CVB Financial Corporation

Good morning, ladies and gentlemen, and welcome to the third quarter 2023 CVB Financial Corporation and its subsidiary, Citizens Business Bank 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 this session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please note, this 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 third quarter of 2023. Joining me this morning are Dave Brigger, President and Chief Executive Officer of 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 today. 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 Security 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 Rager. Dave?

Thank you, Christina, and good morning, everyone. For the third quarter of 2023, we reported net earnings of $57.9 million, or 42 cents per share, representing our 186th consecutive quarter of profitability. We previously declared a 20 cent per share dividend for the third quarter of 2023, representing our 136th consecutive quarter of paying a cash dividend to our shareholders. Our net earnings of $57.9 million, or 42 cents per share, compares with $55.8 million for the second quarter of 2023, or 40 cents per share, and $64.6 million for the year-ago quarter, or 46 cents per share. Although headwinds exist in the current operating environment, we continued our long history of producing solid quarterly earnings and returns on capital in the third quarter. We produced a return on average tangible common equity of 18.82% and a return on average assets of 1.4% for the third quarter. Our pre-tax, pre-provision income growth over the second quarter of 2023 was 5.7% as our pre-tax, pre-provision income for the third quarter of 2023 was $82.6 million compared with $78 million for the second quarter of 2023. This growth in earnings reflects the positive operating leverage we generated this quarter with total revenue growing by 4.2% compared to expense growth of 1.9%. We continue to be among the industry leaders with respect to expense control with a 40% efficiency ratio for the third quarter and full year 2023. Our net interest margin grew by nine basis points from the second quarter of 2023 to 3.31% for the third quarter reversing the trend of a declining net interest margin from the prior two quarters. The expansion of our net interest margin was the net result of a 17 basis point increase in our earning asset yield, which offset a nine basis point increase in our cost of funds. Total loans outstanding declined from the second quarter of 2023 by approximately $30 million to $8.88 billion at the end of the third quarter. Our allowance for credit losses increased to approximately $89 million on September 30th based on net recoveries of $28,000 and a $2 million in provision for credit losses for the third quarter of 2023. Average total deposits for the third quarter increased by approximately $278 million compared to the second quarter of 2023. Our average non-interest bearing deposits continue to be greater than 62% of our average total deposits. At September 30th, 2023, our total deposits were $12.4 billion, a $2 million decrease from June 30th, 2023. I would highlight that we continue to have zero brokered deposits. Non-interest bearing deposits declined by $292 million, while interest bearing deposits increased by $253 million, from the end of the second quarter of this year. The velocity of deposits moving to Citizens Trust continued to decline in the third quarter with approximately $170 million transferred off balance sheet in the quarter compared to $180 million in the second quarter and $370 million in the first quarter of 2023. Customer repos were $270 million at the end of the third quarter which was $183 million lower than the balance at June 30, 2023. We've experienced a $773 million decline in deposits and customer repos from the end of 2022, which includes, as I just noted, the $720 million that was moved to Citizens Trust, where these funds were invested in higher-yielding liquid assets such as Treasury notes. The bank continues to acquire new deposit customers, New accounts opened during the first nine months of 2023 totaled approximately $867 million of new average deposits. We have historically maintained one of the lowest costs of deposits in the industry based on the customers we target and our business model. Our cost of deposits was 52 basis points on average for the third quarter of 2023, which compares to 35 basis points for the second quarter of 2023 and five basis points for the third quarter of 2022. From the first quarter of 2022 through the third quarter of 2023, our cost of deposits has increased by 49 basis points, representing a deposit beta of less than 7%. since the Federal Reserve began this tightening cycle by increasing rates by 525 basis points. Now, let's discuss loans. Total loans at September 30, 2023 were $8.9 billion, a $30 million decrease from June 30, 2023, and a $202 million, or 2.2%, decrease from the end of 2022. The quarter-over-quarter decline was led by a $61 million decline in commercial real estate loans, We also experienced an $18 million decrease in CNI loans as the line utilization declined from 31% at the end of the second quarter to 27% at the end of September 2023. Partially offsetting the decrease in commercial and real estate loans was a $49 million increase in dairy and livestock loans. Utilization on dairy and livestock loans was at 73% on September 30, 2023, which compares to 67% at the same point last year. From December 31, 2022, loans declined by $109 million after excluding the seasonal increase in dairy and livestock loans from year-end and PPP loan forgiveness. Dairy and livestock loans decreased by $87 million from December 31, 2022, as we experienced a seasonal peak in line utilization in the fourth quarter of each year. Commercial real estate loans decreased by $42 million from the end of 2022 to September 30, 2023, and C&I loans decreased by approximately $11 million over the same period, as line utilization decreased from 33% to 27%. In addition, construction loans declined by $25 million and consumer loans are lower by $23 million. Loan growth continues to be impacted by a slowdown in loan demand. Our new loan production weakened in the third quarter. New loan commitments were approximately $288 million in the second quarter of 2023 and approximately $217 million in the third quarter of 2023. In comparison, we originated $443 million of new loans in the third quarter of 2022. New loan production at the end of the third quarter of 2023 was generated at average yields of approximately 7%. Although loans declined at quarter end from the end of the second quarter, we recorded a provision for credit losses of $2 million for the third 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 $10 million or six basis points of total assets. The $10 million in non-performing loans compares with $6.5 million for the prior quarter and $10.1 million for the year-ago quarter. The increase from the prior quarter was primarily due to a CNI loan that was placed on non-accrual at the end of the third quarter. During the third quarter, we experienced credit charge-offs of $26,000 and total recoveries of $54,000, resulting in net recoveries of $28,000, compared with net charge-offs of $73,000 for the second quarter of 2023. Year-to-date net charge-offs were $122,000. Classified loans for the second quarter were $92 million compared with $78 million for the prior quarter and $64 million for the year-ago quarter. Classified loans as a percentage of total loans was 1.04% at quarter end. The $14.4 million increase in classified loans quarter over quarter was primarily due to a $24.4 million increase in classified commercial real estate loans partially offset by a $10.2 million decrease in classified dairy and livestock and agribusiness loans. The increase in classified loans for the commercial real estate category was primarily due to one relationship in which approximately $20 million of non-owner-occupied commercial real estate loans were downgraded due to the death of a borrower during the third quarter. This loan is well collateralized and the property is currently listed for sale. We anticipate no loss once the property is sold. I will now turn the call over to Alan to discuss the allowance for credit losses, investments, borrowings, and capital.