CVBF - NASDAQ

Good morning, ladies and gentlemen, and welcome to the Fourth Quarter of 2024 CVB Financial Corporation and its subsidiary, Citizens Business Bank Earnings Conference Call. My name is Shuri, and I am your operator for today. [Operator Instructions] Please note, this call is being recorded. I would now like to turn the presentation over to your host for today's call, Allen Nicholson, Executive Vice President and Chief Financial Officer. You may proceed.

Thank you, Shuri, and good morning, everyone. Thank you for joining us today to review our financial results for the fourth quarter of 2024. Joining me this morning is Dave Brager, President and Chief Executive Officer. Our comments today will refer to the financial information that was included in the earnings announcement released yesterday. To obtain a copy, please visit our website at www.cbbank.com and click on the Investors tab. The speakers on this call claim the protection of the safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from our forward-looking statements, please see the company's annual report on Form 10-K for the year ended December 31, 2023, and in particular, the information set forth in Item 1A risk factors therein. For a more complete version of the company's safe harbor disclosure, please see the company's earnings release issued in connection with this call. I'll now turn the call over to Dave Brager.

Thank you, Allen. Good morning, everyone. First, I want to say that our thoughts and prayers are with the victims and those impacted by the devastating wildfires that occurred in Los Angeles County. Citizens Business Bank organized a response around 4 key issues: our associates, our customers, our facilities and our corporate response for our communities. First, we had over 50 associates that were impacted by the mandatory evacuation orders, and we will be providing direct support to them through a variety of methods. Second, we have identified 114 loans totaling approximately $105 million located in the fire zones. At this point, 14 properties have experienced some level of damage with 7 of the properties completely destroyed, 1 commercial building and 6 residential properties totaling $7.4 million. All 14 of the impacted properties had insurance in place and we have actually received proceeds to fully pay off one of the residential properties. Third, due to the mandatory evacuation orders or power outages, we had 6 centers temporarily closed at some point during the fires and all the locations have now reopened. Fourth, we announced that we have donated $200,000 to 4 relief agencies working on the front lines to assist people in need and will be one of the banks participating in the California DFPI relief efforts to assist those impacted. Now to the quarter. For the fourth quarter of 2024, we reported net earnings of $51 million or $0.36 per share, representing our 191st consecutive quarter of profitability. We previously declared a $0.20 per share dividend for the fourth quarter of 2024 representing our 141st consecutive quarter of paying a cash dividend to our shareholders. We produced a return on average tangible common equity of 14.31% and a return on average assets of 1.3% for the fourth quarter of 2024. Our return on equity is impacted by our high level of capital which is reflected in our common equity Tier 1 capital ratio of 16.2% and 9.8% tangible common equity ratio. In conjunction with our company's capital planning, we announced in November of 2024 that our Board of Directors authorized a new $10 million share repurchase program. Our net earnings of $51 million or $0.36 per share compared with $51 million for the third quarter of 2024 or $0.37 per share and $48.5 million or $0.35 per share for the prior year quarter. Pretax income in the fourth quarter of $68 million was $423,000 higher than the third quarter of 2024. Net interest income decreased quarter-over-quarter by $3.2 million or 2.8%, primarily due to the actions we have taken to deleverage our balance sheet by reducing borrowings and other wholesale funds, therefore, reducing our earning assets. Noninterest income increased by $269,000 and noninterest expense decreased by $355,000 compared to the third quarter. We had a recapture of allowance for credit losses of $3 million in the fourth quarter. On September 26, 2024, we completed an early redemption of our $1.3 billion bank term funding program borrowing that was scheduled to mature in January of 2025. By redeeming this debt, we deleveraged our balance sheet, resulting in total average assets for the fourth quarter declining by almost $1 billion from the third quarter. The reduction in debt reduced interest expense by $15 million per quarter, driving a 13 basis point increase in our net interest margin for the fourth quarter. We were able to increase our return on average assets from 1.24% in the third quarter to 1.3% in the fourth quarter. We executed 2 sale-leaseback transactions in the fourth quarter of 2024 and in which we sold and leased back 2 buildings under long-term leases, realizing gains on sale totaling $16.8 million. In conjunction with these real estate transactions, we sold $155 million of available-for-sale investment securities at a cumulative loss of $16.7 million. At December 31, 2024, our total deposits and customer repurchase agreements totaled $12.2 billion, a $505 million increase from December 31, 2023, including the growth of $315 million of nonmaturity deposits. Although we generally experienced a decrease in deposits at the end of the fourth quarter each year, total deposits and customer repos grew on average by $150 million over the third quarter of 2024. Compared to the third quarter, non-maturity deposits grew on average by $188 million while time deposits declined on average by $130 million, inclusive of a $100 million brokered CD that we did not renew. By the end of the fourth quarter, we experienced a decrease in deposits and customer repos from the end of the third quarter of $257 million. Noninterest-bearing deposits were 59% of total deposits for the fourth and third quarters of 2024, down from 63% at the end of 2023. We are optimistic about our ability to continue to grow low-cost deposits. 2024 was a relatively strong year for new deposit relationships. As an example, our specialty deposit group generated 75% more in new business in 2025 than the average for the prior 2 years. From December 31, 2019, to December 31, 2024, our total deposits and repos have grown by more than $3 billion. Excluding the deposits acquired from Suncrest Bank and brokered CDs, our core deposits and repos grew by approximately $1.6 billion, which represents a cumulative average growth rate of 3.3% over that 5-year period. Our cost of deposits was 93 basis points for the fourth quarter of 2024, which compares to 98 basis points for the third quarter of 2024 and 62 basis points for the year ago quarter. Our cost of nonmaturity deposits has grown from 60 basis points in December of 2023 to 81 basis points in December of 2024 while our cost of time deposits has grown from 1.84% in December of 2023 to 2.84% in December of '24. Now let's discuss loans. Total loans at December 31, 2024, were $8.54 billion, a $36 million decrease from the end of the third quarter and a $368 million or 4% decline from December 31, 2023. The quarter-over-quarter decrease was led by a $111 million decline in commercial real estate loans. We also had an $11 million decrease in commercial and industrial loans and approximately $10 million decline in agribusiness loans. Dairy and livestock loans grew seasonally by $87 million from the end of the third quarter. We continue to experience limited demand for commercial real estate loans and rate competition for the quality of loans we focus on has been very competitive. We average yields of 7% on new CRE loans in the fourth quarter, but by the end of the quarter, originations were in the high 6% range. C&I line utilization continues to be low, even though we have grown our total C&I loan commitments. Overall, total new loan commitments for 2024 were 90% of 2023's production but balances funded on the new loan commitments was only 75% of 2023 levels as we originated a greater percentage of C&I loans in 2024. The decrease in loans from the end of 2023 included commercial real estate loans declining by $277 million and construction loans declining by $51 million as construction loan origination was minimal in 2024. C&I loans also declined by $45 million when comparing December 31, 2023 to December 31, 2024. In total, we ended the quarter with $19.3 million in OREO assets, including $17.7 million of loans that were classified as nonperforming at the end of the third quarter of 2024 and were foreclosed during the fourth quarter and recorded as an OREO. An additional $1 million loan that was not past due at September 30, 2024 became an OREO asset at year-end. Net recoveries for the fourth quarter were $180,000, which compares to $156,000 in net recoveries for the third quarter of 2024. Total nonperforming and delinquent loans decreased from $53.3 million at September 30, 2024, to $47.6 million at December 31, 2024. We had $30.7 million of past due and accruing loans as of September 30, 2024, of which $24.8 million became nonperforming and approximately $1 million became OREO by the end of 2024. We reversed interest income of approximately $1.5 million during the fourth quarter for these nonperforming assets. The remaining $4.9 million of past due and accruing loans at the end of the third quarter were paid off by the borrower or from the sale of loan collateral. Classified loans were $89.5 million at December 31, 2024, $25 million lower than the prior quarter and $17 million lower than the end of 2023. Classified loans as a percentage of total loans was 1.05% at the end of 2024. Classified dairy and livestock and agribusiness loans declined by $11 million as profitability is improving for these borrowers. Classified nonowner commercial real estate loans decreased by $27 million, including a reduction of $13 million for a group of multifamily loans to 1 borrower which we foreclosed on during the fourth quarter. Of this $13 million in loans, $9 million became OREO as of December 31, while the remaining $4 million was paid off through the sale of the collateral. Additionally, $9.8 million loan on a senior living facility that was a participation entered into by Suncrest Bank was foreclosed during the fourth quarter and recorded as an OREO at December 31, 2024. We do not anticipate losses on the sale of the $19 million of OREO assets during the first quarter of 2025. The multifamily properties representing the $9 million of OREO have been or will be sold in January as sales of these properties have either closed or under sales contracts awaiting title to clear in the next few days. There is also a signed purchase agreement for the senior living facility, which we expect to close in February. I will now turn the call over to Allen to further discuss our net interest income and additional aspects of our balance sheet. Allen?

Thanks, Dave. We effected a deleveraging of our balance sheet at the end of the third quarter of 2024 by completing an early redemption of $1.3 billion bank term funding program borrowing in September of last year. As a result of this deleveraging, average borrowings during the fourth quarter of 2024 were $1.2 billion lower than the third quarter of last year. And average earning assets decreased by approximately $975 million from the third quarter. The use of cash to redeem the bank term funding program borrowing at the end of the third quarter resulted in our average funds on deposit at the Federal Reserve decreasing by approximately $750 million during the fourth quarter of 2024. Investment securities also declined on average between the third and fourth quarters of 2024 by $144 million as we executed on targeted sales of certain available-for-sale or AFS securities during the third and fourth quarters of '24. We executed 2 sale-leaseback transactions during the fourth quarter of 2024, realizing gains on sale totaling $16.8 million. In conjunction with these real estate transactions, we sold approximately $155 million of available-for-sale investment securities at a cumulative loss of $16.7 million. During the fourth quarter of 2024, we purchased $385 million of securities, a combination of floating rate and 15-year fixed-rate mortgage-backed securities with an average yield at the time of purchase of more than 5%. We also sold more than $300 million of AFS securities during the third quarter of 2024 at a cumulative loss of $11.6 million, which was also timed in conjunction with the sale and leaseback of 2 banking center buildings during the third quarter. The building sales in the third quarter resulted in gains on sales totaling $9.1 million. The securities sold in the third quarter had an average book yield of less than 3%, while the securities sold in the fourth quarter had an average book yield of less than 2%. On a combined basis, over the third and fourth quarters of 2024, we sold $467 million of the low-yielding AFS securities and purchased $385 million of new investments with current yields in excess of 5%. Available for sale investment securities were approximately $2.54 billion at December 31, 2024, a $77 million increase from September 30, 2024. The unrealized loss on AFS securities increased by $80 million from $367 million at September 30, 2024, to $448 million on December 31, 2024. At the end of the third quarter of 2024, we had 3 paid fixed swaps that we recorded as fair value hedges totaling $1 billion in notional value. The bank received daily sober on these swaps. In December, we unwound one of these swaps, which matured in June of 2027 with a notional value of $300 million and a fixed rate of 3.95%. We netted less than $100,000 on the transaction. For the fourth quarter of 2024, we earned a positive carry on these swaps, generating $2.3 million of interest income compared to $4.3 million in the third quarter of 2024. At year-end, we continue to have $300 million of brokered CDs that have been swapped as cash flow hedges. But an additional $100 million brokered CD that was issued earlier in 2024 was not renewed during the fourth quarter. As of December 31, 2024, the market value of our remaining 2 fair value hedges, combined with our cash flow hedges, increased by approximately $27 million from the end of the third quarter. The net after-tax impact of changes in both the fair value of our AFS securities and our derivatives resulted in a $37 million decrease in other comprehensive income for the fourth quarter. Investment securities held to maturity or HTM securities totaled approximately $2.38 billion at December 31, 2024. The HTM portfolio declined by approximately $26 million from September 30. Our total investment portfolio declined by $500 million from December 31, 2023, including a decline in AFS securities of more than $400 million. As of December 31, 2024, we had $800 million in wholesale funds including $500 million of Federal Home Loan Bank advances and $300 million of brokered CDs, which represents a $1.4 billion decrease from our wholesale funds on December 31, 2023. As a result of our balance sheet deleveraging and the Fed lowering short-term interest rates, our interest income in the fourth quarter declined by $18 million over the third quarter of 2024. Average earning assets declined by $974 million and the yield on earning assets declined by 19 basis points. The decrease in interest income was primarily due to an $11 million decline in interest from funds deposited at the Federal Reserve, reflecting a $748 million decrease in average balances at the Fed and a 65 basis point decline in the yield on these funds. Loans were also down on average by $83 million, which combined with a 16 basis point decrease in loan yields resulted in a $4.7 million decrease in interest income. This decline in loan interest income included the approximately $1.5 million of accrued interest that was reversed for loans that were classified as nonaccrual during the fourth quarter. A better reflection of the decline in loan yield is the decline in our core loan yields, which decreased by 6 basis points from September to December of 2024. Interest expense decreased by $15 million over the prior quarter due to the $15 million decrease in interest on borrowings, reflecting the redemption of the $1.3 billion in BTFP borrowings. Our cost of funds decreased from 1.47% for the third quarter of 2024 to 1.13% in the fourth quarter. After our balance sheet repositioning net interest income before provision for credit losses decreased by $3.2 million from the third to the fourth quarters of 2024, while our net interest margin expanded from 3.05% in the third quarter to 3.18% in the fourth quarter. For the fourth quarter of 2024, we recaptured $3 million in provision for credit losses reducing our allowance for credit losses as of December 31, 2024, to $80 million. Our ACL at December 31, 2023, was $86.8 million including approximately $6 million of reserves for specifically identified nonperforming loans. Our reserves for specific loans was close to 0 at December 31, 2024. Our economic forecast continues to be a blend of multiple forecasts produced by Moody's. We continue to have the largest individual scenario waiting on Moody's baseline forecast with both upside and downside risk weighted among multiple forecasts. The resulting economic forecast resulted in real GDP growing at a slower rate with GDP growth below 2% for 2025 through 2027. And the unemployment rate rising over 5% by 2026 and not moving below 5% until 2028. Commercial real estate prices are also forecasted to continue their decline in 2025 with only meaningful price appreciation starting in 2027. Now turning to our capital position. At December 31, 2024, our shareholders' equity was $2.2 billion, a $108 million increase from the end of 2023. The company's tangible common equity ratio at December 31, 2024, was 9.8% compared with 8.5% at December 31, 2023. At December 31, 2024, our common equity Tier 1 capital ratio was 16.2% and our total risk-based capital ratio was 17.1%. Although the Board of Directors authorized a new 10b5-1 stock repurchase plan in November, there were no shares repurchased during the fourth quarter of 2024. I'll now turn the call back to Dave for further discussion of our fourth quarter earnings.

Thank you, Allen. Moving on to noninterest income. Our noninterest income was $13.1 million for the fourth quarter of 2024 compared to $12.8 million for the third quarter and $19.2 million for the fourth quarter of 2023. The third quarter of 2024 included a net loss of $2.3 million between the sale-leaseback transactions and the accompanying bond sales, while the fourth quarter transactions essentially offset. BOLI income decreased by $1.1 million from the third quarter and by $5.5 million in the fourth quarter of 2023. These decreases were primarily the result of the BOLI restructuring during the fourth quarter of 2023. Income from CRA-related investments was approximately $1 million lower in the fourth quarter of 2024 compared to both the third quarter of '24 and the fourth quarter of 2023. Our trust and wealth management fees increased by approximately $370,000 or more than 14% and compared to the fourth quarter of 2023. Now expenses. Noninterest expense for the fourth quarter was $58.5 million compared with $58.8 million for the third quarter of 2024 and $65.9 million in the fourth quarter of 2023. The fourth quarter of 2023 included $9.2 million of additional expense related to the initial FDIC special assessment. A recapture provision for unfunded loan commitments totaled $750,000 in the third quarter of 2024 and $500,000 in the fourth quarter of 2023. Staff-related expenses declined by approximately $650,000 from the third quarter of 2024, while increasing by approximately $350,000 from the fourth quarter of 2023. Occupancy expense grew by $167,000 when compared with the fourth quarter of 2023, which includes the impact of the higher occupancy costs for the 4 offices involved in the sale-leaseback transactions. Excluding a decrease in building security expense, occupancy expense would have increased by approximately $400,000 from the fourth quarter of 2023 and would have been essentially the same in comparison to the third quarter of 2024. Noninterest expense totaled 1.49% of average assets for the fourth quarter of 2024 compared to 1.42% for the prior quarter and 1.62% for the fourth quarter of 2023. Our efficiency ratio was 46.3% for the fourth quarter of 2024. This compares with 46.5% for the third quarter and 47.6% in the year ago quarter. This concludes today's presentation. Now Allen and I will be happy to take any questions that you might have.

[Operator Instructions] And our first question will come from the line of David Feaster with Raymond James.

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

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

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

Yes. So I mean, obviously, we recognize we have an enormous amount of capital. And we have a number of things that we want to accomplish, First and foremost, we want to be able to grow -- utilize the capital to grow internally. As far as the M&A market is concerned, conversations have definitely picked up. We've had numerous conversations over the last month or so with a number of banks, and we'll continue to do that. The challenge really has been most of the people on the other side, look at this and say, well, here's what Citizens Business Bank can pay based on where they're trading, and then we have to explain to them how much we are willing to pay, and there's usually a disconnect between those 2 numbers. And so it is an important part of 2025 for us. I do believe we're in a window from a regulatory perspective, from a business environment perspective, I think that we should be able to execute on something in 2025. But at this point, obviously, nothing imminent, nothing happening, but we are working very hard at that. And then beyond the M&A, but beyond the growth in the M&A front, we do have the 10b5-1 plan in place we are disciplined, and it is somewhat opportunistic from where we're trading or at least where we were trading yesterday. And so there will be an opportunity, I believe, for us to continue to look at that if it hits the certain numbers. So we're working on that. So I don't know, Allen, if you have anything you want to add, but...

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

Yes. And just 1 more thing, David, just to sort of tie the bow on this. It's not burning a hole in our pocket either from the sense of, I think there was a big bank CEO who said the capital is not burning a hole in our pocket. We're going to be disciplined in how we look at the uses of capital, whether that's through M&A, buybacks, other ways, we will continue to perform at a very high level, and we are going to generate additional capital but we definitely want to put it to use, but we also want to make sure we put it to use in our normal disciplined way.

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

Yes. We added a slide in our slide deck that showed from -- and I mentioned in my prepared remarks, that we've grown deposits by 3.3% on a 5-year cumulative average growth rate. It's actually 6% if you include the acquisition and the brokered deposits that we've added. But I feel very confident on that front. I mean we have done a great job in the last couple of years when commercial real estate last year really, but a couple of years for the most part, where commercial real estate demand has been slower. We have brought on a number of great operating companies, C&I relationships. Well, that doesn't really translate into loan growth because the utilization is low and -- but it does translate in a lot of other ways. And so if there is this optimism that I am feeling out there in the market. I think that some of these customers will start to utilize those lines, we'll start to initiate projects that maybe they were holding off on. And deposits should grow just as that money starts moving around. And we're continuing to drive growth in our Specialty Banking group and our government services group. So all of those sort of focused verticals that we have there are areas for us to do a good job. And a lot of the excess money is out of the system. As we've talked about in the past, over $1 billion has gone to our trust group. There's an opportunity depending on what rates do, that some of that could start to come back if they're going to start on some of these other projects. So I'm very optimistic on the deposit side. We constantly have to prove our worth there. And we've done a really good job. We will continue to do a good job there.

One moment for our next question. And that will come from the line of Andrew Terrell with Stephens.

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

So Andrew, if you look at that slide, I think you're mentioning, if you look at the top left, where you separate the cost of nonmaturity versus time deposits. From the time deposit perspective, the bulk of what we have in time deposits is those cash flow hedge CDs. So those are unlikely near term to change. That said, the nonmaturity deposits will probably continue to slowly go down in the near term. If the Fed does nothing, then obviously, it hit a floor. But I think over the next month or 2, we probably will still see a little bit of a lag because the last Fed cut was in December. So there's still probably a little bit of a decline for that to continue. And then we suspect that, that won't be doing anything this year and that will probably level out.

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

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

I think it's in the low 4s, if I remember correctly, Andrew, I'll estimate like 4.25, if I recall correctly.

Okay. And then just last 1 for me. I mean, the expenses were pretty stable quarter-to-quarter. I would love to hear just your thoughts on -- it sounds like optimistic on loan growth in 2025. How are you thinking about expense growth in 2025? And what are some of the kind of key areas of investment you're focused on in the year?

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

One moment for our next question. And that will come from the line of Ahmad Hasan with D.A. Davidson.

Ahmad Hasan on for Gary Tenner. Any additional color on the timing of the $385 million in securities purchases?

Timing of the purchases we did in the fourth quarter?

Yes.

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

Right. That makes sense. And as a follow-up, any additional sale leaseback or securities transaction contemplated at this point?

No. We originally had actually looked at selling 6 properties. Our timing was pretty good on this and both from a sales perspective is of the properties and the sale perspective of the securities. We actually sold all of the properties under a 6 cap and a couple of the properties under a 5 cap. And so once we got to the 4 properties, we decided to not sell the other 2 properties to increase our expenses. So at this point, there are no contemplated sale-leaseback transactions and we don't have anything listed for sale. So I think our mini balance sheet restructuring for the most part is done.

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

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

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

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

Well, I think as Dave said, that buyback, we have a 10b5-1 in place. And we typically do make those opportunistic. So we'll see. There's always -- I mean 2025 may be a volatile stock market. And so we buy on the dips, really, and that's the way it's designed.

[Operator Instructions] One moment for our next question. And that will come from the line of Kelly Motta with KBW.

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

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

Got it. That's really helpful. And then I also wanted to touch on just the opportunity on the loan side. I think I caught in your prepared remarks or earlier in the Q&A that commercial real estate has been -- it's challenging right now to get things that missed fit your very tight credit box. Can you remind us where are new loans coming on at? And do you -- if we were to get a rate cut or 2, do you think you can help offset that with reinvestment of some of these cash flows into the loan production you're getting?

Yes. So look, like I said, sort of in my earlier answer, I think people are optimistic, and I do think the pipelines are improving, albeit not where we want them to be completely. I do think that there's more commercial real estate that people are now willing maybe to do some stuff. The movement in the 10-year -- the 5-year and the 10-year, which is primarily what we base our rates on as move rates higher spreads have come in, we've had to be more aggressive on the pricing if it meets our credit box. We won't substitute or take any credit -- any more credit risk than we would normally take, but we are having to be more aggressive on the pricing. And as I said in my prepared remarks, I would say it's coming in at the 6.5% range and maybe slightly higher than that. So we're having to do stuff. We just lost the deal yesterday and it was a 10-year fixed at 4.8% to a large bank. So that's not even the -- I mean, the 10-year treasury is 4.50% or whatever it's at. So I don't -- I mean I think a lot of the challenge -- obviously, we didn't compete at that rate. But a lot of the challenge has been everybody says they're going to grow loans 10%. And the only way to do -- there's only 2 ways to do that: jeopardize your credit quality or price to win. And we're going to be smart about how we do that just as we've been in the history of our bank. But there is some irrational pricing that's starting to happen. And so we just have to make sure -- as Allen reminds me often, we can get mortgage-backed securities and other investments over 5%. So I don't -- with 0 credit risk and a 0 risk rating. So why are we...

No bonus paid on it.

Yes. So we just need to be smart about how we do that. But the simple answer to your question is around 6.5% to 6.75% is probably the range, I would say, new things are coming on.

One moment for our next question. And that will come from the line of Tim Coffey with Janney Montgomery Scott.

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

Yes. By the way, it's no problem asking the questions. I mean, Tim, we have a very limited impact, I would say, directly. As I mentioned, we only have 14 impacted properties, 7 of those 14 were completely destroyed. One of the 7, we've already received the insurance proceeds and paid off the loan. And he has the money sitting in the bank. So currently, that money is sitting in a band control in an account that we control, bank control account that we will use to -- once you find somebody and once he can start rebuilding to rebuild his home. So I don't think the impact is that great. I mean, it's about $7.5 million of loans that are on properties that are destroyed. And so I think the appraised value is somewhere in the neighborhood of $23 million, $24 million. We'll probably get somewhere close to $20 million in insurance proceeds. So I don't think it's going to have a big impact either way. One of the things -- and again, not something that you want to have to do. But we have agreed to be part of a couple of different efforts to rebuild, one through the Department of Financial Protection and innovation. We decided to give relief if anybody asks -- nobody has asked for a relief at this point. But there are some measures that they asked us to agree to, which we did. There's also a group of banks that's being put together led by a supervisor in L.A. County that wants to work with a bunch of community banks to help these impacted people rebuild. And so that -- I don't know too much about that yet. Our first meeting is tomorrow on that. So I'll know more after tomorrow. But I don't think it's going to be a huge impact. We have a decent amount of contractors as customers. And they're all going to be busy and for a long time on this. And so I think that maybe should help us a little bit on the deposit side and potentially even the borrowing side. So I think all in all, while it was obviously a terrible situation, I think from a business perspective for the bank, I see probably more upside opportunity than downside risk. At least at this point.

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

We are. We have -- as you know, we have such a low balance there. I mean we have a lot of capacity there. And I have actually even -- we are extremely disciplined on the construction side. Like 50%, 60% loan to cost is generally what we do. I've actually even talked to our Chief Credit Officer about maybe relaxing that a little bit where we are doing something from a wildfire relief perspective, still has to meet all the other credit aspects of it, but allowing maybe a 60% or 70% loan to cost. So relaxing a little bit while still maintaining excellent credit quality. I don't see that number going from where it is today and going to $300 million, but it could get to $100 million or $150 million over the next couple of years. And Tim, I just want to say thank you regarding the donations as well. I appreciate your comments in the e-mail you sent me.

Well, yes, of course, I mean, I'm in Northern California. So I've seen how devastating the wildfires can be to my community. So absolutely, I'll be of help.

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

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