CVBF (2025 - Q3)

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. [Operator Instructions] 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. E. Nicho

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.

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 of sale -- 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-quarters growth was driven by growth in money market and customer repurchase balances. The year-over-year growth was 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. I will now turn the call over to Allen to further discuss additional aspects of our balance sheet and our net interest income -- sorry, net interest income.

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 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 $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.

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

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?

Yes. So obviously that last rate cut was towards the end of the third quarter. So we didn't get the benefit of -- the big benefit of what we did and had a little bit to do with some of the mix of individual accounts. And in our repurchase agreement sweep, one of our largest depositors had built his deposits pretty good. But we did reduce every rate -- every money market rate and repo rate over 1.25% -- we reduced by a full 25 basis points the day after the Fed moved. So we're just trying to match that off. Obviously it depends a little bit on the mix between some of the higher paying ones and the lower paying ones that still got reduced. But at the end of the day, our plan is to continue to match whatever the Fed funds decreases with decreases in money market rates over 1%. Do you have anything to add to that, Allen?

No, I think, there's a small portion obviously of our deposit base that has higher yields and there was a little bit of an increase relative to the rest of the deposits in the quarter. But as Dave said, we'll be reducing all of them as the market -- as the Fed goes down.

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?

Yes. A lot of dialogs. Not a lot has happened yet. I feel a little bit like Allen Iverson on the practice thing. We just keep practicing, but we're continuing conversations. I still believe that the dam is going to break here, but at this point, there's not anything imminent, and we're still having conversations. I will say one thing we did in the third quarter, and it was in our investor presentation -- excuse me, subsequent to the third quarter, we did hire a team of 4 bankers from City National Bank and are opening a de novo office in the Temecula, Murrieta area. They actually started yesterday. So we're excited about that. We feel like we got 4 really great bankers, and they all came from sort of different parts of City National, but they all live in that area. And so we're going to open a presence there. So we're excited about that. And we'll see how they do as we go forward. But at the end of the day, we're going to keep looking to bring the right bankers and/or the right opportunities from an M&A perspective.

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

I wanted to start just on loan growth. You guys had a really good quarter. Dave, it sounded like in your prepared remarks, obviously, originations are up a lot this year. It sounds like the pipeline is still pretty strong. I just wanted to get -- I know you've got a seasonal benefit in the fourth quarter, but just expectations on loan growth over the near term. Do you think you can continue at this mid-single-digit pace?

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.

Very good. I appreciate it. And I did want to ask about -- you referenced just pricing competition in the market. And it sounds like your new origination yields came down a little bit this quarter relative to the first half of the year and rates have obviously come down, so that will influence it. But I'm curious, are you willing to be a little more competitive on the pricing front now, just given where the market is at today? Or has your approach to new loan pricing not really changed much?

Yes. I mean, look, we're always willing to compete on price for the right relationship. So that's something we've had to do. And I think that's part of the reason why we've continued to see opportunities on the loan front. But yes, it is aggressive. I mean, I just saw a deal -- this was a pretty large equipment deal, but it had a 4 handle that we were competing with a large bank on. So people are out there pretty aggressively and we're trying to hold the line as best we can, but we are definitely willing to compete on price as long as the credit quality is where we want it to be.

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

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?

No. We actually brought on 2 new dairy relationships in the third quarter, so that impacted it as well. It's interesting at the beginning of the year, they were doing really well. Milk prices have come down a little bit. So they're still doing okay, but not as well as they were doing in the first couple of quarters. So I think we'll still see some of that, but I wouldn't necessarily say it's going to be muted. That growth -- that small increase in utilization probably had a little bit more to do with the new relationships than just people doing things early. So we still should see kind of a normal increase in that line item in the fourth quarter.

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 kind of outlook for short-term rates is probably points 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?

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.

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

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 4 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?

Yes. So the deposit gathering has still been relatively strong. It's not as strong as it was towards the end of -- I'd say, all of '24 and the beginning of the year. It slowed a little bit. But we're going after operating companies and it is a little more competitive, I think. But I don't think it's changed much from the perspective. We're not looking for high-rate CDs or high-rate money market accounts. It has to be a full relationship. So that hasn't changed. But I will say the loan pricing is generally coming from the larger banks and the larger regional banks. It's not as much from the banks that are our size or smaller per se. So I do think that, that will continue. And look, there's a lot of market disruption with some of the acquisitions that have been done. There's a lot of market disruption from the perspective of Wells Fargo's asset cap is removed. I mean, all these things are sort of influencing that. So there are some probably more aggressive competitors in the market. But we're really focused on the operating company and most of our new deposits -- I'd say most of the new deposit gathering, relationship gathering that includes deposits is coming on at a little bit higher percentage of noninterest-bearing than our overall portfolio. So we feel pretty good about it. This last quarter on the deposit side, like Allen and I said, it was more related to just one large customer in the bank that had a little greater mix at a higher rate. But we should start to see the benefit of that deposit cost going down as the Fed continues to lower. So there's competition on both sides, but we we're willing to compete, but we want to do it for the right relationships.

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?

So they've been focused on more operating companies and high net worth individuals. They did not have the opportunity to do investor commercial real estate. So that's an area that they can -- instead of having to refer out or give to somebody else that they'll be able to do here within their group. They all live in that area, and they covered different parts of Southern California from Orange County to Riverside County. So they'll be able to cast a wide net in those markets. And for us, it fills in a little bit of the geography from our San Diego region to our Riverside region. So that's a good thing. And Temecula, Murrieta is really a growing market. So we're excited about the opportunities there, and they're all experienced bankers, and they've been doing it for a long time. So we're excited to see what they can do.

[Operator Instructions] And one moment for our next question, that will come from the line of Charlie Driscoll with KBW.

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?

A couple of quick things. One, you're right. In the fourth quarter, we'll see a fairly large increase in the dairy. We also see end of the quarter more year-end versus quarterly average impact, but we do see deposit outflows for tax reasons and bonuses, et cetera. So we prepare for that. But we will -- especially if the Fed continues to cut, we do evaluate where bond yields are. They're down from where we were buying early in the quarter. But we may put some of that to work depending on how we look at the bond market in the quarter.

Okay. And then if you guys could just touch on expenses, they've been really well controlled. Just looking forward here, if we do get a little bit of growth and with the team lift out, how are you thinking about expense management heading into 2026?

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 it impact. 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 stuff.

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.

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.

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