CVB Financial Corporation

Good morning, ladies and gentlemen, and welcome to the first quarter of 2021 CVB Financial Corporation and its subsidiary Citizens Business Bank Earnings Conference Call. My name is Samantha, 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, this call is being recorded. I would now like to turn the presentation over to your host for today's call, Christina Carabino. You may proceed.

Thank you, Samantha, and good morning, everyone. Thank you for joining us today to review our financial results for the first quarter of 2021. 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 meeting 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, the effectiveness and distribution of COVID-19 vaccines, and actions taken by government 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 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, 2020, and in particular, the information set forth in Item 1-A, Risk Factors Therein. Now I will turn the call over to Dave Brager. Dave? Thank you, Christina.

Good morning, everyone. Thank you for joining us again this quarter. We reported net earnings of $63.9 million for the first quarter of 2021, or 47 cents per share, representing our 176th consecutive quarter of profitability. We previously declared an 18 cent per share dividend for the first quarter of 2021, which represented our 126th consecutive quarter of paying a cash dividend to our shareholders. First quarter net earnings of $63.9 million compares with $50.1 million for the fourth quarter of 2020 and $38 million for the year-ago quarter. Earnings per share of 47 cents for the first quarter compares with 37 cents for the fourth quarter and 27 cents for the year-ago quarter. We recorded a recapture provision for credit losses of $19.5 million for the first quarter of 2021. In comparison, we did not have a provision for credit losses in the fourth quarter of 2020 and recorded a provision for credit losses of $12 million for the first quarter of 2020. The recapture of provision was primarily the result of our forecast of improving macroeconomic variables, including GDP growth and decreasing unemployment. Now, I would like to discuss our deposits and loans. At March 31, 2021, our net interest-bearing deposits Our non-interest bearing deposits totaled $7.58 billion compared with $7.46 billion for the prior quarter and $5.57 billion for the year-ago quarter. Non-interest bearing deposits were 62.7% of total deposits at the end of the first quarter compared with 63.5% for the prior quarter and 61.2% for the year-ago quarter. We continue to see strong deposit growth for the first quarter as total deposits and customer repurchase agreements increased by $409 million or 3.4% from the end of 2020. At March 31, 2021, our total deposits and customer repurchase agreements were $12.6 billion compared with $12.2 billion at December 31, 2020 and $9.5 billion for the same period a year ago. Average non-interest bearing deposits were $7.2 billion for the first quarter of 2021, compared with $6.9 billion for the prior quarter and $5.2 billion for the year-ago quarter. Our average total deposits and customer repurchase agreements of $12.2 billion for the first quarter grew by $438 million, or 3.7% from the fourth quarter. Now, moving on to loans. Total loans decreased by $56 million from the end of 2020. However, when adjusting for dairy and livestock and agribusiness loans, which have seasonal loan growth during the fourth quarter, and the increase in the Paycheck Protection Program loans, our loans grew by $30 million, or nearly 2% annualized rate in the first quarter. Our loan production was relatively strong in the first quarter, as is our current loan pipeline. We continue to remain optimistic that we can grow loans in 2021 exclusive of the impact related to PPP loans. The decline in agribusiness and dairy and livestock loans from the end of the fourth quarter of 2020 was $100 million. This decline was mostly seasonal as we experienced paydowns in the first quarter of each calendar year as a result of the temporary increase we experienced in the fourth quarter of each year. As a result, line usage for agribusiness and dairy and livestock loans declined from its peak level at year end. PPP loans increased by $15 million from the end of the fourth quarter, as new PPP loan originations were partially offset by forgiveness from the SBA for loans originated during the first round of PPP. Commercial real estate loans grew by $95 million from the end of 2020, which is almost a 7% annualized rate. Additionally, construction loans grew by $11 million from the prior quarter. Commercial industrial loans declined by $58 million and single family mortgage loans declined by $15 million from the end of the fourth quarter. Overall line utilization rates declined from 52% at 3-31-2020 to 41% at 3-31-2021. The decline in overall utilization rate was primarily due to C&I loan utilization that declined from 39% to 26% compared to the year-ago quarter. Average loans for the first quarter decreased by $77 million compared with the fourth quarter of 2020 while increasing by $787 million compared with the year-ago quarter. During the first quarter of 2021, PPP loans had an average balance of $881 million compared to $1 billion for the fourth quarter of 2020. As of March 31, 2021, of the more than 4,000 PPP loans we originated during Round 1, approximately 2,400 of our borrowers representing $544 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 received greater than 99% forgiveness based on the customer's forgiveness application. As of March 31, 2021, we have originated approximately 1,500 PPP loans in round two for $325 million in outstanding balances at quarter end. Net interest income before recapture or provision for credit losses was $103.5 million for the first quarter compared with $105.9 million for the fourth quarter and $102.3 million from the year-ago quarter. Earning assets grew by $560 million on average from the fourth quarter with more than $523 million of the growth coming from an increase in investment securities. Our earning asset yield decreased by 17 basis points compared to the prior quarter. Interest-bearing deposits and customer repos increased on average by $130 million from the fourth quarter, but interest expense declined as the cost of interest-bearing deposits and customer repurchase agreements decreased by six basis points. Our tax equivalent net interest margin was 3.18% for the first quarter of 2021 compared with 3.33% for the fourth quarter and 4.08% for the first quarter of 2020. When the impact of PPP loans, discount accretion on acquired loans, and non-accrual interest paid is excluded, our adjusted tax equivalent net interest margin was 2.93% for the first quarter, down from 3.11% for the prior quarter and 3.87% for the year-ago quarter. Our net interest margin continued to be negatively impacted by excess liquidity. During the first quarter, we had approximately $1.6 billion on average on deposit at the Federal Reserve, earning 10 basis points. The net interest margin for the first quarter would have been approximately 35 basis points higher without the $1.4 billion year-over-year average increase in deposits at the Federal Reserve. Loan yields were 4.5% for the first quarter of 2021, compared with 4.56% for the fourth quarter of 2020. and 4.95% for the year-ago quarter. The decrease in yield from the prior quarter was due to lower prepayment penalties and rates on new originations that are below the overall portfolio yields. Total interest and fee income from PPP loans was $10.4 million in the first quarter compared to $10.5 million in the fourth quarter. PPP loan yields increased from 4.08% in the fourth quarter of 2020 to 4.78% in the current quarter due to the accelerated recognition of fees from loan forgiveness. The decrease in loan yields from the prior year-ago quarter was primarily due to the impact of the Federal Reserve's rate decreases as well as decline in discount accretion income for acquired loans. Excluding the impact of PPP loans, interest income related to purchase discount accretion and non-accrual interest paid Loan yields were 4.23% for the first quarter of 2021, 4.38% for the fourth quarter of 2020, and 4.67% the first quarter of 2020. Our cost of deposits and customer repos for the first quarter was six basis points, and our cost of funds was seven basis points. Our cost of funds has declined by 14 basis points over the last year. We plan to redeem our $25.8 million junior subordinated debentures, which had a cost of 1.6% during the current quarter by the end of the second quarter of this year. Moving to non-interest income. Non-interest income was $13.7 million for the first quarter of 2021, compared with $12.9 million for the prior quarter and $11.6 million for the year-ago quarter. The first quarter of 2021 included $3.5 million in death benefits that exceeded the asset value of certain Boley policies and a $400,000 net gain on the sale of an OREO property. In comparison, the prior quarter included $1.6 million in death benefits income from the Boley policies and a $365,000 net gain on the sale of two OREO properties. We generated approximately $200,000 in fees from interest rate swaps during the first quarter, which was $660,000 lower than the prior quarter and $160,000 less than the first quarter of 2020. The steepening of the yield curve has made it less attractive for our customers to enter into interest rate swaps that convert floating rate loans to fixed rate instruments compared to a conventionally fixed rate loan. Deposit service charges were essentially unchanged from the fourth quarter but were lower than the first quarter of 2020 by almost $800,000 due to the higher earnings credits generated by the significant increases in our customers non-interest bearing checking account balances. Now expenses. Non-interest expense for the first quarter was $47.2 million compared to $48.3 million from the fourth quarter of 2020 and $48.6 million for the year ago quarter. Total salary and benefit expenses increased by $564,000 compared to the fourth quarter, including a $1.3 million increase in payroll taxes. Higher payroll taxes are typical for the first quarter of every year. Salary and benefit expense declined by $1.2 million from the first quarter of 2020 as deferred loan origination costs, which are a contra expense, increased by more than $1 million due primarily to the origination of more than 1,500 PPP loans in the first quarter of 2021. Occupancy and equipment expense and professional service expense decreased by a combined $1.3 million quarter over quarter. Additionally, marketing and promotion expense declined by $225,000 and $830,000 compared to the first and fourth quarters of 2020, respectively. Non-interest expense totaled 1.32% of average assets for the first quarter of 2021 compared with 1.37% for the fourth quarter of 2020 and 1.72% for the first quarter of 2020. Our efficiency ratio was 40.26% for the first quarter of 2021 compared with 40.64% for the prior quarter and 42.7% for the first quarter of 2020. Now, turning to our asset quality matrix. During the quarter, we had net loan charge-offs of $2.4 million, compared with $177,000 for the fourth quarter of 2020, and no net loan charge-offs for the year-ago quarter. The current quarter includes a previously substandard-graded commercial industrial loan that was fully charged off for approximately $2.5 million. At quarter end, non-performing assets, defined as non-accrual loans plus other real estate owned were $15.3 million compared with $17.7 million for the prior quarter and $11.3 million at March 31, 2020. At March 31, 2021, we had loans delinquent 30 to 89 days of $1.7 million compared with $3.1 million at December 31, 2020. Classified loans for the first quarter were $69.7 million, a $9 million decrease from the prior quarter. We will have more detailed information on classified loans available on our first quarter form 10-Q. I will now turn the call over to Allen Nicholson to discuss our effective tax rate, our allowance for credit losses, investments, and capital levels. Allen.