CVB FINANCIAL CORP

Financial Performance

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.

(1)

Tax effected at respective statutory rates.

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.

(1)

Includes tax equivalent (TE) adjustments utilizing federal statutory rates of 21% in effect for the three months ended March 31, 2024 and March 31, 2023. The non TE rates for total investment securities were 2.60% and 2.33% for the three months ended March 31, 2024 and March 31, 2023, respectively.

(2)

Includes loan fees of $706,000 and $781,000 for the three months ended March 31, 2024 and March 31, 2023, respectively. Prepayment penalty fees of $630,000 and $583,000 are included in interest income for the three months ended March 31, 2024 and March 31, 2023, respectively.

(3)

Includes interest-bearing demand and money market accounts.

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

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.

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.

Provision for (Recapture of) Credit Losses

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.

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.

Noninterest Expense

The following table summarizes the various components of noninterest expense for the periods presented.

(1)

Noninterest expense divided by net interest income before provision for credit losses plus noninterest income.

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.