Good morning, ladies and gentlemen, and welcome to the Fourth Quarter and Year-End 2016 CVB Financial Corporation and its subsidiary, Citizens Business Bank Earnings Conference Call. My name is Andrea 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 event is being recorded. I would now like to turn the presentation over to your host for today's call, Christina Carrabino. You may proceed.

Thank you, Andrea and good morning everyone. Thank you for joining us today to review our financial results for the fourth quarter and year-end 2016. Joining me this morning are Chris Myers, President and 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. 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, 2015 and in particular, the information set forth in Item 1A, risk factors therein. Now I will turn the call over to Chris Myers.

Thank you, Christina. Good morning everyone and thank you for joining us again this quarter. Yesterday, we reported net earnings of $27.1 million for the fourth quarter, compared to $25.4 million for the third quarter 2016 and $28.6 million for the year ago quarter. Earnings per share were $0.25 for the fourth quarter compared to $0.23 for the third quarter and $0.27 for the year ago quarter. Net earnings were $101.4 million for the year ended 2016 compared to $99.1 million for 2015. Diluted earnings per share were $0.94 for 2016 compared with $0.93 for 2015. The fourth quarter represented our 159th consecutive quarter of profitability and the 109th consecutive quarter of paying a cash dividend to our shareholders. The fourth quarter included several sizable items that impacted earnings. We had approximately $4.9 million in recoveries during the quarter, which resulted in a $4.4 million loan loss recapture. In addition, we recaptured $450,000 related to our reserve for unfunded loan commitments. We also incurred an approximate $2.5 million charge to write-down an asset classified as held for sale to its estimated market value. As we noted on last quarters call, the bank purchased a new operations building to house central operations, information technology and other bank departments. In analyzing our options, we determined the best course of action is to sell the building. Based on various appraisals the prior book value of our existing operations center was determined to be approximately $2.5 million higher than the current estimated market value. As disclosed in prior SEC filings, we have been defending the bank against a wage-hour lawsuit. After much consternation, we decided to settle this lawsuit through mediation rather than face the ongoing cost of litigation and the uncertainty of outcome. We accrued $1.5 million in the fourth quarter to settle…

Thanks, Chris. Good morning everyone. Our effective tax rate was 37.5% for the fourth quarter, consistent with our full year effective tax rate to 37.5%. In comparison, our 2015 effective tax rate was 34.5%. Our effective tax rate varies depending upon tax advantaged income, as well as available tax credits. The increase in the effective tax rate was impacted by the continued decline in tax-exempt municipal bond interest income. Looking to our investment portfolio, during the fourth quarter of 2016 our average interest earning balances at other financial institutions and at the Federal Reserve totaled $190 million. We decreased these balances by $373 million on average from the prior quarter as we transitioned these balances into loan growth and investment purchases during the quarter. At quarter end these balances totaled $50 million. During the fourth quarter, these balances represented approximately 2.5% of our average earning assets which compares to 7.4% in the prior quarter. This decrease in lower yielding assets, combined with growth in the investment and loan portfolios contributed to the improvement in net interest margin from the third quarter. At December 31, 2016 our combined available for sale and held to maturity investment securities totaled $3.18 billion, increasing by $75.6 million or 2.4% from the third quarter of 2016. Investment securities represented 39.4% of our total assets at quarter end and were 41% of our average earnings assets during the fourth quarter compared to 38% in the prior quarter. At quarter end investment securities available for sale totaled $2.27 billion, including a pretax unrealized gain of $14.6 million. In addition we have held to maturity investment securities totaling $912 million. The tax equivalent yield on the total securities portfolio was 2.31% for the fourth quarter, which is down 7 basis points from the prior quarter and 20 basis…

Thanks Allen. And now let's talk about economic conditions. In terms of the California drought, winter has so far brought a deal of rain and snow, contributing to a significant decrease in California's drought conditions, particularly in Northern California. We continue to see little effect of the drought on the repayment of our customers' loans. Turning to the California economy, according to various economic reports, as the last half of 2016 drew to a close the California economy maintained a steady course. California's unemployment rate fell to 5.3% in November 2016 compared with 5.5% in October and 5.9% back in November 2015. With November's jobs gains, California has gained a total of 2.4 million jobs since the economic expansion began in February 2010. Virtually every industry in the state continued to add jobs from an annual perspective. The California housing market continued to move forward. Lower mortgage rates have helped to fuel the increase in sales. The supply of existing homes remains lean and new home construction continues to proceed at a modest pace, although it appears to be accelerating a little bit. All-in-all the state-wide economy is poised for continued growth over the next several quarters and should outpace most other states in the nation. In terms of the dairy industry, the forecast for 2017 appears to be an improvement over last year. Milk price futures are trending upward and feed costs are predicted to be favorable to dairy farmers. We are cautiously optimistic. In closing, we are pleased with 2016 and feel we are well-positioned to have a great year in 2017. We were excited to complete our acquisition of County Commerce Bank earlier this year and look forward to the expected closing of the acquisition of Valley Business Bank, later this year - later this quarter actually. We thank our employees for their continued hard work and dedication, our customers for their loyalty, our shareholders for their continued support and our Board of Directors for their ongoing guidance. As we move into 2017, we remain externally focused on expanding our geographic footprint, both organically and through acquisitions. We remain internally focused on quality loan growth, fee income expansion, continued strong core deposits and overall operating efficiency. And that concludes today's presentation. Allen and I would be happy to take any questions that you might have.

Thank you. We will now begin the question-and-answer session [Operator Instructions] Our first question comes from Jackie Bohlen of KBW. Please go ahead.

Hi, good morning.

Hi, Jackie.

I wondered, if we could first touch up on expenses. I am just kind of looking at the quarter's run rate excluding the building cost, the settlement, and the M&A fees, it looked like compensation and occupancy were down a little bit. Were those year-end true-ups or was there any sort of change in either of the run rates?

Yeah, there was a little bit of true-up on the salary and wage expense, in terms of bonus accrual. But it was not a hugely significant number, just a few hundred thousand dollars there. On the occupancy side, we have been doing some consolidation, getting more efficiency on the occupancy place, and I think that's starting to pay-off a little bit. I do think in looking forward at expenses though, the next quarter or two, I think our expenses could be elevated somewhat, because of several things we have going on. First of all, we’re moving from our operations technology center into a whole new building. There is new expenses that will come up on that building and we’re building that out right now. A lot of those expenses will be capitalized but some of those expenses like moving expenses and other items will not be capitalize. So I think you are going to see elevated expenses related to our building move in the first quarter that could even leak into the second quarter. In terms of our acquisition of Valley Business Bank, I think you are going to see elevated expenses there as well. Those are the two areas that I think expenses will be heightened, but as far as the core expense rate of this company we’re pretty disciplined and I think will continue to show solid numbers there.

Okay. And is a mid-quarter timeframe, maybe mid to late quarter timeframe appropriate for the Valley closure?

Yes, I think that’s it. Our objective is to close it by the end of February. I think we have stated here that end of the first quarter -- by the end of February, if you read our actual definitive agreement and so forth that’s end of February is our anticipated closing day.

Okay. And just one clarification question from your prepared remarks. The mark on the building, was that a mark on the new building or was that a mark on the old building?

It’s a mark on the old building. And what happens is, we have held that building for now for about a dozen years and we’ve done a lot of improvements to it. We customized the building. It's our operations building. So there a lot of stuff in that, that may not translate to a new buyer. So we did an evaluation of that, and then at the end of the day, we came up with this $2.5 million shortfall and we decided that we are going to proceed with attempting to sell the building. So once we did that, we felt that it made sense to recognize that now. The building probably won't be sold actually till the second or third quarter of 2017, but that remains to be seen.

Okay, thanks guys.

Our next question comes from Gary Tenner of D.A. Davidson. Please go ahead.

Good morning guys. Just a question regarding what you’ve observed over the last couple of months, in terms of customer activity. Obviously you had the spike up in loan growth on the dairy and livestock piece. But ex that the core business, any changes from your customers on how they’re kind of looking at the world and the outlook there?

Yeah, that’s a great question and right now let me talk a little bit how our interest rate are affecting that and then we can talk a little bit about just the general kind of business environment that we’re in. So as I said, during the quarter, as rates increase at the end of the quarter we started seeing prepayment pressure subside. Now as you look forward the prepayment pressure continues to subside in 2017 which would be likely because of higher interest rates. If interest rates stay up right, they come back down who knows but if they stay up, you’re going to see a couple of things. First of all you’re going to see that our prepayments fees on -- pay-offs on our existing loans should slow down. So that’s going to help loan retention if you will and potentially loan growth. Now conversely though, the refinance market on commercial real estate will probably slow down because rates that are 4.5%, 5% out there won’t get refinanced. They’ll stay in place and so that refinance market is going to be more difficult for us to get new loan volume out of. So we’re really focusing our sales teams on operating companies and making sure they are calling on operating companies and new business and expansion and all that. We do feel there is an optimism that’s out there. I think -- but it’s going to take a while to see that come to fruition. The optimism I think is just in -- we bank a lot of entrepreneurs and I think that with the recent run up in the stock market and maybe optimism about taxation and regulation and things like that I think that entrepreneurs may get more aggressive. Do I have examples of that yet? Not specifically but we’re starting to see that, kind of that feel come into the market place. So I'm hoping a quarter from now I'm able to give you a little bit more color on that.

Two weeks of January?

About $55 billion has already been payback down from the year end.

Okay, thank you.

And we anticipate ballparkish another $20 million-$25 million probably coming out of there.

Okay, thanks again.

Our next question is from Matthew Clark of Piper Jaffray. Please go ahead.

Hey, good morning, guys. Just first maybe on the margin, you mentioned that there is less rate pressure out there and it also looks like purchases this quarter in the securities portfolio came at a rate slightly above the portfolio. But just curious I guess first, what’s the rate, I guess, on new production in the quarter, maybe even in the second half of the quarter on new loans? And then is it fair to assume maybe a modest, more modest margin pressure going forward with that -- with still some re-pricing in the loan book?

Yeah, I don’t know that in the fourth quarter we really felt any higher interest rates on our loans other than the moving prime. For the most part we were -- there is like a 60 days cycle to close these commercial real estate loans. So when the rates dropped in the middle of October most of our borrowers have till the middle of the December to get those loans booked, or the rates are going to go up on them. So a lot of rush then to get them closed, so to speak. Our loan pipeline is pretty good. It’s not exceptional but it’s solid. It really -- it’s been consistent over the last several months. So I don’t really see a change in that as of yet, I think as far as the security side I think we purchased -- Allen give a little color on our security purchases and your thoughts going forward on that.

Sure, I mean we actually have seen early in 2017 some of the yields on the bonds that are out there for us to purchase come back a little bit from where they were at the end of the fourth quarter. So but we did see a lot better opportunities as I noted the tax equivalent yield on our bond purchase is at 2.19% for the quarter and that was better as the quarter went along, well over 2.25 as we got into the latter half. We do probably still see some continued pressure on the overall yield on that portfolio because run-off is running off at probably 2.50. And so depending on where rates are we may or may not be able to replace them exactly at the same levels.

Okay, great. And then maybe just on credit. First on your pipeline of recovery, I know that’s difficult to forecast but I think you did -- you attempted to previously. I mean what’s your -- what are thoughts for the ability to continue to experience net recoveries next few quarters?

Yeah, I think the net recovery run we’ve had, has been pretty good and we’re definitely -- we feel like we’re definitely in the -- we use the football game analogy; we are in the fourth quarter of our net recovery run here. We do have some more to come. I don’t anticipate we will have a net recovery like we did in 2016 where we had $9 million, almost $9 million; it was at $8.8 million in net recoveries -- $8.8 million in net recovery for the year. I don’t think we have as strong a year as that in 2017. That's not foreseeable. I do think that at least for the first six months of the year we will have net recoveries barring something unforeseen. So there is some left but it really run itself through by the end of 2017 and for most intents purposes. So it is coming to an end.

Okay.

It’s been a good ride up.

Yeah, no doubt. And then just on classified loans in the dairy portfolio, another increase here this quarter. Can you just maybe size-up what portion of your portfolio is in classified, maybe the related reserve and how we should think about that trend going forward?

Yeah, we have had a run-up on the diary side in terms of classified loans and we do anticipate or I guess we’re cautiously optimistic that some of those downgrades will be upgraded in 2017 when they get the year-end financial statement and show our solid first quarter. The milk futures -- milk is now at a price where dairies can -- a lot of dairies can make money again. And seed prices have of kind of stayed to same or moderated if anything. So I do think it’s looking like it’s a more advantageous situation for dairies for 2017. On our reserve for dairies I think we’ve roughly over $8.2 million, somewhere in that vicinity on just dairy alone right.

Yes. And that's the one area that was trending negatively and our allowance analysis was really -- the downgrade in the dairy.

So when you look at the -- against the dairy portfolio if you will, we have about just about 2.6% reserves against that portfolio compared to 1.4% reserves against the rest of the -- on the average the bank.

Got it. Okay. Thank you.

Our next question comes from Aaron Deer of Sandler O'Neill & Partners. Please go ahead.

Hi, good morning, guys.

Good morning.

I think most of my key questions have already been asked and answered. Maybe just a little bit more color on the C&I trends, and obviously the portfolio is down a bit. Just curious now if that was just a drop in line usage and what the expectation are for that particular category in 2017, given the general optimism amongst customers?

Yeah, I am hoping that we are going to get that line usage going forward as entrepreneurs act more like entrepreneurs and pursue some of the profit gains that they can take and so forth and so on. The usage is still very low on a lot of these commercial loans -- commercial lines of credit that we have. We are -- I’m looking for the same thing you are. I want – I’m optimistic that we’re going to grow commercial loans in 2017 particularly with our orientation on calling on operating companies being accelerated. And so we have our quarterly sales rally that's coming up next week. And one of big themes at that sales rally was you going to get back to calling. Hopefully they are already doing it. They are calling on operating companies and be less reliant on commercial real estate brokers and those type of people for referrals into businesses. And listen this bank was built off of operating companies and relationship banking and that's what we need to continue to focus on. So I’m optimistic we are going to be able to do that but it’s really -- it’s a deal-by-deal roll up your sleeves, process to grow their business. Now as we acquire more teams we tend to acquire teams that are more C&I oriented. So I think that will help as well. And we are in discussion with a couple of teams right now that hopefully next quarter I'm able to report on.

Okay. Can you give any sense of kind of where line usage stood at year end relative to commitments and to how that was -- trended during the quarter?

I think was somewhere around 40%ish. Allen what’s your thoughts on that, low 40s?

Say low 40s. I don’t think it change dramatically quarter-over-quarter.

Okay. And then Allen maybe just -- I know you already gave some thoughts on broader margin and rate related issues. But I think as to some rate swaps that showed up in your fee income, I think in the other non-interest income line. With rates kind of trending upward here, what is your expectation here for the rate swaps and how that affects your non-interest income?

We were -- in 2016 we grew pretty nicely as related to that income. And we are modestly up in the fourth quarter over third quarter. But we're optimistic about 2017. I think our loan pipeline includes a fair number of interest rate swaps. And we think the environment will be generally positive and we're looking forward to having a strong year.

And the swap side is when we look at the alternative of doing a fixed rate on our book or an interest rate swap, we want to look at the differential between what the fixed rate on our book will be and what that swap rate will be. And as the variable -- as the short term rates go up swaps become more compelling to us. And so now we can get a yield on a variable loan that's in excess of 3% whereas a year ago that variable yield might have been below 3%. So it becomes more compelling to look at swaps to not only help offset too much fixed rate loan exposure but also we like to say as rates move up we want to benefit of getting higher yields on our loans.

And bear in mind these are back-to-back swaps. So we're not really exposing ourselves in anything from a hedging perspective.

Right. Okay, great, thanks for taking my questions.

Our next question comes from Tim Coffey of FIG Partners. Please go ahead.

Good, thanks, good morning gentlemen.

Good morning.

Chris, as we get to end of the line on these recoveries and you start to look into provision, what is kind of the optimal level of originating on new loans? Is that 50 basis points, 100 basis points, maybe what do you think?

Well, obviously we have a pretty complex analysis and formula along the way. And it really depends -- and we use -- look back to our experience over the many years and we have different qualitative and quantitative factors that we use. But at the end of the day that 1.4% reserve is kind of our balanced reserve on the whole portfolio. Depending on whether we're doing owner occupied commercial real estate, non-owner occupied commercial real estate, construction lending, dairy lending, residential real estate, the reserves differ somewhat on each of those categories based on those qualitative and quantitative factors, and to look back at what we've experienced in loans in our history. So as a ball park most of the core stuff we're putting on you're probably looking at a 1.25% reserve on it.

Okay.

And most of the qualitative factors which appear a number of them are just industry market-related type of things, things we don't necessarily control in this environment continue to trend favorably quarter-over-quarter. So that's part of the equation as well.

But I don't you're going to see, I mean we're going to -- obviously the numbers are what the numbers are, but I really don't anticipate that our reserve is going to go down to 1% on our total portfolio. I really think that where -- there is a certain point where you get to that you want to make sure that you have a healthy enough reserve because we all know that you need your reserve during the bad times. And during the good times your reserve gets depleted. And so we're trying to hold the line on that as much as we can through our methodology and et cetera, et cetera.

Sure yeah. Now I wasn't surprised when you said your reserve was going to drop by half going forward. And then kind of the other item I want to talk about was on taxes. If there is progress on corporate tax reform and your tax rate does come down, would a 100% of that flow to the bottom line or would you anticipate using some of that to make some investments in the business?

Before we get that question I want to clarify a little bit more on our allowance. I think at 140 that's probably where we are. And we'll see what happens from there. I don't, I'm just saying that if you have a performing commercial real-estate loan and so forth it tends to be a little bit lower than that, because some of that reserve is also based on classified loans and some of it's based on special mention loans and it blends into that 140. So you just say a pass grade loan that we're putting on the book, so I'd say a normal reserve for that would be 1.25%. So it doesn't necessarily mean our reserves going to go down any further than it is right now. So just a clarification there, Tim.

Right, now I understood.

Onto the tax question Allen, you got a feel for?

Well, Tim I'll just reiterate what your question was. You asked if we saw some tax reform and our effective tax rate went down. Therefore net income would grow what would we do with that. Would we -- where would we invest that? I think we would continue with our existing strategy. We would continue to invest in adding teams around our current geographic footprint. We’ll continue to look for acquisitions and we would continue to look for potentially buybacks of stock. We do have a buyback out there that we can utilize.

All right. Well, thank you very much. Those were my questions.

I think if you saw we also repurchased a small amount of stock in the fourth quarter, about a $1.3 million worth of stock I think it was 81,000 shares and net average price of that was around 16.49, I think, just below 16.50 in terms of our stock repurchase. So we feel good about that. We would have liked to have done a lot more, but there was a very narrow window when the stock dropped down to that level. But we’re being opportunistic if the stock does drop we’re prepared to support that and reduce our nearly 10 million shares now repurchase capability.

[Operator Instructions] Our next question comes from Brian Zabora of Hovde Group. Please go ahead.

Thanks. I have a question on expenses. If I look at the efficiency ratio, if I back out some of those one-time items in the fourth quarter, efficiency ratio was maybe around 41%. I know in the past you've talked about kind of 45% kind of target. You said that there may be some increases kind of near term but could the efficiency ratios long term be closer to what we saw in the fourth quarter?

Yeah, I think kind of the current benchmark in the company borrowing unusual items is to run that efficiency somewhere around 45%, 44%. I do think there are some opportunities if we can switch our more opportunities I would say on the income side than on the expense side in terms of -- but those are both part of the funnel. So I would hope to aspire one day yes, with a higher interest rate environment to get in the low 40s on our operating efficiency ratio. To put that as a target for the company right now I think is ambitious. I think it’s about 44%, 45% is a good run rate for us. And then you have to add in special items like I talked to on the building and the acquisition that we’re in, the acquisition expenses that we’ll be incurring here in the next two quarters.

That’s helpful. Okay and then just a question on the acquisition, have you seen more interest or more sellers looking -- you just talked about activity if you have more sellers kind of approaching you?

I don’t think there’s been any great change. I do think that it's going to be interesting to see what price expectations are for smaller banks now. I mean there’s been a couple of banks that have sold at some higher multiples. Our multiple is roughly 2.7 times tangible book right now. So that gives us some more, I guess runway and looking at that as well. But I don’t think we’ve seen anything notable yet although we are having discussions here and there along the way and would like to announce another acquisition in 2017 if everything works great.

Okay, very good, thanks for taking my questions.

Our next question comes from Jackie Bohlen of KBW. Please go ahead.

Hi, just one quick follow up question. Do you have the dollar amount of the special FHLB dividend that happened in the quarter?

It was roughly $700,000 I believe.

Great. Thank you. That was all.

[Operator Instructions] There appear to be no further questions at this time. So I will now turn the call back over to Mr. Myers.

Well we thank you all for your support of CVB Financial and Citizens Business Bank. We appreciate your interest and look forward to speaking with you again on our first quarter 2017 earnings conference call in April. In the meantime feel free to contact me or Allen Nicholson, our CFO. Have a great day and thank you for listening. Hope 2017 is a great year for all of us. Thanks.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.