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. [Operator Instructions] Later we will conduct the question-and-answer period. [Operator Instructions] I would now like to turn the presentation over to your host for today's call Christina Carrabino. 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 and 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 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, 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 $0.35 per share, which represented our 174th consecutive quarter of profitability. We also declared an $0.18 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, compared with $46 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, compared 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 $0.93 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 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…

Thanks, Dave and good morning everyone. Our effective tax rate was 29% for the third quarter and for the year-to-date. Our allowance for credit losses decreased by $114,000 in the third quarter, as a result of the net loan charge-offs. Our economic forecast as it relates to the key macroeconomic variables that we modeled for our allowance remained mostly stable from the end of the prior quarter. Our ending allowance for credit losses was $94 million or 1.28% of total loans, when excluding the $1.1 billion in PPP loans. This $94 million reserve represents approximately 130% of our classified loans or 68% of our total net classified and deferred loans. In addition to the allowance for credit losses, we have $35 million and remaining fair value discounts from acquisitions. As a result, the decline in economic activity due to the pandemic, we recorded $23.5 million in provision for credit losses during the first two quarters of 2020. Our economic forecast continues to be a blend of multiple forecast produced by Moody's. With California slowly reopening the economy and having an unemployment rate greater than 11%. Our forecast includes a partial waiting on the downside economic forecast scenarios to Moody's. However, the baseline forecast continues to represent more than 50% weighting in our multi-weighted forecast scenario. The U.S. baseline forecast assumes GDP will increase by 27% in the third quarter, 2.9% in the fourth quarter and then grow by 3.5% in 2021 and 5% in 2022. The unemployment rate is forecasted to be 8.9% in the third quarter, then stay at an elevated level over 8% through 2021, before declining the 6.4% in 2022. Now turning to our capital position. For the first nine months shareholders' equity decreased by $12 million to $1.98 billion, decrease was primarily due to a $92…

Thanks, Allen. Our Bank remains strong and financially sound and has been a consistent and stable business partner over a variety of economic cycles during the past 46 years. As previously discussed, we have been supporting our employees, communities and customers during the pandemic through various methods, including providing a Thank You Award to our associates. The funding of over $1.1 billion in Paycheck Protection loans participating in and closing our first Main Street lending program loan and contributing financially to our most impacted communities through charitable donations. During these difficult times, we continue to prioritize the health and safety of our associates, customers and other business relationships, as well as being a good partner and solid source of strength to our customers and communities. As a result of the pandemic and in order to further protect the health and safety of our associates, we made the decision to cancel our annual award celebration and holiday party. This party has been a long-standing tradition of our Bank, and it was a difficult decision. Thankfully, the Board agreed to reallocate a portion of the anticipated cost of the event to support our communities. We have identified multiple food banks within our geographic territories and made the decision to donate the money to those that needed the most. While some of our geographic markets remain under lockdowns, there have been positive signs with California's reopening for the COVID-19 guidelines established by our Governor. The Governor's framework for reopening shows each of the California's 58 counties into a Tier, which determines the extent to which business activity in each county can resume. The system is based largely on new daily COVID-19 case numbers per 1,000 residents, as well as positivity rates. It has been challenging to monitor and track and many of the businesses have had to open and reopen more than once. We will continue to assist our customers navigate through this uncertainty and provide appropriate assistance as we have done historically through challenging times. On the positive side, while the future obviously remains uncertain. We've been pleased to see that our customers and credit portfolio have generally speaking continue to perform favorably, which as we've discussed is appropriately reflected in relevant overall third quarter asset quality metrics and our stable allowance for credit losses. In closing, as we finish up the year, we remain focused on managing our business and assisting our customers through the pandemic, while maintaining our strong capital levels, consistent earnings, solid credit and excellent liquidity. Our strategy remains focused on continuing to grow the Bank in a disciplined and balanced manner and we will continue to evaluate potential acquisitions and other expansion opportunities as they arise. Please stay healthy and safe. That concludes today's presentation. Now Allen and I will 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 is from David Feaster from Raymond James. Go ahead.

Hey, good morning everybody.

Good morning, David.

Good morning, David.

I'd just -- I wanted to start off on the loan growth front, I mean, that's obviously the best opportunity to deploy this excess liquidity. Just how -- where are you seeing attractive new opportunities, however originations trended? And what are you seeing on the pay-off and pay down front?

Yes, it's a good question, David and you're right. I mean, it is obviously our best opportunity and actually our loan production in the first nine months of 2020 versus the first nine months of 2019 is up 11%. So we're actually seeing a lot of opportunities and actually closing a significant number of them, that's the opportunity side. On the back end of that, there is continues to be enormous rate pressure when you look at the net interest margins of some of our larger competitors and see that they're, you know, floating below 2%, we're competing for the best customers, we're competing for the best relationships and they generally require the best pricing, and so we've had to be very careful with that and try and get the best rate we can get. But from a production standpoint, it's been pretty positive. So I'm optimistic that we can continue that trend, our pipelines for the fourth quarter look good. We did grow loans albeit by $1.3 million excluding PPP loans, but we were happy with that and the fourth quarter looks looks relatively good.

Okay.

And David, either headwind really is the decline in utilization. And so we'd start to see that rebound that could help.

Okay, that's helpful. And then, kind of, along those same lines how our new loan yields trending in the quarter?

Yes, so I -- it kind of depends on the type of loan, but I'd say in general it's north a little bit of 3.5%, it's somewhere in the 3.5% to 3.75% range on average. Obviously, if we can get something that has a 4% in front of it, we're excited about that, but we, kind of, drawn the line at -- kind of that 3.5% on any loan that has any term to it.

Okay, that's helpful. You guys have done a tremendous job on the deferral front, I mean, the decrease is staggering. I'm just curious, and I know it's still early, but what are you hearing from your SBA clients? Now that the agencies no longer paying P&I?

Yes, I mean that and as I mentioned previously, I mean, that's one of my one of my larger concerns as far as the credit quality is how that's going to play out. What we did is we created a team, we basically took about 10 associates from our sales group and created a team to really evaluate the SBA 7a loans that are on our books. And so they've been doing some enhanced due diligence on those relationships and just trying to get a feel for that. It is too early to tell September was the last month that a payment was made on behalf of them by the government. So October so far has been good, but I still believe there's going to be some more problems there.

Okay. And then last one from me, you guys already operated incredibly lien institution extremely efficient. And just in light of the revenue headwinds, I know you guys have already worked on the branches somewhat. But how do you think about opportunities to potentially reduce expenses going forward? Or at least potentially offset inflationary pressures. And on the converse side, I mean, are there any other investments that you need to make to continue to be successful in this environment?

Yes, I mean, we consistently invest in the bank, I think that's pretty, pretty stable through our expense run rate. This quarter was impacted a little bit by a couple of things as you saw the increase in the loan originations, the Thank You Award, we had a writedown, I mean there's some things that impacted our expenses. But we're constantly looking at that, I mean, that's something we want to operate as efficiently as possible. The consolidation of the one office, while it's not going to have a material impact overall. I mean, it's just something that is part of our process and what we do. We're constantly evaluating our what we call our center network, the branch network and looking at opportunities to operate as efficiently as possible. So I think that without giving guidance per se, I think that -- it was a little elevated this quarter, but I think it will run a little bit lower, I don't know Allen, if you have anything add to that.

No. And of course, David, you saw the FDIC assessment expense went up, which [indiscernible] now we're sort back to a normal run rate for that.

Okay. Alright, that's helpful. Thanks everybody.

Thanks, David.

Our next question is from Jackie Bohlen from KBW. Go ahead.

Hi, good morning.

Good morning, Jackie.

Wanted to touch on the rather challenging topic of balance sheet size and liquidity. I saw that you have the securities purchase that you talked about happening toward the end of the quarter. So just thinking, I guess, first off, starting with what deposit flows have looked like in October to the extent you're able to comment on that and how you're thinking about balance sheet size over the next several months?

Yes, I'll start and then Allen can jump in, if he has anything to add. But obviously the balance sheet size has been inflated for a variety of reasons, Fed and monetary policy, our customers that have maybe maintained a much more liquid position, maintaining cash. I think in the beginning of this everybody thought that, as the PPP money was used that the balance sheets and your balances would start to decline. We haven't really seen that, the balances even through here, the first 22 days of the month have remained relatively stable, there hasn't been a big move either way. I do think that at some point, you know, that money will start to go away, but I think it's here for a little bit longer than we anticipate. So our goal is to grow the 67% of earning assets that we have in loans to a higher percentage of our total earning assets. And that's really what we need to focus on. We'll be investing sort of in securities and just kind of replenishing probably our securities that are maturing. But I think overall, the goal is to grow our loans as a higher percentage of our total earning assets. So it's very challenging but as, you know, in some respects, it's a good problem to have, because our customers are strong and that bodes well on the credit quality front. But it's challenging from the investment side, so we're going to look at all of the tools in our toolbox to manage it, the best we can.

Hey, Jackie, we'll be balanced in our approach, obviously we really just don't want to move a ton of this liquidity into extremely low-yielding securities. We might not like what that looks like in a couple of years, so we really have to balance the impact on short-term earnings versus, you know, preferably our focus is really on long-term.

Okay. And do you have an interest in any shorter duration securities or is the yield pickup maybe not worth the effort at this point?

There is very little yield anywhere.

Understood, understood, okay. So with the excess liquidity weighing on the balance sheet and then you mentioned, if I heard correctly loan yields averaging around 3.50% to 3.75%. I mean, I guess my interpretation of that is, this is just a really challenging net interest margin environment, until we see higher rates, is that fair?

Yes, I think it is challenging, I mean, again, we have some ability to offset that just by changing the mix and that's really what our goal is, but it is a challenging environment that's very fair.

Okay. Okay, thank you.

[Operator Instructions] Our next question is from Matthew Clark from Piper Sandler. Go ahead.

Hey, good morning guys.

Good morning, Matthew.

Just maybe starting on PPP related income, I think last quarter you mentioned you were assuming a 15 month life. It doesn't sound like you've had much in the way of forgiveness to-date, but it looks like you're accruing more than the base rate. I guess, how should we think about that PPP related income coming into the net interest income. Is it -- should we assume kind of a similar pace over the next three quarters, do you think we're going to get some acceleration here?

Matthew, we will start to get some acceleration there, we're still assuming about the 16-month average life, but we would expect by the end of the year we'll have some forgiveness actually, if you look at the data we provided some of those will start coming through, and we expect that we'll probably accelerate in early next year.

Okay. And then on the pipeline and when you think about the opportunity for loan growth, if you exclude dairy and exclude the PPP, I assume you should be able to grow, kind of, a low single-digit rate. But I don't know if that's had a liner of it or whether or not that's more in line with your expectations?

Yes. I mean, we are working toward growing, excluding those things, you know, the dairy seasonal. So in the fourth quarter, we're going to see some growth in the dairy & livestock. As Allen mentioned, and I mentioned in my comments, our utilization rate is down significantly from the end of the year and previous year. So that's the wildcard, if people continue to sit on all this cash and I have to borrow from the C&I loan that's an impact. I do feel confident that we can grow loans organically at what rate is still something that is to be determined. The one thing I didn't say that, I will say is, there's been a lot of disruption specifically in some of the larger banks and that's created some opportunities for us on the relationship side to go after some large decent credit quality -- good credit quality, but decent relationships that are out there. And we've been getting our fair share if those. Now some of those are C&I relationships, where we're booking commitments, but not necessarily seeing the outstandings on those loans. But I do think that we're still open for business, we've been open for business, we've been -- as I mentioned, we've grown our loan production by about 11% year-over-year. I foresee that continuing through the fourth quarter. So we'll see how it all plays out. But the wildcard is line utilization from the new loans and our existing loans and then what we're doing as far as, you know, more a permanent loans like real estate loans.

Okay. And then on the margin 45 basis point drag from the $1.5 billion at the Fed, you've spoken to the remix opportunity. It sounds like it will take a while maybe two, three years to get all that 45 basis points back. But I would assume you'd be able to get some of it over the next six, nine, 12 months to help that 3.18%core NIM, is that fair?

Yes, I mean I think it's fair. I mean a lot of it obviously depends on the Fed's policy, as far as rates and what long-term rates are doing, that everything is low and flat right now. And so this deeper the yield curve, the better it is for most banks and we're in that same boat. But I'm hoping that we can continue to do the rebounds on the asset side of the balance sheet and help protect and drive that NIM.

Okay and then just last one from me. On the reserve should we assume that your reserves have peaked at this stage, assuming we don't get a material change in the model and the underlying assumptions that you've used, and you'll just match charge-offs or? And when might do we start to see some reserve release?

I think as we've talked about on the prior quarters. The reserve buildup in the first half of the year was really a reflection of the downturn in the economy. And so our credit metrics, obviously have been very stable, maybe even improving. So that continues to hold up, I think we'll once again future increases or even releases are going to be probably more dependent on the economic outlook than anything in terms of actual losses we might be really looking at those things to be well into next year before we really see the impact of any of that. But right now as you can tell from what we presented our metrics look very strong.

Yes. Great, thank you.

You're welcome.

[Operator Instructions] At this time there are no more questions. So I would like to turn the call back over to Mr. Brager.

Great, thank you. I want to thank everybody for joining us this quarter. We appreciate your interest and look forward to speaking with you in January for our fourth quarter and year-end 2020 earnings call. Please let Allen and I know if you have any questions. Have a great day. Thank you for listening and stay safe and healthy.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.