CVB Financial Corporation

Good morning, ladies and gentlemen, and welcome to the third quarter 2020 CVB Financial Corporation and its subsidiary Citizens Business Bank Earnings Conference Call. My name is Kate and I'll be your operator today. At this time, all participants are in listen-only mode. Later, we will conduct the question and answer period. Please note this call is being recorded. I would now like to turn the presentation over to your host for today's call, Christina Calabino. You may proceed.

Thank you, Kate, and good morning, everyone. Thank you for joining us today to review our financial results for the third 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, 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 future developments, which are highly uncertain 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 the 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 this quarter. We reported net earnings of $47.5 million for the third quarter of 2020, or 35 cents per share, which represented our 174th consecutive quarter of profitability. We also declared an 18 cent per share dividend for the third quarter of 2020, which represented our 124th consecutive quarter of paying a cash dividend to our shareholders. Our net earnings of $47.5 million compares with $41.6 million for the second quarter of 2020 and $50.4 million for the year-ago quarter. Earnings per share of $0.35 for the third quarter compares with $0.31 for the second quarter and $0.36 for the year-ago quarter. Through the first nine months of 2020, We earned $127.1 million compared with $156.5 million for the first nine months of 2019. Diluted earnings per share were 93 cents for the nine-month period ended September 30, 2020 compared with $1.12 for the same period in 2019. Our pre-tax, pre-provision income was $66.9 million for the third quarter, which was $3.4 million lower than the prior quarter and $5.6 million lower than the third quarter of 2019. We did not have a provision for credit losses in the third quarter as our forecast of macroeconomic variables at quarter end was generally consistent with the prior quarter and the asset quality of our loan portfolio did not materially change from the second quarter. We will discuss our allowance and our economic forecast in more detail later in this call. Now, I'd like to discuss our deposits and loans. At September 30, 2020, our non-interest-bearing deposits totaled $6.92 billion compared with $6.9 billion for the prior quarter and $5.39 billion for the year-ago quarter. Non-interest-bearing deposits were 62% of total deposits at the end of our third quarter compared with 63% for the prior quarter and 61% for the year-ago quarter. At September 30, 2020, our total deposits and customer repurchase agreements were $11.7 billion compared with $11.5 billion at June 30, 2020 and $9.2 billion for the same period a year ago. Average non-interest-bearing deposits were $6.7 billion for the third quarter of 2020, compared with $6.2 billion for the prior quarter and $5.2 billion for the year-ago quarter. Our average total deposits and customer repurchase agreements of $11.4 billion for the third quarter grew by $930 million, or 8.9% from the second quarter. Now, moving on to loans. Total loans increased by $5.3 million from the end of the second quarter. SBA Paycheck Protection Program loans grew by $4 million and excluding PPP loans, loans increased by $1.3 million. As a $63 million increase in commercial real estate loans was offset by a $24 million decrease in construction loans, a $12 million decrease in single family residential loans. A $12 million decline in municipal financing loans and a $24 million decline in CNI loans. The CNI loan balances were impacted by a reduction in line utilization from the end of the second quarter. The bank's total unused loan commitments increased by approximately $72 million from June 30th to September 30th, and the overall line utilization rate declined from approximately 48% at June 30, 2020 to 46% at September 30, 2020. Compared to September 30, 2019, total loans were $913 million higher, but when the PPP loans were excluded, total loans declined by $188 million or 2.5% over the prior year. This decrease in loans was generally across all loan segments with the exception of a $53 million increase in commercial real estate loans. Average loans for the third quarter increased by $335 million compared with the second quarter of 2020 and increased by $887 million compared with the year-ago quarter. During the third quarter of 2020, PPP loans had an average balance of $1.1 billion compared to $670 million for the second quarter. Of the more than 4,000 PPP loans we originated, 387 of our borrowers representing $439 million in loans have made submissions to the bank in order to request forgiveness. Approximately half of those loans requesting forgiveness are between $150,000 and $350,000 in loan size. with the remaining 50% comprised of loans that are greater than $350,000. To date, we have not processed forgiveness requests on any of the 1,360 loans originated under the $150,000 level. Of the 387 forgiveness applications, only 26 loans representing $17 million have been submitted to the SBA for review. Net interest income Before provision for credit losses was $103.3 million for the third quarter compared with $104.6 million for the second quarter and $108.2 million from the year-ago quarter. The $1.2 million decrease in net interest income from the second quarter was due to the $1.2 million decrease in loan interest income. The $4.8 million decrease in net interest income from the prior year was primarily due to a $4.6 million decline in loan interest income. Our tax equivalent net interest margin was 3.34% for the third quarter of 2020 compared with 3.7% for the second quarter and 4.34% for the third quarter of 2019. When the impact of PPP loans, discount accretion on acquired loans, and non-accrual interest paid as excluded, the adjusted tax equivalent net interest margin was 3.18% for the third quarter, down from 3.42% from the prior quarter and 4.02% for the year-ago quarter. Our net interest margin was negatively impacted during the third quarter due to the excess liquidity that resulted in approximately $1.5 billion on average on deposit at the Federal Reserve, earning just 10 basis points. The net interest margin in the third quarter would have been about 45 basis points higher without the $1.5 billion on deposit at the Federal Reserve. Loan yields were 4.47% for the third quarter of 2020 compared with 4.77% for the second quarter of 2020 and 5.23% for the year-ago quarter. Thank you for joining us. Interest income related to purchase discount accretion and non accrual interest paid, loan yields were 4.37% for the third quarter, seven basis points lower than the second quarter of 2020 and 44 basis points lower than the third quarter of 2019. Our cost of deposits and customer repurchase agreements for the third quarter were 11 basis points and our total cost of funds was also 11 basis points. Our cost of funds declined by two basis points from the prior quarter and by 12 basis points from the third quarter of last year. Now moving on to non-interest income. Non-interest income was $13.2 million for the third quarter of 2020 compared with $12.2 million for the prior quarter and $11.9 million for the year-ago quarter. The third quarter of 2020 included a $1.7 million gain from the sale of a bank-owned building related to a banking center that we closed and consolidated during September. We generated $1.6 million in fees from interest rate swaps during the third quarter, which was our second highest quarter in history. The highest quarter in history was the $2.2 million of fees in the second quarter of this year. Deposit service charges grew modestly from the prior quarter by $161,000 but were down by $863,000 from the prior year due to the higher earnings credits generated by the significant increase in our customers non-interest bearing checking account balances. Now to expenses. Non-interest expense for the third quarter was $49.6 million compared with $46.4 million for the second quarter of 2020 and $47.5 million for the year-ago quarter. Non-interest expense for the third quarter of 2020 included $1.1 million for a special thank you award paid in the third quarter to qualifying associates for their commitment and effort during these unprecedented times. Salary and benefit expense also increased over the prior quarter by an additional $900,000 due to the lower net deferred loan costs related to loan originations that were elevated in the second quarter from the origination of PPP loans. The quarter also included a $700,000 write-down in value for one OREO property. Assessment expense increased by approximately $800,000 compared to both the prior quarter and the third quarter of 2019. as the bank fully utilized its FDIC assessment credits from the third quarter of 2019 through the second quarter of 2020. Non-interest expense totaled 1.44% of average assets for the third quarter compared with 1.48% for the second quarter and 1.68% for the third quarter of 2019. Our efficiency ratio is 42.57% for the third quarter of 2020 compared with 39.75% for the prior quarter and 39.6% for the third 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 $16 million compared to $11.7 million for the prior quarter and $16.1 million at September 30, 2019. As of September 30, 2020, we had OREO of $4.2 million. At September 30, 2020, we had loans delinquent 30 to 89 days of $3.8 million compared with $2.6 million at June 30, 2020. Classified loans for the third quarter were $72.7 million, a $13.6 million decrease from the prior quarter. We will have more detailed information on classified loans available in our third quarter form 10-Q. Through October 9, 2020, we have granted temporary payment deferments. primarily a principal and interest for loans in the amount of $69 million for 33 borrowers. These deferments were primarily for 90 days with 89% of these loans being pass rated. 27 of these loans have received a second deferment and the remaining six loans are first deferments. At September 30th, 2020, commercial real estate loans on retail properties totaled $771 million or 9% of total loans. 1% of these loans are on deferment and only $7 million of these loans are classified. At origination, the loans on retail properties were underwritten with loan-to-values averaging approximately 53%. It is important to note that 53% of these loans were also originated prior to 2017. We also have $67 million of commercial real estate loans for hospitality properties, which is less than 1% of total loans. None of these loans are classified, but 16% of these loans are on deferment. Commercial and SBA loans to customers in the hotel, restaurant, entertainment, retail trade, or recreation industries represented approximately $96 million in loans at September 30, 2020, or approximately 1% of total loans. $1.6 million of these loans are classified, and only $1.4 million are on deferment. I will now turn the call over to Allen Nicholson to discuss our effective tax rate, our allowance for credit losses, capital levels, and liquidity.