Q2 2020 CVB Financial Corp Earnings Call
My name is Nick I'll be your operator for today.
This time all participants are in listen only mode. Later, we'll conduct a question and answer period.
Please note that this event is being recorded.
I like to turn the presentation over to your host for todays call My script Christina Carrabino. Please go ahead.
That's your neck and good morning, everyone. Thank you for joining us today to review our financial results for the second quarter of 2020.
Joining me this morning, our day breaker, Chief Executive Officer, and Allen Nicholson Executive Vice President and Chief Financial Officer.
Our comments today, we'll refer to the financial information that was included in their earnings announcement released yesterday to obtain a copy. Please visit our website at www Dot CB bank Dot com and click on the investors tab.
Before we get started let me remind you that today's conference call will include some forward looking statements. These forward looking statements relate to among other things.
Current plans expectations events and industry trends that may affect the company's future operating results and financial position.
Such statements involve risks and uncertainties and future activities and results may differ materially from these expectations.
Other risk the ongoing cobot 19 pandemic, they significantly affect the banking industry and the company's business prospects the ultimate impact on our business or financial results will depend on future developments, which are highly uncertain and cannot be predicted including the scope and duration of the pandemic the impact on there.
Economy, our customers and our business partners and actions taken by governmental authorities in response to the pandemic.
The speakers on this call claim the protection of the Safe Harbor provisions contained in the private Securities Litigation Reform Act of 1995.
For 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 31st 2019, and in particular, the information set forth in item one a risk factors therein.
Now I will turn the call over today Brager Dave.
Thank you Christina and good morning, everyone and thank you for joining US again on our Investor calls for the second quarter.
We announced in our second quarter earnings release yesterday afternoon, the effects of the covert 19 pandemic continue to probably impact the financial services industry, including citizens business Bank.
Economic impacts of the stayed home orders.
Closure orders and a widespread attacks are required social distancing and health and safety measures in California, but.
Before we provide more details on the impact on our business and how we plan to continue to manage through this pandemic, our and I will report on our second quarter 2020 financial results yesterday, we reported net earnings of $41.6 million for the second quarter, 2020, or 31 cents per share which represented.
Our 170 threerd consecutive quarter of profitability. We also declared an 18 cents per share dividend for the second quarter 2020, which represented our 120 threerd consecutive quarter or pay any cash dividend to our shareholders.
Our net earnings of $41.6 million compared with $38 million for the first quarter 2020, and $54.5 million for the year ago quarter earnings.
Earnings per share of 31 cents for the second quarter compared with 27 cents for the first quarter and 39 cents for the year ago quarter.
Through the first six months of 2020, we are $79.6 million compared with $106.1 billion for the first six months of 2019.
Diluted earnings per share were 58 cents for the six month period ended June Thirtyth 2020, compared with 76 cents for the same period in 2019.
Our pretax pre provision income was $70.3 million for the second quarter, which was $5 million higher than the prior quarter and $8.4 million lower than the second quarter 2019.
We originated $1.1 billion under the SBH Paycheck protection program, resulting in approximately $8.5 billion and loan interest and fee income during the second quarter of 2020.
We recorded a credit loss provision of $11.5 million for the second quarter 2020 in comparison, we had a credit loss provision of $12 million in the first quarter 2020, and a loan loss provision of $2 million in the second quarter of 2019.
The additional provision in the second quarter was primarily the result of our forecast of a further deterioration in our economy due to the pandemic, we will discuss our economic forecasts in more detail later in this call.
Now I would like to discuss our deposits and loans.
We had significant deposit growth of approximately $2 billion for the second quarter due primarily to proceed from PPP loans and our customers maintaining greater liquidity at June Thirtyth 2020, our noninterest bearing deposits totaled $6.9 billion compared with $5.6 billion for the prior quarter.
$5.3 billion for the year ago border.
Noninterest bearing deposits were 63% of total deposits at the end of the second quarter compared with 61% for both the prior quarter and a year ago order.
At June Thirtyth 2020, our total deposits in customer repurchase agreements were $11.5 billion compared with $9.5 billion at March 30, Onest 2000, $29.1 billion for the same period a year ago.
Average non interest bearing deposits were $6.2 billion for the second quarter of 2020, compared with $5.2 billion for the prior quarter and $5.1 billion for the year ago quarter.
Our average total deposits and customer repurchase agreements of $10.5 billion for the second quarter grew by $1.3 billion or 14% from the first quarter.
Now moving on the loans total loans, including $1.1 billion UPB loans increased by $936 million or 12.5% from the end of the first quarter.
Excluding PPP loans loans decreased by $161 million, including a $120 million decline in C and I loans.
The cnine balances were impacted by a reduction in line usage from the ended the first quarter.
The banks total unused loan commitments increased by approximately $117 million from March 30, Onest at June Thirtyth and the overall line utilization rate decline from Pocs approximately 53% at March 31, 2020% to 48% at June Thirtyth 2020.
Commercial real estate loans increased by $17 million over the period over the prior quarter end.
Compared to June 32019, total loans were $867 million higher but when PPP loans are excluded total loans declined by $230 million or 3% over the prior year.
The decrease in loans was generally across all loan segments.
Average loans for the second quarter increased by $564 million compared with the first quarter of 2020 and increased by $489 million compared with a year ago order.
During the first quarter of 2020, PPP loans had an average balance of $670 million.
Net interest income before provision for credit losses was $104.6 million for the second quarter compared with $102.3 million for the first quarter and $111.1 million from the year ago order.
The increase in interest income from the first quarter.
The net result of additional interest and fee income recognized for PDP PPP loans offset by a declining net interest margin.
The decrease in net interest income from the prior year was primarily due to the decline in interest income from lower loan yields.
Our tax equivalent net interest margin was 3.7% for the second quarter of 2020, compared with 4.08% for the first quarter and 4.49% for the second quarter of 2019.
When the impact of PPP loans discount accretion on acquired loans and nonaccrual interest paid is excluded the adjusted tax equivalent net interest margin was 3.42% for the second quarter down from 3.87% for the prior quarter and 4.08% for the year ago quarter.
Our net interest margin was negatively impacted during the second quarter by excess liquidity that resulted in more than $1 billion on average deposit at the federal reserve.
Loan yields were 4.77% for the second quarter 2020, compared with 4.95% for the first quarter of 2020, and 5.4% for the year ago quarter.
This decline was primarily due to the impact of the federal reserve's rate decreases and the decline in discount accretion income for acquired loans.
Excluding the impact of ERP loans interest income related to purchase discount accretion and nonaccrual interest paid loan yields were 4.44% for the first quarter 23 basis points lower than the first quarter of 2020.
And 42 basis points lower than the second quarter of 2019.
Our cost of deposits and customer repurchase agreements for the second quarter were 12 basis points and our total cost of funds was 13 basis points.
Our cost of funds declined by eight basis points from the prior quarter and 12 basis points from the second quarter last year.
Now moving on to non interest income.
Noninterest income was $12.2 million for the second quarter 2020, compared with $11.6 million for the prior order and $18.2 million for the year ago order.
The second quarter of last year included a 5.7 million dollar net gain from the legal settlement of an eminent domain action on one of our banking center buildings located in Bakersfield.
During the current quarter, we generated record levels of swap fee income of $2.2 million, which was $1.8 million higher than both the prior order and the second quarter of 2019.
Now expenses.
Noninterest expense for the second quarter was $46.4 million compared with $48.6 million for the first quarter of 2020 and $50.5 million for the year ago quarter.
Compared with the first quarter of 2020 salary and benefit expense declined by $2.2 million, which included approximately $1.1 billion due to the timing of payroll related tax expenses and $1.2 million in higher deferred loan origination costs related primarily to the origination of more than 4000 people.
Loans.
The second quarter 2019 included $2.6 million and acquisition expense related to the community Bank merger.
Noninterest expense totaled 1.48% of average assets for the second quarter compared with 1.72% for the first quarter and 1.81% for the second quarter of 2019.
Our efficiency ratio with 39.75% for the second quarter of 2020, compared with 42.69% for the prior quarter and 39.09% for the second quarter of 2019.
Now turning to our asset quality metrics at quarter end nonperforming assets defined as non accrual loans plus other real estate owned were $11.7 million compared with $11.3 million for the prior order and $13.6 million at June Thirtyth 2019.
As of June Thirtyth 2020, we had Oreo of $4.9 million the same as the prior quarter.
At June Thirtyth 2020, we had loans delinquent 30 to 89 days up $2.6 million compared with $4.4 million at March 31 2020.
Classified loans for the second quarter were $86.3 billion, a 2.7 million dollar increase from the prior quarter. We will have more detailed information on our classified loans available in our second quarter form 10-Q.
Through July 10th we granted temporary payment deferrals, primarily a principal and interest for loans in the amount of $1.27 billion.
Deferments were primarily for 90 days with 93% of these loans being pass rated.
Only 6% of these loans have received the second deferment and 94% of the deferments were granted between March and May.
At June Thirtyth 2020, commercial loans to customers in the hotel restaurant Entertainment and Recreation industries represented approximately 4% of our commercial loans and loans to customers and retail trade, we're only 2% of RCN Islands.
Commercial real estate loans on retail properties comprised 15% of RCR Ilan portfolio at June Thirtyth 2020.
At origination the loans on retail properties were underwritten with loan to values, averaging approximately 50%.
It's important to note that 56% of these loans were originated prior to 2017.
I will now turn the call over to Allen Nicholson to discuss our effective tax rate the allowance capital levels and liquidity Alan.
Thanks, Dave Good morning, everyone.
Effective tax rate was 29.23% for the second quarter compared to 28.75% for the first quarter 2020.
And 29% for the year ago quarter.
Our year to date effective tax rate 29%.
Our allowance for credit losses increased in the second quarter as a result of our forecast of a greater decline and economic activity due to the pandemic.
We recorded $12 million in provision for credit losses during the first quarter of 2020.
Recorded an additional $11.5 million in the second quarter.
Including net charge offs of $158000 in the second quarter ending allowance for credit losses was $94 million.
For 1.29% of total loans, when excluding the $1.1 billion and PPP loans.
This $94 million reserve represents an amount that exceeds our entire classified loan balance.
Our economic forecast as a blend of multiple forecast produced by Moody's.
The number of Cobot 19 cases, rising in California, and the state backtracking on reopening the economy, our forecast increase waiting on the downside economic forecast scenario.
Moody's USA baseline forecast continues to have the largest waiting our model and assumes GDP declined by 33% in the second quarter and will increase by 20% and the third quarter with a full year 2020 decrease in GDP of 5.6%.
GDP is forecasted to be less than 2% in 2021.
But rebounding to a strong 6.6% growth rate in 2022.
Unemployment is forecasted to have been at 14% in the second quarter Bank continues to stay at an elevated level of approximately 9% through 2021.
Before declining to 7% in 2022.
Now turning to our capital position.
For the first six months shareholders' equity decreased by $35 million to $1.96 billion.
The decrease was primarily due to $92 million in stock repurchases during the first quarter.
And $48.8 million in cash dividends.
Offset by net earnings of $79.6 million and 24.9 million dollar increase in other comprehensive income from the tax effected impact of the increase in market value of available for sale Securities.
Our overall capital position continues to be very strong.
Our tangible common equity ratio was 9.6% ended the second quarter and our regulatory capital capital ratios are well above regulatory requirements to be considered well capitalized.
At June Thirtyth, our common equity tier one capital ratio was 14.5%.
And our total risk based capital ratio was 16%.
We're also well positioned with the balance sheet that it's highly liquid funded almost entirely with core deposits.
The ability of significant off balance sheet sources of liquidity.
At June Thirtyth 2020, we had $1.8 billion on deposit at the Federal Reserve.
At the end of the second quarter, we started to deploy some of the excess funds into security purchases totaling $162 million.
These mortgage backed securities are expected to you on approximately 1.2%.
At June Thirtyth 2020, our combined available for sale and held to maturity investment securities totaled $2.3 billion.
$33 million decrease from the first quarter and a $39 million decrease from June 32019.
At quarter end investment securities available for sale totaled $1.68 billion. The portfolio had a pretax unrealized gain of $57.3 million at ended the quarter.
This portfolio securities comprised primarily of highly liquid government agency mortgage backed securities.
At quarter end, we had $25.8 million in sub debt and $10 million zero interest advances from the FHLB.
The bank has available lines of credit exceeding $4 billion, most of which is secured by pledged loans.
I'll now turn the call back Dave for some closing remarks.
Thank you Alan as Alan and I discussed, we believe that our bank remains well positioned to succeed with strong capital consistent earnings solid credit an excellent liquidity, we have been a consistent and stable source of financial services for our customers in communities over a variety of economic cycles, and we will continue to focus on the key.
Attributes that make citizens business bank high performer.
Through our five core values of financial strength superior people customer focus cost effective operation and having fun, we've been able to create enduring value for our communities our customers our associates and our shareholders. These core values have guided our organization through many challenging times and economic cycles.
In our 46 year history, and they will continue to drive us forward for the future.
We'll continue to support the customers and communities, we serve as we seek to navigate through the current pandemic as we discussed last quarter, we've been supporting our communities and customers. During this pandemic through various avenues and programs, including providing over 4000 Paycheck protection program loans for $1.1 billion, making charitable done.
This is our particularly needed at a time like this are bank as partner with hope through housing to offer services that assists senior residents to maintain their health and wellbeing by donating non perishable food and household items to over 600 at risk seniors.
As part of our pledge to our associates to maintain a healthy and safe environment. We're committed to the following values, creating a safe and respectful working environment treaty and others with compassion and respect and embracing a diverse and inclusive working environment. Our bank has committed to the following all applicable regulations directives and guidance.
In an effort to keep our associates and customers safe and healthy during this period.
In addition in view of recent events occurring across the us weve assert our assured our associates that of our continuing commitment to provide career and growth opportunities.
I also want to express my gratitude to our associates that have helped to ensure that citizens business Bank remains open to serve our customers and communities. During these unprecedented times. We recently provided a special financial Thank you award for qualify in associates.
Been exceptionally proud of the commitment and effort of our team over the past three months and I'm happy to report that our executive team and the board enthusiastically supported this award program for our associates.
As in the case of all financial institutions in this environment. The pandemic continues to leave us and many of our customers with uncertainty as to what will transpire in the future. We started seeing positive signs of economic recovery would California's reopening as many counties began moving into phase three reopening on forward.
Additionally, due to the spike and Coven 19 cases.
And hospitalizations, our governor rolled back some of the previously positive steps towards a full reopening and many businesses had to close or sharply curtailed their operations. After just recently reopening.
We hope that evolving national state and local policies will continue to be supportive of the overall economy and the businesses that continue to be impacted.
In closing as we move to into the second quarter second excuse me second half of 2020.
We are focused on managing our banking business through the challenges presented by the pandemic and seeking to bolster our long term track record of outperformance, particularly during troubled times that tend to highlight the benefits of our historically conservative and disciplined approach to managing capital and credit.
Our strategy remains focused on protecting shareholder value by continuing to manage the bank in a disciplined and balanced manner and to evaluate growth opportunities carefully and selectively.
In closing I'd like to thank our customers for their ongoing loyalty our shareholders for their continued support and trust.
Please stay healthy and safe that concludes today's presentation now Alan and I will be happy to take any questions that you might have.
Thank you, we'll now begin the question answer session.
Question. Please press Star then one on the telephone keypad.
Good for use in the speakerphone, please pick up your handset before pressing the keys.
For all your questions. Please press Star then too.
At this time, a pause momentarily still some lower roster.
First question comes from Jackie Bohlen KBW. Please go ahead.
Hi, good morning, everyone.
Good morning.
Hi, Good question on then on the PDP fees.
All the.
Point 8 million, but you had in on slide 14 in the presentation and I wanted to see if that included the interest earned on the balances or if that was just purely related to see.
I was just the recognition of the fees.
So the interest itself with about 1.7 million.
The total 8.5 million Jackie that we highlighted.
Okay point 5 million okay.
Sorry, I somehow missed that that's all right. Okay and then how how are you internally modeling the pay off of these loans in your forgiveness expectations at them.
We're we're estimating that the average life is going to be about 15 months.
You know almost all of them you'll have a 24 month term, there's very few that out in term longer than that.
But we'll monitor quarterly and see how that performed we do expect that most of our customers are anxious to have the forgiveness, but we're still waiting on the FDA.
Nothing set up but 15 months is our expectation on average.
Okay and is that.
Amortizing the fee structure, then over 15 months enough 20 formats.
We're doing now and effective yield so I don't let alone level.
Okay.
Okay. Thank you and then just one more and then I'll step back in queue and I realize that this is a very difficult question to answer but I just want to get your thought on balance sheet size I'm. If as these PBP loans pay off if you will see meaningful declines in deposits or if you think customer liquidity.
I mean elevated I mean, just how you're thinking about that over the next couple of quarters.
Yes, so I mean, obviously, we were surprised I mean, it felt like every time, we made a PPP loan for one dollar we got $2 of deposits. So I.
I think for the most part our customers are maintaining higher levels of liquidity, we monitor that really on a daily basis.
Most of the the first round of the P.P.P.I. I believe that they've spent that those funds for payroll and other things.
The money is fungible I think there's some you know potentially some slowdowns in investment and things and you know people were wanting to maintain you know the liquidity right. Now. So we are modeling that it will decline slightly but we are also investing a portion of those excess funds and you know going to do loans first but.
Absent you know.
The loan opportunity, we've invested a little bit and securities as well, but we think it's going to remain elevated I believe through you know at least through the end of the year, but that's still to be seen.
Okay.
Thank you all sit back.
Thanks.
Thank you next question comes from David Feaster, Raymond James. Please go ahead.
Hey, good morning, everybody. Good morning, David David I, just wanted to start on.
Re deferral rate I mean, the early read that you've got at 6% is extremely well and we're kind of at that you know crossing going with most of the the deferrals happening in March and April I'm. Just curious if you think this in just the beginning or that we could actually kind of staying as high single low dose.
Well digit or you know re deferral rate realm, just curious on any trends that you're seeing in what you expect with referral rates.
Yeah. That's a good question and those numbers were actually after the quarter end those rather than July 10th.
The 6% read deferral rate, we anticipate that to remain low. However, we also as we've said in the first round, we wanted to make sure that our customers you know come out of this relatively as stronger stronger than they were before but the one thing and we did it on the first round, but the one thing we're doing a little bit more on the second.
Around is we really want to understand if theres any underlying credit issues, we really want to be able to look at that deal and in many cases, where they're asking for a second deferral. If they are I'll use the term don't need it we're going to have harder conversations with them and we're going to want something you know in return for that so there have been.
You know some of the situations on the first 6%, where we've taken additional collateral where weve you know looked at the structure or there's asked for paydowns. So there's been a different different situations, but we're looking at every single one individually.
I anticipated to remain lower but I believe that it will be you know that ultimately it will be higher than 6% I just can't make a guess on where the actual number will end up.
Yeah. So and then I guess just kind of following up on that I mean, assuming that you know we get more referrals going forward, but probably translates into additional risk rating downgrades I guess, how do you think about the reserve going forward and reserve builds I mean do you think most of the heavy lifting largely done and will only see modest reserved.
And then the second last year, the more risk rating downgrade.
That you know we might see more.
Additional large with reserve builds.
<unk> back up here.
Yeah, I'll start on this and all that out until it any blanks, but I think you know for the most part in the first two quarters, it's been largely driven by just the economic forecasts and our modeling in the third quarter. We do believe that we're going to see some more credit downgrades, we don't know what that extends going to be but in our investor presentation, we outlined.
On the deferral amounts and it's a interesting slide.
You know shows what's being deferred and then go to the cobot impacted industries. It shows what percentage is classified.
And so I think that you know the third quarter in the fourth quarter are going to be more driven by assuming that things get better from an economic forecast anymore at least stay the same it's going to be driven more by by the credit migration. So I don't know and if you want to add anything to that.
I would add is you could see credit migration increase loss rate within our modeling, but but if we also get to the point where are the economic forecast is more reflective of an improvement and not the decline that that could have some mitigating impact onto future bills.
Okay.
I'm sorry, David one is just one quick thing I mean, as Alan mentioned, you know our our allowance for credit losses is over 100% of our classified loans you know.
900% of our.
Non performers.
Yeah.
Thank you good points and then I guess last one from me just wanted to get your thoughts on organic loan growth going forward, you know you'd mentioned that loan long decks TBD were down a bit more than expected. It seems like this is largely due to decreasing see an eye utilization, but just curious given the trends that you're seeing how much of the decline.
Got it may be declining utilization woods from maybe more of a strategic perspective, where your tightening the credit box versus elevated payoffs and paydowns or asset sales or just simply limited demand for new credit just curious what you're seeing there and the pipeline as well that score.
Yeah. So you know we normally don't give a lot of detail here, but I will tell you. This the you know as far as loan demand we are seeing loan demand.
We actually in the first six months or 2020 produce more gross loans than we did in the first six months of 2019, So we're still seeing demand from our customers and prospects.
We're active we you know our first priority is to grow quality loans, we want to be able to do that in this environment. Obviously, we have to be very disciplined about how we look at that because of the uncertainties related to the pandemic, but we've also seen heighten prepayments and that's evidenced by just the prepayment penalties that weve recognized.
In the first six months, so we're about 50% up year over year in prepayment penalties in the first six months and that's really related to you know I think where rates are and refinances on commercial real estate loans and our philosophy on that as when there's a relationship we're going to compete hard and by relationship I mean.
Deposit relationship and loan relationship if we're dealing with the transaction that you know is a industry type that's maybe not as attractive today, we're going to look at that a little bit differently than if we have somebody that's you know self funding their loan relationship with their deposits or close to self funding or long relationship we're going to compete.
On price, but we've been losing you know some commercial real estate loans that at sub to 70 510 year rates to some of the larger banks and you can see that in the net interest margin of those basin you can see that impacted our loan yields from the first to second quarter for us as well so we want to compete from one.
Grow loans, we produce more loans, but we're also seeing some run off on the backend, but we're not losing relationships.
Okay terrific. That's helpful. Thank you.
Next question comes from Gary Tenner of D.A. Davidson. Please go ahead.
Thanks morning.
Good morning.
Wanted to follow up on the deferrals.
The 6% obviously on the second deferral.
At this point in terms of the remainder the remainder as of June.
Ah June 30, or actually I'm, sorry July 10th what's what's the kind of point in time were those would actually expire in terms of the original 90 days is that by the end of July or.
Broadly the end of August.
Yes, so obviously the ones that were done in March have expired. The ones that are in April were almost to the point, where they would have expired, but I think that you know.
The process, probably I'd say be more complete by the end of August than the end of July.
As far as that will be really were will have a much better idea of what that that's kinda second deferment looks like.
So we have a little bit of game to play there. So that's why I you know I suggested that that number that 6% numbers going to be higher I, just don't know how much higher.
Okay, Great and then in terms of the investment.
That's $162 million of excess liquidity invested at quarter end.
Your your point taken that obviously your preference will be to grow loans.
Generally speaking if you know if the loan growth in the back half of your does not materialize were.
Do you think the comfort level is in terms of.
The incremental investment interest for each portfolio.
Gary I think it'll somewhat depend on on the market and the opportunities, but we were monitoring and as Dave said liquidity very closely we do plan on investing.
Yeah far more than 162 million in the quarter, but it will somewhat depend on on opportunities. We look we look on a daily basis, certainly we want to reinvest the cash flow out of the portfolio as it come through but but we probably will look to.
Invest a fair amount of that back into the bomb portfolio, if we can find appropriate bonds.
Okay. Thank you.
Again, if you ever question. Please press Star then one.
At this time there were no more questions I'm I like to turn the call back over to Mr. Brager. Please go ahead.
Great. Thank you I want to thank everybody for joining us this quarter. We appreciate your interest and look forward to speaking you speaking with you in October for our third quarter 2020 earnings call. Please let Alan I know if you have any questions have a great day stay safe and thank you for listening.
Conference has now concluded thank you for attending today's presentation.
Now disconnect.
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