UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2024
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 000-10140
CVB FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
California
95-3629339
(State or other jurisdiction of
Incorporation or organization)
(I.R.S. Employer
Identification No.)
701 North Haven Ave., Suite 350
Ontario, California
91764
(Address of principal executive offices)
(Zip Code)
(909) 980-4030
(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, No Par Value
CVBF
The Nasdaq Stock Market, LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, non-accelerated filer or smaller reporting company, or emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No
Number of shares of common stock of the registrant: 139,639,680 outstanding as of April 30, 2024.
TABLE OF CONTENTS
PART I –
FINANCIAL INFORMATION (UNAUDITED)
3
ITEM 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
41
CRITICAL ACCOUNTING POLICIES
OVERVIEW
42
ANALYSIS OF THE RESULTS OF OPERATIONS
44
ANALYSIS OF FINANCIAL CONDITION
51
ASSET/LIABILITY AND MARKET RISK MANAGEMENT
65
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
68
ITEM 4.
CONTROLS AND PROCEDURES
PART II –
OTHER INFORMATION
69
LEGAL PROCEEDINGS
ITEM 1A.
RISK FACTORS
70
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
71
DEFAULTS UPON SENIOR SECURITIES
MINE SAFETY DISCLOSURES
ITEM 5.
ITEM 6.
EXHIBITS
72
SIGNATURES
73
2
PART I – FINANCIAL INFORMATION (UNAUDITED)
GENERAL
Cautionary Note Regarding Forward-Looking Statements
Certain statements set forth herein constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “will likely result”, “aims”, “anticipates”, “believes”, “could”, “estimates”, “expects”, “hopes”, “intends”, “may”, “plans”, “projects”, “seeks”, “should”, “will,” “strategy”, “possibility”, and variations of these words and similar expressions help to identify these forward-looking statements, which involve risks and uncertainties that could cause actual results or performance to differ materially from those projected. These forward-looking statements are based on management’s current expectations and beliefs concerning future developments and their potential effects on the Company, including, without limitation, plans, strategies, goals and statements about the Company’s outlook regarding revenue and asset growth, financial performance and profitability, capital and liquidity levels, loan and deposit growth and retention, yields and returns, loan diversification and credit management, stockholder value creation, tax rates, the impact of economic developments, and the impact of acquisitions we have made or may make. Such statements involve inherent risks and uncertainties, many of which are difficult to predict and are generally beyond the control of the Company, and there can be no assurance that future developments affecting the Company will be the same as those anticipated by management. The Company cautions readers that a number of important factors in addition to those set forth below could cause actual results to differ materially from those expressed in, or implied or projected by, such forward-looking statements.
General risks and uncertainties include, but are not limited to, the following: the strength of the United States economy in general and the strength of the local economies in which we conduct business; the effects of, and changes in, trade, monetary, and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; inflation/deflation, interest rate, market, and monetary fluctuations; the effect of acquisitions we have made or may make, including, without limitation, the failure to obtain the necessary regulatory approvals, the failure to achieve the expected revenue growth and/or expense savings from such acquisitions, and/or the failure to effectively integrate an acquisition target, customers and key personnel into our operations; the timely development of competitive new products and services and the acceptance of these products and services by new and existing customers; the impact of changes in financial services policies, laws, and regulations, including those concerning taxes, banking, securities, and insurance, and the application thereof by regulatory bodies; the effectiveness of our risk management framework and quantitative models; changes in the levels of our nonperforming assets and charge-offs; the effect of changes in accounting policies and practices or accounting standards, as may be adopted from time-to-time by bank regulatory agencies, the U.S. Securities and Exchange Commission (“SEC”), the Public Company Accounting Oversight Board, the Financial Accounting Standards Board or other accounting standards setters; possible credit related impairments or declines in the fair value of loans and securities held by us; possible impairment charges to goodwill, including any impairment that may result from increased volatility in our stock price; changes in consumer spending, borrowing, and savings habits; the effects of our lack of a diversified loan portfolio, including the risks of geographic and industry concentrations; periodic fluctuations in commercial or residential real estate prices or values; our ability to attract and retain deposits or to access government or private lending facilities and other sources of liquidity; the possibility that we may reduce or discontinue the payments of dividends on our common stock; changes in the financial performance and/or condition of our borrowers; changes in the competitive environment among financial and bank holding companies and other financial service providers; technological changes in banking and financial services; geopolitical conditions, including acts or threats of terrorism, actions taken by the United States or other governments in response to acts or threats of terrorism, and/or military conflicts, which could impact business and economic conditions in the United States and abroad; catastrophic events or natural disasters, including earthquakes, drought, climate change or extreme weather events that may affect our assets, communications or computer services, customers, employees or third party vendors; public health crises and pandemics, and their effects on the economic and business environments in which we operate, including on our credit quality, business operations and employees, as well as the impact on general economic and financial market conditions; cybersecurity and fraud threats and the cost of defending against them, including the costs of compliance with potential legislation to combat cybersecurity and fraud threats at a state, national, or global level; our ability to recruit and retain key executives, board members and other employees, and changes in employment laws and regulations; unanticipated regulatory or legal proceedings or outcomes; and our ability to manage the risks involved in the foregoing.
Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in the Company's 2023 Annual Report on Form 10-K filed with the SEC and available at the SEC’s Internet site (http://www.sec.gov).
The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements, except as required by law. Any statements about future operating results, such as those concerning accretion and dilution to the Company’s earnings or shareholders, are for illustrative purposes only, are not forecasts, and actual results may differ.
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CVB FINANCIAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
(Unaudited)
March 31,
December 31,
2024
2023
Assets
Cash and due from banks
$
131,955
171,396
Interest-earning balances due from Federal Reserve
817,634
109,889
Total cash and cash equivalents
949,589
281,285
Interest-earning balances due from depository institutions
12,632
8,216
Investment securities available-for-sale, at fair value (with amortized cost of $3,333,603 at March 31, 2024, and $3,398,942 at December 31, 2023)
2,837,100
2,956,125
Investment securities held-to-maturity (with fair value of $2,044,031 at March 31, 2024, and $2,082,881 at December 31, 2023)
2,454,586
2,464,610
Total investment securities
5,291,686
5,420,735
Investment in stock of Federal Home Loan Bank (FHLB)
18,012
Loans and lease finance receivables
8,770,713
8,904,910
Allowance for credit losses
(82,817
)
(86,842
Net loans and lease finance receivables
8,687,896
8,818,068
Premises and equipment, net
43,448
44,709
Bank owned life insurance (BOLI)
310,744
308,706
Accrued interest receivable
47,891
48,994
Intangibles
13,853
15,291
Goodwill
765,822
Income taxes
180,750
163,968
Other assets
145,823
127,187
Total assets
16,468,146
16,020,993
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing
7,112,789
7,206,175
Interest-bearing
4,782,132
4,227,467
Total deposits
11,894,921
11,433,642
Customer repurchase agreements
275,720
271,642
Other borrowings
1,995,000
2,070,000
Deferred compensation
23,082
22,335
Accrued interest payable
45,404
23,268
Other liabilities
147,194
122,134
Total liabilities
14,381,321
13,943,021
Commitments and Contingencies
Stockholders' Equity
Common stock, authorized, 225,000,000 shares without par; issued and outstanding 139,641,884 at March 31, 2024, and 139,344,981 at December 31, 2023
1,288,755
1,288,899
Retained earnings
1,133,355
1,112,642
Accumulated other comprehensive (loss) income, net of tax
(335,285
(323,569
Total stockholders' equity
2,086,825
2,077,972
Total liabilities and stockholders' equity
See accompanying notes to the unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
(Dollars in thousands, except per share amounts)
Three Months Ended
Interest income:
Loans and leases, including fees
116,349
108,394
Investment securities:
Investment securities available-for-sale
21,446
19,596
Investment securities held-to-maturity
13,402
13,956
Total investment income
34,848
33,552
Dividends from FHLB stock
419
349
Interest-earning deposits with other institutions
6,073
491
Total interest income
157,689
142,786
Interest expense:
Deposits
21,366
5,365
Borrowings and customer repurchase agreements
23,862
11,693
Total interest expense
45,228
17,058
Net interest income before provision for credit losses
112,461
125,728
Provision for credit losses
—
1,500
Net interest income after provision for credit losses
124,228
Noninterest income:
Service charges on deposit accounts
5,036
5,344
Trust and investment services
3,224
2,914
Bankcard services
385
377
BOLI income
3,593
1,189
Other
1,875
3,378
Total noninterest income
14,113
13,202
Noninterest expense:
Salaries and employee benefits
36,401
35,247
Occupancy and equipment
5,565
5,450
Professional services
2,255
1,696
Computer software expense
3,525
3,408
Marketing and promotion
1,630
1,715
Provision for unfunded loan commitments
500
Amortization of intangible assets
1,438
1,720
8,957
5,145
Total noninterest expense
59,771
54,881
Earnings before income taxes
66,803
82,549
18,204
23,279
Net earnings
48,599
59,270
Other comprehensive (loss) income:
Unrealized (loss) gain on securities arising during the period, before tax
(17,073
40,702
Less: Income tax benefit (expense) related to items of other comprehensive income
5,357
(12,033
Other comprehensive (loss) income, net of tax
(11,716
28,669
Comprehensive income (loss)
36,883
87,939
Basic earnings per common share
0.35
0.42
Diluted earnings per common share
5
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Dollars and shares in thousands)
Three Months Ended March 31, 2024 and 2023
Common Shares Outstanding
Common Stock
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Total
Balance, January 1, 2024
139,345
Repurchase of common stock
(146
(2,573
Exercise of stock options
43
Shares issued pursuant to stock-based compensation plan
440
2,386
Cash dividends declared on common stock ($0.20 per share)
(27,886
Other comprehensive loss
Balance, March 31, 2024
139,642
Balance, January 1, 2023
139,819
1,300,466
1,002,847
(354,796
1,948,517
(918
(21,036
397
2,284
(28,007
Other comprehensive income
Balance, March 31, 2023
139,302
1,281,786
1,034,110
(326,127
1,989,769
6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Cash Flows from Operating Activities
Interest and dividends received
161,187
148,044
Service charges and other fees received
10,560
11,779
Interest paid
(23,092
(17,239
Net cash paid to vendors, employees and others
(71,181
(72,445
(19
Net cash provided by operating activities
77,474
70,120
Cash Flows from Investing Activities
Proceeds (purchases) of FHLB stock, net
(11,070
Net change in interest-earning balances from depository institutions
(4,416
(2,391
Proceeds from repayment of investment securities available-for-sale
82,060
89,465
Proceeds from maturity of investment securities available-for-sale
15,000
Proceeds from repayment and maturity of investment securities held-to-maturity
18,446
17,552
Purchases of investment securities held-to-maturity
(11,455
(2,026
Net (increase) decrease in equity investments
(1,599
2,680
Net decrease in loan and lease finance receivables
132,281
138,709
Purchase of premises and equipment
(166
(343
Proceeds from BOLI death benefit
882
Net cash provided by investing activities
231,033
232,579
Cash Flows from Financing Activities
Net increase (decrease) in other deposits
182,120
(553,692
Net increase (decrease) in time deposits
279,159
(10,683
Net (decrease) increase in other borrowings
(75,000
410,000
Net increase (decrease) in customer repurchase agreements
4,078
(75,196
Cash dividends on common stock
(28,030
(28,091
Proceeds from exercise of stock options
Net cash provided by (used in) financing activities
359,797
(278,626
Net increase in cash and cash equivalents
668,304
24,073
Cash and cash equivalents, beginning of period
203,461
Cash and cash equivalents, end of period
227,534
7
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Reconciliation of Net Earnings to Net Cash Provided by Operating Activities
Adjustments to reconcile net earnings to net cash provided by operating activities:
Increase in BOLI
(3,593
(1,189
Net amortization of premiums and discounts on investment securities
4,142
4,635
Accretion of discount for acquired loans, net
(1,042
(1,102
Valuation allowance on other real estate owned
28
Stock-based compensation
Depreciation and amortization, net
3,092
4,448
Change in other assets and liabilities
(226
Total adjustments
28,875
10,850
Supplemental Disclosure of Non-cash Investing Activities
Transfer of loans to other real estate owned
675
8
1. BUSINESS
The condensed consolidated financial statements include CVB Financial Corp. (referred to herein on an unconsolidated basis as “CVB” and on a consolidated basis as “we”, “our” or the “Company”) and its wholly owned subsidiary: Citizens Business Bank (the “Bank” or “CBB”), after elimination of all intercompany transactions and balances. The Company has one inactive subsidiary, Chino Valley Bancorp.
The Company’s primary operations are related to traditional banking activities. This includes the acceptance of deposits and the lending and investing of money through the operations of the Bank. The Bank also provides trust and investment-related services to customers through its CitizensTrust Division. The Bank’s customers consist primarily of small to mid-sized businesses and individuals located throughout California. As of March 31, 2024, the Bank operated 62 banking centers and three trust office locations. The Company is headquartered in the city of Ontario, California.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for Form 10-Q and conform to practices within the banking industry and include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting. The accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of financial results for the interim periods presented. The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results for the full year. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements, accounting policies and financial notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC. A summary of the significant accounting policies consistently applied in the preparation of the accompanying unaudited condensed consolidated financial statements follows.
Reclassification — Certain amounts in the prior periods’ unaudited condensed consolidated financial statements and related footnote disclosures have been reclassified to conform to the current presentation with no impact on previously reported net income or stockholders’ equity.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Except as discussed below, our accounting policies are described in Note 3 – Summary of Significant Accounting Policies, of our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023 as filed with the SEC (“Form 10-K”).
Use of Estimates in the Preparation of Financial Statements — The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for credit losses. Other significant estimates, which may be subject to change, include fair value determinations and disclosures, impairment of investments, goodwill, loans, as well as valuation of deferred tax assets.
4. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities are summarized below. The majority of securities held are available-for-sale securities with fair value based on quoted prices for similar assets in active markets or quoted prices for identical assets in markets that are not active. Estimated fair values were obtained from an independent pricing service based upon market quotes.
March 31, 2024
Amortized Cost
Gross Unrealized Holding Gain
Gross Unrealized Holding Loss
Fair Value
Total Percent
Investment securities available-for-sale:
Government agency/GSE
32,644
(4
32,640
1.15
%
Mortgage-backed securities
2,766,695
25
(367,613
2,399,107
84.56
CMO/REMIC
495,576
(116,682
378,894
13.35
Municipal bonds
26,480
36
(1,372
25,144
0.89
Other securities
1,315
0.05
Unallocated portfolio layer fair value basis adjustments (1)
10,893
(10,893
0.00
Total available-for-sale securities
3,333,603
61
(496,564
100.00
Investment securities held-to-maturity:
526,752
(103,672
423,080
21.46
652,864
(109,336
543,528
26.60
798,226
(162,528
635,698
32.52
465,289
2,223
(37,242
430,270
18.96
11,455
0.46
Total held-to-maturity securities
(412,778
2,044,031
December 31, 2023
32,229
24
32,253
1.09
2,843,744
(336,107
2,507,679
84.83
502,234
(112,872
389,362
13.17
26,477
46
(888
25,635
0.87
1,196
0.04
(6,938
6,938
3,398,942
7,050
(449,867
530,656
(97,972
432,684
21.53
663,090
(97,436
565,654
26.90
802,892
(156,155
646,737
32.58
467,972
3,438
(33,604
437,806
18.99
(385,167
2,082,881
11
The following table provides information about the amount of interest income earned on investment securities which is fully taxable and which is exempt from regular federal income tax.
Taxable
21,280
19,428
Tax-advantaged
166
168
Total interest income from available-for-sale securities
10,984
11,507
2,418
2,449
Total interest income from held-to-maturity securities
Total interest income from investment securities
Approximately 90% of the total investment securities portfolio at March 31, 2024 represents securities issued by the U.S. government or U.S. government-sponsored enterprises, with the implied guarantee of payment of principal and interest. The remaining securities are predominately AA or better general-obligation municipal bonds. The allowance for credit losses for held-to-maturity investment securities under the CECL model was zero at March 31, 2024 and December 31, 2023.
The following table presents the Company’s available-for-sale and held-to-maturity investment securities, by investment category, in an unrealized loss position for which an allowance for credit losses has not been recorded as of March 31, 2024 and December 31, 2023.
Less Than 12 Months
12 Months or Longer
Gross Unrealized Holding Losses
22
2,397,803
2,397,825
378,893
6,525
(145
17,743
(1,227
24,268
39,187
(149
2,794,439
(485,522
2,833,626
(485,671
543,529
46,060
(649
289,996
(36,593
336,056
1,892,303
(412,129
1,938,363
12
48
2,506,162
2,506,210
389,359
3,286
(17
18,105
(871
21,391
3,334
2,913,626
(449,850
2,916,960
565,655
20,609
(200
293,467
(33,404
314,076
1,938,543
(384,967
1,959,152
At March 31, 2024 investment securities with carrying values of $2.51 billion were pledged to secure various types of deposits, including $1.37 billion of public funds. In addition, investment securities with carrying values of $2.75 billion were pledged to secure $372.3 million for repurchase agreements, $1.88 billion for outstanding borrowings, $446 million for unused borrowing capacity and approximately $51 million for other purposes as required or permitted by law.
At December 31, 2023, investment securities with carrying values of $2.26 billion were pledged to secure various types of deposits, including $1.38 billion of public funds. In addition, investment securities with carrying values of $3.02 billion were pledged to secure $372.5 million for repurchase agreements, $1.8 billion for outstanding borrowings, $796 million for unused borrowing capacity and approximately $51 million for other purposes as required or permitted by law.
The amortized cost and fair value of debt securities at March 31, 2024, by contractual maturity, are shown in the table below. Although mortgage-backed and CMO/REMIC securities have weighted average remaining contractual maturities of approximately 23 years, expected maturities will differ from contractual maturities because borrowers may have the right to prepay such obligations without penalty. Mortgage-backed and CMO/REMIC securities are included in maturity categories based upon estimated average lives which incorporate estimated prepayment speeds.
Available-for-sale
Held-to-maturity
Due in one year or less
36,409
36,328
3,565
3,554
Due after one year through five years
264,422
241,797
52,525
50,505
Due after five years through ten years
2,519,475
2,164,588
317,491
280,289
Due after ten years
513,297
394,387
2,081,005
1,709,683
The investment in FHLB stock is periodically evaluated for impairment based on, among other things, the capital adequacy of the FHLB and its overall financial condition. No impairment losses have been recorded through March 31, 2024.
13
5. LOANS AND LEASE FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES
The following table provides a summary of total loans and lease finance receivables by type.
Commercial real estate
6,720,538
6,784,505
Construction
58,806
66,734
SBA
268,320
270,619
SBA - Paycheck Protection Program (PPP)
2,249
2,736
Commercial and industrial
963,120
969,895
Dairy & livestock and agribusiness
351,624
412,891
Municipal lease finance receivables
72,032
73,590
SFR mortgage
276,475
269,868
Consumer and other loans
57,549
54,072
Total loans, at amortized cost
Less: Allowance for credit losses
Total loans and lease finance receivables, net
As of March 31, 2024, 80.44% of the Company’s total loan portfolio consisted of real estate loans, with commercial real estate loans representing 76.62% of total loans. The Company’s real estate loans and construction loans are secured by real properties primarily located in California. As of March 31, 2024, $498.2 million, or 7.41% of the total commercial real estate loans included loans secured by farmland, compared to $497.7 million, or 7.34%, at December 31, 2023. The loans secured by farmland included $121.4 million for loans secured by dairy & livestock land and $376.8 million secured by agricultural land at March 31, 2024, compared to $122.4 million for loans secured by dairy & livestock land and $375.3 million for loans secured by agricultural land at December 31, 2023. As of March 31, 2024, dairy & livestock and agribusiness loans of $351.6 million were comprised of $308.5 million for dairy & livestock loans and $43.1 million for agribusiness loans, compared to $412.9 million were comprised of $374.9 million for dairy & livestock loans and $38.0 million of agribusiness loans at December 31, 2023.
At March 31, 2024 and December 31, 2023, loans totaling $4.24 billion and $4.04 billion, respectively, were pledged to secure the borrowings and available lines of credit from the FHLB and the Federal Reserve Bank.
There were no outstanding loans held-for-sale as of March 31, 2024 and December 31, 2023.
14
Credit Quality Indicators
We monitor credit quality by evaluating various risk attributes and utilize such information in our evaluation of the appropriateness of the allowance for credit losses. Internal credit risk ratings, within our loan risk rating system, are the credit quality indicators that we most closely monitor.
An important element of our approach to credit risk management is our loan risk rating system. The originating officer assigns each loan an initial risk rating, which is reviewed and confirmed or changed, as appropriate, by credit management. Approvals are made based upon the amount of inherent credit risk specific to the transaction and are reviewed for appropriateness by senior line and credit management personnel. Credits are monitored by line and credit management personnel for deterioration or improvement in a borrower’s financial condition, which would impact the ability of the borrower to perform under the contract. Risk ratings are adjusted as necessary.
Loans are risk rated into the following categories: Pass, Special Mention, Substandard, Doubtful and Loss. Each of these groups is assessed for the proper amount to be used in determining the adequacy of our allowance for losses. These categories can be described as follows:
Pass — These loans, including loans on the Bank’s internal watch list, range from minimal credit risk to lower than average, but still acceptable, credit risk. Watch list loans usually require more than normal management attention. Loans on the watch list may involve borrowers with adverse financial trends, higher debt/equity ratios, or weaker liquidity positions, but not to the degree of being considered a defined weakness or problem loan where risk of loss may be apparent.
Special Mention — Loans assigned to this category have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or the Company’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
Substandard — Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Company will sustain some loss if deficiencies are not corrected.
Doubtful — Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or the liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.
Loss — Loans classified as loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this asset with insignificant value even though partial recovery may be affected in the future.
15
The following table summarizes loans by type and origination year, according to our internal risk ratings as of the dates presented.
Origination Year
Revolving loans amortized
Revolving loans converted to
2022
2021
2020
Prior
cost basis
term loans
Commercial real estate loans:
Risk Rating:
Pass
54,653
441,596
1,299,240
1,120,686
866,833
2,457,881
179,725
38,940
6,459,554
Special Mention
678
4,556
3,867
18,616
19,117
121,713
2,366
170,913
Substandard
669
8,105
2,891
32,952
44,705
749
90,071
Doubtful & Loss
Total Commercial real estate loans:
55,331
446,821
1,311,212
1,142,193
918,902
2,624,299
182,840
Current YTD Period: Gross charge-offs
2,258
Construction loans:
2,513
12,277
22,289
8,066
11,549
56,697
-
2,109
Total Construction loans:
24,398
SBA loans:
10,759
19,621
47,896
50,594
24,417
102,067
255,354
1,616
4,767
3,010
9,393
3,573
Total SBA loans:
49,512
29,184
108,650
90
SBA - PPP loans:
591
1,658
Total SBA - PPP loans:
Commercial and industrial loans:
28,523
135,426
136,353
90,310
82,495
151,348
296,236
4,688
925,379
9,498
1,124
1,595
828
7,989
8,133
5,279
34,446
239
45
2,637
374
3,295
Total Commercial and industrial loans:
144,924
137,716
91,905
83,323
159,382
307,006
10,341
300
1,186
431
1,917
16
Dairy & livestock and agribusiness loans:
685
917
262
266,157
270
268,291
432
1,335
79,044
80,811
60
2,380
82
2,522
Total Dairy & livestock and agribusiness loans:
2,020
322
347,581
352
Municipal lease finance receivables loans:
193
5,719
25,803
5,733
34,402
71,850
182
Total Municipal lease finance receivables loans:
34,584
SFR mortgage loans:
11,528
21,229
60,524
43,305
43,832
93,044
273,462
750
913
438
2,101
604
308
912
Total SFR mortgage loans:
21,979
44,745
94,086
Consumer and other loans:
1,636
4,037
3,483
2,492
572
1,035
42,049
1,256
56,560
214
173
391
598
Total Consumer and other loans:
2,706
42,053
2,027
1
Total Loans, at amortized cost:
107,295
624,422
1,565,492
1,356,755
1,034,523
2,840,039
795,716
45,154
8,369,396
15,236
6,607
21,760
25,625
133,332
89,547
5,452
298,237
8,344
5,000
48,987
5,766
1,362
103,080
Total Loans at amortized cost:
107,973
640,327
1,580,443
1,383,515
1,093,100
3,022,358
891,029
51,968
Current YTD Period: Total gross charge-offs
3,534
4,267
17
2019
447,991
1,315,563
1,133,331
885,590
497,541
2,041,329
171,223
38,568
6,531,136
3,241
3,897
15,868
19,368
43,824
74,673
2,911
163,782
744
8,127
33,401
12,986
30,637
801
89,587
451,976
1,327,587
1,152,090
938,359
554,351
2,146,639
174,935
1,274
15,046
22,288
8,058
17,938
64,604
2,130
24,418
20,701
48,212
51,038
29,306
6,236
101,856
257,349
1,627
4,784
1,132
1,760
9,303
3,218
3,967
49,839
34,090
8,117
106,834
288
699
2,037
141,080
143,847
100,059
88,743
68,352
94,027
289,539
5,460
931,107
7,829
738
745
552
4,114
3,986
10,529
5,347
33,840
257
89
1,296
2,487
819
4,948
148,909
144,842
100,804
89,295
72,555
99,309
302,555
11,626
109
18
296
1,586
931
80
208
337,525
340,626
448
69,232
69,705
2,500
2,560
105
268
409,257
5,735
5,981
31,622
73,408
31,804
22,248
61,070
43,573
44,076
28,049
67,750
266,766
789
918
544
327
2,578
200
324
524
23,037
44,994
28,593
68,277
4,911
4,122
2,707
702
644
486
38,595
871
53,038
246
423
611
2,953
498
38,600
1,642
638,501
1,593,595
1,381,084
1,065,424
605,169
2,337,278
854,820
44,899
8,520,770
12,307
6,262
18,989
25,622
49,639
80,928
82,676
5,520
281,943
8,384
13,824
35,423
5,789
1,741
102,197
651,552
1,608,241
1,402,964
1,124,447
668,632
2,453,629
943,285
52,160
292
113
405
Allowance for Credit Losses ("ACL")
The Company's allowance models calculate reserves over the average life of the loan, which includes the remaining time to maturity, adjusted for estimated prepayments applied as an adjustment to our commercial real estate and commercial and industrial loans. Our allowance for credit losses is based upon lifetime loss rate models developed from an estimation framework that uses historical lifetime loss experiences to derive loss rates at a collective pool level. We measure the expected credit losses on a collective (pooled) basis for those loans that share similar risk characteristics. We have three collective loan pools: Commercial Real Estate, Commercial and Industrial, and Consumer. A substantial portion of the ACL relates to loans within the Commercial Real Estate and Commercial and Industrial methodologies, each evaluated on a collective basis. Our ACL amounts are largely driven by portfolio characteristics, including loss history, internal risk grading, various risk attributes, and the economic outlook for certain macroeconomic variables. Risk attributes for commercial real
19
estate loans include Original Loan to Value ratios ("OLTV"), origination year, loan seasoning, and macroeconomic variables that include Real GDP growth, commercial real estate price index and unemployment rate. Risk attributes for commercial and industrial loans include internal risk ratings, borrower industry sector, loan credit spreads and macroeconomic variables that include unemployment rate and BBB spread. The macroeconomic variables for Consumer include unemployment rate and GDP. The Commercial Real Estate methodology is applied over commercial real estate loans, a portion of construction loans, and a portion of SBA loans. The Commercial and Industrial methodology is applied over a substantial portion of the Company’s commercial and industrial loans, all dairy & livestock and agribusiness loans, municipal lease receivables, as well as the remaining portion of SBA loans (excluding Paycheck Protection Program loans). The Consumer methodology is applied to SFR mortgage loans, consumer loans, as well as the remaining construction loans. In addition to determining the quantitative life of loan loss rate to be applied against the amortized cost basis of the portfolio segments, management reviews current conditions and forecasts to determine whether adjustments are needed to ensure that the life of loan loss rates reflect both the current state of the portfolio, and expectations for macroeconomic changes. The Company’s ACL estimate incorporates a reasonable and supportable forecast of various macroeconomic variables over the remaining average life of our loans. This forecast incorporates an assumption that each macroeconomic variable will revert to a long-term expectation, starting in years two through three, of the reasonable and supportable forecast period, with the reversion largely completed within the first five years of the forecast. The economic forecast is based on probability weighted scenarios to address macroeconomic uncertainty. Our methodology for assessing the appropriateness of the allowance is reviewed on a regular basis and considers overall risks in the Bank’s loan portfolio. Refer to Note 3 – Summary of Significant Accounting Policies included in our Annual Report on Form 10-K for the year ended December 31, 2023 for a more detailed discussion concerning the allowance for credit losses.
The ACL totaled $82.8 million at March 31, 2024, compared to $86.8 million at December 31, 2023. The $4.0 million decrease in the ACL from December 31, 2023 to March 31, 2024 is comprised of $4.0 in net charge-offs. At March 31, 2024, the ACL as a percentage of total loans and leases, at amortized cost, was 0.94%. This compares to 0.97% at December 31, 2023. Our economic forecast continues to be a blend of multiple forecasts produced by Moody’s. These U.S. economic forecasts include a baseline forecast, as well as downside forecasts. The baseline forecast continues to represent the largest weighting in our multi-weighted forecast scenario, with downside risks weighted among multiple forecasts. As of March 31, 2024, the resulting weighted forecast resulted in Real GDP growth declining in the third and fourth quarters of 2024. Real GDP growth is forecasted to be below 2% for 2025, before returning to growth between 2% and 2.5% in 2026. Commercial real estate values are forecasted to continue their decline until reaching their lowest level in the third quarter 2024. Unemployment is forecasted to rise in 2024, peaking around 6% in the first quarter of 2025. The unemployment rate is forecasted to stay elevated through 2026.
Management believes that the ACL was appropriate at March 31, 2024 and December 31, 2023. Due to inflationary pressures, high interest rates, lower commercial real estate values, and geopolitical events, no assurance can be given that economic conditions that adversely affect the Company’s service areas or other circumstances will not be reflected in increased provisions for credit losses in the future.
The following tables present the balance and activity related to the allowance for credit losses for held-for-investment loans by type for the periods presented.
Three Months Ended March 31, 2024
Ending Balance December 31, 2023
Charge-offs
Recoveries
Provision for (Recapture of) Credit Losses
Ending Balance March 31, 2024
69,466
(2,258
2,237
69,445
1,277
2,679
(90
63
(121
2,531
9,116
(1,917
176
(2,316
5,059
3,098
154
3,252
210
(16
194
535
(52
483
461
(2
98
557
Total allowance for credit losses
86,842
(4,267
242
82,817
20
Three Months Ended March 31, 2023
Ending Balance December 31, 2022
Ending Balance March 31, 2023
64,806
2,311
67,117
1,702
(31
1,674
2,809
(94
2,729
10,206
(1,241
8,963
4,400
366
4,770
(13
283
409
532
595
85,117
(110
33
86,540
Past Due and Nonperforming Loans
We seek to manage asset quality and control credit risk through diversification of the loan portfolio and the application of policies designed to promote sound underwriting and loan monitoring practices. The Bank’s Credit Management Division is responsible for monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures across the Bank. Reviews of nonperforming, past due loans and larger credits, designed to identify potential charges to the allowance for credit losses, are conducted on an ongoing basis. These reviews consider such factors as the financial strength of borrowers and any guarantors, the value of the applicable collateral, loan loss experience, estimated credit losses, growth in the loan portfolio, prevailing economic conditions and other factors. Refer to Note 3 – Summary of Significant Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2023, for additional discussion concerning the Bank’s policy for past due and nonperforming loans.
The following table presents the recorded investment in, and the aging of, past due loans (including nonaccrual loans), by type of loans as of the dates presented.
30-59 Days Past Due
60-89 Days Past Due
Greater than 89 Days Past Due
Total Past Due
Loans Not Past Due
Total Loans and Financing Receivables
Owner occupied
2,526
2,407,593
2,410,119
Non-owner occupied
11,295
5,960
10,661
27,916
4,282,503
4,310,419
Speculative (1)
52,256
Non-speculative
6,550
408
54
462
267,858
SBA - PPP
2,493
960,627
Total loans at amortized cost
14,235
33,397
8,737,316
21
2,505
2,805
2,430,447
2,433,252
531
547
4,350,706
4,351,253
57,921
8,813
108
969
1,077
269,542
4,253
4,265
965,630
201
269,667
54,054
8,258
8,913
8,895,997
Amortized cost of our finance receivables and loans that are on nonaccrual status, including loans with no allowance are presented as of March 31, 2024 and December 31, 2023 by type of loan.
Nonaccrual with No Allowance for Credit Losses
Total Nonaccrual (1) (3)
Loans Past Due Over 89 Days Still Accruing
Speculative (2)
2,727
13,810
Total Nonaccrual (1)
548
12,935
787
908
4,509
323
5,131
21,302
23
Collateral Dependent Loans
A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. The following table presents the recorded investment in collateral-dependent loans by type of loans as of the date presented.
Number of Loans
Real Estate
Business Assets
Dependent on Collateral
Total collateral-dependent loans
11,083
15,440
220
392
2,950
1,167
16,965
3,170
Reserve for Unfunded Loan Commitments
The allowance for off-balance sheet credit exposure relates to commitments to extend credit, letters of credit and undisbursed funds on lines of credit. The Company evaluates credit risk associated with the off-balance sheet loan commitments in the same manner as it evaluates credit risk associated with the loan and lease portfolio. The Bank's ACL methodology produced an allowance of $7.5 million for the off-balance sheet credit exposures as of March 31, 2024. There was no provision for unfunded loan commitments for the three months ended March 31, 2024, compared to $500,000 in provision for the three months ended March 31, 2023. As of March 31, 2024 and December 31, 2023, the balance in this reserve was $7.5 million and was included in other liabilities.
Modifications of Loans to Borrowers Experiencing Financial Difficulty
The Company adopted Accounting Standards Update (“ASU”) 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”) effective January 1, 2023. The amendments in ASU 2022-02 eliminated the recognition and measurement of TDRs and enhanced disclosures for loan modifications to borrowers experiencing financial difficulty.
There were three loans to borrowers experiencing financial difficulty that were modified during the three months ended March 31, 2024 with an amortized cost totaling $1.3 million as of March 31, 2024, including one dairy & livestock and agribusiness loan of $962,000 and two commercial and industrial loans totaling $350,000.
The tables below reflect the amortized cost of loans by type made to borrowers experiencing financial difficulty that were modified as of March 31, 2024 and March 31, 2023, and the financial effect of those modifications.
Term Extension
Combination-Term Extension and Interest Rate Reduction
Amortized Cost Basis
% of Total Class of Financing Receivables
Commercial real estate loans
2,466
0.03
686
0.01
3,152
1,644
0.02
1,886
5,727
0.07
9,837
928
10,765
March 31, 2023
1,587
2,250
1,999
5,836
Loan Type
Financial Effect
Added a weighted-average 1.3 years to the life of loans, which reduced monthly payment amounts for the borrowers.
Added a weighted-average 0.7 years to the life of loans, which reduced monthly payment amounts for the borrowers.
Added a weighted-average 0.6 years to the life of loans, which reduced monthly payment amounts for the borrowers.
Added a weighted-average 1.1 years to the life of loans, which reduced monthly payment amounts for the borrowers.
Added a weighted-average 0.8 years to the life of loans, which reduced monthly payment amounts for the borrowers.
Added a weighted-average 1.2 years to the life of loans, which reduced monthly payment amounts for the borrowers.
As of March 31, 2024, the Company did not have any loans made to borrowers experiencing financial difficulty that were modified during the first quarter of 2024 that subsequently defaulted. Payment default is defined as movement to nonaccrual (nonperforming) status, foreclosure or charge-off, whichever occurs first.
The following table presents the recorded investment in, and the aging of, past due loans at amortized cost (including nonaccrual loans), by type of loans, made to borrowers experiencing financial difficulty as of March 31, 2024.
Payment Status (amortized cost basis)
Current
30-89 Days Past Due
90+ Days Past Due
26
6. BORROWINGS
Customer Repurchase Agreements
The Bank offers a repurchase agreement product to its customers. This product, known as Citizens Sweep Manager, sells our investment securities overnight to our customers under an agreement to repurchase them the next day at a price which reflects the market value of the use of funds by the Bank for the period concerned. These repurchase agreements are signed with customers who want to invest their excess deposits, above a pre-determined balance in a demand deposit account, in order to earn interest. As of March 31, 2024, total funds borrowed under these agreements were $275.7 million with a weighted average interest rate of 0.41%, compared to $271.6 million with a weighted average interest rate of 0.29% at December 31, 2023.
Federal Home Loan Bank Advances and Other Borrowings
As of March 31, 2024, total borrowings of $2.0 billion, consisted of one-year advances from the Federal Reserve’s Bank Term Funding Program (“BTFP”) at a cost of approximately 4.75%. The BTFP advances include maturities of $695 million in May and $1.3 billion in January of 2025.
As of December 31, 2023, total short-term borrowings of $2.07 billion, consisted of $1.91 billion of one-year advances from the Federal Reserve’s BTFP at a cost of 4.78% and $160 million of short-term FHLB advances, at an average cost of approximately 5.7%. The BTFP advances included maturities of $695 million in May and $1.2 billion in December of 2024.
At March 31, 2024, loans with a carrying value of $4.24 billion were pledged to secure available lines of credit from the FHLB and the Federal Reserve Bank.
27
7. EARNINGS PER SHARE RECONCILIATION
Basic earnings per common share are computed by dividing income allocated to common stockholders by the weighted-average number of common shares outstanding during each period. The computation of diluted earnings per common share considers the number of shares issuable upon the assumed exercise of outstanding common stock options. Antidilutive common shares are not included in the calculation of diluted earnings per common share. For the three months ended March 31, 2024 and March 31, 2023, shares deemed to be antidilutive, and thus excluded from the computation of earnings per common share, were 1,021,000 and 348,000, respectively.
The table below shows earnings per common share and diluted earnings per common share, and reconciles the numerator and denominator of both earnings per common share calculations.
Three Months EndedMarch 31,
(In thousands, except per share amounts)
Earnings per common share:
Less: Net earnings allocated to restricted stock
407
Net earnings allocated to common shareholders
48,275
58,863
Weighted average shares outstanding
138,429
138,592
Diluted earnings per common share:
Net income allocated to common shareholders
Incremental shares from assumed exercise of outstanding options
174
361
Diluted weighted average shares outstanding
138,603
138,953
8. FAIR VALUE INFORMATION
Fair Value Hierarchy
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The valuation methodologies for financial assets and liabilities measured at fair value on a recurring and non-recurring basis are described in Note 18 — Fair Value Information, included in our Annual Report on Form 10-K for the year ended December 31, 2023.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The tables below present the balances of assets and liabilities measured at fair value on a recurring basis as of the dates presented.
Carrying Value at March 31, 2024
Quoted Pricesin Active Markets forIdentical Assets(Level 1)
Significant Other Observable Inputs(Level 2)
Significant Unobservable Inputs(Level 3)
Description of assets
Investment securities - AFS:
Total investment securities - AFS
Derivatives not designated as hedging instruments:
Interest rate swaps
38
Derivatives designated as hedging instruments:
Fair value hedges: interest rate swaps
Cash flow hedges: interest rate swaps
2,848,820
Description of liability
29
Carrying Value at December 31, 2023
112
2,956,237
30
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
We may be required to measure certain assets at fair value on a non-recurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower of cost or fair value accounting or write-downs of individual assets.
For assets measured at fair value on a non-recurring basis that were held on the balance sheet at March 31, 2024 and December 31, 2023, respectively, the following tables provide the level of valuation assumptions used to determine each adjustment and the carrying value of the related assets that had losses during the period.
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Total Losses For the Three Months Ended March 31, 2024
Loans:
13,813
211
4,612
5,787
Other real estate owned
Asset held-for-sale
24,731
2,300
Total Losses For the Year Ended December 31, 2023
18,678
2,128
995
57
6,092
3,510
4,700
30,465
5,722
31
Fair Value of Financial Instruments
The following disclosure presents estimated fair value of our financial instruments. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to develop the estimates of fair value. Accordingly, the estimates presented below are not necessarily indicative of the amounts the Company may realize in a current market exchange as of March 31, 2024 and December 31, 2023, respectively. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Carrying
Estimated Fair Value
Amount
Level 1
Level 2
Level 3
Total loans, net of allowance for credit losses
8,273,529
Liabilities
4,777,393
Borrowings
2,270,720
2,204,434
32
8,503,518
4,222,773
2,341,642
2,283,631
The fair value estimates presented herein are based on pertinent information available to management as of March 31, 2024 and December 31, 2023. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and therefore, current estimates of fair value may differ significantly from the amounts presented above.
9. DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives Not Designated as Hedging Instruments
The Bank is exposed to certain risks relating to its ongoing business operations and utilizes interest rate swap agreements (“swaps”) as part of its asset/liability management strategy to help manage its interest rate risk position. As of March 31, 2024, the Bank has entered into 114 interest-rate swap agreements with customers with a notional amount totaling $390.3 million. The Bank then entered into identical offsetting swaps with counterparties. The swap agreements are not designated as hedging instruments. The purpose of entering into offsetting derivatives not designated as a hedging instrument is to provide the Bank a variable-rate loan receivable and to provide the customer the financial effects of a fixed-rate loan without creating significant volatility in the Bank’s earnings.
The structure of the swaps is as follows. The Bank enters into an interest rate swap with its customers in which the Bank pays the customer a variable rate and the customer pays the Bank a fixed rate, therefore allowing customers to convert variable rate loans to fixed rate loans. At the same time, the Bank enters into a swap with a counterparty bank in which the Bank pays the counterparty a fixed rate and the counterparty in return pays the Bank a variable rate. The net effect of the transaction allows the Bank to receive interest on the loan from the customer at a variable rate based on SOFR plus a spread. The changes in the fair value of the swaps primarily offset each other and therefore should not have a significant impact on the Company’s results of operations, although the Company does incur credit and counterparty risk with respect to performance on the swap agreements by the Bank’s customer and counterparty, respectively. These instruments contain language outlining collateral pledging requirements for each counterparty, in which collateral must be posted if market value exceeds certain agreed upon threshold limits. Cash or securities are pledged as collateral. Our interest rate swap derivatives are subject to a master netting arrangement with our counterparties. None of our derivative assets and liabilities are offset in the Company’s condensed consolidated balance sheet.
We believe our risk of loss associated with our counterparty borrowers related to interest rate swaps is mitigated as the loans with swaps are underwritten to take into account potential additional exposure, although there can be no assurances in this regard since the performance of our swaps is subject to market and counterparty risk.
Derivatives Designated as Hedging Instruments
Fair Value Hedges
To manage interest rate risk on our AFS securities portfolio, we have entered into pay-fixed, receive-floating interest rate swap contracts to hedge against exposure to changes in the fair value of such securities resulting from changes in interest rates. We designate these interest rate swap contracts as fair value hedges that qualify for hedge accounting under ASC 815, Derivatives and Hedging. We elected to account for the fair value hedges using the portfolio layer method in accordance with ASU 2022-01. We record the interest rate swaps in the line items "accrued interest receivable and other assets" and "other liabilities" on our consolidated balance sheet. For qualifying fair value hedges, both the changes in the fair value of the derivative and the portion of the fair value adjustments associated with the portfolio layer attributable to the hedged risk are recognized into earnings as they occur. Derivative amounts impacting earnings are recognized consistent with the classification of the hedged item in the line item "investment securities available for sale" as part of interest income, a component of consolidated net income.
In June 2023, fair value hedging transactions were executed in which $1 billion notional pay-fixed interest rate swaps were consummated with original maturities ranging from four to five years, wherein the Company pays a weighted average fixed rate of approximately 3.8% and receives daily SOFR. The fair value of these instruments totaled $10.9 million and were reflected as an asset at March 31, 2024.
Cash Flow Hedges
To manage our interest rate risk associated with brokered CDs, FHLB advances or other fixed rate advances for specified periods, the Company enters into interest rate derivative contracts that are designated as qualifying cash flow hedges to hedge the exposure to variability in expected future cash flows attributable to changes in a contractually specified interest rates. During the first quarter of 2024, $300 million of 3-month term brokered CDs were issued and cash flow hedging transactions were also executed in which $300 million notional pay-fixed interest rate swaps were consummated with maturities of three years, wherein the Company pays a weighted average fixed rate of approximately 4.2% and receives daily SOFR.
To qualify for hedge accounting, a formal assessment is prepared to determine whether the hedging relationship, both at inception and on an ongoing basis, is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk during the term of the hedge if a cash flow hedge. At inception a statistical regression analysis is prepared to determine hedge effectiveness. At each reporting period thereafter, a statistical regression or qualitative analysis is performed to determine hedge effectiveness. If it is determined that hedge effectiveness has not been or will not continue to be highly effective, then hedge accounting ceases and any gain or loss in AOCI is recognized in earnings immediately. The cash flow hedges are recorded at fair value in other assets and other liabilities on the consolidated balance sheets with changes in fair value recorded in AOCI, net of tax. All related cash flows are reported in the operating activities section of the consolidated statement of cash flows. Amounts recorded to AOCI are reclassified into earnings in the same period in which the hedged asset or liability affects earnings and are presented in the same income statement line item as the earnings effect of the hedged asset or liability.
34
Balance Sheet Classification of Derivative Financial Instruments
As of March 31, 2024 and December 31, 2023, the notional amount, the location of the asset and liability, and their respective fair values, are summarized in the tables below.
Asset Derivatives
Liability Derivatives
Notional
Balance Sheet Location
390,307
Total derivatives
1,000,000
300,000
11,682
394,359
The Effect of Derivative Financial Instruments on the Condensed Consolidated Statements of Earnings
The following table summarizes the effect of derivative financial instruments on the condensed consolidated statements of earnings for the periods presented.
Location of Gain Recognized in Income on Derivative Instruments
Amount of Gain Recognized in Income on Derivative Instruments
Derivatives Not Designated as Hedging Instruments:
Other income
35
Amount of Gains (Losses) Recognized in InterestIncome on Derivative Instruments
OCI Impact on Derivatives-Gains (Losses) recorded in OCI
Three Months Ended March 31,
Derivatives Designated as Hedging Instruments:
Interest income
3,687
12,869
Interest expense
178
556
3,865
13,425
10. OTHER COMPREHENSIVE INCOME
The table below provides a summary of the components of other comprehensive income (“OCI”) for the periods presented.
Before-tax
Tax effect
After-tax
Net change in fair value recorded in accumulated OCI
(35,856
10,600
(25,256
40,424
(11,951
28,473
Amortization of net unrealized losses on securities transferred from available-for-sale to held-to-maturity
163
(48
115
278
(82
196
Fair value hedges:
17,831
(4,962
Cash flow hedges:
(233
Net change
11. BALANCE SHEET OFFSETTING
Assets and liabilities relating to certain financial instruments, including, derivatives and securities sold under repurchase agreements (“repurchase agreements”), may be eligible for offset in the condensed consolidated balance sheets as permitted under accounting guidance. As noted above, our interest rate swap derivatives are subject to master netting arrangements. Our interest rate swap derivatives require the Company to pledge investment securities as collateral based on certain risk thresholds. Investment securities that have been pledged by the Company to counterparties continue to be reported in the Company’s condensed consolidated balance sheets unless the Company defaults. We offer a repurchase agreement product to our customers, which include master netting agreements that allow for the netting of collateral positions. This product, known as Citizens Sweep Manager, sells certain of our securities overnight to our customers under an agreement to repurchase them the next day. The repurchase agreements are not offset in the Company’s condensed consolidated balances.
In June 2023, fair value hedging transactions were executed in which $1 billion notional pay-fixed interest rate swaps were consummated with original maturities ranging from four to five years, wherein the Company pays a weighted average fixed rate of approximately 3.8% and receives daily SOFR. The fair value of these instruments totaled $10.9 million and were reflected as an asset on March 31, 2024.
During the first quarter of 2024, cash flow hedging transactions were executed in which $300 million notional pay-fixed interest rate swaps were consummated with maturities of three years, wherein the Company pays a weighted average fixed rate of approximately 4.2% and receives daily SOFR. The fair value of these instruments totaled $789,000 and were reflected as an asset on March 31, 2024.
Refer to Note 9 – Derivative Financial Instruments of the notes to the unaudited condensed consolidated financial statements of this report for additional information.
37
Gross Amounts Recognized in the Condensed
Gross Amounts Offset in the Condensed
Net Amounts Presented in the Condensed
Gross Amounts Not Offsetin the Condensed Consolidated Balance Sheets
Consolidated Balance Sheets
Financial Instruments
Collateral Pledged
Net Amount
Financial assets:
11,720
Financial liabilities:
47,507
(47,469
47,469
(15,827
31,680
Repurchase agreements
360,312
636,032
323,227
275,758
344,485
667,712
Derivatives not designated as hedging instruments
Derivatives designated as hedging instruments
42,613
(42,501
42,501
(11,659
30,954
362,505
634,147
321,193
271,754
49,439
350,846
672,039
12. LEASES
The Company’s operating leases, where the Company is a lessee, include real estate, such as office space and banking centers. Lease expense for operating leases is recognized on a straight-line basis over the term of the lease and is reflected in the consolidated statement of earnings. Right-of-use (“ROU”) assets and lease liabilities are included in other assets and other liabilities, respectively, on the Company’s condensed consolidated balance sheet.
While the Company has, as a lessor, certain equipment finance leases, such leases are not material to the Company’s consolidated financial statements.
The tables below present the components of lease costs and supplemental information related to leases as of and for the periods presented.
March 31,2024
December 31,2023
Lease Assets and Liabilities
ROU assets
20,666
21,655
Total lease liabilities
24,056
Lease Cost
Operating lease expense (1)
1,845
1,841
Sublease income
Total lease expense
Other Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflows from operating leases, net
1,864
1,756
Lease Term and Discount Rate
Weighted average remaining lease term (years)
3.84
3.94
Weighted average discount rate
3.58
3.48
39
The Company’s lease arrangements that have not yet commenced as of March 31, 2024 and the Company’s short-term lease costs and variable lease costs, for the three months ended March 31, 2024 and 2023 are not material to the consolidated financial statements. The future lease payments required for leases that have initial or remaining non-cancelable lease terms in excess of one year as of March 31, 2024, excluding property taxes and insurance, are as follows:
Year:
2024 (excluding the three months ended March 31, 2024)
5,490
2025
6,759
2026
5,524
2027
4,040
2028
2,169
Thereafter
825
Total future lease payments
24,807
Less: Imputed interest
(1,770
Present value of lease liabilities
13. REVENUE RECOGNITION
The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the periods indicated.
In-scope of Topic 606:
Noninterest Income (in-scope of Topic 606)
10,520
12,013
Noninterest Income (out-of-scope of Topic 606)
Refer to Note 3 – Summary of Significant Accounting Policies and Note 23 – Revenue Recognition, included in our Annual Report on Form 10-K for the year ended December 31, 2023 for a more detailed discussion about noninterest revenue streams that are in-scope of Topic 606.
40
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information about the results of operations, financial condition, liquidity and capital resources of CVB Financial Corp. (referred to herein on an unconsolidated basis as “CVB” and on a consolidated basis as “we,” “our” or the “Company”) and its wholly owned bank subsidiary, Citizens Business Bank (the “Bank” or “CBB”). This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of our operations. This discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2023 and the unaudited condensed consolidated financial statements and accompanying notes presented elsewhere in this report.
The discussion and analysis of the Company’s unaudited condensed consolidated financial statements are based upon the Company’s unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these unaudited condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following is a summary of the more judgmental and complex accounting estimates and principles. In each area, we have identified the variables we believe are most important in our estimation process. We utilize information available to us to make the necessary estimates to value the related assets and liabilities. Actual performance that differs from our estimates and future changes in the key variables and information could change future valuations and impact the results of operations.
Our significant accounting policies are described in greater detail in our 2023 Annual Report on Form 10-K in the “Critical Accounting Policies” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 3 – Summary of Significant Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2023, which are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Recently Issued Accounting Pronouncements but Not Adopted as of March 31, 2024
Standard
Description
Adoption Timing
Impact on Financial Statements
ASU 2023-09 Income Taxes (Topic 740): Improvements to Income Tax DisclosuresIssued December 2023
On December 14, 2023, the FASB issued ASU 2023-09 Income Taxes (Topic 740) - Improvements to Income Tax Disclosures. This ASU enhances annual income tax disclosures to address investor requests for more detailed information about tax risks and improved transparency of income tax disclosures. The two primary enhancements disaggregate existing income tax disclosures related to the effective tax rate reconciliation and information on income taxes paid disaggregated by jurisdiction. This ASU is effective for annual reporting periods beginning after December 15, 2024 and are to be applied on a prospective basis; early adoption is permitted.
1st Quarter 2025
The adoption of this ASU is not expected to have a material impact on our consolidated financial statements.
For the first quarter of 2024, we reported net earnings of $48.6 million, compared with $48.5 million for the fourth quarter of 2023 and $59.3 million for the first quarter of 2023. Diluted earnings per share were $0.35 for the first quarter, compared to $0.35 for the prior quarter and $0.42 for the same period last year. Net income of $48.6 million for the first quarter of 2024 produced an annualized return on average equity (“ROAE”) of 9.31%, an annualized return on average tangible common equity (“ROATCE”) of 15.13%, and an annualized return on average assets (“ROAA”) of 1.21%. Our net interest margin, tax equivalent (“NIM”), was 3.10% for the first quarter of 2024, while our efficiency ratio was 47.22%.
Net interest income was $112.5 million for the first quarter of 2024. This represented a $6.9 million, or 5.78%, decline from the fourth quarter of 2023, and a $13.3 million, or 10.55%, decrease from the first quarter of 2023. The quarter-over-quarter decrease in net interest income was primarily due to a 16 basis point decline in net interest margin driven by approximately $6 million in higher interest expense associated with time deposits and borrowings. The decline in net interest income compared to the first quarter of 2023 was due to a 35 basis point decrease in net interest margin and a $158.5 million decline in average earning assets. Interest expense from borrowings increased by approximately $12 million compared to the first quarter of 2023, as average borrowings grew by $1.02 billion.
Noninterest income was $14.1 million for the first quarter of 2024, compared with $19.2 million for the fourth quarter of 2023 and $13.2 million for the first quarter of 2023. First quarter income from Bank Owned Life Insurance (“BOLI”) decreased by $4.3 million from the fourth quarter of 2023 and increased by $2.4 million compared to the first quarter of 2023, primarily due to restructuring and enhancements in BOLI policies in the fourth quarter of 2023.
Noninterest expense for the first quarter of 2024 was $59.8 million, compared to $65.9 million for the fourth quarter of 2023 and $54.9 million for the first quarter of 2023. The $6.2 million quarter-over-quarter decrease was primarily due to the expense associated with the FDIC special assessment. The first quarter of 2024 reflected an additional accrual of $2.3 million for the FDIC special assessment. This is in addition to the $9.2 million accrued in the fourth quarter of 2023. The increase in the accrual was the result of the FDIC increasing its initial estimate of losses from last year’s bank failures by 25%, which was communicated in March of 2024.
At March 31, 2024, total assets of $16.47 billion increased by $447.2 million, or 2.79%, from total assets of $16.02 billion at December 31, 2023. Interest-earning assets of $14.91 billion at March 31, 2024, increased by $448.9 million, or 3.10%, when compared with $14.46 billion at December 31, 2023. The increase in interest-earning assets was primarily due to a $707.7 million increase in interest-earning balances due from the Federal Reserve, offset by a $129.0 million decrease in investment securities, and a $134.2 million decrease in total loans.
Total investment securities were $5.29 billion at March 31, 2024, a decrease of $129.0 million, or 2.38%, from $5.42 billion at December 31, 2023. At March 31, 2024, investment securities held-to-maturity (“HTM”) totaled $2.45 billion, a decrease of $10.0 million, or 0.41%, from December 31, 2023. At March 31, 2024, investment securities available-for-sale (“AFS”) totaled $2.84 billion, inclusive of a pre-tax net unrealized loss of $485.6 million. AFS securities decreased by $119.0 million, or 4.03%, from $2.96 billion at December 31, 2023. Pre-tax unrealized loss grew by $35.9 million from December 31, 2023. Our tax equivalent yield on investments was 2.64% for the quarter ended March 31, 2024, compared to 2.71% for the fourth quarter of 2023 and 2.37% for the first quarter of 2023. The 27 basis point increase in the yield on investment securities from the prior year was impacted by the positive spread generated from fair-value hedging of certain AFS securities, in which the Company receives daily SOFR and pays a weighted average fixed cost of approximately 3.8%.
In June 2023, fair value hedging transactions were executed in which $1 billion notional pay-fixed interest rate swaps were consummated with maturities ranging from four to five years, wherein the Company pays a weighted average fixed rate of approximately 3.8% and receives daily SOFR. The fair value of these instruments totaled $10.9 million and were reflected as an asset at March 31, 2024. These instruments generated interest income of $3.7 million for the quarter ended March 31, 2024. Refer to Note 9 – Derivative Financial Instruments of the notes to the unaudited condensed consolidated financial statements of this report for additional information.
Total loans and leases, at amortized cost, of $8.77 billion at March 31, 2024, decreased by $134.2 million, or 1.51%, from December 31, 2023. The quarter-over-quarter decline in loans included decreases of $64.0 million in commercial real estate loans, $61.3 million in dairy & livestock and agribusiness loans, $7.9 million in construction loans, $6.8 million in commercial and industrial loans, partially offset by an increase of $6.6 million in SFR mortgage loans. The decline in dairy and livestock loans primarily relates to the seasonal peak in line utilization at the end of every calendar year, demonstrated by a decline in utilization from 80% at the end of 2023 to 75% at March 31, 2024. Our yield on loans was 5.30% for the quarter ended March 31, 2024, compared to 5.18% for the fourth quarter of 2023 and 4.90% for the first quarter of 2023. This 40 basis point increase in our loan yields year-over-year was the result of recent increases in interest rates, highlighted by the 525 basis point increase in the Fed Funds rate since the end of the first quarter of 2022.
The allowance for credit losses totaled $82.8 million at March 31, 2024, compared to $86.8 million at December 31, 2023. There was no provision for credit losses in the first quarter of 2024. The decline in the allowance was due to $4 million of net charge-offs in the first quarter of 2024, primarily due to two borrowers in which specific loan loss reserves were previously established in 2023. Projected loss rates continue to be driven primarily by economic forecast changes to various macroeconomic variables such as Real GDP growth and the rate of unemployment.
Since March of 2022 to March of 2024, the Federal Reserve has increased the Federal Funds rate by 525 basis points to the target range of 5.25% to 5.50%. In comparison to the rising Federal Funds rate, our average cost of deposits has increased from three basis points for the first quarter of 2022 to 74 basis points for the first quarter of 2024. The change in market interest rates that has resulted from the Federal Reserve's monetary policies has impacted the availability of higher interest rates on short-term alternatives to deposits, such as money market mutual funds and treasury notes. These higher yielding alternatives, as well as overall inflationary increases on spending, have impacted our deposit levels over the last two years.
Noninterest-bearing deposits were $7.11 billion at March 31, 2024, a decrease of $93.4 million, or 1.30%, when compared to $7.21 billion at December 31, 2023 and a decrease of $731.5 million, or 9.33%, when compared to $7.84 billion at March 31, 2023. At March 31, 2024, noninterest-bearing deposits were 59.80% of total deposits, compared to 63.03% at December 31, 2023 and 63.92% at March 31, 2023.
Interest-bearing deposits were $4.78 billion at March 31, 2024, an increase of $554.7 million, or 13.12%, when compared to $4.23 billion at December 31, 2023 and an increase of $354.6 million, or 8.01%, when compared to $4.43 billion at March 31, 2023. The increase in deposits included $300 million in new brokered deposits at March 31, 2024. These deposits, which mature every 90 days, were combined with cash flow hedges which resulted in a fixed rate of approximately 4.2%. Customer repurchase agreements totaled $275.7 million at March 31, 2024, compared to $271.6 million at December 31, 2023 and $490.2 million at March 31, 2023. Our average cost of total deposits including customer repurchase agreements was 0.73% for the first quarter of 2024, compared to 0.61% for the fourth quarter of 2023 and 0.17% for the first quarter of 2023.
At March 31, 2024, total borrowings, consisted of approximately $2.0 billion of one-year advances from the Federal Reserve’s Bank Term Funding Program ("BTFP"), at a weighted average cost of approximately 4.75%. The BTFP advances include maturities of $695 million in May and $1.3 billion in January of 2025.
The Company’s total equity was $2.09 billion at March 31, 2024. This represented an overall increase of $8.9 million from total equity of $2.08 billion at December 31, 2023. Increases to equity included $48.6 million in net earnings, that were partially offset by $27.9 million in cash dividends and an $11.7 million decrease in other comprehensive income from the tax effected impact of the net decline in market value of available-for-sale securities and increase in value of pay fixed swaps. We engaged in no stock repurchases during the first quarter of 2024. Our tangible book value per share at March 31, 2024 was $9.36.
Our capital ratios under the revised capital framework referred to as Basel III remain well-above regulatory requirements. As of March 31, 2024, the Company’s Tier 1 leverage capital ratio was 10.46%, common equity Tier 1 ratio was 14.95%, Tier 1 risk-based capital ratio was 14.95%, and total risk-based capital ratio was 15.77%. Refer to our Analysis of Financial Condition – Capital Resources.
Financial Performance
Variance
Net interest income
(13,267
-10.55
(Provision for) recapture of credit losses
(1,500
Noninterest income
911
6.90
Noninterest expense
(59,771
(54,881
(4,890
-8.91
(18,204
(23,279
5,075
21.80
(10,671
-18.00
Basic
(0.07
Diluted
Return on average assets
1.21
1.47
-0.26
Return on average shareholders' equity
9.31
12.15
-2.84
Efficiency ratio
47.22
39.50
7.72
Noninterest expense to average assets
1.48
1.36
0.12
119,356
(6,895
-5.78
2,000
(2,000
19,163
(5,050
-26.35
(65,930
6,159
9.34
(26,081
7,877
30.20
48,508
91
0.19
0.40
(0.05
-0.15
11.03
-1.72
40.86
6.36
1.32
0.16
Return on Average Tangible Common Equity Reconciliation (Non-GAAP)
The return on average tangible common equity is a non-GAAP disclosure. The Company uses certain non-GAAP financial measures to provide supplemental information regarding the Company's performance. The following is a reconciliation of net income, adjusted for tax-effected amortization of intangibles, to net income computed in accordance with GAAP; a reconciliation of average tangible common equity to the Company's average stockholders' equity computed in accordance with GAAP; as well as a calculation of return on average tangible common equity.
Net Income
Add: Amortization of intangible assets
1,446
Less: Tax effect of amortization of intangible assets [1]
(425
(427
(508
Tangible net income
49,612
49,527
60,482
Average stockholders' equity
2,098,868
1,994,150
1,978,244
Less: Average goodwill
(765,822
Less: Average intangible assets
(14,585
(15,993
(20,983
Average tangible common equity
1,318,461
1,212,335
1,191,439
Return on average equity, annualized
9.65
Return on average tangible common equity, annualized
15.13
16.21
20.59
Net Interest Income
The principal component of our earnings is net interest income, which is the difference between the interest and fees earned on loans and investments (interest-earning assets) and the interest paid on deposits and borrowed funds (interest-bearing liabilities). Net interest margin is net interest income as a percentage of average interest-earning assets for the period. The level of interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net interest income and net interest margin. The net interest spread is the yield on average interest-earning assets minus the cost of average interest-bearing liabilities. Net interest margin and net interest spread are included on a tax equivalent (TE) basis by adjusting interest income utilizing the federal statutory tax rates of 21% in effect for the three months ended March 31, 2024 and 2023. Our net interest income, interest spread, and net interest margin are sensitive to general business and economic conditions. These conditions include short-term and long-term interest rates, inflation, monetary supply, and the strength of the international, national and state economies, in general, and more specifically, the local economies in which we conduct business. Our ability to manage net interest income during changing interest rate environments will have a significant impact on our overall performance. We manage net interest income through affecting changes in the mix of interest-earning assets as well as the mix of interest-bearing liabilities, changes in the level of interest-bearing liabilities in proportion to interest-earning assets, and in the growth and maturity of earning assets. See Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset/Liability and Market Risk Management – Interest Rate Sensitivity Management included herein.
The tables below present the interest rate spread, net interest margin and the composition of average interest-earning assets and average interest-bearing liabilities by category for the periods indicated, including the changes in average balance, composition, and average yield/rate between these respective periods.
Average
Yield/
Balance
Interest
Rate
INTEREST-EARNING ASSETS
Investment securities (1)
Available-for-sale securities:
2,874,642
2.96
3,190,462
2.44
25,455
3.13
25,681
Held-to-maturity securities:
2,080,985
2.11
2,163,847
2.13
376,626
3.11
382,738
3.10
Investment in FHLB stock
9.36
28,868
4.90
444,101
5.50
47,934
4.15
Loans (2)
8,824,579
5.30
8,963,323
Total interest-earning assets
14,644,400
4.34
14,802,853
3.91
Total noninterest-earning assets
1,561,013
1,510,283
16,205,413
16,313,136
INTEREST-BEARING LIABILITIES
Savings deposits (3)
4,007,124
18,529
1.86
4,335,951
5,247
0.49
Time deposits
447,011
2,837
2.55
285,296
118
0.17
Total interest-bearing deposits
4,454,135
1.93
4,621,247
0.47
FHLB advances, other borrowings, and customer repurchase agreements
2,301,250
4.17
1,522,455
Interest-bearing liabilities
6,755,385
2.69
6,143,702
1.13
Noninterest-bearing deposits
7,182,718
8,092,704
168,442
98,486
Stockholders' equity
Net interest spread - tax equivalent
1.65
2.78
Net interest margin
3.08
3.43
Net interest margin - tax equivalent
3.45
The following table presents a comparison of interest income and interest expense resulting from changes in the volumes and rates on average interest-earning assets and average interest-bearing liabilities for the periods indicated. Changes in interest income or expense attributable to volume changes are calculated by multiplying the change in volume by the initial average interest rate. The change in interest income or expense attributable to changes in interest rates is calculated by multiplying the change in interest rate by the initial volume. The changes attributable to interest rate and volume changes are calculated by multiplying the change in rate times the change in volume and reflect an adjustment for the number of days as appropriate.
Rate and Volume Analysis for Changes in Interest Income, Interest Expense and Net Interest Income
Comparison of Three Months Ended March 31,
2024 Compared to 2023
Increase (Decrease) Due to
Rate/
Volume
Taxable investment securities
(1,913
4,192
1,852
Tax-advantaged investment securities
(1
(438
(85
(523
(38
(132
320
(118
4,092
160
1,330
5,582
Loans
(1,691
8,898
748
7,955
13,492
1,532
14,903
Savings deposits
(401
14,759
(1,076
13,282
67
1,692
960
2,719
6,031
3,996
2,142
12,169
5,697
20,447
2,026
28,170
(5,818
(6,955
(494
First Quarter of 2024 Compared to the First Quarter of 2023
Net interest income, before provision for credit losses, of $112.5 million for the first quarter of 2024 decreased by $13.3 million, or 10.55%, from the first quarter of 2023. The decline in net interest income compared to the first quarter of 2023 was due to a $158.5 million decline in average earning assets and a 35 basis point decrease in net interest margin. The decline in net interest margin was the result of an 82 basis point increase in funding costs, which was partially offset by a 43 basis point increase in the earning asset yield. The increase in funding costs includes interest expense from borrowings, which increased by approximately $12 million compared to the first quarter of 2023, as average borrowings grew by $1.02 billion.
Total interest income of $157.7 million grew by $14.9 million, or 10.44%, when compared to the first quarter of 2023. This increase was primarily due to a 43 basis point expansion of the yield on earning assets, which offset a $158.5 million decline in average interest-earning assets. Average loan balances declined by $138.7 million. Loan yields grew from 4.90% for the first quarter of 2023 to 5.30% for the first quarter of 2024. Likewise, the yield on investment securities increased by 27 basis points from the prior year. Compared to the first quarter of 2023, the average balance of investment securities decreased by $405.0 million, while the average amount of funds held at the Federal Reserve increased by $396.5 million.
Total interest income and fees on loans for the first quarter of 2024 was $116.3 million, an increase of $8.0 million, or 7.34%, from the first quarter of 2023. This increase in income was primarily due to higher loan yields, which grew from 4.90% in the first quarter of 2023 to 5.30% in the first quarter of 2024. Loan yields grew year-over-year, as rising interest rates contributed to an increase in yields on loans indexed to the Prime rate or other short-term indexes, as well as higher rates from newly originated loans.
Interest income from investment securities was $34.8 million, an increase of $1.3 million, or 3.86%, from the first quarter of 2023. The increase was driven by a 27 basis point increase in the yield on securities, compared to 2023. The increase in yield includes the positive carry on the fair value hedges during the first quarter of 2024, which resulted in $3.7 million of interest income associated with these interest rate swaps. Excluding the impact of these swaps, interest income on investment securities would have declined by $2.4 million, as average investment securities declined by $405.0 million when compared with the first quarter of 2023.
47
Interest expense of $45.2 million for the first quarter of 2024, increased $28.2 million, compared to the first quarter of 2023. Total cost of funds of 1.31% for the first quarter of 2024 increased from 0.49% for the year ago quarter. This 82 basis point increase in cost of funds was the result of a 146 basis point increase in the cost of interest-bearing deposits and an average cost of 4.76% on $1.99 billion of average borrowings for the first quarter of 2024, compared with 4.81% on $971.7 million of borrowings for the first quarter of 2023. Average noninterest-bearing deposits were 61.72% of total deposits for the first quarter of 2024, compared to 63.65% for the first quarter of 2023.
The provision for (recapture of) credit losses is a charge to earnings to maintain the allowance for credit losses at a level consistent with management’s assessment of expected lifetime losses in the loan portfolio as of the balance sheet date.
There was no provision for credit losses in the first quarter of 2024, compared to $1.5 million in provision in the first quarter of 2023. Projected loss rates were 0.94% at March 31, 2024, compared to 0.97% at March 31, 2023. Excluding specific reserves associated with nonperforming or substandard loans, the projected loss rate on performing loans increased from 0.91% at the end of 2023 to 0.94% on March 31, 2024. The modest increase in these projected loss rates continues to be driven primarily by economic forecast changes to various macroeconomic variables such as Real GDP growth, commercial real estate values and the rate of unemployment. Refer to the discussion of “Allowance for Credit Losses” in Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations contained herein for discussion concerning observed changes in the credit quality of various components of our loan portfolio as well as changes and refinements to our methodology.
No assurance can be given that economic conditions which affect the Company’s service areas or other circumstances will or will not be reflected in future changes in the level of our allowance for credit losses and the resulting provision or recapture of provision for credit losses. The process to estimate the allowance for credit losses requires considerable judgment and our economic forecasts may continue to vary due to the uncertainty of the future impact from the recent rise in interest rates, geopolitical events in Europe, and global inflation will have on future interest rates, unemployment, the overall economy and resulting impact on our customers. See “Allowance for Credit Losses” under Analysis of Financial Condition herein.
Noninterest Income
Noninterest income includes income derived from financial services offered to our customers, such as CitizensTrust, merchant processing and card services, international banking, and other business services. Also included in noninterest income are service charges and fees, primarily from deposit accounts, gains (net of losses) from the disposition of investment securities, loans, other real estate owned, and fixed assets, and other revenues not included as interest on earning assets.
The following table sets forth the various components of noninterest income for the periods presented.
(308
-5.76
310
10.64
2.12
2,404
202.19
(1,503
-44.49
The $911,000 increase in noninterest income included a $2.4 million increase in BOLI income primarily due to the restructuring and enhancements in our BOLI policies completed in the fourth quarter of 2023. CRA investment income declined by approximately $800,000, due to both changes in the net asset value of certain equity investments, and a recapture of an impairment charge in the first quarter of 2023 of $500,000 as a result of the payoff of a CRA investment that was previously identified as impaired. The first quarter of 2023 also included approximately $550,000 in interest rate swap related fees resulting from the conversion to SOFR of all of our previously originated interest rate swaps indexed to LIBOR.
Trust and Investment Services represents our CitizensTrust group. The CitizensTrust group is made up of wealth management and investment services. They provide a variety of services, which include asset management, financial planning, estate planning, retirement planning, private and corporate trustee services, and probate services. Investment Services provides self-directed brokerage, 401(k) plans, mutual funds, insurance and other non-insured investment products. At March 31, 2024, CitizensTrust had approximately $4.3 billion in assets under management and administration, including $3.09 billion in assets under management. CitizensTrust generated fees of $3.2 million for the first quarter of 2024, compared to $2.9 million for the first quarter of 2023. We have experienced growth in managed assets from the transition of customer deposits that are now being managed by CitizensTrust in various liquidity strategies. The increase in fees in 2024 included both the impact on market values of changes in equity and fixed income markets but also increased flows of funds from customers, including liquidity management of funds formerly on deposit with the Bank.
The Bank’s investment in BOLI includes life insurance policies generally acquired through acquisitions or the purchase of life insurance by the Bank on a select group of employees to fund deferred compensation plans. The Bank is the owner and beneficiary of these policies. BOLI is recorded as an asset at its cash surrender value. Increases in the cash value of these policies, as well as insurance proceeds received, are recorded in noninterest income and are not subject to income tax, as long as they are held for the life of the covered parties. The increase in BOLI income was primarily due to the restructuring and enhancements in our BOLI policies in the fourth quarter of 2023. The first quarter of 2024 also included $531,000 in death benefits that exceeded the asset value on certain policies, compared with no death benefits for the first quarter of 2023.
49
Noninterest Expense
The following table summarizes the various components of noninterest expense for the periods presented.
1,154
3.27
Occupancy
4,570
4,594
(24
-0.52
Equipment
856
139
16.24
559
32.96
117
-4.96
(282
-16.40
Telecommunications expense
493
503
(10
-1.99
Regulatory assessments
4,445
2,072
2,373
114.53
Insurance
507
505
Loan expense
286
299
-4.35
OREO expense
(500
(100.00
)%
Directors' expenses
328
289
13.49
Stationery and supplies
229
(57
-19.93
2,639
1,191
1,448
121.58
4,890
8.91
Efficiency ratio (1)
Our ability to control noninterest expenses in relation to asset growth can be measured in terms of total noninterest expenses as a percentage of average assets. Noninterest expense as a percentage of average assets was 1.48% for both the first quarter of 2024, compared to 1.36% and the first quarter of 2023. This ratio was negatively impacted by an additional accrual of $2.3 million for the FDIC special assessment in the first quarter of 2024.
Our ability to control noninterest expenses in relation to the level of total revenue (net interest income before provision for credit losses plus noninterest income) can be measured by the efficiency ratio and indicates the percentage of net revenue that is used to cover expenses. The efficiency ratio for the first quarter of 2024 was 47.22%, compared to 39.50% for the first quarter of 2023. The increase in the efficiency ratio for the first quarter of 2024 was primarily due to increased regulatory assessment expense, including the FDIC special assessment, and inflationary pressures on staff related expenses.
Noninterest expense of $59.8 million for the first quarter of 2024 was $4.9 million, or 8.91%, higher than the first quarter of 2023. The first quarter of 2024 reflected an additional accrual of $2.3 million for the FDIC special assessment resulting from a 25% increase in the FDIC's initial loss estimate, which was $9.2 million as reflected in the fourth quarter of 2023. Year-over-year expense growth included increased staff related expenses of $1.2 million, or 3.27%. Professional services also increased $559,000 year-over-year, including a $430,000 increase in legal expense. The increase in other expense year-over-year was due to higher data processing costs, an increase in deferred compensation expense and various expense accruals. There was no provision or recapture of provision for unfunded loan commitments in the first quarter of 2024, compared to $500,000 in provision for the first quarter of 2023.
Income Taxes
The Company’s effective tax rate for the three months ended March 31, 2024 was 27.25%, compared to 28.20% for the three months ended March 31, 2023, respectively. Our estimated annual effective tax rate also varies depending upon the level of tax-advantaged income from municipal securities and BOLI, as well as available tax credits.
The Company’s effective tax rates are below the nominal combined Federal and State tax rate primarily as a result of tax-advantaged income from certain municipal security investments, municipal loans and leases and BOLI, as well as available tax credits for each period.
50
Total assets of $16.47 billion at March 31, 2024 increased by $447.2 million, or 2.79%, from total assets of $16.02 billion at December 31, 2023. Interest-earning assets of $14.91 billion at March 31, 2024, increased by $448.9 million, or 3.10%, when compared with $14.46 billion at December 31, 2023. The increase in interest-earning assets was primarily due to a $707.7 million increase in interest-earning balances due from the Federal Reserve, offset by a $129.0 million decrease in investment securities, and a $134.2 million decrease in total loans.
Total liabilities were $14.38 billion at March 31, 2024, an increase of $438.3 million, or 3.14%, from total liabilities of $13.94 billion at December 31, 2023. The increase of $461.3 million in total deposits at March 31, 2024 included the addition of $300 million in brokered deposits that were added between the end February and the end of March. These deposits, which mature every 90 days, were combined with cash flow hedges which resulted in a fixed rate of approximately 4.2%. Borrowings decreased by $75.0 million from December 31, 2023. At March 31, 2024, total borrowings consisted of $2.0 billion of one-year advances from the Federal Reserve’s Bank Term Funding Program, at an average cost of approximately 4.75%. The BTFP advances include maturities of $695 million in May and $1.3 billion in January of 2025.
Total equity increased $8.9 million to $2.09 billion at March 31, 2024, compared to total equity of $2.08 billion at December 31, 2023. Increases to equity included $48.6 million in net earnings, that were partially offset by $27.9 million in cash dividends and an $11.7 million decrease in other comprehensive income. We engaged in no stock repurchases during the first quarter of 2024.
Investment Securities
The Company maintains a portfolio of investment securities to provide interest income and to serve as a source of liquidity for its ongoing operations. We continued to shrink our investment portfolio. At March 31, 2024, total investment securities were $5.29 billion. This represented a decrease of $129.0 million, or 2.38%, from $5.42 billion at December 31, 2023. The overall decrease in investment securities was primarily due to a $119.0 million decline in our AFS securities. At March 31, 2024, our AFS investment securities totaled $2.84 billion, inclusive of a pre-tax net unrealized loss of $485.6 million, compared to $449.8 million at December 31, 2023. The $36 million decrease in fair value of our AFS securities was partially offset by an $18 million increase in the fair value of our derivatives that hedge the change in value of our AFS portfolio. The after-tax unrealized loss reported in AOCI on our AFS investment securities at March 31, 2024 was $335.8 million. The changes in the net unrealized holding loss resulted primarily from fluctuations in market interest rates. At March 31, 2024, investment securities HTM totaled $2.45 billion. For the three months ended March 31, 2024 and 2023, repayments/maturities of investment securities totaled $115.5 million and $107.0 million, respectively. The Company purchased $11.5 million of HTM securities during the first quarter of 2024. There were no purchases of investment securities in the first quarter of 2023 as cashflows generated from the portfolio were not reinvested during the first quarter. There were no investment securities sold during the first quarter of 2024 and 2023.
The tables below set forth our investment securities AFS and HTM portfolio by type for the dates presented.
As of March 31, 2024, approximately $30.1 million in U.S. government agency bonds are callable. The Agency CMO/REMIC securities are backed by agency-pooled collateral. Municipal bonds, which represented approximately 9% of the total investment portfolio, are predominately AA or higher rated securities.
52
Once it is determined that a credit loss has occurred, an allowance for credit losses is established on our available-for-sale and held-to-maturity securities. Management determined that credit losses did not exist for securities in an unrealized loss position as of March 31, 2024 and December 31, 2023.
Refer to Note 4 – Investment Securities of the notes to the unaudited condensed consolidated financial statements of this report for additional information on our investment securities portfolio.
53
Total loans and leases, at amortized cost, of $8.77 billion at March 31, 2024 decreased by $134.2 million, or 1.51%, from December 31, 2023. The decrease in total loans quarter-over-quarter included decreases of $64.0 million in commercial real estate loans, $61.3 million in dairy & livestock and agribusiness loans, $7.9 million in construction loans, $6.8 million in commercial and industrial loans, and, partially offset by an increase of $6.6 million in SFR mortgage loans. The decline in dairy and livestock loans primarily relates to the seasonal peak in line utilization at the end of every calendar year, demonstrated by a decline in the utilization rate from 80% at the end of 2023 to 75% at March 31, 2024.
The following table presents our loan portfolio by type as of the dates presented.
Distribution of Loan Portfolio by Type
As of March 31, 2024, $498.2 million, or 7.41% of the total commercial real estate loans included loans secured by farmland, compared to $497.7 million, or 7.34%, at December 31, 2023. The loans secured by farmland included $121.4 million for loans secured by dairy & livestock land and $376.8 million secured by agricultural land at March 31, 2024, compared to $122.4 million for loans secured by dairy & livestock land and $375.3 million for loans secured by agricultural land at December 31, 2023. As of March 31, 2024, dairy & livestock and agribusiness loans of $351.6 million were comprised of $308.5 million for dairy & livestock loans and $43.1 million for agribusiness loans, compared to $412.9 million were comprised of $374.9 million for dairy & livestock loans and $38.0 million for agribusiness loans at December 31, 2023.
Real estate loans are loans secured by conforming trust deeds on real property, including property under construction, land development, commercial property and single-family and multi-family residences. Our real estate loans are comprised of industrial, office, retail, medical, single family residences, multi-family residences, and farmland. Consumer loans include installment loans to consumers as well as home equity loans, auto and equipment leases and other loans secured by junior liens on real property. Municipal lease finance receivables are leases to municipalities. Dairy & livestock and agribusiness loans are loans to finance the operating needs of wholesale dairy farm operations, cattle feeders, livestock raisers and farmers.
As of March 31, 2024, the Company had $197.5 million of total SBA 504 loans. SBA 504 loans include term loans to finance capital expenditures and for the purchase of commercial real estate. Initially the Bank provides two separate loans to the borrower representing a first and second lien on the collateral. The loan with the first lien is typically at a 50% advance to the acquisition costs and the second lien loan provides the financing for 40% of the acquisition costs with the borrower’s down payment of 10% of the acquisition costs. The Bank retains the first lien loan for its term and sells the second lien loan to the SBA subordinated debenture program. A majority of the Bank’s 504 loans are granted for the purpose of commercial real estate acquisition. As of March 31, 2024, the Company had $70.8 million of total SBA 7(a) loans that include a guarantee of payment from the SBA (typically 75% of the loan amount, but up to 90% in certain cases) in the event of default. The SBA 7(a) loans include revolving lines of credit (SBA Express) and term loans of up to ten (10) years to finance long-term working capital requirements, capital expenditures, and/or for the purchase or refinance of commercial real estate.
As of March 31,2024, the Company had $58.8 million in construction loans. This represents 0.67% of total gross loans held-for-investment. Although our construction loans are located throughout our market footprint, the majority of construction loans consist of commercial land development and construction projects throughout California. There were no nonperforming construction loans at March 31, 2024.
Our loan portfolio is geographically disbursed throughout our marketplace. The following is the breakdown of our total held-for-investment and commercial real estate loans, by region as of March 31, 2024.
Total Loans
Commercial RealEstate Loans
Los Angeles County
3,204,076
36.5
2,349,745
35.0
Central Valley and Sacramento
2,076,644
23.7
1,664,015
24.8
Orange County
1,154,124
13.2
679,001
10.1
Inland Empire
1,002,479
11.4
883,428
13.1
Central Coast
478,068
5.4
389,610
5.8
San Diego
336,174
3.8
339,372
5.1
Other California
153,797
1.8
97,015
1.4
Out of State
365,351
4.2
318,352
4.7
100.0
The table below breaks down our commercial real estate portfolio.
Loan Balance
Percent
Percent Owner-Occupied (1)
AverageLoan Balance
Commercial real estate:
Industrial
2,257,765
33.6
49.1
1,621
Office
1,099,264
16.4
24.5
Retail
928,888
13.8
11.3
1,686
Multi-family
835,289
12.4
0.2
1,594
Secured by farmland (2)
498,171
7.4
98.9
1,496
Medical
307,167
4.6
32.8
1,477
Other (3)
793,994
11.8
41.7
1,620
Total commercial real estate
35.9
Nonperforming Assets
The following table provides information on nonperforming assets as of the dates presented.
Nonaccrual loans
Loans past due 90 days or more and still accruing interest
Nonperforming modified loans to borrowers experiencing financial difficulty
Total nonperforming loans
OREO, net
647
Total nonperforming assets
14,457
Modified loans to borrowers experiencing financial difficulty
9,460
Total nonperforming loans and performing modified loans to borrowers experiencing financial difficulty
24,575
30,762
Percentage of nonperforming loans and performing modified loans to borrowers experiencing financial difficulty to total loans, at amortized cost
0.28
Percentage of nonperforming assets to total loans, at amortized cost, and OREO
0.24
Percentage of nonperforming assets to total assets
0.09
0.13
55
The table below reflects the amortized cost of loans by type made to borrowers experiencing financial difficulty that were modified as of March 31, 2024 and March 31, 2023, and the financial effect of those modifications.
The following table describes the financial effect of the loan modifications made to borrowers experiencing financial difficulty during the three months ended March 31, 2024.
56
As of March 31, 2024 and March 31, 2023, the Company did not have any loans made to borrowers experiencing financial difficulty that were modified during the first quarter of 2024 and 2023 that subsequently defaulted. Payment default is defined as movement to nonaccrual (nonperforming) status, foreclosure or charge-off, whichever occurs first.
At March 31, 2024 and December 31, 2023, there was no ACL allocated to modified loans to borrowers experiencing financial difficulty. Impairment amounts identified are typically charged off against the allowance at the time the loan is considered uncollectible. There were no charge-offs on loans to borrowers experiencing financial difficulty for the three months ended March 31, 2024 and 2023.
Nonperforming Assets and Delinquencies
The table below provides trends in our nonperforming assets and delinquencies as of the dates presented.
September 30,
June 30,
Nonperforming loans:
3,655
3,159
2,634
1,050
629
4,672
2,039
2,049
243
273
406
339
354
384
9,963
(1)
6,454
6,175
% of Total loans
0.11
Past due 30-89 days:
19,781
136
425
575
555
183
20,195
639
1,087
1,183
0.23
OREO:
Total nonperforming, past due, and OREO
34,652
21,941
10,099
7,541
7,358
0.25
0.08
Classified Loans
92,246
77,834
66,977
Nonperforming loans, defined as nonaccrual loans, nonperforming modified/TDR loans and loans past due 90 days or more and still accruing interest, were $13.8 million at March 31, 2024, or 0.16% of total loans. This compares to nonperforming loans of $21.3 million, or 0.24% of total loans, at December 31, 2023 and $6.2 million, or 0.07% of total loans, at March 31, 2023. The $7.5 million decrease in nonperforming loans from December 31, 2023 was primarily due to the payoff of two nonperforming commercial real estate loans totaling $2.5 million, a $2.3 million charge-off of one nonperforming commercial real estate loan, and the charge-off of one nonperforming commercial industrial loan totaling $1.1 million.
Classified loans are loans that are graded “substandard” or worse. Classified loans increased $883,000 quarter-over-quarter, primarily due to increases of $2.1 million in classified construction loans and $484,000 commercial real estate loans, partially offset by a $1.7 million decline in classified commercial and industrial loans primarily due the charge-off of one nonperforming commercial and industrial loan.
At March 31, 2024, we had one OREO property totaling $647,000. At December 31, 2023 and March 31, 2023, we had no OREO properties.
Allowance for Credit Losses
The allowance for credit losses totaled $82.8 million as of March 31, 2024, compared to $86.8 million as of December 31, 2023 and $86.5 million as of March 31, 2023. Our allowance for credit losses at March 31, 2024 was 0.94% of total loans. This compares to 0.98% and 0.97% at December 31, 2023 and March 31, 2023, respectively. The decrease in our allowance for credit losses from December 31, 2023 was due to net charge-offs of $4.0 million reflected in the first quarter of 2024, primarily due to two borrowers in which we previously established specific loan loss reserves in 2023. Our allowance for credit losses that is established on a collective pool basis for performing loans grew from $80.9 million at December 31, 2023 to $82.8 million at March 31, 2024. The changes in our allowance over the last few quarters have been primarily due to changes in our economic forecast, as well as reserves established on specific loans. There was no provision for credit losses recorded in the first quarter of 2024, as the $1.9 million increase in the allowance for those loans evaluated on a collective pooled basis, was offset by the net impact from the $5.9 million reduction in specific reserves and the $4 million of net charge-offs. For the quarter ended March 31, 2023, we recorded $1.5 million in provision for credit losses. Net charge-offs were $77,000 for the quarter ended March 31, 2023.
The allowance for credit losses as of March 31, 2024 is based upon lifetime loss rate models developed from an estimation framework that uses historical lifetime loss experiences to derive loss rates at a collective pool level. We measure the expected credit losses on a collective (pooled) basis for those loans that share similar risk characteristics. We have three collective loan pools: Commercial Real Estate, Commercial and Industrial, and Consumer. Our ACL amounts are largely driven by portfolio characteristics, including loss history and various risk attributes, and the economic outlook for certain macroeconomic variables. The allowance for credit loss is sensitive to both changes in these portfolio characteristics and the forecast of macroeconomic variables. Risk attributes for commercial real estate loans include Original Loan to Value ratios ("OLTV"), origination year, loan seasoning, and macroeconomic variables that include Real GDP growth, commercial real estate price index and unemployment rate. Risk attributes for commercial and industrial loans include internal risk ratings, borrower industry sector, loan credit spreads and macroeconomic variables that include unemployment rate and BBB spread. The macroeconomic variables for Consumer include unemployment rate and GDP. The Commercial Real Estate methodology is applied over commercial real estate loans, a portion of construction loans, and a portion of SBA loans. The Commercial and Industrial methodology is applied over a substantial portion of the Company’s commercial and industrial loans, all dairy & livestock and agribusiness loans, municipal lease receivables, as well as the remaining portion of Small Business Administration (SBA) loans (excluding Paycheck Protection Program loans). The Consumer methodology is applied to SFR mortgage loans, consumer loans, as well as the remaining construction loans. In addition to determining the quantitative life of loan loss rate to be applied against the portfolio segments, management reviews current conditions and forecasts to determine whether adjustments are needed to ensure that the life of loan loss rates reflect both the current state of the portfolio, and expectations for macroeconomic changes.
Our economic forecast continues to be a blend of multiple forecasts produced by Moody’s. The baseline forecast continues to represent the largest weighting in our multi-weighted forecast scenario, with downside risks weighted among multiple forecasts. As of March 31, 2024, the resulting weighted forecast resulted in Real GDP growth declining in the third and fourth quarters of 2024. Real GDP growth is forecasted to be below 2% for 2025, before returning to growth between 2% and 2.5% in 2026. Commercial real estate values are forecasted to continue their decline until reaching their lowest level in the third quarter 2024. Unemployment is forecasted to rise in 2024, peaking around 6% in the first quarter of 2025. The unemployment rate is forecasted to stay elevated through 2026.
58
The table below presents a summary of charge-offs and recoveries by type, the provision for credit losses on loans, and the resulting allowance for credit losses for the periods presented.
As of and For the
Allowance for credit losses at beginning of period
Charge-offs:
Total charge-offs
Recoveries:
Total recoveries
Net (charge-offs) recoveries
(4,025
(77
Provision for (recapture of) credit losses
Allowance for credit losses at end of period
Summary of reserve for unfunded loan commitments:
Reserve for unfunded loan commitments at beginning of period
7,500
8,000
Reserve for unfunded loan commitments at end of period
8,500
Reserve for unfunded loan commitments to total unfunded loan commitments
Amount of total loans at end of period (1)
8,942,489
Average total loans outstanding (1)
Net (charge-offs) to average total loans
-0.05
Net (charge-offs) to total loans at end of period
Allowance for credit losses to average total loans
0.94
0.97
Allowance for credit losses to total loans at end of period
Net (charge-offs) to allowance for credit losses
-4.86
-0.09
Net (charge-offs) to provision for credit losses
-5.13
The Bank’s ACL methodology also produced an allowance of $7.5 million for our off-balance sheet credit exposures as of March 31, 2024, compared with $7.5 million and $8.5 million as of December 31, 2023 and March 31, 2023, respectively. The year-over-year decrease included a $500,000 recapture of provision for unfunded loan commitments in the fourth quarter of 2023 and $500,000 in provision in first quarter of 2023.
59
While we believe that the allowance at March 31, 2024 was appropriate to absorb losses from known or inherent risks in the portfolio, no assurance can be given that future economic conditions, interest rate fluctuations, conditions of our borrowers (including fraudulent activity), or natural disasters, which adversely affect our service areas or other circumstances or conditions, including those defined above, will not be reflected in increased provisions for credit losses in the future.
Changes in economic and business conditions could have an impact on our market area and on our loan portfolio. We continually monitor these conditions in determining our estimates of needed reserves. However, we cannot predict the extent to which the deterioration in general economic conditions, real estate values, changes in general rates of interest and changes in the financial conditions or business of a borrower may adversely affect a specific borrower’s ability to pay or the value of our collateral. See “Risk Management – Credit Risk Management” contained in our Annual Report on Form 10-K for the year ended December 31, 2023.
The primary source of funds to support earning assets (loans and investments) is the generation of deposits.
Total deposits were $11.89 billion at March 31, 2024. This represented an increase of $461.3 million, or 4.03%, from total deposits of $11.43 billion at December 31, 2023. The increase in total deposits at March 31, 2024 included $300 million in brokered deposits.
The composition of deposits is summarized as of the dates presented in the table below.
59.80
63.03
Interest-bearing deposits
Investment checking
545,066
4.58
552,408
4.83
Money market
3,106,539
26.12
2,821,344
24.67
Savings
454,973
3.82
457,320
4.00
675,554
5.68
396,395
3.47
Total Deposits
The amount of noninterest-bearing deposits in relation to total deposits is an integral element in our strategy of seeking to achieve a low cost of funds. Average noninterest-bearing deposits totaled $7.18 billion for the first quarter of 2024, a decrease of $268.1 million, or 3.60%, from noninterest-bearing deposits of $7.45 billion for the fourth quarter of 2023. Average noninterest-bearing deposits were 61.72% of total average deposits for the first quarter of 2024, compared to 61.30% for the fourth quarter of 2023.
Interest-bearing non-maturity deposits, which include savings, interest-bearing demand, and money market accounts, totaled $4.11 billion at March 31, 2024, representing an increase of $275.5 million, or 7.19%, from $3.83 billion at December 31, 2023.
Time deposits totaled $675.6 million at March 31, 2024, representing an increase of $279.2 million, or 70.42%, from total time deposits of $396.4 million at December 31, 2023. This increase included $300 million in brokered deposits.
During the first quarter of 2024, $300 million of brokered deposits were issued and cash flow hedging transactions were simultaneously executed in which $300 million notional pay-fixed interest rate swaps were consummated with maturities of three years, wherein the Company pays a weighted average fixed rate of approximately 4.2% and receives daily SOFR. We entered into these interest rate derivative contracts that are designated as qualifying cash flow hedges to hedge the exposure to variability in expected future cash flows attributable to changes in a contractually specified interest rate. The fair value of these instruments totaled $789,000 and were reflected as an asset at March 31, 2024.
Our deposits are primarily relationship based and include deposits and customer repurchase agreements ("repos"). For the first quarter of 2024, 74% of our deposits consist of business deposits and 26% consist of consumer deposits, primarily the owners and employees of our business customers. The largest percentage of our deposits, 39%, are analyzed business accounts, which represent customer operating accounts that generally utilize a wide array of treasury management products. As most of our business customers need to operate with more than $250,000 in their operating account, we have a significant percentage of deposits that are uninsured. As of March 31, 2024, 45% of our total deposits and customer repos were uncollateralized and uninsured.
Our customer deposit relationships represent a diverse set of industries. The industry classification with the largest concentration is construction, which represents 7% of our deposits. Overall, there are 16 different industry classifications that represent 2% or more of our deposits as of March 31, 2024. Our depositors have typically banked with us for many years. As of March 31, 2024, 44% of our deposit relationships have banked with us more than 10 years and 76% of our deposit relationships have been with us for three or more years.
Average total deposits for the first quarter decreased by approximately $517 million compared to the fourth quarter of 2023, while average borrowings grew by $407 million. The decline in average deposits was primarily due to deposit outflows at the end of 2023 related to estate planning for the Bank's largest deposit customer. Our average noninterest-bearing deposits continued to be greater than 61% of our average total deposits for the first quarter of 2024.
Our cost of deposits was 74 basis points on average for the first quarter of 2024, which compares to 62 basis points for the fourth quarter of 2023 and 17 basis points for the first quarter of 2023. From the first quarter of 2022 through the first quarter of 2024, our cost of deposits has increased by 71 basis points, representing a deposit beta of 14%, compared to the 525 basis point increase in the Fed Funds rate during the Federal Reserve’s tightening cycle.
We offer a repurchase agreement product to our customers. This product, known as Citizens Sweep Manager, sells our investment securities overnight to our customers under an agreement to repurchase them the next day at a price that reflects the market value of the use of these funds by the Bank for the period concerned. These repurchase agreements are signed with customers who want to invest their excess deposits, above a pre-determined balance in a demand deposit account, in order to earn interest. As of March 31, 2024 and December 31, 2023, total funds borrowed under these agreements were $275.7 million and $271.6 million, respectively, with a weighted average interest rate of 0.38% for the first quarter of 2024, compared to 0.27% for the fourth quarter of 2023 and 0.12 for the first quarter of 2023.
As a result of declining deposit balances, we had borrowings of $2.0 billion from the Federal Reserve's Bank Term Funding Program during the first quarter of 2024. Borrowings from the Bank Term Funding Program at the end of the first quarter included $695 million of advances that mature in May of this year and $1.3 billion of advances that mature in January of 2025. Our BTFP borrowings had a weighted average borrowing rate of approximately 4.75%.
As of March of 2024, BTFP was no longer available for new borrowings. We anticipate that the BTFP borrowings will be repaid through a combination of existing cash, future principal and interest payments from our security portfolio, core deposit growth, and additional wholesale funding sources which may consist of new borrowing sources such as the FHLB and/or additional brokered deposits. As of March 31, 2024, the Bank had unused borrowing capacity at the FHLB of $4.81 billion.
Aggregate Contractual Obligations
The following table summarizes the aggregate contractual obligations as of March 31, 2024.
Maturity by Period
Less Than One Year
One Year Through Three Years
Four Years Through Five Years
Over Five Years
Deposits (1)
11,880,259
12,166
2,217
279
Customer repurchase agreements (1)
1,152
1,150
20,205
Operating leases
7,193
11,737
5,208
Equity investments
24,197
16,782
6,735
205
475
14,237,727
14,175,529
31,790
8,780
21,628
Deposits represent noninterest-bearing, money market, savings, NOW, certificates of deposits, brokered and all other deposits held by the Bank.
Customer repurchase agreements represent excess amounts swept from customer demand deposit accounts, which mature the following business day and are collateralized by investment securities. These amounts are due to customers.
Deferred compensation represents the amounts that are due to former employees based on salary continuation agreements as a result of acquisitions and amounts due to current and retired employees under our deferred compensation plans.
Operating leases represent the total minimum lease payments due under non-cancelable operating leases. Refer to Note 12 – Leases of the notes to the Company’s unaudited condensed consolidated financial statements for a more detailed discussion about leases.
62
Off-Balance Sheet Arrangements
The following table summarizes the off-balance sheet items at March 31, 2024.
After Five Years
Commitment to extend credit:
446,496
97,096
179,539
139,060
30,801
24,929
22,926
2,003
386
64
1,029,607
750,394
257,136
1,661
20,416
Dairy & livestock and agribusiness (1)
203,074
131,015
72,059
SFR Mortgage
6,120
4,163
1,957
123,704
16,718
7,308
2,477
97,201
Total commitment to extend credit
1,834,316
1,022,376
516,042
143,198
152,700
Obligations under letters of credit
55,432
34,091
21,123
1,889,748
1,056,467
537,165
143,398
152,718
As of March 31, 2024, we had commitments to extend credit of approximately $1.83 billion, and obligations under letters of credit of $55.4 million. Commitments to extend credit are agreements to lend to customers, provided there is no violation of any material condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Commitments are generally variable rate, and many of these commitments are expected to expire without being drawn upon. As such, the total commitment amounts do not necessarily represent future cash requirements. We use the same credit underwriting policies in granting or accepting such commitments or contingent obligations as we do for on-balance sheet instruments, which consist of evaluating customers’ creditworthiness individually. As of March 31, 2024 and 2023, the balance in this reserve was $7.5 million and $8.5 million, respectively, and was included in other liabilities. There was no provision or recapture of provision for unfunded commitments for the first quarter of 2024, compared to $500,000 in recapture of provision in the fourth quarter of 2023 and a $500,000 provision in the first quarter of 2023.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the financial performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing or purchase arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. When deemed necessary, we hold appropriate collateral supporting those commitments.
Capital Resources
Our primary source of capital has been the retention of operating earnings and issuance of common stock in connection with periodic acquisitions. In order to ensure adequate levels of capital, we conduct an ongoing assessment of projected sources, needs and uses of capital in conjunction with projected increases in assets and the level of risk. As part of this ongoing assessment, the Board of Directors reviews the various components of our capital plan and capital stress testing.
Total equity increased $8.9 million, or 0.43%, to $2.09 billion at March 31, 2024, compared to total equity of $2.08 billion at December 31, 2023. Increases to equity included $48.6 million in net earnings, that were partially offset by $27.9 million in cash dividends and an $11.7 million decrease in other comprehensive income. We engaged in no stock repurchases during the first quarter of 2024, compared to the first quarter of 2023, when we repurchased 791,800 shares of common stock, at an average repurchase price of $23.43, totaling $18.5 million.. Our tangible book value per share at March 31, 2024 was $9.36.
During the first quarter of 2024, the Board of Directors of CVB declared quarterly cash dividends totaling $0.20 per share. Dividends are payable at the discretion of the Board of Directors and there can be no assurance that the Board of Directors will continue to pay dividends at the same rate, or at all, in the future. CVB’s ability to pay cash dividends to its shareholders is subject to restrictions under federal and California law, including restrictions imposed by the Federal Reserve, and covenants set forth in various agreements we are a party to.
On February 1, 2022, we announced that our Board of Directors authorized a share repurchase plan to repurchase up to 10,000,000 shares of the Company’s common stock ("2022 Repurchase Program"). During the first quarter of 2023, we repurchased 791,800 shares at an average price of $23.43. We engaged in no stock repurchases during the first quarter of 2024.
The Bank and the Company are required to meet risk-based capital standards under the revised capital framework referred to as Basel III set by their respective regulatory authorities. The risk-based capital standards require the achievement of a minimum total risk-based capital ratio of 8.0%, a Tier 1 risk-based capital ratio of 6.0% and a common equity Tier 1 (“CET1”) capital ratio of 4.5%. In addition, the regulatory authorities require the highest rated institutions to maintain a minimum leverage ratio of 4.0%. To be considered “well-capitalized” for bank regulatory purposes, the Bank and the Company are required to have a CET1 capital ratio equal to or greater than 6.5%, a Tier 1 risk-based capital ratio equal to or greater than 8.0%, a total risk-based capital ratio equal to or greater than 10.0% and a Tier 1 leverage ratio equal to or greater than 5.0%. At March 31, 2024, the Bank and the Company exceeded the minimum risk-based capital ratios and leverage ratios required to be considered “well-capitalized” for regulatory purposes. For further information about capital requirements and our capital ratios, see “Item 1. Business – Capital Adequacy Requirements” as described in our Annual Report on Form 10-K for the year ended December 31, 2023.
The table below presents the Company’s and the Bank’s risk-based and leverage capital ratios for the periods presented.
Capital Ratios
Adequately Capitalized Ratios
Minimum Required Plus Capital Conservation Buffer
Well Capitalized Ratios
CVB Financial Corp. Consolidated
Citizens Business Bank
Tier 1 leverage capital ratio
4.00%
5.00%
10.46%
10.36%
10.27%
10.17%
Common equity Tier 1 capital ratio
4.50%
7.00%
6.50%
14.95%
14.81%
14.65%
14.49%
Tier 1 risk-based capital ratio
6.00%
8.50%
8.00%
Total risk-based capital ratio
10.50%
10.00%
15.77%
15.63%
15.50%
15.34%
Liquidity and Cash Flow
The objective of liquidity management is to ensure that funds are available in a timely manner to meet our financial obligations when they come due without incurring unnecessary cost or risk, or causing a disruption to our normal operating activities. This includes the ability to manage unplanned decreases or changes in funding sources, accommodating loan demand and growth, funding investments, repurchasing securities, paying creditors as necessary, and other operating or capital needs.
We regularly assess the amount and likelihood of projected funding requirements through a review of factors such as historical deposit volatility and funding patterns, present and forecasted market and economic conditions, individual customer funding needs, as well as current and planned business activities. Management has an Asset/Liability Committee that meets monthly. This committee analyzes the cash flows from loans, investments, deposits and borrowings, as well as the input assumptions and results from various models. In addition, the Company has a Balance Sheet Management Committee of the Board of Directors that meets at least quarterly to review the Company’s balance sheet and liquidity position. This committee provides oversight to the balance sheet and liquidity management process and recommends policy guidelines for the approval of our Board of Directors, and courses of action to address our actual and projected liquidity needs.
In general, our liquidity is managed daily by controlling the level of liquid assets as well as the use of funds provided by the cash flow from the investment portfolio, loan demand, deposit fluctuations, and borrowings. Our definition of liquid assets includes cash and cash equivalents in excess of minimum levels needed to fulfill normal business operations, short-term investment securities, and other anticipated near term cash flows from investments. In addition to on balance sheet liquidity, we have significant off-balance sheet sources of liquidity. To meet unexpected demands, lines of credit are maintained with correspondent banks, the Federal Home Loan Bank and the Federal Reserve, although availability under these lines of credit are subject to certain conditions. In addition to having more than $900 million of cash on the balance sheet at March 31, 2023, we had substantial sources of off-balance sheet liquidity. These sources of available liquidity include $4.8 billion of secured and unused capacity with the Federal Home Loan Bank, $741 million of secured unused borrowing capacity at the Fed’s discount window, more than $18 million of unpledged AFS securities that could be pledged at the discount window and $300 million of unsecured lines of credit. In addition to these borrowing sources, the Bank has capacity to utilize additional brokered deposits as of March 31, 2024. We can also obtain additional liquidity from deposit growth by utilizing state and national wholesale markets.
Our primary sources of funds for the Company are deposits, customer repurchase agreements and borrowings. Total deposits and customer repos of $12.17 billion at March 31, 2024 increased $465.4 million, or 3.98%, over total deposits and customer repos of $11.71 billion at December 31, 2023. As of March 31, 2024, total borrowings, consisted of $2.0 billion of advances from the Federal Reserve’s Bank Term Funding Program, at an average cost of approximately 4.75%. The BTFP advances include maturities of $695 million in May and $1.3 billion in January of 2025. Our deposit levels and cost of deposits may fluctuate from period-to-period due to a variety of factors, including the stability of our deposit base, prevailing interest rates, and market conditions. At March 31, 2024, our deposits and customer repurchase agreements that are neither collateralized nor insured were approximately $5.4 billion, or 45% of our total deposits and customer repos.
Additional sources of liquidity include cash on deposit at the Federal Reserve, which exceeded $900 million at March 31, 2024, and principal and interest payments from our investment portfolio. We shrank our investment portfolio by not reinvesting the cashflows generated by our investments during the first quarter of 2024. Our total investment portfolio declined by $129.0 million from December 31, 2023 to $5.29 billion as of March 31, 2024. The decrease was primarily due to a $119 million decline in AFS securities. AFS securities totaled $2.84 billion at March 31, 2024, inclusive of a pre-tax net unrealized loss of $485.6. Pre-tax unrealized loss grew by $35.9 million from December 31, 2023. Market risk, is partly managed by $1 billion notional pay fixed swaps hedging the fair value of the AFS portfolio. The $35.9 million decrease in fair value of our AFS securities was partially offset by an $18 million increase in the fair value of our derivatives that hedge the change in value of our AFS portfolio.
CVB is a holding company separate and apart from the Bank that must provide for its own liquidity and must service its own obligations. Substantially all of CVB’s revenues are obtained from dividends declared and paid by the Bank to CVB. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to CVB. In addition, our regulators could limit the ability of the Bank or CVB to pay dividends or make other distributions.
Below is a summary of our average cash position and statement of cash flows for the three months ended March 31, 2024 and 2023. For further details see our “Condensed Consolidated Statements of Cash Flows (Unaudited)” under Part I, Item 1 of this report.
Consolidated Summary of Cash Flows
Average cash and cash equivalents
595,470
212,079
Percentage of total average assets
3.67
1.30
Average cash and cash equivalents increased by $383.4 million, or 180.78%, to $595.5 million for the three months ended March 31, 2024, compared to $212.1 million for the same period of 2023.
At March 31, 2024, cash and cash equivalents totaled $949.6 million. This represented an increase of $722.1 million, or 317.34%, from $227.5 million at March 31, 2023. Our cash on deposit at the Federal Reserve grew by more than $700 million when compared to March 31, 2023. This growth in cash was partly attributable to the issuance of $300 million in brokered deposits. These deposits, which mature every 90 days, were combined with cash flow hedges which resulted in a fixed rate of approximately 4.2%.
Interest Rate Sensitivity Management
During periods of changing interest rates, the ability to re-price interest-earning assets and interest-bearing liabilities can influence net interest income, the net interest margin, and consequently, our earnings. Interest rate risk is managed by attempting to control the spread between rates earned on interest-earning assets and the rates paid on interest-bearing liabilities within the constraints imposed by market competition in our service area. The primary goal of interest rate risk management is to control exposure to interest rate risk, within policy limits approved by the Board of Directors. These limits and guidelines reflect our risk appetite for interest rate risk over both short-term and long-term horizons. We measure these risks and their impact by identifying and quantifying exposures through the use of sophisticated simulation and valuation models, which, as described in additional detail below, are employed by management to understand net interest income (NII) at risk and economic value of equity (EVE) at risk. Net interest income at risk sensitivity captures asset and liability repricing mismatches and is considered a shorter term measure, while EVE sensitivity captures mismatches within the period end balance sheets through the financial instruments’ respective maturities or estimated durations and is considered a longer term measure.
One of the primary methods that we use to quantify and manage interest rate risk is simulation analysis, which we use to model NII from the Company’s balance sheet under various interest rate scenarios. We use simulation analysis to project rate sensitive income under many scenarios. The analyses may include rapid and gradual ramping of interest rates, rate shocks, basis risk analysis, and yield curve scenarios. Specific balance sheet management strategies are also analyzed to determine their impact on NII and EVE. Key assumptions in the simulation analysis relate to the behavior of interest rates and pricing spreads, the changes in product balances, and the behavior of loan and deposit clients in different rate environments. This analysis incorporates several assumptions, the most material of which relate to the re-pricing characteristics and balance fluctuations of deposits with indeterminate or non-contractual maturities, and prepayment of loans and securities.
Our interest rate risk policy measures the sensitivity of our net interest income over both a one-year and two-year cumulative time horizon.
The simulation model estimates the impact of changing interest rates on interest income from all interest-earning assets and interest expense paid on all interest-bearing liabilities reflected on our balance sheet. This sensitivity analysis is compared to policy limits, which specify a maximum tolerance level for net interest income exposure over a one and two year
66
horizon assuming no balance sheet growth, given a 200 basis point upward and a 200 basis point downward shift in interest rates depending on the level of current market rates. The simulation model uses a parallel yield curve shift that ramps rates up or down on a pro rata basis over 12-months and measures the resulting net interest income sensitivity over both the 12-month and 24-month time horizons.
The following depicts the Company’s net interest income sensitivity analysis for the periods presented below, when rates are ramped up 200bps or ramped down 200bps over a 12-month time horizon.
Estimated Net Interest Income Sensitivity (1)
Interest Rate Scenario
12-month Period
24-month Period (Cumulative)
+ 200 basis points
3.93%
3.97%
3.96%
4.56%
- 200 basis points
-4.69%
-5.90%
-3.97%
-5.21%
Based on our current simulation models, we believe that the interest rate risk profile of the balance sheet is modestly asset sensitive over both a one-year and a two-year horizon. The estimated sensitivity does not necessarily represent a forecast and the results may not be indicative of actual changes to our net interest income. These estimates are based upon a number of assumptions including: the nature and timing of interest rate levels including yield curve shape, re-pricing characteristics and balance fluctuations of deposits with indeterminate or non-contractual maturities, prepayments on loans and securities, pricing strategies on loans and deposits, and replacement of asset and liability cash flows. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions including how customer preferences or competitor influences might change.
We also perform valuation analysis, which incorporates all cash flows over the estimated remaining life of all material balance sheet and derivative positions. The valuation of the balance sheet, at a point in time, is defined as the discounted present value of all asset cash flows and derivative cash flows minus the discounted present value of all liability cash flows, the net of which is referred to as EVE. The sensitivity of EVE to changes in the level of interest rates is a measure of the longer-term re-pricing risk and options risk embedded in the balance sheet. EVE uses instantaneous changes in rates, as shown in the table below. Assumptions about the timing and variability of balance sheet cash flows are critical in the EVE analysis. Particularly important are the assumptions driving prepayments and the expected duration and pricing of the indeterminate deposit portfolios. EVE sensitivity is reported in both upward and downward rate shocks. At March 31, 2024 and December 31, 2023, the EVE profile indicates a decline in net balance sheet value due to instantaneous downward changes in rates. From December 31, 2023 to March 31, 2024, our EVE sensitivity to rising rates changed from a minimal decline in value to a modest gain in value due to increased cash balances. Our overall sensitivity of EVE to changes in interest rates is modest, with the exception of more meaningful reductions in value if rates were to immediately decline by 300 or 400 basis points.
Economic Value of Equity Sensitivity
Instantaneous Rate Change
400 bp decrease in interest rates
-17.0%
-13.9%
300 bp decrease in interest rates
-11.6%
-9.3%
200 bp decrease in interest rates
-7.2%
-4.7%
100 bp decrease in interest rates
-3.2%
-1.6%
100 bp increase in interest rates
-0.1%
-0.4%
200 bp increase in interest rates
1.2%
-0.3%
300 bp increase in interest rates
2.0%
-1.0%
400 bp increase in interest rates
2.7%
-2.2%
As EVE measures the discounted present value of cash flows over the estimated lives of instruments, the change in EVE does not directly correlate to the degree that earnings would be impacted over a shorter time horizon (i.e., the current year). Further, EVE does not take into account factors such as future balance sheet growth, changes in asset and liability mix, changes in yield curve relationships, and changing product spreads that could mitigate the adverse impact of changes in interest rates.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in the market prices and interest rates. Our market risk arises primarily from interest rate risk inherent in our lending and deposit taking activities. We do not currently have futures, forwards, or option contracts. As a result of the phase out of LIBOR, our interest rate swap derivatives and the associated loans that were indexed to LIBOR, have been replaced with one month CME Term SOFR. For further quantitative and qualitative disclosures about market risks in our portfolio, see “Asset/Liability Management and Interest Rate Sensitivity Management” included in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” presented elsewhere in this report. This analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2023. Our analysis of market risk and market-sensitive financial information contains forward-looking statements and is subject to the disclosure at the beginning of Part I regarding such forward-looking information.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures under the supervision and with the participation of the Chief Executive Officer, the Chief Financial Officer and other senior management of the Company. Based on the foregoing, the Company’s Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
During the quarter ended March 31, 2024, there have been no changes in our internal controls over financial reporting that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to various lawsuits and threatened lawsuits in the course of business. From time to time, such lawsuits and threatened lawsuits may include, but are not limited to, actions involving securities litigation, employment matters, wage-hour and labor law claims, consumer claims, regulatory compliance claims, data privacy claims, lender liability claims, bankruptcy-related claims and negligence claims, some of which may be styled as “class action” or representative cases. Some of these lawsuits may be similar in nature to other lawsuits pending against the Company’s competitors.
For lawsuits where the Company has determined that a loss is both probable and reasonably estimable, a liability representing the best estimate of the Company’s financial exposure based on known facts has been recorded in accordance with FASB guidance over loss contingencies (ASC 450). However, as a result of inherent uncertainties in judicial interpretation and application of a myriad of laws and regulations applicable to the Company’s business, and the unique, complex factual issues presented in any given lawsuit, the Company often cannot determine the probability of loss or estimate the amount of damages which a plaintiff might successfully prove if the Company were found to be liable. For lawsuits or threatened lawsuits where a claim has been asserted or the Company has determined that it is probable that a claim will be asserted, and there is a reasonable possibility that the outcome will be unfavorable, the Company will disclose the existence of the loss contingency, even if the Company is not able to make an estimate of the possible loss or range of possible loss with respect to the action or potential action in question, unless the Company believes that the nature, potential magnitude or potential timing (if known) of the loss contingency is not reasonably likely to be material to the Company’s liquidity, consolidated financial position, and/or results of operations.
Our accruals and disclosures for loss contingencies are reviewed quarterly and adjusted as additional information becomes available. We disclose a loss contingency and/or the amount accrued if we believe it is reasonably likely to be material or if we believe such disclosure is necessary for our financial statements to not be misleading. If we determine that an exposure to loss exists in excess of an amount previously accrued or disclosed, we assess whether there is at least a reasonable possibility that a loss, or additional loss, may have been incurred, and we adjust our accruals and disclosures accordingly.
We do not presently believe that the ultimate resolution of any lawsuits currently pending against the Company will have a material adverse effect on the Company’s results of operations, financial condition, or cash flows. The outcome of litigation and other legal and regulatory matters is inherently uncertain, however, and it is possible that one or more of the legal matters currently pending or threatened against the Company could have a material adverse effect on our results of operations, financial condition or cash flows.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors as previously disclosed in Item 1A. to Part I of our Annual Report on Form 10-K for the year ended December 31, 2023. The materiality of any risks and uncertainties identified in our Forward Looking Statements contained in this report together with those previously disclosed in the Form 10-K or those that are presently unforeseen could result in significant adverse effects on our financial condition, results of operations and cash flows. See Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On February 1, 2022, our Board of Directors approved a program to repurchase up to 10,000,000 shares of CVB common stock in the open market or in privately negotiated transactions, at times and at prices considered appropriate by us, depending upon prevailing market conditions and other corporate and legal considerations ("2022 Repurchase Program"). We did not repurchase any shares of our common stock during the quarter ended March 31, 2024. As of March 31, 2024, an aggregate of 4,300,059 shares remained available for repurchase under our 2022 Repurchase Program. The only shares repurchased during the first quarter of 2024 were shares repurchased pursuant to net settlement by employees in satisfaction of income tax withholding obligations incurred through the vesting of Company stock awards.
Period
Total Number of Shares Purchased (1)
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number of Shares Available for Repurchase Under the Plans or Programs
January 1 - 31, 2024
59,970
18.00
4,300,059
February 1 - 29, 2024
18,923
17.47
March 1 - 31, 2024
66,826
17.40
145,719
17.66
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
Exhibit No.
Description of Exhibits
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
32.2
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
101.INS
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents
104
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2024, has been formatted in Inline XBRL.
*
Filed herewith
**
Furnished herewith
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
Date: May 9, 2024
/s/ E. Allen Nicholson
E. Allen Nicholson
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)