Executive Summary / Key Takeaways

• CVB Financial Corp. (CVBF) demonstrates enduring stability and profitability, marking 48 years of continuous profitability and 142 consecutive quarterly dividends, underpinned by a relationship-focused banking model for California's small to mid-sized businesses.
• The company maintains a strong, low-cost deposit franchise, with noninterest-bearing deposits consistently representing a high percentage of total deposits, providing a stable funding base despite market competition and customer migration to higher-yielding options.
• Disciplined credit underwriting and proactive asset quality management, particularly in specialized areas like agriculture and commercial real estate, are central to CVBF's strategy, contributing to a robust allowance for credit losses and relatively low nonperforming assets despite challenging economic forecasts.
• Strategic balance sheet management, including deleveraging wholesale funding and optimizing the investment portfolio through targeted sales and purchases, has successfully expanded the net interest margin and enhanced profitability metrics like Return on Average Assets.
• CVBF's significant capital strength positions it for strategic flexibility, prioritizing M&A opportunities while also engaging in opportunistic share repurchases, aiming to drive future growth and enhance shareholder value.

A Foundation of Stability in a Dynamic Market

CVB Financial Corp., through its subsidiary Citizens Business Bank, has carved out a distinguished position in the California banking landscape, built on a foundation of stability and a deep-rooted commitment to its core market. With a history stretching back nearly five decades, the company stands as a testament to enduring profitability, having achieved 192 consecutive quarters of positive earnings and rewarding shareholders with 142 consecutive quarterly cash dividends. This remarkable track record is not merely a historical footnote but reflects a deliberate and consistent strategy focused on relationship-based banking for small to mid-sized businesses and individuals across California.

The company's business model is centered on traditional banking activities: gathering deposits, extending credit, and managing an investment portfolio. Complementing these core functions is the CitizensTrust Division, offering essential trust and investment services that deepen customer relationships and provide valuable fee income. Operating through a network of 62 banking centers and three trust offices, CVBF's strength lies in its localized approach, fostering strong ties with business owners and professionals who form the backbone of its deposit and lending base.

In a competitive environment dominated by national giants like JPMorgan Chase (JPM), Bank of America (BAC), and Wells Fargo (WFC), alongside regional players such as U.S. Bancorp (USB) and an increasing array of fintech challengers, CVBF differentiates itself through specialized expertise and a focus on service quality. While larger institutions may boast superior scale and broader digital offerings, CVBF leverages its regional presence and relationship model to offer more personalized service and potentially faster decision-making for its target clientele. For instance, its specialized lending teams, particularly in areas like agriculture and commercial real estate, possess deep market knowledge that allows for nuanced underwriting and tailored solutions, often leading to higher profitability margins in these niches compared to more standardized offerings from larger competitors.

Technologically, CVBF's differentiation is less about groundbreaking innovation and more about leveraging technology to enhance its relationship-based service model and operational efficiency. While specific quantifiable metrics on the speed or cost advantages of its core banking technology relative to competitors are not detailed, the company consistently invests in its technology infrastructure and automation. This is reflected in increasing computer software expenses, which grew by approximately $700,000 year-over-year in the first quarter of 2025. These investments are aimed at improving overall efficiencies and automating processes, supporting the delivery of services like treasury management and bankcard services. For example, its Citizens Sweep Manager product, which allows customers to invest excess deposits overnight, is enabled by technology that facilitates seamless transactions collateralized by investment securities. While larger banks like Bank of America may have more advanced mobile platforms offering faster online loan processing, CVBF's technology supports its core strategy of providing comprehensive, relationship-driven solutions, aiming for efficiency gains that contribute to managing controllable expense growth below 4%. The "so what" for investors is that while CVBF may not lead in cutting-edge digital features, its focused technology investments support its existing business model and contribute to operational efficiency, which is crucial for maintaining profitability in a competitive market.

Performance Reflecting Strategic Discipline

CVBF's recent financial performance underscores the impact of its strategic balance sheet management in a dynamic interest rate environment. For the first quarter of 2025, the company reported net earnings of $51.1 million, or $0.36 per diluted share, building on $50.9 million in the fourth quarter of 2024 and $48.6 million in the first quarter of 2024. This performance translated into a Return on Average Assets (ROAA) of 1.37% and a Return on Average Tangible Common Equity (ROATCE) of 14.51% for Q1 2025, demonstrating solid profitability relative to its asset base and tangible equity.

A key driver of the first quarter's results was the expansion of the net interest margin (NIM), which reached 3.31%, a notable increase from 3.18% in Q4 2024 and 3.10% in Q1 2024. This improvement was primarily a direct consequence of strategic balance sheet deleveraging undertaken in the second half of 2024, specifically the early redemption of $1.3 billion in Bank Term Funding Program (BTFP) borrowings. This action significantly reduced interest expense from borrowings, which decreased by approximately $17.1 million compared to Q1 2024, as average borrowings declined by $1.5 billion. While average earning assets also decreased ($1.1 billion from Q1 2024), the lower cost of funds more than offset a modest decline in earning asset yields. The cost of total deposits and customer repurchase agreements did increase from 0.73% in Q1 2024 to 0.87% in Q1 2025, reflecting the competitive environment for deposits, but the overall cost of funds decreased significantly due to the reduction in higher-cost borrowings.

Noninterest income provided a boost in Q1 2025, totaling $16.2 million compared to $14.1 million in Q1 2024. This increase was largely attributable to a $2.2 million net gain on the sale of four OREO properties. Other components like Trust and Investment Services fees saw modest growth, reaching $3.4 million in Q1 2025, reflecting the continued success of the CitizensTrust division, which manages approximately $4.7 billion in assets under management and administration. BOLI income, while lower year-over-year due to a death benefit received in Q1 2024, remains a source of tax-advantaged income.

Noninterest expense remained well-managed at $59.1 million in Q1 2025, a slight decrease from $59.8 million in Q1 2024. The prior year quarter included a significant $2.3 million additional accrual for the FDIC special assessment, which masked some underlying expense increases in Q1 2025, such as a $500,000 provision for unfunded loan commitments and higher software and occupancy expenses. The increase in occupancy costs reflects higher rent expenses associated with the sale-leaseback transactions executed in the latter half of 2024, a strategic move to unlock value from owned properties and offset losses from selling lower-yielding investment securities.

The investment portfolio continues to be managed for income and liquidity, totaling $4.89 billion at March 31, 2025. The portfolio saw a modest decrease as cash flows were not fully reinvested, contributing to the overall balance sheet deleveraging. The unrealized loss on the Available-for-Sale (AFS) portfolio decreased by $59.3 million from December 31, 2024, reflecting changes in market interest rates. The company utilizes fair value hedges ($700 million notional in Q1 2025) to manage interest rate risk on the AFS portfolio, although the positive carry from these swaps decreased compared to the prior year due to changes in SOFR and a reduction in notional value.

Asset Quality and Risk Management

CVBF's disciplined credit culture is a cornerstone of its risk management framework. The company maintains a robust Allowance for Credit Losses (ACL), totaling $78.3 million or 0.94% of total loans at March 31, 2025, consistent with the level at December 31, 2024. This ACL is determined using lifetime loss rate models informed by historical experience, portfolio characteristics, and a probability-weighted economic forecast. The forecast anticipates slower Real GDP growth through 2025, unemployment rising to 5% by early 2026 and remaining elevated, and commercial real estate values continuing to decline through the first half of 2026. While these macroeconomic assumptions suggest potential headwinds, management believes the ACL is appropriate to absorb expected losses.

Asset quality metrics remain relatively sound, though some areas warrant close monitoring. Nonperforming loans increased to $25.6 million (0.31% of total loans) at March 31, 2025, compared to $13.8 million (0.16% of total loans) at March 31, 2024. Classified loans, those graded substandard or worse, also saw an increase, reaching $94.2 million in Q1 2025, up from $89.5 million in Q4 2024 and $103 million in Q1 2024. The increase in classified loans has been particularly noted in the dairy and livestock portfolio, reflecting the challenges faced by the agricultural sector due to commodity price volatility and input costs, although management noted some recent improvements in milk prices and stabilization of input costs. The company's exposure to commercial real estate, particularly owner-occupied properties, is a significant portion of the loan book, and while overall trends are monitored, the disciplined underwriting (low LTVs, strong guarantors) is intended to mitigate risks associated with potential declines in property values.

The company's approach to credit risk is consistent, emphasizing sound underwriting and loan monitoring regardless of the economic cycle. This is evident in their selective approach to new loan originations, prioritizing credit quality over volume, even in a competitive pricing environment. While loan growth has been modest, management is optimistic about achieving low single-digit growth by the end of 2025, driven by improving pipelines, particularly in commercial real estate and increased utilization of C&I lines.

Beyond credit risk, CVBF actively manages interest rate risk, which is inherent in its balance sheet structure. The company uses simulation and valuation models to assess the impact of interest rate changes on Net Interest Income (NII) and Economic Value of Equity (EVE). Based on current models, the balance sheet is modestly asset sensitive over one-year and two-year horizons, suggesting NII could benefit from rising rates, though EVE is sensitive to significant instantaneous downward rate shifts. The use of interest rate swaps, both fair value hedges on the AFS portfolio and cash flow hedges on brokered CDs, is a key tool in managing this risk, aiming to stabilize earnings and balance sheet values.

Capital Strength and Strategic Flexibility

A defining characteristic of CVBF is its exceptional capital strength. At March 31, 2025, the company reported robust regulatory capital ratios, including a Common Equity Tier 1 (CET1) ratio of 16.52% and a Total Risk-Based Capital ratio of 17.33%, significantly exceeding the requirements to be considered "well-capitalized." This high level of capital provides substantial strategic flexibility.

Management views mergers and acquisitions (M&A) as a primary avenue for growth, actively engaging in conversations with potential targets, particularly banks with assets between $1 billion and $10 billion. While acknowledging challenges related to valuation gaps and the impact of unrealized losses on potential transaction math, management remains optimistic about the possibility of announcing a deal, positioning CVBF as a potential acquirer of choice in the California market, especially amidst disruption among competitors.

Absent a suitable M&A opportunity, CVBF is committed to returning capital to shareholders and supporting internal growth. The company's Board authorized a new 10 million share repurchase program in November 2024, replacing a previous program. In the first quarter of 2025, CVBF repurchased 782,063 shares for $15.3 million, demonstrating a disciplined and opportunistic approach to buybacks, particularly when the stock is perceived to be trading at attractive valuations relative to tangible book value. The company's strong capital ratios support continued repurchase activity while retaining ample capital for potential acquisitions and organic growth initiatives.

Furthermore, strategic actions like the targeted sale-leaseback transactions of owned properties, which generated gains used to offset losses from selling lower-yielding AFS securities, are part of a broader effort to optimize the balance sheet, enhance profitability, and free up capital and liquidity. These actions, combined with the deleveraging of wholesale funding, are expected to contribute to EPS growth and improved Return on Assets, even if the total asset size of the bank shrinks in the near term.

Conclusion

CVB Financial Corp. presents a compelling investment case grounded in its long history of consistent profitability, a resilient low-cost deposit franchise, and a deeply ingrained culture of disciplined credit management. The company's strategic actions, including the recent balance sheet deleveraging and targeted portfolio adjustments, have successfully enhanced its net interest margin and profitability metrics, demonstrating effective navigation of the current interest rate environment.

While macroeconomic headwinds, particularly concerning commercial real estate and certain agricultural sectors, pose ongoing risks that warrant careful monitoring, CVBF's robust capital position and conservative underwriting practices provide a strong buffer. The company is well-positioned for future growth, with clear objectives for low single-digit loan expansion driven by strengthening pipelines and a strategic focus on full operating company relationships. The significant excess capital affords management the flexibility to pursue value-enhancing M&A opportunities or continue opportunistic share repurchases, both of which could drive future shareholder value. Investors looking for a financially strong, well-managed regional bank with a proven track record and strategic clarity in a key U.S. market may find CVBF's story compelling. The ability to execute on M&A, continue disciplined loan growth, and effectively manage deposit costs in a competitive landscape will be key factors to watch.