CVB Financial Corporation

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 that this call is being recorded. I would now like to turn the presentation over for today's call. Christina Carabino, 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 Dave Brager, Chief Executive Officer, and Allen Nicholson, Executive Vice President and Chief Financial Officer. Our comments today will refer to the financial information that was included in the earnings announcement released yesterday. To obtain a copy, please visit our website at www.cbbank.com and click on the Investors tab. 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 in 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 future developments, 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 governmental 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 1-A risk factors therein. Now I will 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 you 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's 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 27 cents 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 27 cents for the first quarter compares with 37 cents for the fourth quarter and 37 cents 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 pre-tax 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 pre-tax 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 $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 31, 2020, our non-expiring demand 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 is typically a seasonably low quarter for us, although a portion of the growth was inflated by approximately $100 million of short-term noninterest deposits at the end of the first quarter. Average non-interest-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 31, 2020, Our total deposits and customer repurchase agreements were $9.48 billion compared with $9.13 billion at December 31, 2019 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 and 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 and livestock loans declines from its peak level at year end of approximately 75% to closer to 50% at the end of the first quarter. Excluding agribusiness and dairy and 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 a 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 $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 equivalent net interest margin was 4.08% for the first quarter of 2020 compared with 4.24% for the fourth quarter and 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 of funds was 21 basis points, both slightly down from the prior quarter and prior year. Moving on to non-interest income. Non-interest 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 housed a banking center that was relocated. Now expenses. Non-interest 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, non-interest expense for the first quarter of 2020 was relatively flat compared to both the prior quarter and the year-ago quarter. Non-interest 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 was 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, non-performing 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 0.06% 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 31, 2020, loans to customers in the hotel, restaurant, entertainment, and Recreation Industries represented approximately 3% of our loan portfolio, and loans to customers in educational services were only 1% of the overall portfolio. Other retail-related loans, primarily loans collateralized by commercial real estate, comprised approximately 12% of our loan portfolio at March 31, 2020. At origination, 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 of 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?