CVB Financial Corp.
Q1 2021 Earnings Call Transcript

Published: 23 Apr 2021

[Operator:]

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. Please note this call is being recorded. I would now like to turn the presentation over to your host for today’s call, Christina Carrabino. You may proceed.

[Christina Carrabino:]

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.

[Dave Brager:]

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 $0.47 per share, representing our 176th consecutive quarter of profitability. We previously declared an $0.18 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 $0.47 for the first quarter compares with $0.37 for the fourth quarter and $0.27 for the year-ago quarter. We recorded a recapture of 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.

[Allen Nicholson:]

Thanks, Dave. Good morning, everyone. Our effective tax rate was 28.6% for the first quarter compared to 29% for the fourth quarter of 2020 and 28.75% for the year-ago quarter. Our effective tax rate can vary depending on the level of tax-advantaged income as well as the available tax credits. Our allowance for credit losses decreased by $21.9 million from the fourth quarter of 2020 as a result of the $19.5 million recapture of provision for credit losses and net loan charge-offs of $2.4 million. We previously recorded a provision for credit losses of $23.5 million in the first half of 2020 due to the estimated impact on loan losses from the economic forecast of a significant downturn in the economy resulting from the COVID-19 pandemic. Based on the magnitude of government economic stimulus and the wide availability of vaccines, our latest economic forecast reflects improvements in key macroeconomic variables and therefore, lower projected loan losses, which resulted in a decrease in our allowance for credit losses.

[Dave Brager:]

Thanks, Allen. As we have discussed today, the bank continues to produce consistent earnings, maintain strong capital levels, solid credit quality and excellent liquidity. We are proud to have remained focused on our commitment to our associates, customers and shareholders during the challenges caused by the COVID-19 pandemic over the past year. We continue to prioritize the health and safety of our associates, customers and our other business relationships. We’re beginning to see more positive trends on the COVID-19 front, such as lower positivity rates and lower average daily cases. Most of the markets that we serve in California have moved into Tier 3 in the blueprint for a safer economy, meaning that some indoor business operations can open up with up to 50% occupancy. Vaccine distribution continues to increase throughout the state. And our governor announced that on June 15, California will fully reopen its economy if two criteria are met

[Operator:]

And our first question comes from the line of Brett Rabatin with Hovde Group.

[Brett Rabatin:]

Hi, good morning everyone.

[Dave Brager:]

Hi, Brett.

[Brett Rabatin:]

I wanted to first ask just around on the margin. It seems like with the investments that you’ve made here in the securities book, that you’ve going to reach to, hopefully, an inflection point on the margin. And it would seem like both NII and the margin should move up at least a little bit going forward. Can you just give us some color on the moving pieces there and how you see NII unfolding this year, maybe excluding the PPP noise?

[Dave Brager:]

Yes, I’ll start on that, and then Allen can add any thoughts he has. So I think we’ve reached maybe the inflection point on the investment securities, but loans were still challenged. We’re still originating loans at lower than the overall loan yield. So I do think that there might be some more headwinds there. The opportunity for us is, obviously, to continue to try and make quality loans, to have loans in a higher percentage of our total earning assets. That’s been challenged with the remaining excess liquidity that’s on the balance sheet. And every time we think we’re making positive gains there, our deposits keep growing. And so we did invest a significant amount in the last quarter, but where we really need to focus is in that quality loan growth and originating loans to grow that at a higher amount. I think there is some headwinds. I think that we do have – we’re getting to the inflection point. I just don’t know if we’re there yet. I don’t know, Allen, if you have anything to add to that.

[Allen Nicholson:]

Yes. I mean, earning asset mix could continue to be somewhat of a drag. Certainly, if we see better utilization on lines that could certainly help us. And for the security portfolio, you’re right. I think we may have reached sort of an equilibrium. But we did take advantage of, I would say, better market conditions in the latter half of the first quarter. Currently, where bonds are is a little bit below there. So we will continue to be very opportunistic when we buy securities, and try to buy them at – when yields are popping up.

[Brett Rabatin:]

Okay. And then to the loan growth point, I know last quarter, I tried to get you guys to use your crystal ball to talk about growth this year, including what the PP – including PPP. i.e., can you grow the loan portfolio even as PPP comes down? And it would seem like you could have some optimism around that although, obviously, the utilization rates are pretty low. Would you expect a pickup in the next few quarters around loan growth? Obviously, 1Q was better than many in the industry that had some atrophy this quarter.

[Dave Brager:]

Yes. As we mentioned, we still have a little over $500 million in remaining PPP round one. We’ve only boarded around $350 million of PPP round two. We continue to see forgiveness on the PPP round one. So that’s going to be a headwind. If you wanted to include it all together, that’s going to be a pretty significant headwind to overall loan growth. I do think that with the utilization on the lines, I am – again, thinking that, that will start to pick up. As I mentioned, as the economy reopens, our customers start to believe that they are going to be able to invest in their business, and it’s going to make sense, I do think that we will see utilization tick up again. But right now, everybody is sitting on so much liquidity that they are not having to use their lines. And when you’re down at 26% utilization on C&I loans compared to 39% in the year-ago quarter, that available line utilization is about $240 million. So if we can get that, if our customers start to believe that they can invest and that they start using that money again, we continue to grow commercial real estate the way we’ve grown it in the first quarter, and I think we will be better off. But it’s still a question as to when that’s going to start. Our loan growth – I mean, our loan production has been outstanding in the first quarter. We beat our first quarter of last year, so I think that, that’s a positive. The pipelines are strong. We’re just going to have to wait and see about utilization and that excess liquidity that’s on everybody’s balance sheets.

[Brett Rabatin:]

Okay. Good color. And Dave, if I could sneak in one last one. We’ve seen a few California deals here so far this year. And obviously, with your currency, you’d be able to do whatever you want, so to speak. Are you thinking more about M&A as a potential growth effort for you guys? And how do you just feel generally about what you’re seeing out there from an M&A perspective?

[Dave Brager:]

Yes. I mean, we always have utilized M&A as one of our areas of growth. There are a lot of conversations. There is nothing imminent, but there are a lot of conversations that are happening. I do believe that we will have opportunities to take a look at potential targets. They are – right now, I think most of the people that we’ve been talking with are considering a strategic option of selling, but you have to agree on price. We want to make sure it’s a good bank. We want to make sure that there is some value, whether it’s strategic and financial value, in a deal. There is a lot of criteria we utilize. But yes, with our currency, we’re hoping that we will be able to find the right partner going forward.

[Brett Rabatin:]

Okay, appreciate all the color.

[Operator:]

Your next question comes from the line of Jackie Bohlen with KBW.

[Jackie Bohlen:]

Hi, good morning everyone.

[Dave Brager:]

Good morning, Jackie.

[Jackie Bohlen:]

I wanted to dive into the reserve just a little bit. And I’m looking at it, that 97 basis points, excluding PPP. So if I understand the prepared remarks correctly, it sounds like just based on the weightings that you used for the Moody’s forecast, you more heavily weighted the adverse scenario, which I think you did in the past as well. So just in that framework, there is obviously still a good amount of conservative within that ratio. And if I look at my calculations, you started at 93 basis points on January 1. So my, I apologize, long-winded question is basically, how do you think about where you could wind up once we’re at the end of the pandemic? Could it be lower than that starting point at January 1, 2020?

[Allen Nicholson:]

It’s hard to predict, obviously, Jackie, but I do think, if you see where we began the accounting for CECL and positive economic outlook that existed at that point; and the fact that excluding PPP loans, which really don’t have a reserve, the portfolio hasn’t changed. The underlying risk associated with the portfolio has been pretty stable. So you could continue to see that coverage ratio drift down to where we began. And beyond that, it’s hard for us to predict.

[Jackie Bohlen:]

And have increasing property value had an impact on required reserves? Meaning low – I’m assuming there is lower loan-to-value because of increasing property value. So I’m wondering what effect that’s having on the methodology, if any.

[Allen Nicholson:]

The methodology looks at original LTVs. But there are probably five or six underlying metrics, including that some of them would theoretically take into current LTVs, but not specifically.

[Jackie Bohlen:]

Okay. Okay. And then I know you mentioned it in the prepared remarks, I was jotting things down too quickly. Maybe if you could just provide a little bit of background on the unique charge-off in the quarter.

[Dave Brager:]

Yes. It was a single C&I loan to a contractor, that he was unwilling to step up. We are still obviously going to pursue all of our recovery opportunities, but we just felt it was prudent to take it as a charge-off and deal with it in that fashion. It’s not something that is, I think, consistent with many of our customers. This was a unique situation that was impacted by COVID, impacted by a lot of different things. And we don’t see this as systematic throughout our contractor portfolio. It’s really a one-off situation.

[Jackie Bohlen:]

Okay, great. Thanks for the extra background.

[Dave Brager:]

Thanks, Jackie.

[Operator:]

Your next question comes from the line of Matthew Clark with Piper Sandler.

[Matthew Clark:]

Hi, good morning guys.

[Dave Brager:]

Good morning.

[Matthew Clark:]

First, on your new production, do you have the weighted average rate on that? I’m trying to get at an incremental margin?

[Dave Brager:]

Yes. We’re still originating loans in the first quarter. I would say that the rates went up slightly, but it’s still in that 3.50% to 3.75% range, just depending on the tenure of the loan, so in that range.

[Matthew Clark:]

Okay. And is that – that’s ex fees, right?

[Dave Brager:]

That’s excluding fees.

[Matthew Clark:]

Yes. Okay. And then maybe just to try to pin you down on core NII, that $89 million, thinking about the timing of the securities purchases and maybe some additional core NIM pressure. Do you think you’ve – I would assume we should see core NII up from here, but correct me if I’m wrong.

[Dave Brager:]

Yes. So when you say core NII, you’re excluding PPP from that?

[Matthew Clark:]

Yes, the $89 million.

[Dave Brager:]

Okay. I mean, if we can execute and grow loans, we still think that there is pressure on the loan yields. The investment yields, we think, have maybe hit the inflection point. There is still a little bit of headwind on our core NII. But our goal is to continue to generate loans and help offset that. As Allen mentioned earlier, just impacting our overall mix will help. And hopefully, we can – our customers start using some of that excess deposits that they have.

[Matthew Clark:]

Okay. And then your expense run rate, I think – I know there is a little bit of seasonality in the first quarter, so probably some relief going forward. Efficiency ratios kind of bouncing around the bottom, expense to average assets as well, but that’s somewhat distorted by PPP. What are your thoughts on kind of expense growth this year? And whether or not there might be some investments that need to be made, or additional savings?

[Allen Nicholson:]

I think from an expense standpoint, quarter-over-quarter, there always can be some minor ups and downs. But generally speaking, we’re trying to keep our expense growth to be flat or minimal. So I think as we find additional efficiencies, we are trying to invest that. So I would say low single-digits to flat expenses is really we’re trying to manage to.

[Matthew Clark:]

Okay. And then just within fee income, some elevated BOLI benefits, but it does seem like you have a little bit of that each quarter.

[Dave Brager:]

Every quarter.

[Matthew Clark:]

Yes. I guess – I know it’s tough, that’s a difficult one to predict. But I’m – I guess I’m trying to honing on the run rate of fee income and the puts and takes there.

[Dave Brager:]

Yes. Our fee income has been impacted on the deposit service charge side primarily just due to all the excess balances. And that’s the largest amount, the deposit service charges, of our noninterest income. And so we’ve been managing our earnings credit rates. We’ve been managing the line item cost of deposit products and services. And we want to make sure that we continue to collect those service charges. So we have a collection goal, a fee collection goal. But when people are sitting with an extra couple of billion dollars in deposits, earning credits to offset service charges that’s a little bit of a challenge. I do think, again, as balances start to decrease, and I believe that – I keep saying this. But I believe that at some point, they will, that we will be in a better position to collect a little bit higher on the deposit service charge side. We’re focused on Citizens Trust and driving revenue in that area as well. Swaps will probably be down just because right now, conventional rate loans are priced in a way with the steeping of the yield curve, although it settled back a little bit, it’s still better for us to take the 3.75% rate versus 30-day LIBOR plus 2.75% rate at 3%. So swap fee income will probably be a little bit challenged through the foreseeable future. And then the other stuff, the BOLI and all that is, it’s just – there is a lot of variables in that, obviously.

[Matthew Clark:]

Got it. Thank you.

[Dave Brager:]

You are welcome.

[Operator:]

Your next question comes from the line of David Feaster with Raymond James.

[David Feaster:]

Hi, good morning everybody.

[Dave Brager:]

Good morning, David.

[David Feaster:]

I appreciate the commentary in the prepared remarks on the origination activity. I’m just curious, how much of that in the quarter was from existing clients that are investing and expanding versus maybe new client acquisition from either new lender hires or the PPP program?

[Dave Brager:]

Yes. I don’t have the specific percentage breakdown, but just anecdotally, I can tell you that there is a good amount of it from new hires. That’s one of the things I’m most optimistic or cautiously optimistic about, is we have been seeing, with some of our new hires, new projects. I mentioned previously – or we mentioned previously that we opened de novo office in Modesto. We’ve hired a number of new RMs in different markets. And I do believe that, that production is a big part of why we’ve had some success in the first quarter of this year over the first quarter last year. If I had to guess, I’d say it’s probably about 50-50 expansion of existing relationships and 50% either new loans from new RMs and just new loan generation from our existing legacy RMs.

[David Feaster:]

That’s encouraging. And I guess just kind of on that topic, I mean, if you look out, we’ve got the Modesto one opening, are there any other de novo markets that you’re interested in expanding to, where you’re seeing opportunities to hire, find a team and build around it, I guess? Where kind of would be your top priorities?

[Dave Brager:]

Well, I mean, we have a lot of opportunity in Southern California that we don’t have huge presence in. It’s not so much about the geographic market as much about the team member that you’re looking to bring on board. And the opportunity that we had in the Central Valley and Modesto is a good one. We’ve hired a couple of new people down in San Diego. There are other places in L.A. County that we would be interested in looking at. There is other places in San Diego County we’d be interested in looking at. But it really depends on getting the right person.

[David Feaster:]

Okay. And then maybe if you could just touch on some capital priorities, obviously, organic growth is top priority. You touched on M&A and the sub-debt redemption, but just curious how you think about the dividend. It looks like the payout ratio, excluding the reserve release this quarter, is kind of held in that 50% realm, just curious, your thoughts on capital and opportunities for capital deployment?

[Dave Brager:]

Yes. We also have the 10b5-1, but where our stock is trading, obviously, we haven’t been – we haven’t repurchased any stock in the last quarter. We also – I agree with you or I agree with your comment on the – kind of in that 50% to 60% range is our plan on the dividend payout, and so the dividend right now. Really, M&A is the opportunity for us if we can find the right opportunity with the right bank. And again, we’re having conversations. There is nothing imminent, but we’re having conversations with a lot of different people. And hopefully, we will be able to identify and move forward with something this year.

[David Feaster:]

Okay. That’s helpful. Thanks for the color.

[Dave Brager:]

Thanks, David.

[Operator:]

At this time, there are no more questions, so I would like to turn the call back over to Mr. Brager.

[Dave Brager:]

Great. Thank you. I want to thank everybody for joining us this quarter. We appreciate your interest and look forward to speaking with you in July for our second quarter 2021 earnings call. Please let Allen or I know if you have any questions. Have a great day, and thanks for listening.

[Operator:]

Ladies and gentlemen, this does conclude today’s conference call. You may now disconnect your lines.