Good morning, ladies and gentlemen and welcome to the Second Quarter 2017 CVB Financial Corporation and its subsidiary, Citizens Business Bank, Earnings Conference Call. My name is Mike and I'm your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer period. Please also note this event is being recorded. I'd now like to turn the presentation over to your host for today's call, Ms. Christina Carrabino. Ms. Carrabino, the floor is yours ma'am.

Thank you, Mike, and good morning, everyone. Thank you for joining us today to review our financial results for the second quarter of 2017. 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 Web site 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, 2016 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 $28.4 million for the second quarter compared with $28.5 million for the first quarter of 2017, and $25.5 million for the year ago quarter. Earnings per share were $0.26 for the second quarter the same as the first quarter and $0.23 for the year ago quarter. The second quarter's earnings were impacted by $1 million loan loss provision recapture; the quarter also included $2 million in net loan loss recoveries. Comparatively the first quarter of 2017 included loan loss provision recapture of $4.5 million and $2.2 million in that recoveries. The second quarter represented our 161st consecutive quarter of profitability and 111th consecutive quarter of paying a cash dividend to our shareholders. Last month, we were additionally pleased to announce a $0.02 increase in our second quarter dividend to $0.14 per share. Through the first six months of 2017, we earned $56.9 million compared with $48.9 million for the first six months of 2016. Diluted earnings per share were $0.52 for the six months period ended June 30, 2017 compared with $0.45 for the same period in 2016. Our year-to-date earnings were the highest in CVBF history for the first six months of any calendar year. Our tax equivalent net interest margin was 3.63% for the second quarter compared with 3.51% for the first quarter and 3.57% for the year ago quarter. The higher net interest margin was a result of a 13 basis point increase in loan yields over the prior quarter, primarily due to rising short-term interest rates. Total loans increased by $72.2 million to $4.69 billion for the second quarter of 2017. Commercial real estate loans increased by $40.5 million and SBA loans increased by $16.5…

Thanks Chris. Good morning everyone. Our effective tax rate was 36.75% year-to-date and 37.49% for the second quarter. This compared with 37% for the first six months of last year. During the first quarter of this year, we had discrete tax benefits related to stock compensation activity accounted for under the newly adopted Accounting Standards Update Number 2016-09. Our effective tax rate can vary depending upon the amount of tax advantage income, tax credit and discrete items such as stock compensation. Looking to our investment portfolio, during the second quarter of 2017, our average interest earning balances and other financial institutions and the Federal Reserve totaled $110 million. During the second quarter these balances represented approximately 1.4% of our average earning assets, which compares to 1.5% for the prior quarter and 5.2% for the second quarter of 2016. At June 30, 2017, our combined available for sale and held maturity investment securities totaled $3.14 billion, a $17.5 million decrease from the first quarter. Investment securities represented 39.6% of our average earning assets during the second quarter and 37.3% of our total assets at quarter end. At quarter end, investment securities available for sale totaled $2.27 billion, which included a pretax unrealized gain of $18.2 million; in addition we had held the maturity investment securities totaling $870 million. The tax equivalent yield on the total securities portfolio was 2.48% for the second quarter, which was a 2 basis point increase from the prior quarter. During the second quarter, we purchased $137.5 million of securities with a tax equivalent yield of 2.60%. Our purchases of available for sale securities were comprised primarily of mortgage backed securities totaling $190 million with an average expected yield of 2.40% based on an expected average life of approximately 4.9 years. Held the maturity securities purchases for the quarter included $18.5 million of high quality bank qualified municipal bonds with an average tax equivalent yield of 3.87%. Our average tax equivalent yield on purchases during the second quarter was 8 basis points higher than the first quarter average as municipal bonds were 13% of purchases in the second quarter compared with 7% in the first quarter. During the second quarter, we sold one security within approximate market value of $5 million realizing that gain on sale $402,000. Now, turning to our capital position. For the first six months -- for the six months ended June 30, 2017, shareholders equity increased by $69.9 million from December 31, 2016 to $1.1 billion at June 30, 2017. The increase was due to $56.9 million in net earnings, $37.6 million, the issuance of common stock through acquisition of Valley Commerce Bancorp and $4 million of various stock-based compensation and other items. This was offset by $28.6 million in cash dividends. I will now turn the call back to Chris for some closing remarks.

Thank you, Allen. Now, let's talk about economic conditions. Turning to the California economy, according to various economic reports, California's economy continue to roll forward in the first half of 2017. California's unemployment rate fell to its lowest in10 years at 4.7% in May 2017 compared with 4.8% in April and 5.5% in May 2016. The states labor market continues to add jobs at a steady pace and is expected to continue to outpace the nation as a whole. Wages are expected to rise over the foreseeable future driving household spending. The California housing market outlook in 2017 is improving. Single family home construction has accelerated in the last few quarters, if sustained it will not only lead to more construction employment, but also help to promote additional spending on household items. In terms of dairy industry, milk price futures have fluctuated during the past few months, while feed costs have stabilized. Overall, the outlook for milk prices for 2017 remains better than 2016, feed prices are expected to remain relatively low. In closing, as we move into the second half of 2017, we remained focused on streamlining our business lines as much as possible, loan growth remains important, but so is our efficiency and return on investment. And that concludes today's presentation. Now Allen and I would be happy to take any questions that you might have.

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

Hi. Good morning, Chris.

Hi, Jackie.

Wanted to kick it off talking about loan yields, just given the nice benefit that you had in the quarter. First of was there any impact in accretable yield versus prior quarters, I know that's been a low contributor in the past, and I'm just wondering given the recent acquisition if there was any increase in that or everything stable below?

Jackie, this is Allen. Quarter-over-quarter it was roughly about a basis point impact.

Okay. So, is that the loan yields or the NIM?

Talking about the loan yields, yes.

Okay. So, roughly 3 basis points this quarter give or take?

About 1 actually quarter-over-quarter, quarter, 1 basis point on the loan yield, 3 basis been impacted on the NIM yield.

I think Jackie you were talking about accretable yield versus NAIP recapture rate.

Yes. Because I had - 2 basis points of impact last quarter from accretion on acquired loans. So with that…

Yes. It's only -- in terms of comparison Q1 to Q2 it was about a basis point.

Okay, okay. And then so, I guess where are you seeing current production versus the portfolio yield and is it something where we could see an increase again in June just based on, what we saw in the second quarter's number after the margin increase?

Jackie, I'm a little confused by the question. Are you talking about what's our loan demand and kind of the pricing, loans that we are receiving comparison to our portfolio?

Yes. Sorry, I'm not that articulate this morning, and looking at where the portfolio yield is, versus where you are booking new generation and given that, we had another rate increase in June which wouldn't be much captured in these numbers, kind of how, could we see the magnitude of increase again next quarter?

I think, in terms of loan yields, its kind of a funny dynamic right now. Because remember the prime rates 4.25% and so if we have a lot of loans out there, I would like to say, for argument say prime plus the half that's a 4.75 yield on those loans. Whereas we might be booking a commercial real estate loan that has a 5 year fixed rate of 25 amortization with a 5 year fixed rate at 4%. So, it's kind of funny we get a 5 year fixed rate at 4%, but our average variable rate yield is like 4.75. So, I think the answer is our yields are coming in about where they are, about where they are to the second quarter in terms of our new loan productivity given that balance. As we get longer 7 year fixed rate and 10 year fixed rate obviously can be higher than the 4% along the way. So, I don't think we have any negative headwind there, I think of anything we have slight tailwind in terms of yields, but we'll have to see if rates moderate for the rest of the year and so forth. And in terms of loan production, our pipeline is good, it's not great. We're tracking about just a little bit behind what we produced last year. We have a big sales rally this afternoon, and I've got all my team coming in there and we're going to say listen, we got to be last year and do all those kinds of things. But, so far in the first six months we are tracking a little bit behind in production, new loan production than we did last year. Despite averaging, I mean despite having a few new teams. So, I'm hoping that will kick in a little bit more in the second half of the year and we'll catch what we did last year and hopefully surpass it.

And is there anything that you credit to that lower, just the pipeline not being quite where you might have expected it?

I think a lot of this remember, we are - we don't buy any loans everything we do is supposed to be within what we specialize in. So, we don't try to get, we really haven't started these new lending initiatives and going to different areas that we're not experienced in. So, we're blocking in tact on that every day and executing. So, there is not strong loan demand out, there is moderate loan demand right now in the economy and I think we're getting our share there and we're trying to get a little bit more than our share that. But, again very focused on quality, especially in this kind of economy, I think lot of times banks make bad decisions during good times and we're in good times right now, we're trying not to make bad decisions that were going to regret. One of the things, I think is phenomenal and Allen and I were talking about just a few minutes ago, we're reporting net recoveries to you guys and you see, our net charge offs depending with that is. But our total charge offs, I had to knock on with when I say that, our total charge offs forget about recoveries, this is just charge offs for the six months of the year is $1558 on bad loans. I mean, I just, so when I hear that, unbelievable that's amazing, but its not going to get any better, so its we're very cautious about that, these are good times in terms of credit quality, but prices have gone up a lot when we look at doing our real estate financing, a lot of our loans now are being the loan to values are being reduced, because the cash flows are, or what we do is, we look at, we give, we lend you up to 65% or 70% against commercial real estate property, but it has to have a debt coverage ratio say 1.25, while lot of times when we get to that debt point coverage ratio of 1.25 we can only lend them 55% or 60% loan to value, because the cap rates on these properties have come down so much. Does that make sense?

Yes, yes.

So, we're making sure that we stay disciplined on that stuff, and sometimes to be candid with you, we'll lose deals here and there, because other banks are more aggressive in terms of that, they might lend just against the loan to value and not be as disciplined as we are in terms of making sure the cash flows make sense.

Okay. No, that's excellent color. Thank you.

But, and I was gearing that, I mean we grew by 1.56% organically which is a annualized rate of 6.24% and I've stated to you guys quarter-after-quarter for last four or five, six quarters that my goal is to grow 2% a quarter, 8% a year organically. So, we're not quite making that, but we're close.

Okay. Thank you very much. That's very helpful and I'll step back now.

The next question will come from Matthew Clark of Piper Jaffray.

Hi. Good morning.

Good morning.

Just on curious on deposit cost unchanged this quarter, obviously pretty impressive, just wanted to get your thoughts on how you think; your deposit cost might inch up from here given the latest increase and maybe talk about competition in and around your footprint?

Yes, deposit competition is heating up. We're feeling that, I think you can see our deposits growth is moderated over the last couple of quarters and if you take out the VBB acquisition and that's a product of us really stay, trying to stay disciplined and focused on our core quarter deposits. The deposits that price with fed funds changed intend to be more; I'd call that elastic with the changes. We're not crazy about those deposits. And we have let some deposits go that we think are non-relationship based deposits for that very reason. Functionally, we feel we're in a great position to do that, we're a 69%, 68% whatever it is loan to deposit ratio, if you include our repos we're 63% or 64%. And so, we can be picky and choosy about our deposits, but not withstanding that funding is the most important thing we do and we're very focused on keeping our non-interest bearing deposits at that 58% level of possible. And so we have let some price here deposits go off, and that's why you're seeing your deposit rates have been gone up. But is there pressure there, yes there is, is it accelerating, I believe it is accelerating, I just don't know what's going to happen with, I think couple of more rate increases its going to get interesting.

Great. And then, just on I know credit obviously solid benign, but just curious if you guys have done a deep dive on your retail, commercial real estate portfolio and if you could maybe size it up and just talk about what's in there and what you are seeing?

Yes. We just did in fact yesterday; our Chief Credit Officer and Deputy Chief Credit Officer just did a comprehensive presentation to the Board. We had a board meeting yesterday. And on retail, our retail exposure and I'll speak to it. We have about $550 million in retail loans in the bank, which these are rough numbers, $500 million is investor and about $50 million is owner occupied. The average loan size of that portfolio is around $1.5 million. So it's very granular, we have five, I believe five relationships, might be six that are $10 million or more in credit on a retail view. And of those relationships, I knew everyone of those clients and so, we feel very good about our larger retail that we've done in terms of - and some of those, it might not just be one $10 million loan, might be five loans that total $10 million to that one borrower. So, the granularity the portfolio is very good, which we feel good about, we don't have a lot of big boxes in there, we just went through the whole thing, I mean we have some -- we have some larger tenants like Walgreens or [Barnes] [ph] or Albertsons and so forth in some shopping centers. But, with that kind of granularity in the portfolio, we feel pretty good about it.

Okay, great. Just last one from me, just on your reserve coverage, just reserves that 151 just want to get an update on your, what your comfort level is, where that might find a bottom?

Well, there is just, very complicated formula that they put together with the ALL methodology and we've just hired a new kind of mathematical client person to help us prepare for when we're going to go over $10 billion and he is building out his team to calculate all these different factors that go into this. So, I think at the end of the day, I mean, I'd like to keep our reserves as high as we possibly can and, but when you have $1558 in charge offs for the first six months of the year, that does put pressure, a downward pressure on our reserves. The 151 is, 151 includes our accretion and so forth, its 128 on the whole portfolio. Well I'd love to see is stay right about there, but I just can't control that, but we will, we'll do what we can to make sure, we're going to, looking at every possibility and every metric that is relevant to our loan loss potential over the next period of time. I don't know what else I can say about that, I think that, I think we're very cognizant of that, one of the thing that's kind of funny in this whole thing is we're spending a lot of money figuring out what the right loan loss reserve is as all banks are. And here we have a billion dollars in capital, and our loan loss reserve is $60 million, and we're probably spending millions of dollars to determine whether that $60 million should be $62 million or $58 million or whatever it's going to be, when we have $1 billion in capital. The whole thing is crazy, I think it's over regulated and all that stuff, I just think they should set some different --I'm kind of go, I guess I shouldn't go [indiscernible]. But, they just set some floors on this start and look at different species of loans and tie loan loss reserve, it's a different species of loans like construction loans that have a higher reserve and commercial real estate would maybe have a lower reserve and C&I would have a lower reserve and et cetera, et cetera. But, I look into pick and choose that, so we just go and do our methodology and I feel like it we're doing the very best -- best we can to make it as accurate as possible and, in my personal preferences to keep it as robust as possible. Sorry for that little answer.

All good. Thanks.

Next we have Aaron Deer of Sandler O'Neill & Partners.

Hi. Good morning, everyone.

Good morning.

Chris, you've - obviously you guys have been doing some repositioning of some of your real estate for your technology and operations group. I know that's way in an expenses a bit, when that's completed and then when you also tie and the cost saves come in from the Valley deal, where do you see your total non-interest expenses is shaking out toward the end of the year?

I think we'll be in a very, I would say is a very normal position by the fourth quarter, there maybe some trickling in there, like we announced the sale of our Westlake office, Woodlake office sorry, Woodlake, not Westlake, we do have a Westlake office. We are not selling our Westlake office, Woodlake office which in the Central Valley and that will happen in the fourth quarter. But the consolidations of those three offices will all happen in the third quarter, so that will be embedded through there, we'll feel the full expense reduction of that in the fourth quarter. In terms of our building, we are still getting more efficiencies out of our new building. The building we bought, we have 10,000 extra square feet that we are going to be leasing out that will take us three to six months or so to lease that out. But, that will produce ultimately around $200,000 a year in income for us when we do lease that out. The sale of our old building which is the former loan operations center is actually an escrow right now nothing for sure till it closes. But, that is schedule to close in August. So, a lot of things are filtering through. I would hope that we are back to that 1.70% ratio that we talked about earlier and making sure that we are below our 45% efficiency ratio for the fourth quarter.

Okay. That's helpful. Thank you.

In the call, I don't really have a dollar for you, but I do think that we are $2.5 million in expenses heavy in this quarter due to those non-recurring type of things. So…

Sure. Okay. And Allen, it seems we are seeing a little bit of shift toward loans and out of investment securities, it's a little a better earning asset mix maybe contributed to some of this margin expansion. Did you kind of look out perspectively the rate environment and the types of yields that you are getting on various assets? How do you see that earning asset mix positioning over the next few quarters?

Well, that is -- that's one of our -- really our critical few things in the bank that we want to get done because right now the average security -- give me a little -- 10 days [points here or there] [ph], the average security we are putting on in the bank right now is 2.5%. And the average loan we are putting on the bank right now is roughly 4.5%. So that 2% divide there between those two things is substantial. And we want to take advantage of that. But, securities have zero risk, loans have some risk. And so, we got to be careful about the type of loans that will be put on. And that's why it's been slower than the world would like. I think one of the things we looked at is buying those, and say should we buy loans and use this great deposit and then kind of reverse out the securities. But, if we were to buy loans and buy the higher quality loans, we would want. We think that our yield on those loans would probably come in, in somewhere in the 375-ish range Allen is that kind of what we looked at. Yes. Net-net-net because you have to pay a premium for them, higher cost. So, we would give up that extra 75 basis points that we organically can create. And I think we would rather just keep marching forward and doing what we are doing, then, even if its -- even if our loan to earning asset mix goes from 55% to 57% to 59%, if we can keep doing that to 60% and 62% and 64%, I think that's going to show -- continue to show nice earnings gains for us in a very predictable fashion.

Okay. Again, thank you. I appreciate for taking my questions.

And the next question we have that will come from Brian Zabora of Hovde Group.

Yes. Good morning. I want to start on dairy, use to get that seasonal benefit in the back half of the year, do you have any early expectations of where that growth could be?

I talked to the head of our dairy and livestock industries group and who has been doing this for us since 1993 by the way, so 24 years and done a great job building that group. And he feels that the -- that will start seeing some of the lending build in the latter portion of the third quarter. But, certainly will see most of the build in the fourth quarter -- in the latter portion of the fourth quarter. Not huge average loan impact for us, but we do feel like it should be a fairly substantial year in that regard kind of like we have had in the last couple of years somewhere between $80 million and $100 million a build out.

Okay, great.

And probably starting in the beginning of September realistically and accelerating each month after that.

Great. And then, your SBA growth has been pretty good, how big does this portfolio get and just kind of your thoughts around -- you are expanding that or you just say your thoughts around SBA?

Well, the SBA portfolio -- we are doing SBA 504 for the most part which are no different than what we have been doing all along. We do a few 7As here and there. The Valley Business Bank folks over there were doing SBA 504 and that made [indiscernible] to our portfolio. So, part of that gain is from Valley Business Bank SBA. But, we've also put on some good SBA loans lately too. So, kind of reversing a trend of kind of slowly falling backwards on SBA 504. So, we are optimistic about it. I think the -- it's getting a little bit revitalized with the addition of Valley business bank. I got to given them credit for getting the bank a little bit more focused on those 504. So, I'm hoping that that turn will continue but I don't have a lot of transparency on that right now. It's still only about $120 million or something like that.

Sure. Understood. And then, just lastly could you also update on how much of your loans repriced with a move in prime or set times or 30-day LIBOR?

Brian, it's approximately 25% to 30%, probably closer to 25%.

Great. Thanks for taking all my questions.

[Operator Instructions] Next we have Tim Coffey of FIG Partners.

Thanks. Good morning gentlemen.

Good morning.

Chris, you have already provided a lot of good color on the call, so most of my questions have been answered. But, I did have a question on the cash dividend. What are your thoughts about a regular -- more regular increases in the dividend going forward given the capital that you have right now.

Yes. We had a lot of conversations about our capital. And our -- my response is really unchanged from where it's been for the last couple of years and that is our first priority is to make sure that we pay a competitive dividend to our shareholders and that's why we increased the dividend by $0.02 in the second quarter. And when you look at where we are paying that out, it's coming out about 50% payout. Our second priority is to use our excess capital for acquisitions. And I think with our new operation center and Valley Business Bank getting integrated here, we are starting to get on the prowl again a little bit. So, we are looking forward to try to see if we can find another good deal along the way. But, again, I think we will be focusing on quality and deals that are both strategic and financial. After that, stock buyback is a possibility although less -- it's probably unlikely when we are trading at 2.6x tangible book. And then, finally, when we do a special dividend, we talked about it, but, we really feel that we want to keep our power dry for our acquisitions as if a great opportunity of a bank -- a larger bank saying over $1 billion in assets came along, we would really like to use our capital to do that and not have to raise capital to do that, which is a lot more expensive. So, that's our priorities for now. Doesn't mean that change stays that way forever, but we are still optimistic about our ability to do M&A going forward.

Okay. I'm sticking with the M&A part, how are those conversations going?

I think the first six months of the year we really have been just executing our deal and with our new operations and technology center kind of retooling ourself, resetting ourself. I mean that building that we bought I think we could -- this bank could grow to $15 billion or $20 billion in assets and we have plenty of room in that building. So, I feel like we have taken care of ourselves for at least the next five years, I would imagine borrowing some large, large acquisition. We are getting more on the offence right now in terms of having discussions with other banks and are very interested. And what's happened that's a little different, I think that we know the banks that we want to talk to for the most part. And so, it's not as much as somebody coming to us and say, we got this bank that's selling, if we get the name, we will say okay. We will know pretty quickly whether we are interested in that or not. There is a very few that we say, we don't know and we have to go to do some research on.

Okay. And those things that you do know well in your mind if any of the situations change or make -- [indiscernible] position near term or likely or is it little more tax growth?

I really don't have any color on that at all. I mean we are out there starting our conversations and we will see how those conversations transpire. We are -- we certainly -- we like to talk about our story, talk about how our business bank, we are very sensitive to client, we give high levels of service, our stock has traded strongly for a long time, we pay -- our currency is strong, and we pay a good dividend. So, those are all compelling things and acquire each we want to see and we hope that resonates going forward.

Okay. That's there. Well, thank you very much. Those are my questions.

Great. Thanks.

[Operator Instructions] Well, at this time that it appears that we have no further questions, we will go ahead and conclude today's question-and-answer session. I would now like to turn the conference call back over to Mr. Chris Myers for any closing remarks. Sir?

Well, thank you very much and to everyone in the call we appreciate your interest and look forward to speaking with you again on our third quarter 2017 earnings conference call in October. In the meantime, feel free to reach out and call me or Allen. Have a great day. And thanks for listening. Bye-bye.

And we thank you, sir and also have a great day to the rest of the management team also. The conference call has now concluded. At this time, you may disconnect your lines. Thank you. Take care and have a great day everyone.