CVB Financial Corporation

Good morning, ladies and gentlemen, and welcome to the third quarter 2021 CVB Financial Corporation and its Subsidiary Citizens Business Bank Earnings Conference Call. My name is Catherine, and I'll be 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. Please proceed.

Thank you, Catherine, and good morning, everyone. Thank you for joining us today to review our financial results for the third 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 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 the 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-Q 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. We reported net earnings of $49.8 million for the third quarter of 2021, or 37 cents per share, representing our 178th consecutive quarter of profitability. We previously declared an 18 cent per share dividend for the third quarter of 2021, which represented our 128th consecutive quarter of paying a cash dividend to our shareholders. Third quarter net earnings of $49.8 million, or 37 cents per share, compares with $51.2 million for the second quarter of 2021, or 38 cents per share, and $47.5 million for the year-ago quarter, or 35 cents per share. Through the first nine months of 2021, we earned $164.8 million or $1.21 per share compared with $127.1 million or $0.93 per share for the first nine months of 2020. For the third quarter of 2021, our pre-tax, pre-provision income was $65.7 million compared with $69.7 million for the prior quarter and $66.9 million for the year-ago quarter. The third quarter included relatively strong core loan growth as well as strong credit metrics and a declining allowance for credit losses. In addition, greater than 99% of our customers' $1.1 billion in PPP Round 1 loans were forgiven as of quarter end. We recorded a recapture provision for credit losses of $4 million for the third quarter of 2021. And in comparison, we recorded a recapture provision for credit losses of $2 million for the second quarter of 2021. The recapture provision was primarily the result of our forecast of continuing improvements in macroeconomic variables, including GDP growth and decreasing unemployment. For the nine months ended September 30, 2021, we recaptured $25.5 million of provision for credit losses, which reverses the $23.5 million in provision expense recorded during the first nine months of 2020. During the third quarter, we had net loan recoveries of $22,000 compared with net charge-offs of $463,000 for the second quarter of 2021 and $114,000 for the year-ago quarter. At quarter end, non-performing assets defined as non-accrual loans plus other real estate owned were $8.4 million, equal to the prior quarter and approximately $9 million lower than year-end 2020. At quarter end, we had no OREO properties and the $8.4 million in non-performing loans represented 11 basis points of total loans. At September 30, 2021, we had loans delinquent 30 to 89 days of $1.1 million compared with $415,000 at June 30, 2021. Classified loans for the third quarter were $49.8 million, equal to the prior quarter, and approximately $23 million lower than year-end 2020. Now, moving on to loans. Our loan production continued to be strong in the third quarter, and our current loan pipeline remains robust. Total loans at quarter end were $7.85 billion. Core loans, excluding PPP loans, grew by $105 million, or approximately 6% annualized when compared to the second quarter. When including PPP loan forgiveness, our loans decreased by $222 million. Loan growth in the third quarter was led by continued growth in commercial real estate loans, which grew by $64 million compared to the end of the second quarter and by $233 million year-to-date. CNI loans and dairy and livestock loans also grew by approximately $20 million each compared to the second quarter. As we look at core loan trends over the past year, CRE loan growth has continued to be strong with an increase of $306 million, or almost 6%. from the third quarter of 2020 to the third quarter of 2021. In addition, our dairy and livestock loans have grown by $32 million, or 15%, over the past year. CNI loans, however, continue to be impacted by low utilization rates, which is the primary driver of the decline in CNI loans, which declined $47 million in comparison to the third quarter of 2020. T&I utilization rates were 27% on average in the third quarter, which compares to the pre-pandemic level of 39% in the first quarter of 2020 and 28% for the third quarter of 2020. Single-family mortgage loans have been declining due to high refinance activity from the low-rate environment, resulting in a year-over-year decrease of $43 million. Construction loans were $77 million at the end of the quarter, which is lower than recent quarters and almost $25 million lower than a year ago. We continue to remain optimistic that we can grow loans during the fourth quarter of 2021, excluding the impact of PPP loan forgiveness and the seasonal dairy and livestock advances, as we strive to overcome headwinds from low line utilization rates and continued higher prepayment activity. Through September 30, 2021, of the over 4,000 PPP loans we originated during Round 1, more than 99% of our borrowers representing more than $1 billion in loans have received forgiveness from the SBA. Of the $420 million of loans originated in PPP Round 2, we had remaining loans outstanding of $287 million as of September 30, 2021. Now, I would like to discuss our deposits. At September 30, 2021, our non-interest-bearing deposits were $8.3 billion, compared with $8.07 billion for the prior quarter and $6.92 billion for the year-ago quarter. Non-interest-bearing deposits remain a key differentiator for the bank, with over 64% of our deposits being non-interest-bearing at the end of the quarter. Furthermore, by executing on our long-term strategy of banking the best small to medium-sized businesses and their owners in our markets, The bank is completely funded by core deposits. We continue to see strong deposit growth for the third quarter as total deposits and customer repurchase agreements increased by $343 million or 3% from the second quarter of 2021 and $1.9 billion or 17% higher than the prior year. At September 30, 2021, our total deposits and customer repurchase agreements were $13.6 billion compared with $13.2 billion at June 30, 2021, and $11.7 billion for the same period a year ago. Average non-interest-bearing deposits were $8 billion for the third quarter of 2021, compared with $7.7 billion for the prior quarter and $6.7 billion for the year-ago quarter. Our average total deposits and customer repurchase agreements of $13.3 billion for the third quarter grew by $417 million, or 3% from the second quarter. Our net interest income declined this quarter as our net interest margin declined to 2.89%. Net interest income before recapture or provision for credit losses was $103.3 million for the third quarter compared with $105.4 million for the second quarter and $103.3 million from the year-ago quarter. Earning assets grew by $471 million on average from the second quarter. including a $187 million increase in investment securities and more than $600 million increase in average funds on deposit at the Federal Reserve. Average loans for the third quarter decreased by $333 million compared with the second quarter of 2021 while decreasing by $466 million compared with the year-ago quarter. During the third quarter of 2021, PPP loans had an average balance of $502 million compared with $838 million for the second quarter of 2021. Our earning asset yield decreased by 19 basis points compared to the prior quarter. 45% of our earning assets are in a combination of liquid investments and cash on deposit at the Federal Reserve. Our tax equivalent net interest margin was 2.89% for the third quarter of 2021, compared with 3.06% for the second quarter and 3.34% for the third quarter of 2020. When the impact of PPP loans, discount accretion on acquired loans, and nonaccrual interest paid is excluded, our adjusted tax equivalent net interest margin was 2.68% for the third quarter, down from 2.89% for the prior quarter, and 3.18% for the year-ago quarter. Our net interest margin continued to be negatively impacted by excess liquidity. During the third quarter, we had approximately $2.3 billion on average on deposit at the Federal Reserve, earning 15 basis points. The net interest margin in the third quarter would have been approximately 56 basis points higher without the $2.3 billion on average on deposit at the Federal Reserve. We continue to be asset sensitive as noted in our June 30th Form 10Q. If rates were to ramp up over 200 basis points over a 12-month time horizon, our net interest income would grow by approximately 21%. Loan yields were 4.43% in the third quarter of 2021, compared with 4.46% for the second quarter of 2021 and 4.47% for the year-ago quarter. Total interest and fee income from PPP loans was $7.9 million in the third quarter compared to $8.1 million in the second 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, the impact of PPP loans, as well as a decline in discount accretion income on acquired loans. Excluding the impact of PPP loans, interest income related to purchase discount accretion and non-accrual interest paid, loan yields were 4.14% for the third quarter of 2021, 4.3% for the second quarter of 2021 and 4.37% for the third quarter of 2020. Pre-payment penalty income decreased by $1.4 million quarter over quarter while increasing by $243,000 compared with the year-ago quarter. Our cost of deposits and customer repos as well as our cost of funds for the third quarter was four basis points. Interest bearing deposits and customer repos increased on average by $124 million from the second quarter, but interest expense declined as the cost of interest bearing deposits and customer repurchase agreements decreased from 12 basis points in the second quarter to nine basis points in the third quarter. Our cost of funds declined by one basis point from the prior quarter and seven basis points compared to the third quarter of 2020. Moving to non-interest income. Non-interest income was $10.5 million for the third quarter of 2021, compared with $10.8 million for the prior quarter and $13.2 million for the year-ago quarter. The third quarter of 2020 included a $1.7 million gain on the sale of a bank-owned building. Our trust and investment service income decreased by approximately $500,000, or more than 15%. compared with the prior quarter while being $276,000 or approximately 12% higher when compared with the year-ago quarter. Deposit service charges increased by 8% or $344,000 from the second quarter and were higher than the third quarter of 2020 by 14% or $543,000. Fees from interest rate swaps were $167,000 for the third quarter which was $1.4 million lower than a year ago. In July, we announced that we entered into a merger agreement with Suncrest Bank, pursuant to which Suncrest Bank will merge into Citizens Business Bank. We're excited to be joining forces with a successful bank that serves California's Central Valley as well as Sacramento, a sizable and important new market for our bank that presents additional growth opportunities. The closing of the merger is expected to occur at the end of the current quarter or the first quarter of 2022. Now on to expenses. Non-interest expense for the third quarter was $48.1 million compared with $46.5 million for the second quarter of 2021 and $49.6 million for the year-ago quarter. We incurred $809,000 in acquisition-related expenses. Salary and benefit expenses decreased by $905,000 compared to the second quarter. The second quarter benefited from a one-time adjustment to the benefit expense of approximately $1 million. Marketing and promotion expense decreased by $942,000 compared to the second quarter of 2021, primarily due to the timing of donations made during the second quarter to community groups throughout our geographic footprint. Non-interest expense also increased by $1 million as we recaptured provision for unfunded loan commitments of $1 million in the second quarter of 2021. Non-interest expense totaled 1.22% of average assets for the third quarter of 2021 compared with 1.23% for the second quarter of 2021 and 1.44% for the third quarter of 2020. Our efficiency ratio is 42.27% for the third quarter of 2021 compared with 40.05% for the prior quarter and 42.57% for the third quarter of 2020. 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.