Good morning, ladies and gentlemen, and welcome to the Third Quarter 2018 CVB Financial Corp. and its subsidiary, Citizens Business Bank, Earnings Conference Call. My name is William, and I'm your operator for today. [Operator Instructions] And please note that today's event is being recorded. I would now like to turn the conference over to your host for today's call, Christina Carrabino. You may proceed.

Thank you, William, and good morning, everyone. Thank you for joining us today to review our financial results for the third quarter of 2018. 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, 2017, 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 $38.6 million for the third quarter compared with $35.4 million for the second quarter of 2018 and $29.7 million for the year-ago quarter. Earnings per share were $0.30 for the third quarter compared with $0.32 for the second quarter and $0.27 for the year-ago quarter. The third quarter represented our 166th consecutive quarter of profitability and 116th consecutive quarter of paying a cash dividend to our shareholders. On August 10, we announced the completion of our acquisition of Community Bank. Our financials for the third quarter of 2018 included 51 days of Community Bank's operations. At close, Citizens Business Bank acquired $2.73 billion of loans, assumed $1.26 billion of noninterest-bearing deposits and $1.61 billion of interest-bearing deposits. Through the 9 months of 2018, we earned $108.8 million compared with $86.6 million for the first 9 months of 2017. Diluted earnings per share were $0.94 for the 9-month period ended September 30, 2018 compared with $0.79 for the same period in 2017. Our tax equivalent net interest margin was 4.06% for the third quarter compared with 3.82% for the second quarter of 2018 and 3.70% for the third quarter a year ago. The increase in our net interest margin was a result of loan growth from the acquisition of Community Bank and a higher level of discount accretion from the acquired loans. Excluding interest income related to purchase discount accretion and nonaccrual interest paid, our third quarter net interest margin expanded by 17 basis points compared to the second quarter. Total loans increased by $2.77 billion or 57% to $7.58 billion for the third quarter of 2018. The increase over the prior quarter included $2.73 billion of loans acquired from…

Thanks, Chris. Good morning, everyone. Our effective tax rate was 28% for the third quarter, the same as the prior quarter. The effective tax rate was 38.9% for the third quarter of 2017. The reduction from the prior year was due to the decrease in federal tax rates from 35% to 21% as a result of the Tax Reform Act. Our effective tax rate can vary depending upon the amount of tax-advantaged income, tax credits and discrete items, such as stock compensation. Looking to our investment portfolio. At September 30, 2018, our combined available-for-sale and held-to-maturity investment securities totaled $2.57 billion, a $137 million decrease from the second quarter. We did not purchase securities during the third quarter. Upon the close of merger, we liquidated the $717 million investment portfolio acquired from Community Bank. In conjunction with the sale of the Community Bank's security portfolio, we repaid their FHLB term advances of $298 million and the $166 million of overnight borrowings. At quarter end, investment securities available-for-sale totaled $1.81 billion, which included a pretax unrealized loss of $44.5 million. In addition, we had held-to-maturity investment securities totaling $759 million. The tax equivalent yield on the total security portfolio was 2.49% for the third quarter compared with 2.48% for the second quarter and 2.42% for the third quarter of 2017. The reduction in the federal tax rate had the impact of lowering the tax effective yield on securities in comparison to 2017. On a nominal basis, our investment security yields have increased modestly, with a 2.41% yield in the third quarter of 2018 compared with 2.40% in the second quarter and 2.29% in the second quarter of 2017. Now turning to our capital position. For the 9 months ended September 30, 2018, shareholders' equity increased by $749.3 million to $1.8 billion. The increase was due to $108.8 million in net earnings, $722 million for the issuance of common stock for the acquisition of Community Bank and $2.8 million of various stock-based compensation and other items. Offset by $50.5 million in cash dividends and a $34.6 million decline in other comprehensive income from the tax-affected impact of the decline in the market value of available-for-sale sales securities. I'll now turn the call back to Chris for some closing remarks.

Thanks, Allen. So let's talk about economic conditions. California economy. According to various economic outlooks, California's unemployment rate was 4.1% in September 2018, a new record low level dating back to 1976 compared with 4.2% in August 2018 and 4.5% back in September 2017. California, much like the nation, is expected to continue to grow the remainder of 2018 and into 2019. Job gains have been steady, and the state's leading industry for growth include health care, leisure and hospitality, technology and construction. There has been continued demand for housing in California. The supply of existing homes remains lean and new home construction still continues to increase at a modest pace. And looking forward, rising interest rates could soften new home purchase demand in some markets as affordability becomes a bigger challenge. In terms of the dairy industry, milk prices are expected to be higher for the latter half of 2018 and into 2019, but are still projected to be slightly under the cost of production. Feed prices are expected to decrease modestly as we're moving into 2019. In closing, we are pleased to finalize the acquisition of Community Bank, and welcome their customers, associates and shareholders. I would like to thank our employees for all their hard work and dedication through this acquisition and ongoing assimilation. We are very excited to have combined forces that will provide us with depth of talent, a strong and diverse customer base and significant geographic overlap. We remain committed to our existing relationship banking model and operating our business in the usual Citizens Business Bank way. That concludes today's presentation. Now Allen and I will be happy to take any questions that you might have.

[Operator Instructions] And our first questioner today will be Aaron Deer with Sandler O'Neill and Partners.

Good morning everyone. First, congratulations on getting the deal closed and the integration under way. The, it seems like some of the dynamics related to that were a little different than maybe I was expecting. So I just wanted to touch on a few items there. One, perhaps Allen, if you could give the, what was the dollar amount of the discount accretion in the third quarter? And then also, maybe what was the total loan discount taken on the book? And what do you expect as kind of a normal discount accretion run rate over the next few quarters?

Well, related to the acquisition of Community Bank, we had discount accretion of $2.7 million, Aaron. And if you think about it in terms of, that was 51 days within the quarter. We would expect that to just do the math in the sense and that's what we'd expect in the near term. The total fair value mark was roughly, discount was about $87 million in total.

Okay. So the amount of accretion, there weren't any early pay-offs or anything that would have elevated that, that's, and on an annualized or quarterized basis, I guess, that's a good rate to work off of.

Yes. And the overall discount was up quarter-over-quarter because the other purchase loans were about $2 million.

Okay. And then, Chris, maybe you can walk us through kind of where you stand in the integration. I know you're looking for November systems integration. But in terms of the pace of consolidation, how is that going to impact your, where you are now in terms of the cost saves expectation and the timing of those?

Yes. Our time line is as follows: we're 2 months now, a little bit beyond 2 months into the merger. I think things are going really well as far as the people side. Our sales teams are coming together. Our credit teams are coming together. We're doing a lot of training. I think a lot of the Community Bank folks are drinking from a firehose with that, but they're really, they really impressed me with the way that they have embraced the challenge. In terms of our operations or conversion on the data processing, the Pfizer side. And I'll repeat this if some of you don't know. They're on Pfizer, we're on Pfizer, we're both on the same type of Pfizer, which is called Premier. However, they run an external model, we run an inside model. And so there are still challenges with any conversion, but we feel like given those facts, the conversion should potentially go smoother than if they were on a completely system, a different system overall. That conversion is taking place over the weekend of November 10, 11 and 12, which is the Veterans Day weekend, I believe. Then, in the first quarter, first 4 months really of 2019, we will consolidate the locations. And so far, we have, we're going to consolidate between 8 and 10 locations. We haven't decided whether we're going to do a full 10 or just the 8, that will be at least 8 and as many as 10, and we'll make that decision shortly. And those will roll out through January into early may. And so by the midpoint of May, we should be fully integrated. Everything should be together. There should be no more onetime costs or acquisition costs, et cetera, et cetera. I do think you're going to see a lot of acquisition expenses in the fourth quarter, in the first quarter of 2019, but by the second quarter of 2019, those, most of those will dissipate and we will be business as usual.

And our next questioner today will be Matthew Clark of Piper Jaffray. Please go ahead.

On the deposit side of things, looks like on an organic basis, deposits were down a little bit linked quarter. Just wondered if any of that was deliberate? Or what you're seeing on the deposit side, excluding the merger?

Yes. That's a good question and I kind of anticipated that. We did run out a couple of $100 million in deposits of higher interest rate deposits. And those were deposits that were tracking close to fed funds or in the case of $120 million single deposit or over fed funds. So we released those deposits, and we weren't going to pay that anymore and let them go. That was done on purpose. Really, our strategy here is to take Community Bank, merge it into Citizens Business Bank and run it like we always run Citizens Business Bank. And so all these steps, the conversion, the consolidation of offices, everything is back, is intended to function that way. So if we see deposits or we see bar, like, for instance, when we did the merger, we immediately sold about $715 million. Is that right in securities, Allen?

Correct.

$715 million in the Community Bank's securities, and we used that $715 million to pay off $300-million-ish in Federal Home Loan Bank term debt, another $170-million-ish in overnight debt and then $180 million we used as a down payment for the acquisition. And so that kind of was a wash. When you took over that money, the $700 million, you did all those things, it kind of washed itself out. So again, we shrunk the bank to $11.5 billion. Even though, on the surface, $8.3 billion and $3.7 billion would equal $12 billion, we shrunk it to $11.5 billion. That's the way we run our company. And we're not going to have fake deposits or fake assets there that we don't think are something that we would permanently want to do. So there is a process here that we're going through and we did a lot of it in the third quarter, we're going to do more of it in the fourth quarter to keep shuffling through to get this exactly as we run Citizens Business Bank. And all of that, I believe, as I said, just a minute ago, will be accomplished by the middle of May of 2019, but most of that will be accomplished from the financial orchestration side, if you will, within the next, by the end of the year.

Okay, great. And then, on the CDI intangible that was created with the Community deal. Can you just give us a sense what that mark was at the end of the day relative to where it was originally?

The CDI was $52 million.

Okay. Okay, great. And then on the purchase accounting accretion, I think you isolated the Community contribution, but overall purchase accounting accretion in the quarter roughly $4.1 million, is that about right or is it higher than that?

Yes, it was $3.5 million.

And our next questioner today will be Gary Tenner with D.A. Davidson. Please go ahead.

Thanks, good morning. Just wanted to ask, as you're kind of working through the process of integration and then systems conversion and you talked about training in terms of the Community Bank folks, how do you think about the combined pipeline and growth opportunity of the new 9 30 loan base over the next couple of quarters? Is it going to be a little bit slower and then maybe accelerate thereafter? How do you think about that?

Yes. I've been really pleasantly surprised by our loan pipeline right now. It is the strongest loan pipeline in our bank's history. And I've been -- and I think some of that is coming from, not only the combining teams that we have more salespeople in location, I think part of that is also that we were competing with this bank against each other and some of that's now we're not competing against each other anymore. But I also think a part of that is, I'm not seeing as much interest rate pressure on the loan side. And this is just happening in the last 60 days. And I know last quarter call, I was complaining about loan interest rates and why are they going up, and this and that, we're not seeing that anymore. And I think a lot of that is because deposit interest rates have gone up dramatically. A lot of these banks are desperate for deposits. Well, our core funding is pretty good, and I think if we can use our core funding and still go after the quality-quality relationships, I think our asset yields i.e. our loan yields are going to outpace what we have to pay on deposits going forward. So I'm optimistic about our spread because of that. The other thing I wanted to cover a little bit, which is an extended answer on this question -- to your question, but if you look at our balance sheet right now, we got roughly $2.5 billion in securities and about $7.5 billion in loans. That $2.5 billion in security is yielding about 2.5 percent-ish and maybe that's a little higher, something like that. That runs off about $40 million a month. So my intent would be to replace that $40 million a month with…

Alright thanks for the answer, Chris.

Yeah.

[Operator Instructions] And our next questioner today will be Jackie Bohlen with KBW. Please go ahead.

Just a clarification question on the understanding the restructuring that took place in the quarter including some of the deposit movements. How much funding do you have left that you'd like to restructure out of the bank?

Not a lot, but we're still looking through that. And we still have to go through relationship by relationship on the larger relationships through account analysis and all that and kind of look at our profitability on these type of things. So we're going to be doing that over the next 6 months. But it really is -- again, what I've been extremely impressed by is the quality of their clients and the business aspect of their clients. They are the type of clients we really like. We have to kind of Citizens Business Bank ice them a little bit along the way here. And that is -- actually, that will take some transition. But it's all about relationship. And we'll compete on the deposit race where we need to for relationships, but not for transactions. And I think a lot of banks out there are just tiling in transactional deposits or, what I will call, hot money deposits. And when we see that, we just say, hey, we're not going to bring those in because I don't want to have to chase the rate up every time fed funds changes. That's not a good, stable source of funding for us. So there will be a huge emphasis on deposit growth in 2019 in this bank, even more important than loan growth for us because I think we're going to get the loan growth. I think -- I know I've been very cautious about by saying it's really tough to grow loans and so forth, but I'm seeing a little -- may be I'm overly optimistic. I'm seeing a little change in the winds there in terms of playing into our hand more because of the pricing going up and then our cost of funds. So we can go out there and get the A quality loans and still price them at a price that we're willing to do.

Okay. Now that's very helpful. And if I'm interpreting your remarks correctly, it sounds like the heavy lifting on what you wanted to do was accomplished in the quarter. And there is just a little bit left that's still under evaluation.

Yes. I think -- both on the -- just on the relationship side, we need to go through all this. We need to get it acclimated. We need to get everybody through here and there, and that just takes some time. We've done that with every relationship we've ever gone through. But I do think you're right. I think there -- will there be some deposit runoff from the portfolio a little bit more? Yes. Will there be just more loan runoff for the portfolio? Yes. But will we put on enough business to offset it? I believe absolutely and then some.

[Operator Instructions] Okay, and there looks to be no further questions at this time. So this will conclude our question-and-answer session. I would now like to turn the conference back over to Mr. Myers for any closing remarks.

All right. Great. Thank you. That was a fast call today and that's good because I have a bad cold, but I wish everybody a happy -- believe it or not, holiday season coming up here, Thanksgiving and New Year's and everything, and we appreciate your interest and look forward to speaking with you again in January for our fourth quarter and year-end 2018 earnings call. Have a great day, and thank you for your interest and listening. Take care.

The conference has now concluded. Thank you for attending today's presentation. And you may now disconnect your lines.