Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- CVB Financial Corp (CVBF, Financial) reported net earnings of $50 million for Q2 2024, marking their 189th consecutive quarter of profitability.
- The company declared a $0.20 per share dividend for Q2 2024, representing their 139th consecutive quarter of paying a cash dividend.
- Return on average tangible common equity was 15.51%, and return on average assets was 1.24% for Q2 2024.
- Interest income grew by $1.4 million over the prior quarter, with earning asset yields improving by three basis points.
- Non-interest expense decreased by $3.3 million compared to the first quarter of 2024, primarily due to a reduction in the estimated cost for the FDIC special assessment.
Negative Points
- Net interest income declined by $1.6 million compared to the first quarter of 2024, due to a five basis point decline in net interest margin.
- Total loans decreased by $89 million from the end of the first quarter and by $223 million from December 31, 2023.
- Non-performing assets increased to $25.6 million, up from $14.5 million in the prior quarter.
- Classified loans grew to $125 million from $103 million in the prior quarter, with much of the growth associated with agricultural lending.
- Interest expense increased by $3 million over the prior quarter, reflecting a seven basis point increase in the cost of funds.
Q & A Highlights
Q: Wanted to just get a sense for the margin here and the related outlook. Do you have the average margin in the month of June and the spot rate on deposits at the end of June?
A: If you look at our IP, you’ll see the cost of interest-bearing deposits and repos in June was 2.21%. You can also, Matthew, if you look at the IP further, we have a breakdown by month showing non-maturity deposits that were at 74 basis points and time deposits of 3.44%. So, that will give you sort of where we finished at the end of the quarter. (E. Allen Nicholson, CFO)
Q: Just on your loan yields, they were down a few basis points this quarter. Was that interest income reversals? What drove that? Just trying to get a sense for that if there’s anything unusual there going forward?
A: Nothing really unusual, Matthew. When we look at our core loan yield over the six months of the first half of this year, it was up about 10 basis points. There are other things that go into that reported loan yield, prepayment penalties, discount accretion. Those things can be a little volatile quarter-to-quarter, but nothing significant. The underlying core trends have generally been one to two basis point increases per month. (E. Allen Nicholson, CFO)
Q: Updated thoughts on M&A, what you might be seeing of late given the move in bank stocks and whether or not something might be passed, might not you might be able to get something done before year-end?
A: Even if there was something, I don’t think we’d be able to get anything done by year-end, but hopefully we’ll be able to announce something by year-end. There are still conversations that are going on. The rebound in bank stock prices could be helpful, but the math remains a problem due to unrealized losses and the marks we have to take. We’re going to be disciplined in how we look at that. (David Brager, CEO)
Q: Are you interested in kind of buyback in the back half of the year? Does the kind of move in valuation potentially preclude you from doing that? Would the preference be incremental securities repositioning?
A: Over the next two, three, four quarters, our focus is to reduce the level of borrowings we have on the balance sheet as well as reducing the securities portfolio. That combined with the fact that we continue to accrete capital every quarter, I think is going to show some pretty strong capital ratios. We’ll be definitely looking at the opportunities from M&A compared to whether we want to be more aggressive in terms of buybacks. (David Brager, CEO)
Q: Can you just maybe frame for us the timeline in which the sale leaseback transactions can occur? Is that something that is primarily completed in the back half of the year?
A: We are doing transactions sort of one at a time. We’re focused on maximizing what we can get out of these properties. If we don’t get the price we want, we won’t sell them. There is certainly some unknowns. One sold already. There’s possibilities of a couple more this year, but we don’t know. It will depend on whether market conditions really give us the cap rate we want. (David Brager, CEO)
Q: Curious what you guys are seeing in the industrial commercial real estate market in the Inland Empire specifically within your portfolio, whether you’ve seen any notable changes in the vacancy rates?
A: The latest data shows a large percentage increase in vacancy rates, but it’s still very concentrated at the larger square footage size buildings. We haven’t seen really any changes in the industrial market with our customers. We’ve been very disciplined in how we’ve underwritten it. Half of it is owner-occupied. We’re not really experiencing vacancies in the investor industrial portfolio at any significant level. (David Brager, CEO)
Q: I was hoping to dig in a little bit more about the sale leasebacks and the potential offsetting securities repositioning. Is there a particular size of the securities portfolio we should be managing to or how you’re thinking about what an optimized size of a securities portfolio looks for you at this stage?
A: We don’t have a near-term target per se. Our focus is more paying down the debt more than anything. Long-term, our objective is to shift the asset mix to a higher percentage of loans. Near-term, the investment portfolio, we want to accelerate it maybe with some of these targeted sale leasebacks. (David Brager, CEO)
Q: With the broker CDs you put on, are you looking to potentially add to that wholesale CD position or if the security sales and the cash flows off that support what you need at this point?
A: The wholesale side is a combination of a couple of things. Depending on how the rest of the balance sheet plays out, do we need more funding? If that’s the case, we will look to what’s the least expensive, whether it be brokered or borrowings. We are managing those numbers to position our interest rate risk. (David Brager, CEO)
Q: How should we be thinking about the back half of the year in terms of loan pipelines and loan growth?
A: The loan pipelines are definitely slower. We are seeing great opportunities. We’ve funded a large amount of commitments this year, but there hasn’t been a large amount of borrowings on those commitments. I do believe that we can grow loans through the end of the year. We’re going to err on the side of credit quality always. (David Brager, CEO)
Q: Can you help us think through maybe some of the trends in the quarter, on the core deposit front and what you saw especially late into the quarter into early July?
A: Overall deposits have been very stable. Our operating model allows for non-interest-bearing deposits to remain high. We are bringing on very good deposit relationships, operating companies that do maintain non-interest-bearing deposits. The deposit pipeline has been solid, but we still are running into the headwinds of the higher for longer. (David Brager, CEO)
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
