CVB Financial Corp. (NASDAQ:CVBF), the parent company of Citizens Business Bank, demonstrated remarkable resilience and consistency, reporting its 189th consecutive quarter of profitability in the second quarter of 2024. The company's net earnings for the full year 2023 reached $221.435 million, while its annual revenue stood at $666.28 million. Its strong operating cash flow of $295.632 million and free cash flow of $182.111 million further underscored its financial stability and ability to generate substantial cash.
Financials
In the second quarter of 2024, CVB Financial reported net earnings of $50 million, or $0.36 per share, representing a year-over-year decrease from the $55.8 million, or $0.40 per share, reported in the prior-year quarter. The $1.4 million increase in earnings compared to the first quarter of 2024 was primarily due to a $3.3 million decrease in non-interest expense, which was partially offset by a $1.6 million decline in net interest income.
The company's net interest margin (NIM) for the second quarter of 2024 was 3.05%, a decrease of 5 basis points from the 3.10% reported in the first quarter. This decline was driven by a 7 basis point increase in the cost of funds, which offset a 3 basis point improvement in earning asset yields. The increase in the cost of funds was primarily due to a 13 basis point rise in the cost of interest-bearing liabilities, including a 79 basis point increase in the cost of time deposits.
Asset Quality
Despite the challenging operating environment, CVB Financial's asset quality remained strong. The company's allowance for credit losses (ACL) totaled $82.8 million at the end of the second quarter, unchanged from the first quarter of 2024. Net charge-offs in the second quarter were $31,000, compared to $4 million in the first quarter. At quarter-end, non-performing assets, defined as non-accrual loans plus other real estate owned, were $25.6 million, or 16 basis points of total assets, up from $14.5 million, or 9 basis points, in the prior quarter.
Risks and Challenges
The increase in non-performing assets was primarily driven by the dairy industry, which suffered a deep downturn in 2023 due to the combined impact of lower milk prices and high feed costs. This resulted in recent downgrades in the bank's dairy lending portfolio, though a recovery in the industry appeared to be underway in 2024 with feed costs down by 25% and milk prices rising due to falling supplies. Additionally, the production agriculture sector experienced losses due to lower prices from higher supplies of commodities, such as almonds and pistachios. Land appraisals also began to reflect lower market values of farmland.
Loan Portfolio
CVB Financial's total loans at the end of the second quarter of 2024 were $8.7 billion, a $89 million, or 1%, decrease from the end of the first quarter and a $223 million decline from December 31, 2023. The quarter-over-quarter decrease was led by a $56 million decline in commercial real estate loans, while all other loan categories declined modestly. The decrease in loans from the end of 2023 included a $71 million decrease in dairy and livestock loans, reflecting the seasonal peak in line utilization at year-end.
Investment Portfolio
The company's total investment portfolio declined by $116 million from the end of the first quarter of 2024 and by $245 million from December 31, 2023, as cash flows generated from the portfolio were not reinvested during this year. Investment securities held-to-maturity (HTM) totaled approximately $2.43 billion at the end of the second quarter, while investment securities available-for-sale (AFS) totaled approximately $2.75 billion. The tax-equivalent yield on the entire investment portfolio was 2.71% for the second quarter of 2024, compared to 2.64% for the prior quarter.
Deposits
CVB Financial's total deposits and customer repurchase agreements were $12.1 billion at the end of the second quarter, a $111 million decrease from March 31, 2024, but a $354 million increase from December 31, 2023. The increase in total deposits and customer repos from the end of 2023 included the addition of $400 million in brokered time deposits. The company's cost of deposits was 88 basis points on average for the second quarter of 2024, compared to 74 basis points for the first quarter.
Geographic Diversification
Geographically, CVB Financial's loan portfolio was well-diversified, with the largest concentrations in Los Angeles County (36.5%), the Central Valley and Sacramento region (23.7%), and Orange County (13.2%). The company's commercial real estate portfolio was also diversified, with the largest segments being industrial (33.6%), office (16.4%), and retail (13.8%).
Outlook
Looking ahead, CVB Financial remained cautiously optimistic about loan growth for the remainder of 2024, targeting low single-digit growth from the current level. The company's management believed that while loan pipelines were slower than in past years, there were still opportunities to grow the loan portfolio, particularly in the commercial and industrial (C&I) segment, where the company had seen strong demand but lower utilization rates.
Capital Position
The company's capital position remained strong, with a common equity Tier 1 capital ratio of 15.3% and a total risk-based capital ratio of 16.1% as of June 30, 2024. CVB Financial was actively exploring opportunities to optimize its balance sheet, including the potential for targeted sale-leaseback transactions and the selective sale of securities within its AFS portfolio to help fund the repayment of higher-cost borrowings, such as the Bank Term Funding Program (BTFP) advances.
Conclusion
CVB Financial continued to demonstrate its ability to navigate challenging economic conditions while maintaining its consistent performance and shareholder value creation. The company's focus on banking the best small and medium-sized businesses and their owners, coupled with its strong asset quality, diversified loan portfolio, and prudent capital management, positioned it well to weather the current environment and capitalize on future growth opportunities.