Q2 2019 Earnings Call
Good morning, ladies and gentlemen, and welcome to the second quarter 2019, CVB financial Corp. and its subsidiary citizens business Bank earnings Conference call.
My name is Ben and I am your operator for today.
At this time all participants are in listen only mode. Later, we will conduct a question and answer period. Please note. This call is being recorded.
I would now like to turn the presentation over to your host for today's call. Christina Carrabino you May proceed.
Thank you Ben and good morning, everyone. Thank you for joining us today to review our financial results for the second quarter of 2019.
Joining me. This morning are Chris Myers, President and Chief Executive Officer Rail, Brian Chairman of the Board and Allen 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 Dot C., we say 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. The speakers on this call claim the protection of the Safe Harbor provisions contained in the private Securities Litigation Reform Act of 1995 [noise].
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 31st 2018, and in particular, the information set forth in item one a risk factors therein now I will turn the call over to Chris Myers.
Thank you Christina good morning, everyone and thank you for joining us again this quarter.
Alan and I are joined on the call today by our chairman of the Board rail Brian before we discuss our quarterly results I would like to briefly address last weeks announcement of my planned retirement, and then ask Ray to say a few words from imports perspective.
On July 18th we announced it after 13 years as President CEO I have decided to retire effective March 15th 2020.
After March 15th and as part of my retirement agreement.
I will remain as a consultant through December 30, Onest 2020 to help facilitate a smooth and orderly transition to the next president and CEO .
In addition, I will serve in this consultant role to support to support both our associates and customer base and to provide strategic advice as needed.
Over the past 13 years My leadership team has accomplished every major objective I put in front of them.
Through it all we have consistently produced outstanding financial results.
Industry, leading in many respects.
Given our current success and our overall strength and stability.
I believe it is the right time to transition the company into a new generation of leadership.
I would like to thank the board of family Ray and all of my directors over the past 13 years for their support.
It has been my pleasure and honor to lead this company and I'm incredibly proud of all of our achievements now I'd like to turn the call over to Ray Ray.
Thank you Chris.
That said as we are to see you go we wish you the absolute best in your retirement.
Let me begin by stating that board is pleased with the company's current direction strategy and performance.
We are not considering any strategic changes to our business or financial model at this time.
Business as usual.
In addition, the board continues to be very happy with Christmas and the banks performance and we are grateful for his continued leadership into next year during this transition.
Chris has a record of tremendous performance as our president and CEO .
And we are appreciative of his long and exceptional service.
As the leader of our management team.
And as a fellow director.
He has left the bank through a period of tremendous growth and strengthen our franchise, while maintaining an enviable track record of 169 consecutive quarters of profitability at 119 consecutive quarters of paying a cash dividend to our shareholders.
We believe our experienced senior management team and deep leadership bench, well I'm sure there will be no disruption to our operation or stability on the company will benefit from the long runway Chris has provided the bank for this transition.
The Special Committee of the board has been formed to oversee the transition process.
Thanks to the long lead time prior to Christmas departure.
Board will have ample time to conduct a thorough process to identify the right successor.
The special Committee will engage an outside executive search firm to assist in identifying and evaluating qualify the internal and external candidates.
Before I turn the call back to Chris to discuss our quarterly financial results.
Let me reiterate that we expect this to be a smooth transition for the company.
This has been an extraordinarily successful president and CEO and he will continue to lead us through March 15, 2020, I will now return the call to Chris to discuss our financial results and the second quarter Chris.
Thank you Ray.
All right back to business yesterday, we reported net earnings of $54.5 million for the second quarter of 2019, compared with $51.6 million for the first quarter of 2019 and $35.4 million for the year ago quarter.
Our second quarter earnings were the highest quarterly earnings in company history, as where our year to date earnings of $106.1 million.
Earnings per share were at a record level of 39 cents for the second quarter compared with 37 cents for the first quarter and 32 cents for the year ago quarter.
The second quarter earnings were positively impacted by a $5.7 million a pre tax gain from the settlement of a lawsuit over an eminent domain condemnation or one of our banking centers and negatively impacted by $2.6 million in acquisition related expenses.
By comparison, our first quarter's earnings were positively impacted by a 4.5 billion dollar gain on the sale of a bank owned building and negatively impacted by $3.1 million in acquisition costs related to the integration of community Bank.
The second quarter 2019 represented a 169th consecutive quarter of profitability and 119th consecutive quarter of paying a cash dividend to our shareholders.
We like to say that twice because we're very happy about it.
Through the first six months of 2019, we earned $106.1 million compared with $70.3 million for the first six months of 2018.
Diluted earnings per share were 76 cents for the six month period ended June 32019, compared with 64 cents for the same period in 2018.
Our tax equivalent net interest margin was 4.49% for the second quarter compared with 4.39% for the first quarter of 2019, and 3.82% for the year ago quarter.
Total loans declined by $71 million or about 1% to $7.54 billion quarter over quarter.
The decrease in loans included a 40 million dollar decline in commercial and industrial loans, and a $19 million a decrease in dairy and livestock loans.
Average loans declined by $104 million quarter over quarter.
Despite the negative loan growth for the quarter New loan production is tracking ahead of 2018 by about 10%.
We have seen increased payoffs, particularly from the former community bank loan portfolio.
For many of these loans that were paid off early we decided not to compete with the new lender primarily due to underwriting concerns.
Loan yields were 5.40% for the second quarter of 2019, compared with 5.27% for the first quarter of 2019, and 4.81% for the year ago quarter.
Excluding interest income related to purchase discount accretion and nonaccrual interest paid.
Loan yields were 4.86% for the second quarter, which was two basis points higher than the first quarter of 2019.
After excluding interest income related to purchase discount accretion and non accrual interest paid our loan yields increased by 23 basis points over the second quarter of 2018.
At June 32019, the allowance for loan and lease losses was $67.1 million or 0.89% of total loans compared with $65.2 million or 0.86% of total loans at March 31 2019.
During the second quarter of 2019, we recorded a provision for loan losses of $2 million.
The provision was primarily due to loan growth of $102 million in non acquired loans. Conversely, Conversely, our portfolio of acquired loans decreased by approximately $173 million from the first quarter.
The allowance for loan losses as a percentage of non acquired loans was 1.36% at June 32019, compared to 1.35% at March 31 2019.
At quarter end nonperforming assets defined as nonaccrual loans, plus other real estate owned were $13.6 million or 0.12% of total assets.
Compared with $19.3 million or 0.17% of total assets for the prior quarter.
And $10.2 million or 0.13% of total assets at June 32018.
Total non performing assets included $8.4 million in nonperforming loans originated by community Bank.
At June 32019, we had loans delinquent 30 to 89 days of only $332000.
Classical classified loans for the second quarter were $49.4 million, a $2.6 million a decrease from the prior quarter.
Total classified loans included $20 million of loans acquired from community Bank.
We will have more detailed information on classified loans available in our second quarter Form 10-Q .
Now I would like to discuss deposits.
For the second quarter 2019, our non interest bearing deposits totaled $5.25 billion compared to $5.10 billion for the prior quarter and $3.98 billion for the year ago quarter.
Non interest bearing deposits were 60.6% of total deposits in the end of the second quarter compared with 58.9% for the prior quarter and 60.9% for the year ago quarter.
At June 32019.
At June Thirtyth 2019, our total deposits and customer repurchase agreements were $9.08 billion compared with $9.12 billion at March 30, Onest 2019, and $6.92 billion for the same period a year ago.
Our cost of deposits and customer repurchase agreements for the second quarter.
Were 20 basis points, the same as the prior quarter.
Our total cost of funds was 25 basis points, which is also equal to the prior quarter.
We continue to achieve our objective of maintaining a low cost stable source of funding for our loans and securities.
As rising short term interest rates have created pressure to increase funding costs industry wide our cost of interest bearing deposits.
Increased by four basis points over the first quarter of 2019 on average.
Notwithstanding an increase in non interest bearing deposits and a decline in overnight borrowings resulted in our cost of funds remaining unchanged at 25 basis points.
Interest income.
Interest income for the second quarter of 2019 totaled $116.8 million compared with $115.3 million for the first quarter and $74.8 million for the same period a year ago.
The increase in interest income for the first quarter of 2019 was the result of one additional day of interest $1.4 million in nonaccrual loan interest paid in the second quarter.
And an $815000 increase in loan discount accretion.
The increase in interest income from the second quarter of 2018 was the result of 2.3.
Billion dollars and growth in average, earning assets and an increased yield on earning assets of 79 basis points.
The second quarter of 2019 reflected a $7.4 million increase in loan discount accretion and non accrual interest paid over the second quarter of 2018.
The tax equivalent yield on earning assets for the second quarter was 4.72%.
Compared with 4.262% for the prior quarter and 3.93% for the year ago quarter.
When loan discount accretion and non accrual interest paid are excluded.
The tax equivalent yield on earning assets for the second quarter increased by one basis point compared to the prior quarter and by 49 basis points compared to the second quarter of 2018.
Interest expense interest expense for the second quarter of 2019 totaled $5.7 million and $19000 decrease over the first quarter and a $3.6 million increase over the second quarter of 2018.
Average interest bearing liabilities decreased by $240 million compared to the first quarter, while the cost of intra bear the cost of interest bearing liabilities increased by two basis points.
The increase in interest expense from the second quarter of 2018 can be attributed to higher average interest bearing liabilities of $1.04 billion and a 28 basis point increase in the cost of interest bearing liabilities.
Net interest margin.
Our tax equivalent net interest margin grew from 4.39% in the first quarter to 4.49% in the second quarter.
When the impact of discount accretion on acquired loans and non accrual interest paid is excluded.
The adjusted tax equivalent net interest margin increased by one basis point from 4.07% to 4.08%.
Our adjusted tax equivalent net interest margin grew by 38 basis points over the second quarter of 2018.
Non interest income.
Non interest income was $18.2 million for the second quarter of 2019, compared with $16.3 million for the prior quarter and $9.7 million for the year ago quarter.
Non interest income for the current quarter included a 5.7 million dollar gain.
From the settlement of a lawsuit.
Over an eminent domain condemnation of one of our branches.
While the first quarter of 2019 Ics included a $4.5 million gain on the sale of a building where citizens business Bank Center was previously located.
When material unusual items are excluded.
Non interest income grew by approximately 5% over the prior year over the prior quarter.
Non interest income grew by $8.5 million compared to the second quarter of 2018.
Or $2.8 million when the eminent domain gain is excluded.
This increase was primarily due to higher bank service charges of approximately $1 million, primarily attributed to the to the the additional income from community Bank and higher fee income of approximately $550000 in international services and interest rate swaps.
Now expenses non interest expense for the second quarter was $50.5 million compared with 50 $51.6 million for the first quarter of 2019 and $34.3 million for the year ago quarter.
The second quarter of 2019 included $2.6 million and acquisition expenses compared with $3.1 million for the prior quarter and $494000 for the second quarter of 2018.
Compared to the.
The first quarter of 2019 salary and benefit expense declined by $440000 due to due to the timing of payroll related tax expenses.
The vast majority of the expense increase year over year is primarily attributed to the community bank merger.
Non interest expense totaled 1.81% of average assets for the second quarter compared with 1.83% for the first quarter and 1.68% for the second quarter of 2018.
Excluding acquisition expense non interest expense was 1.71% of average assets for the second quarter compared compared with 1.72% for the first quarter.
Our efficiency ratio was 39.09% for the second quarter of 2019.
Or 38.77% when the eminent domain gain and acquisition expense are eliminated.
Now I'd like to turn the call over to Allen Nicholson, our CFO to discuss our effective tax rate investment portfolio and overall capital position Alan.
Thanks, Chris Good morning, everyone.
Our effective tax rate was 29% for both the second quarter and the first quarter of 2019.
Compared with 28% for the second quarter of 2018.
Slight increase from the prior year was due to the greater relative increase in taxable income compared to the increase in tax advantage income.
Looking to our investment portfolio.
At June Thirtyth 2019, our combined available for sale and held to maturity investment securities totaled $2.3 billion, a $79 million decrease from the first quarter and a $374 million decrease from June Thirtyth 2018.
At quarter end investment securities available for sale totaled $1.6 billion.
Due to lower interest rates the portfolio went from a pretax unrealized loss of $4.2 million.
To a pretax unrealized gain of $15.3 million.
In addition, we own held to maturity investment securities totaling $728 million.
The tax equivalent yield on the total security portfolio was 2.53% for the second quarter compared with 2.57% for the first quarter and 2.48% for the second quarter of 2018.
During the second quarter, we purchased $17.3 million of mortgage backed securities.
With an average yield of 2.51%.
Now turning to our capital position.
For the first six months ended June Thirtyth, 2019, shareholders' equity increased by $85.5 million to $1.94 billion.
The increase was primarily due to $106.1 million in net earnings.
And the $26.6 million increase in other comprehensive income from the tax effected impact of the increase in market value of available for sale Securities.
Partially offsetting these increases to equity working $50.4 million in cash dividends.
I'll now turn the call back to Chris for some closing remarks.
Thank you Alan.
Let's talk about economic conditions.
Turning to the California economy, according to various economic reports.
California's unemployment rate was 4.2% in May 2019, compared with 4.3% in April 2018, and 4.2% in May 2018.
The state's 111 months employment expansion is a second longest on work on record behind the 113 month long expansion of the 19 sixties.
Seven of California's 11 major industries gain jobs in May the biggest job gains were in construction.
Reflecting an increase in homebuilding.
This was followed by gains in leisure and hospitality and government jobs.
There is a continued housing demand in California.
The supply of existing homes has increased slightly and is expected to remain lean while the high demand for housing continues.
New home construction continued to increase at a modest pace for the first half of 2019.
In terms of the dairy industry milk prices are expected to be higher for the remainder of 2018 due to the strong economy and an increased demand for nonfat dry milk exports notwithstanding milk prices are projected to still remain slightly under the cost of production while feed prices are expected to be flat or decreased modestly.
In closing we are extremely pleased with our financial results for the first six months of 2019.
It is truly exceeded our expectations our strategy remains unchanged as we remain focused on continuing to grow the bank in a conservative and balanced way.
That concludes today's presentation now Ray Allen and I will be happy to take any questions that you might have.
Thank you very much we will now begin the question and answer session.
If you ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
Okay.
Our first question comes from Gary Tenner with D.A. Davidson. Please go ahead.
Thanks, Good morning, and Chris Congratulations on your announcement.
One of those couple of questions one on the loan front and then one on kind of outlook on rates. So on the loans year to date down 3% you highlighted.
The kind of core production this quarter relative to the run off in the acquired portfolio, but how are you thinking about.
The second half of the year as it relates to run off in the portfolio and and your own production.
Yes.
The loan thing is a tougher thing for me to determine when we're going to go back to.
Comprehensive organic growth.
Which is our clearly our objective.
We haven't gotten there yet so the third quarter I think.
It's tough to say well, we are have positive growth or not whether will be flat or down a little bit.
But I do feel like its comment I think we're probably.
75% through filtering through the community bank loans to determine what we're keeping and what we're not keeping as those renewals transpired remember, we're still less than a year from the close date of that deal so thats that.
The headwind there.
The.
It's going to turn and I think it will.
Im hoping will have positive growth loan in the third quarter, but I would bet, we'd have positive loan growth in the fourth quarter.
Just on a pure how should the credits that you mentioned from community Bank, where there was several that you walked away from competing for because of underwriting any are those loans that you would have identified in that vein.
When you closed the deal or did anything deteriorate within that.
But that alone.
No there wasn't there wasn't really any deterioration it's just that.
Okay. Whenever there is a merger there is a lot of theres enhance competition. So there is a lot of banks that are coming after our clients and so forth and some of those structures of those deals can change and some of the structures. We may have tried to renegotiate to tighten that down. So you don't know where they are going to keep that business are not examples of that could be.
Requiring a personal guarantee or not.
There are some credits where we say if we're not going to guarantee were not going to be if you're not going to guarantee were not going to do this that this deal and other banks may release, the guarantee and then the borrower may say well if I if I can go if I can move.
For the same price and not have to guarantee this loan sometimes though they'll make that move and we're trying not to compromise our credit standards and stick to what is built this company for.
And then and helped US have our great track record for 45 years or so.
We are looking at Theres community Bank has a lot of great clients and a lot of great associates that are running those relationships and we're it's been better than we thought.
But.
We're we're we're everyday we're in there looking at that and making sure that we're we're making this citizens business bank.
Culture and not any other culture so.
It's an aggressive market out there there's a lot of people who are still lending very aggressively.
One of the things I think is a little crazy as pricing is still is very aggressive out there.
At the end of the first quarter of 2019, we did.
Assessment of our what we call our peer banks between two and $25 billion in the six western States.
And our cost of deposits was 66 basis points lower on average than those banks $2 billion to $25 billion to six western states.
So.
I am puzzled, how how we're having as much competition on prices. We are because I guess banks are just willing to take lower margins are more fixed interest rate risks than we are at times.
But for relationship.
For relationship banking, we're going to compete on price all day long. It's the transactional deals that don't have much deposits associated with them, where we will try to get a little bit better higher price for it and sometimes we will.
When those deals.
Okay. That's great color. Thank you and since you brought up kind of the pricing on deposits.
Obviously, all benefited as fed was tightening through your ability to keep those deposit costs as low as you you have.
How how do you think about your your your ability to react.
Two potential.
In July .
Well I think the from a competition standpoint, the cuts going to be good for us because it's going to it's going to alleviate some of the deposit pressure on the money market type accounts into and we've had to increase a lot of money market rate a money market rates for different customer selectively.
And we and that you saw that in our second quarter were up four basis points or something and interest space and I know that doesnt sound like a lot to you guys, but if were up four basis points. It means we probably increased by 80 basis points, because there's an average affected there.
But when you have 60% of your deposits and noninterest bearing it's just not that huge of a financial burden.
In terms of.
60%, our noninterest bearing 40% our interest bearing if it goes up four basis points its not a tremendous amount of money.
But if we want to see a rate card because I think thats going to moderate some of that.
Interest bearing pressure on our deposits one of the things, we're trying to do and I think Alan IR.
You know, it's like one of those things you Pat each other in the back but no one ever knows is that we orchestrated this thing when we bought community bank and we got rid of almost a $1 billion in deposits that we felt were non relationship or a $1 billion and in quad band some borrowings and things like that all that was about $1 billion and we use citizens business Bank <unk> billion dollars in deposits to fund those loans.
Right now we are running pretty close to equilibrium in turn it and in terms of.
Neither a borrower or a lender on overnight funds and during the second quarter, we borrowed money and the interviews second quarter by the end of the second quarter, we weren't borrowing any money and right now the last week or so we've been running at a slight surplus meaning we have more deposits than we do that are going into loans that are going in the fed funds. So that's exactly where we want to be from an efficiency standpoint, and this is something that we we talked about of how we orchestrated us all the way back in August of last year. So thats why hours at our like Hey, we did it we got exactly where we wanted to get it and so I think the company is running extremely efficiency efficiently right now and our focus is look at every asset we have in this bank, we want to be pound for pound. The best we're late in the we're late in the economic cycle and so we want to make sure that every asset counts and that we're looking at every asset carefully to make sure. It's the right investment for CVB.
For its numbers. Thank you.
Our next question comes from Aaron.
Deer with Sandler O'neill and partners. Please go ahead.
Hi, good morning, everyone.
I guess is sticking with that same theme, Chris I guess, I'm, a little surprised to see suggesting that.
Lower rates are good just given the huge funding advantage that you have over competitors I would think that that that could actually.
Make that competition worst snow.
No I agree with you if rates continue to come down I, just think the first quarter percent thats going to go in and July is going to moderate some of the deposit competition, a little bit it's going to put thats going to start putting the brakes on some of these some of these banks out there that are that are offering crazy deals, which which isn't going to us. So I think that's I think just from a competition standpoint that will moderate a little bit, but you're absolutely right. If rates go and we have three or four rate decreases that will put pressure on our margin as.
As our our our variable rate loans will yield on those will go down and I don't think our deposit costs will go down as fast as I know our deposit costs will go down as fast as those variable rate loans. So it will put margin pressure on US no question about it but I think the first quarter percent is.
Is going to help.
From a competition standpoint of business retention standpoint is going to help US sure. Okay, and then I guess touching on the asset side. If we do get a couple of rate hikes or in the back half the year, maybe give us a sense of what percentage of the book now.
Tied to the short term rates and.
I was going to see repricing either.
On a on a monthly quarterly basis.
And what kind of rate floors might be in place in some of your credits to help minimize the downside.
Yes.
Our best.
Our best estimate on that is 25% is tied to prime or short term LIBOR.
The we do have some rate floors over the past year, we've been putting in rate floors. You know what happens is when rates go back up and your rate floors are too low you get rid of your rate floors. Because you don't want to have a low rate floor. When they are paying 5.5% your rate floors, 3%. It's it doesn't mean anything so we got rid of some rate floors and now we're starting to put them back in.
Where we can.
And some of that saga, particularly on the dairy side.
Agribusiness side and that are and then to some extent RCN eyesight.
Okay and then.
Alan.
Forgive me if I missed this but can you just give the exact dollar amount of what the accretion and interest recoveries were in the quarter.
Sure.
We had about 1.4 million and non accrual interest paid and approximately $8 million and discount accretion.
Okay, great. Thank you for taking my questions.
Our next question comes from Matthew Clark with Piper Jaffray. Please go ahead.
Hi, good morning.
Morning automatic.
Can you.
Thanks outlook.
You probably got the rest of the crossings.
Gone from the community Bank deal partners.
I want to get your thoughts on.
Types of investments you might need to make from here.
The overall expense outlook there.
Method can you can you repeat that question it was mumbled.
Sorry, just wanted on expenses.
I wanted to get it I think the cost saves from the deal fully came through this quarter just want to get your thoughts on the outlook in the types of investments might be thanks.
Okay on the expense side I think we still the second quarter, we were still reducing expenses we had.
Analysts.
$2.6 million in acquisition expenses that would have us thats correct.
2.6 million acquisition.
Acquisition expenses, I would guess that that acquisition expense would.
Or nonrecurring type of acquisition related expenses would be probably several hundred thousand dollars for the third quarter down significantly from the prior two quarters. We've done all our office consolidations all that so the third quarter should be a very poor quarter for us and in terms of how we're going to operate what our margins are going to be.
We're not anticipating another $5 billion gain on something about we've had the last two quarters and I and we won't have large acquisition related expenses. So I think the third quarter's going to be our our fruit.
Will be a relatively now I can't predict a still a couple of months left a relative relatively uneventful onetime event quarter for us.
And then on the.
Were you asking about our our acquisition strategy I wasn't clear on the second part.
No just the Reinvestments you need to make from here from you know from a technology standpoint.
Yes.
I think.
You know all the technology I think.
Regulation all of those things now there were over $10 billion, we're having to spend more money on that and we are starting to staff up in that area too. So I do think that that will be.
An expense headwind for us.
Going in but we have the technology side Weve already have already been investing a lot of dollars and so.
The.
So I would say that beds.
An expense headwind I think we've been running right now we look at our kind of our efficiency ratio at 38% ish.
And I would say that that a year from now I would expect our efficiency ratio to be running at probably 40%.
Maybe 41% or something due to some of the cost of going over $10 billion in the staffing up for that and so forth, so which still is a great number and.
And the other number we focus on is our noninterest expense divided by our total assets is that total assets were to learning a total average assets total average assets and our goal there is 1.70% and we've been running a little bit above that and I expect us to get right about at that number too.
At about 1.70% so if you.
That's our long term goals and that is kind of run a 40% efficiency ratio and a 1.70%.
Non interest expense divided into total.
Average assets.
Got it and then I know the numbers not large but.
Can you update us on the Durbin impact in the upcoming quarter quantify that yet.
Great question and.
One of the things that's kind of been a pleasant surprise for us that's been a little better than we thought was our fee income our non interest income.
With us and community Bank together, there's been some good synergies there and our international side on interest rate swaps were having.
It is if we finish like we should finish the year out we should have the best year ever in interest rate swap fee income and the best year ever in International income and then our fee income and service charges is is is gone up quite a bit. So we're running about right now we've been running about two and a half million dollars a quarter higher than we were pre acquisition, which is $10 million in pre tax a year about $400000 a quarter will be taken out of that ish by the Durban is that does have a is that the right number Alex yes. So I think if you're if you're modeling.
Guesstimate would be.
Net income that noninterest income addition from where we were before is about $2.1 million a quarter once we get.
Past, the third quarter or do with Windows effective July yet so its already it's already effective.
That's not good.
All right well.
I guess the effective this quarter, we are going to be $400000 down due to Durban Amendment.
Okay, and then just and then just on the provision you with it with loan balances shrinking this quarter.
You guys still added to reserves.
Hi, quite a bit I assume that's just renewals of the community bank loans, but.
Given where your Nonperformers are just a little surprised to see the provision up this quarter.
Yes, and this is something that we've gone through quite a bit is as we transition loans from community Bank.
On to citizens business Bank books, the Alan I'm going to have you help me with this so weve discount accretion goes away. Some Matthew we segregate the portfolios that have been acquired and because of the credit discounts. We don't typically have low month allowance, but as there is a transition of those loans at their renewed et cetera, and they move and we have accounted for all the accretion then we're starting to put provisioning on that so we had over $102 million increase and our non acquired loan portfolio that drove most of that provisioning and a significant decline in the community bank acquired portfolio.
Got it thank you.
Our next question is from Luke <unk> with KBW. Please go ahead.
Hi, Good morning, guys. Thanks for taking my questions.
Oh, I'm, just kind of wanted to push back into that fee income.
I know you guys had great growth in a quarter over quarter, just kind of wanted to see if this is in the trust and investment services line item just kind of wanted to see how we should kind of model that going forward and if you see growth in that continuing at the same clip.
Yes.
Some of that growth in the AIU and Linda was more.
What's more liquidity management and.
And so it's not driving as much fee income as as you would normally see true AUM growth and part of that was a defensive move as interest rates a defensive move to.
To compete on the interest rate basis.
Without having to put those on our CVB citizens business Bank looks we some of those deposits. We we shifted over to citizens Trust, where they can offer a higher rate I think you're going to see those deposits if rates come down.
Migrate back into the bank and used for funding as they become less expensive will want them back.
But when they when they have a two or higher number on it right now that we're kind of migrate them to set instructions, we want to keep him within one of keeping within the family. So that was the strategy there.
Okay. Thanks for that and then.
Just kind of I know you guys talked a little bit about the loan growth kind of seeing it.
Still a little slow in the third quarter and pickup probably in the fourth quarter.
And should we model deposit growth somewhat in the same line does that or will do you see that the loan growth will kind of follow and they are they are interrelated with the relationship basis of the deposit.
Yes.
I think.
I think both of them are very competitive right now I think that there's there's the deposit side. There is there is.
I think there's good opportunity for us to grow organically, we're kind of gauging our annual growth at about 5% on the deposit side and we want to keep close to that 60% noninterest bearing number we'd like that number.
It's one of the best in the country and it's a huge advantage over the competition. So I think you'll see more of the same on the deposit side I think we will.
We will see.
I think we will get back to net growth on the deposit side and we saw the noninterest bearing grow quarter over quarter, but it was almost swapped out the noninterest bearing went up $200 million into interest bearing went down 200 million. So we're kind of a breakeven over the quarter I think you'll see the aggregate number start to grow again, and and proportionately with the noninterest bearing an interest bearing hopefully.
That's just all about relationship and bringing in new customers and so forth. The loan side is is again, a little bit we're still we're still again, 75% through the sifting through the community Bank portfolio, we've got a little bit more runway. There. So I think that will be a little bit more challenged on the deposit side, but.
The key to this organization is that we grow three ways, we grow what we call same store sales and that's our deposits and our loans and fee income need to grow organically office over office year over year et cetera, et cetera, Thats. The goal second way as we open up new de Novo locations.
We opened up in Stockton in San Diego in Santa Barbara over the last few years in our in our in our building those things out.
And then the third way is through acquisition and.
And the bank is well my retirement may put us a little bit on the sideline on the acquisition trail here. There's no reason that this company with its balance sheet its its earnings power.
Talent here can continue on with acquisitions as you know once we get through the leadership transition here.
Okay. That's that's that's very helpful. And my last question was just going to kind of be on on capital management and.
So it sounds like the Denovo kind of is the banks more geared toward de Novo in the near term. Then then M&A and then also just pulling that off with repurchases and dividend increases just kind of the full capital management picture. If you wouldn't mind, just clarifying that a little bit.
Yes, no I think.
We have a great rich man's problem, we're right now we're running at $50 million, a quarter and profitability plus and were good and our dividends are about half of that and if we're not if we're if our growth is flat that means organically, we're creating a $100 million in new capital year without any growth and that's after dividends.
A lot of capital so we have to figure out how to deploy that so the bank does need to get back on the acquisition Trail I do think Theres, just a transitionary period here through until the new CEO is named to probably do that but ill never say never right. If the right opportunity came along I think I've got a very talented management team and Alan and I have worked on a lot of these deals and and know how to price them and Alan does too and and I've involved my key other executives in that as well and they have been part of that learning curve true too over the last four years or so.
I I think that the transition should be pretty smooth and these guys know what they're doing.
Okay. That's very helpful. Thank you for taking my questions.
As a reminder, if you have a question. Please press Star then one.
Our next question comes from Tim Coffey with Janney. Please go ahead.
Great. Thank you good morning, gentlemen.
Good morning, Jim.
Hey, Chris kinetic well get your thoughts on the potential seasonality the dairy portfolio in the back half of this year because last year. The second half is very strong relative to what we saw in 17.
I was wondering are you getting the sense that it might slow down a little bit relative to last year.
Every time I think it will because the dairies have not been overly profitable in the last year. So you think that it should slow down a little bit but.
Some of these areas are powering through so I do think it's going to probably you know I would estimate the seasonal run up.
In the.
The late third quarter, and mostly in the fourth quarter will be $60 million to $80 million.
Okay. Okay.
And then I heard your comments on opening the de Novo branches have you been looking at you know.
Trimming and other other.
Parts of your footprint in terms of total footings.
Well, we kind of done that with the acquisition I mean, when we had six we have 16 locations. We we cut that we only were only keeping six now granted some of those most of those are our transition to our offices, but a couple of those been transitioned the other way so.
I don't know that we'll do any any pruning of our tree at this point I think there's a there's little things here and there we can do as we don't need as much brick and mortar and some offices. So we may look at realigning their that's like where we sold we sold one of our bank buildings. We you know we are eminent domain, we moved a half mile down the street, but we didnt close that office so.
We're running pretty efficient right now theres not theres not a ton I'm not talking about we're going to consolidate another five or six offices right now. It's a we've got this organization pretty streamlined and it's about positioning ourselves for future growth.
And are there any parts of.
The deal for your footprint or adjacent to your footprint that you look at you like right now that could be a de novo candidate.
Yes, I mean.
Any and all where we can find a good team thats been relative close proximity geographically to where we are so I'd like to drive up the central coast I'd like to densify and in San Diego, even more so we're looking for more people in San Diego and then up through the Central Valley as well.
So we're we're in Stockton and we'd love to backfill in Modesto and reset and then get into Sacramento. Those are all markets that we'd like to to either get into or through acquisition or through a.
Through de Novo as we and then eventually into northern California, if the right opportunity came in and so those are all exciting things that we have kind of in the future. It's a question of.
How they got Dan how they get done and when they get done.
Sure.
Okay well. Thank you very much those are my questions.
Once again, if you have a question. Please press star then one to the keel.
Okay. This concludes our question and answer session I would like to turn the conference back over to Mr. Myers for any closing remarks.
Yes. Thank you for joining us on the call today I will I will I have committed myself to a finishing strong here in the next seven and a half months of my tenure as president and CEO .
And I reiterate that I have a great team of people Weve worked very closely together and I I.
I really want to thank all of my associates for the great things, we've accomplished and ER and I have high expectations for the next seven to half months under my leadership and also the the citizens business bank for many years to come after that.
That said Oh, we'll talk to you guys in October for our third quarter 2019 earnings call and have a great day.
[noise].
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.
[noise].