Good morning, ladies and gentlemen. And welcome to the First Quarter of 2020 CVB Financial Corporation and its Subsidiary Citizens Business Bank Earnings Conference Call. My name is Chuck and I am your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer period.

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

Thank you, Chuck and good morning, everyone. Thank you for joining us today to review our financial results for the first quarter of 2020. Joining me this morning are David Brager, Chief Executive Officer; and Allen Nicholson, Executive Vice President and Chief Financial Officer.

Our comments today will refer to the financial information that was included in the earnings announcement released yesterday. To obtain a copy, please visit our website at www.cbbank.com and click on the Investors tab. Before we get started, let me remind you that today's conference call will include some forward-looking statements.

These forward-looking statements relate to, among other things, current plans, expectations events and industry trends that may affect the company's future operating results and financial position. Such statements involve risks and uncertainties, and future activities and results may differ materially from these expectations.

Among other risks, the ongoing COVID-19 pandemic may significantly affect the banking industry and the company's business prospects. The ultimate impact on our business and financial results will depend on our future development which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic.

The impact on the economy, our customers and our business partners and actions taken by government authorities in response to the pandemic. 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, 2019 and in particular the information set forth in item 1A, Risk Factors therein.

Now, I'll turn the call over to Dave Brager.

Dave?.

Thank you, Christina and good morning everyone. Thank you for joining us again this quarter. First of all, I just want to let you know that I'm pleased to be joining here today for my first earnings conference call as the new Chief Executive Officer of CVB Financial Corporation.

I assumed the role last month and I'm truly honored that our Board chose me to lead this outstanding organization. I see it as a terrific opportunity to leverage my more than 17 years at Citizens Business Bank and share my deep understanding of our bank strategies and local geographic markets to continue delivering strong financial results.

As we discuss our first quarter earnings today, the entire world and our nation is being affected by the COVID-19 pandemic. While all of us are still coming to grips with its impact, it's clear that the effect on many industries including the financial services sector will be felt in a significant way in 2020.

Before we provide more details on how we are responding to this crisis, Allen and I will report on our first quarter 2020 financial results. Yesterday, we reported net earnings of $38 million for the first quarter of 2020 or $0.27 per share, which represented our 172nd consecutive quarter of profitability.

We also declared an $0.18 per share dividend for the first quarter of 2020 which represented our 122nd consecutive quarter of paying a cash dividend to our shareholders. Our net earnings of $38 million compares with $51.3 million for the fourth quarter of 2019 and $51.6 million for the year ago quarter.

Earnings per share of $0.27 for the first quarter compared with $0.37 for the fourth quarter and $0.37 for the year ago quarter. We recorded a credit loss provision of $12 million for the first quarter of 2020 after adopting and implementing CECL.

In comparison we had no loan loss provision in the fourth quarter of 2019 and a loan loss provision of $1.5 million for the first quarter of 2019. The increase in our provision was primarily the result of the forecasted impact of the pandemic on our economy, which we will discuss later in more detail.

Our pretax pre provision income was $65.3 million for the first quarter which was $5.3 million lower than the prior quarter and $8.9 million lower than the first quarter of 2019. The decline in pretax pre provision income was primarily the result of lower net interest income due to the significant decline in interest rates.

The Federal Reserve lowered short-term interest rates by 150 basis points in the first quarter of 2020 after having lowered them by 75 basis points in the second half of 2019.

Net interest income before provision for credit losses was a $102.3 million for the first quarter, down $4.7 million from the fourth quarter and down $7.2 million from the year ago quarter. Now I would like to discuss deposit and loan growth.

At March 31st, 2020, our noninterest-bearing deposits totaled $5.57 billion compared with $5.25 billion for the prior quarter and $5.1 billion for the year ago quarter. Noninterest-bearing deposits were 61.2% of total deposits at the end of the first quarter compared with 60.3% for the prior quarter and 59% for the year ago quarter.

We had strong deposit growth for the first quarter given what it is typically a seasonably low quarter for us. Although, a portion of the growth was inflated by approximately a $100 million of short-term noninterest deposits at the end of the first quarter.

Average noninterest-bearing deposits were $5.25 billion for the first quarter of 2020, compared with $5.3 billion for the prior quarter and $5.09 billion for the year ago quarter. Our average total deposits and customer repurchase agreements of $9.23 billion for the first quarter grew by $18 million or 0.2% from the fourth quarter.

At March 31st, 2020, our total deposits and customer repurchase agreement were $9.48 billion, compared with $9.13 billion at December 31st, 20219 and $9.12 billion for the same period a year ago. Now moving on to loans. Total loans decreased by $98 million at the end of the first quarter of 2020 or about 1.3% to $7.47 billion.

The decrease in loans included a $112 million decline in agribusiness and dairy livestock loans. This decline was mostly seasonal as we experienced pay downs in the first quarter of each calendar year as a result of the temporary increase, we experienced in the fourth quarter of each calendar year.

As a result, line usage for agribusiness and dairy livestock loans declines from its peak level year end of approximately 75% to closer to 50% at the end of the first quarter. Excluding agribusiness and dairy livestock loans, total loans grew by $13.2 million or 0.18%.

D&I loans increased $26 million or 2.7% from the fourth quarter, partially due to a modest increase in credit line utilization. Construction loans increased $11 million while CRE loans decreased $27 million.

Commercial lines of credit saw a modest increase in line usage from roughly 55% at the end of 2019 to approximately 60% at the end of the first quarter. Construction loan growth was also reflection of higher line usage which grew from approximately 60% at year end to slightly more than 70% at the end of the first quarter.

Average loans for the first quarter declined by $13 million compared to the fourth quarter of 2019 and declined by a $180 million or 2.4% compared to the year ago quarter.

Net interest income before provision for credit losses was $102.3 million for the first quarter, compared to $107 million for the fourth quarter and $109.5 million from the year ago quarter. The decrease in net interest income was primarily due to the decline in interest income from lower loan yields.

Our tax equivalence net interest margin was 4.08% for the first quarter of 2020, compared with 4.24% for the fourth quarter and four 4.39% for the first quarter of 2019.

When the impact of discount accretion on acquired loans and non-accrual interest paid is excluded, the adjusted tax equivalent net interest margin was 3.87% for the first quarter, down from 3.95% for the prior quarter and 4.07% for the year ago quarter.

Loan yields were 4.95% for the first quarter of 2020, compared with 5.15% for the fourth quarter of 2019 and 5.27% for the year ago quarter. This decline was primarily due to the impact of the Federal Reserve's rate decreases and the decline in discount accretion income for the acquired loans.

Excluding interest income related to purchase discount accretion and non-accrual interest paid, loan yields were nine basis points lower than the fourth quarter of 2019 and 18 basis points lower than the first quarter of 2019.

Our cost of deposits and customer repurchase agreements for the first quarter were 20 basis points and our total cost to fund was 21 basis points, both slightly down from the prior quarter and prior year. Moving on to noninterest income.

Noninterest income was $11.6 million for the first quarter of 2020 compared with $12.6 million for the prior quarter and $16.3 million for the year ago quarter. The first quarter of 2019 benefited from a $4.5 million gain on the sale of a building, which house a banking center that was relocated. Now expenses.

Noninterest expense for the first quarter was $48.6 million compared with $49.1 million for the fourth quarter of 2019 and $51.6 million for the year ago quarter.

When adjusted for acquisition expense related to the Community Bank merger, noninterest expense for the first quarter of 2020 was relatively flat compared to both the prior quarter and the year ago quarter.

Noninterest expense totaled 1.72% of average assets for the first quarter, compared with 1.71% for the fourth quarter and 1.83% for the first quarter of 2019. Our efficiency ratio is 42.7% for the first quarter of 2020, compared with 41% for both the prior quarter and the first quarter of 2019. Now turning to our asset quality metrics.

At quarter end, nonperforming assets defined as non-accrual loans plus other real estate owned were $11.3 million, compared with $10.2 million for the prior quarter and $19.3 million at March 31st, 2019. As of March 31st, 2020, we had other real estate owned of $4.9 million, the same as the prior quarter.

At March 31, 2020, we had loans delinquent 30 to 89 days of $4.4 million or 0.6% of loans. Classified loans for the first quarter were $83.6 million, a $10.1 million increase from the prior quarter. The increase was due to $10.2 million in commercial loans acquired from Community Bank.

We will have more detailed information on classified loans available in our first quarter Form 10-Q. At March 31st, 2020, loans to customers in the hotel, restaurant, entertainment and recreation industries represented approximately 3% of our loan portfolio and loans to customers and educational services were only 1% of the overall portfolio.

Other retail related loans primarily loans collateralized by commercial real estate comprise approximately 12% of our loan portfolio at March 31, 2020. At origination, the retail, these loans were underwritten with loan to values averaging approximately 53%. Our exposure to the oil and gas industry is minimal.

Through April 17th, we have granted temporary payment deferments of interest or a principal and interest for 508 loans in the amount of $768 million, which represents approximately 10% of our total loan portfolio. These deferments range from 60 to 90 days. Additionally, we have been an active participant in the SBA's paycheck protection program.

The SBA exhausted the initial funding for this program on April 15th, but through that date we processed 911 loans totaling $558 million. I will now turn the call over to Allen Nicholson to discuss our effective tax rate, adoption of CECL, capital levels and liquidity.

Allen?.

Thanks Dave. Good morning, everyone. Our effective tax rate was 28.75% for the first quarter, compared to 27.4% for the fourth quarter of 2019 and 29% for the year ago quarter. Our estimated annual effective tax rate varies depending upon the level of tax advantaged income, as well as available tax credits.

We adopted the CECL accounting standard for credit losses on January 1st, 2020, which resulted in a beginning balance transition adjustments to our allowance for credit losses of $1.9 million with a cumulative effect adjustment to beginning retained earnings of $1.3 million net of tax.

We recorded $12 million in provision for credit losses during the quarter, primarily as a result of forecasted economic impact from the coronavirus pandemic. Including that recoveries of a $141,000 in the quarter, our ending allowance for credit losses was $82.6 million or 1.11% of total loans.

At the end of 2019, our allowance was 91 basis points, therefore increasing the allowance by 20 basis points as a result of the new seasonal accounting standard and the associated economic recession from the pandemic. Our economic forecast is a blend of multiple forecasts produced by Moody's.

The resulting forecast assumes a decline in GDP for the second quarter of almost 20% and unemployment rising to 9% in the second quarter and continuing to be inflated through the remainder of 2020. Now turning to our capital position. Shareholders equity decreased by $52.7 million to $1.94 billion at the end of the first quarter.

The decrease was primarily due to the repurchase of approximately 4.9 million shares of common stock for $91.7 million under our 10b5-1 stock repurchase program. We previously announced that we suspended this 10B-5-1 stock repurchase program due to the uncertainty of the COVID-19 pandemic.

We had $38 million in net earnings during the quarter offset by $24.4 million in cash dividends declared. Finally, our equity increased by $25.8 million as the result of an increase in other comprehensive income from the increase in our tax adjusted market value of our available-for-sale security portfolio.

Our overall capital position continues to be very strong. Our tangible common equity ratio was 11.3% at the end of the first quarter and our regulatory capital ratios are well above regulatory requirements to be considered well capitalized. At March 31st, our common equity Tier 1 capital ratio was greater than 14%.

And our total risk-based capital ratio was approximately 15.5%. We are well positioned with a balance sheet that's highly liquid funded almost entirely with core deposits and the availability of significant off-balance sheet sources of liquidity.

At March 31st, 2020, our combined available-for-sale and held maturity investment securities total $2.3 billion, a $93 million decrease from the fourth quarter and an $85 million decrease from March 31st, 2019. At quarter end, investment of security is available for sale total $1.68 billion.

The portfolio had a pretax unrealized gain of $58.5 million at March 31st, 2020, an increase of $36.6 million from the end of the year. This portfolio of securities is comprised primarily of highly liquid government agency mortgage-backed securities.

In addition, we had $567 million in balances at the Federal Reserve at March 31st, which we expected to deploy in the second quarter to fund loans under the SBA's paycheck protection program. At quarter end, we had only $25 million in sub debt and no other borrowings.

The bank has available lines of credit exceeding $4 billion most of which is secured by pledged loans I will now turn the call back to Dave for some closing remarks..

Thanks Allen. Our bank continues to be strong and financially sound and has been a consistent and stable business partner over a variety of economic cycles during the past 45 years.

We've received many accolades for our solid performance and are proud to have been ranked as the Best Bank in America for 2020 by Forbes magazine for the second time in five years.

We've represented the best about community banking, a focused approach on our customers and the many ways the bank can assist them achieve more for their businesses, their employees, their customers and the communities they serve.

During these difficult times due to the COVID-19 pandemic, we're supporting our communities and customers through various methods. First, all of our banking channels are open to support them. As always, many of our products and services are already available remotely or in a manner that minimizes person-to-person physical contact.

When possible, we encourage our customers to utilize our customer service line, online banking, bill pay and other mobile solutions. Currently, our 58 business financial centers and three trust offices are open for business with reduced operating hours.

We've been closely monitoring the situation and any actions we take with regard to the well-being of our customers and associates will be consistent with guidelines from the CDC and public health officials. We have programs in place to assist our customers with loan forbearance as we have previously discussed.

We've participated in the Paycheck protection program and hope that Congress will soon authorize additional funds for small businesses that are struggling. Recently, if we announced over $350,000 of donations to Community Benefit organizations in need of assistance due to this pandemic.

At the beginning of 2020, we were optimistic about meeting our loan and deposit growth objectives for the year. However, this pandemic has left us with uncertainty as to what will transpire in the future. Currently, we have experienced limited increase on draws on lines of credit by our customers and our deposit growth remains strong.

We are monitoring these metrics on a daily basis. Our business continuity task force comprised the members from our executive and senior management teams has been meeting twice a week to discuss the best ways to work with our customers and associates to keep themselves them safe, while providing essential financial services.

I want to assure you that our customers and associates are always our top priority. Our associates have been truly amazing during this difficult time. And I would like to acknowledge their dedication and hard work. I'd also like to thank our customers for their ongoing loyalty and our shareholders for their continued support and trust.

We believe these attributes will be even more important to our bank as we navigate the uncertain financial and business environment created by this pandemic. Please stay safe and healthy. That concludes today's presentation. Now and I and Allen will be happy to take any questions that you might have..

[Operator Instructions] Our first question will come from Gary Tenner of DA Davidson. Please go ahead..

Thanks. Good morning. I had a couple of questions. You talked about some level of drawdowns in the C&I portfolio, though it sounds like you're kind of wrap-up comments said they were somewhat limited.

Have those drawdowns been repaid in early in the second quarter? And did that impact the kind of seasonal or the late quarter spike you said you saw on the deposit side?.

Yes. It's been, Gary, it's been relatively stable. They haven't necessarily paid down. I mean it's a very granular list of customers. So it's kind of all over the board but on average it's stayed pretty stable..

Okay. So you're saying okay and the late quarter spike in deposits. I think you said about a $100 million.

Is that related to the C&I draws or was that just a customer transaction with the temporary kind of deposit?.

Yes. That was more of a temporary deposit that was there at the end of 3/31..

Our next question will come from David Feaster of Raymond James. Please go ahead..

Hey. Good morning, guys. I just wanted to talk about some of the factors that drove the $12 million in provision increase for the ongoing pandemic.

And maybe just given an updated economic forecast that may be a bit worse than what you currently modeled, how do you think about additional reserve bills going forward?.

So, David, as you could probably tell from our prepared remarks of the weightings of our forecasts, there was a significant weighting to Moody's baseline forecast from March 27. So that had GDP declining by about 20% and Q2 unemployment rising by approximately 9%.

So certainly some of the forecast data that's come out more recently possibly could suggest that we could see a bigger effect on the economy and certainly because that's a big part of the CECL accounting, we potentially could see some additional reserve build in the second quarter, but a lot of things will go into that that's just one component of it.

And certainly early in the quarter, so it's, we have a lot of uncertainty and we really don't have any guidance to really know where that's going in the future..

Okay. That's helpful. And I appreciate the color on the at risk portfolio. One area that you didn't comment on that we, I've read some negative headlines on, is the dairy and the livestock segment.

Just curious what you are hearing there? What are you hearing from your producers especially on the dairy front and just how is asset quality trended and how active have they been in the deferrals and PPP program?.

Yes. I'll take that one, David. So obviously beginning in 2019 or at the end of 2019 beginning in 2020, dairy actually had a very profitable 2019 and there was a positive outlook. With the 2020 changes that are occurring, there is a little more concern.

Our dairies at this point are doing okay, but milk prices and forward-looking milk prices are down slightly. So that obviously will have an impact on the dairy portfolio. We're working with our customers through all the variety of programs that we offer.

At this point, everything is okay, but demand is down a little bit and prices are down a little bit. Conversely feed and cost are also down a little bit but not as much as the price is down, the forward-looking price. And some of our customers also have price protection built-in. So we're going to - we're very close to that.

We're staying very close to that. It's an important portfolio for us and we'll continue to monitor that on a weekly daily basis..

Okay. That's helpful. And last one from me just not on the PPP program. I mean you guys have been very active.

Just curious how that's progressed? How inbound calls have progressed since April 15th when the data that you provided was as of any thoughts on fees coming in and just whether you're still accepting new applications and are taking new customers or just existing clients only..

Yes. So I'll, so just a couple quick comments on that. We're accepting applications from existing customers only. We have a queue of applications that we were unable to satisfy in the first round of funding. We're going to be working on that list for the second round of funding. I don't know if they voted yet today, but I know that's close.

And we're going to be active in the second round of that as well. But we are technically accepting applications, but we have a queue of people that have already applied that we're going to focus on first..

Okay.

How big is that queue? And do you have any idea of fees generated from that program?.

Yes. So the queue, yes, approximately 4,000 applications. We were able to process 911 of them. A significant number of those were ready to go and move forward with. So just based on the 911 applications at the dollar amount, our average will probably be slightly below 3%. We haven't done a full analysis of that. We just kind of estimated at this point.

So somewhere around below 3%, a little bit below 3% on the loans, the amount outstanding..

Our next question will come from Jackie Bohlen with KBW. Please go ahead..

Hi. Just one quick follow-on to that.

Of the roughly 4,000 applications that you received, are the loan sizes of that similar to what you had in the 911?.

Go ahead. I am sorry..

I guess I had a different way the 2.5%, does it apply to the 4,000 or 911?.

The number I was saying below 3% applied to the 911. I would imagine that it would be pretty similar moving forward with the additional applications. It might be slightly higher than 2.5% actually on the additional applications..

Okay. Thank you and then just one more for me and I'll step back.

Do you happen to have that breakdown with the $82.6 million ACL? Do you have the breakdown between what portion of that is attributable towards loans outstanding? And what is for unfunded commitments?.

Jackie, that doesn't include the unfunded commitment and liability..

Okay. Great.

It's just pure loans?.

That' correct. The unfunded liability for our balance sheet reserves is $9 million..

Our next question will come from Tim Coffey with Janney. Please go ahead..

Okay. Thanks. Good morning, gentlemen. Just to kind of round out the questions on the PPP program.

What is your - what is your preferred kind of holding period for those loans?.

Well, the customers have, once the loan is funded, they have eight weeks to utilize the funds for payroll and other approved expenses. And so we're still waiting for final guidance on the forgiveness aspect of it. So in theory that holding period could be anywhere from nine weeks to 16 weeks just depending on the process for the forgiveness.

And so, I think, it will, I would believe most of it will be satisfied in the second quarter although there may be some that rolls over to the third quarter..

Okay and, Allen, kind of follow up on a comment you made. It sounds like you're likely to use your own liquidity to fund some of these loans rather than borrowing from the PPP facility.

Is that correct?.

At this point, we predict that, but there is a lot of uncertainty. We never know, but right now we would pursue that..

Okay, sounds good. And then the deferment period that you mentioned of 60 to 90 days is so much shorter than I've heard from other calls. What's kind of the thinking behind going out to this 30 to 90 days, I'm sorry 60 to 90 days..

Yes. The vast majority of them are 90-day deferments and that's - that was sort of our initial take on it. And then we'll obviously reevaluate that and potentially look at the impacts of this virus. And obviously any other underlying credit issues there might be. But we're taking it 90 days at a time.

The reason we said 60 and 90 there was a few that only asked for 60, our customers and so we satisfied their requests..

Okay. And what we call at risk COVID loans in your portfolio that 16%.

Do you have any idea what percentage requested deferments?.

We don't have details on that specific number, no..

Okay. All right. And then I mean, I know, it's not a big part of your portfolio, but it is in your local geography.

So I'm just kind of wondering what kind of, is there any kind of color you can give us on what you're seeing from the industrial warehouse space in the Inland Empire right now? Are there trucks moving through? Is it slowed down? Is - anything would be helpful. Thanks..

Yes. So just a couple of comments on that. I mean, obviously, the Inland Empire is a distribution hub and I drive to work every day, takes me about 30 minutes to drive in and there's a significant amount of trucks moving on the freeway. There's not a lot of other cars moving, but there's a significant amount of trucks.

So, I think, logistics and the distribution networks from here are strong. I mean, obviously, it's impacted but it's probably less impacted than most other industries..

Our next question will come from Jackie Bohlen with KBW. Please go ahead..

Hi. Thanks for taking the follow up.

I just wanted to touch base on expectations for loan and security yields and how you expected to move in the coming quarter with the March rate reductions and where other interest rates are at right now?.

I'll let Allen take the securities and then I'll follow up with the loans.

So, Allen?.

Sure. I mean from a security portfolio perspective; we haven't been active in buying securities this year. And I don't foresee a lot of activity there at least in the near term. So our security yields will probably hold up fairly stable where they are.

The municipal portfolio continued to run down a little bit, but overall we haven't seen any significant change in prepayment speeds on the mortgage back securities that would have a significant difference in terms of what we expect yields to be there..

And I would just add, as far as loans there's a little more headwind on the loan side.

A significant amount of our loans are priced on 10-year treasury and so 10-year treasury is down in the low 60s today and so that's something that on new loan origination, we're looking at pricing on that and then there is some pressure although, I think, it's moderated a little bit with this on our existing loans and performing modifications on those.

So I expect us, we're trying to hold the line as best we can kind of the similar story that we've had in previous quarters in a declining rate environment. And we looked at the relationship and we want to make sure we're taking care of our customers. And we're evaluating that but there are definitely some headwinds..

Okay. No, fair. So, I mean, just given what I assume to be limited room in the funding side because your funding is already so strong and low price, it sounds like anticipation that's some more margin pressure just as the loan yields reprice.

Is that fair?.

Yes. Jackie, you can go back to our 10-K at the end of the year and we talked about a 100 basis points declining rates, our ramp to change, right? And over 12-months it's a decline of 2% in over 24 months, it's 5%. We had 150 basis points decline late in the quarter.

So I think that gives you some sense of color as to the sensitivity of our balance sheet..

Our next question will come from Gary Tenner with DA Davidson. Please go ahead..

Hey, guys. This is Jake Stern on for Gary Tenner. And just a follow up question. So you mentioned some detail on discount accretion for the quarter. Could you tell us projected quarterly discount accretion for the remainder of 2020? Thank you..

Sure. We don't - we, it's a hard to project because much of it is accelerated as loans pay off. So it's obviously coming down. It was down approximately $2 million quarter-over-quarter. Generally speaking, the trend will be down, but one quarter out, it's hard to tell if we have changing prepayment activity.

The prepayment activity starts to slow down then that number will also slow down, but ultimately, it's going to be declining,.

This concludes our question-and-answer session. I would like to turn the conference back over to David Brager for any closing remarks. Please go ahead, sir..

Great. Thank you. I want to thank everybody for joining us this quarter. We appreciate your interest and look forward to speaking with you in July for our second quarter 2020 earnings call. Please let Allen or I know if you have any questions. Have a great day and stay safe. Thanks for listening..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..