CVB Financial Corporation

Good morning, ladies and gentlemen, and welcome to the second quarter of 2020 DVB Financial Corporation and its subsidiary, Citizens Business Bank Earnings Conference Call. My name is Nick, and I'll be your operator for today. This time, all participants are in listen-only mode. Later, we will conduct a question-and-answer period. Please note that this event is being recorded. I'd now like to turn the presentation over to your host for today's call, Ms. Crystal. Christina Carabino, please go ahead.

Thank you Nick and good morning everyone. Thank you for joining us today to review our financial results for the second 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, www.cbbank.com 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 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, 2019 and in particular, The information set forth in item 1A, risk factors therein. Now I will turn the call over to Dave Brager. Dave?

Thank you, Christina, and good morning, everyone. And thank you for joining us again on our investor call for the second quarter. As we announced in our second quarter earnings release yesterday afternoon, the effects of the COVID-19 pandemic continue to broadly impact the financial services industry, including Citizens Business Bank, through the economic impacts of the stay-at-home orders, business closure orders, and the widespread effects of required social distancing and health and safety measures in California. Before we provide more details on the impact on our business and how we plan to continue to manage through this pandemic, Allen and I will report on our second quarter 2020 financial results. Yesterday, we reported net earnings of $41.6 million for the second quarter of 2020, or 31 cents per share, which represented our 173rd consecutive quarter of profitability. We also declared an 18 cent per share dividend for the second quarter of 2020 which represented our 123rd consecutive quarter of paying a cash dividend to our shareholders. Our net earnings of $41.6 million compared with $38 million for the first quarter of 2020 and $54.5 million for the year-ago quarter. Earnings per share of $0.31 for the second quarter compares with $0.27 for the first quarter and $0.39 for the year-ago quarter. Through the first six months of 2020, we earned $79.6 million compared with $106.1 million for the first six months of 2019. Diluted earnings per share were $0.58 for the six-month period into June 30, 2020. compared with 76 cents for the same period in 2019. Our pre-tax, pre-provision income was $70.3 million for the second quarter, which was $5 million higher than the prior quarter and $8.4 million lower than the second quarter of 2019. We originated $1.1 billion under the SBA's Paycheck Protection Program, resulting in approximately $8.5 million in loan interest and fee income during the second quarter of 2020. We recorded a credit loss provision of $11.5 million for the second quarter of 2020. In comparison, we had a credit loss provision of $12 million in the first quarter of 2020 and a loan loss provision of $2 million in the second quarter of 2019. The additional provision in the second quarter was primarily the result of our forecast of a further deterioration in our economy due to the pandemic. We will discuss our economic forecast in more detail later in this call. Now, I would like to discuss our deposits and loans. We had a significant deposit growth of approximately $2 billion for the second quarter due primarily to proceeds from PPP loans and our customers maintaining greater liquidity. At June 30, 2020, our non-interest-bearing deposits totaled $6.9 billion, compared with $5.6 billion for the prior quarter and $5.3 billion for the year-ago quarter. Non-interest-bearing deposits were 63% of total deposits at the end of the second quarter, compared with 61% for both the prior quarter and the year-ago quarter. At June 30, 2020, our total deposits in customer repurchase agreements were $11.5 billion compared with $9.5 billion at March 31, 2020 and $9.1 billion for the same period a year ago. Average non-interest-bearing deposits were $6.2 billion for the second quarter of 2020 compared with $5.2 billion for the prior quarter and $5.1 billion for the year-ago quarter. Our average total deposits and customer repurchase agreements of $10.5 billion for the second quarter grew by $1.3 billion or 14% from the first quarter. Now, moving on to loans. Total loans, including $1.1 billion of PPP loans, increased by $936 million or 12.5% from the end of the first quarter. Excluding PPP loans, loans decreased by $161 million including a $120 million decline in CNI loans. The CNI balances were impacted by a reduction in line usage from the end of the first quarter. The bank's total unused loan commitments increased by approximately $117 million from March 31st to June 30th and the overall line utilization rate declined from approximately 53% at March 31, 2020 to 48% at June 30, 2020. Commercial real estate loans increased by $17 million over the prior quarter end. Compared to June 30, 2019, total loans were $867 million higher, but when PPP loans were excluded, total loans declined by $230 million, or 3% over the prior year. This decrease in loans was generally across all loan segments. Average loans for the second quarter increased by $564 million compared with the first quarter of 2020 and increased by $489 million compared with the year-ago quarter. During the first quarter of 2020, PPP loans had an average balance of $670 million. Net interest income before provision for credit losses was $104.6 million for the second quarter compared with $102.3 million for the first quarter and $111.1 million from the year-ago quarter. The increase in interest income from the first quarter was the net result of additional interest and fee income recognized for PPP loans offset by a declining net interest margin. The decrease in net interest income from the prior year was primarily due to the decline in interest income from lower loan yields. Our tax equivalent net interest margin was 3.7% for the second quarter of 2020, compared with 4.08% for the first quarter and 4.49% for the second quarter of 2019. When the impact of PPP loans, discount accretion on acquired loans, and non-accrual interest paid is excluded, The adjusted tax equivalent net interest margin was 3.42% for the second quarter, down from 3.87% for the prior quarter and 4.08% for the year-ago quarter. Our net interest margin was negatively impacted during the second quarter by excess liquidity that resulted in more than $1 billion, on average, deposited at the Federal Reserve. Loan yields were 4.77% for the second quarter of 2020 compared with 4.95% for the first quarter of 2020 and 5.4% 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 acquired loans. Excluding the impact of PPP loans, interest income related to purchase discount accretion and non-accrual interest paid, loan yields were 4.44% for the first quarter. 23 basis points lower than the first quarter of 2020 and 42 basis points lower than the second quarter of 2019. Our cost of deposits and customer repurchase agreements for the second quarter were 12 basis points and our total cost of funds was 13 basis points. Our cost of funds declined by 8 basis points from the prior quarter and 12 basis points from the second quarter of last year. Now, moving on to non-interest income. Non-interest income was $12.2 million for the second quarter of 2020, compared with $11.6 million for the prior quarter and $18.2 million for the year-ago quarter. The second quarter of last year included a $5.7 million net gain from the legal settlement of an imminent domain action on one of our banking center buildings located in Bakersfield. During the current quarter, we generated record levels of swap fee income of $2.2 million which was $1.8 million higher than both the prior quarter and the second quarter of 2019. Now expenses. Non-interest expense for the second quarter was $46.4 million compared with $48.6 million for the first quarter of 2020 and $50.5 million for the year-ago quarter. Compared with the first quarter of 2020, salary and benefit expense declined by $2.2 million which included approximately $1.1 million due to the timing of payroll related tax expenses and $1.2 million in higher deferred loan origination costs related primarily to the origination of more than 4,000 PPP loans. The second quarter of 2019 included $2.6 million in acquisition expense related to the community bank merger. Non-interest expense totaled 1.48% of average assets for the second quarter compared with 1.72% for the first quarter and 1.81% for the second quarter of 2019. Our efficiency ratio was 39.75% for the second quarter of 2020 compared with 42.69% for the prior quarter and 39.09% for the second quarter of 2019. Now, turning to our asset quality matrix. At quarter end, non-performing assets defined as non-accrual loans plus other real estate owned were $11.7 million compared with $11.3 million for the prior quarter and $13.6 million at June 30th, 2019. As of June 30th, 2020, we had OREO of $4.9 million, the same as the prior quarter. At June 30th, 2020, We had loans delinquent 30 to 89 days of $2.6 million compared with $4.4 million at March 31, 2020. Classified loans for the second quarter were $86.3 million, a $2.7 million increase from the prior quarter. We will have more detailed information on our classified loans available in our second quarter Form 10-Q. Through July 10, we granted temporary payment deferrals primarily a principal and interest for loans in the amount of $1.27 billion. These deferments were primarily for 90 days with 93% of these loans being pass rated. Only 6% of these loans have received a second deferment and 94% of the deferments were granted between March and May. At June 30th, 2020, commercial loans to customers in the hotel, restaurant, entertainment and recreation industries represented approximately 4% of our commercial loans, and loans to customers in retail trade were only 2% of our CNI loans. Commercial real estate loans on retail properties comprised 15% of our CRE loan portfolio at June 30, 2020. At origination, the loans on retail properties were underwritten with loan-to-values averaging approximately 50%. It's important to note that 56% of these loans were originated prior to 2017. I will now turn the call over to Allen Nicholson to discuss our effective tax rate, the allowance, capital levels, and liquidity. Allen.