CVB Financial Corporation

Good morning, ladies and gentlemen, and welcome to the second quarter of 2021 CVB Financial Corporation and its Subsidiary Citizens Business Bank Earnings Conference Call. My name is Shalon, 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, Shalon, and good morning, everyone. Thank you for joining us today to review our financial results for the second 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. While the COVID-19 pandemic has receded from peak levels seen over the past year and business conditions continue to improve as the U.S. economy reopens, the pandemic is still ongoing and more contagious and virulent variants of the COVID-19 virus have surfaced and spread throughout the U.S., including in the company's markets in California. As a result, the COVID-19 pandemic may still carry the potential to significantly affect the banking industry in California and the company's business prospects. The ultimate impact on our business and financial results and on the health and safety of our employees will depend on future developments which are uncertain and cannot be predicted, including the infectious and pathogenic properties of COVID-19 variants as they develop, the safety, effectiveness, distribution, and public acceptance of vaccines developed to mitigate the pandemic, 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 1A, 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 $51.2 million for the second quarter of 2021, or 38 cents per share, representing our 177th consecutive quarter of profitability. We previously declared an 18 cent per share dividend for the second quarter of 2021, which represented our 127th consecutive quarter of paying a cash dividend to our shareholders. Second quarter net earnings of $51.2 million, or 38 cents per share, compares with $63.9 million for the first quarter of 2021, or 47 cents per share, and $41.6 million for the year-ago quarter, or 31 cents per share. Through the first six months of 2021, we earned $115.1 million or 85 cents per share compared with $79.6 million or 58 cents per share for the first six months of 2020. We recorded a recapture provision for credit losses of $2 million for the second quarter of 2021. In comparison, we recorded a recapture provision for credit losses of $19.5 million for the first quarter of 2021. The recapture of provision was primarily the result of our forecast of continuing improvements in macroeconomic variables, including GDP growth and decreasing unemployment. For the six months into June 30, 2021, we recaptured $21.5 million of provision for credit losses, which essentially reverses the $23.5 million in provision expense recorded during the first six months of 2020. For the second quarter of 2021, our pre-tax, pre-provision income was $69.7 million compared with $70 million for the prior quarter and $70.3 million for the year-ago quarter. Now, I would like to discuss our deposits and loans. At June 30, 2021, our non-interest-bearing deposits were $8.07 billion compared with $7.58 billion for the prior quarter and $6.9 billion for the year-ago quarter. Non-interest-bearing deposits were 63.7% of total deposits at the end of the second quarter compared with 62.7% for the prior quarter and 63% for the year-ago quarter. We continue to see strong deposit growth for the second quarter as total deposits and customer repurchase agreements increased by $662 million or 5.3% from the first quarter of 2021 and $1.8 billion or 15.7% higher than the prior year. At June 30, 2021, Our total deposits and customer repurchase agreements were $13.2 billion compared with $12.6 billion at March 31, 2021 and $11.5 billion for the same period a year ago. Average non-interest-bearing deposits were $7.7 billion for the second quarter of 2021 compared with $7.2 billion for the prior quarter and $6.2 billion for the year-ago quarter. Our average total deposits and customer repurchase agreements of $12.9 billion for the second quarter grew by $682 million or 5.6% from the first quarter. Now, moving on to loans. Total loans, including PPP loan forgiveness, decreased by $222 million from the end of the first quarter. When compared to the first quarter, adjusting for the decrease in Paycheck Protection Program loans, our loans grew by $18 million or at a 1% annualized rate. Compared to the prior quarter end, commercial real estate loans grew by $74 million or by more than 5% annualized. Year-to-date CRE loans have grown by $169 million or more than 6% annualized. As we look at core loan trends, CRE loan growth has continued to be strong, with an increase of $306 million, or 6%, between the second quarter of 2021 and the second quarter of 2020. Our dairy and livestock and agribusiness loans, excluding seasonal changes, have grown modestly by $6 million. C&I loans, however, continue to be impacted by low utilization rates, which is the primary driver of the continued decline in C&I loans, which was $92 million compared to the second quarter of 2020. C&I utilization rates were 27% on average in the second quarter, which compares to the pre-pandemic level of 39% in the first quarter of 2020 and 31% for the second quarter of 2020. Single-family mortgage loans have have been declining due to high refinance activity from the low rate environment, resulting in a year-over-year decrease of $49 million. Finally, all other loan categories have also decreased in total by $62 million over the past 12 months. Our loan production continued to be strong in the second 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, as we overcome headwinds from low line utilization rates and continued high prepayment activity. Average loans for the second quarter decreased by $21 million compared with the first quarter of 2021 while increasing by $202 million compared with the year-ago quarter. During the second quarter of 2021, PPP loans had an average balance of $838 million compared with $881 million for the first quarter of 2021. Through June 30, 2021, of the 4,000 PPP loans we originated during Round 1, more than 80% of our borrowers representing $853 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 June 30, 2021, we originated over 1,900 PPP loans in Round 2 for more than $400 million. Net interest income before recapture or provision for credit losses was $105.4 million for the second quarter, compared with $103.5 million for the first quarter and $104.6 million from the year-ago quarter. Earning assets grew by $646 million on average from the first quarter with more than $590 million of the growth coming from an increase in the investment securities. Our earning asset yield decreased by 13 basis points compared to the prior quarter. Interest-bearing deposits and customer repos increased on average by $223 million from the first quarter, but interest expense declined as the cost of interest-bearing deposits and customer repurchase agreements decreased from six basis points in the first quarter to five basis points in this recent quarter. Our tax equivalent net interest margin was 3.06% for the second quarter of 2021, compared with 3.18% for the first quarter and 3.7% for the second 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 2.89% for the second quarter, down from 2.93% for the prior quarter and 3.42% for the year-ago quarter. Our net interest margin continued to be negatively impacted by excess liquidity. During the second quarter, We had approximately $1.7 billion on average on deposit at the Federal Reserve, earning 11 basis points. The net interest margin in the second quarter would have been approximately 40 basis points higher without the $1.7 billion on average on deposit at the Federal Reserve. Loan yields were 4.46% for the second quarter of 2021 compared with 4.5% for the first quarter of 2021 and 4.77% for the year-ago quarter. Total interest and fee income from PPP loans was $8.1 million in the second quarter compared to $10.4 million in the first quarter. The decrease in loan yields from the year-ago quarter was partly due to the impact of the Federal Reserve's rate decreases on our core loan yields and the impact of PPP loans, as well as 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 pay, loan yields were 4.3% for the second quarter of 2021, 4.23% for the first quarter of 2021, and 4.44% the second quarter of 2020. Prepayment only income increased by $1.8 million quarter over quarter and by $1.3 million compared with the year ago quarter. Our cost of deposits and customer repos as well as our cost of funds for the second quarter was five basis points. We redeemed our $25.8 million junior subordinated to ventures on June 15th, which had a borrowing cost of approximately 1.6%. Our cost of funds declined by 8 basis points compared to the second quarter of 2020. Now moving on to non-interest income. Non-interest income was $10.8 million for the second quarter of 2021 compared with $13.7 million for the prior quarter and $12.2 million for the year-ago quarter. Second quarter income from bank-owned life insurance or BOLI decreased by $3.4 million from the first quarter of 2021 and $443,000 from the second quarter of 2020. The first quarter of 2021 included a $3.5 million in death benefits that exceeded the asset value of certain BOLI policies, while the second quarter of 2020 included $450,000 in death benefits. Fees from interest rate swaps were lower than the prior quarter by $215,000 and were $2.2 million less than the second quarter of 2020. The steepening of the yield curve during the second quarter 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 conventional fixed rate loan. Deposit service charges increased by 5% or $184,000 from the first quarter and were higher than the second quarter of 2020 by $360,000 or more than a 9% increase. Our trust and investment services income increased by approximately $550,000 or more than 21% compared with the prior quarter and almost $700,000 or approximately 28% compared with the year-ago quarter. Now expenses. Non-interest expense for the second quarter was $46.5 million compared with $47.2 million for the first quarter of 2021 and $46.4 million for the year-ago quarter. Total salary and benefit expenses decreased by $870,000 compared to the first quarter, including a $1 million decrease in payroll taxes. Higher payroll taxes are typical for the first quarter of every year. Salary and benefit expense increased by $130,000 from the second quarter of 2020. Marketing and promotion expense increased by $1.1 million and $544,000 compared to the first quarter of 2021 and the second quarter of 2020 respectively. The increase was primarily due to the timing of donations made during the second quarter to community groups throughout our geographic footprint. During the second quarter of 2021, we recaptured provision for unfunded commitments of $1 million as a result of our improving forecast for macroeconomic variables that project losses from unfunded commitments. Non-interest expense totaled 1.23% of average assets for the second quarter of 2021 compared with 1.32% for the first quarter of 2021 and 1.48% for the second quarter of 2020. Our efficiency ratio was 40.05% for the second quarter of 2021 compared with 40.26% for the prior quarter and 39.75% for the second quarter of 2020. Now turning to our asset quality matrix. During the second quarter, we had net loan charge offs of $463,000 compared with $2.4 million for the first quarter of 2021 and $158,000 for the year-ago quarter. At quarter end, non-performing assets defined as non-accrual loans plus other real estate owned were $8.5 million down from $15.3 million for the prior quarter and $11.7 million at June 30, 2020. At June 30, 2021, we had loans delinquent 30 to 89 days of $415,000 compared with $1.7 million at March 31, 2021. Classified loans for the second quarter were $49 million, a $20.1 million decrease from the prior quarter. As of June 30th, we had no loans remaining on deferment related to the CARES Act. We will have more detailed information on classified loans available on our second 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.