Suncrest Bank (CVBF) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the conference call this morning to discuss CVB Financial Corporation and Suncrest Bank's agreement to merge. My name is Renz, and I am your operator for today. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the presentation over to your host for today's call, Ms. Christina Carrabino. You may proceed.

Thank you, Renz, and good morning, everyone. Thank you for joining us today. With me on the call this morning from CVB Financial Corporation are Dave Brager, Chief Executive Officer; and Allen Nicholson, Executive Vice President and Chief Financial Officer. Our comments today will refer to the information that was included in the merger announcement released yesterday. To obtain a copy of the press release, please visit our website at www.cbbank.com and click on the Investors tab. We will also be referring to an investor presentation for this call. Please go to the Investor section of our website where you can download a copy. Before we get started, let me remind you that today's conference call will include some forward-looking statements. Page 2 of the investor presentation includes our disclosures on forward-looking statements that should be read in conjunction with this presentation. The speakers on this call claim the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. In addition, we wish to advise you that CVBF will file with the SEC a registration statement on Form S-4 that will include a proxy statement of Suncrest Bank and a prospectus of CVBF as well as other relevant documents and information concerning the proposed transaction. Accordingly, this presentation does not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of any vote or approval. Information about the participants and the solicitation of votes by Suncrest shareholders and other important information regarding the merger is available in the accompanying investor presentation. Now I will turn the call over to Dave Brager. Dave?

Thank you, Christina, and good morning, everyone. We're excited that you're joining us this morning to discuss the announced acquisition of Suncrest Bank. Allen and I are excited to go through the presentation, the investor presentation. But just -- I'd like to make just a couple of comments first. First and foremost, this is a process that we've been going through for multiple months now. And I just want to say thank you to Ciaran McMullan and his management team as well as thank you to the CVBF management team for working so diligently through the due diligence. And this is an opportunity in a market that I'm very familiar with. I've spent more than half my banking career in the Central Valley, primarily from Bakersfield to Stockton. So the opportunity to deepen our presence in these markets, I think, is a very important one, and then as well, having the opportunity to expand it north into the Sacramento and even further north to Yuba City. So I would like to walk through the investor presentation. We'll have time for questions at the end. But if you can all turn to Page 3, I'm going to start with the transaction overview. And first, we agreed to acquire Suncrest. It's a $1.3 billion asset commercial community bank. They are headquartered in Visalia, California. It's Citizens Business Bank and CVBF's second largest acquisition ever, and it's our fifth acquisition since 2012. Suncrest shareholders will receive 0.697 CVBF shares for each share of Suncrest and $2.69 in cash for each share outstanding. So in total, the transaction's valued at $204 million and $16.18 per Suncrest share, and that was at the closing price as of July 26. So why Suncrest and the strategic rationale? They've done a really good job. So a growing commercial bank with a diverse loan portfolio. They have very strong relationships in the Central Valley. It allows Citizens, as I mentioned, to expand into our -- into the Sacramento market, which is one of California's largest deposit markets. We get to deepen our presence in the Central Valley. And this is a transaction, just our familiarity with the markets -- it's a transaction that we believe has low execution risk and some very considerable efficiency opportunities. It helps us build scale and create some capacity for the organization. And then also and importantly, expands our strategic alternatives in Northern California and throughout the Central Valley. I'm going to turn it over to Allen to talk about some of the financial aspects of it, and we'll be -- I'll be right back with you.

Thanks, David. Acquisition of Suncrest Bank is expected to have a financially attractive metrics for CVBF with earnings per share accretion of approximately 3.5% in 2023 when all the cost saves are fully integrated and an internal rate of return of approximately 20% and tangible book value dilution of 0.8%, which will be earned back in less than 1.75 years. So I'll turn it back to you, Dave.

Yes. The one thing, Allen, I'd like to just add to that, and we obviously made a decision on the fact that we wanted to utilize some of our capital in this transaction. And just to give you an idea, if this were a 100% stock deal, the metrics for us would have impacted, obviously, the EPS accretion that would have been reduced to about 2.5%, but it would have actually been accretive with no earn-back period if it were 100% stock deal. So this was an opportunity for us to put some of our capital to use in this deal, and we believe, again, that it's a very solid transaction for us and very consistent with our growth strategy. So if you look on Page 4, as we've talked about in all of our investor presentations, we have 3 ways we grow. We grow our same-store sales, which is increasing loans, deposits and fee income in each of our 58 business financial centers. We opened de novo -- in de novo markets with team pullouts, and you can see the list there. We've done San Diego, Oxnard, Santa Barbara, Stockton and Modesto all in the last 7 years. And then finally, it fits right within our acquisition strategy, which is target asset size of $1 billion to $8 billion. We look for financial and strategic acquisitions, and we want them to be in market or adjacent markets within California. And you can see Suncrest checks all 3 boxes there. I'm not going to spend a lot of time on the next page, which is Page 5, but it's just an overview of Suncrest. And one thing that I will say it was established in Visalia in 2008. They have 7 locations. There are 2 locations that are very close together in Fresno and Visalia, which are their largest 2 markets. They've had strong growth trends. And they definitely have a commercial lending focus and have a little bit higher percentage of their loans in ag and ag real estate than we do on a balance sheet perspective. So -- the pro forma company overview, you can see our totals, our totals are as of 6/30, Suncrest totals are as of 3/31. They have not reported second quarter earnings yet, but the pro forma company is going to be nearly $17 billion in assets with nearly $9 billion in gross loans, nearly $14 billion in total deposits with tangible common equity of $1.5 billion. And what we've highlighted here really is the new markets that we're getting into, which is Sacramento. And you can see on the pullout map, our 1 dot there in Stockton, and then there's 3 additional locations we'll be picking up in Lodi, Sacramento and Yuba City. And then more in the central portion of the Central Valley, they have 4 locations. And as I mentioned, 2 of those locations are -- overlap with our locations in Fresno and Visalia and then they have locations in Porterville and Kingsburg. Moving on to Page 7. I'm going to turn it back over to Allen to go through some more of the financial aspects.

So as we mentioned before, consideration for the merger includes $2.69 of cash per Suncrest share and a fixed exchange ratio in which each Suncrest share receives 0.97 (sic) [ 0.697 ] shares of CVB stock. And based on CVBF's stock price of $19.36 on July 26, aggregate value of the acquisition is estimated to be $204 million or $16.18 per Suncrest share. Approximately 8.5 million shares of CVBF will be issued to Suncrest shareholders and $39 million in cash will be paid to shareholders and for the options that will be cashed out at close. This equates to 81% stock, 19% cash transaction. So on a pro forma ownership, Suncrest shareholders will end up owning almost 6% of the combined shares at close. Based on...

Yes, I think -- go ahead, Allen.

Just finishing off this page for everyone. Based on the public information, as Dave said, that's available as of March 31, this transaction is going to result in transaction value for Suncrest. You can see there it's about 14x our last 12-month earnings and 1.62x tangible book value. Go ahead, Dave, if you want to take the next page.

Yes. Sorry about that. Due diligence. I just wanted to touch on due diligence. We did -- we completed the due diligence, including an extensive loan file review. We actually reviewed over 77% of the total loans, non-PPP loans at Suncrest. And we are -- obviously, we'll be waiting for our customary regulatory approvals as well as Suncrest shareholder approval. We anticipate this deal closing in the fourth quarter of 2021. We're very hopeful that we can do that. But if not, we will close it very early in the first quarter of 2022. I'm going to turn it back over to Allen.

Okay. Looking at Page 8 of our slide deck, some of our pro forma assumptions and, therefore, impacting from a forecast standpoint. Obviously, we're using our current consensus earnings as well as Suncrest Management's long-term forecast with some adjustments by CVBF. Cost savings, we mentioned before, but we're estimating 40% of Suncrest's noninterest expense will be cost save. There will be a small Durbin effect we anticipate of less than $500,000 in lower fee income, and we've reflected that in pro forma. We believe there are also a number of potential revenue synergies that have not been included in our pro forma estimates that will further improve earnings growth. This could include wealth management, international treasury services as well as greater lending capacity. We are estimating onetime merger-related expenses of approximately $12 million pretax. So initial estimates for some of the purchase accounting includes a total gross credit discount of 2.35% of the non-PPP loans or approximately $18 million. Approximately 48% of that credit discounts allocated to potentially PCD loans, and we also anticipate a small positive rate premium of slightly more than $1 million on the loan portfolio. Our current estimate of a core deposit intangible is about $2 million. And post close, an allowance for credit loss for the non-PCD loans is currently estimated to be approximately 1.2%. I'm going to go ahead and then turn it back over to you, Dave for the next page.

Yes. Thank you, Allen. This slide just basically outlines our organic as well as acquisition and our growth strategy. And as you can see, we have had organic growth augmented by acquisitions. And if you look back to 2012, we have had a 12.2% growth, including the proposed, obviously, acquisition of Suncrest Bank, which would take us to just under $17 billion in assets. The next page, Page 10, looks at the pro forma loan and deposit composition. And again, these numbers are our 6/30 numbers, and the Suncrest numbers are as March 31. And you can see there's very little impact overall on the combined organization, both from an asset yield perspective and a loan-to-deposit perspective or cost of deposit perspective. The one thing I will highlight, and they do have an expertise in agriculture with about nearly 20% of their loans in ag. We have approximately 7% of our loans in ag and ag real estate. So the combined organization will have 8%. And we really do feel that's an opportunity for us in the Central Valley to continue growing loans. So in summary, this is a $204 million stock and cash transaction. It's the second largest deal in the history of CVBF and it's our fifth acquisition since 2012. We've been a very efficient integrator in these situations, and we believe there's very little execution risk once we get past all the approval process. Suncrest has been a fast-growing bank. They have a diverse loan portfolio and they have quality customer relationships, which is right in line with our strategy. We get opportunity to enter into the Sacramento market, one of California's largest deposit markets. There's a great team up there. There's 3 offices, and we're looking forward to expanding our presence in that market, as we -- after we close. Again, it deepens our penetration in the other 4 locations basically from Fresno to Porterville; allows us to increase scale, which will help us from an operating efficiency perspective and -- as well as a competitive position. So we're a proven integrator, and acquisitions continue to be an important component of our growth strategy, and we're looking forward to welcoming the Suncrest associates and customers to our bank. With that, I will -- Christina, are you going to mention anything? Or are we going to go straight to questions and answers?

We're going straight to questions and answers.

Great.

Operator, go ahead, please.

[Operator Instructions] We have our first question from the line of Matthew Clark from Piper Sandler.

It sounds like you've been working on this deal for a number of months. Can you just give us some background on how this transaction came together?

Yes, sure. So I mean as I mentioned on our earnings calls, we've been having a lot of conversations with a lot of different opportunities, and we are pretty selective on who we consider and did receive a call from the investment banker on Suncrest side to start the conversation. Ciaran McMullan and I had multiple conversations going back about 3 months in earnest. And we began our due diligence shortly after June 1, and we were able to get to the finish line here, obviously, as of yesterday.

Okay. And then in terms of the growth expectations for this franchise, can you give us a sense at what pace you think Suncrest can grow at with -- on a combined basis with you guys?

Allen, do you want to start there and I can add anything?

Yes. Sure. So Matthew, they've been growing at a pretty fast pace recently. But from our perspective, conservatively, we think in that market with the combined franchise, certainly growing loans at roughly 7% to 8% is very realistic. We -- as I said, we have not modeled any revenue synergies, but certainly, the ability to offer some of the products and services we have that they do not should also help us grow some of our noninterest income as well.

Yes. And the thing I would add to that is, I mean, they've run into some issues just from a capacity -- legal lending perspective, a capacity standpoint. So we believe that 7% to 8% is very doable, and they've been growing at a higher rate than that, as Allen mentioned. So we were conservative in our estimates, but we do believe we can grow at that pace.

Okay. And then the 40% cost saves, can you just give us a sense for where a lot of that is coming from specifically?

Well, I'll start, Allen. You can add.

Go ahead. Go ahead.

I'll start, Allen. So obviously, we have some overlap in a couple of our locations. We want to build the best team. We want to build an A team. So we're going to look at all Suncrest associates as well as ours and make the determination on who we believe is best suited to move forward. But there's some cost saves on what I would call the sales side of the organization, but there's more significant cost saves on the back office although we are planning on building out some of our back office stuff. So we think 40% is a number that is very attainable, and we're looking forward to getting to know all the Suncrest associates. Allen, go ahead and add anything you want.

Yes, Matthew, obviously, some of the normal things, technology, they're on FIS, we're Fiserv, but we anticipate a lot of savings from a vendor perspective as part of that 40%.

Okay. And then last one for me, just on your appetite for additional deals. This is pretty manageable in terms of size. I guess, would you be open to other opportunities while you're integrating this one? And any kind of update on whether or not you're seeing potential activity on that front of late?

Yes. I mean we want to make sure we do a good job integrating this deal, but it does not mean that we wouldn't consider looking at other opportunities. We want -- we have a proven history of being able to integrate these types of acquisitions, and we'll make sure we do a good job at that. But at the same time, there are a number of conversations that are still taking place. So we're hopeful that whether it's -- whether we begin working on something or not, that we'll continue to have those conversations. And if it's the right opportunity, we'll consider it. But we're really focused on this deal right now. And hopefully, once we get through this, we'll be able to turn around and look at some other opportunities that have been presented to us as well.

The next one is from Gary Tenner from D.A. Davidson.

This is Clark Wright filling in for Gary Tenner. In the year prior to the pandemic, 2019 to be specific, Suncrest had a fairly modest loan growth in the 2% to 3% range. The accretion of the deal appears positive, but can you talk a little bit more about some of the underlying growth or property assumptions used to -- kind of incorporated into this transaction?

Allen, do you want to start on that one?

Yes. I mean, I'm not sure if I can add much more than I mentioned before. We've looked very closely and Dave mentioned the due diligence was extensive. And they have been growing at a very nice pace, particularly post pandemic. I think they fully integrated all their new salespeople that they've put on in recent years. And we see a lot of opportunity, as Dave said, to do more with their customers. So they're going to make $14 million, $15 million a year on their own probably over the next couple of years. And I don't think there will be much of a change in that.

And then just my second point. So the loan mix, as you mentioned, has a higher look at farmland exposure. And as you shift and as you build your expectations for credit marks, was there any weighting towards the second that reflects any concerns regarding current water issues in California and the Central Valley?

Allen, I'll start with that and then you can add anything. But -- this actually -- this question came up on our earnings call. And one of the things that we have been disciplined in is the underwriting of ag credit. And as I mentioned, we looked at over 77% of the loans at Suncrest, obviously, including their largest ag deals. And we do a full water availability evaluation, the water aspect of it is part of our normal underwriting. So we applied that same methodology in our credit due diligence. So again, we feel very comfortable with their portfolio with the marks and the things that we have identified in the investor deck. So water is a big thing that's going on for sure, and it's something that's impactful. But even combined, the total ag portfolio or ag exposure will be less than 10%, running at about 8%.

[Operator Instructions] The next question is from Jackie Bohlen from KBW.

Dave, first off, thanks for the data on what the deal accretion and the tangible book dilution would have been if it had been 100% in stock transaction. I know you've provided that with the Community Bank deal as well, and it's always helpful to see those metrics. I'm just curious, when you're having discussions both with this bank and then with other banks that you've been having discussions with, how hard is that conversation to get a piece of cash component into the deal consideration? I mean I completely understand from your point of view, why you want it there. I'm just wondering how the reception is for that given CVB shares are so attractive?

Yes. Well, I mean, obviously, that is definitely something that is a conversation point. And as you mentioned, I would say most of the conversations I have with CEOs or investment bankers, everybody is interested in 100% stock. But we do want to be smart with our capital. If we can get a little bit of cash in a deal, we're interested in doing that. We still want the deal metrics to hit our internal numbers that we're looking for on any acquisition. But I would say most of the time, they want more stock. We are asking for more cash, generally speaking.

Okay. And have you ever had an instance where it kind of becomes a no-go because of that conversation? And I know there's a number of issues and...

I have not had that situation, and I don't believe that's ever been the reason that we have not done a deal in our history.

Okay. And then looking to -- obviously, you laid out some good metrics on what you're expecting from a loan perspective in Sacramento. But I feel like most of the text within the press release and maybe it was in the presentation as well and in your prepared remarks, really centered on the deposit opportunities there. And so I was just curious as to how you would weigh the loan versus the deposit opportunities in the market and kind of what excites you about those 2?

Yes. Well, there's, I'll say, a newer group and team in Sacramento that Suncrest has put together. We have met a couple of them already, and we're excited about the opportunities there. Jackie, as you know, we're a relationship bank, and we focus on the entire relationship and operating businesses. And a lot of times, that intro product is on the deposit side from a treasury management perspective or otherwise. We obviously want to do the loans as well. But we do believe that the market share that Suncrest currently has in Sacramento really is a platform for us to continue to grow organically there, hopefully build out more teams and then look at other strategic opportunities that present themselves due to our presence there. So we believe that obviously Sacramento can grow faster just from a percentage basis because it's much smaller portion of Suncrest, but it does get us a foothold there where we can utilize our culture and our process to attract the best privately held small businesses and small to medium-sized businesses in that market.

Okay. So with that in mind then, is it appropriate to think of a deposit growth rate similar or perhaps even higher than the loan growth rate you were talking about at 7% to 8%?

Yes, we've modeled things. Allen can give you the specifics on that. Allen, you -- Allen and I are in different places. This is the first time we've done this in different places. I'm up in the Central Valley actually. So I apologize we're trying to go back and forth here without being able to see each other.

Yes, Jackie, I would say we would -- we assumed a similar growth rate for loans and deposits.

Okay. And then just last one for me. I realize that there are a number of items that impact whether the deal closes in fourth quarter or first quarter. Do you have a systems conversion time tentatively set yet? Or is that something you're waiting on deal close for?

No, we've actually booked a date because there's a lot going on right now, and it's, I believe, in mid to late February.

The next one is from David Chiaverini from Wedbush Securities.

Could you talk about your vision for the bank in terms of footprint over the next 3 to 5 years? Do you plan to push for additional M&A in Northern California? Or will it be a combination of de novo branch openings up there and M&A?

Yes. So our strategy is to be the premier financial institution in California. We want to thank the top businesses. Generally, we want to look at opportunities within or adjacent to our footprint. We have done a number of de novo teams. We'll continue to look at that opportunity. And then if there's an opportunity on the M&A front that is -- presents itself up there, that's something that we would be interested in looking at. But we want to stick in California. We like the Central Valley markets. We like the Southern California markets, and we'll continue to just sort of follow the strategy that we followed as we've gone through the year. So again, this being our fifth transaction, you can see those transactions. Community Bank was in Southern California, Valley Business Bank was in the Central Valley, County Commerce Bank was in the Santa Barbara Ventura County area and then American Security Bank was Southern California bank. So we're looking in those markets to deepen our presence as well as sort of expand market by market outside of that area, like with this deal in Sacramento.

[Operator Instructions] I'm showing no further questions at this time. I would now like to turn the conference back to Mr. David Brager.

Thank you, Renz, and thank you again for joining us. Allen and I are excited about this opportunity as well as our team. And again, once again, I'd like to thank Ciaran and his team at Suncrest as well as my team here at Citizens Business Bank. Now we are planning on executing this. We're actually doing visits today in the Central Valley with their teams and looking forward to meeting all of them. So thank you for your time and look forward to talking to you hopefully, again, here soon. Thank you very much.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day, and you may now all disconnect.