CVB Financial (CVBF) Q3 2026 earnings call transcript

Thank you, Cherie, and good morning, everyone. Thank you for joining us today to review our financial results for the third quarter of 2026. Joining me this morning is our Chief Executive Officer, Dave Brager, and our President, Clay Jones. 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. cebbank. com and click on the Investors tab.

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, 2025, and in particular, the information set forth in Item 1-A, Risk Factors therein.

For a more complete version of the company's safe harbor disclosure, please see the company's earnings release issued in connection with this call. I'll now turn the call over to Dave Brager. Dave?

Thank you, Alan. Good morning, everyone. For the third quarter of 2026, we reported net earnings of $78.1 million, or 44 cents per share, representing our 198th consecutive quarter of profitability, which is every quarter for over 49 years. We previously declared a 20 cents per share dividend for the third quarter of 2026, representing our 148th consecutive quarter of paying a cash dividend to our shareholders.

Our net earnings of $78.1 million, or 44 cents per share, compared with $48.3 million for the second quarter of 2026, or 29 cents per share, and $52.6 million, or 38 cents per share, for the prior year quarter. Pre-tax income in the third quarter of 2026 was $106.1 million compared to $65 million in the second quarter of 2026. The third quarter was the first calendar quarter with the full benefit of the acquisition of Heritage Bank of Commerce, as the second quarter of 2026 reflected 74 days of combined operations with Heritage. The core banking systems of the two banks were integrated at the end of the second quarter, and we incurred $31.4 million in acquisition expenses during the second quarter, compared to $8.1 million for the third quarter.

Now that we have completed a full quarter post-merger and systems conversion, I would like to highlight some key financial measurements we have achieved at this time by comparing the third quarter of 2026 to the same quarter of 2025. We announced with the merger that we would generate EPS growth of 13% by 2027. For the third quarter, earnings per share grew by 6 cents, or 16%. Upon announcement, we highlighted a return on average assets targeted to exceed 150 basis points by 2027.

For the third quarter of 2026, the reported return on average assets was 1.48%, percent, but after adjusting for acquisition expense, it was 1.59 percent. We also achieved a 16.2 percent return on average tangible common equity in the third quarter of 2026, which compares to the 17 percent target we announced in 2027. I will now turn the call over to Clay to discuss loans and deposits.

Thank you, Dave. Total loans were $12.1 billion dollars at September 30, 2026, an increase of $105 million from June 30. Loan originations continued at a strong pace in the third quarter. However, originations decreased by 15% from the second quarter of 2026, but were approximately 20% higher than the first quarter of this year. Third quarter loan origination yields were approximately 20 basis points higher than the prior quarter, with new loan origination yields approaching 6.25%. Rate competition for high-quality loans continues to be intense, and the recent rise in interest rates has resulted in some customers rethinking transactions or just utilizing internal cash funds.

Our loan pipelines remain relatively strong, but demand is slowing down among our customers and prospects due to higher interest rates. Our average loan portfolio yield was 5.66% for the third quarter of 2026, compared to 5.53% for the second quarter of 2026 and 5.25% for the third quarter of 2025. Excluding loan fees and discount accretion on acquired loans, our base loan yield increased from 5.37% at June 30th to 5.46% at September 30th. The overall line utilization rate at September 30, 2026 was 42 percent compared to 41 percent at June 30, 2026.

However, the CNI line utilization decreased quarter over quarter from 32 percent to 31 percent. Dairy and livestock line utilization increased from 53 percent at the end of the prior quarter to 66 percent at September 30, which compares to 64% in the second quarter of last year. We experienced $20,000 of net charge-offs during the third quarter, compared to $137,000 of net charge-offs during the second quarter of 2026.

Total non-performing assets increased from $16.8 million to $18.7 million at September 30, 2026, which represents nine basis points of total assets. Classified loans were 94 basis points of total loans, or $113.9 million at September 30th, compared to $109.7 million at June 30th, 2026. The $4.2 million increase from June 30th, 2026 was due to the addition of two classified CRE loans totaling approximately $5 million.

Now on to deposits. Our total deposits and customer repurchase agreements as of September 30th were $16.3 billion, which compares to $16.9 billion on June 30th, 2026. The $550 million decrease was the result of interest-bearing deposits and repos declining by $360 million and non-interest-bearing deposits decreasing by $190 million. Our non-interest-bearing deposits were 53.5% of total deposits on September 30th compared to 52.8% on June 30th, 2026.

Total deposit deposits and customer repurchase agreements increased on average by $578 million dollars from the second quarter of 2026, net of a 256 million dollar decline in average time deposits concentrated in the 240 million dollar average decrease in brokered CDs. If the second quarter is adjusted on a pro forma basis to include the deposits acquired from Heritage for the full 91 days in the quarter, total deposits and customer repurchase agreements would have decreased in the third quarter by approximately $300 million, including the $240 million average decrease in brokered CDs.

Non-interest-bearing deposits have been stable. On a pro forma basis, they would have increased by $100 million on average in the third quarter. However, we did experience some late quarter drawdowns on interest-bearing deposits that on a pro forma basis reflect an average decrease in customer interest-bearing deposits and repos of $170 million. Interest-bearing deposit levels have stabilized in October to date, while non-interest-bearing deposit levels have strengthened modestly. With the Fed increasing interest rates, we anticipate continued deposit pressure, which could impact our near-term level of interest-bearing deposits. Our cost of deposits and repos was 83 basis points for the third quarter of 2026 compared to 86 basis points for the second quarter of 2026 and 90 basis points for the year-ago quarter.

I will now turn the call over to Alan to further discuss balance sheet and net interest income.

Thanks, Clay. Our total assets decreased from $21.2 billion at June 30, 20th, 2026 to $20.5 billion as of September 30th. Average earning assets for the third quarter of 2026 were billion an increase over the second quarter of million The growth in earning assets combined with a 16 basis point expansion in our earning asset yield drove a 9 or million increase in interest income compared to the second quarter of 2026. Our cost of funds was 0.96% for both the third and second quarters of this year. Interest expense for the third quarter increased by $1.9 million from the second quarter of this year as average interest bearing deposits grew by $213 million and borrowings increased by $116 million, related to the transition of our cash flow hedges from brokered CDEs to FHLB advances during the second quarter.

Our allowance for credit loss decreased from $126.7 million at June 30, 2026 to $125.6 million at September 30, resulting from a $1 million recapture of credit losses. The ACL as a percentage of loans decreased from 1.05% at June 30th to 1.04% at September 30th. Our ACL is based on our economic forecast that is a blend of multiple forecasts produced by Moody's. We continue to have the largest individual scenario weighting on Moody's baseline forecast with both upside and downside risks weighted among multiple forecasts. The resulting economic forecast of September 30, 2026 was generally consistent with our second quarter forecast. Real GDP growth is forecasted to stay below 2% through the first half of 2028. The unemployment rate is forecasted to reach 5% by the beginning of 2027 and remain above 5% through 2028.

Commercial real estate prices are forecast to continue their decline through the end of 2027 before experience and growth in 2028. Now turning to our capital position, at September 30, 2026 our shareholders equity was $3.13 billion compared to $3.17 billion at June 30, 2026. The $39 million decrease in shareholder equity includes a $67 million decline in accumulated other comprehensive income resulting from rising interest rates at the end of the third quarter. We also repurchased 775,000 shares for approximately $17.5 million during the third quarter compared to 241,000 shares repurchased in the second quarter of this year. From June 18th through October 19th of this year, we repurchased 1.8 million shares for approximately $40 million at an average share price of $22.05.

Our tangible book value per share at September 30, 2026 was $10.92 compared to $11.07 at June 30, 2026. The company's tangible common equity ratio was 9.9% at September 30 compared to 9.8% at June 30, 2026, while our common equity tier one capital ratio was 14.8% at September 30th compared to 14.7% at June 30, 2026. I'll now turn the call back to Dave for further discussion of non-interest income and expense.

Thank you, Alan. Non-interest income was $16.5 million in the third quarter of 2026 compared to $17 million in the second quarter of this year. The quarter-over-quarter decrease of $500,000 includes a $509,000 decrease in the fair value of a CRA bond investment fund, a $360,000 decrease in trust and investment fees, and losses on the sale of two OREO properties totaling $134,000. Partially offsetting these decreases in non-interest income were increases in deposit service fees of $226,000 and Boley income of $580,000. Non-interest expense for the third quarter of 2026 was $90.5 million compared to $114.4 million for the second quarter. Acquisition expense related to the Heritage merger was $8.1 million in the third quarter compared to $31.4 million in the second quarter of this year.

For non-interest expense, which excludes acquisition expense and provision for unfunded commitments, increased from the second quarter of 2026 by $3.6 million, as the third quarter included 18 more calendar days of combined operations compared to the second quarter. Areas of expense growth included staff expense growing by $1 million and marketing and promotion expense increasing by approximately $600,000. After excluding acquisition expense and provision for unfunded commitments, our adjusted efficiency ratio is 42.1 percent compared to 43.9 percent in the second quarter of 2026 and 45.2 percent in the third quarter of 2025. In conclusion, we continue to focus on increased opportunities for growth in the Bay Area while achieving the the projected returns we outlined for this acquisition.

This concludes today's presentation. We are now happy to take any questions that you might have. Thank you.

Matthew, if you look at the investor presentation that's out on the website on page 33 on the investment portfolio, you'll see the projected principal runoff and the coupons associated with that. So it's roughly $160 million a quarter, I would say. and those are running off in the 2% range. The overall portfolio is about 3%. We don't really announce any betas. Obviously you know from historical perspective our beta is very, very low.

So I don't know if I have any more comments for you on that. Yeah, the only thing I would say Matthew is with the last rate increase, we did not move any rates specifically and really haven't had a lot of conversation with any of our relationships. regarding increasing their rates outside of sort of a normal flow of those requests. So, at least at this point, we're not planning to do anything, and we'll see what happens with the Fed.

So in the fourth quarter, there'll still be some technology expenses that will go away by the end of the year. There's a few things on the people side that still have to transpire. But I think you'll see a fourth quarter number that's pretty close to the run rate. So it won't be significantly different than the third quarter. We will have minimal acquisition expense. expense came down throughout the quarter and was normalized by the end of the year.

Good morning, David.

Yeah, I'll start and then let Clay jump in as well. So I think there's a couple of things here. Number one, there are a lot of moving parts. I think your assessment is very accurate. And as we continue to align the former heritage relationships into the CBB deposit pricing structure, account setup structure, all of those things take a little bit of time. And I think it's pretty typical when you look at the deals we've done, you know, in our history, and specifically those deals we've done over the last 10, 15 years, you see a little bit of this movement where things sort of settle out and then we can really focus on growing again. So I think we're almost there from that perspective.

You know, there was a lot of heavy lifting by the teams during the second and third quarter, and we continue to work on that I think the other bigger thing that is happening as Clay mentioned in the prepared remarks what happening right now is there are a lot of people that are deciding, hey, I'm not gonna pay a 7% plus loan rate when I can utilize my cash. And so there has not been any significant deposit relationships that have left the bank. As a matter of fact, the largest deposit relationships measured by the top 150 have grown slightly from the second to third quarter. So that gives me some comfort. I think as you look forward with where we're going to be, there is some seasonality that's going to start to hit probably in the fourth quarter and the first quarter like typical.

But I'm very confident on where we are. So, Clay, anything you want to add? The only thing I would add, David, is we're now 90 days plus past the conversion weekend, and so we've done a lot of work to make sure that those customers and relationships have kind of put themselves in a good position from a costing standpoint.

And yes, when interest rates do rise, it does bring attention to the interest-bearing account load and pricing on those, but it's really only a handful. We have true relationships with deep operating relationships, So we just don't feel the interest-bearing pressure that others might.

Yeah, so I think there's a couple of things, and I'd want Clay to jump in on this as well. We have seen a lot of synergies that were not modeled originally in this opportunity. and whether that's in international, the capacity to expand with existing customers that maybe had some lending limit challenges with the former heritage. So we're seeing a lot of opportunity in all of those areas. I do believe that the Bay Area market, especially with what's going on with technology, has really accelerated. So I think that we are in a really good spot. We have the capacity, we have the product array, we have the ability to do more with the former Heritage customers than they could do with Heritage and bring all of that in-house.

So I think there's a lot of tailwinds for us there. We still need to build our brand. We still need to do the things and the hard work as far as getting our name out there, but we've done a really good job in that. And I know Clay and the team that's up in those 16 offices are working hard and it always takes a little bit of time. So I'm very confident about our ability to compete in that market in a much bigger way than Heritage did independently. Clay, any of you want to add? Yeah, the only thing I would add is just economically the Bay Area has rebounded very nicely. We We continue to see good growth there.

I would add to that just the process throughput of accelerating and moving the pipeline to conversion and onto the boarding and booking stage really went very seamlessly through the conversion process and the team should be commended on just making sure they converted that existing very strong pipeline and continuing the pipeline. So economically very strong and continued momentum on the conversion.

Yeah, so I'll sort of answer that a couple of different ways. I think first and foremost, as evidenced by our ACL and the math that goes into calculating the ACL would demonstrate that overall, you know, the credit portfolio remains strong. We have, as you mentioned, a very proactive approach to solving these problems. And, you know, it seems that for the majority of the time that I've been here, our classifieds move faster in these types of situations, but then the charge-offs never materialize from the classifieds or the non-performing assets. So I feel, you know, very good about our, the credit quality. we underwrite correctly at the origination of these loans. It doesn't mean things won't happen, there could always be challenges in certain areas.

And I would characterize those areas as smaller C&I, SBA 7A, the more rate sensitive stuff, and we pay a lot of attention to that. You know, there's pros and cons sometimes when people look at the overall loan portfolio and say, oh yeah, 77, 78% of your loans are secured by real estate. We don't view that as a bad thing, especially when we originate loans that are below 50% loan-to-value at origination. That gives us a lot of cushion for some of these challenges, especially on rate resets if rates are going up and that service coverage is challenged or whatever the case may be. So I feel pretty good about it. I think that as we look forward, we do annual term loan reviews on every loan over a million dollars every year.

We get updated information in the interim period, depending on the annual cycle. So there's a lot of portfolio management that goes on with our bankers and our credit management team to make sure that we are ahead of any of those problems. And there's always movement and stuff, but all in all, I feel pretty good about it. I don't know, Clay, if you wanna add anything to that. Yeah, no, I've, well said. You know, based on our underwriting criteria and client selection on the front end, discipline credit management, I mean that's the hallmarks of how we run credit here. Yeah, and David, just one more anecdotal thing. Clay and I have finished visiting all 79 locations and while we've been doing that, we've also been doing customer receptions, throughout the bank.

We do customer luncheons a couple times a month. Candidly, I'd say the majority of people still think things are going to be better six months from now. Maybe that's just hope. But all in all, people say they're doing pretty well. I mean, there are some that have been impacted more by rising prices, whether that's energy, whether that's other things. But I think all in all, our customers on the street are still pretty positive.

Thank you.

Good morning, Andrew.

It's hard to see with where the interest rates are too much in the way of headwinds. You know, we have a page 39 there that gives you a sense of the sort of embedded improvement in our interest margin. We're still modestly asset sensitive as that page would also show you. I would say the other thing to keep in mind as we get into 2027, we do have some wholesale funding that's maturing both cash flow hedges, putable FHLB advances, some sub-debt, and you know, relatively that's much more costly in our deposit. So we'll be looking at evaluating that and, you know, that could be an opportunity to further reduce cost of funds as we get into 2027.

Yeah, Andrew, the only thing I would add to that is, you know, we've been kind of talking about this story for a little while. And I think with the information that we've included in our deck, it does give a lot of information about the investment portfolio repricing and what's rolling off, gives a lot of information on the loan resets or maturities and at what rates it's rolling off. And we are, as Alan mentioned, slightly asset sensitive. So I think there are a lot of tailwinds for us. The only thing that I could see as a headwind would be just depending on how many rate increases they are and how that impacts the overall deposit pricing and the demands that our customers might put on us from a pricing perspective I think that probably the major headwind.

But assuming everything sort of stays around where it is or even if there's one or two more rate hikes in the next, you know, four months or something, I think we're in a really good spot.

You mean lower or higher? Which way do you want to go?

Thank you.

Yeah, look, I think, you know, as you know, and I think everybody on this call knows, we do have a short list of banks that we would be interested in. And we want to make sure we continue to integrate the heritage, the former heritage folks and the processes and the relationships and the culture, maybe even more importantly. And we'll continue to do that as we go forward. If an opportunity presented itself, we could be ready to do that. It would have to be the right opportunity and at the right price. And so I think all of those things sort of lead to the window I believe we're in from a deal perspective, from the regulatory perspective, from how we're performing.

It depends on the size of any opportunity. So all of those things would go into any equation, but we are open for business if one of those opportunities presented itself.

So, Gary, similar to what we were doing prior to the announcement of Heritage, we built our 10b51 repurchases to increase, I would say, in volume and aggressiveness over time. You can look at some of our graphs in there about how quickly our capital levels rebuild after we do an acquisition. And so, obviously, if an opportunity comes around, as you were just talking about with Dave, you know, we would put a stop to it likely. But if there's nothing in the near term on an acquisition, we'll continue to be, you know, slightly more aggressive as time goes on.

Thank you.

There's been some, but really I think, you know, the deposit story is more about just getting everything in our pricing model, in our structure model, and working through that. And look, I mean, there are banks out there that are offering rates that, you know, they could earn, they could probably borrow cheaper from the FHLB or the Fed overnight than they are paying in interest rates. So, excuse me, I choked.

But no, I don't think that, I just think we're gonna be disciplined in how we look at that and for relationships, we'll protect it. But outside of that, if it's hot money, we're not interested. So we'll continue to evaluate that as we go along. Clay, anything? Yeah, no, I mean, as Dave said, You know, we're trying to, we are seeking and banking true operating companies with deep relationships. And, you know, as customers come to us seeking the ultimate in high yield deposit accounts, it's just not a great fit for us. We want to be deep into the relationship and make sure that we can add true value as a community business bank. Yeah, and we will, to your point, we will refer to trust initially.

And if that's an option, then that's happened.

So technically at the end of the year you definitely see an increase in the loan deposit ratio, but that will be temporary. You know I think we've always operated for the most part at about 80 or between 80 and 75. I think that's just the model we have and I don't forget seeing a lot of changes to that.

You know, I think in terms of, if you're getting at doing anything in terms of the bond portfolio, our strategy has been for some time will continue to be. If there's opportunities where there's some one-off wins that no one counts for, we may take the opportunity to take some losses and pair back some of the AFS portfolio that's low yielding.

But besides that, the heavy lifting was done with the merger, repositioning the bond portfolio from Heritage, as well as selling those mortgage pools and reinvesting them in higher yielding securities. So most of that's complete. There could be little opportunities here and there, though.

Yeah, so a couple of things on that. We do need to maintain a little bit higher level of investment securities just because we have a significant amount of deposits that are collateralized by those securities. Absolutely, we would want to remix it and continue to increase the loan as a percentage of earning assets.

Thank you. Thanks, Jim. Thank you.

Great. Thank you, Cherie. Our third quarter results reflect solid financial performance, including increased profitability, net interest margin expansion, and disciplined expense management following the Heritage Bank commerce acquisition. The third quarter represented our 198th consecutive quarter of profitability, and we remain focused on the integration, serving our customers, supporting our communities, and associates as we extend our relationship-focused banking model across California's major economic centers. We're grateful for the continued trust of our customers and the dedication of our associates.

Thank you for joining us this quarter. We appreciate your interest and look forward So speaking with you in January of 2027 for our fourth quarter 2026 earnings call. Have a great day.