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Edited Transcript of CVBF earnings conference call or presentation 26-Apr-17 2:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 CVB Financial Corp Earnings Call

Ontario May 3, 2017 (Thomson StreetEvents) -- Edited Transcript of CVB Financial Corp earnings conference call or presentation Wednesday, April 26, 2017 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christina Carrabino

CLC Communications, Inc. - IR

* Christopher D. Myers

CVB Financial Corporation - CEO, President

* E. Allen Nicholson

CVB Financial Corporation - EVP, CFO

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Conference Call Participants

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* Aaron James Deer

Sandler O'Neill and Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst

* Brian James Zabora

Hovde Group, LLC, Research Division - Director

* Jacquelynne Bohlen

Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research

* Matthew Timothy Clark

Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the First Quarter 2017 CVB Financial Corporation and its subsidiary, Citizens Business Bank, Earnings Conference Call. My name is Daniel and I am your operator for today. (Operator Instructions) Please note that this call is being recorded.

I would now like to turn the presentation over to your host for today's call, Christina Carrabino. You may proceed.

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Christina Carrabino, CLC Communications, Inc. - IR [2]

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Thank you, Daniel, and good morning, everyone. Thank you for joining us today to review our financial results for the first 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 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, 2016, and, in particular, the information set forth in Item 1A, Risk Factors, therein.

Now I will turn the call over to Chris Myers.

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Christopher D. Myers, CVB Financial Corporation - CEO, President [3]

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Thank you, Christina. Good morning, everyone, and thank you for joining us again this quarter. Yesterday, we reported net earnings of $28.5 million for the first quarter compared to $27.1 million for the fourth quarter of 2016 and $23.4 million for the year-ago quarter. Earnings per share were $0.26 for the first quarter compared to $0.25 for the fourth quarter and $0.22 for the year-ago quarter.

The first quarter represented our 160th consecutive quarter of profitability and 110th consecutive quarter of paying a cash dividend to our shareholders. On March 10, we announced the completion of our acquisition of Valley Commerce Bancorp and its subsidiary, Valley Business Bank. Our financials for the first quarter of 2017 included 21 days of VBB's operations. At close, Citizens Business Bank acquired $309.7 million of loans, assumed $172.5 million of noninterest-bearing deposits and $189.3 million of interest-bearing deposits.

The first quarter's earnings were impacted by a $4.5 million loan loss provision recapture, which included $2.2 million in recoveries during the quarter. The fourth quarter of 2016 also included loan loss provision recapture of $4.4 million. Our tax equivalent net interest margin was 3.51% for the first quarter compared with 3.47% for the fourth quarter and 3.52% for the year-ago quarter. The modest increase was a result of both loan growth from the acquisition of Valley Business Bank and an increase in our investment portfolio yield.

Total loans were $4.62 billion for the first quarter of 2017 compared with -- compared to $4.40 billion for the prior quarter. The $220.4 million increase over the prior quarter included $309.7 million of loans acquired from Valley Business Bank. Our dairy and livestock and agribusiness loan portfolio declined by $109.2 million, primarily due to seasonal paydowns which occur in the first quarter of the calendar year. For the first quarter, excluding the impact of loans acquired from Valley Business Bank and loans associated with our dairy and livestock portfolio, commercial real estate loans increased by $50.3 million, while construction loans decreased by $21.5 million. All other loans declined by $8.9 million in aggregate.

Loan yields were 4.50% for the first quarter of 2017 compared to 4.53% for both the fourth quarter and the first quarter of 2016. When interest recaptured on nonaccrual loans and discount accretion on purchase credit impaired loans are excluded, rising interest rates contributed to a 4 basis point increase in overall loan yields over the fourth quarter.

The allowance for loan and lease losses was $59.2 million or 1.28% of total loans at March 31, 2017, compared with $61.5 million or 1.40% of total loans at December 31, 2016. Net recoveries on loans for the first quarter were $2.2 million. It is important to note that when the loan loss allowances combine with the remaining fair market value loan discounts from our acquisitions, the allowance for loan and lease loss ratio increases to 1.54% as of March 31, 2017.

In terms of loan quality, nonperforming assets, defined as nonaccrual loans plus other real estate owned, were $14.9 million at the end of the first quarter compared to $11.7 million for the prior quarter. Total nonperforming assets included $6.4 million in nonperforming loans from the acquisition of Valley Business Bank. At March 31, 2017, we had loans delinquent 30 to 89 days of $1.4 million or 0.03% of total loans. Classified loans for the first quarter were $104.2 million, a $4.1 million decrease from the prior quarter. We will have more detailed information on classified loans available in our first quarter Form 10-Q.

Now I'd like to discuss deposits. For the first quarter of 2017, our noninterest-bearing deposits totaled $4 billion compared with $3.67 billion for the prior quarter and $3.35 billion for the year-ago quarter. The ending balance at March 31, 2017, included $172.5 million in noninterest-bearing deposits acquired from Valley Business Bank and a single $140 million deposit from one customer that deposited shortly before quarter-end and was withdrawn shortly after quarter-end, inflating our numbers. Average noninterest-bearing deposits were $3.70 billion for the first quarter of 2017 compared to $3.72 billion for the prior quarter. Average noninterest-bearing deposits represented 58% of our total deposits for the quarter. Our cost of interest-bearing deposits and customer repurchase agreements for the first quarter was 11 basis points compared to 10 basis points for the prior quarter.

At March 31, 2017, our total deposits and customer repurchase agreements were $7.4 billion compared to $6.9 billion at December 31, 2016, and $6.84 billion for the same period a year ago. Total deposits acquired from Valley Business Bank were $368.1 million. Average total deposits and customer repurchase agreements were $7 billion for the first quarter of 2017, up $32 million from the prior quarter. Compared to the first quarter of 2016, total average deposits increased by $367.5 million, while customer repurchase agreements declined by $82.7 million. We continued our focus on maintaining a low-cost stable source of funding for our loans and securities. Our overall cost of funds for the first quarter of 2017 was 12 basis points, which compares to 11 basis points for the prior quarter and 12 basis points for the first quarter of 2016.

Interest income. Interest income for the first quarter of 2017 totaled $67.4 million compared with $67.4 million for the prior quarter and $64.5 million for the same period a year ago. Excluding interest recaptured on nonaccrual loans and discount accretion on purchase credit impaired loans, interest income for the quarter of 2017 increased by $880,000 over the prior quarter.

The tax equivalent yield on earning assets grew by 5 basis points over the prior quarter as the tax equivalent yield on investment securities increased by 15 basis points and average loans grew from 56% to 57% of average interest-bearing -- interest-earning assets. Interest income grew by $2.9 million or 4.6% from the same quarter last year as average interest-earning assets were higher by approximately $343 million. Excluding interest recaptured on nonaccrual loans and discount accretion on purchase credit-impaired loans, interest income grew by about $3.5 million or 5.5% year-over-year. Noninterest income was $8.7 million for the first quarter of 2017 compared with $8.4 million for the prior quarter and $8.7 million for the first quarter of 2016.

Now expenses. Noninterest expense for the first quarter was $34.1 million compared with $34.9 million for the prior quarter and $34.4 million for the same quarter last year. The fourth quarter of 2016 included $4.1 million in expenses associated with a legal settlement and a write-down of a building held-for-sale. The current quarter included $676,000 in acquisition expenses. Salary and benefit expense increased by approximately $1.9 million or 9.9% compared to the fourth quarter of 2016.

In comparison to the fourth quarter, salary and benefit expense increased by approximately $1 million related to payroll taxes, which is typical during the first quarter of each year. Salary and benefit expense increased by approximately $200,000 related to our acquisition of Valley Business Bank. Annual increases in group health insurance also increased our salary and benefit expenses by approximately $400,000 for the first quarter. Notwithstanding the increases, noninterest expense totaled 1.70% of average assets for the first quarter compared with 1.72% for the fourth quarter and 1.79% for the first quarter of 2016.

Now I'd like to turn the call over to Allen Nicholson, our CFO, to discuss our effective tax rate, investment portfolio and overall capital position. Allen?

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E. Allen Nicholson, CVB Financial Corporation - EVP, CFO [4]

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Thanks, Chris. Good morning, everyone. Our effective tax rate was 36% for the first quarter compared with 37.5% for the prior quarter and 37.5% for 2016 as a whole. The decline in our effective tax rate was driven by new accounting guidance related to stock-based compensation and the impact from annual vesting of stock awards and option exercises. Our effective tax rate also varies depending upon tax-advantaged income as well as available tax credits.

Looking to our investment portfolio. During the first quarter of 2017, our average interest-earning balances at other financial institutions and at the Federal Reserve totaled $118 million. We decreased these balances by $72 million on average from the prior quarter as we transitioned these balances into loan growth during the quarter. During the first quarter, these balances represented approximately 1.5% of our average earning assets, which compares to 2.5% in the prior quarter. At March 31, 2017, our combined available-for-sale and held-to-maturity investment securities totaled $3.16 billion, a $25.4 million decrease from the fourth quarter of 2016.

Investment securities represented 36.9% of our total assets at quarter-end and were 41% of our average earning assets during the first quarter, which was identical to the prior quarter. At quarter-end, investment securities available-for-sale totaled $2.27 billion including a pretax unrealized gain of $15.8 million. In addition, we had held-to-maturity investment securities totaling $885 million. The tax equivalent yield on the total securities portfolio was 2.46% for the first quarter, which is a 15 basis point increase from the prior quarter. The type and amount of security investments we make each quarter are based on our available liquidity as well as market rates and the overall price and duration risks. During the first quarter, we purchased $120 million of securities with a tax equivalent yield of 2.51%.

Our purchases of available-for-sale securities were comprised of mortgage-backed securities totaling $112 million with an average expected yield of 2.42% based on an expected average life of approximately 4.5 years. Held-to-maturity security purchases for the first quarter included $8 million of high-quality bank-qualified municipal bonds with an average tax equivalent yield of 3.86%. Our average tax equivalent yield on purchases during the quarter were 33 basis points higher than the prior quarter average as market rates were generally higher for the most of the first quarter.

Prepayment speeds in our investment portfolio have continued to slow in recent months as market rates increased. The decline in prepayment speeds resulted in lower premium amortization for our mortgage-backed securities and collateralized mortgage obligations, resulting in a 9 basis point increase in the portfolio's yield for the quarter. Based on current interest rate environment, we currently project approximately $130 million to $150 million in quarterly cash outflows.

Now turning to our capital position. Shareholders' equity increased $55.5 million to $1.05 billion for the first quarter. The quarter-over-quarter increase was due to $28.5 million in net earnings, $37.6 million from the issuance of common stock for the acquisition of Valley Commerce Bancorp and $2.1 million of various stock-based compensation items. This was offset by [$13] million in cash dividends.

I'll now turn the call back to Chris for some closing remarks.

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Christopher D. Myers, CVB Financial Corporation - CEO, President [5]

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Thank you, Allen. Now let's talk about economic conditions. In terms of the California drought, winter brought a great deal of rain and snow, contributing to a significant decrease in drought conditions throughout the state. In most parts of the state, particularly in Northern California, the drought has been declared as over. Consequently, we saw little effects of the drought on the repayment of our customers' loans.

Turning to the California economy. According to various economic reports, California economy generally tracked the national economy throughout 2016. California's unemployment rate fell to its lowest in 10 years at 5.0% in February 2017 compared with 5.2% in January and 5.6% back in February 2016. With February's job gains, California has gained a total of 2.5 million jobs since the economic expansion began in February 2010.

The California housing market outlook in 2017 is mixed. With growing income, economists predict renters will be in a better position to become homeowners. However, the supply of existing homes remains lean and interest rates are expected to rise. All in all, California should experience continued growth in economic activity and jobs throughout 2017 with the largest contributions to employment coming from the healthcare, leisure and hospitality and professional services industries.

In terms of the dairy industry, feed costs continued to decreased and milk price futures continue to trend upward. With recent price increases for all major dairy products and an expected strength in short-term demand, the all milk price forecast for 2017 is predicted to increase. We remain cautiously optimistic.

In closing, we are pleased to complete the acquisition of Valley Business Bank and welcome their customers, associates and shareholders. We remain focused on our growth initiatives and we'll continue to look for other exciting acquisition opportunities to help us increase our market share and expand our geographic footprint.

And that concludes today's presentation. Allen and I will be happy to take any questions that you might have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Matthew Clark with Piper Jaffray.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [2]

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First a quick one. Just curious how much the accretion contributed to the margin this quarter?

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E. Allen Nicholson, CVB Financial Corporation - EVP, CFO [3]

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There is very, very little in accretion. As we noted year-over-year, the decline was about $600,000. Linked quarter, I think the decline was less than $200,000. So yes, obviously, the acquisition was very late in the quarter and accretion from prior acquisitions is becoming really a rounding error.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [4]

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Okay. And then just on the margin outlook from here. You've obviously had a nice uptick in your core loan yields, reinvestment rates and securities portfolio up nicely on new purchases, deposit costs really unchanged. Just curious what does new production look like, yields on new production? And how should we think about the latest March hike as we look out for your core margins?

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Christopher D. Myers, CVB Financial Corporation - CEO, President [5]

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Sure. On the margin, I think what was interesting this quarter was this margin was a pure margin for us. There wasn't really -- like the fourth quarter, we had a big -- we had some interest income increase and our prepayment penalties have been running about $700,000 a quarter for the last few quarters. So it seemed like a very ordinary quarter in terms of our interest income. So I think our net interest margin at that 3.51% is kind of where we are right now.

It's come up some because of the short-term interest rate increases on our variable rate product, and some of that takes a little while to kick in for us because we have a lot of stuff that's tied to either one month LIBOR or, in some cases, even 1-year LIBOR, where we have some of our commercial real estate loans that are tied to 1-year LIBOR. So we anticipate some more tailwinds on the margin side there.

Now I felt better a month ago when the 10-year treasury rate was 2.65%. It has -- it fell down in the 2.20s. Now it's back in the 2.30s. So that 10-year treasury rate will affect our loan pricing as we go along on our commercial real estate loans because it's not that we're directly tied to it but it's indicative of how we price our product. So I think we shall see what that 10-year treasury rates do going forward. But I think yes, our core margin is up from where it was 6 months ago, no question about it.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [6]

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And what would you say the weighted average rate is on new production in the quarter?

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Christopher D. Myers, CVB Financial Corporation - CEO, President [7]

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Yes, hard to say but it's -- I think our portfolio right now is around 4.50%, I think our total yield. And I would say that the loans we're putting on the books right now are right around that area on average in the fixed rate category. And in the floating rate category, not far from it because you've got a 4% prime now. So it's, I'd say, right in there. I think it's kind of a wash right now.

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Operator [8]

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Our next question comes from Aaron Deer with Sandler O'Neill and Partners.

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Aaron James Deer, Sandler O'Neill and Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [9]

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If I could just follow up on the margin commentary. Notwithstanding kind of the core items and the different moving parts there, but just looking at the -- at what will be the benefit from Valley Commerce, I guess they had a slightly higher yield in general plus the little bit of accretion that's going to come from that. What kind of -- if you can isolate the benefit from that addition, what is that going to add to the margin here in the second quarter? Somewhere around 5 basis points or so, does that seem like a reasonable expectation?

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E. Allen Nicholson, CVB Financial Corporation - EVP, CFO [10]

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What I'd tell you, Aaron, is I think their loan portfolio was about 4.9 on average, so a little bit higher than what our portfolio is. So you'll get the benefit of that. And as we mentioned, about roughly $300 million of loans that came on in the last 20 days. So I think you can simply do the math from there.

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Aaron James Deer, Sandler O'Neill and Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [11]

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Okay. And then Chris, what have you seen quarter-to-date in terms of any additional paydowns on the dairy? And are you kind of comfortable with what's kind of been your guidance in recent quarters about kind of targeting the 2% per quarter, 8% annual in terms of the core organic loan growth?

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Christopher D. Myers, CVB Financial Corporation - CEO, President [12]

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Yes. We looked at our organic loan growth this quarter at basically 0.5%. So our goal is to do 2%, but the first quarter is always our toughest quarter, not only because we have the runoffs. I mean, I'm taking out -- when I say that 0.5%, I'm taking out the dairy and I'm also taking out Valley Business Bank loans. 0.5% was our core portfolio. So our goal is to grow our core portfolio 2%, and that would include -- yes, it would include dairy going forward, but we've got to take out the seasonality of dairy. That remains unchanged. I think our pipeline is good. It remains good.

Prepayment penalties should be less of a factor going forward. But tell me what the 10-year treasury rate does. 10-year treasury rate goes to 2.50%, our prepayment pressure should subside more. It goes down to 2%, then our prepayment pressure will accelerate a little bit more. So that has something to do with that too.

So I think that's kind of where we are right now. We feel pretty comfortable. I do think we're going to see -- if we see a couple of more rate increases, I think we're going to see some more interest rate pressure on our deposit rates which we've seen a little bit of already, not a lot. But I think that as those short-term interest rates on deposits or short-term interest rates go up, pressure on deposits rates will come around the bend, and that's why we've been so focused on our business noninterest-bearing deposits.

I mean, we feel comfortable with our 58% of those deposits in noninterest-bearing -- and a lot of that is a function of, they need to keep those deposits in there to support all the services that we provide them. And so that makes me feel good because they're less interest-rate-sensitive to a money market or a CD type of product.

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Aaron James Deer, Sandler O'Neill and Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [13]

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Okay, that's helpful. Just to clarify, has there been any additional paydown from the dairy books since quarter-end? Or has that stabilized?

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Christopher D. Myers, CVB Financial Corporation - CEO, President [14]

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[None seasonal], yes, none seasonal. The dairy business is -- I don't like to report after-quarter stuff. This is our first quarter production, but no, the dairy portfolio is kind of running the same thing it's run for the last few years and it is what it is. We got a good team there and they're doing a good job.

We are seeing improvement in the dairy portfolio in terms of credit quality. And -- but as dairies make more money, they tend to pay it down a little faster. Dairies do 2 things when they make money. They pay your debt down or they buy more cows. And they've been paying our debt down. We were a little surprised to see it was $109 million in the first quarter. We anticipated that would be about $80 million or $85 million. So it was $20 million, $25 million higher, but that's part of the fact that the dairies -- most of our dairies made money in the fourth quarter and we believe they made money in the first quarter too and they're using that excess profit to pay us down.

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Operator [15]

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The next question comes from Jacque Bohlen with KBW.

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Jacquelynne Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [16]

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Following up a bit on your deposit commentary, have you seen any movement at all from the March increase?

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Christopher D. Myers, CVB Financial Corporation - CEO, President [17]

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I mentioned that $140 million deposit. We have a large investment firm that banks with us, and they brought in some money on, like, March 29 and took it out on April 3 which skewed our end of the quarter noninterest-bearing deposits and total deposits by $140 million. But other than that, it's kind of business as usual. Actually deposits tend to resurge in the second quarter. The first quarters are low point in deposits historically, and then we tend to come on in the second quarter and we're seeing the same thing except for that $140 million.

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Jacquelynne Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [18]

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Yes, yes. No, understood about that one. And any rate movement from March? Or are you still -- are you thinking more like what you said about, we need a few more before you start to see the pressure?

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Christopher D. Myers, CVB Financial Corporation - CEO, President [19]

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Yes, I mean a little bit here, a little bit there, but nothing material. There's just -- sometimes we have to make decisions where we have competitors. I mean, I really think that deposits -- if rates go up, the deposits are going to be a game of the haves and the have-nots. And the have-nots are going to pay up for deposits because they're going to get more desperate as they go along and the haves are going to say, I'm going to hang on to my pricing as much as I can to the extent I don't lose the core of my deposits, and I think we're in the have category.

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Jacquelynne Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [20]

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And the services that your depositors get, are a lot of the balances in their accounts -- I know they need to maintain a certain level of deposits in order to have those services. What if -- how do you think about the excess deposits within that account? Do they look at that at all? Or do they just kind of think we have our deposits with you, we get these services, we're not concerned about the balances as much?

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Christopher D. Myers, CVB Financial Corporation - CEO, President [21]

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They do, but they look at it less more when interest rates are low and they'll look at it more as interest rates rise. But remember this, I think every day, we're selling more and more IT type products, whether that's cyber security protection or other remote deposit capture or more sophisticated online banking, [EC]. I mean there's all kinds of products and services that customers weren't using as much 10 years ago that they're using today. Those are built into those deposits, if you will. So they have their choice. They can either pay those in fees or they can pay those by keeping higher deposit levels with us and then not have to pay fees.

And if you really look at our noninterest income and break it down and look at our service charge noninterest income, it's been really flat over the last few years. In fact, it has declined a little bit over the last few years. But that's a product of companies not wanting to pay fees and keeping more money in our noninterest-bearing deposits, so they don't have to pay fees. So that's been a -- it's been a little bit of a bad news in terms of the fee income side, but it's been very good news in terms of our funding side.

So the excess balances from our noninterest-bearing business accounts go in 1 of 2 places: they either go into a money market account, or they go into a repurchase agreement sweep. Or the third option is, if somebody's really chasing rate, they may take them and go to some other bank and get 1% or something like that. So we don't like to see that and that sometimes we will pay up a little bit more on our money market rate or our repo rate to retain that business, if need be.

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Operator [22]

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(Operator Instructions) Our next question comes from Brian Zabora with the Hovde Group.

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Brian James Zabora, Hovde Group, LLC, Research Division - Director [23]

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Question on the recovery there. Was that multiple loans that you had as far as the recovery? And I know it's hard to predict the -- provide an outlook, but any sense on the pace of recoveries or if we should expect or could see more in the rest of the year?

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Christopher D. Myers, CVB Financial Corporation - CEO, President [24]

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Yes, the loan recovery was a few loans and -- but I do feel this way. One of the things that we did during the crisis that some banks did and some banks didn't was, for the vast majority of our loans, other than our large relationship for many years gone by and a few other small things, we hung on to our loans. And so we hung on to them all through the cycle and some of these loans are doing a lot better as real estate prices are better, occupancy levels are up on properties commercial real estate.

So these loans are now maturing x number of years later. And what happens is, when they mature, a lot of them we've marked down. And so they'll go refinance them with someone else and pay us off, and then that's what we're getting these recoveries on. So I think that will continue through 2017. But after 2017, it gets very thin after that. And I think we've been very fortunate. We've had a longer run than most of the competition on this because of the fact that we hung on to those loans through thick and thin, and we were able to do that because we were making money every quarter and we had pretty good capital ratios through the crisis. So I think that longer-term strategy, I think, is paying off right now in terms of these recoveries.

And our only problem is that these recoveries, we're having to unwind that of our loan loss reserve because our loss history isn't very -- it's fading into the distance, right? I mean, we have very little loss history after 2012 and we're going on 5, 6 years to show any real loss history numbers, and this will be our fourth year in a row or yes, this -- 2017 I think will be our fourth year in a row where I think we will have a net recovery for the year in terms of charge-offs recoveries [for the loan time].

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Brian James Zabora, Hovde Group, LLC, Research Division - Director [25]

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The results have been pretty impressive. So could we expect then a negative provision maybe matching those recoveries for the rest of the year? Is that a possibility?

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Christopher D. Myers, CVB Financial Corporation - CEO, President [26]

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Yes, it is. It just depends on our organic loan growth. And if we can grow loans 2% a quarter, we're going have to -- 8% on $4.6 billion or let's say 6% for the rest of the year on $4.6 billion is $275 million. So you put a 1% to 1.5% reserve and that's $3 million to $3.5 million right there in terms of reserves that we'll need to have, assuming we meet that growth target. So that could get swallowed up with recoveries or we'll have to add some to the provision. My guess, and this is just a guess, is that we will either have net-net 0 provision for the rest of the year or a slight recovery just based on the fact that I think our recoveries are still strong enough that they will outpace our reserves on our, hopefully, 2% quarterly growth. I think I said that right.

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Brian James Zabora, Hovde Group, LLC, Research Division - Director [27]

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That makes sense. And then the construction balances were down. Did you have some of those loans where the construction was completed and moving to CRE? Or were the increase in the balances of CRE really not related to the construction portfolio?

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Christopher D. Myers, CVB Financial Corporation - CEO, President [28]

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The answer is yes. Some of those did move into CRE and that was related to construction. Some of -- a couple of them paid off. There's going to be some ebbing and flowing on our construction loan portfolio. Our pipeline is actually pretty good right now. So I think you'll see those numbers should go back up considerably in the second quarter, but it's a good thing to get these construction loans going through the pipeline and getting finished.

What we don't like to do is have construction loans that hang in the pipeline a long time because the real risk of a construction loan is getting the property started and then getting it finished and then moving on to either the next financer or to a buyer or a permanent financing and then see the property stabilize. So we try to keep that as short as we can. And so it's a good thing when some of these pay off. But I think it's more of a timing thing than anything else. I think you'll see our construction loans kind of resurge in the second quarter here to some extent.

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Brian James Zabora, Hovde Group, LLC, Research Division - Director [29]

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Right. And just lastly, even with the paydown from, I guess, the depositor that came in and came out fairly quickly, it looks like you still have a good amount of liquidity on the balance sheet. I think interest-bearing cash is about -- net of that still over $100 million. Just kind of your thoughts around deploying that. Is the preference loan growth? Or could you also add to the securities book going forward?

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Christopher D. Myers, CVB Financial Corporation - CEO, President [30]

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I think in the order you just said, loan growth, number one; securities, number two. We still are looking at buying securities in this marketplace right now, but the things we're buying right now are probably 25 to 30 basis points lower than what we were buying a month ago. And Allen's nodding at me. I'm just making sure I'm saying that correctly. So I do think that it's still attractive to us at this rate. It's just not as attractive to us.

So, but we do want to keep our cash deployed especially when you see that we have $130 million to $150 million in cash that's running off on a quarterly basis. So if we did get -- we had to borrow overnight fed funds, we could quickly cure that through just our securities runoff and paydowns within a few month period of time. So we want to try to keep that cash balance somewhere around 0 to $100 million is kind of our goal. And if every once in a while we have to borrow a little bit here and there, that's not such a bad thing either.

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Operator [31]

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(Operator Instructions) We now have a follow-up question from Matthew Clark.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [32]

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Just on the cost saves from the acquisition. Just curious when you think you might have those fully phased in, if there's any change there?

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Christopher D. Myers, CVB Financial Corporation - CEO, President [33]

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Yes, good question. I think our actually cost for the acquisition will go up in the second quarter from the first quarter because we convert their operating system over in the beginning of May. And so we keep most of their employees that we're going to not keep, we keep them through May or through the middle of May-ish. And so those costs, the separation costs will come through in the second quarter there.

And we announced -- we are announcing anyways that we are consolidating 2 offices. Those offices will be -- we're consolidating our Visalia office into their Visalia office. Our offices are actually less than 1,000 feet away from each other. So that one is an easy one. And their office, their Visalia office is bigger and more robust than ours and that was their corporate headquarters, so it makes sense. And then we're consolidating their Fresno office, Valley Business Bank's Fresno office, into our Fresno office. And both of those things should occur in August, August maybe. Yes, I think both of them will happen in August, maybe August, September. So those will still be costs that we incur in the third quarter as well.

So I think the vast majority of costs will still be played out with the acquisition in the second and third quarter. And by the time we get to the fourth quarter, we should be pretty pure.

Allen, you agree with that?

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E. Allen Nicholson, CVB Financial Corporation - EVP, CFO [34]

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Correct.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [35]

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Okay. And then just on the adjusted reserve ratio, 1.54%, just curious where you think that could go. I guess what's kind of your comfort level based on your mix in the outlook assuming things remain fairly stable?

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E. Allen Nicholson, CVB Financial Corporation - EVP, CFO [36]

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As Chris pointed out, our allowance is built off of a lot of factors. Most of those factors have been continually improving, both our loss history and a lot of the economic factors as well as our internal asset quality factors. So there's probably some level of pressure on seeing that allowance level decline. We also, though, continually recalibrate on an annual basis some of those factors and look at maybe some factors that haven't been looked at before. So we don't know at this point, but I think the trends are such that we could possibly see those continue to decline.

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Christopher D. Myers, CVB Financial Corporation - CEO, President [37]

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And this is -- obviously, as we become closer to $10 billion, our methodology (inaudible) And everything is kicking in here in the next couple of years, we're actually looking forward to that from the sense of, we're trying to find ways that we can hang on to our reserve at these kinds of levels right now. But it is -- there's quite a bit of science involved in this. And so we have to -- KPMG and the regulators and everybody all look at this stuff too. So a lot of eyes watching it. But my preference would be certainly to keep as robust a reserve as we can within the guidelines that are presented to us.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [38]

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Okay, and then just one last one on the tax rate. A little higher this quarter if you adjust for the tax benefit. Curious where you think that might shake out for the balance of the year.

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E. Allen Nicholson, CVB Financial Corporation - EVP, CFO [39]

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Well, the effective tax rate for the quarter is what we forecasted to be for the full year right now at 36%. The one factor that will create volatility, of course, is the change in how we account for stock-based compensation. However, we can't predict option exercises for the rest of the year. But because we generally grant our options and our restricted stock on sort of an annual basis, we would expect the biggest impact to have actually been in the first quarter.

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Christopher D. Myers, CVB Financial Corporation - CEO, President [40]

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And let's not forget about the proposed tax cut that we could get, right? So that's not factoring in any of that stuff, so...

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E. Allen Nicholson, CVB Financial Corporation - EVP, CFO [41]

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15%, yes.

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Christopher D. Myers, CVB Financial Corporation - CEO, President [42]

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We're all holding our breath, right?

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Operator [43]

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(Operator Instructions) At this time, it appears that we have no further questions. So I would like to turn the call back to Mr. Myers.

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Christopher D. Myers, CVB Financial Corporation - CEO, President [44]

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Thank you. Everyone on the call and listening in here today, we appreciate your interest and look forward to speaking with you again on our second quarter 2017 earnings conference call in July. In the meantime, feel free to contact me or Allen if you have any direct questions. Have a great day, and thank you for your interest. Goodbye.

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Operator [45]

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