CVB FINANCIAL CORP

For the year ended December 31, 2023, we reported net earnings of $221.4 million, compared with $235.4 million for 2022, a $14.0 million, or 5.94%, decrease from the prior year. Diluted earnings per share of $1.59 for 2023, decreased by $0.08, or 4.8%, when compared to $1.67 for 2022. Net income was negatively impacted by a $9.2 million expense accrual for the FDIC’s final rule that implements a special assessment (Special FDIC Assessment) that will be collected over eight quarters beginning in 2024. Net earnings of $221.4 million produced a return on average equity (“ROAE”) of 11.03%, a return on average tangible common equity (“ROATCE”) of 18.48% and a return on average assets (“ROAA”) of 1.35%. Our net interest margin, tax equivalent (“NIM”), was 3.31% for 2023, while our efficiency ratio was 42.0%.

Net interest income of $488.0 million for the year ended December 31, 2023, decreased $17.5 million, or 3.47%, compared to the same period of 2022. Interest income grew by $91.7 million, or 17.81%, in 2023, offset by a $109.2 million increase in interest expense year-over-year. Cost of funds for 2023 increased by 77 basis points over 2022, while the earning asset yield grew by 74 basis points. Average earning assets declined by $610.4 million year-over-year.

Noninterest expense increased from $216.6 million in 2022 to $229.9 million in 2023. The $13.3 million increase in noninterest expense included a $12.2 million increase in regulatory assessment expense, including the $9.2 million Special FDIC assessment.

At December 31, 2023, total assets of $16.02 billion decreased by $455.5 million, or 2.76%, from total assets of $16.48 billion at December 31, 2022. Interest-earning assets of $14.46 billion at December 31, 2023 decreased by $509.5 million, or 3.40%, when compared with $14.97 billion at December 31, 2022. The decrease in interest-earning assets was primarily due to a $388.8 million decrease in investment securities and a $174.5 million decrease in total loans, partially offset by an increase of $64.7 million in interest-earning balances due from the Federal Reserve.

Total investment securities were $5.42 billion at December 31, 2023, a decrease of $388.8 million, or 6.69%, from $5.81 billion at December 31, 2022, primarily due to repayments and maturities. At December 31, 2023, investment securities held-to-maturity (“HTM”) totaled $2.46 billion. At December 31, 2023, investment securities AFS totaled $2.96 billion, inclusive of a pre-tax net unrealized loss of $449.8 million. AFS securities decreased by $299.1 million, or 9.19%, from $3.26 billion December 31, 2022, net of a $50.3 million decrease in the pre-tax unrealized loss. Our tax equivalent yield on our investment portfolio grew from 2.03% for 2022 to 2.52% for 2023. The 49 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 $6.9 million and were reflected as a liability at December 31, 2023. These instruments generated interest income of $8.2 million for the year ended December 31, 2023. Refer to Note 19 –Derivative Financial Instruments of the notes to the consolidated financial statements of this report for additional information.

Total loans and leases, at amortized cost, of $8.90 billion at December 31, 2023, decreased by $174.5 million, or 1.92%, from $9.08 billion at December 31, 2022. After adjusting for PPP loans, which declined by $6.4 million, our core loans decreased by $168.1 million, or 1.85% from December 31, 2022. Loan growth continues to be impacted by a slowdown in loan demand with our new loan production decreasing throughout the second half of 2023. The $168.1 million decreases included $100.4 million in commercial real estate loans, $21.5 million in construction loans, $20.7 million in dairy & livestock and agribusiness loans, $20.3 million in SBA loans, $7.5 million in municipal lease financings, and $22.7 million in consumer and other loans. Commercial and industrial loans increased by $21.2 million although line utilization decreased from 33% to 29%. Our loan yields were 5.04% for the year ended December 31, 2023, compared to 4.49% for 2022. This 55 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 $86.8 million at December 31, 2023, compared to $85.1 million at December 31, 2022. At December 31, 2023, ACL as a percentage of total loans and leases outstanding was 0.98%. This compares to 0.94% at December 31, 2022. The changes in our allowance over the last few quarters have been primarily due to changes in our economic forecast. Our economic forecast continues to be a blend of multiple forecasts produced by Moody’s. The resulting economic forecast reflects a modest decline in GDP for the first three quarters of 2024, with a return to positive GDP growth in the fourth quarter of 2024. GDP is forecasted to increase by 0.92% in 2025, before reaching a more robust growth rate of 2.6% 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 and throughout 2025.

Unemployment is forecasted to exceed 5% in 2024 and then peak at 5.7% in the first quarter of 2025. The unemployment rate forecast then declines to less than 5% in the third quarter of 2026.

Since March of 2022 to December of 2023, 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 62 basis points for the fourth quarter of 2023. 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 year. On January 31, 2024, the Federal Reserve announced that they would maintain the overnight Fed Funds rate at the current range of 5.25% to 5.50% noting that, despite an easing in the inflation rate over the past year, they do not expect it will be appropriate to reduce the target range until they have gained greater confidence that inflation is moving sustainably toward their goal of 2%.

Noninterest-bearing deposits were $7.21 billion at December 31, 2023, a decrease of $958.2 million, or 11.74% when compared to $8.16 billion at December 31, 2022. At December 31, 2023, noninterest-bearing deposits were 63.03% of total deposits, compared to 63.60% at December 31, 2022.

Interest-bearing deposits were $4.23 billion at December 31, 2023, a decrease of $444.4 million, or 9.51%, when compared to $4.67 billion at December 31, 2022. Customer repurchase agreements totaled $271.6 million at December 31, 2023, compared to $565.4 million at December 31, 2022. Our average cost of total deposits including customer repurchase agreements for 2023 was 0.41%, compared to 0.05% for 2022.

Overall, we have experienced a decline in deposit levels due to higher cash outflows on customer accounts resulting from inflationary pressures, as well as the impact of higher interest rates that has led to deposits moving to higher yielding alternatives, such as money market funds and short-term treasury notes. These higher interest rates resulting from the Federal Reserve’s significant increase in the federal funds rate over the last year have continued to impact deposit levels, including approximately $800 million of funds on deposit at the end of 2022 that were transferred from the Bank’s balance sheet by customers to be invested by CitizensTrust in higher yielding instruments such as United States treasury notes or bonds.

At December 31, 2023, total borrowings of $2.07 billion consisted of $1.91 billion of one-year advances from the Federal Reserve’s Bank Term Funding Program ("BTFP"), at a weighted average cost of 4.78% and $160 million of short-term Federal Home Loan Bank ("FHLB") advances, at an average cost of approximately 5.7%. Borrowings increased $1.08 billion from $995.0 million at December 31, 2022. These higher cost short-term borrowings and an increase in the cost of deposits and customer repurchase agreements from five basis points for the year ended December 31, 2022 to 41 basis points for 2023, increased our cost of funds by 77 basis points to 0.83% for the year ended December 31 2023.

The Company’s total equity was $2.08 billion at December 31, 2023. This represented an overall increase of $129.5 million from total equity of $1.95 billion at December 31, 2022. Increases to equity included $221.4 million in net earnings and a $31.2 million increase in other comprehensive income, that were partially offset by $111.6 million in cash dividends. We engaged in no stock repurchases during the second, third and fourth quarters of 2023, 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. The Company's 2022 10b5-1 stock repurchase plan expired on March 2, 2023. Our tangible book value per share at December 31, 2023 was $9.31.

Our capital ratios under the revised capital framework referred to as Basel III remain well-above regulatory requirements. As of December 31, 2023, the Company’s Tier 1 leverage capital ratio totaled 10.27%, our common equity Tier 1 ratio totaled 14.65%, our Tier 1 risk-based capital ratio totaled 14.65%, and our total risk-based capital ratio totaled 15.50%. We did not elect to phase in the impact of CECL on regulatory capital, as allowed under the interim final rule of the FDIC and other U.S. banking agencies. Refer to our Analysis of Financial Condition — Capital Resources.

Acquisition Related

On January 7, 2022, the Company completed the merger transaction whereby Suncrest Bank (“Suncrest”), headquartered in Visalia, California, merged with and into the Company’s wholly-owned subsidiary Citizens Business Bank (“Citizens”), in accordance with the terms and conditions of that certain Agreement and Plan of Reorganization and Merger (“Merger Agreement”), dated as of July 27, 2021, by and among the Company, the Bank and Suncrest, in a stock and cash transaction valued at approximately $237 million in aggregate, or $18.63 per Suncrest share based on CVB Financial Corp.’s closing stock price of $22.87 on January 7, 2022. Under the terms of the Merger Agreement, the Company issued approximately 8.6 million shares of Company common stock and approximately $39.6 million in aggregate cash consideration, including cash paid out in settlement of outstanding incentive stock option awards at Suncrest.

At close, the total fair value of assets acquired approximated $1.38 billion in total assets, including $329.0 million of cash and cash equivalents, net of cash paid, $131.1 million of investment securities, and $765.9 million in net loans. The acquired loans were recorded at fair value, which reflected a net discount of 1.5% for the entire loan portfolio. Approximately 30% of the acquired loans are considered PCD loans. An allowance for credit loss of $8.6 million was established for these PCD loans at acquisition. In addition, the acquired PCD loans were further discounted by almost 2% to adjust them to fair value. Non-PCD loans were valued at a total premium of 0.3%, net of a credit discount of 1.5%. We recorded a loan loss provision to establish a day one allowance for credit losses of $4.9 million on the non-PCD loans.

Suncrest had seven branch locations and two loan production offices in California’s Central Valley and the Sacramento area, which opened as Citizens Business Bank locations on January 10, 2022. The integration of Suncrest, including the conversion of core systems in the first quarter of 2022, was completed with the consolidation of two banking centers during the second quarter of 2022. For the year ended December 31, 2022, the Company incurred non-recurring merger related expenses associated with the Suncrest acquisition of $6.0 million.