CVB Financial Corp (CVBF) 2011 Q1 法說會逐字稿

Good morning, ladies and gentlemen; welcome to the first-quarter 2011 CVB Financial Corp. and subsidiary Citizens Business Bank earnings conference call. My name is Mike and I'm your operator for today. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer period. I would now like to turn the presentation over to your host for today's call, [Christina Carrabino]. You may proceed, ma'am.

Thank you, Mike, and good morning, everyone. Thank you for joining us today to review our financial results for the first quarter of 2011. Joining me this morning is Chris Myers, President and Chief Executive Officer, and Rich Thomas, Executive Vice President and Chief Financial Officer.

Our comments today will refer to the financial information that was included in the earnings announcement released last night. To obtain a copy please visit our website at www.CBbank.com and click on the CVB investors tab.

Before we get started let me remind you that today's conference call will contain some forward-looking statements and as such involve risks and uncertainties. These forward-looking statements relate to, among other things -- anticipated future operating and financial performance; the allowance for credit losses; our financial position and liquidity; business strategies; regulatory and competitive outlook; investment and expenditure plans; capital and financing needs and availability; plans and objectives of management for future operations; expectations of the environment in which we operate; projections of future performance; perceived opportunities in the market and strategies regarding our mission and vision and statements relating to any of the foregoing.

Future activities and results may differ materially from these expectations. Words such as will likely result, aims, anticipates, believes could, estimates, expects, hopes, intends, may, plans, projects, seeks, should, will, and variations of these words and similar expressions are intended to identify these forward-looking statements which involve risks and uncertainties.

The speakers on the call claim the protection of the Safe Harbor provisions contained in the Private Securities Litigation Reform Act of 1995 with respect to such forward-looking statements. 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, 2010 and in particular the information set forth in Item 1A, Risk Factors Therein. Now I will call over to Chris Myers.

Thanks, Christina. Good morning, everyone, and thank you for joining us on our initial earnings conference call. We are excited to begin the process of hosting quarterly earnings conference calls and look forward to hearing from you in the quarters to come. Some of you on this morning's call may not be familiar with CVB Financial Corp., so I will provide a brief overview of our Company.

CVB Financial Corp. is the largest financial institution headquartered in the Inland Empire region of Southern California which is about 40 miles east of downtown Los Angeles. It is the holding company for Citizens Business Bank which was formed in 1974 and is a $6.5 billion in assets financial services company based in Ontario, California. As of December 31, 2010 the Bank was ranked the 10th largest bank headquartered in California based on total assets.

Citizens Business Bank serves 41 cities with 43 business financial centers and five commercial banking centers in the Inland Empire, Los Angeles County, Orange County and the Central Valley areas of California.

Citizens Trust, the Bank's wealth management and investment division, provides trust, investment and brokerage-related services as well as financial, estate and business succession planning.

Our mission is to offer the finest financial products and services to professionals and businesses in our market area. A strong credit culture and underwriting integrity remain paramount at CVB Financial Corp. Our target customers are the best privately held and/or family-owned businesses throughout Southern and Central California with annual revenues of $100 million to $200 million.

We provide full relationship banking and our aim to build long-term 20-plus-year relationships. We have a long history of strong financial performance with over 135 consecutive quarters of profitability and 86 consecutive quarters of dividends. Over the past decade we have experienced deposit growth, including customer repurchase agreements, of almost 217% from $1.6 billion to $5.1 billion and loan growth of nearly 249% from $1 billion to $3.6 billion over the same 10-year period.

Over the past 10 years we have been active in both acquisitions and organic growth. Since 2000 we have acquired five banks and a leasing company and have opened three de novo branches. We have also opened five commercial banking centers since 2008, four of them on a de novo basis.

In October 2009 we acquired San Joaquin Bank, a Kern County-based community bank with assets totaling $736 million in an FDIC-assisted transaction. San Joaquin Bank was headquartered in Bakersfield, California with five branch locations. Several months after the acquisition we consolidated one of the five branch locations into our existing Bakersfield business financial center.

Over the years Citizens Business Bank has been recognized with numerous performance and ratings awards. Recently BauerFinancial Inc. awarded Citizens Business Bank its highest ranking of five stars based on our December 31, 2010 performance data. Also in December 2010, Fitch ratings assigned CVB Financial Corp. a BBB+ -- a BBB, excuse me, investment grade rating.

Our trust division, Citizens Trust, has approximately $2.2 billion in assets under administration including $1.2 billion in assets under direct management as of March 31, 2011. Citizens Trust provides trust, investment and brokerage-related services as well as offering estate and business succession planning.

Now let's return to our first-quarter 2011 results. We reported net income of $16.6 million and diluted earnings per share of $0.16 for the first quarter of 2011 compared with net income of $9.9 million and diluted earnings per share of $0.09 for the fourth quarter of 2010 and net income of $16.1 million and diluted earnings per share of $0.15 for the first quarter of 2010.

The annualized return on average assets was 1.03% for the first quarter and our annualized return on average equity was 10.33%. Excluding the impact of the yield adjustment on covered loans, our net interest margin for the quarter ended March 31, 2011 was 3.78%. We are pleased that our net interest margin has remand relatively stable over the last several quarters. Our ability to reduce our overall deposit costs and improve our deposit mix has been instrumental in this achievement.

Net interest income before the provision for credit losses totaled $57.1 million for the first quarter of 2011 compared with $73.3 million for the first quarter of 2010. The first quarter of 2011 included $2 million in accelerated accretion on acquired loans compared with $13.4 million for the first quarter of 2010. The yield on earning assets, excluding the impact of accelerated accretion, was 4.39% for the first quarter of 2011 compared with 4.91% for the first quarter of 2010.

Cost of funds was 0.65% for the first quarter of 2011 compared with 1.13% for the first quarter of 2010. Non-interest income for the first quarter of 2011 was $10 million compared with $7.2 million for the fourth quarter of 2010. The first-quarter results included a $1.4 million increase in the FDIC loss sharing asset compared with a $1.1 million decrease in the fourth quarter of 2010. Growing our non-interest income is one of our four key strategic objectives for 2011.

Non-interest expense totaled $36.3 million for the first quarter compared with $35.9 million for the first quarter of 2010. Our expenses are higher than we would like primarily due to two areas, professional services and expenses and software and communication expenses.

Professional services expenses have been elevated primarily due to legal expenses associated with problem loan resolution and the SEC investigation. Software and communication expenses have increased as we are interesting more dollars in our product development and expansion and in backroom infrastructure which will help us prepare for future growth and expansion. Expense control is another one of our four key strategic objectives for 2011.

In terms of gains on sale of securities we had zero to report for the quarter. In terms of debt prepayment penalties we also had zero to report for the quarter. Our net income before tax is $23.7 million for the first quarter ended March 31, 2011 compared with $11.8 million and $23 million for the quarters ended December 31, 2010 and March 31, 2010 respectively.

Our net income after tax was negatively impacted by an increase in our effective income tax rate for the first quarter of 2011. Our effective tax rate of 30% for the first quarter of 2011 was higher than the approximate 27% for the past several quarters. The increase in tax rate was due primarily to the proportionate decrease in non-taxable income generated by our municipal investment portfolio and bank owned life insurance.

Now let's move to the balance sheet, liabilities first. We continue to grow our non-interest-bearing deposits. Our non-interest-bearing deposit portfolio is truly one of the key core factors to our Bank's ongoing success. Our non-interest-bearing deposits grew to $1.82 billion for the first quarter, an increase of $116.4 million or 7% from December 31, 2010.

The $1.82 billion in non-interest-bearing deposits is a Citizens Business Bank all-time record for a quarter end. Non-interest-bearing deposits now represent over 40% of our total deposits. What is interesting is that despite our strong non-interest-bearing deposit growth, our total deposits actually decreased slightly by $33 million to $4.49 billion for the first quarter of 2011 compared with the fourth quarter of 2010. So why is this happening?

The answer is that we are focusing our marketing efforts on driving non-interest-bearing and low cost deposit growth. Our objective is to grow and retain our sticky deposits, deposits that are more inclined to stick with us when and if interest rates rise again.

For the first quarter we provided approximately $330 million in overnight funds to the federal reserve and received a yield of 25 basis points -- only 25 basis points. Higher cost interest-bearing deposits are not attractive to us at this time as they are not accretive to earnings and are actually loss leaders.

Our borrowings remained materially unchanged from the prior quarter and totaled $553.5 million at the end of the first quarter. We did not prepay any Federal Home Loan Bank debt during the first quarter. Of note, our average cost of borrowings was 3.72% for the first quarter of 2011 on this $553.5 million. Our weighted average duration for these borrowings is 4.4 years. All borrowings have prepayment penalties at this time.

Now let's move to the asset side of the balance sheet. Total loans and leases were $3.6 billion at March 31, 2011, a decrease of $149.3 million from December 31, 2010. While the decline in total loans is contrary to our strategic objective to grow loans for 2011, we have accomplished some good things in this area.

First we sold six of seven notes related to our former largest borrowing relationship. This resulted in a decrease of $42.9 million in total loans.

We were also able to decrease our exposure to mortgage pools, residential mortgage pools, by $11.3 million, our non-covered construction loans by $15.4 million, and our total covered loans by $25.3 million for the first quarter of 2011. We consider all of these declines totaling $94.9 million positive events for the Bank.

Our dairy and livestock portfolio declined by $51.9 million from the fourth quarter to the first quarter of 2011. We attribute most of this decline to the seasonal nature of dairy lending as many clients will draw down on their lines during the fourth quarter and then repay them during the first quarter.

So, our three core growth lending segments are as follows -- number one, commercial and industrial loans and lines of credit; number two, commercial real estate loans; and number three, dairy, livestock and agribusiness loans. These three areas are key for our loan growth in 2011.

Now I would like to address our asset quality and I will break down the discussion between non-covered loans and covered loans. The non-covered loans represent the legacy Citizens Business Bank loans and exclude all loans acquired in the San Joaquin Bank acquisition.

The San Joaquin Bank loans are covered loans as defined in the loss sharing agreement with the FDIC. These loans have been marked to fair value at acquisition date and have a guarantee by the FDIC through our loss sharing agreement. The allowance for credit losses as of March 31, 2011 pertains only to those loans made by Citizens Business Bank and not those acquired through the San Joaquin Bank transaction.

Our provision for loan and lease losses was $7.1 million for the first quarter of 2011 compared with $12.7 million for the fourth quarter of 2010. Net charge-offs during the first quarter were $11.3 million compared with $12.7 million for the fourth quarter. The allowance for loan and lease losses was $101.1 million or 3.11% of outstanding loans at March 31, 2011 compared with $105.3 million or 3.12% at December 31, 2010.

Non-performing assets were $114.4 million at the end of the first quarter, down $47.9 million from the end of the fourth quarter of 2010 and down $61.9 million from the end of the third quarter of 2010. First-quarter 2011 non-performing assets totaling $114.4 million consist of the following -- $40 million in commercial construction loans; $18.4 million in residential mortgages; $35 million in commercial real estate loans; $3 million in dairy and livestock loans; $11.8 million in other loans; and $6.2 million in four OREO properties.

At March 31, 2011 we had loans delinquent 30 to 89 days of $3.6 million compared with $9.1 million at December 31, 2010. All loans delinquent 90 days or more were categorized as non-performing.

Now I will talk about our covered loans. At March 31, 2011 we had $446.9 million in gross loans from San Joaquin Bank with a carrying value of $348.8 million. Of these gross loans a total of $115.1 million were non-performing compared with $133.1 million in non-performing loans at December 31, 2010.

At March 31, 2011 we had gross loans delinquent 30 to 89 days of $3 million compared with $661,000 at December 31, 2010. In addition, we had 16 properties totaling $11.5 million in OREO at March 31, 2011 compared with 17 properties totaling $11.3 million at December 31, 2010. We are working diligently to resolve our problem covered loans.

I will now talk briefly about our equity and our capital position. In the first quarter of 2011 we paid out approximately $9 million in cash dividends. Despite this, shareholder's equity increased by over $10.7 million to $654.6 million for the quarter ended March 31, 2011.

Our capital ratios are well above regulatory standards and are above our peer group. Our capital ratios at December 31, 2010 are summarized as follows -- Tier 1 risk-based capital ratio was 16.6%; total risk-based capital ratio was 18%; Tier 1 leverage ratio was 10.6%; and tangible capital ratio was 9.1%. Our March 31, 2011 capital ratios will be released concurrently with our first quarter of 2011 Form 10-Q.

I will now turn the call over to Rich Thomas to discuss our investment securities portfolio. As of March 31, 2011 our investment portfolio represented approximately 31% of our total assets. During the first quarter we announced Rich's appointment as Executive Vice President and Chief Financial Officer concurrently with the retirement of our former CFO, Ed Biebrich. Ed enjoyed a very successful 13-year career with us and he did an outstanding job leading and assembling a first rate team of financial accounting and investment professionals.

Rich Thomas joined Citizens Business Bank in December 2010 serving in the Bank's finance and accounting division. He has over 33 years of financial audit and public accounting experience primarily in the financial services industry. He was an audit partner specializing in banking in the Los Angeles office of Deloitte & Touche LLP for 22 years and immediately prior to joining us he was the Chief Risk Officer with a Southern California-based community bank. I'm excited to have Rich carry the torch forward as our new CFO. Rich, please proceed.

Thank you, Chris, and good morning, everyone. Investment securities totaled $2.02 billion at March 31, 2011, up $226 million from the fourth quarter. Our available for sale investment portfolio continued to perform well. As of March 31, 2011 we had an unrealized gain of $15 million. We have no preferred stock or trust preferred securities in our portfolio.

Virtually all of our mortgage-backed securities are issued by Freddie Mac or Fannie Mae, which have the implied guarantee of the US government. We have ten private-label mortgage-backed issues totaling $8.4 million, we also have one private-label mortgage-backed security that is held to maturity and is impaired. This security has a carrying value of $3 million and had previous impairment of $1.2 million.

Our municipal portfolio is diversified amongst 610 issues in 30 states. 6.3% of our portfolio is in California which includes three [QZA] securities that are pre-funded. Our largest holdings are in New Jersey at 14.4%, Michigan at 12.5% and Illinois at 12.4%. Substantially all municipal securities were AAA rated upon purchase, many with insurance coverage over and above the individual issuer's credit ratings.

We currently have 11 general obligation securities totaling $9.6 million that are not rated. General obligation bonds are backed by the full [faith] credit and taxation powers of the issuer. Our credit administration department performs annual credit evaluations on their financial data. The remainder of the portfolio is rated securities.

The total unrealized gain of the municipal portfolio as of March 31, 2011 was $7.3 million. Currently we typically focus on municipal security purchases on tax exempt AA rated or better general obligation bonds. Valuation remains attractive at the long end of the municipal curve. We continue to maintain an average duration of about 10 years on new municipal security purchases.

We have been reinvesting our cash flows from the investment portfolio. During the first quarter we purchased $323.2 million in mortgage-backed securities with an average yield of 3.20%. And $12.8 million in municipal securities with an average yield of 5.55%. We maintain a neutral position at the short end of the treasury curve by reinvesting in securities with an average duration of about 3.5 years to avoid extension risk as interest rates rise. I will now turn the call back to Chris for some closing remarks.

Thanks, Rich. I will now talk briefly about the California economy and our outlook. Our outlook comes from various reports and data provided by local economists.

First the negatives. California's economy will likely continue to grow steadily but modestly over the next several years. Overall income will lag the national average and probably not return to its pre-recession strength until at least 2015. According to a respected local economic forecast, double-digit jobless rates will continue to last until 2015. Home prices will remain flat well into 2012 and then recover slowly from there.

Now the positives. California has strong economic diversification. Agriculture, oil and gas, manufacturing, distribution, Aerospace and Defense, and entertainment are all significant parts of the California economy. California is one of the few places in the world that is strong in all of these business segments. 80% of the state's cargo is shipped through the Los Angeles Inland Empire corridor. 28 of our 48 banking center locations are located in Los Angeles County or the Inland Empire.

Port of Los Angeles and Long Beach activity is up 10.65% year over year when compared to 2010. Agribusiness has fared comparatively well during the recession. California is the leading agricultural producing state. The Inland Empire is projected to remain the fastest growing region in the state for many years to come. That pretty much -- and that concludes our economic outlook.

In summary, we are pleased that we have maintained quarter-over-quarter profitability despite a very difficult economy over the past few years. We attribute our success to being selective with our clientele, our focus on relationship banking, our strong credit culture and conservative nature and a very solid capital position that has allowed us to mitigate substantial loan losses.

During the past few years we were able to achieve several important milestones in our Company's history including the successful integration of our FDIC assisted acquisition of San Joaquin Bank. The continued deleveraging of our balance sheet through our repayment of $1.45 billion in borrowings since 2007 and solid core deposit growth despite substantially lowering our deposit costs.

Our strategic focus for 2011 is our continued commitment to quality loan growth, non-interest-bearing deposit growth, non-interest income growth and expense control. We continue to build new fee income opportunities and feel our long-term outlook is very positive. We believe we are well capitalized, adequately reserved and poised to continue to produce solid earnings in the future.

In terms of expansion, we will continue to drive same-store sales growth and seek to open de novo locations wherever and whenever possible. Our acquisition strategy is to focus on community banks and business banks that are in or adjacent to our existing footprint.

We will continue to look at FDIC assisted opportunities as they present themselves, but feel that our future is more oriented toward conventional M&A deals. Our acquisition strategy is to focus on things with total assets of $300 million to $3 billion. We will also pursue acquisitions in the trust and wealth management areas.

Well, that concludes today's presentation. And now Rich and I will be happy to take your questions. Thank you.

(Operator Instructions). Hugh Miller, Sidoti & Company.

Good morning. I was wondering I guess if you could talk to us obviously about the capital levels here. You mentioned as of the end of the year a roughly total capital ratio of 18%. And obviously well above the regulatory threshold to be considered well capitalized. And it seems obviously, as you alluded to in the press release that you're going more to an offensive stance relative to a defensive one. What could we see that kind of come down to, what's a level that you guys are willing to kind of lever the balance sheet?

Right now our strategy with capital is to -- we want to maintain a strong capital position in this type of economy so that we can weather any type of things that may come up. We also want strong capital position because we want to be able to use that offensively for acquisition purposes.

In terms of tangible capital ratio, we want to keep that somewhere 8% plus, maybe possibly go down to 7.5% if we did an acquisition than try to restore that to 8% plus. In the other areas you could probably take a few percentage points off each of the Tier 1 risk-based capital, total risk-based capital and Tier 1 leverage ratio.

So what that translates to us is that from an acquisition standpoint if we were to acquire something with assets, a bank with assets between say up to $750 million in assets, we'd probably have the capability to do that without raising capital. Anything beyond that would probably necessitate a capital raise.

Okay, that's good to know. And then obviously prior to the credit crisis you guys had kind of been a bank that prided itself on growing dividends and so forth. And while the dividend payout ratio remains above those levels before, usually when it got down I guess 40% you'd be in a mode to kind of grow the dividend.

How far off are we from that? Do we have to kind of get back down towards a call it 40% payout ratio for you guys to be able to get comfortable raising the dividend and your thoughts on that?

In terms of dividends we really don't provide any forward guidance on what we're going to do in the future. We do meet on the last month of the quarter, the Board does, to discuss what we want to do for dividends at that time and then make an announcement shortly thereafter. Again, we produced dividends 86 consecutive quarters. A lot of the dividends can depend on a lot of different factors and the factors certainly being how much we can drive upward our income.

Okay. And can you talk a little bit about some of the trends you're seeing with regards to both loan and deposit pricing competition and your ability on an organic basis to attract relationship bankers at this point in the cycle?

Sure, I'd be happy to. In terms of deposit pricing, we're really, again as I mentioned in the call here earlier in the call, we're really focused on those sticky deposits, those relationship-based deposits and we have objectives to grow -- continue to grow our non-interest-bearing deposits.

Interest-bearing deposits that exceed that 25 basis point level we really have to look at carefully and say what else are we getting besides that deposit relationship? Is it fee income, are there loans, are there all kinds of things that go along with it, what is the relationship aspect of it? Because it really doesn't make any sense for us to pay somebody 75 basis points on a money market account on a stand-alone basis.

In terms of loan growth, we're getting after it in a big way. We have our people mobilized, we have ambitious goals for them for the years and they're out there hustling. It is a very competitive marketplace, it's not dynamic in the sense there's tons of loan growth potential out there at this time. But we do feel that we're making good progress in that area and, again, it's one of our four key strategic objectives for 2011.

Okay. And then two housekeeping questions, one with regards to obviously some of the noise around the tax rate. Can you give us a sense of what you guys think a go-forward rate would likely be for 2011?

We really don't offer any guidance on the tax rate. I will say that as you look at our municipal securities and you look at our bank owned life insurance, as they become -- it really depends on what portion of our income they represent. As they represent a greater portion of our income then our tax rate will typically go down; if they represent collectively a lower portion of our income then the tax rate will go up.

So it's hard to move the needle on the municipal securities and bank owned life insurance. So ideally if we're really cranking the income side, I guess hypothetically you could say that that tax rate could go up, but that's a good thing, right?

Great. And the last question I had was with regards to -- you mentioned obviously some of the non-interest expenses being kind of bloated here from both legal expenses and also abnormally high credit cost for working down problem assets. Can you just give us a sense of helping us to quantify what rough ballpark that was on the expense side?

I can give you some general figures year over year. In terms of 2009 versus 2010, our professional services expenses were up $6.4 million year over year from $6.9 million to $13.3 million in professional services, and our total supplies, software and communication expenses went from $7 million to roughly $10 million from 2009 to 2010, those are full-year numbers.

So far this year we're tracking a little bit behind what we were tracking last year quarter to quarter, but we're working on that. That's something -- some of that we feel like is in terms of the professional services expense -- as our problem loans go down and other things happen, those legal expenses should go down over time. We don't feel like this is a permanent situation for us.

But in terms of guidance of when that's going to happen, I really don't have any feel for that. I do feel really good about the following and that is in September we had $176 million in non-performing assets, today we have $114.4 million in non-performing assets. So we've made a lot of progress on that front. And that in turn I think will ultimately drive down our legal expenses.

Thank you very much.

Tim Coffey, FIG Partners.

Good morning, gentlemen. Chris, what's the status of the SEC investigation?

Well, at this point we don't have a lot to update anybody on. We continue to fully cooperate with the SEC in their investigation, but we're not in a position to say how long the investigation will last and we really can't make any prediction as to the outcome.

But our focus is on running our business in figuring out ways to grow revenue and we don't feel like we're being slowed down by that. We're off and running, we're building our initiatives, we're looking at making acquisitions, either FDIC or good bank acquisitions. In a lot of respects it's business as usual, other than the fact we've got increased legal expenses.

Sure. Has anybody from the Commission asked to speak with management yet?

Again, we don't have any comments on that.

Okay. In terms of acquisitions, as you were mentioning, are you actively talking with companies right now? Are you still kind of taking a view of the landscape?

Well, for a long time this Company has been actively involved in acquisitions. In fact, we've made over 15 acquisitions of either banks or branches in our Company's history. So we're always out there looking at opportunities and that hasn't changed through the cycle. I'll tell you right now we're feeling like we really -- that's a big initiative for us in 2011/2012. We'd like to get a good bank deal done or, if the right bank came along, an FDIC assisted transaction.

Okay. As you view the credit quality of the Company right now do you see the trend quarter over quarter that we saw in the first quarter continuing?

Well, I can't predict the future. But certainly when you look at the September numbers, the December numbers and what we just turned in in March, the trends are very positive. Our objective is to do exactly that. But again, there are a lot of factors that we can't control that go into that. So I really don't have any more guidance other than the fact that we feel really good about our success over the last few quarters.

Okay. And then in terms of the non-interest-bearing deposits, where's that growth coming from?

The growth is coming from -- I think we have really built a relationship-based company. And so our people are out -- and this really comes from the key sales leadership of the Bank in that our objective again is to collect the best small- to medium-sized businesses as our clients.

Whether there's a transaction that leads us to that or what have you, that doesn't matter. We want to get people focused on making sure they're building long-term relationships with the best businesses. And if that's deposit oriented or loan oriented or fee income oriented we really don't care. We just want to collect these good businesses as our clients and then provide comprehensive financial services to them.

So in the world today I think there's less -- for a business owner, there is less focus on interest rate. They really -- whether they get 60 basis points for you on a money market or 80 basis points for your competitor on a money market that's really not the focus. The focus is relationship based. So it kind of is playing into our hands. And that's why you're seeing the strong growth. I mean when you talk about 7% growth in non-interest-bearing DDA quarter over quarter, that's some party strong numbers.

Great, those are all my questions. I appreciate the call, thank you.

Joe Gladue, B. Riley.

Good morning. A couple questions. It looks like you still have a good bit of liquidity on the balance sheet. I'm just wondering if there are any plans on reducing that or deploying that anywhere.

Well, in terms of our liquidity, we feel like in a lot of respects we can have a lot more liquidity on our balance sheet if we were willing to pay up for deposits and do some other different things like that. We're carefully thinking of how we deploy that liquidity going forward because we're also sensitive to taking interest rate risk.

So for instance right now, the best thing we can do is grow loads, but there's a lot of competition out there for loans and some of the banks are actually offering 10-year fixed rates in the fives on commercial real estate loans. And defensively we have to respond to that.

But what we've done along the way is we've also done some interest-rate swaps where we're using a variable rate, so the Bank gets a veritable rate and the client ultimately gets a fixed rate so that we can at least diminish our interest-rate exposure should interest rates go back up to some of these fixed rate loans that are out there in the marketplace.

Okay, all right. Thank you, that's helpful. I get that touches on another question I was just going to ask about the loan pipeline. Can you give us any color on what you see out there now in terms of the loan pipeline?

Well, our loan ambition exceeds our loan pipeline right now, and I think that's -- just because of the economy, there's not enough wind behind us in the economy to really have a robust market out there to drive loan growth. However, our pipeline over the last few months has grown. I can't predict whether it's going to continue to grow, but I can tell you that we've got all oars in the water rowing pretty hard down the river and trying to make that happen.

Is that growth in any particular loan category or type of business?

Well, we're focused on three areas and that is commercial and industrial loans and lines of credit; commercial real estate -- we prefer owner occupied to investor but we're still doing investor deals; and third area is our dairy, livestock and agribusiness area. Those three are our main focus areas of loan growth.

All right. Just moving on to asset quality, just one question there. Where do the performing TDRs stand at March 31? And can you give us some idea of -- are most of those still -- are you having any migration of them to non-performing or how are they performing?

Joe, this is Rich. We are working on TDRs. I don't have that number right in front of me of the TDRs. But with the new accounting rules that are out there we're working diligently to identify those, classify them and report them in the disclosure.

That will come out with our 10-Q, is that right?

10-Q, the 10-Q will identify those. We are -- we do have a requirement to reserve those things -- those TDRs, just like any other loan, which we are following our methodology that's been over the last several years. So it's a disclosure that will come out in our 10-Q.

All right, thank you, that's all I had.

Robert Greene, Sterne, Agee.

Good morning and thanks for taking my call. I had a couple -- my first question is on the reserve. Over 3%, over two times annualized charge-offs in the quarter. It looks like a pretty good cushion there. I'm just wondering how you feel about reserve levels kind of going forward throughout 2011?

You know what, we don't provide guidance on the reserve and give you forward-looking things. But I do want to say this -- if you look at our 10-K and you go ahead and look at our substandard loans and you see that we've got a substantial amount of those substandard loans, $214 million in dairy, livestock and agribusiness and the dairy business had a very difficult year in 2009. In 2010 things improved, particularly in the latter half of 2010.

So there is a possibility that we will have upgrades in our dairy and livestock portfolio in 2011 -- I'm not predicting that but there is that possibility because we anticipate that the year-end numbers on some of the dairy will be positive and that may result in an upgrading of those credits. I'm not saying that's going to happen, but that could happen based on what we're feeling like in the dairy business because we believe that the dairy business has improved here over the last six months to a year.

When we establish our reserve it's very formula driven, we have all types of factors that go into that reserve. And so how we grade credits is a big part of that reserve. A substandard classified loan will typically carry a larger reserve than a pass grade credit. And so as credits become downgraded or upgraded that affects our reserve. So that's really the only thoughts I can give you on that, because we don't provide future guidance on our reserves.

That was very helpful and it actually answered my second question. Just going back to M&A, you're done a great job kind of explaining your targets. I was wondering if you'd give maybe a little bit more general commentary as to what the M&A pipeline looks like sort of throughout the industry in your space and really why we haven't seen more deals done to date?

Well, that's a great question. And when you look at M&A out there and we look at what's out there, first of all the industry is still in a transition here and most of the banks are trying to bring down their non-performing asset levels, as are banks that may be acquired in the future.

So just as we've seen strong improvement over the last two quarters, we'd like to see that kind of trend in any potential M&A good bank that we would buy. And we want to feel comfortable with the fact that we felt like their non-performing assets were going down and they would continue to go down so we don't walk into someone else's problems.

The other factor that's in there is there's still an expectation gap between what people think their bank is worth and what we're willing to pay for the bank. Then you deal with the last factor which is accounting and some of the accounting rules and the mark to market accounting that you need to do with an acquisition can make a deal a little bit more complicated to do than you'd like.

We're going to have to see -- I think we will see industry trends get more active in terms of M&A and we're hoping to be -- we would really like to do a deal either later this year or in 2012, but it's got to be the right deal strategically for us and it's got to have a good financial result for us as well.

But that's no different than what we've done over the many years of our Company if you look. We've done 15 acquisitions, we did an acquisition in 2007, we did one in 2009, I really don't have any guidance whether we're going to do one in 2011 or 2012 either. We would like to do it.

Terrific, terrific. One last question just on deposit costs. Obviously the growth in non-interest-bearing deposits has been very impressive. I was wondering, how much room is there on the deposit cost side? Is there anything significant rolling off over the next couple quarters that could maybe push that downward a little bit?

Our deposit costs were 25 basis points as of the first quarter and I believe it was 28 basis points if you include our repurchase agreement. Does that sound right to you?

27.

27 basis points if you include our repurchase agreements, excuse me. So 25 basis points deposits only, 27 basis points if you include deposits and our customer repurchase agreement. Can't project the future. I do know that, again, we're looking very relationship based on this. It does get to a point where deposit costs can only go so low and we're sitting here at 25 basis points anyway. So there is a logic to your question there, I get it.

Okay well I think that about does it for me. I appreciate you taking my call.

Aaron Deer, Sandler O'Neill.

Good morning, Chris. Congratulations, Rich, on your new position.

Thank you.

If I can follow up, it hasn't been talked too much about the margin yet. It was down pretty sharply in the quarter, I guess especially if you take out the 20 basis points of discount accretion. Can you talk about what drove that, how much of that was from the mix shift in earning assets? Obviously you mentioned the excess liquidity on the balance sheet. But I'm wondering if there were some interest reversals in there that also might have helped drive that? And then what your expectations are for the margin as we head into the second quarter?

Sure. Well, actually we've been really pleased with our net interest margin. If you look over the last two years, the last eight quarters -- actually nine quarters our net interest margin has been contained within a 25 basis point span. So it hasn't fluctuated more than 25 basis points. I think it peaked in the first quarter of 2010 and then -- and so -- and when you look at the fourth quarter it's really not down that much.

We feel very good about the fact we've been able to reduce our cost of deposits which has really helped mitigate our yield -- our lower yield on our securities portfolio. And ultimately we feel that loan -- our loan -- yield on loan rates may come down in the future slightly as refinances and the interest rates continue to stay long -- continue to stay down over a longer period of time.

As far as the future is concerned, we really don't offer any guidance on this other than we feel good from a business model standpoint and the way we set this up and our relationship banking approach I think is going to help us a lot in this category.

Okay. Any guidance on where you expect that margin to stand in the second quarter?

No.

Okay. (multiple speakers). I'm sorry, say again?

We just don't offer guidance on the net interest margin and go forwards.

Can you give us what the total classified loan total was at the end of the quarter and also where that stood at the end of the year?

Classified loans -- we have -- give me one second here.

Sure.

That is -- we do have that number. I know ballpark where it is, I just need the exact figure, so give me a second. This is part of our -- (inaudible), this doesn't have to wait for our Q, correct?

(inaudible) the 30 to 89 days in the press release and the non-performing asset number.

All right -- classified loans?

Classified, we have not put that in the --.

Hold on one second, I'm just grabbing this for a second. You know what, we have not released that number yet, it will be released along with our 10-Q. So --.

Okay, we'll keep an eye out for it.

Yes, sorry about that. But I will tell you that number is obviously going to be down quarter over quarter.

Okay, that's great and all my other questions were answered. Thank you.

Kevin Reynolds, Wunderlich Securities.

Good morning, gentlemen. Chris, you mentioned a couple of different times talking about your desire to potentially find a good bank acquisition I think in '11 or '12. Can you maybe describe -- without getting maybe too specific, can you describe what a good bank acquisition would look like for you? Maybe size, markets that you'd like to go into if you had your wishes? And maybe even pricing levels if you thought -- at what point do you say that's too rich for us, we're not even interested anymore?

Yes, I'd be happy to. Our target is a bank that's either in or adjacent to our existing markets in Southern California and Central California. Asset size, we would really focus on something between $300 million in assets and $3 billion in assets. And right now we feel that what defines a good bank is one that -- one that we feel brings -- is synergistic with our business model, has a good concentration of community and business banking clients.

So I think strategically we'd love -- in this market right now there's not a lot of wind -- economic wind at our back. So we've got to be smart about the way we do that. We would also want to focus on cost saves in any type of acquisition that we did. But those are kind of the strategic outlook. I don't have -- and you mentioned 2011, '12 -- sure, we'd like to do a deal there, but if the deal is not right we're going to wait until the deal is right for us.

Okay, and do you have a preference for if you did a deal? I know that is more general than probably reality, but any preference for using stock as currency or cash and is that going to limit who you'd go after if you had a preference one way or another?

We certainly are very sensitive to dilution for our shareholders, but we would look at stock and/or cash, absolutely.

Okay, good quarter.

Chris Stulpin, Raymond James.

Good morning. Chris, I'm not sure if you mentioned this, but what was your -- what was the loan origination amount for this quarter and last?

We didn't disclose the loan origination amount. We haven't given any figures on that.

Okay, all right. And back to your agri livestock portfolio, it seems to have held up in the second quarter. But with elevated grain prices, what is your current view on how you expect that portfolio to perform going forward? I know you alluded to this, or you mentioned it earlier in the call, but can you get a little more specific why you were a little more optimistic? It seems you are a little more optimistic now and if you'd just back that up I'd appreciate it.

Well, I will say I am not an expert in the dairy and livestock area. But we do have some people in the institution, including our Board members, that run businesses in that area. And so I'll pass on some, just some general comments that they've made.

Certainly feed costs remain inflated from historical levels, but also milk prices are up right now. It's really the fact that the milk prices are up, and then beef prices are also up, that are at least driving more confidence and we assume profitability in the business.

In terms of going forward, the dairy business is a very cyclical business, it's hard to project what's going to happen in the future, so I really don't know what's going to happen in the future. But 2010 we feel was a better year for the dairy than certainly 2009 was and that's where our optimism is based.

Okay. Everything else has been answered. Thank you.

Michael Zaremski, Credit Suisse.

Hi, guys, thanks for hosting the call.

Yes, thanks, Michael.

Two quick questions. Can you comment on inflows into non-accrual this quarter versus prior quarters? And will you seek to pay down any more funding agreements going forward if there was another use for the excess capital?

I'm sorry, the second part of your question, repeat that for me?

Would you be willing to pay off more of the higher cost FHLB agreements if there were other uses for excess capital?

We are constantly looking at trying to reduce our overall cost of funds. And so we currently have approximately $550 million in FHLB debt with an average duration of 4.4 years of that debt. The prepayment penalties are very expensive. And so we've got to balance that with our ongoing view of interest rates.

With that long of a duration we are sensitive to looking at repaying the debt because we don't know what interest rates are going to do. So I don't have any guidance whether we will continue to repay like we have in the past on that debt, but certainly we're always looking to reduce our cost of funds. And I'm sorry, your other question was --?

Are you able to comment on inflows into non-accrual this quarter versus last quarter?

We haven't provided any direct numbers on the inflows, but obviously in terms of non-accruals, you saw that our largest borrower went down by $42.9 million. And then when you look at the end of the quarter where we're -- I believe at the end of December we were at about -- on non-performing assets we were $162.3 million and then at the end of March we were $114.4 million.

So even if you take out that $43 million from the $162 million, you can see that we're still down from where we were at the end of the quarter by about -- what is that, roughly $5 million to $6 million, somewhere in that range. So no net-net-net, even without the largest relationship in there we're down quarter over quarter.

And, Rich, I just remembered, FDIC insurance fees with the new rate structure going into effect, do you guys expect a material benefit?

We've made some rough calculations, but we should be getting our statement from the FDIC here shortly to provide some guidance on that. But we don't have a number right now.

Okay, thanks, guys.

Doug Rainwater, Rodman & Renshaw.

Gentlemen, good morning. I think about everything that could have been asked has been asked at this point. But Let me, Chris, just throw one thing out, a question. You had mentioned in the release about a number of the business owners you talk to hesitating to invest based on economic outlook.

Chris, do you think there's any potential at all to focus on maybe more export driven businesses, things -- businesses that may have opportunities in Asia, South America especially with a weaker dollar? I just wonder, just given where you are in California and I think there are a lot of more export driven businesses, if you think there are opportunities there?

That's a real good question and the answer is there are opportunities there and we are focused on that. We have our own in-house international department. And through export letters of credit, we also do import letters of credit, standby letters of credit, foreign currency exchange, we can do hedging, all kinds of different things for our client. So that becomes a more important factor, especially if you're trying to drive C&I loans and lines of credit.

One of the things as we're trying to build our C&I portfolio of clients, we do look at a lot of these businesses as the small- to medium-sized business as great potential in that area. A lot of -- and my comment regarding the businesses not willing to invest -- well, I think most of the business that we bank have gotten lean and mean here over the last couple years and they've actually cut down some of their employee base. Most of them are making -- I'd say a good portion of them anyway are making money and they're comfortable yet cautious.

Where we're going to see real good loan growth is when these companies are feeling confident enough to buy new equipment, to expand their infrastructure, to hire new people and so forth, that's going to really drive the numbers. I think right now there is some hesitancy because of the uncertainty about tax rates, about the uncertainty about the state's economy.

But I will say that just from a feel standpoint, and I really don't have any numbers or anything to back this up, from a feel standpoint, it feels better than it did six months ago and I think our business owners are gaining more confidence.

We'll sit down and we'll do customer lunches where we'll bring in eight to 10 clients in our Board room and have a luncheon and just kind of listen to them talk about the economy, their business, what are the obstacles and so forth. And I do see more optimism now than I did six months ago at those meetings.

Okay, good. That's good color, Chris, I appreciate it. Like I said, I think everything else has been touched on and I would like to say again I appreciate you taking the time to host a call.

No, glad to do it, guys.

Joe Stieven, Stieven Capital.

Good morning, Chris. First of all good quarter. Everything has been asked except for one final thing. Regarding the SEC's investigation, it seemed like a lot of it was -- it's just speculation but it seems -- as an outsider maybe some of it was tied to a couple of your big loans that, especially the one that got reported in one article. With the fact that those are resolved have you guys provided all that information up there just sort of on your own, not even waiting for them to ask for anything?

Well, Joe, as I appreciate the question, that's a question I just can't answer for you. But we do continue to fully cooperate in all aspects with their inquiry and we hope for a speedy and positive outcome.

Okay. Chris, sorry to ask, but I had to. But good quarter and thanks for doing the call.

No problem, Joe.

(Operator Instructions). Julianna Balicka, KBW.

Good morning. Glad to see a solid quarter.

Thank you.

I have a couple of follow-up questions to some of the topics that have already been discussed. On the M&A front, you mentioned moving into adjacent or staying within your footprint. Any bigger picture or longer-term thoughts into moving up north along the Monterey Coast and into the Northern Bay Area?

You know, I think certainly our overall strategic objective is to be throughout the state of California. So that is something we might consider in the future. But right now, we are really focused on running our business day-to-day and as opportunities arise, we are certainly going to look at them.

But we are really more focused on in-market and in-market/adjacent market M&A. It's not something where we would leapfrog unless some fabulous opportunity came up. That's not really what we are focused on, but never say never, right?

Right. Okay, that makes sense. Then a couple more questions on the loan growth front. In terms of the C&I, you talked about customer optimism improving. Do you have any sense of C&I line utilizations, any changes there; any particular verticals within C&I that are standing out to you?

You know, we haven't really haven't seen much change in that area in terms of line utilizations and so forth. In fact, if you really think about it over the last year or two, we've probably seen line utilization go down as a lot of these companies are harvesting cash.

But I think, again, that's tied to the optimism and businesses willing to buy new equipment, expand their infrastructure and do all the different things that drive -- and do their own M&A, right, by other companies in their industry. That will dictate loan growth for us I think more than a lot of things.

That makes sense. And within that context, as loan growth returns and your borrowers are drawing down their own cash which is sitting in your deposits, how low will you allow your securities portfolio to run down to? Do you have a sense of the percentage of earning assets, a dollar amount or how much can that reduce to?

Well, you know what, I think our -- in terms of guidance on the security side, we really don't have any there. I do think this, I think there's a difference between buying securities on a levered basis and buying securities on a non-levered basis. I mean, as we have excess deposits we want to put those to work.

Our first objective is to put those in good quality relationship-based loans to our clients. As an alternative we look at securities. And again, we have a large $2-billion-plus securities portfolio where it represents over 30% of our total assets. But if you compare to that where we were a few years ago when our securities portfolio was maybe 43%, approximately 43% of our total assets, we've certainly come down quite a bit.

And our leverage, which at one time we were -- three or four years ago we were borrowing $2 billion -- approximately $2 billion against that portfolio, or at least borrowing $2 billion funding that portfolio, today our total borrowings are only $550 million. So we've really been able to delever our balance sheet. And so the securities part doesn't really bother us, but we would be very careful about levering up.

Okay, that makes sense. And then final question if I may. On the CRE loan growth you responded -- you had commented that you need to respond to some of the more aggressive pricing going on in the market and some of that competition, but of course not all responses will my sense in terms of the bottom line.

So looking at your loan portfolio, should we kind of expect it to be fairly flattish and then you would maybe kind of keep pay downs flat with new originations? Or do you think you might see some growth? I mean how should we think about that?

Well, you know what, I really -- again, it's hard to predict the future, a lot of this depends on the economy and what goes on there. I can tell you that as the leader of this Company and our team of sales people, we're actively out there in the marketplace looking for good loans. But we really feel that quality is still the key.

We've maintained our quality for a long period of time, been able to navigate through some very difficult economies in the '90s and certainly this economic downturn. So we don't want to sacrifice credit quality for loan growth. So we can't push the envelope beyond what's there in the marketplace. But we are feeling more optimistic and giving it the very best effort that we can.

Very good. Thank you very much for taking my questions.

Gerry Heffernan, Lord, Abbett & Company.

Hey, guys, and also from me thank you very much for having the call today. Actually my two areas of questions were just hit by the previous caller there. In regards to the undrawn lines, Chris, you did characterize historically recent history has been seeing them -- the utilization going down on that. Has that changed? Is the utilization still going down or has that flattened out?

I don't have any specific numbers for you on that. But our utilization is lower than historical levels at this point in time. But I do anticipate that if we get some economic wind behind us, hopefully that will turn around. And we have brought in a lot of good businesses. And one of the things I'm really proud of this Company in the last few years is we've done a good job collecting new clients and bringing them into the Bank and acclimating them.

A lot of these clients are currently non-borrowing clients or are borrowing money in a very small way. And with economic wind behind as and some more economic momentum, I would guess that a lot of these clients will begin using some of those lines and want to borrow money, but I just don't know when and how and if that will occur.

Okay, okay. And in regards to the discussion on commercial real estate lending, just kind of on a bigger picture standpoint, are you favorable to commercial real estate lending right now or would you like to see it increase as a percentage of the portfolio or decrease as a percentage of the portfolio? Because there's still a lot of opinions, diverse opinions being thrown out in the market as to the status of real estate and the status of commercial real estate, etc.

Commercial real estate has always been a big portion of our loan portfolio. And in California commercial real estate lending is -- if you look at the other California bank, it's a big part of most of their portfolios too because of the value of real estate and the fact that a lot of our businesses have owner occupied properties and have made money off those properties over time in seeing the value of those properties enhance.

And you might see a company with a 20,000 square foot manufacturing facility that is successful in then they go ahead and they expand into a 50,000 square foot manufacturing facility. A lot of those business owners may choose to hang on to that 20,000 square-foot building and lease it out to someone else. So those are loans that we all feel good about and it's part of our core lending at the Bank.

We need to keep disciplined in our underwriting of those credits and the loan to values, but right now when you look at the valuations of those properties compared to where they were three or four years ago, you can make the argument that a lot of these properties are at 65% or 70% value of what they once were at the peak.

So now if we lend 65% or 70% against those properties that are down 30%, we're even better off in terms of credit quality on a go-forward basis. Again, I can't predict the future, but there is a sentiment. So we do think commercial real estate absolutely is part of one of our three areas and I'd love to grow all of our three areas proportionately to each other and continue to have a similar mix to what we have right now.

Okay. Again, Chris, thank you very much.

At this time there are no more questions, so I would like to turn the call back to Mr. Myers.

Great, thank you. Well, I want to thank all of you for joining us today on our call and for taking the time to listen about CVB Financial Corp. and Citizens Business Bank. We truly appreciate your interest and look forward to speaking with you again on our second-quarter earnings conference call. In the meantime please feel free to contact me or Rich if you have any further questions and have a great day. Take care.

Thank you, sir, and thank you to management for your time also. The conference has now concluded. We thank you for attending today's presentation. At this time you may disconnect your lines.