CVB Financial Corp.
Q4 2020 Earnings Call Transcript

Published: 28 Jan 2021

[Operator:]

Good morning ladies and gentlemen and welcome to the Fourth Quarter of 2020 CVB Financial Corp. and its subsidiary Citizens Business Bank earnings conference call. My name is Carmen and I am your operator for today. Please note that 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 Carmen and good morning everyone. Thank you for joining us today to review our financial results for the fourth quarter and year ended 2020. Joining me this morning are

[Dave Brager:]

Thank you, Christina. Good morning everyone. Happy New Year and thank you for joining us again this quarter. We reported net earnings of $50.1 million for the fourth quarter of 2020 or $0.37 per share representing our 175th consecutive quarter of profitability and our highest level of quarterly income in 2020. We previously declared $0.18 per share dividend for the fourth quarter of 2020 which represented our 125th consecutive quarter of paying a cash dividend to our shareholders. Fourth quarter net earnings of $50.1 million compared with $47.5 million for the third quarter of 2020 and $51.3 million for the year ago quarter. Earnings per share of $0.37 for the fourth quarter compared with $0.35 for the third quarter and $0.37 for the year ago quarter. Net earnings were $177.2 million for the year ended 2020 compared with $207.8 million for the year ended 2019. Diluted earnings per share were $1.30 for 2020 compared with $1.48 for 2019. We did not have a provision for credit losses in the fourth quarter as our forecast of macroeconomic variables at quarter end changed modestly from the prior quarter and the asset quality of our loan portfolio did not materially change from the third quarter. We will discuss our allowance and our economic forecast in more detail later in this call.

[Allen Nicholson:]

Thanks Dave. Good morning everyone. Our effective tax rate was 29% for the fourth quarter and full year. Our allowance for credit losses decreased by approximately $200,000 in the fourth quarter, as a result of the net loan charge-offs. Our economic forecast, as it relates to the key macroeconomic variables that we model for our allowance, remained mostly stable from the end of the prior quarter. Our ending allowance for credit losses was $93.7 million or 1.25% of total loans when excluding the $883 million in PPP loans. In addition to the allowance for credit losses we have $31 million in remaining fair value discounts from acquisitions. As a result of the decline in economic activity due to the pandemic, we recorded $23.5 million in provision for credit losses during the first two quarters of 2020. Our economic forecast continues to be a blend of multiple forecasts, produced by Moody's. These forecasts, included baseline forecast, as well as an upside and downside forecast. This U.S. baseline forecast assumes GDP, will increase by 4.1% in 2021, 4.7% in 2022, and 3.2% in 2023. The unemployment rate is forecasted to be 6.9% in 2021, declining to 6% in 2022, and then dropping to 4.6% in 2023. California having to shut down parts of the economy again starting in December, and having an unemployment rate greater than 8%, our blended forecast year-end included a greater weighting on the downside economic forecast, as compared to the weighting on the upside forecast. Now, turning to our capital position shareholders' equity, increased by $14 million to $2 billion end of 2020. The increase was primarily due to net earnings of $177 million and a $23 million increase in other comprehensive income from the tax-effected impact of the increase in market value of available for sale securities, offset by $92 million in stock repurchases during the first quarter and $98 million in cash dividends. Our overall capital position continues to be very strong. Our tangible common equity ratio was 9.6% at the end of the fourth quarter and our regulatory capital ratios are well above regulatory requirements to be considered well capitalized. At December 31, our common equity Tier 1 capital ratio was 14.8% and our total risk-based capital ratio was 16.2%. At December 31, 2020, we had $1.8 billion on deposit to Federal Reserve. During the fourth quarter, we started to deploy some of the excess funds into security purchases, which totaled $462 million. These securities are expected to yield interest income at approximately 1.1%. In the current low rate environment with Federal Reserve purchasing a significant amount of mortgage-backed securities, we will continue to limit how much of our excess liquidity we invest in such low-yielding securities. At December 31, 2020, our combined available-for-sale and held-to-maturity investment securities totaled $2.98 billion, a $194 million increase from the third quarter and the $563 million increase from December 31, 2019. I'll now turn the call back to Dave for some closing remarks.

[Dave Brager:]

Thanks, Allen. 2020 was a very eventful year to say the least. The worldwide pandemic, stay-at-home orders, business shutdowns, social unrest and a near zero interest rate environment all combined to create a very challenging environment for financial institutions to operate and succeed in. I'm proud to say that Citizens Business Bank not only remained open to service our customers and communities but also excels in many areas. This is due in large part to the dedication and focus of our associates throughout the bank and the long and loyal relationships we have developed with our customers. The bank has continued to produce consistent earnings, maintain strong capital levels, solid credit quality and excellent liquidity. Our customers and loan portfolio performed favorably during the past nine months despite the many challenges we have all faced. We believe that there is a light at the end of the pandemic tunnel, as the manufacturer and distribution of the new COVID vaccine hopefully continues to progress and increase. We remain committed to the core values that have allowed our bank to succeed through the many economic cycles we've encountered over our past 46 years of business. Looking forward, we are encouraged by the improving economic conditions we are seeing throughout the various markets that we serve. Despite the recent spike in COVID cases in California and elsewhere, along with the accompanying anxiety and systematic stresses that this spike has created, our customers have thus far continued to perform relatively well through their entrepreneurial spirit and sheer force of will. We're proud to be their partners in helping them persevere and hopefully come out stronger on the other side. Additionally, as of Monday, the Governor of California listed the more stringent stay-at-home order allowing some businesses to resume limited reopening. In terms of specific responses, our bank provided needed support to our communities through targeted charitable giving to assist those most impacted by COVID. We provided over 4000 paycheck protection loans to our customers totaling $1.1 billion. We generated record new loan volume outside of the PPP lending. And we invested in our future by beginning an online banking platform conversion that will allow us to better compete in an ever-changing banking environment. In addition, as was the case in the first round of PPP, we are committed to being an active participant in both the loan programs provided in the second round of PPP recently enacted by Congress. The new first drop program for those businesses that did not receive a previous PPP loan and the new second drop program for those eligible businesses that did receive a previous PPP loan. In closing, we are proud of our accomplishments in 2020, as we successfully navigated through the COVID pandemic and I believe we are well positioned for future growth in 2021. We remain committed to growing the bank in a balanced way, utilizing all three of our growth initiatives increasing same-store sales, opening de novo centers and seeking strategic and financially sound acquisitions. And a late hour at this morning, I'm proud to say that the bank was once again made the top-ranked bank in America by Forbes Magazine for 2021. Please stay healthy and safe. And that concludes our presentation today. Now Allen and I will be happy to take any questions that you might have.

[Operator:]

Thank you. Our first question is from Jackie Bohlen with KBW. Your question please.

[Jackie Bohlen:]

Hi. Good morning.

[Dave Brager:]

Good morning, Jackie.

[Jackie Bohlen:]

First off, thank you for that color about the 35 basis point impact to the margin, if you normalize the liquidity that's really helpful to put it in context. I know about -- I ask about this every quarter, but just as you think about potential deposit growth, I think in the past you mentioned for every dollar of PPP that comes in or goes out it feels like $2 in deposits come in. How are you seeing those trends today and what are your expectations in the coming months with the new round of PPP?

[Dave Brager:]

Yes. I mean, I think for the most part that I anticipate our customer deposits to continue to build. I mean that's been our experience. We have fantastic customers. We have customers that prior to this near zero interest rate environment. It was great to have these types of customers. They're so strong. They just continue adding to their deposits. So I do anticipate the balance is going up. I don't think it will be the 2

[Jackie Bohlen:]

Okay. And I mean, I know there's a lot of unknowns and variables in there. And then, I guess taking that in context with Allen's comments regarding the disadvantages with the rate environment, for securities purposes, just how you're thinking about managing liquidity obviously loan growth, but just any color you can provide there?

[Dave Brager:]

Yes, Jackie. I mean obviously it is loan growth. That's the number one priority. I'm proud to say we had our best year in gross loan production that we've ever had in 2020. And the pipeline going into 2021 is as strong as it's ever been going into a new year. Now we have some seasonality obviously with dairy and livestock. But I do think that we have the opportunity, especially with the disruption in larger banks and potential issues at some other banks that we have the opportunity to net-net gain new customers and gain new lending opportunities. So, I'm very optimistically -- cautiously optimistic about our ability to continue to do that going throughout 2021. And hopefully, the vaccine and businesses reopen, maybe some of our customers will feel a little more confident, start investing some of their excess deposits in equipment and other things that will allow us to reduce some of that excess liquidity while also providing some loan opportunities.

[Jackie Bohlen:]

Okay. So, is it fair to say you're looking more towards economic expansion in the latter half of the year as a source of liquidity appointment, just given bad securities rates at the moment?

[Dave Brager:]

Yes. I think that's fair. And I mean obviously we're also going to have to continue to look at investment purchases to augment that because $1.8 billion is a lot of money. And we're going to maintain our credit quality, and we're going to do the best loans that we can do. So that's important to us as well.

[Jackie Bohlen:]

Okay. Okay, thank you. I’ll step back.

[Dave Brager:]

Thank you.

[Operator:]

Thank you. Our next question comes from Gary Tenner with D.A. Davidson. Your question please.

[Gary Tenner:]

Thanks. Good morning.

[Dave Brager:]

Good morning.

[Gary Tenner:]

Hey. With regard to loan growth, I thought the fourth quarter was encouraging, as you pointed out a moment ago great origination strong pipeline. I think in the past you'd kind of talked about a loan growth bogey maybe in the 6% to 8% range given how things look for 2021, and admittedly, it's pretty early. It's kind of low to mid, excluding PPP where you think you would be focused, or do you think you could do better than that?

[Dave Brager:]

Yes. I don't know that -- we don't typically give guidance on a specific number. But I would say the numbers that you mentioned are probably aggressive and probably on the high end of the best case scenario for us. I do anticipate for us to have loan growth. But I wouldn't say we would get to those numbers. And obviously a lot of it is dependent on what's going on and how we get through this. But I am again cautiously optimistic that we can have some loan growth. Like I said we had our best quarter of loan production in the fourth quarter that we've ever had. We had our best year of production in 2020 despite all the challenges that we've ever had and we're starting off the year in a better position from a pipeline perspective than we have. Now, we have to execute and we have to compete and the rate environment is a little crazy and all that. But I mean I think that we can definitely grow loans outside of PPP and all the noise there and outside of the seasonality in our dairy and livestock.

[Gary Tenner:]

All right. Thanks for that. And then as it relates to provisioning and your CECL calculation, given the commentary that given -- that since California has been more shutdown than other parts of the country, the weighting was more towards the downside Moody's forecast with the commentary that the governors open this up a little bit more. All else equal would that have a meaningful delta to your kind of CECL forecast at the end of this quarter if that's the only kind of real meaningful change during the quarter?

[Allen Nicholson:]

Gary, this is Allen. I guess to start out with I would direct you to page 20 of our investor presentation and our -- and you'll see the weighted forecast assumptions there. So, that might give you a little more context. Certainly, as I mentioned in my prepared remarks, we are weighting it more on some of the downside forecast for Moody's just because of California's performance has obviously been below par compared to the rest of the country. So, if California starts to trend closer to how the rest of the country has been performing, yes, we would probably see some potentially some releases in 2021 if everything else stays the same.

[Gary Tenner:]

All right. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Brett Rabatin with Hovde Group. Your question please.

[Brett Rabatin:]

Hey, good morning everyone.

[Dave Brager:]

Good morning Brett.

[Brett Rabatin:]

Wanted to just talk about expenses for a second. And obviously really strong performance in terms of managing them flat last year. Can you talk maybe about just any need to invest going forward? And I'm just kind of trying to think about like what needs you might have and then just kind of thinking about -- not looking for specific guidance, but maybe just thinking about if we can continue that trend of kind of maintaining that flattish level?

[Dave Brager:]

Yes, I mean obviously we've always taken cost-effective operations and cost control very seriously. What we're doing is we're trying to make targeted investments where we can create efficiencies like the online banking platform conversion I mentioned that will allow us hopefully to deliver a more digital experience to those customers that want it, while controlling those expenses. And so those are the types of things that we're doing. We're constantly evaluating the -- our -- we call them centers or branches to determine if that's something that we need to look at. But at this point, our focus is to keep expenses as flat as we can and try and grow the revenue side and get some positive operating leverage and that's the goal and that's what we're managing to. But there are a lot of unknowns in that as well. Some of the expenses that occurred in 2020 depending on how long and how deep the pandemic continues to go, we had increased expenses in cleaning we had increased expenses and a lot of things sort of partially offset by some of the things we weren't able to do. So we'll have to see how it all plays out as we move forward through the year. But that -- the plan is to definitely keep them as flat as possible. Allen, do you have anything to add to that?

[Allen Nicholson:]

No, I mean I think as Dave said, we might see some increases in certain areas but at the same time we look for decreases in others that can try to offset that and keep expenses to a fairly low level of increasing if not flat.

[Brett Rabatin:]

Okay, that's helpful. And then I think everybody is talking more about M&A and obviously with the premium currency, you're in a pretty good spot. If you find something that looks attractive. Maybe just could you provide any color on your appetite for M&A and any optimism that you're interested in doing such?

[Dave Brager:]

Yes, I mean we're absolutely interested in the right M&A opportunities. As you mentioned with our premium, and the opportunity out there, I think as we kind of get further along here, there's people that are looking at the future the acquisition, the potential acquisition targets out there that, we're having conversations. I would say, there's nothing that's imminent. We always get a phone call just based on the premium of our stock and how we're trading. But we're definitely interested in looking at doing that. It needs to be the right organization. It needs to be an organization that – from either financial or strategic situations circumstances makes sense for us. But we're definitely open and looking at those types of opportunities, and hopefully, we'll be able to execute on one in the next 12 months.

[Brett Rabatin:]

Okay. Thanks. Appreciate all the color.

[Dave Brager:]

Thank you.

[Operator:]

Thank you. Our next question comes from Matthew Clark with Piper Sandler. Your question please.

[Matthew Clark:]

Good morning.

[Dave Brager:]

Good morning.

[Matthew Clark:]

Just on the – on your core loan yields, it looked like the degradation there slowed to only about down two basis points to 4.38%. I guess, can you speak to that outlook on loan yields and what the pricing environment is like, and if they can start to stabilize and you're able to put some of that excess liquidity to work even, if it's in securities. Should we assume that that 3.11% is kind of a trough in the core NIM?

[Dave Brager:]

Yeah. I'll start and I'll let Allen jump on. We're – just to kind of speak to part of your question there. We're originating loans kind of in that 3.50% to 3.75%, or anything that's a long-term 5, 7, 10 year fixed rate loan today. So there is pressure there. And then obviously with the investment securities that we purchased yielding 1.19%, there's pressure there. So I think there is still more pressure on the asset side. Obviously, the ability to deploy that excess liquidity impacts that a great deal. If we can move a higher percentage of the earning assets to loans that helps these are our plans. And then, we'll see how the liquidity the excess liquidity how long it sticks around and what happens there. But I think in the fourth quarter, it was pretty good. It stated relatively flat down slightly. So I'm hoping that, we can maintain that level. I think there's still some headwinds there though. So Allen, anything you want to add?

[Allen Nicholson:]

Yeah, I'd agree. I mean, it certainly has slowed down. But to Dave's point, if you look at origination yields versus the core yield of the portfolio there is more than likely still some game to be played in terms of decline there, but certainly slowing.

[Dave Brager:]

Yeah. I mean, I want to just to add on to that one of the thought I had is we did decrease our cost of deposits and cost of funds to nine basis points. So I'm getting close to the all-time record for Citizens Business Bank. But we're going to – we're going to continue to watch outside. There's not as much room obviously on that side, but we're going to do everything we can to manage the interest expense and continue to grow loans in the higher percentage of the balance sheet.

[Matthew Clark:]

Okay. And then, do you happen to have the remaining net PPP fees that you expect to realize for round one just so that we're modeling it we're on the same page?

[Dave Brager:]

Well, in general terms as we noted in our investor presentation the total PPP fees were approximately $35 million. And I think we've recognized about $20 million of that I think.

[Allen Nicholson:]

A little more actually, because we had 10.5 and 9.5 and then whatever we did in the –

[Dave Brager:]

Yeah. For 2018 $21 million. Yeah. So we probably have $13 million, $14 million remaining.

[Matthew Clark:]

Okay. Just double checking. Thank you.

[Dave Brager:]

You’re welcome.

[Operator:]

Thank you. Our next question comes from David Feaster with Raymond James. Your question, please.

[David Feaster:]

Hey, good morning, everybody.

[Dave Brager:]

Good morning, David.

[David Feaster:]

I'm just curious, if you could give us maybe a pulse of your clients. I appreciate the commentary on record originations in 2020, and what was a pretty tough year obviously. Just curious, how much of this is existing clients investing and expanding their business versus new client acquisition from new lenders or the PPP program? And just maybe the pulse of your clients and their thoughts on willingness to invest in the near term.

[Dave Brager:]

Yes. So I think just overall, generally our clients our customers have been navigating very, very well. They're obviously wanting things to get back to more normal circumstances. But we've had some interesting stories and some great success stories with some of our customers that have had to pivot from their traditional business into other things that were more secondary for them that they've been able to grow and do a good job. And so I think overall, they as well are cautiously optimistic. I meet -- I still have been meeting with clients either via Zoom or even some cases face-to-face appropriately socially distance face-to-face. But we have some really great customers that are really entrepreneurial, as I mentioned in the prepared comments. And they've continued to drive their business and do really good things. So to go to another part of your question, I think that I would say, it's probably been about 65 -- about two-thirds existing relationships that have been driving that loan growth taking advantage of opportunities. But we've done a much better job on the prospecting side. And I think that has a lot to do with some of the disruption and some of the other -- with some of the other banks, especially larger banks that have allowed us the opportunity to do some things and get into some relationships that we weren't in before. So the one thing we haven't talked about, I mean, our utilization is still way down. And so if things start getting back to normal, utilization goes back to a normal level and we continue to generate the loans that we've been generating that's why I'm cautiously optimistic about the loan growth. But California just on Monday, they announced that they were lifting the more stringent stay-at-home order and now it's back to the counties in the kind of former tier system. And so I think there's a little bit of fatigue on our customers' parts of opening, closing, opening and closing. And so they just want to get back to business. They feel they can do it in a safe manner. And I hope that they'll be able to do that.

[David Feaster:]

Okay. That's good color. And then just maybe your thoughts on fee income. How much of the waived fees are still waived? And maybe when you think those come back? Any thoughts on additional fee income lines you'd be interested in expanding into? And then just any thoughts on the trust business. I mean, AUM has done really well. Just how do you think about that business and opportunities to gain share there with your existing client base?

[Dave Brager:]

Yes. I mean, obviously, the trust business it's a function of the market. It's a function of the new client acquisition. We had a good year in new client acquisition and trust. It is something that we focus on. We actually incent -- our associates to refer to our trust business, our sales associates. So we work hard to grow that part of the business. That's part of it. I think from the biggest challenge or the biggest headwind on the service charge income is more on the deposit side. And on the deposit side because of all of the excess balances more of those balances -- or more of those charges have been offset by the higher balances and higher earnings credit. And so what's happened is, we've managed the ECRs down a little bit. We want to maintain -- after we get out of this near zero interest rate environment, we want to maintain those relationships. So we probably reduced that slower than we reduced our interest rates on interest-bearing accounts. So we'll continue to look at that and evaluate that. I mean, just to give you an example, we had a relationship with the bank and they made a very large deposit and the relationship manager was asking me, if we could pay them 20 basis points on the money market. And I said, no, you can put it in the non-interest-bearing. So those are the kinds of conversations. We're having those individual conversations on relationships every single day. So we're just trying to manage that. I think the fee income side as we manage down ECRs and balances start to maybe decline a little bit, I think we have some opportunity there. But we're focused on card. Card was really down this year obviously because there wasn't as much activity. So we're looking to that -- for that to bounce back. International had a pretty good year relative to what you would have thought. And I think there's a lot of opportunity there with our customers as things start to open back up. So I think there are some tailwinds for us there, but we really just have to continually manage to drive that. Our goal is to collect 90% of the charges that we -- that are available to collect. We're slightly below that, but we also have great customers that are demanding. So you have to balance those two things.

[David Feaster:]

Okay. That's helpful. And then just last one for me. Just any -- could you just talk about your asset sensitivity? I mean, it was a little -- it was a good run we had with the rising 10-year yields, which have come back. But our internal forecast we're thinking that rates are going to be higher. I'm just curious how your asset sensitivity has changed today? I suspect it's continuing to increase just in light of the impacts of excess liquidity and shorter durations and securities. But just curious your thoughts on asset sensitivity how that might have changed? And how you're planning to manage that going forward?

[Dave Brager:]

Yes, David. Of course, with the excess liquidity on the balance sheet it has increased the level of asset sensitivity where we are right now. We've always been relatively asset sensitive. And so it's accentuated it. I think it gives us opportunities to a certain degree in terms of going out long on potentially investment purchases, but once again those will be very modest I would say in the context of our whole balance sheet. So yes, if rates do go up and particularly, frankly, we would just like to see rates go up on the longer end of the curve more than anything as most banks would and it will definitely benefit from that.

[David Feaster:]

Certainly. Thank you.

[Dave Brager:]

Thanks, David.

[Operator:]

Thank you. At this time, there are no more questions. So I would like to turn the call back 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 April for our first quarter 2021 earnings call. Please let Allen and I know, if you have any questions. Have a great day and thanks for listening. Bye-bye.

[Operator:]

Thank you for your participation in today's conference. And you may now disconnect.