Good morning, ladies and gentlemen. And welcome to the Second Quarter of 2020 CVB Financial Corporation and its Subsidiary Citizens Business Bank Earnings Conference Call. My name is Nick and I’ll be 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’ll now like to turn the presentation over to your host for today's call, Ms. Christina Carrabino. Please go ahead.

Thank you, Nick, and good morning, everyone. Thank you for joining us today to review our financial results for the second 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 our future development, 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 government 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 on our investor call for the second quarter. As we announced in our second quarter earnings release yesterday afternoon, the effects of the COVID-19 pandemic continue to broadly impact the financial services industry, including Citizens Business Bank through the economic impacts of the stay-at-home orders, business closure orders and the widespread effects that require social distancing and health and safety measures in California. Before we provide more details on the impact on our business and how we plan to continue to manage to this pandemic, Allen and I will report on our second quarter 2020 financial results. Yesterday, we reported net earnings of $41.6 million for the second quarter of 2020 or $0.31 per share, which represented our 173rd consecutive quarter of profitability. We also declared an $0.18 per share dividend for the second quarter of 2020, which represented our 123rd consecutive quarter of paying a cash dividend to our shareholders. Our net earnings of $41.6 million, compares with $38 million for the first quarter of 2020, and $54.5 million for the year ago quarter. Earnings per share of $0.31 for the second quarter, compares with $0.27 for the first quarter and $0.39 for the year ago quarter. Through the first six months of 2020, we earned $79.6 million compared with $106.1 million for the first six months of 2019. Diluted earnings per share were $0.58 for the six-month period ended June 30, 2020, compared with $0.76 for the same period in 2019. Our pre-tax pre-provision income was $70.3 million for the second quarter, which was $5 million higher than the prior quarter and $8.4 million lower than the second quarter of 2019. We originated $1.1 billion under the SBA's Paycheck Protection Program resulting in approximately…

Thanks, Dave. Good morning, everyone. Our effective tax rate was 29.23% for the second quarter compared to 28.75% for the first quarter of 2020 and 29% for the year ago quarter. Our year-to-date effective tax rate was 29%. Our allowance for credit losses increased in the second quarter, as a result of our forecasting a greater decline in economic activity due to the pandemic. We recorded $12 million of provision for credit losses during the first quarter of 2020 and recorded an additional $11.5 million in the second quarter. Including net charge-offs of $158,000 in the second quarter, our ending allowance for credit losses was $94 million or 1.29% of total loans when excluding the $1.1 billion in PPP loans. This $94 million reserve represents an amount that exceeds our entire classified loan balance. Our economic forecast is a blend of multiple forecasts produced by Moody's. With the number of COVID-19 cases rising in California and the state backtracking on reopening the economy, our forecast increased the weighting on the downside economic forecast scenario. Moody's U.S. baseline forecast continues to have the largest weighting our models and assumes GDP declined by 33% in the second quarter and will increase by 20% in the third quarter with a full year 2020 decrease in GDP of 5.6%. GDP is forecasted to be less than 2% in 2021, but rebounding to a strong 6.6% growth rate in 2022. Unemployment is forecasted to have been at 14% in the second quarter. The bank continues to stay at an elevated level of approximately 9% through 2021 before declining to 7% in 2022. Now, turning to our capital position. For the first six months, shareholders' equity decreased by $35 million to $1.96 billion. The decrease was primarily due to $92 million in stock repurchases during the…

Thank you, Allen. As Allen and I discussed, we believe that our bank remains well positioned to succeed with strong capital, consistent earnings, solid credit and excellent liquidity. We have been a consistent and stable source of financial services for our customers and communities over a variety of economic cycles and we will continue to focus on the key attributes that make Citizens Business Bank a high performer. Through our five core values of financial strength, superior people, customer focus, cost-effective operation and having fun, we've been able to create enduring value for our communities, our customers, our associates and our shareholders. These core values have guided our organization through many challenging times and economic cycles during our 46-year history and they will continue to drive us forward for the future. We will continue to support the customers and communities we serve as we seek to navigate through the current pandemic. As we discussed last quarter, we have been supporting our communities and customers during this pandemic through various avenues and programs, including providing over 4,000 Paycheck Protection Program loans for $1.1 billion, making charitable donations to organizations assisting those most in need during these difficult times and registering as an eligible lender under the Federal Reserve's Main Street lending program. I would like to highlight one of the organizations that Citizens Business Bank is assisting during this time: Hope through Housing, which is one of the largest nonprofit affordable housing developers in the country. This organization is specifically dedicated to turning around neighborhoods negatively impacted by poverty and crime and its services are particularly needed at a time like this. Our bank has partnered with Hope through Housing to offer services that assist senior residents to maintain their health and well-being by donating non-perishable food and household items to…

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] First question comes from Jackie Bohlen of KBW. Please, go ahead.

Hi. Good morning, everyone.

Good morning, Jackie.

I just have a question on the PPP fees. I saw the $6.8 million that you had on slide 14 in the presentation. And I wanted to see if that included the interest earned on the balances? Or if that was just purely related to fees?

That was just the recognition of the fees.

Okay.

So the interest itself was about $1.7 million.

Okay.

The total was $8.5 million, Jackie, that we highlighted.

Okay. $8.5 million. Okay. Sorry, I somehow missed that.

That's all right.

Okay. And then how are you internally modeling the payoff of these loans and your forgiveness expectations of them?

We're estimating that the average life is going to be about 15 months. Almost all of them have a 24-month term. There's very few that had a term longer than that. But we'll monitor it quarterly and see how that performs. We do expect that most of our customers are anxious to have the forgiveness. But we're still waiting on the SBA to have things set up. But 15 months is our expectation on average.

Okay. And is that -- you're amortizing the fee structure then over 15 months and not 24 months?

We're doing an effective yield so at a loan level.

Okay. Okay. Thank you. And then just one more and then I'll step back in queue. I realize that this is a very difficult question to answer. But I just want to get your thoughts on balance sheet size. If as these PPP loans pay off, if you'll see meaningful declines in deposits? Or if you think customer liquidity will remain elevated? I mean, just how you're thinking about that over the next couple of quarters?

Yes. So I mean, obviously we were surprised. I mean it felt like every time we made a PPP loan for $1, we got $2 of deposit. So I think for the most part our customers are maintaining higher levels of liquidity. We monitor that really on a daily basis. Most of the first round of the PPP I believe that they've spent that those funds for payroll and other things. The money is fungible. I think there's some -- potentially some slowdowns in investment and things and people are wanting to maintain the liquidity right now. So we are modeling that it will decline slightly, but we are also investing a portion of those excess funds and hoping to do loans first. But absent the loan opportunity we've invested a little bit in securities as well. But we think it's going to remain elevated I believe through -- at least through the end of the year. But that's still to be seen.

Okay. Great. Thank you. I'll step back.

Thanks.

Thank you. Next question comes from David Feaster of Raymond James. Please go ahead.

Hey, good morning, everybody.

Good morning, David.

Hey, David.

I just wanted to start on redeferral rate. I mean, the early read that you've got at 6% is extremely low. And we're kind of at that crossing point with most of the deferrals happening in March and April. Just curious if you think this is just the beginning? Or that we could actually kind of stay in this high single low double-digit redeferral rate realm? Just curious on any trends that you're seeing and what you expect with redeferral rates?

Yes. It's a good question. And those numbers were actually after the quarter end. Those were as of July 10, the 6% redeferral rate. We anticipate that to remain low. However, we also as we've said in the first round, we wanted to make sure that our customers come out of this relatively as strong or stronger than they were before. But the one thing -- and we did it on the first round, but the one thing we're doing a little bit more on the second round is we really want to understand if there's any underlying credit issues. We really want to be able to look at that deal. And in many cases where they're asking for a second deferral if they -- I'll use the term don't need it, we're going to have harder conversations with them. And we're going to want something in return for that. So there has been some of the situations on the first 6% where we've taken additional collateral, where we've looked at the structure. There's ask for paydowns. So there's been different situations, but we're looking at every single one individually. I anticipate it to remain lower, but I believe that it will be -- that ultimately it will be higher than 6%. I just can't make a guess on where the actual number will end up.

Yes. That's fair. And then I guess just kind of following up on that. I mean, assuming that we get more redeferrals going forward that probably translates into additional risk rating downgrades. I guess, how do you think about the reserve going forward, the reserve build? I mean, do you think most of the heavy lifting is largely done and we'll only see modest reserve builds in the second half of the year? Or that as more risk rating downgrades could come that we might see more additional large reserve builds in the back half of the year? A – David Brager: Yes. I'll start on this and I'll let Allen fill in any blanks. But I think for the most part in the first two quarters it's been largely driven by just the economic forecast and our modeling. In the third quarter, we do believe that we're going to see some more credit downgrades. We don't know what that extent is going to be. But in our investor presentation, we outlined on the deferral amounts and it's an interesting slide. It shows what's being deferred and then you go to the COVID impacted industries, it shows what percentage is classified. And so I think that the third quarter and the fourth quarter are going to be more driven by assuming that things get better from an economic forecast standpoint or at least stay the same it's going to be driven more by the credit migration. So I don't know Allen, if you want to add anything to that. A – Allen Nicholson: Yes. The only thing I would add is you could see credit migration, increase loss rates within our modeling. But if we also get to the point where the economic forecast is more reflective of an improvement…

Okay, terrific. That’s helpful. Thank you.

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

Thanks. Good morning.

Good morning, Gary.

Just wanted to follow-up on the deferrals, the 6%, obviously on the second deferral at this point. In terms of the remainder, the remainder as of June 30 -- or actually, I'm sorry July 10, what's the kind of point in time where those would actually expire in terms of the original 90 days? Is that by the end of July or broadly the end of August?

Yeah. So, obviously the ones that were done in March have expired. The ones that are in April were almost to the point where they would have expired. But I think that the process, probably I'd say be more complete by the end of August than the end of July, as far as that will be -- really where we'll have a much better idea of what that kind of second deferment looks like. So we have a little bit of game to play there. So that's why I suggested that that number, that 6% number is going to be higher. I just don't know how much higher.

Okay, great. And then, in terms of the investment, I think you mentioned $162 million of the excess liquidity invested at quarter end. Your point taking that obviously, your preference will be able to grow loans. Generally speaking, if the loan growth in the back half of the year does not materialize, where do you think the comfort level is in terms of the incremental investment into the securities portfolio?

Gary, I think it will somewhat depend on the market and the opportunities. But, we're monitoring, and as Dave said, liquidity very closely. We do plan on investing far more than $162 million in the quarter, but it will somewhat depend on opportunities. We look on a daily basis. Certainly, we want to reinvest the cash flow out of the portfolio as it comes through. But, we probably will look to invest a fair amount of that back into the bond portfolio, if we can find appropriate bonds.

Thanks. Thank you.

[Operator Instructions] At this time, there are no more questions. I'd now like to turn the call back over to Mr. Brager. Please go ahead.

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 October for our third quarter 2020 earnings call. Please let Allen and I know if you have any questions. Have a great day. Stay safe, and thank you for listening.

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