CVB Financial Corporation

Good morning, ladies and gentlemen, and welcome to the second quarter of 2024 CVB Financial Corporation and its subsidiary, Citizens Business Bank Earnings Conference Call. My name is Cherie, and I'm your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Please note, this call is being recorded. I would now like to turn the presentation over to your host for today's call, Alan Nicholson. Executive Vice President and Chief Financial Officer. You may proceed.

Thank you, Cherie, and good morning, everyone. Thank you for joining us today to review our financial results for the second quarter of 2024. Joining me this morning is Dave Brager, President and Chief Executive 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. 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, 2023. And in particular, information set forth in item 1A risk factors therein. For a more complete version of the company's safe harbor disclosure, please see the company's earnings release issued in connection with this call. I'll now turn the call over to Dave Breger. Dave? Thank you, Alan.

Good morning, everyone. For the second quarter of 2024, we reported net earnings of $50 million, or 36 cents per share, representing our 189th consecutive quarter of profitability. We previously declared a 20 cents per share dividend for the second quarter of 2024, representing our 139th consecutive quarter of paying a cash dividend to our shareholders. We produced a return on average tangible common equity of 15.51% and a return on average assets of 1.24% for the second quarter of 2024. Our net earnings of $50 million, or 36 cents per share, compared with $48.6 million for the first quarter of 2024, or 35 cents per share, and $55.8 million, or 40 cents per share, for the prior year quarter. The $1.4 million increase in earnings compared to the first quarter of 2024 was primarily due to a $3.3 million decrease in non-interest expense. Non-interest expense was impacted by the change in the estimated cost for the FDIC special assessment. Compared to the first quarter of 2024, non-interest expense related to the special assessment declined by $3 million. Net interest income declined by $1.6 million when compared to the first quarter of 2024. This decrease resulted from a five basis point decline in our net interest margin from 3.10% in the first quarter to 3.05% in the second quarter of 2024. Our earning assets remain stable compared to the first quarter of 2024. Interest income grew by $1.4 million over the prior quarter Earning asset yields improved by three basis points compared to the prior quarter, as investment yields increased by seven basis points, and we had a positive shift in asset mix with our average balance of funds on deposit at the Federal Reserve growing from 3% of earning assets in the prior quarter to 5% for the second quarter. Interest expense increased by $3 million over the prior quarter, reflecting a seven basis point increase in our cost of funds. The increase in our cost of funds was primarily due to the 13 basis point increase in cost of interest-bearing liabilities, as non-interest-bearing deposits continued to be greater than 60% of total deposits for the second quarter of 2024. This 13 basis point quarter-over-quarter increase was due to the increased interest expense associated with wholesale funds and a 14 basis point increase in the cost of interest-bearing non-maturity deposits. which increased from 1.86% in the prior quarter to 2% in the second quarter of 2024. In terms of wholesale funds, second quarter borrowing costs decreased as average borrowings declined by $142 million. However, a $300 million increase in average broker deposits drove a 79 basis point increase in the cost of our time deposits. Average total deposits for the second quarter increased by approximately $245 million compared to the first quarter of 2024. Non-maturity deposits declined modestly by $40 million, including a $29 million decrease in non-interest-bearing deposits. On average, non-interest-bearing deposits continued to be greater than 60% of our average total deposits for the second quarter of 2024. At June 30, 2024, our total deposits and customer repurchase agreements total $12.1 billion, a $111 million decrease from March 31, 2024, and a $354 million increase from December 31, 2023. The increase in total deposits and customer repos from the end of 2023 includes the addition of $400 million in brokered time deposits. For the first six months of 2024, approximately $170 million of deposits were moved to Citizens Trust, including $100 million during the second quarter. These funds were invested in higher yielding liquid assets such as Treasury notes. This compares to $800 million that was transferred during 2023. Our cost of deposits was 88 basis points on average for the second quarter of 2024, which compares to 74 basis points for the first quarter of 2024. Our cost of non-maturity deposits has grown from 60 basis points in December of 23 to 74 basis points in June of 2024. While our cost of time deposits has grown from 1.84% in December of 2023 to 3.44% in June of 2024. From the first quarter of 2022 through the second quarter of 2024, our cost of deposits is increased by 85 basis points, representing a deposit beta of 16% compared to the 525 basis point increase in the Fed funds rate during the Federal Reserve's current tightening cycle. Now, let's discuss loans. Total loans at June 30, 2024 were $8.7 billion, an $89 million or 1% decrease from the end of the first quarter, and a $223 million decline from December 31, 2023. The quarter over quarter decrease was led by a $56 million decline in commercial real estate loans. All other loan categories declined modestly from the end of the first quarter of 2024. The decrease in loans from the end of 2023 included a $71 million decrease in dairy and livestock loans. Dairy and livestock loans see higher line utilization at year end, which is reflected in the 80% utilization rate at the end of the fourth quarter compared to the 74% utilization rate at June 30, 2024. Commercial real estate loans declined by $120 million from December 31, 2023. As commercial real estate loan demand is weakened, our CRE loan production for the first six months of 2024 has lagged the same period in 2023 by more than 50%. Construction loans declined by $15 million over the same period, as we have experienced minimal borrowings from newly originated construction loans. CNI loans declined by $14 million when comparing to June 30, 2024 period, in balance to December 31, 2023, even though we have generally seen higher average loan balances over the first two quarters of 2024. This generally reflects the growth in new relationships as C&I line utilization continues to be at a rate at less than 30%. We compete on loans very selectively, which can impact new loan production. Even considering the high credit quality of our new loan originations, Yields on new loans in 2024 have been greater than 7.25%. Our continued focus on banking the best small to medium-sized businesses and their owners, providing them our full array of products, has resulted in a higher percentage of new loans in 2024 that are either owner-occupied or CNI loans. Non-owner-occupied loan originations in 2024 have been less than 20% of the total loan originations. which compares to 35% for the same six-month period in 2023. Although loan demands continues to be slower than past years, we continue to be optimistic about growth and future line utilization from our pipeline of CNI loans. We believe our asset quality remains strong, even though we have experienced an increase in non-performing and classified loans. Our allowance for credit losses totaled approximately $83 million at June 30th, the same as March 31, 2024. Net charge-offs in the second quarter were $31,000 compared to $4 million in the first quarter of this year. At quarter end, non-performing assets, defined as non-accrual loans plus other real estate owned, were $25.6 million, or 16 basis points of total assets. The $25.6 million in non-performing loans compares with $14.5 million for the prior quarter. Classified loans for the second quarter were $125 million compared with $103 million for the prior quarter. Classified loans as percentage of total loans was 1.44% at quarter end. Much of the growth in classified loans has been associated with agricultural lending. The dairy industry suffered a deep downturn in 2023, primarily resulting from the combined impact of lower milk prices and high feed costs. Widespread losses for our customers in 2023 resulted in recent downgrades in the bank's dairy lending portfolio, but a recovery in the industry appears to be underway in 2024 with feed costs down by 25% and milk prices rising due to falling supplies. Additionally, production ag has been experiencing losses due to lower prices from higher supplies of commodities such as almonds and pistachios. Land appraisals are also beginning to reflect lower market value of farmland. I will now turn the call over to Alan to discuss additional aspects of our balance sheet.