CVB Financial Corporation

Good morning, ladies and gentlemen, and welcome to the fourth quarter of 2020 CDB Financial Corporation and its subsidiary, Citizens Business Bank Earnings Conference Call. My name is Carmen, and I am your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer period. Please note that this call is being recorded live. I would now like to turn the presentations over to your host for today's call, Christina Carabino. You may proceed.

Thank you, Carmen, and good morning, everyone. Thank you for joining us today to review our financial results for the fourth quarter and year-ended 2020. Joining me this morning are Dave Brager, 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. 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. Among other risks, the ongoing COVID-19 pandemic may significantly affect the banking industry and the company's business prospects. The ultimate impact on our business and financial results will depend on future developments which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the impact on the economy, Our customers and our business partners and actions taken by governmental authorities in response to the pandemic. The speakers on this call claim the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. For 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, 2019, and in particular, the information set forth in item 1A, risk factors therein. Now, I will turn the call over to Dave Brager. Dave?

Thank you, Christina. Good morning, everyone. Happy New Year, and thank you for joining us again this quarter. We reported net earnings of $50.1 million for the fourth quarter of 2020, worth 37 cents per share, representing our 175th consecutive quarter of profitability and our highest level of quarterly income in 2020. We previously declared an 18 cent per share dividend for the fourth quarter of 2020, which represented our 125th consecutive quarter of paying a cash dividend to our shareholders. Four quarter net earnings of $50.1 million compared with $47.5 million for the third quarter of 2020 and $51.3 million for the year-ago quarter. Earnings per share of 37 cents for the fourth quarter compared with 35 cents for the third quarter and 37 cents for the year-ago quarter. Net earnings were $177.2 million for the year ended 2020 compared with $207.8 million for the year ended 2019. Diluted earnings per share were $1.30 for 2020 compared with $1.48 for 2019. We did not have a provision for credit losses in the fourth quarter as our forecast of macroeconomic variables at quarter end changed modestly from the prior quarter and the asset quality of our loan portfolio did not materially change from the third quarter. We will discuss our allowance and our economic forecast in more detail later in this call. Now, I'd like to discuss our deposits and loans. At December 31, 2020, our non-interest-bearing deposits totaled $7.46 billion, compared with $6.92 billion for the prior quarter and $5.25 billion for the year-ago quarter. Non-interest-bearing deposits were 63.5% of total deposits at the end of the fourth quarter, compared with 62% for the prior quarter and 60.3% for the year-ago quarter. At December 31, 2020, our total deposits and customer repurchase agreements were $12.2 billion, compared with $11.7 billion at September 30, 2020, and $9.13 billion for the same period a year ago. Average non-interest-bearing deposits were $6.9 billion for the fourth quarter of 2020, compared with $6.7 billion for the prior quarter and $5.3 billion for the year-ago quarter. Our average total deposits and customer repurchase agreements of $11.8 billion for the fourth quarter grew by $376 million, or 3.3% from the third quarter. Now, moving on to loans. After adjusting for seasonal loan growth and forgiveness of Paycheck Protection Program loans in the fourth quarter, our loans grew by $51 million, or approximately 1%. Our loan production was relatively strong in the fourth quarter, as is our current loan pipeline. We are optimistic that we can grow loans in 2021 exclusive of the forgiveness of Round 1 PPP loans and the origination of second round PPP loans. Total loans decreased by $59 million from the end of the prior quarter when including the impact of the PPP loans. PPP loans decreased by $218 million from the end of the third quarter as our borrowers started to receive forgiveness from the SBA. Excluding the decline in PPP loans, our remaining loans increased by $159 million. The increase was primarily due to a $108 million increase in dairy and livestock and a $73 million increase in commercial real estate loans. The majority of the increase in dairy and livestock loans was seasonal and occurred near the end of the quarter as many of our dairy owners chose to defer their milk checks into the first quarter of the following year and or prepay their feed expenses. The increases in loans were offset by a $17 million Decrease in construction loans, with the remaining loan segments declining by a net amount of $5 million. Compared to December 31, 2019, total loans were $784 million higher, but when the PPP loans are excluded, total loans declined by $99 million, or 1.3%, over the prior year. This decrease in loans was generally across all loan segments, with the exception of have a $127 million increase in commercial real estate loans. Average loans for the fourth quarter decreased by $35 million compared with the third quarter of 2020 while increasing by $851 million compared with the year-ago quarter. During the fourth quarter of 2020, PPP loans had an average balance of $1 billion compared to $1.1 billion for the third quarter. As of January 15, 2021, of the more than 4,000 PPP loans we originated in 2020, approximately 1,100 of our borrowers, representing $260 million in loans, have received forgiveness from the SBA. To date, our borrowers' PPP forgiveness requests that have been completely processed by the SBA have been 100% forgiven based on the have not processed forgiveness requests on any of the approximately 1,200 loans originated in the amounts that exceed $50,000 and are equal or less than $150,000 in anticipation of new guidance from the SBA. We will be making our forgiveness process available to these borrowers in early February as the updated guidance was just received. Recently, the bank began accepting applications for the second round of PPP loans As of January 25, 2021, we have received approximately 1,400 applications totaling $340 million. Net interest income was $105.9 million for the fourth quarter compared with $103.3 million for the third quarter and $107 million from the year-ago quarter. The $2.5 million increase in net interest income from the third quarter was due to the combination of a $2 million increase in interest income, including a $1.5 million increase in loan interest income and a $510,000 decrease in interest expense. Earning assets grew by $230 million on average from the third quarter, with more than $200 million of the growth coming from investment securities. Our earning asset yield decreased by four basis points compared to the prior quarter. Interest-bearing deposits and customer repos increased on average by $174 million from the third quarter, but interest expense declined as the cost of interest bearing deposits and customer repos decreased by five basis points. The $1.2 million decrease in net interest income from the prior year was primarily due to a $3.6 million decline in interest income, partially offset by a $2.4 million decrease in interest expense. Our tax equivalent net interest margin was 3.33% for the fourth quarter of 2020, compared with 3.34% for the third quarter and 4.24% for the fourth quarter of 2019. When the impact of PPP loans, discount accretion on acquired loans, and non-accrual interest is excluded, the adjusted tax equivalent net interest margin was 3.11% for the fourth quarter down from 3.18% for the prior quarter and 3.95% from the year-ago quarter. Our net interest margin was negatively impacted during the fourth quarter due to our excess liquidity that resulted in approximately $1.5 billion on average on deposit at the Federal Reserve earning just 10 basis points. The net interest margin in the fourth quarter would have been about 35 basis points higher without the $1.2 billion year-over-year average increase in deposits at the Federal Reserve. Loan yields were 4.56% for the fourth quarter of 2020 compared with 4.47% for the third quarter of 2020 and 5.15% for the year-ago quarter. The increase in yield from the prior quarter was due to higher levels of fee income on PPP loans and an increase in prepayment penalty income. Total interest and fee income from PPP loans was $10.5 million in the fourth quarter and David Farnsworth. In the first quarter, loan yields were essentially the same as the prior quarter. The decrease from the year-ago quarter was primarily due to the impact of the Federal Reserve's rate decreases and the decline in discount accretion income for acquired loans. Excluding the impact of PPP loans, interest income related to the purchase, discount accretion and non-accrual interest paid loan yields were 4.38% for the fourth quarter. and David Farnsworth. Our cost of deposits and customary purchase agreements for the fourth quarter were nine basis points, as were our cost of funds. Our cost of funds declined by two basis points from the prior quarter and 13 basis points from the fourth quarter of last year. Moving on to non-interest income. Non-interest income was $12.9 million for the fourth quarter of 2020, compared with $13.2 million for the prior quarter and $12.6 million for the year-ago quarter. The fourth quarter of 2020 included a $1.6 million in debt benefits that exceeded the asset value of certain BOLI policies and a $365,000 net gain on the sale of two OREOs. In comparison, the prior quarter included a $1.7 million net gain on the sale of one of our bank-owned buildings related to a banking center that was closed in September. We generated $876,000 in fees from interest rate swaps during the fourth quarter, which was $715,000 lower than the prior quarter but more than $200,000 greater than the fourth quarter of 2019. Deposit service charges were essentially unchanged from the third quarter but were lower than the fourth quarter of 2019 by $965,000. due to the higher earnings credits generated from the significant increases in our customers non-interest bearing checking account balances. Now expenses. Non-interest expense for the fourth quarter was $48.3 million compared with $49.6 million for the third quarter of 2020 and $49.1 million for the year-ago quarter. Salary and benefit expense decreased from the prior quarter by $2 million. The prior quarter included thank you awards and David Farnsworth. Thank you. Thank you. and the support for our online banking platform conversion. Non-interest expense totaled 1.37% of average assets for the fourth quarter compared with 1.44% for the third quarter and 1.71% for the fourth quarter of 2019. Our efficiency ratio was 40.64% for the fourth quarter of 2020 compared with 42.57% for the prior quarter and 41% for the fourth quarter of 2019. Now, turning to our asset quality matrix. During the fourth quarter, we had net loan charge-offs of $177,000, and for all of 2020, our net charge-offs totaled $308,000. At quarter end, non-performing assets defined as non-accrual loans plus other real estate owned were $17.7 million, compared with $16 million in the prior quarter and $10.2 million at December 31, 2019. As of December 31, 2020, we had OREO of $3.4 million. At December 31, 2020, we had loans delinquent 30 to 89 days of $3.1 million compared with $3.8 million in September 30, 2020. Class V loans for the fourth quarter were $78.8 million, a $6 million increase from the prior quarter. will have more detailed information on classified loans available in our year-end form 10-K. At December 31, 2020, commercial real estate loans on retail properties totaled $784 million, or 9% of total loans. None of these loans are on deferment, and only $5 million of these loans are classified. At origination, the loans on retail properties were underwritten with loan-to-values averaging approximately 49%. Of further note, 51% of these loans were originated prior to 2017. We also have $65 million of commercial real estate loans for hospitality properties, which is less than 1% of total loans. None of these loans are classified or on deferment. Commercial and SBA loans to customers in the hotel, restaurant, entertainment, retail trade, or recreation industries represented approximately $97 million in loans in December 31, 2020. or approximately 1% of total loans. $2.6 million of these loans are classified and $2.7 million of these SBA loans are on deferment. As of January 15, 2021, we have total remaining temporary payment deferments, primarily of principal and interest, for loans that total less than $10 million or 0.12% of total loans. 85% of these loans are classified as special mention or substandard. I will now turn the call over to Allen Nicholson to discuss our effective tax rate, our allowance for credit losses, capital levels, and liquidity. Allen.