CVB Financial Corporation

Good morning, ladies and gentlemen, and welcome to the second quarter 2023 CVB Financial Corporation and its Subsidiary Citizens Business Bank and Earnings Conference Call. My name is Cherie, 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 session. To ask a question during the session, please press star 1-1 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, press star 11 again. Please be advised that today's call is being recorded. I would now like to turn the presentation over to your host for today's call, Christina Carabino. You may proceed.

Thank you, Sheree, and good morning, everyone. Thank you for joining us today to review our financial results for the second quarter of 2023. Joining me this morning are Dave Breger, President and Chief Executive Officer, and Alan 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. 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, 2022, 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. Now, I will turn the call over to Dave Breger. Dave?

Thank you, Christina. Good morning, everyone. For the second quarter of 2023, we reported net earnings of $55.8 million, or 40 cents per share, representing our 185th consecutive quarter of profitability. We previously declared a 20 cent per share dividend for the second quarter of 2023, representing our 135th consecutive quarter of paying a cash dividend to our shareholders. Our net earnings of $55.8 million, or $0.40 per share, compares with $59.3 million for the first quarter of 2023, or $0.42 a share, and $59.1 million for the year-ago quarter, or $0.42 per share. The second quarter demonstrated the bank's financial strength at a time where the industry is seeing disruption. Although our net interest margin contracted by 23 basis points compared to the first quarter of 2023, our efficiency ratio was below 41% in the second quarter of 2023. We generated strong returns reflected by a return on average tangible common equity of 18.39% and a return on average assets of 1.36%. Our pre-tax pre-provision return on average assets was 1.91% for the second quarter. For the second quarter, our pre-tax pre-provision income was $78 million, compared with $84 million for the prior quarter and $85.7 million earned in the year-ago quarter. Total deposits increased by approximately $126 million from the end of the first quarter of 2023 to June 30th, without the benefit of brokered deposits. Our non-interest-bearing deposits continued to be greater than 63% of our total deposits. At June 30th, 2023, our total deposits and customer repos were $12.8 billion, an $88 million increase from March 31st, 2023. However, deposits and customer repos were lower than the same period a year ago by approximately $1.7 billion for an approximate 12% decline year over year. We've experienced $552 million decline in deposits and customer repos from the end of 2022 which includes $550 million that was moved into Citizens Trust where these funds were invested in higher yielding liquid assets such as treasury notes. The velocity of deposits moving to Citizens Trust declined in the second quarter with approximately $180 million transferred off balance sheet in the quarter compared to $370 million in the first quarter of 2023. The bank continues to acquire new deposit customers and the deposit pipeline has strengthened over the last three months. New accounts opened during the first half of 2023 total approximately $650 million of new average deposits. We have historically maintained one of the lowest cost of deposits in the industry based on the customers we target and our business model. Our cost of deposits was 35 basis points on average for the second quarter of 2023, which compares to 17 basis points for the first quarter of 2023 and three basis points for the second quarter of 2022. At June 30, 2023, our non-interest-bearing deposits were $7.9 billion, compared with $7.8 billion for the prior quarter and $8.9 billion from the year-ago quarter. Non-interest-bearing deposits were greater than 63% of total deposits as they have been for the last five quarters. The bank has no broker deposits. Our deposits are 100% core customer relationships across diversified industries. More than 75% of our deposits represent customer relationships that have banked with Citizens Business Bank for three or more years. 76% of our deposits are business deposits and our customers typically have operating accounts that by the nature of each of their businesses exceeds the FDIC insurance coverage level of $250,000. Therefore, 52% of total deposits and customer repos were uninsured and uncollateralized at June 30, 2023. As of the end of the second quarter, the Federal Reserve had increased the Fed funds rate by 500 basis points since April of 2022. The bank's cost of deposits over the same period of time have increased from three basis points to 41 basis points for the month of June 2023. The bank failures in March of 2023 brought greater tension to the Fed's increases in short-term rates. And of the 38 basis point increase in our cost of deposits from the start of the Fed's rate increase, more than 50% of the increase has been experienced since March of 2023. Although the pace of the increase in deposit costs slowed in June, we cannot be certain about the pace of increases in the future, especially if the Fed continues to raise rates as they did yesterday. Total loans at June 30, 2023 were $8.9 billion, a $172 million or 1.9% decrease from the end of 2022. From December 31st, 2022 loans declined by $31.9 million after excluding the seasonal increase in dairy and livestock loans and PPP loan forgiveness at year end. Dairy and livestock loans decreased by $136 million from December 31st, 2022 as we experienced pay downs in the first quarter of each calendar year. As we, excuse me, as paid out the first quarter of each year as a result of the temporary increase we experienced in the fourth quarter of each year. Commercial real estate loans increased by $19 million from the end of 2022 to June 30th, while CNI loans increased by approximately $8 million over the same period. The clients in construction, SBA, and consumer loans totaled $59 million from December 21st, 2022 to June 30th, 2023. Now, let's discuss loans in more detail. Loan growth during the second quarter was impacted by a slowdown in loan demand. Total loans declined by $35 million from the end of the first quarter of 2023 to the end of the second quarter. Commercial real estate, construction, and consumer loans declined from the prior quarter, while C&I loans increased as utilization rates improved from 28% at the end of the first quarter to 31% at the end of June. Year-over-year core loan growth was $277 million or approximately 3%. This core loan growth was led by growth in commercial real estate loans, which grew by $260 million or 3.9% year-over-year. Our new loan production weakened in the second quarter. New loan commitments were approximately $240 million in the first quarter of 2023 and approximately $288 million in the second quarter of 2023. In comparison, we originated $604 million of new loans in the second quarter of 2022. New loan production at the end of the second quarter was generated at average yields exceeding 7%. Although we continue to strive to grow loans, our current loan pipeline is at its lowest level in the last three years. Although loans declined at quarter end from the end of the first quarter, We recorded a provision for credit losses of $500,000 for the second quarter of 2023 to reflect a further deterioration in our economic forecast. Asset quality continues to be strong, and the trends remain stable. At quarter end, non-performing assets, defined as non-accrual loans plus other real estate owned, were $6.5 million, or four basis points of total assets. The $6.5 million in non-performing loans compares with $6.2 million for the prior quarter and $13 million from the year-ago quarter. During the second quarter, we experienced credit charge-offs of $88,000 and total recoveries of $15,000, resulting in net charge-offs of $73,000 compared with net charge-offs of $77,000 for the first quarter of 2023. Classified loans for the second quarter were $78 million compared with $67 million for the prior quarter and $76 million for the year-ago quarter. Classified loans as a percentage of total loans over the last five quarters has been consistently less than 90 basis points. The $10.9 million increase in classified loans quarter over quarter was primarily due to a $9.7 million increase in classified commercial real estate loans and a $6.1 million increase in classified dairy and livestock and agribusiness loans, partially offset by a $4.4 million decrease in classified commercial and industrial loans. The increase in classified loans for the dairy and commercial real estate categories were primarily due to one dairy relationship in which $11 million of dairy and livestock loans and $6 million of owner-occupied commercial real estate loans were downgraded during the second quarter. Commercial real estate loans secured by office buildings has been an area of much attention recently across the banking industry. So we've included additional information related to our office exposure and our July 2023 investor presentation. A couple of data points regarding our $1.1 billion of office CRE includes the granular nature of the portfolio, which is highlighted by the average loan size of less than $1.7 million. 87% of the office CRA loan balances are below $10 million and we only have one loan greater than $20 million. Additionally, 25% of this portfolio is owner occupied and on average these loans were originated with loan devalues of 55%. Approximately 13% of the office portfolio will mature over the next 24 months. while an additional 13% of the portfolio will have their interest rates reset during those same 24 months. To visualize where our office portfolio is positioned geographically, we have maps on pages 33 through 36 of our investor presentation that show the dispersion of our loans and the minimal exposure in the city centers of Los Angeles, San Diego, and San Francisco. In summary, we believe our office CRE portfolio was conservatively underwritten, very granular, and not exposed to central business district areas. I will now turn the call over to Alan to discuss the allowance for credit losses, liquidity, and capital.