offense through all of this.

Speaker 4

Got it. Thank you. You're welcome.

Operator

Thank you. One moment for our next question. And that will come from the line of Matthew Clark with Piper Sandler. Your line is open.

Speaker 5

Hey, good morning.

Speaker 3

Good morning.

Speaker 5

Maybe just on the margin first, trying to get some visibility into the next quarter if you have the spot rate on interest bearing deposits at the end of June and the average margin in the month of June?

Speaker 3

Yes. I think we actually noted that it was 41 basis points in June, Matthew. And you can look at our that's the deck and you'll see a monthly trend. So that should give you more color there. In terms of the outlook for our net interest margin, Yes.

Speaker 3

Let me start with what you'll see in our Q. And we always disclose a 200 basis point up in 200 basis point down ramp over 12 months. And on a static balance sheet, that's going to generate over the 1st 12 months an increase in net interest income of 1.5% and over a 24 month period 2.7%. Likewise, if rates were happened to be down 200 basis points. It's a modest decline of 1% in the first 12 and then cumulatively over the 24 it would be a negative 3.

Speaker 2

I would give I will give you

Speaker 3

a little more color on the very short term outlook. And I think it's reasonable to assume that we could have some improved asset mix On the earning asset side, in the near term quarter or quarters and as well as potentially improve the funding mix with less borrowings. So I think our outlook is that we think there's a reasonable chance of a better NIM and But obviously that's subject to maybe the Fed increasing even further in September. And Matthew

Speaker 2

just one other on Page 39 in the investor deck, The cost of interest bearing deposits was 1.04% in the month of June.

Speaker 5

Got it. Thank you. Okay. And then, it doesn't sound like it from your prepared comments on the AFS portfolio, but any change in your willingness to restructure the securities portfolio given regulatory capital strengthening even further here?

Speaker 3

No, I mean, we'll always evaluate it and determine if there's opportunities. But as we commented, the balance sheets And the liquidity position is strong and there's no need to really do anything there.

Speaker 5

Okay. And then expenses down a little bit here this quarter, including lower comp. Can you give us kind of a sense for the run rate outlook here in the second half?

Speaker 3

Well, as you may recall from prior years, we generally do salary increases mid year. So the Q3 over the Q2 should see some growth, Probably 2% to 3% in overall staff and benefit expenses. The professional service number can be a little choppy quarter to quarter as we do different things. We have a lot of projects to continue to invest in to improve long term efficiencies. But generally, we continue to be very focused on keeping expense growth in the low single digits to the extent we can.

Speaker 3

And obviously, The big unknown for us is going to be how we have to account for the special assessment from the FDIC. So how does that $8 plus 1,000,000 show up? One quarter is they change it, it's split over multiple quarters. We'll have to wait and see.

Speaker 5

Okay. And on the office CRE portfolio, it looks like 26% of it matures or reprices over the next 2 years. Do you have any examples or have you experienced any of that type of any maturities or repricing to date here more recently. And I assume you've kind of looked through what's coming due in repricing. What's kind of the outcome of what you found?

Speaker 2

Yes. I mean we do a lot of testing As we said before, we do an annual review of every loan that's over $1,000,000 in the bank and we look at All the economics, the rent rolls, the NOI on the property, how everything's going. We have obviously had, we always have every month, probably every week and maybe sometimes daily, repricing or maturities of loans. And you have to remember, most I'd say the vast, vast majority of those loans are not based on prime. There might be very few that are even based on prime.

Speaker 2

And so most of those are based on a 5 year treasury. The typical structure would be a 25 year amortization, 10 year term, 5 year fixed, repricing at year 6. And that would be based on the 5 year treasury. So if you look at the difference in the 5 year treasury from 5 years ago to today, that would give you a good indication as far as how Those loans would reprice. Today, we really and I don't know of 1 and I asked this Question of our Chief Credit Officer and our sales leaders.

Speaker 2

I've asked if we've had to have any customers right size their loans based on The cash flow from the property or how we value the property at reset or maturity. And to date, there really hasn't been anything that has been material and no problems with our customers being able to cash flow and maintain solid debt service coverage ratios according to the covenants in their loan.

Speaker 5

Great. And then last one for me, just getting back to M and A and more explicitly. Did you have any interest in Pac West and why or why not?

Speaker 2

So look, We as been our stated approach to M and A, we want to do $1,000,000,000 to $10,000,000,000 We want to stick kind of with banks that are more similar to us. There were a lot of things that I would have said that I would have been interested in, but there were also a lot of things that I would have said I wouldn't have been interested in. And I think that for us, we want to execute on our strategy. We want to remain CVB. We want any bank that We look at acquiring to be able to fold into our culture, our processes, our credit quality, all of those things.

Speaker 2

And I just think that Right now that would be a pretty big ask of anybody to go through some of that. So I mean I'm happy for the overall banking That was sort of taken off the table, but I do think that it probably wouldn't have fit our criteria.

Speaker 5

Understood. Okay. Thank you.

Speaker 2

You're welcome.

Operator

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

Speaker 6

Hi, good morning. Thanks for the question.

Speaker 2

Good morning.

Speaker 6

I wanted to start on the excellent deposit You guys had this quarter, and I appreciate all the color there. I'm just wondering if you could maybe step back and talk more broadly. I know there's been obviously a lot of disruption out West and wanted to see if any of the inflows you're seeing have been from new customers that you're able to like win from this disruption versus how much of these deposit closed from existing customers just running their business or coming back after some initial headwinds in March.

Speaker 2

Yes. Well, I mean it's really kind of a tale of in the second quarter, it's tail of the early quarter and later in the quarter. And in the early quarter, I would say there was a little bit of disruption just from the failures. And we really we did have some impact there, but it really wasn't significant. And as I I mentioned, our kind of average existing customer balance has been is down quarter over quarter.

Speaker 2

And a lot of when you ask a question about the new deposit relationships, the $647,000,000 I don't have a breakdown of How many of that is new customer or new customers visavis existing customers opening new accounts, but the vast majority of it is new customers to the bank. I mean, we really started working on this last year. We changed our incentive plan to really focus on deposits. The disruption has helped us with some of the bank failures. We've opened accounts from those banks.

Speaker 2

A lot of the people that were at First Republic or Silicon, we haven't got a ton from Silicon, but a lot of the customers that were there, They left bigger banks and they don't really want to go back to bigger banks. And our specialty deposit groups like specialty banking, our government services, they've been very active. And in those 2 sort of verticals, The majority of those deposits are non interest bearing because our operating funds are other people's money in short term escrows, that type of thing. And we still haven't seen a full return of where we were at the high point on the specialty banking side. Government Services continues to generate new relationships with cities and municipalities and districts, especially banking is probably having one of their best new production years ever.

Speaker 2

So I never thought I would say our deposit pipeline might be Bigger than our loan pipeline. But yes, we have a lot of things going and I think with the more recent disruption could create even more opportunities for us.

Speaker 6

Great. Maybe I'll lead into just then with the deposit pipeline and kind of how we should be thinking about the The size of the balance sheet going ahead, I appreciate the commentary on securities. And Just as we look ahead with what you're seeing in the pipe for deposits and considering what you have with borrowings, like how should we be thinking about the overall size of the balance sheet? Do you expect that to grow? And tying it into what you had talked about with the margin and commentary around that, like where any color on where we should expect to NII to kind of exit the year and kind of the outlook for that as we consider both sides of the balance sheet and the size?

Speaker 3

So Kelly, I don't think the balance sheet size will change dramatically. Certainly as deposits grow, our most likely reaction to that is to reduce the amount of debt on the balance sheet. We are going to look to try to grow loans, of course, let the security portfolio pay down a little bit. So we could modestly grow, we could modestly decline depending on some of those factors. In terms of the net interest margin, once again, I think some of it's going to be predicated on changing the asset mix, changing the funding mix.

Speaker 3

We do feel that it's reasonable that in the near term maybe the second quarter is the worst net interest margin this year, but We still have to see how the Fed reacts later in the year.

Speaker 6

Okay. Got it. And provided that what you're thinking with, what you see for margin with maybe assuming the forward curve, it's fair to say we flattish balance sheet and some kind of modest NII growth, any just way to size that?

Speaker 3

I think it's we don't really give For guidance. So I think I'll just leave it with the commentary, KV, Kelly.

Speaker 6

Got it. Thank you so much.

Operator

Thank you. One moment for our next question. Our next question will come from the line of Tim Coffey with Janney Montgomery. Your line is open.

Speaker 4

Thanks. Good morning, gentlemen.

Speaker 3

Good morning. Good morning.

Speaker 4

Hey, just most of my questions have been asked and answered, but I had to have one question on speaking of Pac West. Can you describe kind of what your level of optimism is that pressures on deposit costs might come down near term given that PacWest was running some fairly aggressive deposit campaigns within your footprint?

Speaker 2

Yes. Look, I think there's a lot of people running fairly aggressive deposit campaigns in our footprint. So I'm not sure that TAC West in and of itself will change much of that. But I just go back to the point that I've made. We bank operating companies and we don't have a lot of people that are chasing yield.

Speaker 2

I mean there is some of that as evidenced by the increase in the cost of Depends on deposits, but the majority of our deposits are operating companies. And so we are focused on that. One thing I and I'm sort of trying to give you some of the color around here. One of the things I looked at is just kind of the mix of The new loan opportunities we're looking at, the new deposit opportunities. There's a significantly higher portion of the new loans we're doing and the new deposit relationships we're getting that are really operating companies, C and I companies.

Speaker 2

And I think the result of this has been a good thing just sort of with the focus of our people to make sure they're going after the right types of businesses and not trying to necessarily do the next Investor commercial real estate loan. And so I'm pretty positive on where that's going. And I think we will see, depending on again what the Fed does, we will see some continued pressure on the funding on the deposit side, but It has moderated a little bit. My hope is that that continues.

Speaker 4

Very good. That was my questions. Thank you for the time.

Speaker 3

Yes, you're welcome.

Operator

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

Speaker 2

Great. Thank you. I want to thank everybody for joining us this We appreciate your interest and look forward to speaking with you in October for our Q3 2023 earnings call. Please let Alan and I know if you have any questions. Have a great day

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Earnings Conference Call
CVB Financial Q2 2023
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