Q4 2021 CVB Financial Corp Earnings Call

January 27, 2022

Good morning, ladies and gentlemen, and welcome to the fourth quarter and year ended 2021, CBB Financial Corporation and its subsidiary.

This is business Bank earnings Conference call. My name is Michelle and I'm your operator for today at.

At this time, all participants are in listen only mode.

Later, we will conduct a question and answer period. Please note. This call is being recorded I would now like to turn the presentation over to your host for today's call Christina Caribbean now you May proceed.

Thank you Michelle and good morning, everyone.

Thank you for joining us today to review our financial results for the fourth quarter and year ended 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 Dot CB Bank Dot 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 1095 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 run.

Port on Form 10-K for the year ended December 31, two.

2020, and in particular, the information set forth in item one a risk factors therein for more complete version of the Companys Safe Harbor disclosure. Please see the company's earnings release issued in connection with this call now.

Now I will turn the call over to Dave Brager, Dave.

Thank you Christina and good morning, everyone.

Bank delivered another solid quarter and full year of strong earnings. The 2021 earnings represented the highest earnings in the company's history.

And over the last two years since the onset of the COVID-19 pandemic citizens business Bank has maintained its high level of performance and confirmed our position as a safe sound and secure financial institution.

We were pleased to complete the acquisition of Suntrust Bank on January seven 2022, and to welcome Suntrust banks associates customers and shareholders to citizens business Bank.

We are excited about the acquisition and the opportunities it provides for expansion into the greater Sacramento market as well as solidifying our significant position in the Central Valley.

We reported net earnings of $47 $7 million for the fourth quarter of 2021, or <unk> 35 per share representing our 179th consecutive quarter of profitability.

We previously declared an <unk> 18 per share dividend for the fourth quarter of 2021, which represented our 129th consecutive quarter of paying a cash dividend to our shareholders.

Fourth quarter net earnings of $47 7 million or <unk> 35 per share compared with $49 $8 million for the third quarter of 2021, or <unk> 37 per share and $51 million for the year ago quarter or <unk> 37 per share.

For the fourth quarter of 2021, our pre tax pre provision income was $66 $8 million compared with $65 7 million for the prior quarter and $75 million for the year ago quarter.

Net earnings were $212 $5 million for the year ended 2021, a $35 4 million increase compared to 2020.

Diluted earnings per share were $1 56 for 2021, compared with $1 30 for 2020.

2021 pre tax pre provision income was $272 million compared with $273 million for 2020.

In 2021, we had $25 $5 million recapture provision for credit losses, while in 2020, we had a $23 5 million provision for credit losses.

Now, let's discuss loans.

Our 2021 loan production continued to be strong in the fourth quarter from year end 2020 to December 31, 2021 core loans, excluding PPP loans grew by $235 3 million or approximately 3%.

Total loans at quarter end were $7 $8 9 billion, a $38 2 million increase from the end of the third quarter.

After excluding PPP loan forgiveness in the seasonal increase in dairy and livestock loans fourth quarter loan growth was $76 million or approximately 4% annualized.

Loan growth in the fourth quarter was led by continued growth in commercial real estate loans, which grew by $55 million compared with the end of the third quarter and by $288 2 million or approximately 5% for all of 2021.

C&I loans increased $43 million compared with the third quarter, but were essentially flat when compared to the end of 2020.

Although our line of credit utilization for C&I loans continues to be lower than our pre pandemic experience. It increased modestly from the third quarter.

The line utilization rate for C&I loans was 29% at the end of the fourth quarter compared with 27% for the third quarter and 29% at the end of 2020.

Dairy and livestock loans grew by approximately $110 million from the end of the third quarter.

The majority of the increase in dairy and livestock loans was seasonal and much of the growth occurred near the end of the fourth quarter as many of our dairy owners choose to defer their milk checks into the first quarter of the following year <unk> prepay their feed expenses.

Dairy and livestock loans grew by approximately $32 million from the end of 2020.

PPP loans declined by $144 million compared with the third quarter and by $696 million from the end of 2020 due to the continued forgiveness of these loans.

Non PPP SBA loans declined by approximately $19 million compared with the third quarter and $15 million from the fourth quarter of 2020.

We are optimistic that we can continue to grow high quality loans in 2022 at a pace similar to our 2021 core loan growth.

We also anticipate that the Suntrust bank merger with an expanded geography, and CBB as greater lending capabilities can further enhance our growth.

At quarter end nonperforming assets defined as non accrual loans plus other real estate owned were $6 $9 million compared with $8 4 million for the prior quarter and $17 $7 million for the year ago year ago quarter.

At fourth quarter end, we had no oreo properties and the $6 $9 million in nonperforming loans represented nine basis points of total loans.

During the fourth quarter, we acquired an Oreo property, which was sold during the fourth quarter at a gain of approximately $700000.

During the fourth quarter, we had net loan charge offs of 345000.

Compared with net loan recoveries of $22000 for the third quarter of 2021.

We had net loan charge offs of $3 $2 million for the full year 2021.

Paired with $308000 for the full year 2020.

At December 31, 2021, we had loans delinquent 30 to 89 days of $2 $5 million compared with $1 1 million at September 32021.

Classified loans for the fourth quarter were $56 $1 million compared with $49 8 million for the prior quarter and were lower than year end 2020 by approximately $23 million or $65 million allowance for credit losses is approximately 103% of our total classified.

And nonperforming loans.

Now I would like to discuss our deposits at.

At December 31, 2021, our total deposits and customer repurchase agreements were $13 $62 billion.

Paired with $13 6 billion at September 32021, and $12 $2 billion for the same period a year ago.

At December 31, 2021, our noninterest bearing deposits were $8 1 billion compared.

Compared with $8 3 billion for the prior quarter and $7 $4 6 billion for the year ago quarter.

During the fourth quarter noninterest bearing deposits averaged $8 3 billion, a $335 million increase from the average balance in the third quarter.

A key differentiator for our bank is the level of our noninterest bearing deposits.

Noninterest bearing deposits were greater than 63% of our average deposits for the fourth quarter and the $8 3 billion balance at year end exceeded the bank seven $8 billion loan portfolio.

We continued to see strong deposit growth for the fourth quarter as average total deposits and customer repurchase agreements increased by $378 million.

Or an annualized rate of approximately 11% from.

From the third quarter of 2021.

And $1 9 billion or approximately 16% higher on average than the year ago quarter. The bank's funding is entirely core customer deposits and customer repos, which combined had a total cost of just three basis points in the fourth quarter.

This three basis point cost of funds compares with four basis points in the prior quarter and nine basis points for the year ago quarter.

I will now turn the call over to Allen Nicholson to discuss our investments allowance for credit losses and capital levels Alan.

Thanks, Dave and good morning, everyone.

We deployed some of our excess liquidity during the fourth quarter.

Additional securities by purchasing more than $700 million in mortgage backed securities.

As a result, our total investment securities increased by $474 million from the end of the third quarter to $5 1 billion as of December 31, 2021.

Investment securities available for sale or <unk> securities totaled $3 8 billion.

Inclusive of pre tax net unrealized loss of $1 3 million.

Investment securities held to maturity or HTM securities totaled approximately $1 93 billion.

At December 31.

During the fourth quarter, we purchased $452 million and new <unk> securities with an expected tax equivalent yield of six 1%.

And $259 million in HTM securities with an expected tax equivalent yield of 184%.

The growth in our investments resulted in the investment portfolio, increasing from 29% of earning assets in the third quarter to 33% on average in the fourth quarter.

We continued to maintain a significant amount of funds at the federal reserve.

Our balance averaged more than $2 billion for the fourth quarter.

As interest rates have begun to rise in 2022.

Been able to purchase new mortgage backed securities at the beginning of this year at yields exceeding 2%.

Security yields continue to rise, we expect to increase our security purchases in 2022.

At December 31, 2021, our ending allowance for credit losses was $65 million or eight 2% of total loans.

When excluding PPP loans, our allowance as a percentage of the remaining loans was eight 4%, which compares to 91% at the pre pandemic period end of December 31 2019.

In addition to the allowance for credit losses, we had $19 million during the remaining fair value discounts from acquisitions at the end of the year.

Sure.

For the full year ended December 31, 2021, we recorded a recapture provision for credit losses of $25 5 million. This.

This compares to the provision for credit losses of $23 5 million, we recorded in the first half of 2020.

This was due to the estimated impact on loan losses from the economic forecast of a significant downturn in the economy, resulting from the initial onset of the COVID-19 pandemic.

Based on the magnitude of government economic stimulus and the wide availability of vaccines, our economic forecast in 2021 continue to reflect improvements in key macroeconomic variables.

And therefore lower projected loan losses.

Which resulted in a decrease in our allowance for credit losses to $65 million.

The allowance did not change from the end of the third quarter as there was limited changes to both our forecast of macroeconomic variables and the underlying loan quality attributes.

Our economic forecast continues to be a blend of multiple forecasts produced by Moody's.

U S. Economic forecast include a baseline forecast as well as upside and downside forecast.

We continue to have the largest weighting on our baseline forecast with downside risk weighted heavier than more optimistic forecast.

Our weighted forecast assumes GDP will increase by two 7% in 2022.

2% for 2023, and then grow by 3% in 2024.

The unemployment rate is forecasted to be over 5% in 2022, and 2023, and then declining to four 8% in 2024.

Now turning to our capital position for the year shareholders' equity increased by $73 5 million to $2.08 billion at the end of 2021.

Increase was primarily due to net earnings of $212 $5 million.

A $39 million decrease in other comprehensive income from the tax effected impact of the decrease in market value of available for sale securities and $98 million in cash dividends.

Our overall capital position continues to be very strong our regulatory capital ratios are well above regulatory requirements to be considered well capitalized and above the majority of our peers at December 31, our common equity tier one capital ratio was 14, 9% and our total risk based capital ratio was 15, 6%.

During the third quarter of 2021, we repurchased 390000 shares of our customer of our common stock under our <unk> one stock repurchase plan.

Which was terminated in late September .

Due to the pending practice limitation associated with the acquisition of Suntrust Bank.

The acquisition of Sunquest closed on January 7th and resulted in the issuance of approximately eight 6 million shares of common stock and cash consideration of approximately $39 6 million.

Our board of directors will evaluate a new authorization for the repurchase of the company's common stock as we have after previous bank acquisitions.

I'll now turn the call back to Dave for further discussion of our fourth quarter earnings.

Thank you Alan.

Net interest income before recapture or provision for credit losses was $102 4 million for the fourth quarter compared with $103 3 million for the third quarter and $105 $9 million for the year ago quarter, Although our total net interest income declined in the fourth quarter.

As our net interest margin declined to $2, 79% core net interest income grew by more than $3 million, our fourth quarter reflected $4 2 million and lower interest and fee income from PPP loans and lower discount accretion on acquired loans.

The quarter over quarter increase in core net interest income was primarily driven by the $2 $8 million increase in interest income from investment Securities, which grew by $733 million on average for the fourth quarter.

Fourth quarter, earning assets increased by $340 million on average from the third quarter as the increase in the investment portfolio was partially offset by a decrease in average loans of $82 $7 million and average funds on deposit at the federal reserve declined by $310 million.

During the fourth quarter of 2021, PPP loans had an average balance of $244 million compared with $502 million for the third quarter of 2021.

Our earning asset yield decreased by 10 basis points compared to the prior quarter.

Excuse me.

The decline in our earning asset yield was the result of a six basis point decline in our core loan yields lower PPP fee income and lower discount accretion.

Our balance sheet is very well positioned for rising interest rates with significant liquidity as demonstrated by approximately 47% of our earning assets at year end in either cash or investment securities.

Our tax equivalent net interest margin was 279% for the fourth quarter of 2021, compared with $2 eight 9% for the third quarter and three 3%, 333% for the fourth quarter of 2020.

When the impact of PPP loans discount accretion on acquired loans and nonaccrual interest paid is excluded our adjusted tax equivalent net interest margin was 265% for the fourth quarter down from two 6% to 8% for the prior quarter and three 1% for the year ago quarter our.

Net interest margin continued to be negatively impacted by our excess liquidity.

During the fourth quarter, we had approximately $2 billion on average on deposit at the Federal reserve, earning 15 basis points. Our net interest margin in the fourth quarter would have been approximately 42 basis points higher without the $2 billion on average on deposit at the Federal reserve.

Loan yields were $4 two 9% for the fourth quarter of 2021, compared with $4 four 3% for the third quarter of 2021, and 456% for the year ago quarter.

Total interest and fee income from PPP loans was $4 2 million in the fourth quarter compared with $7 9 million in the third quarter.

Excluding the impact of PPP loans interest income related to purchase discount accretion and nonaccrual interest paid loan yields were four 8% in the fourth quarter of 2021, 414% for the third quarter of 2021 and $4 three 8% for the fourth quarter of 2020.

Prepayment penalty income decreased by $35000 quarter over quarter, while decreasing by $852000 compared with the year ago quarter.

New loan production continues to reflect yields.

Three 5% to 375% on average.

Our cost of deposits and customer repos as well as our total cost of funds for the fourth quarter was three basis points interest bearing deposits and customer repos increased on average by $43 million from the third quarter, but interest expense declined as the cost of interest bearing deposits and customer repurchase agreements decrease.

<unk> from nine basis points in the third quarter to eight basis points in the fourth quarter, our cost of funds declined by one basis point from the prior quarter and six basis points compared with the fourth quarter of 2020.

During the last cycle of rising short term rates from 2014 through the end of 2018, where the fed increased rates by 225 basis points, our cost of funds increased by only eight basis points. We believe that our low cost of funds will remain relatively stable if short term rates rise in 2022.

Although the impact of the deposits acquired from the Suntrust Bank acquisition May have a small impact on our funding costs for the first quarter of 2022.

Moving on to noninterest income.

Noninterest income was $12 4 million for the fourth quarter of 2021, compared with $10 5 million for the prior quarter and $12 $9 million for the year ago quarter.

The fourth quarter included a $700000 gain on sale of an ore property as mentioned early earlier and $890000 from the collection of a previously acquired loans that had been charged off prior to our acquisition of San Joaquin Bank.

Deposit service charges were flat compared with the third quarter, but were higher than the fourth quarter of 2020 by 12% or $479000. We.

We did not have any fees from interest rate swaps during the fourth quarter.

In comparison swap fees were $167000 in the third quarter and $876000 in the fourth quarter of 2020.

Generally speaking our volume of interest rate swaps is impacted by the shape of the yield curve with a relatively flat yield curve more conducive to a higher volume of swaps.

Our trust and investment services fee income increased by approximately $430 or more than 16% compared with the prior quarter, while being $436000 or approximately 16% higher when compared with the year ago quarter.

Our trust business anticipates, losing a significant relationship in 2022 due to the relocation of our customer out of state.

The impact will be primarily to assets under managed under management. However, the revenue impact will represent less than 4% of the trust and investment services revenue.

Overall, we are optimistic that the addition of sunquest customers and the extension of our geographic footprint will allow us to grow fee income through a wider array of products and services not previously offered by Sunquest, including wealth management investment management foreign exchange and more sophisticated treasury management products.

<unk> now.

Now expenses, we have continued to manage our expenses in a disciplined manner as reflected by the consistent level of noninterest expense over the past year noninterest.

Noninterest expense for the fourth quarter was $48 million compared with $48 1 million for the third quarter of 2021, and $48 $3 million for the year ago quarter.

Noninterest expense totaled $1, 109% of average assets for the fourth quarter of 2021, compared with one 2% for the third quarter of 2021, and 137% for the fourth quarter of 2020.

Our efficiency ratio was 41, 8% for the fourth quarter of 2021, compared with 42, 7% for the prior quarter and 46, 4% for the fourth quarter of 2020.

In regard to the Suntrust merger, we incurred $153000 in acquisition related expenses in the fourth quarter and $809000 in the third quarter.

We expect to see higher acquisition expense in the first and second quarters of 2022.

The systems integration of the Sunquest of Suntrust Bank will occur in mid February and we will consolidate two banking centers in the second quarter by the end of the second quarter. We expect to have completed the integration and consolidations in the third quarter of 2022 will reflect the full benefit of our expense savings.

According to various economic reports, the California economy is strengthening as many sectors have recovered or are in the process of recovery to their pre pandemic levels. However, labor shortages and supply chain disruptions continue to negatively impact our businesses in the industries we serve.

These issues are also beginning to impact our staffing and labor costs as well as.

As we start 2022, we anticipate that these inflationary pressures will be a greater challenge to our expense management. However, we continue to be disciplined and we will increase our efforts to maintain our efficient operations through increased automation and digital investments for 2022, we plan on investing in numerous projects with total.

Spend estimated at close to $3 million.

These investments will enhance the productivity and efficiency of our sales efforts, our risk management processes and our overall operational scale.

As we look forward to 2022, our outstanding asset quality strong capital levels low cost funding and substantial liquidity gives us a strong position to grow core loans and take advantage of the anticipated increases in interest rates.

Furthermore, the integration and consolidation of Suntrust Bank in the first half of 2022 will enhance our growth opportunities and our ability to generate positive operating leverage in the second half of this year.

In closing we are proud of our accomplishments in 2021 as we have continued to successfully navigate through the COVID-19 pandemic and believe we are well positioned for future growth in 2022.

I want to thank our associates for their continued hard work and dedication our customers for their business and ongoing loyalty loyalty and our shareholders for their continued support and trust. We look forward to a successful 2022.

Please stay healthy and safe that concludes today's presentation now Alan and I will be happy to take any questions that you might have.

As a reminder to ask a question. Please press Star then one.

If your question has been answered and you like to remove yourself from the queue.

Our first question comes from Matthew Clark with Piper Sandler Your line is open.

Hi, Good morning, guys good morning.

I wanted to start on the rate sensitivity outlook.

You guys disclosed.

21% benefit for up 200 over two years, but what's your expectation.

We're up 100 over the first year it sounds like deposit betas will be.

Pretty negligible.

But what are your thoughts on the on the asset side of things I think.

In the deck, you show $800 million of cash coming off the securities portfolio this year, but.

Thinking more about the the loan portfolio and any floors, you have that you might need to work through.

Well my view.

We do disclose in the Q and the K the impact on our ramp basis as you noted.

That's been pretty consistent for for institution.

Obviously, the shape of the yield curve has a big impact on what the impacts might be.

We have our.

Our loan book might have roughly 20% that's variable.

You mentioned all the liquidity, we have that we can deploy as rates move up and historically, our beta has been very limited. So by the end of the day, if we have a.

Rates rising it's a steep curve is going to be very beneficial if rates rise and it's a flat curve it will be muted somewhat still beneficial but you did.

Yes, Matthew as far as the quarters are concerned on the variable rate loans that Alan mentioned, we do have floors in most of our loans, but many of the floors are around the rate that they're at now I mean, thats a competitive situation. Obviously, it's great to have a higher floor sample or four 5% floor, but if somebody can go across the street.

Get a three and a quarter or three 5% rate you have to you have to balance that based on the relationship. So there is some probably movement before we see some.

That benefit, but I don't think its pretty I don't think its very significant.

Okay.

And then how do you feel about the.

The near term kind of core NIM outlook.

If you exclude PPP in purchase accounting.

With some Chris coming online.

Should we anticipate another kind of leg down here in terms of loans to earning assets just given the more excess liquidity and mix shifts.

And where do you think we find the bottom in the NIM.

Ex rates.

I think there is going to be a lot of moving parts for 2022 Matthew.

Look at Sunquest their loan yields.

Our higher than our loan yields on average there.

Their cost of deposits is also a little bit.

Higher so will be reengineering that a little bit.

We do have a ton of liquidity and.

The asset mix, obviously, it could be a big part of what changes in terms of the direction of our net interest margin.

We are deploying a lot more of that into securities at attractive yields in the second half of the year that can certainly mitigate some of the decrease in loan yields.

Loan yields could continue in the very near term may be continued.

Down if we don't see anything on the short end move, but but certainly we can also get the benefit of that so many many moving parts we'll see.

If the fed does and how the bond market performs thereafter.

Okay and then just.

On expenses.

Can you remind us.

Our update us where.

The contribution.

Stands in terms of the expense run rate coming from Suntrust crest.

We have it from a couple of them.

Last quarter, but.

Any update there on the contribution from Sunquest ex merger charges and then just your underlying.

Expense growth outlook, given the wage pressure that were seeing.

I'll start and Alan can jump in so as far as Suntrust on the expense run rate, we're executing to our stated 40% expense saves and probably will do a little bit better there.

So we will be consolidating the two offices in the second quarter, which will.

Create a little more save there as far as the overall expense rate nothing's changed I mean, we're still running and estimating that we're going to have.

Low low single digit expense growth and through the remainder of the year and hopefully we'll be able to.

Execute on that there are there are some headwinds with respect to labor and those issues and we're experiencing that a little bit and just the talent that's out there making sure that you keep your best people. So those are also headwinds, but I think we're going to be very consistent we're investing in <unk>.

Gnc's in the organization both.

From the technology side as I mentioned in my comments.

And some of that should be able to offset some of the pressure we're having so that's the plan.

Yeah, and then only thing I would add as Dave mentioned earlier once we get through all of the sort of noise with some credits.

First half of the year.

We certainly.

We feel pretty confident that positive operating leverage.

By the third quarter and.

We will be achieving that.

If rates move significantly it could be.

I'm going to give you better.

Okay. Thank you.

Our next question comes from David Feaster with Raymond James Your line is open.

Hey, good morning, everybody good morning, David.

I just wanted to start on loan growth loan growth was tremendous in the quarter, and obviously AG seasonally stronger, but even excluding that it was really good.

Just kind of curious what youre seeing in the market was this more of a function of improving production or slowdown in payoffs and pay downs and then just any color as we head into 'twenty two on how the pipelines look in it sounded like new loan yields have held steady just kind of any commentary you could give there would be helpful.

Yes sure.

<unk>.

So I've mentioned I think on every quarterly call that our loan production and.

The pipelines have been strong and that remains we actually produced over 15% higher on the loan production side in 2021 than we did in 2020 and as I've mentioned in the past 2020 was a record year for the bank. So obviously 2021 was a record year for the bank that's contributed.

I would say to you the new teams.

We've hired and the people that have come on board plus are we remained open I mean, we were we were open for business the entire time and our bankers are out talking to people in and so we had a very good.

First ever 2021 loan production I do.

Don't think anything has changed from the previous quarters, our pipelines remain robust and strong I think we're still kind of in that mid single digit growth rate for the quality of loan that we go after if we grow more than that sometimes that.

I would be a little more concern from the asset quality perspective, but.

I am very cautiously optimistic about continuing that I mean subject to all the macroeconomic things going on but I do think that.

We have a good pipeline going into 2022, and our goal is to do more than we did last year.

And to your second point regarding prepayment you did see there was some slowdown in the prepayment penalty.

Area and that is reflective of the slowdown in loans being paid off either refinanced or sold so I think we're in pretty good shape.

That's great.

And then maybe could you just give us some details on the competitive dynamics from your standpoint across your footprint.

We hear a lot about asset sales and deleveraging.

But just curious it sounds like again pricing has kind of stabilized are you seeing any.

Changes in structure or just kind of some irrationality from the competitive standpoint that might be causing you concern.

Yes, I mean, that's that's always something that we talk about I mean, we're a disciplined lender. So we get challenged when somebody is willing to do things without guarantees are interest only for extended period of time or or types of properties that we would normally loan a lower loan to value their loan in a <unk>.

Higher loan to value.

I think it's not as much on the credit underwriting and the.

That aspect of it it's still a price sensitive world.

I mean, just to give you some real color, we just lost a deal to banks smaller than us.

At three 1% fixed for 10 years interest only 60% loan to value non recourse on a retail property.

We wanted to do the loan at 50% and at a rate that was higher than $3, one, but we wont P&I payments and we wanted the guarantee so there are still they are rational behaviors going on out there.

But we are going to remain disciplined and not not.

Not chase that.

Okay and then just.

Helpful. And then just touching on capital priorities glad to see you guys repurchasing stock being enacted just kind of how do you think about your capital priorities, obviously organic growth probably numero Uno, but you guys are continuing to invest in the franchise. Just how do you think about dividend growth continued repurchases just how our M&A.

Compensation I know, we just closed on crushed but just curious how the M&A market from your standpoint.

Yes, there is still a lot of conversations going on and yes, we did close on crest, and we're going to be integrating <unk>.

Next month the systems, So I mean, we're open.

For business there if it's the right opportunity we definitely are having conversations I think the biggest thing on the M&A front is.

The seller.

And the realistic nature of what their expectations are with the rise in sort of everybody's stock price recently, so we have our guidelines, we're going to remain true to those guidelines and how we evaluate acquisition opportunities, but there are a lot of conversations still going on there is nothing eminent.

But there are opportunities that were being presented as far as the rest we discuss our capital management strategies. All the time, we had our board meeting yesterday obviously.

And those conversations as Alan mentioned in his comments.

Are things that we are evaluating all the time, so I don't know if you want to add anything to that.

I mean, David you can see with some of our acquisitions that.

Because there is limited cash like we only put in about $40 million here with Sunquest that it's hard to deploy capital into M&A and so certainly.

The board.

We are well aware that our capital levels are above peers. So so.

I have to look at alternatives there.

I think the dividend payout ratio.

Consistently said were targeting.

Or minus 50%, so I think I don't foresee that changing so.

But yes, we do have that rich man's problem right now.

Okay, that's great color, thanks, everybody great quarter.

Thank you.

Our next question comes from Gary Tenner with D. A Davidson your line is open.

Thanks, Good morning, I, just wanted to revisit the loan growth commentary as it relates to 2022.

Mid single digit looks a lot like what the back half of 2021 looked like ex PPP.

I'm just wondering does that.

Assume any additional increase in C&I utilization rates or would that become a potential positive lever above that mid single digit rates as you look out over the year, yes that does not include the C&I utilization and the opportunities if people do start utilizing their excess liquidity and then ultimately their life.

So that's ex any line utilization increase.

Okay. Thank you and then.

With regards to the some crisp book is there any part of their loan portfolio that would.

<unk> be in a runoff were kind of.

We do see.

Framework post deal for some period of time.

Yes, I don't know that Theres any specific part of their portfolio, but obviously individual deals as we look at them and touch them I mean, we.

We did due diligence on I think close to 80% of the dollars.

Over 75% of the loans, so we feel confident about whats there, but there could be some structural changes as we touched on in the first time that might impact that so there is some.

Headwind there as far as what could happen it really just depends on.

Our ability to sell why we're doing what we're doing to those deals and try and convince them that we're protecting them as well as us and Thats part of the strategy that we've done in every acquisition. So there could be some offset to their additional loan growth that we anticipate.

Thank you.

Our next question comes from Kelly.

Kelly Motta with <unk> Your line is open.

Hi, yes. Thank you so much for the question most of mine have been asked and answered already.

I think maybe going get.

Deposits and obviously you have a really good core funding franchise just wondering.

As we look to 2022 after the great influx of liquidity.

So how much.

Transitory and they may run off as well.

Uh huh.

Yeah.

It's a good question I love the word transitory, we've been talking about that for quite some time so.

Ally for the last two years since this pandemic began have been talking about this topic and we talked about it almost every day and every time, we talked about at our deposits go up and the balances continue to increase so I think that the money are subject to a couple of things is going to be here for a little while.

And we've invested in our investment portfolio.

Pretty significantly over the past 18 months and we continue to maintain a large amount of money overnight at the fed. So we're hopeful that some of that starts to get utilized I think unfortunately, it's going to be utilized for.

Costs associated with our customers' businesses both in the on.

On the labor front and the materials front, but I do believe that the money is going to be here for a little while I think the one thing that could influence that a little bit more as the rising rates and we're a little more disciplined on increasing our deposit rates as rates go up as evidenced by our past, but I do think that there could be some money that <unk>.

Moves out to higher yielding opportunities.

We maintained the discipline on our pricing so I kind of danced around your question, but I think for the most part.

We're going to see that excess liquidity as well.

A little while longer.

Yes.

Really helpful. Thanks, Thanks, a bunch and then let the securities purchases you Bob.

Obviously, <unk> been putting some money to work there.

What's a good sort of rate of assumption.

Does continue obviously have.

A lot of cash on balance sheet. Thanks.

As I mentioned earlier.

We've seen.

Yields over 2% so far this year.

Certainly markets moved in.

As much as 20 basis points over the course of just one month, but pretty consistently we can get over two and.

And what.

What I would call your plainville mortgage backed securities.

So it's a little more attractive obviously than it was in 2021, well thats above our overall.

I mean, yes, I mean, the portfolio itself was yielding a little bit over 150 basis points in the fourth quarter. So.

So yes, it should have an uplift to the overall yields as we go in throughout 2022.

Got it thank you so much.

As a reminder to ask a question. Please press Star then one.

Our next question comes from Tim Coffey with Janney. Your line is open.

Thanks, Good morning, guys good morning.

What do you think it takes to get your commercial clients to start using more of their lines of credit.

I think they have to get through their deposit.

Balances first and they are sitting on a lot of excess liquidity I mean, there is.

<unk>. The same thing we are as a bank and we have I mentioned this number before but just our 150 top deposit customers in the bank. So the relationships of the top 150 depositors those balances have increased by over $1 billion $5 since the beginning of the pandemic.

So those guys are not necessarily borrowers.

And then as you go down to the next tier of customers that we have their balances have increased as well. So I think they have to utilize some of that excess liquidity, where they feel like they need to borrow and I think part of the challenge could be as rates are rising what theyre doing with that excess liquidity and then ultimately if they start to borrow again.

Confident I do believe overall that the customers are starting to to use some of that but I just don't know how quickly that's going to occur.

Have you seen an increase in some of the volatility within the deposit accounts this last quarter.

Not really.

Our.

Our deposit base is very very stable.

It's obviously, a very fantastic deposit base with 63% of our deposits noninterest bearing but there hasnt been a lot of volatility we do have a couple of larger clients that there is some some fluctuation, but but for the most part that's normal.

Outside of what's normally occurred in past years.

Okay got it thanks, and then Alan I apologize if I missed this but what do you think the tax rate is going to do when sunquest.

Inside the company now that is inside the company I should say.

I don't know that we really precede any any significant change to our tax rate.

On a relative basis.

Small acquisition in there.

Yes, they have some boy they have a couple of <unk>.

Tax credit deals, but its not going to have a big impact.

Okay, great. Thank you those are my questions.

Yes.

Again to ask a question. Please press Star then one.

Yeah.

At this time there are no more questions I'd like to turn the call back to Mr. Breaker.

Thank you I want to thank everybody for joining us this quarter. We appreciate your interest and we look forward to speaking with you in April for our first quarter 2022 earnings call. Please either Alan or I know if you have any questions have a great day and thanks for listening.

Yeah.

This concludes the program you may now disconnect everyone have a great day.

[music].

Speaker 1: Good morning, ladies and gentlemen, and welcome to the fourth quarter and year-ended 2021 CBB Financial Corporation and its subsidiary Citizens Business Bank Earnings Conference Call. My name is Michelle, and I am your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer period. Please note this call is being recorded. I would now like to turn the presentation over to your host for today's call, Christina Carabino. You may proceed.

Good morning, ladies and gentlemen, and welcome to the fourth quarter and year ended 2021 have you been financial Corporation and its subsidiary.

The business Bank earnings Conference call. My name is Michelle and I'm your operator for today.

At this time, all participants are in listen only mode.

We will conduct a question and answer period. Please note. This call is being recorded I would now like to turn the presentation over to your host for today's call Christina Caribbean now you May proceed.

Thank you Michelle and good morning, everyone.

Speaker 2: Thank you for joining us today to review our financial results for the fourth quarter and year ended 2021.

Thank you for joining us today to review our financial results for the fourth quarter and year ended 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 Dot C B bank Dot 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.

Now I will turn the call over to Dave Brager, Dave.

Thank you Christina and good morning, everyone.

The bank delivered another solid quarter and full year of strong earnings. The 2021 earnings represented the highest earnings in the company's history and over the last two years since the onset of the COVID-19 pandemic citizens business Bank has maintained its high level of performance and confirmed our position as a safe sound and secure.

Financial institution.

We were pleased to complete the acquisition of Suntrust Bank on January seven 2022 and to welcome Suntrust. Thanks Associates customers and shareholders to citizens business Bank.

We are excited about the acquisition and the opportunities it provides for expansion into the greater Sacramento market as well as solidifying our significant position in the Central Valley.

We reported net earnings of $47 $7 million for the fourth quarter of 2021, or <unk> 35 per share representing our 179th consecutive quarter of profitability.

We previously declared an <unk> 18 per share dividend for the fourth quarter of 2021, which represented our 129th consecutive quarter of paying a cash dividend to our shareholders.

For the fourth quarter of 2021, our pre tax pre provision income was $66 $8 million compared with $65 7 million for the prior quarter and $75 million for the year ago quarter.

Net earnings were $212 $5 million for the year ended 2021, a $35 $4 million increased compared to 2020.

Diluted earnings per share were $1 56 for 2021, compared with $1 30 for 2020.

2021 pretax pre provision income was $272 million compared with $273 million for 2020.

In 2021, we had $25 5 million recapture of provision for credit losses, while in 2020, we had a $23 5 million provision for credit losses.

Now, let's discuss loans.

Our 2021 loan production continued to be strong in the fourth quarter from year end 2020 to December 31, 2021 core loans, excluding PPP loans grew by $235 3 million or approximately 3%.

Total loans at quarter end were 789 billion, a $38 $2 million increase from the end of the third quarter.

After excluding PPP loan forgiveness in the seasonal increase in dairy and livestock loans fourth quarter loan growth was $76 million or approximately 4% annualized.

Loan growth in the fourth quarter was led by continued growth in commercial real estate loans, which grew by $55 million compared with the end of the third quarter and by $288 $2 million or approximately 5% for all of 2021.

C&I loans increased $43 million compared with the third quarter, but were essentially flat when compared to the end of 2020.

Although our line of credit utilization for C&I loans continues to be lower than our pre pandemic experience. It increased modestly from the third quarter.

The line utilization rate for C&I loans was 29% at the end of the fourth quarter compared with 27% for the third quarter and 29% at the end of 2020.

Dairy and livestock loans grew by approximately $110 million from the end of the third quarter.

Dairy and livestock loans grew by approximately $32 million from the end of 2020.

PPP loans declined by $144 million compared with the third quarter and by $696 million from the end of 2020 due to the continued forgiveness of these loans.

Non PPP SBA loans declined by approximately $19 million compared with the third quarter and $15 million from the fourth quarter of 2020.

We are optimistic that we can continue to grow high quality loans in 2022 at a pace similar to our 2021 core loan growth. We also anticipate that the Suntrust Bank merger with an expanded geography and CVP is greater lending capabilities can further enhance our growth.

At fourth quarter end, we had no Oreo properties and the $6 9 million in nonperforming loans represented nine basis points of total loans.

During the fourth quarter, we acquired an Oreo property, which was sold during the fourth quarter at a gain of approximately $700000.

During the fourth quarter, we had net loan charge offs of $345000 compared with net loan recoveries of $22000 for the third quarter of 2021.

We had net loan charge offs of $3 $2 million for the full year 2021, compared with $308000 for the full year 2020.

At December 31, 2021, we had loans delinquent 30 to 89 days of $2 $5 million compared with $1 1 million at September 32021.

And nonperforming loans.

Now I would like to discuss our deposits at.

At December 31, 2021, our total deposits and customer repurchase agreements were 13, six 2 billion compared with $13 6 billion at September 32021, and $12 $2 billion for the same period a year ago.

At December 31, 2021, our noninterest bearing deposits were $8 $1 billion compared with $8 3 billion for the prior quarter and 746 billion for the year ago quarter.

During the fourth quarter noninterest bearing deposits averaged $8 3 billion, a $335 million increase from the average balance in the third quarter.

A key differentiator for our bank is the level of our noninterest bearing deposits.

Noninterest bearing deposits were greater than 63% of our average deposits for the fourth quarter and the $8 3 billion balance at year end exceeded the bank seven $8 billion loan portfolio.

We continued to see strong deposit growth for the fourth quarter as average total deposits and customer repurchase agreements increased by $378 million or an annualized rate of approximately 11%.

The third quarter of 2021.

And $1 $9 billion or approximately 16% higher on average than the year ago quarter. The bank's funding is entirely core customer deposits and customer repos, which combined had a total cost of just three basis points in the fourth quarter.

This three basis point cost of funds compared with four basis points in the prior quarter and nine basis points for the year ago quarter.

I will now turn the call over to Allen Nicholson to discuss our investments allowance for credit losses and capital levels Alan.

Thanks, Dave and good morning, everyone.

We deployed some of our excess liquidity during the fourth quarter.

Additional securities by purchasing more than $700 million in mortgage backed securities.

As a result, our total investment securities increased by $474 million from the end of the third quarter to $5 1 billion as of December 31, 2021.

Investment securities available for sale or <unk> securities totaled $3, one 8 billion.

Inclusive of our pre tax net unrealized loss of $1 $3 million.

Investment securities held to maturity or HTM securities totaled approximately $1 $93 billion.

At December 31.

During the fourth quarter, we purchased $452 million and new <unk> securities with an expected tax equivalent yield of 161%.

And $259 million in new HTM securities with an expected tax equivalent yield of 184%.

The growth in our investments resulted in the investment portfolio, increasing from 29% of earning assets in the third quarter to 33% on average in the fourth quarter.

We continued to maintain a significant amount of bonds at the federal reserve.

Our balance averaged more than $2 billion for the fourth quarter.

As interest rates have begun to rise in 2022.

Been able to purchase new mortgage backed securities at the beginning of this year at yields exceeding 2%.

If security yields continue to rise, we expect an increase in our security purchases in 2022.

At December 31, 2021, our ending allowance for credit losses was $65 million.

Or eight 2% of total loans, when excluding PPP loans, our allowance as a percentage of the remaining loans was <unk>, 84%, which compares to <unk>, 91% at the pre pandemic period end of December 31 2019.

In addition to the allowance for credit losses, we had $19 million during the remaining fair value discounts from acquisitions at the end of the year.

For the full year ended December 31, 2021, we recorded a recapture of provision for credit losses of $25 5 million. This compares to the provision for credit losses of $23 5 million, we recorded in the first half of 2020.

This was due to the estimated impact on loan losses from the economic forecast of a significant downturn in the economy, resulting from the initial onset of the COVID-19 pandemic.

Based on the magnitude of government economic stimulus and the wide availability of vaccines, our economic forecast in 2021 continue to reflect improvements in key macroeconomic variables and therefore lower projected loan losses.

Which resulted in a decrease in our allowance for credit losses to $65 million the.

The allowance did not change from the end of the third quarter as there is limited changes to both our forecast of macroeconomic variables and the underlying loan quality attributes.

Our economic forecast continues to be a blend of multiple forecasts produced by Moody's.

U S. Economic forecast include a baseline forecast as well as upside and downside forecast.

We continue to have the largest weighting on our baseline forecast with downside risk weighted heavier than more optimistic forecast.

Our weighted forecast assumes GDP will increase by two 7% in 2022.

2% for 2023, and then grow by 3% in 2024.

The unemployment rate is forecasted to be over 5% in 2022, and 2023, and then declining to four 8% in 2024.

Now turning to our capital position for the year shareholders' equity increased by $73 5 million to $2.08 billion at the end of 2021.

The increase was primarily due to net earnings of $212 $5 million.

A $39 million decrease in other comprehensive income from the tax effected impact of the decrease in market value of available for sale securities and $98 million in cash dividends.

Our overall capital position continues to be very strong.

Our regulatory capital ratios are well above regulatory requirements to be considered well capitalized and above the majority of our peers.

At December 31, our common equity tier one capital ratio was 14, 9% and our total risk based capital ratio was 15, 6%.

During the third quarter of 2021, we repurchased 390000 shares of our customer of our common stock under our <unk> one stock repurchase plan.

Which was terminated in late September .

Due to the pending proxy solicitation associated with the acquisition of Suntrust Bank.

The acquisition of Sunquest closed on January seven and resulted in the issuance of approximately eight 6 million shares of common stock and cash consideration of approximately $39 6 million.

Our board of directors will evaluate a new authorization for the repurchase of the company's common stock as we have after previous bank acquisitions.

I'll now turn the call back to Dave for further discussion of our fourth quarter earnings.

Thank you Alan net interest income before recapture of our provision for credit losses was $102 4 million for the fourth quarter compared with $103 3 million for the third quarter and $105 $9 million for the year ago quarter, Although our total net.

Income declined in the fourth quarter as our net interest margin declined to $2, 79% core net interest income grew by more than $3 million, our fourth quarter reflected $4 $2 million and lower interest and fee income from PPP loans and lower discount accretion on acquired loans.

During the fourth quarter of 2021, PPP loans had an average balance of $244 million compared with $502 million for the third quarter of 2021.

Our earning asset yields decreased by 10 basis points compared to the prior quarter.

Excuse me.

The decline in our earning asset yield was the result of a six basis point decline in our core loan yields lower PPP fee income and lower discount accretion.

Our tax equivalent net interest margin was 279% for the fourth quarter of 2021, compared with $2 eight 9% for the third quarter and three 3%, 333% for the fourth quarter of 2020.

Net interest margin continued to be negatively impacted by our excess liquidity.

Loan yields were $4 two 9% for the fourth quarter of 2021, compared with $4 four 3% for the third quarter of 2021, and 456% for the year ago quarter.

Total interest and fee income from PPP loans was $4 2 million in the fourth quarter compared with $7 9 million in the third quarter exclude.

Prepayment penalty income decreased by $35000 quarter over quarter, while decreasing by $852000 compared with the year ago quarter.

New loan production continues to reflect yields from.

From three 5% to 375% on average.

<unk> from nine basis points in the third quarter to eight basis points in the fourth quarter.

Our cost of funds declined by one basis point from the prior quarter and six basis points compared with the fourth quarter of 2020.

Although the impact of the deposits acquired from the Sunquest Bank acquisition May have a small impact on our funding costs for the first quarter of 2022.

Moving on to noninterest income.

Noninterest income was $12 4 million for the fourth quarter of 2021, compared with $10 5 million for the prior quarter and $12 9 million for the year ago quarter.

The fourth quarter included a $700000 gain on sale of an ore REO property as mentioned early earlier and 890 <unk>.

From the collection of a previously acquired loans that had been charged off prior to our acquisition of San Joaquin Bank.

Deposit service charges were flat compared with the third quarter, but were higher than the fourth quarter of 2020 by 12% or $479000. We.

We did not have any fees from interest rate swaps during the fourth quarter.

In comparison swap fees were $167000 in the third quarter and $876000 in the fourth quarter of 2020 <unk>.

Generally speaking our volume of interest rate swaps is impacted by the shape of the yield curve with a relatively flat yield curve more conducive to a higher volume of swaps.

Our trust and investment services fee income increased by approximately $430000 or more than 16% compared with the prior quarter, while being $436000 or approximately 16% higher when compared with the year ago quarter.

Our trust business anticipates, losing a significant relationship in 2022 due to the relocation of our customer out of state.

The impact will be primarily to assets under managed under management. However, the revenue impact will represent less than 4% of the trust and investment services revenue.

Overall, we are optimistic that the addition of sunquest customers and the extension of our geographic footprint will allow us to grow fee income through a wider array of products and services not previously offered by sung press, including wealth management investment management Foreign exchange and more sophisticated treasury management products.

<unk> now.

Now expenses, we have continued to manage our expenses in a disciplined manner as reflected by the consistent level of noninterest expense over the past year noninterest expense for the fourth quarter was $48 million compared with $48 1 million for the third quarter of 2021, and $48 3 million for the.

A year ago quarter.

Noninterest expense totaled $1, one 9% of average assets for the fourth quarter of 2021, compared with $1 two 2% for the third quarter of 2021, and 137% for the fourth quarter of 2020.

Our efficiency ratio was 41, 8% for the fourth quarter of 2021, compared with 42, 7% for the prior quarter and 46, 4% for the fourth quarter of 2020.

In regard to the Suntrust merger, we incurred $153000 in acquisition related expenses in the fourth quarter and $809000 in the third quarter.

We expect to see higher acquisition expense in the first and second quarters of 2022.

These issues are also beginning to impact our staffing and labor costs as well as.

Spend estimated at close to $3 million. These investments will enhance the productivity and efficiency of our sales efforts, our risk management processes and our overall operational scale as.

As we look forward to 2022, our outstanding asset quality strong capital levels low cost funding and substantial liquidity to give us a strong position to grow core loans and take advantage of the anticipated increases in interest rates. Furthermore, the integration and consolidation of Suntrust Bank in the first half of 2022 will end.

Hence our growth opportunities and our ability to generate positive operating leverage in the second half of this year in.

In closing we are proud of our accomplishments in 2021 as we have continued to successfully navigate through the COVID-19 pandemic and believe we are well positioned for future growth in 2022.

Please stay healthy and safe that concludes today's presentation now Alan and I will be happy to take any questions that you might have.

As a reminder to ask a question. Please press Star then one.

Your question has been answered and you like to look at yourself in the queue.

Our first question comes from Matthew Clark with Piper Sandler Your line is open.

Hi, Good morning, guys good morning.

Wanted to start on the rate sensitivity outlook.

You guys disclosed.

21% benefit for up 200 over two years, but what's your expectation.

We're up 100 and over the first year it sounds like deposit betas will be.

Pretty negligible.

But what are your thoughts on the on the asset side of things I think.

In the deck, you show $800 million of cash coming off the securities portfolio this year, but.

More about that.

The loan portfolio and any floors, you have that you might need to work through.

While Matthew.

We do disclose in the Q and the K the impact on our ramp basis as you noted.

Yes, that's been pretty consistent for for institution.

Obviously, the shape of the yield curve has a big impact on what the impacts might be.

We have.

Our loan book might have roughly 20% that's variable.

You mentioned all the liquidity, we have that we can deploy as rates move up and historically, our beta has been very limited. So by the end of the day we have.

A rates rising as a steep curve is going to be very beneficial if rates rise on a flat curve it will be muted somewhat still beneficial but muted.

Yes, Matthew as far as orders are concerned on the variable rate loans that Alan mentioned, we do have floors in most of our loans, but many of the floors are around the rate that they're at now I mean, thats a competitive situation. Obviously, it's great to have the higher floors at 4% four 5% floor, but if somebody can go across the street.

Can get three in a quarter or three 5% rate you have to you have to balance that based on the relationship. So there is some probably movement before we see some.

That benefit, but I don't think its pretty I don't think its very significant.

Okay.

And then Allen how do you feel about the.

The near term and the core NIM outlook.

If you exclude PPP in purchase accounting.

With <unk> coming online.

Should we anticipate another kind of leg down here in terms of loans to earning assets just given the X more excess liquidity and mix shifts.

And where do you think we find the bottom in the NIM.

Ex rates.

I think there's going to be a lot of moving parts for 2022, Matthew if you look at Sunquest their loan yields.

Our higher than our loan yields on average their.

Our cost of deposits is also a little bit higher so we will be.

Reengineering that a little bit.

We do have a ton of liquidity and.

The asset mix, obviously, it could be a big part of what changes in terms of the direction of our net interest margin.

If we are deploying a lot more of that into securities at attractive yields in the second half of the year that can certainly mitigate some of.

The decrease in loan yields.

Loan yields could continue in the very near term may be continued to be down if we don't see anything on the short end and move but but certainly we can also get benefit of that so many many moving parts, we'll see to what the fed does and how the bond market performs thereafter.

Okay, and then just on.

On the expenses.

Can you remind us.

Our update us where.

The contribution kind of stand in terms of the expense run rate coming from Suntrust crest.

We have it from a couple of.

From last quarter, but.

Any update there on the contribution from Sunquest ex merger charges and then just your underlying.

Expense growth outlook, given the wage pressure that were seeing.

So I'll start and then Alan can jump in so as far as Suntrust on the expense run rate.

We're executing to our stated 40% expense saves and probably will do a little bit better there we.

Also we will be consolidating the two offices.

The second quarter, which will.

Create a little more save there as far as the overall expense rate nothing's changed I mean, we're still running and estimating that we're going to have.

Low low single digit expense growth and through the remainder of the year and hopefully we'll be able to.

<unk> in the organization both.

From the technology side as I mentioned in my comments.

And some of that should be able to offset some of the pressure we're having so that's the plan.

Yes, and then only thing I would add is as Dave mentioned earlier once we get through all of the sort of noise with sunquest in the first half of the year.

We certainly.

Feel pretty confident that positive operating leverage.

By the third quarter and.

And we will be achieving that.

If rates move significantly it could be.

To give you better.

Okay. Thank you.

Our next question comes from David Feaster.

With Raymond James Your line is open.

Hey, good morning, everybody.

David.

I just wanted to start on on loan growth loan growth was amended in the quarter, and obviously AG AG seasonally stronger, but even excluding that it was really good just just kind of curious what youre seeing in the market with more of a function of improving production or a slowdown in payoffs and pay downs and then just any color as we head into <unk>.

22 on how the pipelines look in it sounded like new loan yields have held steady just kind of any commentary you could give there would be helpful.

Yes sure.

So I've mentioned I think on every quarterly call that our loan production and.

I would say to you the new teams.

That we've hired and the people that have come on board plus are we remained open I mean, we were we were open for business the entire time and our bankers were out talking to people in and so we had a very good.

Best ever 2021 loan production.

I don't think anything's changed from the previous quarters, our pipelines remain robust and strong.

Think we're still kind of in that mid single digit growth rate for the quality of loan that we go after if we grow more than that sometimes that.

I would be a little more concern from the asset quality perspective, but.

I am very cautiously optimistic about continuing that subject to all the macroeconomic things going on but I do think that.

We have a good pipeline going into 2022, and our goal is to do more than we did last year.

To your second point regarding prepayment you did see there was some slowdown in the prepayment penalty.

Area and that is reflective of the slowdown in loans being paid off either refinanced or sold so.

I think we're in pretty good shape.

That's great.

And then maybe could you just give us some details on the competitive dynamics from your standpoint across your footprint.

We hear a lot about asset sales and deleveraging.

But just curious it sounds like again pricing has kind of stabilized are you seeing any.

Changes in structure or just kind of some irrationality from the competitive standpoint that might be causing you concern.

Higher loan to value I think it's not as much on the credit underwriting.

The that aspect of it it's still a price sensitive world.

And I mean, just to give you some real color. We just lost a deal to a bank smaller than us.

At three 1% fixed for 10 years interest only 60% loan to value non recourse on a retail property.

We wanted to do the loan at 50% and at a rate that was higher than $3, one, but we wont P&I payments and we wanted to guarantee so there are still they are rational behaviors going on out there.

But we are going to remain disciplined and not not.

Not chase that.

Okay.

And then just.

That's helpful. And then just touching on capital priorities glad to see you guys repurchasing stock being enacted just kind of how you're thinking about your capital priorities, obviously organic growth probably numero Uno, but you guys are continuing to invest in the franchise.

How do you think about dividend growth.

<unk> repurchases, just how power M&A conversations I know, we just closed on crushed but just curious how.

The M&A market from your standpoint.

Yes, there is still a lot of conversations going on and yes, we did closed sunquest and we're going to be integrating nex.

Next month the systems, So I mean, we're open.

For business there if it's the right opportunity we definitely are having conversations I think the biggest thing on the M&A front is the seller.

The realistic nature of what their expectations are with the rise in sort of everybody stock price recently.

So we have our guidelines, we're going to remain true to those guidelines and how we evaluate acquisition opportunities, but there are a lot of conversations still going on there is nothing eminent.

But there are opportunities that were being presented as far as the rest we discuss our capital management strategies. All the time, we had our board meeting yesterday, obviously and those conversations as Alan mentioned in his comments.

Are things that we are evaluating all the time, so I don't know if you want to add anything to that.

I mean, David you can see with some of our acquisitions that.

Because there's limited cash like we only put in about $40 million here with Sunquest that it's hard to deploy capital through M&A and so certainly.

The board.

Certainly are well aware that our capital levels are above peers. So so.

I have to look at alternatives there.

I think the dividend payout ratio as we've consistently said we're targeting.

Or minus 50%, so I think I don't foresee that changing so.

But yes, we do have that rich man's problem right now.

Okay, that's great color, thanks, everybody great quarter.

Thank you.

Our next question comes from Gary Tenner with D. A Davidson your line is open.

Thanks, Good morning, I, just wanted to revisit the loan growth commentary as it relates to 2022.

Mid single digit looks a lot like what the back half of 2021 look like ex PPP.

I'm just wondering does that.

Assume any additional increase in C&I utilization rates or would that become a potential positive lever above that mid single digit rate as you look out over the year, yes that does not include the C&I utilization and the opportunities if people do start utilizing their excess liquidity and then ultimately their line.

<unk>.

So that's ex any line utilization increase.

Okay. Thank you and then.

With regards to the some crisp book is there any part of their loan portfolio that would.

Sort of be in a runoff where kind of.

Due soon.

Framework post deal for some period of time.

Yes, I don't know if theres any specific part of their portfolio, but obviously individual deals as we look at them and touch them. I mean, we did due diligence on I think close to 80% of the dollars and over 75% of the loans. So we feel confident about whats there, but there could be some structural changes.

As we touched on in the first time that might impact that so there is some.

Headwind there as far as what could happen. It really just depends on our ability to sell why we're doing what we're doing to those deals and try and convince them that we're protecting them as well as us and Thats part of the strategy that we've done in every acquisition. So there could be some offset to their additional loan growth that we anticipate.

<unk>.

Thank you.

Our next question comes from.

Kelly Motta with <unk> Your line is open.

Hi, yes. Thank you so much for the question most of mine have been asked and answered already.

Thank you.

So in Q deposits and obviously you have a really good core funding franchise just wondering.

As we look to 2022 after the great influx of liquidity.

How much.

Potentially transitory and Mei.

As well as.

Ah.

Yeah, No. That's a good question I love the word transitory we've been talking about that work for quite some time so.

Ally for the last two years since this pandemic began have been talking about this topic and we talk about it almost every day and every time, we talked about at our deposits go up in the balances continue to increase so I.

I think that the money is subject to a couple of things is going to be here for a little while and we've invested in our investment portfolio.

Costs associated with our customers' businesses both in the on the labor front and the materials front, but I do believe that the money is going to be here for a little while I think the one thing that could influence that a little bit more is the rising rates and we're a little more disciplined on increasing our deposit rates as rates go up as evidenced by our past Budd.

I do think that there could be some money that moves out to higher yielding opportunities. If we maintain the discipline on our pricing. So I kind of danced around your question, but I think for the most part.

We're going to see that excess liquidity as well.

A little while longer.

Yes.

Really helpful. Thanks, Thanks, a bunch and then let the securities purchases.

Obviously, putting some money to work there.

What's a good sort of rate of assumption.

And obviously half.

A lot of cash on balance sheet. Thanks.

As I mentioned earlier.

We've seen.

Yields over 2% so far this year.

Certainly markets moved in.

As much as 20 basis points over the course of just one month, but a pretty consistently we can get over two and.

And what I would call your plain vanilla mortgage backed securities.

So it's a little more attractive obviously than it was in 2021 well above our overall.

I mean, yes, I mean, the portfolio itself was yielding a little bit over 150 basis points in the fourth quarter. So.

So yes, it should have an uplift to the overall yields as we go in throughout 2022.

Got it thank you so much.

As a reminder to ask a question. Please press Star then one.

Our next question comes from Tim Coffey with Janney. Your line is open great.

Good morning, guys good morning.

Dave What do you think it takes to get your commercial clients.

Start using more of their lines of credit.

I think they have to get through their deposit balances first and they are sitting on a lot of excess liquidity I mean, they are experiencing the same thing we are as a bank and we have mentioned this number before but just our 150 top deposit customers in the bank. So the relationships of the top 100 <unk>.

Depositors those balances have increased by over $1 billion $5 since the beginning of the pandemic. So those guys are not necessarily borrowers.

I do believe overall that the customers are starting to to use some of that but I just don't know how quickly that's going to occur.

Have you seen an increase in some of the volatility within the deposit accounts this last quarter.

Not really.

Our deposit base is very very stable and it's obviously, a very fantastic deposit base with 63% of our deposits noninterest bearing but there hasnt been a lot of volatility we do have a couple of larger clients that there is some some fluctuation but for the most part that's normal so its not.

Outside of what's normally occurred in past years.

Okay got it thanks, and then Alan I apologize I missed this but what do you think the tax rate is going to do once sunquest is inside the company now that is inside the company I should say.

I don't know that we really precede any any significant change to our tax rate.

On a relative basis.

Small acquisition in there, yes, they have some boy they have a couple of.

Tax credit deals.

Not going to have a big impact.

Okay, great. Thank you those are my questions.

Thanks Chip.

Again to ask a question. Please press Star then one.

At this time there are no more questions I would like to turn the call back to Mr. Breaker.

This concludes the program you may now disconnect everyone have a great day.

Q4 2021 CVB Financial Corp Earnings Call

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