CVB Financial Corp. (NASDAQ:CVBF) Q4 2023 Earnings Call Transcript
CVB Financial Corp. (NASDAQ:CVBF) Q4 2023 Earnings Call Transcript January 25, 2024
CVB Financial Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen, and welcome to the Fourth Quarter and Year Ended 2023 CVB Financial Corporation and its subsidiary Citizens Business Bank Earnings Conference Call. My name is Cherie, and I am your operator for today. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's call is being recorded. I would now like to turn the presentation over to your host for today's call, Christina Carrabino. You may proceed.
Christina Carrabino: Thank you, Cherie, and good morning, everyone. Thank you for joining us today to review our financial results for the fourth quarter and year ended 2023. Joining me this morning are Dave Brager, President and Chief Executive Officer; 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.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, 2022, and in particular, the information set forth in Item 1A, Risk Factors therein.
For a more complete version of the company's safe harbor disclosure, please see the company's earnings release issued in connection with this call. Now I will turn the call over to Dave Brager. Dave?
Dave Brager: Thank you, Christina, and good morning, everyone. For the fourth quarter of 2023, we reported net earnings of $48.5 million or $0.35 per share, representing our 187th consecutive quarter of profitability. We previously declared a $0.20 per share dividend for the fourth quarter of 2023, representing our 137th consecutive quarter of paying a cash dividend to our shareholders. Our net earnings of $48.5 million or $0.35 per share compared to $57.9 million for the third quarter of 2023 or $0.42 per share and $66.2 million for the year ago quarter or $0.47 per share. Fourth quarter earnings would have been $0.39 per share, excluding the $9 million expense related to the FDIC special assessment, we produced a return on average tangible common equity of 16.21% and a return on average assets of 1.19% for the fourth quarter.
Net income was $221.4 million for the year ended 2023, a $14 million decrease compared to 2022. When excluding the $9.2 million FDIC special assessment, the decrease would have been $7.6 million. Diluted earnings per share were $1.59 for 2023 compared to $1.67 for 2022. Our fourth quarter pre-tax pre-provision income decreased $10 million from the third quarter of 2023, primarily due to the expense accrual for the FDIC special assessment. We continue to be among the industry leaders with respect to expense control as our efficiency ratio for the fourth quarter and full year 2023 was 40.98% and 40.3%, respectively, after excluding the FDIC special assessment. Our net interest margin declined, by five basis points from the third quarter of 2023 to 3.26% for the fourth quarter.
The decrease in our net interest margin was the net result of a 17 basis point increase in our cost of funds, which offset a 12 basis point increase in our earning asset yield. Our net interest margin for all of 2023 was 3.31%, essentially the same as our 2022 net interest margin of 3.3%. Total loans outstanding at the end of 2023 increased from the end of the third quarter of 2023 by approximately $30 million to $8.9 billion. Our allowance for credit losses decreased to approximately $87 million on December 31st based on net charge-offs of $153,000 and a $2 million recapture provision for credit losses in the fourth quarter of 2023. Average total deposits for the fourth quarter decreased by approximately $429 million compared to the third quarter of 2023.
Our average noninterest-bearing deposits continued to be greater than 61% of our average total deposits. At December 31st, 2023, our total deposits were $11.4 billion, a $925 million decrease from September 30th, 2023. During the latter half of the fourth quarter, we experienced both the normal year-end seasonal deposit outflows as well as some unexpected deposit withdrawals that were directed to an external trust company for estate planning. Although noninterest-bearing deposits declined by $38 million from the end of the third quarter, noninterest-bearing deposits represented 63% of total deposits. Customer repos were $271 million at the end of the fourth quarter, which was consistent with the balance at September 30th, 2023. We have experienced a $1.7 billion decline in deposits and customer repos from the end of 2022, which includes approximately $800 million that was moved to CitizensTrust where these funds were invested in higher-yielding assets such as treasury notes.
Overall, we have experienced a decline in deposit levels due to the cash burn on customer accounts, resulting from inflationary pressures as well as the impact of higher interest rates that has led to deposits moving to higher-yielding alternatives, such as money market funds and short-term treasury notes. Our cost of deposits was 62 basis points on average for the fourth quarter of 2023, which compares to 52 basis points for the third quarter of 2023 and eight basis points for the fourth quarter of 2022. From the first quarter of 2022 through the fourth quarter of 2023, our cost of deposits has increased by 59 basis points, representing a deposit beta of less than 12%, compared to the recent Federal Reserve tightening cycle of increasing the Fed funds rate by 525 basis points.
Now let's discuss loans. Total loans at December 31, 2023, were $8.9 billion, a $27 million increase from September 30th, 2023, and a $174 million or 1.9% decrease from the end of 2022. The quarter-over-quarter increase included $73 million increase in dairy and livestock loans. Utilization on dairy and livestock loans was at 80% at December 31, 2023, which compares to 73% at the end of the third quarter. C&I loans also increased by $32 million, as line utilization increased from 27% at the end of third quarter to 29% at the end of December 2023. These increases were partially offset by a $58 million decline in commercial real estate loans. In comparison to December 31, 2022, loans declined by $168 million after excluding PPP loans. The majority of the decline was in commercial real estate loans, which decreased by $100 million from the end of 2022 to December 31, 2023.
We saw a decline in both construction and consumer loans of $22 million and $23 million, respectively. C&I loans increased by approximately $21 million over the same period, although line utilization decreased from 33% to 29%. This aligns with our strategy of making the best small- to medium-sized businesses and their owners. Loan growth continues to be impacted by a slowdown in loan demand. Our new loan production decreased throughout the second half of 2023, and new loan production for the fourth quarter of 2023 was generated at average yields exceeding 7%. Although loans modestly increased at quarter end from the end of the third quarter, we recorded a $2 million recapture of provision for credit losses for the fourth quarter of 2023 due to an improving economic forecast.
Asset quality remains strong. At the end of the quarter, non-performing assets, defined as non-accrual loans plus other real estate owned were $21 million or 13 basis points of total assets. The $21 million in non-performing loans compared with $10 million from the prior quarter and $4.9 million for the year ago quarter. The increase from the prior quarter was primarily due to a CRE loan that is a loan participation acquired in the Suncrest merger that was placed on non-accrual at the end of the fourth quarter. During the fourth quarter, we experienced credit charge-offs of $181,000 and total recoveries of $28,000 resulting in net charge-offs of $153,000 compared with net recoveries of $28,000 for the third quarter of 2023. Year-to-date, net charge-offs were $275,000.
Classified loans for the third quarter were $102 million compared with $92 million for the prior quarter and $79 million for the year ago quarter. Classified loans as a percentage of total loans was 1.15% at quarter end. The $10 million increase in classified loans quarter-over-quarter was primarily due to a $9.8 million increase in classified commercial real estate loans. I will now turn the call over to Alan to discuss the allowance for credit losses and additional aspects of our balance sheet. Allen?
Allen Nicholson: Thanks, Dave. Good morning, everyone. As of December 31, 2023, our allowance for credit losses was $86.8 million or 0.98% of total loans, which compares to $89 million or 1% of total loans at September 30, 2023, and $85.1 million or 0.94% of total loans at December 31, 2022. From the end of 2022 to the end of 2023, our allowance for credit losses increased by $1.7 million, while loans declined by $174 million over that same period. The changes in our allowance over the last few quarters have been primarily due to changes in our economic forecast. For the quarter ended December 31, 2023, we recorded a $2 million recapture provision for credit losses. This compares to $2 million in provision for the third quarter of 2023 and $2.5 million in provision for the fourth quarter of 2022.
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 downside risk weighted among multiple forecasts. The resulting economic forecast reflects a modest decline in GDP for the first three quarters of 2024, with a return to positive GDP growth in the fourth quarter of 2024. GDP is forecasted to increase by 0.92% in 2025 before reaching a more robust growth rate of 2.6% in 2026. Commercial real estate values are forecasted to continue their decline until reaching their lowest level in the third quarter of 2024. Unemployment is forecasted to rise in 2024 and throughout 2025. The unemployment rate is forecasted to exceed 5% in 2024 and then peak at 5.7% in the first quarter of 2025.
The unemployment rate is forecasted to then climb to less than 5% by the third quarter of 2026. Total borrowings at the end of the fourth quarter were approximately $2 billion, including $1.9 billion of advances from the bank term funding program. Our borrowings increased by $950 million from September 30, 2023, and by approximately $1.1 billion from the end of 2022. The $1.9 billion of bank term funding program borrowings, which had a weighted average borrowing rate 4.78% at the end of 2023, will mature in May and December of 2024. Our total investment portfolio declined by $389 million from December 31, 2022 to $5.4 billion as of December 31, 2023, as the majority of our cash flows generated from the portfolio were not reinvested during the year.
The overall decrease in our investment portfolio from December 31, 2022, was primarily due to a $299 million decline in investment securities available for sale or AFS securities. AFS securities totaled $2.96 billion at the end of the fourth quarter inclusive of a pre-tax net unrealized loss of $450 million, a decrease in the unrealized loss from September 30 to December 31, 2023 of $179 million resulted in a net increase in AFS securities of $58 million. Investment securities, held-to-maturity or HTM securities totaled approximately $2.46 billion at December 31, 2023. The HTM portfolio declined by approximately $25 million from September 30 and by $90 million from the end of 2022 as the cash flows were not reinvested throughout 2023. The tax equivalent yield on the entire investment portfolio was 2.71% for the fourth quarter of 2023 compared to 2.64% for the prior quarter and 2.36% for the fourth quarter of 2022.
The increase in the yield has been the result of the positive carry on fair value hedges we executed on in late June of 2023. The fourth quarter of 2023 when compared to the year ago quarter had $4 million of interest income from the positive carry on the swaps. We received daily SOFR on these pay fixed swaps, which has a weighted average fixed rate of approximately 3.8%. At the end of the fourth quarter, we executed on a partial restructuring of our bank-owned life insurance, or BOLI portfolio. We surrendered $68 million of policies, which resulted in a $4.5 million market value write-down of the cash render value of these policies and approximately $6.5 million in additional tax expense. The purchase of $109 million of new BOLI policies at the end of December included an increase of cash render value of approximately $10 million.
On a net basis, non-interest income was positively impacted by $6.5 million, offsetting the $6.5 million increase in tax expense. The new policies will have an initial crediting rate that is approximately 300 basis points higher than the policies we surrendered. Now turning to our capital position. The company's tangible common equity ratio at December 31, 2023 was 8.51% compared with a prior quarter's ratio of 7.73% and 7.4% at December 31, 2022. At year-end, our shareholders' equity increased from the third quarter of 2023 by $126.6 million to $2.08 billion. That increase reflects an increase in our OCI of $103.6 million due to the impact of lower interest rates that decreased the unrealized loss in our AFS portfolio. Equity increased for the 12 months of 2023 by $129.5 million.
Retained earnings increased in 2023, as year-to-date income of $221 million was offset by $112 million in dividends. The resulting year-to-date dividend payout ratio was 50.4%. Our OCI increased by $31 million from the end of 2022. The 10b5-1 stock repurchase plan we initiated in 2022 expired on March 2, 2023. During the first quarter of 2023, we repurchased approximately 792,000 shares of common stock at an average price of $23.43, totaling $18.5 million in stock repurchases. There were no shares purchased during the remaining quarters of 2023. Our regulatory capital ratios are well above regulatory requirements to be considered well capitalized and above the majority of our peers. At December 31, 2023, our common equity Tier 1 capital ratio was 14.6%, and our total risk-based capital ratio was 15.5%.
I'll now turn the call back to Dave for a further discussion of our fourth quarter earnings.
Dave Brager : Thank you, Allen. Net interest income before provision for credit losses was $119.4 million for the fourth quarter, compared with $123.4 million for the third quarter, and $137.4 million for the year ago quarter. Our tax equivalent net interest margin was 3.26% for the fourth quarter of 2023, compared with 3.31% for the third quarter of 2023. Our net interest margin has trended within a somewhat narrow range over the past three quarters, with the second quarter at 3.22% and our full year at 3.31%. Interest income grew by nearly $2 million over the prior quarter, as interest income on loans grew by $2.5 million as a result of an 11 basis point increase in loan yields. Offsetting the growth in loan interest income was a $500,000 decline in interest on investment securities due to a $214 million decline in average balance -- in the average balance of the investment portfolio.
Interest income from our pay fixed swaps increased by approximately $200,000 from the prior quarter. Interest expense increased by $5.9 million over the prior quarter as our cost of funds decreased by 17 basis -- increased, excuse me, by 17 basis points from the third quarter of 2023. Interest expense on deposits increased by $2.4 million due to a 22 basis point increase in the cost of interest-bearing deposits, while average interest-bearing deposits declined by $67 million quarter-over-quarter. The cost of interest-bearing deposits was 1.59% in the fourth quarter compared to 1.37% in the prior quarter. Interest expense on borrowings increased by $3.5 million as average borrowings in the fourth quarter increased by $267 million compared to the prior quarter and the cost of borrowings rose by approximately 25 basis points.
The $18 million decline in net interest income from the year ago quarter resulted from a 43 basis point decrease in net interest margin and a $217 million decline in average earning assets. The year-over-year net interest margin decline was due to a 96 basis point increase in our cost of funds, offsetting a 49 basis point increase in earning asset yields. The increase in earning asset yields was a result of higher loan and investment yields in the fourth quarter of 2023 compared to the fourth quarter of 2022 as well as an improved asset mix in which average loans grew from approximately 59.7% of earning assets in the fourth quarter of 2022 to 60.5% in the fourth quarter of 2023. Loan yields were 5.18% for the fourth quarter of 2023 compared with 4.78% for the year ago quarter.
Investment security yields increased by 35 basis points from a yield of 2.36% in the prior year quarter to 2.7% in the fourth quarter of 2023, including the positive carry on the pay fixed swaps. The $17.5 million decline in net interest income from 2022 was driven by a $600 million average decline in interest-earning assets, as our net interest margin of 3.31% for 2023 was essentially the same as a 3.3% margin in 2022. Moving on to non-interest income. Non-interest income was $19.2 million for the fourth quarter of 2023 compared with $14.3 million for the prior quarter and $12.5 million for the year ago quarter. Our customer-related banking fees, including deposit services, international and merchant bankcard decreased by $87,000 compared to the third quarter and declined by $782,000 when compared to the fourth quarter of 2022.
Although, our trust and wealth management fees decreased by $165,000 compared to the prior quarter year-over-year, these fees grew by $214,000. Fourth quarter BOLI income increased by $6.4 million compared to the third quarter and increased by $6.5 million compared to the fourth quarter of 2022, primarily due to the surrender and redeployment of BOLI policies Alan just described. Fourth quarter CRA investment income increased by $1.1 million over the third quarter of 2023 and by approximately $700,000 over the fourth quarter of 2022 primarily due to underlying asset valuation increases. The third quarter also included $2.6 million of income from an equity fund distribution related to one of our CRA investments. For the entire year of 2023, non-interest income grew by $9.3 million over 2022, including $7.4 million of higher BOLI income.
A $1.2 million decline in deposit service charges was offset by a $1 million increase in higher trust fees and more than $600,000 of swap fees in 2023. CRA-related investment income was $5.4 million higher in 2023, while 2022 included a $2.4 million gain on the sale of a banking center building. Now expenses. Non-interest expense for the fourth quarter was $66 million compared with $55 million for the third quarter of 2023 and $54 million for the year ago quarter. The $10.9 million quarter-over-quarter increase was primarily due to the fourth quarter expense of $9.2 million resulting from the FDIC special assessment. Regulatory assessment expense was $11.3 million in the fourth quarter of 2013, a $10 million increase from the fourth quarter of 2022.
The fourth quarter of 2023 included $500,000 in recapture provision for unfunded loan commitments compared to a $900,000 in recapture for the third quarter of 2023. There was no provision in the -- for the fourth quarter of 2022. Salaries and employee benefit costs increased $908,000 quarter-over-quarter. This increase includes approximately $400,000 associated with year-end employee awards. Salary expense increased by 1.3% or approximately $300,000 and bonus and profit sharing increased by another $300,000 based on full year earnings. The $11.5 million increase in non-interest expense year-over-year includes the $10 million increase in assessment expense and an increase of $1.5 million in total salaries and employee benefits compared with the prior year quarter.
Salary expense grew by $1.1 million or 4.8% over the fourth quarter of 2022. Deferred loan origination costs were also lower than the prior year quarter, resulting in an additional employee expense of $550,000. Marketing and promotion expense increased over 2022 by approximately $380,000 as these expenses returned to pre-pandemic levels. As we continue to invest in new technology, software expense increased by more than $300,000 or 9.5%. The increase in technology demonstrates our commitment to improving efficiencies and providing an excellent customer experience. Non-interest expense totaled 1.62% of average assets or 1.39%, excluding the FDIC special assessment for the fourth quarter of 2023. This compares with 1.33% for the third quarter and 1.32% for the fourth quarter of 2022.
Our efficiency ratio was 47.6% or 40.8% excluding the FDIC special assessment for the fourth quarter of 2023. This compares with 39.99% for the prior quarter and 36.31% for the fourth quarter of 2022. This concludes today's presentation. Now, Allen and I will be happy to take any questions that you might have.
See also 30 Most Affordable Beach Towns to Live in the US and 20 Highest Quality Rums in the World.
To continue reading the Q&A session, please click here.
