CVB Financial Corporation

Good morning, ladies and gentlemen, and welcome to the fourth quarter of 2024 CVB Financial Corporation and its subsidiary, Citizens Business Bank Earnings Conference Call. My name is Cherie, 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, 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 fourth quarter of 2024. Joining me this morning is Dave Breger, 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, the 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 relief issued in connection with this call. I'll now turn the call over to Dave Brayer.

Thank you, Alan. Good morning, everyone. First, I want to say that our thoughts and prayers are with the victims and those impacted by the devastating wildfires that occurred in Los Angeles County. Citizens Business Bank organized a response around four key issues. Our associates, our customers, our facilities, and our corporate response for our communities. First, we had over 50 associates that were impacted by the mandatory evacuation orders, and we will be providing direct support to them through a variety of methods. Second, we have identified 114 loans totaling approximately $105 million located in the fire zones. At this point, 14 properties have experienced some level of damage, with seven of the properties completely destroyed. one commercial building and six residential properties totaling $7.4 million. All 14 of the impacted properties had insurance in place and we have actually received proceeds to fully pay off one of the residential properties. Third, due to the mandatory evacuation orders or power outages, we had six centers temporarily closed at some point during the fires and all the locations have now reopened. Fourth, we announced that we have donated $200,000 to four relief agencies working on the front lines to assist people in need and will be one of the banks participating in the California DFPI relief efforts to assist those impacted. Now to the quarter. For the fourth quarter of 2024, we reported net earnings of $51 million or 36 cents per share. representing our 191st consecutive quarter of profitability. We previously declared a 20 cents per share dividend for the fourth quarter of 2024, representing our 141st consecutive quarter of paying a cash dividend to our shareholders. We produced a return on average tangible common equity of 14.31% and a return on average assets of 1.3% for the fourth quarter of 2024. Our return on equity is impacted by our high level of capital, which is reflected in our common equity tier one capital ratio of 16.2% and 9.8% tangible common equity ratio. In conjunction with our company's capital planning, we announced in November of 2024 that our board of directors authorized a new 10 million share repurchase program. Our net earnings of $51 million, or 36 cents per share, compares with $51 million for the third quarter of 2024, or 37 cents per share, and $48.5 million, or 35 cents per share, for the prior year quarter. Pre-tax income in the fourth quarter of $68 million was $423,000 higher than the third quarter of 2024. Net interest income decreased quarter over quarter by $3.2 million, or 2.8%, primarily due to the actions we have taken to deleverage our balance sheet by reducing borrowings and other wholesale funds, therefore reducing our earning assets. Non-interest income increased by $269,000 and non-interest expense decreased by $355,000 compared to the third quarter. We had a recapture of allowance for credit losses of $3 million in the fourth quarter. On September 26, 2024, we completed an early redemption of our $1.3 billion bank term funding program borrowing that was scheduled to mature in January of 2025. By redeeming this debt, we deleveraged our balance sheet, resulting in total average assets for the fourth quarter declining by almost $1 billion from the third quarter. The reduction in debt reduced interest expense by $15 million per quarter, driving a 13 basis point increase in our net interest margin for the fourth quarter. We were able to increase our return on average assets from 1.24% in the third quarter to 1.3% in the fourth quarter. We executed two sale leaseback transactions in the fourth quarter of 2024, in which we sold and leased back two buildings under long-term leases, realizing gains on sale totaling $16.8 million. In conjunction with these real estate transactions, we sold $155 million of available for sale investment securities at a cumulative loss of $16.7 million. At December 31st, 2024, Our total deposits and customer repurchase agreements total $12.2 billion, a $505 million increase from December 31, 2023, including the growth of $315 million of non-maturity deposits. Although we generally experience a decrease in deposits at the end of the fourth quarter each year, total deposits and customer repos grew on average by $150 million over the third quarter of 2024. Compared to the third quarter, non-maturity deposits grew on average by $188 million, while time deposits declined on average by $130 million, inclusive a $100 million brokered CD that we did not renew. By the end of the fourth quarter, we experienced a decrease in deposits in customer repos from the end of the third quarter of $257 million. Non-interest-bearing deposits were 59% of total deposits for the fourth and third quarters of 2024, down from 63% at the end of 2023. We are optimistic about our ability to continue to grow low-cost deposits. 2024 was a relatively strong year for new deposit relationships. As an example, our specialty deposit group generated 75% more in new business in 2025 than the average for the prior two years. From December 31, 2019 to December 31, 2024, our total deposits and repos have grown by more than $3 billion. Excluding the deposits acquired from Suncrest Bank and brokered CDs, Our core deposits and repos grew by approximately $1.6 billion, which represents a cumulative average growth rate of 3.3% over that five-year period. Our cost of deposits was 93 basis points for the fourth quarter of 2024, which compares to 98 basis points for the third quarter of 2024 and 62 basis points for the year-ago quarter. Our cost of non-maturity deposits has grown from 60 basis points in December of 2023 to 81 basis points in December of 2024, while our cost of time deposits has grown from 1.84% in December of 2023 to 2.84% in December of 2024. Now, let's discuss loans. Total loans at December 31st, 2024 were $8.54 billion, a $36 million decrease from the end of the third quarter and a $368 million or 4% decline from December 31st, 2023. The quarter over quarter decrease was led by a $111 million decline in commercial real estate loans. We also had an $11 million decrease in commercial industrial loans and approximately $10 million decline in agribusiness loans. Dairy and livestock loans grew seasonally by $87 million from the end of the third quarter. We continue to experience limited demand for commercial real estate loans and rate competition for the quality of loans we focus on has been very competitive. We average yields of 7% on new CRE loans in the fourth quarter, but by the end of the quarter, originations were in the high 6% range. CNI line utilization continues to be low, even though we have grown our total CNI loan commitments. Overall, total new loan commitments for 2024 were 90% of 2023's productions, but balances funded on the new loan commitments was only 75% of 2023 levels, as we originated a greater percentage of CNI loans in 2024. The decrease in loans from the end of 2023 included commercial real estate loans declining by $277 million and construction loans declining by $51 million, as construction loan origination was minimal in 2024. CNI loans also declined by $45 million when comparing December 31, 2023 to December 31, 2024. In total, we ended the quarter with $19.3 million in OREO assets, including $17.7 million of loans that were classified as non-performing at the end of the third quarter of 2024 and were foreclosed during the fourth quarter and recorded as OREO. An additional $1 million loan that was not passed due at September 30, 2024 became an OREO asset at year end. Net recoveries for the fourth quarter were $180,000, which compares to $156,000 in net recoveries for the third quarter of 2024. Total non-performing and delinquent loans decreased from $53.3 million at September 30, 2024 to $47.6 million at December 31, 2024. We had $30.7 million of past due and accruing loans as of September 30, 2024, of which $24.8 million became non-performing and approximately $1 million became OREO by the end of 2024. We reversed interest income of approximately $1.5 million during the fourth quarter for these non-performing assets. The remaining $4.9 million of past due and accruing loans at the end of the third quarter were paid off by the borrower or from the sale of loan collateral. Classified loans were $89.5 million at December 31, 2024, $25 million lower than the prior quarter, and $17 million lower than the end of 2023. Classified loans' percentage of total loans was 1.05% at the end of 2024. Classified dairy and livestock and agribusiness loans declined by $11 million as profitability is improving for these borrowers. Classified non-owner commercial real estate loans decreased by $27 million, including a reduction of $13 million for a group of multifamily loans to one borrower, which we foreclosed on during the fourth quarter. Of this $13 million in loans, $9 million became OREO as of December 31st, while the remaining $4 million was paid off through the sale of the collateral. Additionally, $9.8 million loan on a senior living facility that was a participation entered into by Suncrest Bank was foreclosed during the fourth quarter and recorded as an OREO at December 31st, 2024. We do not anticipate losses on the sale of the $19 million of OREO assets during the first quarter of 2025. The multifamily properties representing the $9 million of OREO have been or will be sold in January, as sales of these properties have either closed or are under sales contracts, awaiting title to clear in the next few days. There is also a signed purchase agreement for the senior living facility, which we expect to close in February. I will now turn the call over to Alan to further discuss our net interest income and additional aspects of our balance sheet.

Alan. Thanks, Dave. We effected a deleveraging of our balance sheet at the end of the third quarter of 2024 by completing an early redemption of $1.3 billion bank term funding program borrowing in September of last year. As a result of this deleveraging, average borrowings during the fourth quarter of 2024 were $1.2 billion lower than the third quarter of last year. And average earning assets decreased by approximately $975 million from the third quarter. The use of cash to redeem the banks from funding program borrowing at the end of the third quarter resulted in our average funds on deposit at the Federal Reserve decreasing by approximately $750 million during the fourth quarter of 2024. Investment securities also declined on average between the third and fourth quarters of 2024 by $144 million as we executed on targeted sales of certain available for sale or AFS securities during the third and fourth quarters of 24. We executed two sale leaseback transactions during the fourth quarter of 2024, realizing gains on sale totaling $16.8 million. In conjunction with these real estate transactions, we sold approximately 155 million of available for sale investment securities at a cumulative loss of $16.7 million. During the fourth quarter of 2024, we purchased 385 million of securities a combination of floating rate and 15-year fixed rate mortgage-backed securities, with an average yield at the time of purchase of more than 5%. We also sold more than 300 million of AFS securities during the third quarter of 2024 at a cumulative loss of $11.6 million, which was also timed in conjunction with the sale and leaseback of two banking center buildings during the third quarter. The building sales in the third quarter resulted in gains on sale totaling $9.1 million. the securities sold in the third quarter had an average book yield of less than 3%, while the securities sold in the fourth quarter had an average book yield of less than 2%. On a combined basis, over the third and fourth quarters of 2024, we sold $467 million of the low-yielding AFS securities and purchased $385 million of new investments with current yields in excess of 5%. Available for sale investment securities were approximately $2.54 billion at December 31, 2024, a $77 million increase from September 30, 2024. The unrealized loss on AFS securities increased by $80 million from $367 million at September 30, 2024 to $448 million on December 31, 2024. At the end of the third quarter of 2024, we had three paid fixed swaps that we recorded as fair value hedges, totaling $1 billion in notional value. The bank received daily SOFR on these swaps. In December, we unwound one of these swaps, which matured in June of 2027, with a notional value of $300 million and a fixed rate of 3.95%. We netted less than $100,000 on the transaction. For the fourth quarter of 2024, we earned a positive carry on these swaps, generating $2.3 million of interest income compared to $4.3 million in the third quarter of 2024. At year end, we continue to have $300 million of brokered CDs that have been swapped as cash flow hedges. But an additional $100 million brokered CD that was issued earlier in 2024 was not renewed during the fourth quarter. As of December 31st, 2024, the market value of our remaining two fair value hedges combined with our cash flow hedges increased by approximately $27 million from the end of the third quarter. The net after-tax impact of changes in both the fair value of our AFS securities and our derivatives resulted in a $37 million decrease in other comprehensive income for the fourth quarter. Investment securities held to maturity for HTM securities totaled approximately $2.38 billion at December 31st, 2024. The HTM portfolio declined by approximately $26 million from September 30th. Our total investment portfolio declined by $500 million from December 31st, 2023, including a decline in AFS securities of more than $400 million. As of December 31st, 2024, we had $800 million in wholesale funds, including $500 million of federal home loan bank advances and $300 million of brokered CDs, which represents a $1.4 billion decrease from our wholesale funds on December 31st, 2023. As a result of our balance sheet deleveraging and the Fed lowering short-term interest rates, our interest income in the fourth quarter declined by $18 million over the third quarter of 2024. Average earning assets declined by $974 million and the yield on earning assets declined by 19 basis points. The decrease in interest income was primarily due to an $11 million decline in interest from funds deposited to Federal Reserve. reflecting a $748 million decrease in average balances at the Fed and a 65 basis point decline in the yield on these funds. Loans were also down on average by $83 million, which combined with a 16 basis point decrease in loan yields resulted in a $4.7 million decrease in interest income. This decline in loan interest income included the approximately $1.5 million of accrued interest that was reversed for loans that were classified as non-accrual during the fourth quarter. A better reflection of the decline in loan yields is the decline in our core loan yields, which decreased by six basis points from September to December of 2024. Interest expense decreased by $15 million over the prior quarter due to the $15 million decrease in interest on borrowings, reflecting the redemption of the $1.3 billion in BTFP borrowings. our cost of funds decreased from 1.47% for the third quarter of 2024 to 1.13% in the fourth quarter. After our balance sheet repositioning, net interest income before provision for credit losses decreased by $3.2 million from the third to the fourth quarters of 2024, while our net interest margin expanded from 3.05% in the third quarter to 3.18% in the fourth quarter. For the fourth quarter of 2024, we recaptured $3 million in provision for credit losses, reducing our allowance for credit losses as of December 31, 2024 to $80 million. Our ACL at December 31, 2023 was $86.8 million, including approximately $6 million of reserves for specifically identified non-performing loans. Our reserves for specific loans was close to zero at December 31st, 2024. Our economic forecast continues to be a blend of multiple forecasts produced by Moody's. We continue to have the largest individual scenario waiting on Moody's baseline forecast with both upside and downside risks weighted among multiple forecasts. The resulting economic forecast resulted in real GDP growing at a slower rate with GDP growth below 2% for 2025 through 2027 and the unemployment rate rising over 5% by 2026 and not moving below 5% until 2028. Commercial real estate prices are also forecasted to continue their decline in 2025 with only meaningful price appreciation starting in 2027. Now, turning to our capital position, at December 31st, 2024, our shareholders' equity was $2.2 billion, a $108 million increase from the end of 2023. The company's tangible common equity ratio at December 31st, 2024 was 9.8%, compared with 8.5% at December 31st, 2023. At December 31st, 2024, our common equity Tier 1 capital ratio was 16.2% and our total risk-based capital ratio was 17.1%. Although the Board of Directors authorized a new 10b-5-1 stock repurchase plan in November, there were no shares repurchased during the fourth quarter of 2024. I'll now turn the call back to Dave for further discussion of our fourth quarter earnings.

Thank you, Alan. Moving on to non-interest income. Our non-interest income was $13.1 million for the fourth quarter of 2024 compared to $12.8 million for the third quarter and $19.2 million for the fourth quarter of 2023. The third quarter of 2024 included a net loss of $2.3 million between the sale-leaseback transactions and the accompanying bond sales, while the fourth quarter transactions essentially offset. BOLI income decreased by $1.1 million from the third quarter and by $5.5 million in the fourth quarter of 2023. These decreases were primarily the result of the BOLI restructuring during the fourth quarter of 2023. Income from CRA-related investments was approximately $1 million lower in the fourth quarter of 2024 compared to both the third quarter of 2024 and the fourth quarter of 2023. Our trust and wealth management fees increased by approximately $370,000 or more than 14% compared to the fourth quarter of 2023. Now expenses. Non-interest expense for the fourth quarter was $58.5 million compared with $58.8 million for the third quarter of 2024 and $65.9 million in the fourth quarter of 2023. The fourth quarter of 2023 included $9.2 million of additional expense related to the initial FDIC special assessment. A recapture provision for unfunded loan commitments totaled $750,000 in the third quarter of 2024 and $500,000 in the fourth quarter of 2023. Staff related expenses declined by approximately $650,000 from the third quarter of 2024, while increasing by approximately $350,000 from the fourth quarter of 2023. Occupancy expense grew by $167,000 when compared with the fourth quarter of 2023, which includes the impact of the higher occupancy costs for the four offices involved in the sale-leaseback transactions. Excluding a decrease in building security expense, Occupancy expense would have increased by approximately $400,000 from the fourth quarter of 2023 and would have been essentially the same in comparison to the third quarter of 2024. Non-interest expense totaled 1.49% of average assets for the fourth quarter of 2024 compared to 1.42% for the prior quarter and 1.62% for the fourth quarter of 2023. Our efficiency ratio is 46.3% for the fourth quarter of 2024. This compares with 46.5% for the third quarter and 47.6% in the year-ago quarter. This concludes today's presentation. Now, Alan and I will be happy to take any questions that you might have.

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Due to time restraints, we ask that you please limit yourself to one question and one follow-up question. Please stand by while we compile the Q&A roster. And our first question will come from the line of David Feaster with Raymond James. Your line is open.

Hey, good morning, everybody.

Morning, David. Good morning.

I just wanted to start out maybe touching on the pulse of your clients. There's a lot of optimism out there with investors and analysts alike talking about improving demand, accelerating loan growth. I'm curious, have you started to see that in your pipeline yet? Just kind of the early read with your conversations and how clients, just their sense of optimism and their plans for 2025.

Yeah, I absolutely believe there's a sense of optimism going forward and we have had a good start to the year on the loan front. The pipelines are improving but are still not where I would want them to be overall. But just generally speaking, I don't think there's any question that people are a little more excited and looking forward to 2025. So I do believe that we'll be able to execute on loan growth. And it's something that all of our bankers understand. We're reaching out to our customers. talking about plans that they maybe had shelved before that they are now hoping to get done or get started. So absolutely believe there's, you know, some enthusiasm out there, which we haven't had in a couple of years.

Okay. That's great. And then, you know, just wanted to touch on your capital priorities. You guys have been, you know, active, very active. You've got an extremely strong balance sheet. how do you think about deploying capital today and where are you most interested? Are buybacks or additional restructurings on the table? And just any broader thoughts maybe on the M&A market as well?

Yeah. So, I mean, obviously we recognize we have an enormous amount of capital and, you know, we have a number of things that we want to accomplish. First and foremost, we want to be able to grow, utilize the capital to grow internally and, As far as the M&A market is concerned, conversations have definitely picked up. We've had numerous conversations over the last month or so with a number of banks, and we'll continue to do that. The challenge really has been most of the people on the other side look at this and say, well, here's what Citizens Business Bank can pay based on where they're trading, and then we have to explain to them how much we are willing to pay, and there's usually a disconnect between those two numbers. And so it is an important part of 2025 for us. I do believe we're in a window from a regulatory perspective, from a business environment perspective. I think that we should be able to execute on something in 2025. But at this point, obviously, nothing imminent, nothing happening, but we are working very hard at that. And then beyond the M&A, beyond the growth in the M&A front, we do have the 10B51 plan in place. We are disciplined, and it is somewhat opportunistic from where we're trading, or at least where we were trading yesterday. And so there will be an opportunity, I believe, for us to continue to look at that if it hits the certain numbers. We're working on that, so I don't know, Alan, if you have anything you want to add.

The only other things I would say, David, is from an M&A perspective, certainly sellers' expectations maybe have gotten a little too optimistic, but also rates have moved up, as you can reflect in the impact for OCI, and that does continue to make the math a little more challenging when you do acquisitions. You know, those are, other than the regulatory being positive, those are maybe some headwinds to it. And just remember, as we said last quarter, we have enough capital to do M&A and buybacks, so they're not exclusive to each other.

Yeah, and just one more thing, David, just to sort of tie the bow on this. It's not burning a hole in our pocket either from the sense of I think there was a big bank CEO that said the capital is not burning a hole in our pocket. We're going to be disciplined in how we look at the uses of capital, whether that's through M&A, buybacks, other ways. We will continue to perform at a very high level, and we are going to generate additional capital. But we definitely want to put it to use, but we also want to make sure we put it to use in our normal disciplined way.

Yeah, that's great. And then just, you know, you guys have done a great job. You've been really active managing interest-bearing deposit costs. I'm curious the feedback that you've received from clients. Have you gotten any pushback? Have you seen any attrition? And then just how do you think about your ability to further reduce deposit costs and, you know, your outlook for core deposit growth going forward?

Yeah, we added a slide in our slide deck that showed, and I mentioned in my prepared remarks, that we've grown deposits by 3.3% on a five-year cumulative average growth rate. It's actually 6% if you include the acquisition and the broker deposits that we've added. But I feel very confident on that front. I mean, we have done a great job in the last couple of years when commercial real estate, last year really, but a couple years for the most part, where commercial real estate demand has been slower. We have brought on a number of great operating companies, C&I relationships. Well, that doesn't really translate into loan growth because the utilization is low and But it does translate in a lot of other ways. And so if there is this optimism that I am feeling out there in the market, I think that some of these customers will start to utilize those lines, will start to initiate projects that maybe they were holding off on. And deposits should grow just as that money starts moving around. And we're continuing to drive growth in our specialty banking group, in our government services group, All of those focused verticals that we have there are areas for us to do a good job. A lot of the excess money is out of the system. As we've talked about in the past, over a billion dollars has gone to our trust group. So there's the opportunity, depending on what rates do, that some of that can start to come back if they're going to, you know, start on some of these other projects. So I'm very optimistic on the deposit side. You know, we constantly have to, you know, prove our worth there. And we've done a really good job. We will continue to do a good job there.

That's great. Thanks, everybody.

Thank you. One moment for our next question. And that will come from the line of Andrew Terrell with Stevens. Your line is open.

Hey, good morning.

Good morning, Andrew.

I just wanted to maybe start on the margin. If I look at the presentation, it looks like the cost of total deposits was 90 basis points in December, so a few basis points off of the quarterly average. I'm just curious, you know, Any color you can provide on just the timing of rate reductions that you took kind of throughout the quarter? And then, you know, as we look into 2025, should we think of, obviously, that 90 basis points as kind of the starting point coming into the year, but do you feel like there's more reductions cost-wise you can make in the deposit base absent any additional rate decreases?

So, Andrew, if you look at that slide I think you're mentioning, if you look at the top left where you separate the cost of non-maturity versus time deposits, From the time deposit perspective, the bulk of what we have in time deposits is those cash flow hedge CDs, so those are unlikely near term to change. That said, the non-maturity deposits will probably continue to slowly go down in the near term. If the Fed does nothing, then obviously it will floor, but I think over the next month or two we probably will still see a little bit of a lag because the last Fed cut was in December, so there's still probably a little bit of a decline for that to continue. And then we suspect that Fed won't be doing anything this year, and that'll probably level out.

And Andrew, just to add one comment on that, you know, a little more technical. Basically, every money market rate in the bank that was 1% or over in the last rate cut, we matched that rate cut 100% on that. So to Alan's point, some of that occurred later in the month of December, and you're not seeing it in the monthly average. but there still should be some opportunity there. And look, it's also a big part of the mix, right? If we can continue to get operating deposits and move our non-interest-bearing deposits, keep them the same or move them up a little bit as percent of total deposits, that should help too in the overall cost.

Got it. I appreciate it. And then for the $500 million of borrowings, that are remaining, can you remind us the weighted average cost of those?

I think it's in the low fours, if I remember correctly, Andrew. I'll estimate like 425, if I recall correctly.

Okay, thanks. And then just last one for me, I mean, you know, the expenses were pretty stable quarter to quarter. Would love to hear just your thoughts on, it sounds like, you know, optimistic or optimistic on, you know, loan growth in 2025. You know, how are you thinking about expense growth into in 2025? And what are some of the kind of key areas of investment you're focused on in the year?

Andrew, I would say that from a controllable expense perspective, we've probably been growing significantly. about 4% recently. I think our goal is to keep it below that going forward, but we do plan on continuing to invest in technology. At the same time, I think some of those investments we have and will be made will help deploy and increase our efficiency. But the area of focus will continue to be, there's no big bang per se of any one major technology. It's just the number of things we're doing to automate and improve overall efficiencies.

Okay. Thanks for taking the questions. Of course.

Thank you. One moment for our next question. And that will come from the line of Ahmad Hassan with DA Davidson. Your line is open.

Hey, guys. Ahmad Hassan on for Gary Tanner. Good morning. Any additional color on the timing of the 385 million securities purchase?

Timing of the purchases we did in the fourth quarter? Yes. The purchases we did in the fourth quarter based on settlement dates, it was probably weighted more towards the end of the quarter versus the middle of the quarter, I guess is the best way of explaining it to you.

Right, that makes sense. And as a follow-up, any additional failed leaseback or securities transactions contemplated at this point?

No, we originally had actually looked at selling six properties. Our timing was pretty good on this and both from the sale perspective of the properties and the sale perspective of the securities. We actually sold all of the properties under a six cap and a couple of the properties under a five cap. And so once we got to the four properties, we decided to not sell the other two properties to increase our expenses. So at this point, there are no contemplated sale leaseback transactions, and we don't have anything listed for sale. So I think our mini balance sheet restructuring, for the most part, is done.

Thank you. Those will be all my questions. You're welcome.

Thank you. One moment for our next question. And that will come from the line of Adam Butler with Piper Sandler. Your line is open.

Hey, good morning, everybody. This is Adam on for Matthew Clark. Hi, Adam. So just on the expense line, particularly occupancy and equipment expense, what was the timing of the sale-leaseback transaction, and how much of that 4Q run rate of $5.9 million includes the expected $1.8 million cost? annualized increase in the expense line?

Those sales occurred in October, so the bulk of it was reflected. There's other things that go into our occupancy expense, so you can look at our slide deck and you'll be able to see the full year annual impact to occupancy from the sale leaseback. But we have other ways to reduce occupancy expense as well. I mean, as leases come up, we are reducing what we're paying on those leases and downsizing the size of our offices. So there's other components that we're managing to keep occupancy expense down.

Okay, that's helpful. And then on the buyback authorization, I was just curious to get your sense of optimism on being opportunistic on repurchases if rates remain elevated?

Well, I think, as Dave said, that buyback, we have a 10B51 in place, and we typically do make those opportunistic. So, you know, we'll see. There's always, I mean, you know, 2025 may be a volatile stock market. And so, you know, we buy on the dips, really, and that's the way it's designed.

Okay. Very helpful. Those are my questions. Thanks for answering them. Thank you.

Thank you. As a reminder, if you have a question, please press star 1-1. One moment for our next question. And that will come from the line of Kelly Mata with KBW. Your line is open. Hey, guys.

Good morning.

Good morning. I guess from a high level, we sometimes get pushback from investors on the dynamics in California with population outflows, migration, and it's a terrible situation, but the wildfire certainly doesn't help the narrative. What would you say to those who question the outlook here in California. What are you seeing and what gives you optimism about your outlook ahead here?

Yeah, so many of those thoughts sometimes Alan and I share as well, so that's okay. But what I would say, and this is true, Look, California is the, whatever, fifth, sixth, seventh largest economy in the world. It's an extremely diversified economy across pretty much every industry, whereas many other states are more one-trick ponies in a lot of cases. When you look at our market share in the markets we serve, we have a lot of opportunity to acquire market share. We're not a 30% or 40% market share in the state of California. We're a 2% or 3% market share in the state of California. So I think there's a lot of opportunity there. And despite the fact that there's been out migration, if somebody's business is here, it is very easy for them to pick up and move to another state, but it's very hard for them to move their business out of state. And while we will follow their business out of state if they go, like we've done in Dairy and Livestock, like we've done in some other situations, most of the time it's more of a personal decision, and where they're making their money is still in California. And so I think to the point of California's challenges, I think all that's true. But it's still a great opportunity for us, and we still have a lot of opportunity in the type of client that we want to attract to our bank. So I don't – I'm not as negative on the overall situation. I mean, there are individual situations sometimes that create problems, but for the most part, even when our customers have moved, you know, 99% of the time we've still banked them. So they're not going anywhere from a business perspective.

Got it. Thanks for that. That's really helpful. And then I also wanted to touch on – just the opportunity on the loan side. I think I caught in your prepared remarks or earlier in the Q&A that commercial real estate has been, it's challenging right now to get things that miss, fit your very tight credit box. Can you remind us, where are new loans coming on at? And do you, if we were to get a rate cut or two, do you think you can help offset that with reinvestment of some of these cash flows into the loan production you're getting?

Yeah. So, look, like I said, you know, sort of in my earlier answer, I think people are optimistic, and I do think the pipelines are improving, albeit not where we want them to be completely. I do think that there's more commercial real estate that – people are now willing maybe to do some stuff. The movement in the 10-year, the five-year and the 10-year, which is primarily what we base our rates on, as move rates higher, spreads have come in, we've had to be more aggressive on the pricing if it meets our credit box. We won't substitute or take any more credit risk than we would normally take, but we are having to be more aggressive on the pricing. And as I said in my prepared remarks, I would say it's coming in at the 6.5 range and maybe slightly higher than that. So we're having to do stuff. We just lost a deal yesterday, and it was a 10-year fixed at 4.8 to a large bank. Okay. That's not even the 10, I mean, 10-year treasury is 450 or whatever it's at. So I don't, I mean, I think a lot of the challenge, obviously we didn't compete at that rate, but a lot of the challenge has been, you know, everybody says they're going to grow loans 10%, and the only way to do, there's only two ways to do that. jeopardize your credit quality or price to win and you know we're going to be smart about how we do that just as we've been in the history of our bank but there is some irrational pricing that's starting to happen and so we just have to make sure as Alan reminds me often you know we can get mortgage backed securities and other investments over 5% so I don't you know with zero credit risk and zero risk rating so why are we

No bonus paid on it.

Yeah, so we just need to be smart about how we do that. But the simple answer to your question is around six and a half to six, seven, five is probably the range I would say new things are coming on.

That's helpful. I'll step back. Thank you, guys.

Thanks, Kelly.

Thanks, Kelly.

Thank you. One moment for our next question. And that will come from the line of Tim Coffey with Jannie Montgomery Scott. Your line is open.

Thank you. Morning, gentlemen.

Morning, Tim.

Hey, Dave. I mean, I hate to ask these questions because, I mean, there's still an active situation. But, I mean, there's going to be, you know, with the FIRE situation in your footprint, there's going to be some things that are going to happen, you know, with your balance sheet over the next couple quarters. And so I'm wondering, is the expectation that the money that comes into the bank is in form of deposits from rebuilding from insurance. Is your expectation to put those into kind of overnight funds?

Yeah. By the way, it's no problem asking the questions. I mean, Tim, we have a very limited impact, I would say, directly. As I mentioned, we only have 14 impacted properties. Seven of those 14 were completely destroyed. One of the seven, we've already received the insurance proceeds and paid off the loan and he has the money sitting in the bank. So currently that money is sitting in a bank control account that we will use to, once find somebody and once he can start rebuilding to rebuild his home. I don't think the impact is that great. It's about $7.5 million of loans that are on properties that are destroyed. I think the appraised value was somewhere in the neighborhood of $23, $24 million. We'll probably get somewhere close to $20 million in insurance proceeds. I don't think it's going to have a big impact either way. One of the things, and again, not something that you want to have to do, but we have agreed to be part of a couple of different efforts to rebuild, one through the Department of Financial Protection and Innovation, We decided to give relief if anybody asked. Nobody has asked for relief at this point, but there are some measures that they asked us to agree to which we did. There's also a group of banks that's being put together led by a supervisor in LA County that wants to work with a bunch of community banks to help these impacted people rebuild I don't know too much about that yet. Our first meeting is tomorrow on that. I'll know more after tomorrow. I don't think it's going to be a huge impact. We have a decent amount of contractors as customers. They're all going to be busy for a long time on this. I think that maybe should help us a little bit on the deposit side and potentially even the borrowing side. So I think, you know, all in all, while it was obviously a terrible situation, I think, you know, from a business perspective for the bank, I see probably more upside opportunity than downside risk. Right. At least at this point.

Right. And that was my next question is on the loan side, right? Because I think there is going to be some opportunity for new development, obviously, in these fire areas, and maybe perhaps not for the existing property owner. And that would put contractors to work quite a bit. Do you feel, I mean, that you're, obviously, you're capable and willing to rebuild the community. I mean, are you comfortable with construction balances rising above the current level for a period of time?

We are. As you know, we have such a low balance there. We have a lot of capacity there. We are extremely disciplined on the construction side. 50%, 60% loan to cost is generally what we do. I've actually even talked to our chief credit officer about maybe relaxing that a little bit where we are doing something from a wildfire relief perspective. Still have to meet all the other credit aspects of it, but allowing maybe a 60% or 70% loan to cost. You know, so relaxing a little bit while still maintaining excellent credit quality. I don't see that number going from where it is today and, you know, going to $300 million, but it could get to $100 or $150 million over the next, you know, couple years.

Right. Okay. All right. Those are my questions. Thank you very much.

And, Tim, I just want to say thank you regarding the donations as well. I appreciate your comments and the email you sent me.

Well, yeah, of course. I mean, I'm a Northern Californian, so I've seen how devastating the wildfires can be to my community. So, absolutely, happy to help.

Yeah, thank you.

Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. David Brager for any closing remarks.

Thank you, Cherie. Citizens Business Bank continues to perform consistently in all operating environments. Our solid financial performance is highlighted by our 191 consecutive quarters or more than 47 years of profitability and 141 consecutive quarters of paying cash dividends. We remain focused on our mission of banking the best small to medium sized businesses and their owners through all economic cycles. I'd like to thank our customers and our associates for their commitment and loyalty. Thank you for joining us this quarter. We appreciate your interest and look forward to speaking with you in April for our first quarter 2025 earnings call. Please let Alan or I know if you have any questions. Have a great day.

Thank you all for participating. This concludes today's program. You may now disconnect.