# CVB Financial Corp: Form 10-Q for the period ended Sep 30, 2023

- Company: [CVB Financial Corp](/companies/cvbf.md) (CIK 354647)
- Form: 10-Q
- Filed: 2023-11-09
- Accepted by EDGAR: Nov 9, 2023, 18:19 ET
- Period: 2023-09-30
- Accession: 0000950170-23-061771
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/354647/000095017023061771/cvbf-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/354647/000095017023061771/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $32.9m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $79.6m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $22.7m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $67.9m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $57.9m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | $172.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.42 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | $1.24 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.42 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | $1.24 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 138,481,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 138,481,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $247.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $2.9m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2023-01-01 to 2023-09-30 | $83.8m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2023-01-01 to 2023-09-30 | $21.2m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-09-30 | $240.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2023-09-30 | $15.90bn | us-gaap:Assets |
| Total liabilities | at 2023-09-30 | $13.95bn | us-gaap:Liabilities |
| Shareholders' equity | at 2023-09-30 | $1.95bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 115,256 characters.

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, 2022 and the unaudited condensed consolidated financial statements and accompanying notes presented elsewhere in this report.

### CRITICAL ACCOUNTING POLICIES

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.

- Allowance for Credit Losses (“ACL”)
- Business Combinations
- Valuation and Recoverability of Goodwill

Our significant accounting policies are described in greater detail in our 2022 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, 2022, 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 September 30, 2023

| Standard | Description | Adoption Timing | Impact on Financial Statements |
| --- | --- | --- | --- |
| ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions Issued June 2022 | On June 30, 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820) - Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. This ASU clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and is not considered in measuring fair value. Further, this ASU clarifies that an entity cannot, recognize and measure a contractual sale restriction as a separate unit of account. Additionally, the amendments require the disclosures for equity securities subject to contractual sale restrictions to include the fair value of equity securities subject to contractual sale restrictions reflected on the balance sheet, the nature and remaining duration of the restrictions and the circumstances that could cause a lapse in the restrictions. This ASU is effective for interim and annual reporting periods beginning after December 15, 2023; early adoption is permitted. | 1st Quarter 2024 | The adoption of this ASU is not expected to have a material impact on our consolidated financial statements. |

38

### OVERVIEW

For the third quarter of 2023, we reported net earnings of $57.9 million, compared with $55.8 million for the second quarter of 2023 and $64.6 million for the third quarter of 2022. Diluted earnings per share were $0.42 for the third quarter, compared to $0.40 for the prior quarter and $0.46 for the same period last year. Pretax pre-provision income grew from $78.2 million in the second quarter of 2023 to $82.6 million for the third quarter of 2023, compared to $91.9 million in the third quarter of 2022. Net income of $57.9 million for the third quarter of 2023 produced an annualized return on average equity (“ROAE”) of 11.33%, an annualized return on average tangible common equity (“ROATCE”) of 18.82%, and an annualized return on average assets (“ROAA”) of 1.40%.

Net interest income was $123.4 million for the third quarter of 2023. This represented a $3.8 million, or 3.21%, increase from the second quarter of 2023, and a $10.0 million, or 7.47%, decrease from the third quarter of 2022. The $3.8 million quarter-over-quarter increase in net interest income was primarily due to a nine basis point increase in net interest margin. The decline in net interest income compared to the third quarter of 2022 was due to a $484.2 million decrease in average earning assets and a 15 basis point decrease in net interest margin.

The third quarter of 2023 included $2.0 million in provision for credit losses, compared to $500,000 in provision for credit losses in the second quarter of 2023 and $2.0 million in the third quarter of 2022. The year-to-date provision for credit losses of $4.0 million was the result of an overall increase in projected loss rates from 0.94% at the end of 2022 to 1.00% at September 30, 2023. The increase in projected loss rates continues to be driven primarily by a deteriorating economic forecast that assumes modest recession in early 2024 with modest overall GDP growth through 2025, as well as lower commercial real estate values and an increase in the rate of unemployment. Our forecast reflects GDP growth of 2.1% for all of 2023, 0.3% in 2024 and 1.1% in 2025. Unemployment is forecasted to be 3.8% in 2023, 5.2% in 2024 and 5.7% in 2025.

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 $24.9 million on September 30, 2023. These instruments generated interest income of $3.8 million for the third quarter of 2023, compared to $446,000 for the second quarter of 2023. Refer to Note 10 – Derivative Financial Instruments of the notes to the unaudited condensed consolidated financial statements of this report for additional information.

At September 30, 2023, total assets of $15.90 billion decreased by $573.5 million, or 3.48%, from total assets of $16.48 billion at December 31, 2022. Interest-earning assets of $14.33 billion at September 30, 2023 decreased by $644.7 million, or 4.31%, when compared with $14.97 billion at December 31, 2022. The decrease in interest-earning assets was primarily due to a $446.9 million decrease in investment securities and a $201.8 million decrease in total loans.

Total investment securities were $5.36 billion at September 30, 2023, a decrease of $446.9 million, or 7.69%, from $5.81 billion at December 31, 2022, primarily due to repayments and maturities. At September 30, 2023, investment securities held-to-maturity (“HTM”) totaled $2.49 billion, a decrease of $64.9 million, or 2.54%, from December 31, 2022. At September 30, 2023, investment securities available-for-sale (“AFS”) totaled $2.87 billion, inclusive of a pre-tax net unrealized loss of $628.4 million. AFS securities decreased by $382.0 million, or 11.74%, from $3.26 billion December 31, 2022. Our tax equivalent yield on investments was 2.64% for the quarter ended September 30, 2023, compared to 2.37% for the second quarter of 2023 and 2.12% for the third quarter of 2022.

Total loans and leases, at amortized cost, of $8.88 billion at September 30, 2023 decreased by $201.8 million, or 2.22%, from December 31, 2022. After adjusting for seasonality of dairy & livestock loans, our core loans declined by $114.8 million, or 1.32%, from December 31, 2022. The $201.8 million decrease in total loans included decreases of $87.0 million in dairy & livestock loans, $41.9 million in commercial real estate loans, $25.2 million in construction loans, $10.6 million in commercial and industrial loans, $7.8 million in SBA loans, $5.9 million in PPP loans, and $24.9 million in consumer and other loans. Commercial and industrial line utilization was 27% at September 30, 2023, compared to 33% at the end of 2022. The decline in dairy & 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 78% at December 31, 2022 to 73% at September 30, 2023. Our yield on loans was 5.07% for the quarter ended September 30, 2023, compared to 5.01% for the second quarter of 2023 and 4.56% for the third quarter of 2022. Loan yields, excluding the impact of PPP loans and discount accretion from acquired loans, increased from 4.42% in the third quarter of 2022 to 5.02% in the third quarter of 2023. This 60 basis point increase in our core 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 $89.0 million at September 30, 2023, compared to $85.1 million at December 31, 2022. The $4.0 million provision for credit losses in the first nine months of 2023 was the result of an overall increase in projected loss rates from 0.94% at the end of 2022 to 1.00% at September 30, 2023. The increase in projected loss rates continues to be driven primarily by a deteriorating economic forecast that assumes modest GDP growth through 2024, as well as lower commercial real estate values and an increase in the rate of unemployment.

Since March of 2022 to September 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 5 basis points for the third quarter of 2022 to 52 basis points for the third 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.

Noninterest-bearing deposits of $7.59 billion at September 30, 2023, decreased $577.7 million, or 7.08% when compared to $8.16 billion at December 31, 2022. At September 30, 2023, noninterest-bearing deposits were 61.39% of total deposits, compared to 63.60% at December 31, 2022. Higher interest rates that have resulted from the Federal Reserve’s significant increase in the federal funds rate over the last year have continued to impact deposit levels, including approximately $720 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 Citizens Trust in higher yielding instruments such as United States treasury notes or bonds.

Interest-bearing deposits were $4.77 billion at September 30, 2023, an increase of $100.3 million, or 2.15%, when compared to $4.67 billion at December 31, 2022. Customer repurchase agreements totaled $269.6 million at September 30, 2023, compared to $565.4 million at December 31, 2022. Our average cost of total deposits including customer repurchase agreements was 0.51% for the quarter ended September 30, 2023, compared to 0.35% for the quarter ended June 30, 2023 and 0.05% for the third quarter of 2022.

At September 30, 2023, total short-term borrowings of $1.12 billion consisted of $870 million of one-year advances from the Federal Reserve’s Bank Term Funding Program, at a cost of 4.87% and $250 million of short-term Federal Home Loan Bank ("FHLB") advances, at an average cost of approximately 5%. Borrowings decreased $375 million from the end of the second quarter of 2023 to the end of the third quarter of 2023, as cash balances were drawn down by $378 million over the same time period. We continued to shrink our investment portfolio resulting in a decline of $446.9 million from December 31, 2022. Short-term borrowings increased $125 million from $995.0 million at December 31, 2022. We had $1.32 billion in average short-term borrowings at a cost of 4.84% for the third quarter of 2023, compared to $1.53 billion in the second quarter of 2023 at a cost of 4.90%. These short-term borrowings and an increase in the cost of deposits and customer repurchase agreements from 35 basis points in the second quarter of 2023 to 51 basis points in the third quarter of 2023, increased our cost of funds by nine basis points to 0.92% for the third quarter of 2023.

The Company’s total equity was $1.95 billion at September 30, 2023. This represented an overall increase of $2.9 million from total equity of $1.95 billion at December 31, 2022. Increases to equity included $172.9 million in net earnings, partially offset by a $72.3 million decrease in other comprehensive income. At the end of the second quarter of 2023, we entered into pay-fixed rate swaps to mitigate the risks of rising interest rates on our AFS securities portfolio. This resulted in a fair value remeasurement of this swap derivative at September 30, 2023, resulting in an after tax increase in other comprehensive income of $17.6 million. Decreases from December 31, 2022 included $83.7 million in cash dividends. We engaged in no stock repurchases during the second and third quarters of 2023, compared to the first quarter of 2023, when we repurchased, under our 10b5-1 stock repurchase plan, 791,800 shares of common stock, at an average repurchase price of $23.43, totaling $18.5 million. This 10b5-1 plan expired on March 2, 2023 and no new plan has been put in place since that time. Our tangible book value per share at September 30, 2023 was $8.39.

Our capital ratios under the revised capital framework referred to as Basel III remain well-above regulatory requirements. As of September 30, 2023, the Company’s Tier 1 leverage capital ratio was 10.00%, common equity Tier 1 ratio was 14.38%, Tier 1 risk-based capital ratio was 14.38%, and total risk-based capital ratio was 15.25%. Refer to our *Analysis of Financial Condition – Capital Resources.*

### ANALYSIS OF THE RESULTS OF OPERATIONS

### Financial Performance

*(Dollars in thousands, except per share amounts)*

|  | Three Months Ended September 30, 2023 | June 30, 2023 | Variance $% |  |
| --- | ---: | ---: | ---: | ---: |
| Net interest income | $123,371 | $119,535 | $3,836 | 3.21% |
| Provision for credit losses | (2,000) | (500) | (1,500) | -300.00% |
| Noninterest income | 14,309 | 12,656 | 1,653 | 13.06% |
| Noninterest expense | (55,058) | (54,017) | (1,041) | -1.93% |
| Income taxes | (22,735) | (21,904) | (831) | -3.79% |
| Net earnings | $57,887 | $55,770 | $2,117 | 3.80% |
| Earnings per common share: |  |  |  |  |
| Basic | $0.42 | $0.40 | $0.02 |  |
| Diluted | $0.42 | $0.40 | $0.02 |  |
| Return on average assets | 1.40% | 1.36% | 0.04% |  |
| Return on average shareholders' equity | 11.33% | 11.03% | 0.30% |  |
| Efficiency ratio | 39.99% | 40.86% | -0.87% |  |
| Noninterest expense to average assets | 1.33% | 1.32% | 0.01% |  |

*(Dollars in thousands, except per share amounts)*

|  | Three Months Ended September 30, 2023 | 2022 | Variance $% |  |
| --- | ---: | ---: | ---: | ---: |
| Net interest income | $123,371 | $133,338 | $(9,967) | -7.47% |
| Provision for credit losses | (2,000) | (2,000) | — | 0.00% |
| Noninterest income | 14,309 | 11,590 | 2,719 | 23.46% |
| Noninterest expense | (55,058) | (53,027) | (2,031) | -3.83% |
| Income taxes | (22,735) | (25,262) | 2,527 | 10.00% |
| Net earnings | $57,887 | $64,639 | $(6,752) | -10.45% |
| Earnings per common share: |  |  |  |  |
| Basic | $0.42 | $0.46 | $(0.04) |  |
| Diluted | $0.42 | $0.46 | $(0.04) |  |
| Return on average assets | 1.40% | 1.52% | -0.12% |  |
| Return on average shareholders' equity | 11.33% | 12.72% | -1.39% |  |
| Efficiency ratio | 39.99% | 36.59% | 3.40% |  |
| Noninterest expense to average assets | 1.33% | 1.25% | 0.08% |  |

*(Dollars in thousands, except per share amounts)*

|  | Nine Months Ended September 30, 2023 | 2022 | Variance $% |  |
| --- | ---: | ---: | ---: | ---: |
| Net interest income | $368,634 | $368,118 | $516 | 0.14% |
| Provision for credit losses | (4,000) | (8,100) | 4,100 | 50.62% |
| Noninterest income | 40,167 | 37,524 | 2,643 | 7.04% |
| Noninterest expense | (163,956) | (162,136) | (1,820) | -1.12% |
| Income taxes | (67,918) | (66,149) | (1,769) | -2.67% |
| Net earnings | $172,927 | $169,257 | $3,670 | 2.17% |
| Earnings per common share: |  |  |  |  |
| Basic | $1.24 | $1.20 | $0.04 |  |
| Diluted | $1.24 | $1.20 | $0.04 |  |
| Return on average assets | 1.41% | 1.32% | 0.09% |  |
| Return on average shareholders' equity | 11.50% | 10.69% | 0.81% |  |
| Efficiency ratio | 40.11% | 39.97% | 0.14% |  |
| Noninterest expense to average assets | 1.34% | 1.27% | 0.07% |  |

41

### 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.

*(Dollars in thousands)*

|  | Three Months Ended September 30, 2023 | June 30, 2023 | September 30, 2022 | Nine Months Ended September 30, 2023 | September 30, 2022 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Net Income | $57,887 | $55,770 | $64,639 | $172,927 | $169,257 |
| Add: Amortization of intangible assets | 1,567 | 1,719 | 1,846 | 5,006 | 5,842 |
| Less: Tax effect of amortization of intangible assets (1) | (463) | (508) | (546) | (1,480) | (1,727) |
| Tangible net income | $58,991 | $56,981 | $65,939 | $176,453 | $173,372 |
| Average stockholders' equity | $2,027,030 | $2,027,708 | $2,016,198 | $2,011,172 | $2,116,164 |
| Less: Average goodwill | (765,822) | (765,822) | (765,822) | (765,822) | (763,578) |
| Less: Average intangible assets | (17,526) | (19,298) | (24,396) | (19,256) | (26,308) |
| Average tangible common equity | $1,243,682 | $1,242,588 | $1,225,980 | $1,226,094 | $1,326,278 |
| Return on average equity, annualized | 11.33% | 11.03% | 12.72% | 11.50% | 10.69% |
| Return on average tangible common equity, annualized | 18.82% | 18.39% | 21.34% | 19.24% | 17.48% |

(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, investments and interest earning cash (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 and nine months ended September 30, 2023 and 2022. 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 policy, and the strength of the global, 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, the growth and maturity of earning assets, and derivative financial instruments. 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.

*(Dollars in thousands)*

| INTEREST-EARNING ASSETS Investment securities (1) Available-for-sale securities: | Three Months Ended September 30, 2023 Average Balance | Interest | Yield/ Rate | 2022 Average Balance | Interest | Yield/ Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Taxable | $3,015,614 | $22,272 | 2.95% | $3,550,602 | $18,371 | 2.08% |
| Tax-advantaged | 25,351 | 169 | 3.19% | 26,047 | 172 | 3.16% |
| Held-to-maturity securities: |  |  |  |  |  |  |
| Taxable | 2,121,571 | 11,139 | 2.10% | 2,136,750 | 10,845 | 2.04% |
| Tax-advantaged | 380,054 | 2,437 | 3.10% | 320,297 | 1,989 | 3.05% |
| Investment in FHLB stock | 21,560 | 598 | 11.00% | 18,012 | 258 | 5.68% |
| Interest-earning deposits with other institutions | 473,391 | 6,422 | 5.38% | 633,152 | 3,476 | 2.18% |
| Loans (2) | 8,862,462 | 113,190 | 5.07% | 8,699,303 | 100,077 | 4.56% |
| Total interest-earning assets | 14,900,003 | 156,227 | 4.18% | 15,384,163 | 135,188 | 3.51% |
| Total noninterest-earning assets | 1,533,575 |  |  | 1,487,725 |  |  |
| Total assets | $16,433,578 |  |  | $16,871,888 |  |  |
| INTEREST-BEARING LIABILITIES |  |  |  |  |  |  |
| Savings deposits (3) | $4,459,967 | $15,670 | 1.39% | $4,849,177 | $1,725 | 0.14% |
| Time deposits | 309,930 | 847 | 1.08% | 357,210 | 3 | 0.00% |
| Total interest-bearing deposits | 4,769,897 | 16,517 | 1.37% | 5,206,387 | 1,728 | 0.13% |
| FHLB advances, other borrowings, and customer repurchase agreements | 1,658,907 | 16,339 | 3.91% | 515,143 | 122 | 0.09% |
| Interest-bearing liabilities | 6,428,804 | 32,856 | 2.03% | 5,721,530 | 1,850 | 0.13% |
| Noninterest-bearing deposits | 7,813,120 |  |  | 9,009,962 |  |  |
| Other liabilities | 164,624 |  |  | 124,198 |  |  |
| Stockholders' equity | 2,027,030 |  |  | 2,016,198 |  |  |
| Total liabilities and stockholders' equity | $16,433,578 |  |  | $16,871,888 |  |  |
| Net interest income |  | $123,371 |  |  | $133,338 |  |
| Net interest spread - tax equivalent |  |  | 2.15% |  |  | 3.38% |
| Net interest margin |  |  | 3.29% |  |  | 3.45% |
| Net interest margin - tax equivalent |  |  | 3.31% |  |  | 3.46% |

(1) Includes tax equivalent (TE) adjustments utilizing federal statutory rates of 21% in effect for the three months ended September 30, 2023 and 2022. The non TE rates were 2.60% and 2.09% for the three months ended September 30, 2023 and 2022, respectively.

(2) Includes loan fees of $763,000 million and $1.7 million for the three months ended September 30, 2023 and 2022, respectively. Prepayment penalty fees of $373,000 and $1.7 million are included in interest income for the three months ended September 30, 2023 and 2022, respectively.

(3) Includes interest-bearing demand and money market accounts.

*(Dollars in thousands)*

| INTEREST-EARNING ASSETS Investment securities (1) Available-for-sale securities: | Nine Months Ended September 30, 2023 Average Balance | Interest | Yield/ Rate | 2022 Average Balance | Interest | Yield/ Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Taxable | $3,113,643 | $60,887 | 2.61% | $3,592,033 | $47,883 | 1.81% |
| Tax-advantaged | 25,726 | 506 | 3.14% | 27,950 | 534 | 3.05% |
| Held-to-maturity securities: |  |  |  |  |  |  |
| Taxable | 2,143,195 | 33,939 | 2.11% | 2,059,798 | 29,927 | 1.95% |
| Tax-advantaged | 381,604 | 7,333 | 3.10% | 292,552 | 5,284 | 2.94% |
| Investment in FHLB stock | 27,460 | 1,430 | 6.96% | 18,315 | 902 | 6.58% |
| Interest-earning deposits with other institutions | 293,203 | 11,583 | 5.28% | 1,030,806 | 5,712 | 0.74% |
| Loans (2) | 8,905,697 | 332,574 | 4.99% | 8,612,166 | 282,308 | 4.38% |
| Total interest-earning assets | 14,890,528 | 448,252 | 4.04% | 15,633,620 | 372,550 | 3.21% |
| Total noninterest-earning assets | 1,522,286 |  |  | 1,452,100 |  |  |
| Total assets | $16,412,814 |  |  | $17,085,720 |  |  |
| INTEREST-BEARING LIABILITIES |  |  |  |  |  |  |
| Savings deposits (3) | $4,327,906 | $31,268 | 0.97% | $4,939,005 | $3,914 | 0.11% |
| Time deposits | 296,942 | 1,379 | 0.62% | 366,783 | 142 | 0.05% |
| Total interest-bearing deposits | 4,624,848 | 32,647 | 0.94% | 5,305,788 | 4,056 | 0.10% |
| FHLB advances, other borrowings, and customer repurchase agreements | 1,734,999 | 46,971 | 3.62% | 591,641 | 376 | 0.08% |
| Interest-bearing liabilities | 6,359,847 | 79,618 | 1.67% | 5,897,429 | 4,432 | 0.10% |
| Noninterest-bearing deposits | 7,908,749 |  |  | 8,885,637 |  |  |
| Other liabilities | 133,046 |  |  | 186,490 |  |  |
| Stockholders' equity | 2,011,172 |  |  | 2,116,164 |  |  |
| Total liabilities and stockholders' equity | $16,412,814 |  |  | $17,085,720 |  |  |
| Net interest income |  | $368,634 |  |  | $368,118 |  |
| Net interest spread - tax equivalent |  |  | 2.36% |  |  | 3.11% |
| Net interest margin |  |  | 3.31% |  |  | 3.16% |
| Net interest margin - tax equivalent |  |  | 3.32% |  |  | 3.17% |

(1) Includes tax equivalent (TE) adjustments utilizing federal statutory rates of 21% in effect for the nine months ended September 30, 2023 and 2022. The non TE rates were 2.42% and 1.89% for the nine months ended September 30, 2023 and 2022 respectively.

(2) Includes loan fees of $2.4 million and $7.1 million for nine months ended September 30, 2023 and 2022, respectively. Prepayment penalty fees of $1.6 million and $6.3 million are included in interest income for the nine months ended September 30, 2023 and 2022, 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

*(Dollars in thousands)*

| Interest income: Available-for-sale securities: | Comparison of Three Months Ended September 30, 2023 Compared to 2022 Increase (Decrease) Due to Volume | Rate | Rate/ Volume | Total |
| --- | ---: | ---: | ---: | ---: |
| Taxable investment securities | $(2,739) | $7,790 | $(1,150) | $3,901 |
| Tax-advantaged investment securities | (5) | 2 | — | (3) |
| Held-to-maturity securities: |  |  |  |  |
| Taxable investment securities | (45) | 343 | (4) | 294 |
| Tax-advantaged investment securities | 413 | 32 | 3 | 448 |
| Investment in FHLB stock | 51 | 242 | 47 | 340 |
| Interest-earning deposits with other institutions | (877) | 5,113 | (1,290) | 2,946 |
| Loans | 1,877 | 11,031 | 205 | 13,113 |
| Total interest income | (1,325) | 24,553 | (2,189) | 21,039 |
| Interest expense: |  |  |  |  |
| Savings deposits | (138) | 15,312 | (1,229) | 13,945 |
| Time deposits | — | 973 | (129) | 844 |
| FHLB advances, other borrowings, and customer repurchase agreements | 271 | 4,952 | 10,994 | 16,217 |
| Total interest expense | 133 | 21,237 | 9,636 | 31,006 |
| Net interest income | $(1,458) | $3,316 | $(11,825) | $(9,967) |

*(Dollars in thousands)*

| Interest income: Available-for-sale securities: | Comparison of Nine Months Ended September 30, 2023 Compared to 2022 Increase (Decrease) Due to Volume | Rate | Rate/ Volume | Total |
| --- | ---: | ---: | ---: | ---: |
| Taxable investment securities | $(7,393) | $27,991 | $(7,594) | $13,004 |
| Tax-advantaged investment securities | (57) | 21 | 8 | (28) |
| Held-to-maturity securities: |  |  |  |  |
| Taxable investment securities | 1,837 | 3,359 | (1,184) | 4,012 |
| Tax-advantaged investment securities | 2,243 | 371 | (565) | 2,049 |
| Investment in FHLB stock | 602 | 69 | (143) | 528 |
| Interest-earning deposits with other institutions | (5,465) | 46,808 | (35,472) | 5,871 |
| Loans | 12,864 | 52,549 | (15,147) | 50,266 |
| Total interest income | 4,631 | 131,168 | (60,097) | 75,702 |
| Interest expense: |  |  |  |  |
| Savings deposits | (647) | 42,475 | (14,474) | 27,354 |
| Time deposits | (36) | 2,088 | (815) | 1,237 |
| FHLB advances, other borrowings, and customer repurchase agreements | 971 | 20,912 | 24,712 | 46,595 |
| Total interest expense | 288 | 65,475 | 9,423 | 75,186 |
| Net interest income | $4,343 | $65,693 | $(69,520) | $516 |

45

#### Third Quarter of 2023 Compared to the Third Quarter of 2022

Net interest income, before provision for credit losses, of $123.4 million for the third quarter of 2023 decreased by $10.0 million, or 7.47%, from the third quarter of 2022. The decline in net interest income compared to the third quarter of 2022 was primarily due to a $484.2 million decrease in average earning assets and a 15 basis point decrease in the net interest margin.

Total interest income was $156.2 million for the third quarter of 2023, which was $21.0 million, or 15.56%, higher than the same period of 2022. This increase was primarily due to a 67 basis point expansion of the yield on earning assets, which offset a $484.2 million decline in average interest-earning assets. Total interest income and fees on loans for the third quarter of 2023 was $113.2 million, an increase of $13.1 million, or 13.10%, from the third quarter of 2022. Loan yields grew from 4.56% for the third quarter of 2022 to 5.07% for the third quarter of 2023, while average loans also grew by $163.2 million. Interest income from investment securities was $36.0 million, an increase of $4.6 million, or 14.79%, from the third quarter of 2022. The increase was a result of a 52 basis point increase in security yields, offset by investment securities declining on average by $491.1 million. The 52 basis point increase in the yield on investment securities from the prior year quarter was primarily due to the positive spread generated from the pay-fixed swaps, in which the Company receives daily SOFR and pays a weighted average fixed cost of approximately 3.8%. Average funds on deposit at the Federal Reserve also declined by $157.8 million.

In June 2023, fair value hedging transactions were executed in which $1.0 billion notional pay-fixed interest rate swaps were consummated with maturities ranging from four to five years in which the Company pays a weighted average fixed rate of approximately 3.8% and receives daily SOFR. The third quarter of 2023 included approximately $3.8 million of interest income associated with these interest rate swaps. Refer to Note 10 – *Derivative Financial Instruments* of the notes to the unaudited condensed consolidated financial statements of this report for additional information.

Interest expense of $32.9 million for the third quarter of 2023 increased $31.0 million, compared to the third quarter of 2022. Total cost of funds of 0.92% for the third quarter of 2023 increased from 0.05% for the year ago quarter. This 87 basis point increase in cost of funds was the result of a 124 basis point increase in the cost of interest-bearing deposits and an average cost of 4.84% on $1.32 billion of short-term borrowings for the third quarter of 2023. On average, noninterest-bearing deposits were 62.09% of total deposits for the third quarter of 2023, compared to 63.38% for the third quarter of 2022.

#### Nine Months of 2023 Compared to Nine Months of 2022

Net interest income, before provision for credit losses, was $368.6 million for the nine months ended September 30, 2023, an increase of $516,000, or 0.14%, compared to $368.1 million for the same period of 2022. Interest-earning assets decreased on average by $743.1 million, or 4.75%, from $15.63 billion for the nine months ended September 30, 2022 to $14.89 billion for the same period in the current year. Our net interest margin (TE) was 3.32% for the first nine months of 2023, compared to 3.17% for the same period of 2022.

Interest income for the nine months ended September 30, 2023, was $448.2 million, which represented a $75.7 million, or 20.32%, increase when compared to the same period of 2022. Compared to the first nine months of 2022, average interest-earning assets decreased by $743.1 million and the yield on interest-earning assets increased by 83 basis points. The $743.1 million year-over-year decrease in earning assets resulted from a $736.1 million decrease in average earning balances due from the Federal Reserve and a decline of $308.2 million in average investment securities, offset by $293.5 million of growth in average loans. The 83 basis point increase in the earning asset yield over the first nine months of 2022 resulted from a 61 basis point increase in loan yields, from 4.38% for the first nine months of 2022 to 4.99% for the same period of 2023, as well as a change in the mix of earning assets. Average loans as a percentage of earning assets grew from 55.09% for the first nine months of 2022 to 59.81% for the first nine months of 2023. Average investments as a percentage of earning assets decreased to 38.04% for the first nine months of 2023 from 38.20% for the same period of 2022. The tax-equivalent yield on investment securities was 2.46% for the nine months ended September 30, 2023, compared to 1.92% for the same period of 2022.

Total interest income and fees on loans for the first nine months of 2023 of $332.6 million increased $50.3 million, or 17.81%, when compared to the same period of 2022. This increase in income was partly due to growth in average loans of $293.5 million. Discount accretion on acquired loans decreased by $3.2 million and interest and fee income from PPP loans declined by $5.2 million compared to the same period of 2022. After excluding discount accretion and the impact from PPP loans, our core loan yields grew by 70 basis points compared to the first nine months of 2022. Core loan yields grew year-over-year, as rising interest rates contributed to an increase in yields from 4.38% for the first nine months of 2022 to 4.99% for the same period of 2023.

Interest income from investment securities of $102.7 million for the nine months ended September 30, 2023, increased $19.0 million from $83.6 million for the first nine months of 2022. This increase was driven by a 54 basis point increase in the yield on securities, compared to the first nine months of 2022. This 54 basis point increase in the yield on investment securities from the prior year period was primarily due to the positive spread generated from the pay-fixed swaps we entered into at the end of the second quarter of 2023. Average investment securities declined from the first nine months of 2022 by $308.2 million.

At the end of the second quarter of 2023, we entered into pay-fixed rate swaps to mitigate the risks of rising interest rates on our AFS securities portfolio. The nine months ended September 30, 2023 included approximately $4.2 million of interest income associated with these interest rate swaps.

Interest expense of $79.6 million for the nine months ended September 30, 2023, increased by $75.2 million from the same period of 2022. The average rate paid on interest-bearing liabilities increased by 157 basis points, to 1.67% for the first nine months of 2023, from 0.10% for the same period of 2022. Likewise, the rate on interest-bearing deposits for the first nine months of 2023 increased by 84 basis points from the same period in 2022. Average interest-bearing deposits declined by $680.9 million when compared to the first nine months of 2022. Total cost of funds for the first nine months of 2023 was 0.75%, compared with 0.04% for the same period of 2022. This 75 basis point increase in cost of funds was the result of the increase in the cost of interest-bearing deposits and the addition of $1.27 billion of short-term borrowings, on average, for the nine months ended September 30, 2023, at an average cost of 4.86%. Average noninterest-bearing deposits represented 63.10% of our total deposits for the nine months ended September 30, 2023, compared to 62.61% for the same period of 2022.

### 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.

The third quarter of 2023 included $2.0 million in provision for credit losses, compared to $2.0 million in the third quarter of 2022. The year-to-date provision for credit losses of $4.0 million was the result of an overall increase in projected loss rates from 0.94% at the end of 2022 to 1.00% at September 30, 2023. The increase in projected loss rates continues to be driven primarily by a deteriorating economic forecast that assumes modest GDP growth through 2024, as well as lower commercial real estate values and an increase in 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.

For the nine months ended September 30, 2023, we recorded $4.0 million in provision for credit losses, and experienced credit charge-offs of $224,000 and total recoveries of $102,000, resulting in net charge-offs of $122,000. For the nine months ended September 30, 2022, we recorded $8.1 million in provision for credit losses, and experienced credit charge-offs of $70,000 and total recoveries of $947,000, resulting in net recoveries of $877,000. 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 that the pandemic, geopolitical events in Europe, and overall supply chain issues may have on our business and 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, BankCard 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.

*(Dollars in thousands)*

| Noninterest income: | Three Months Ended September 30, 2023 | 2022 | Variance $% |  | Nine Months Ended September 30, 2023 | 2022 | Variance $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Service charges on deposit accounts | $5,062 | $5,233 | $(171) | -3.27% | $15,244 | $15,625 | $(381) | -2.44% |
| Trust and investment services | 3,246 | 2,867 | 379 | 13.22% | 9,475 | 8,651 | 824 | 9.52% |
| Bankcard services | 354 | 376 | (22) | -5.85% | 1,221 | 1,102 | 119 | 10.80% |
| BOLI income | 1,548 | 1,987 | (439) | -22.09% | 4,834 | 3,939 | 895 | 22.72% |
| Swap fee income | — | — | — | — | 632 | — | 632 | — |
| Gain/(loss) on sale of other investments | 2,575 | — | 2,575 | — | 2,575 | — | 2,575 | — |
| Other | 1,524 | 1,127 | 397 | 35.23% | 6,186 | 8,207 | (2,021) | -24.63% |
| Total noninterest income | $14,309 | $11,590 | $2,719 | 23.46% | $40,167 | $37,524 | $2,643 | 7.04% |

#### Third Quarter of 2023 Compared to the Third Quarter of 2022

Noninterest income was $14.3 million for the third quarter of 2023, compared with $11.6 million for the third quarter of 2022. The third quarter of 2023 included approximately $2.6 million in gain from an equity fund distribution related to a CRA investment, partially offset by a $222,000 decrease in CRA investment income due to underlying asset valuation declines. Compared to the third quarter of 2022, BOLI income decreased $439,000.

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 September 30, 2023, CitizensTrust had approximately $3.92 billion in assets under management and administration, including $2.67 billion in assets under management. CitizensTrust generated fees of $3.2 million for the third quarter of 2023, compared to $2.9 million for the same period of 2022.

The Bank’s investment in BOLI includes life insurance policies acquired through acquisitions and 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. BOLI income decreased $439,000 compared to the third quarter of 2022 due to both the death benefits received in the third quarter of 2022, offset by higher returns for the underlying investments in separate fund life insurance policies used to fund deferred compensation plans. The third quarter of 2022 included $1.8 million in death benefits that exceeded the asset value of certain policy values, which was offset by a $1.0 million decline in the market value of separate account life insurance policies that are used to fund our deferred compensation liabilities.

The Bank also enters into interest rate swap agreements with our customers to manage our interest rate risk and enters into identical offsetting swaps with a counterparty. The changes in the fair value of these non-hedged swaps primarily offset each other resulting in swap fee income. Generally speaking, our volume of back-to-back interest rate swaps is impacted by the level and shape of the yield curve and the Bank's management of interest rate risk. There were no executed swap agreements related to new loan originations for the third quarter of 2023 and the third quarter of 2022. Refer to Note 10 – Derivative Financial Instruments of the notes to the unaudited condensed consolidated financial statements of this report for additional information.

#### Nine Months of 2023 Compared to Nine Months of 2022

The first nine months of 2023 included approximately $2.6 million of income from an equity fund distribution related to a CRA investment. The $895,000 increase in BOLI income was primarily due to higher returns for the underlying investments in separate fund life insurance policies used to fund deferred compensation plans and the $806,000 in death benefits received in 2023 compared to the $1.8 million in death benefits received in 2022. The remaining LIBOR indexed swaps that were not converted to term SOFR in the first quarter of 2023 were converted during the second quarter of 2023, generating fee income of approximately $100,000. The nine months ended September 30, 2022 included $2.7 million in net gains from the sale of properties associated with banking centers. Trust and investment fees grew by $824,000 or 9.52% due to increased assets under management.

### Noninterest Expense

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

*(Dollars in thousands)*

| Noninterest expense: | Three Months Ended September 30, 2023 | 2022 | Variance $% |  | Nine Months Ended September 30, 2023 | 2022 | Variance $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Salaries and employee benefits | $34,744 | $33,233 | $1,511 | 4.55% | $103,539 | $97,442 | $6,097 | 6.26% |
| Occupancy | 4,730 | 4,926 | (196) | -3.98% | 13,915 | 13,957 | (42) | -0.30% |
| Equipment | 888 | 853 | 35 | 4.10% | 2,670 | 2,960 | (290) | -9.80% |
| Professional services | 2,117 | 2,438 | (321) | -13.17% | 6,375 | 6,788 | (413) | -6.08% |
| Computer software expense | 3,648 | 3,243 | 405 | 12.49% | 10,372 | 10,141 | 231 | 2.28% |
| Marketing and promotion | 1,628 | 1,488 | 140 | 9.41% | 4,664 | 4,584 | 80 | 1.75% |
| Amortization of intangible assets | 1,567 | 1,846 | (279) | -15.11% | 5,006 | 5,842 | (836) | -14.31% |
| Telecommunications expense | 496 | 576 | (80) | -13.89% | 1,518 | 1,646 | (128) | -7.78% |
| Regulatory assessments | 2,181 | 1,368 | 813 | 59.43% | 6,417 | 4,136 | 2,281 | 55.15% |
| Insurance | 504 | 486 | 18 | 3.70% | 1,515 | 1,468 | 47 | 3.20% |
| Loan expense | 364 | 227 | 137 | 60.35% | 845 | 766 | 79 | 10.31% |
| OREO expense | — | — | — | — | — | (3) | 3 | 100.00% |
| (Recapture of) provision for unfunded loan commitments | (900) | — | (900) | — | — | — | — | — |
| Directors' expenses | 361 | 342 | 19 | 5.56% | 870 | 1,071 | (201) | -18.77% |
| Stationery and supplies | 280 | 250 | 30 | 12.00% | 773 | 716 | 57 | 7.96% |
| Acquisition related expenses | — | — | — | — | — | 6,013 | (6,013) | -100.00% |
| Other | 2,450 | 1,751 | 699 | 39.92% | 5,477 | 4,609 | 868 | 18.83% |
| Total noninterest expense | $55,058 | $53,027 | $2,031 | 3.83% | $163,956 | $162,136 | $1,820 | 1.12% |
| Noninterest expense to average assets | 1.33% | 1.25% |  |  | 1.34% | 1.27% |  |  |
| Efficiency ratio (1) | 39.99% | 36.59% |  |  | 40.11% | 39.97% |  |  |

(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 1.33% for the third quarter of 2023, compared to 1.25% for the third quarter of 2022.

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 was 39.99% for the third quarter of 2023, compared to 36.59% for the third quarter of 2022.

#### Third Quarter of 2023 Compared to the Third Quarter of 2022

Noninterest expense for the third quarter of 2023 was $55.0 million, compared to $53.0 million for the third quarter of 2022. The $2.0 million increase in noninterest expense year-over-year included an increase of $1.5 million in salaries and employee benefits and an increase in regulatory assessments of approximately $800,000. The increase in salary and benefit expense included a 3.5% or approximately $840,000 increase in salary expense, combined with an $800,000 decline in the contra expense for deferred origination costs.

#### Nine Months of 2023 Compared to Nine Months of 2022

Noninterest expense of $164.0 million for the first nine months of 2023 was $1.8 million higher than the prior year period. Year-over-year increases included $6.1 million in salaries and employee benefits primarily due to inflationary pressures on salary and benefits and a $2.3 million increase in regulatory assessments, offset by a $6.0 million decrease in acquisition expense. As a percentage of average assets, noninterest expense was 1.34% for the nine months ended September 30, 2023, compared to 1.27% for the same period of 2022. If acquisition expense is excluded, noninterest expense as a percentage of average assets was 1.22% for the first nine months of 2022. For the nine months ended September 30, 2023, the efficiency ratio was 40.11%, compared to 39.97% for the same period of 2022. Excluding acquisition expense, the efficiency ratio was 38.49% for the nine months ended September 30, 2022.

### Income Taxes

The Company’s effective tax rate for the three and nine months ended September 30, 2023 was 28.20%, compared to 28.10% for the three and nine months ended September 30, 2022, respectively. Our estimated annual effective tax rate varies depending upon the level of tax-advantaged income 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.

### ANALYSIS OF FINANCIAL CONDITION

Total assets of $15.90 billion at September 30, 2023 decreased by $573.5 million, or 3.48%, from total assets of $16.48 billion at December 31, 2022. Interest-earning assets of $14.33 billion at September 30, 2023 decreased by $644.7 million, or 4.31%, when compared with $14.97 billion at December 31, 2022. The decrease in interest-earning assets was primarily due to a $446.9 million decrease in investment securities and a $205.6 million decrease in net loans.

Total liabilities were $13.95 billion at September 30, 2023, a decrease of $576.4 million, or 3.97%, from total liabilities of $14.53 billion at December 31, 2022. Total deposits declined by $477.5 million, or 3.72%. Higher interest rates that have resulted from the Federal Reserve’s significant increase in the federal funds rate over the last year have continued to impact deposit levels, including $720 million of funds on deposit at the end of 2022 that transferred from the Bank's balance sheet by customers to CitizensTrust for investment in higher yielding securities such as treasury notes, including $170 million that were transferred in the current quarter. Short-term borrowings increased by $125.0 million from December 31, 2022. As of September 30, 2023, total short-term borrowings, consisted of $870 million of one-year advances from the Federal Reserve’s Bank Term Funding Program, at a cost of 4.87% and $250 million of short-term Federal Home Loan Bank advances, at an average cost of approximately 5%. Total equity increased $2.9 million to $1.95 at September 30, 2023, compared to total equity of $1.95 billion at December 31, 2022. Increases to equity included $172.9 million in net earnings, partially offset by a $72.3 million decrease in other comprehensive income. At the end of the second quarter of 2023, we entered into pay-fixed rate swaps to mitigate the risks of rising interest rates. This resulted in a fair value remeasurement of this swap derivative at September 30, 2023, resulting in an after tax increase in other comprehensive income of $17.6 million, resulting in an increase in other comprehensive income. Decreases from December 31, 2022 included $83.7 million in cash dividends. We engaged in no stock repurchases during the second and third 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 10b5-1 stock repurchase plan expired on March 2, 2023 and no new plan has been put in place since that time.

### 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 September 30, 2023, total investment securities were $5.36 billion. This represented a decrease of $446.9 million, or 7.69%, from $5.81 billion at December 31, 2022. The overall decrease in investment securities was primarily due to a $382 million decline in our AFS securities. At September 30, 2023, our AFS investment securities totaled $2.87 billion, inclusive of a pre-tax net unrealized loss of $628.4 million. The after-tax unrealized loss reported in AOCI on AFS investment securities was $442.6 million. The changes in the net unrealized holding loss resulted primarily from fluctuations in market interest rates. At September 30, 2023, total HTM investment securities of $2.49 billion declined by approximately $65 million from December 31, 2022. For the nine months ended September 30, 2023 and 2022, repayments/maturities of investment securities totaled $358.6 million and $523.9 million, respectively. There were no investment securities sold during the third quarter of 2023 and 2022.

The tables below set forth our investment securities AFS and HTM portfolio by type for the dates presented.

*(Dollars in thousands)*

| Investment securities available-for-sale: | September 30, 2023 Amortized Cost | Gross Unrealized Holding Gain | Gross Unrealized Holding Loss | Fair Value | Total Percent |
| --- | ---: | ---: | ---: | ---: | ---: |
| Government agency/GSE | $34,126 | $— | $(17) | $34,109 | 1.19% |
| Mortgage-backed securities | 2,925,382 | 1 | (488,759) | 2,436,624 | 84.81% |
| CMO/REMIC | 514,161 | — | (136,663) | 377,498 | 13.13% |
| Municipal bonds | 26,799 | 23 | (3,009) | 23,813 | 0.83% |
| Other securities | 1,119 | — | — | 1,119 | 0.04% |
| Unallocated portfolio layer fair value basis adjustments (1) | 24,868 | — | (24,868) | — | 0.00% |
| Total available-for-sale securities | $3,526,455 | $24 | $(653,316) | $2,873,163 | 100.00% |
| Investment securities held-to-maturity: |  |  |  |  |  |
| Government agency/GSE | $534,814 | $— | $(123,981) | $410,833 | 21.48% |
| Mortgage-backed securities | 673,413 | — | (134,290) | 539,123 | 27.05% |
| CMO/REMIC | 812,006 | — | (194,237) | 617,769 | 32.62% |
| Municipal bonds | 469,208 | 4 | (67,619) | 401,593 | 18.85% |
| Total held-to-maturity securities | $2,489,441 | $4 | $(520,127) | $1,969,318 | 100.00% |

*(Dollars in thousands)*

| Investment securities available-for-sale: | December 31, 2022 Amortized Cost | Gross Unrealized Holding Gain | Gross Unrealized Holding Loss | Fair Value | Total Percent |
| --- | ---: | ---: | ---: | ---: | ---: |
| Mortgage-backed securities | $3,192,151 | $39 | $(403,049) | $2,789,141 | 85.68% |
| CMO/REMIC | 535,269 | — | (95,966) | 439,303 | 13.50% |
| Municipal bonds | 26,797 | 67 | (1,177) | 25,687 | 0.79% |
| Other securities | 1,080 | — | — | 1,080 | 0.03% |
| Total available-for-sale securities | $3,755,297 | $106 | $(500,192) | $3,255,211 | 100.00% |
| Investment securities held-to-maturity: |  |  |  |  |  |
| Government agency/GSE | $548,771 | $— | $(114,343) | $434,428 | 21.48% |
| Mortgage-backed securities | 706,796 | — | (105,867) | 600,929 | 27.67% |
| CMO/REMIC | 827,346 | — | (131,730) | 695,616 | 32.39% |
| Municipal bonds | 471,388 | 913 | (47,687) | 424,614 | 18.46% |
| Total held-to-maturity securities | $2,554,301 | $913 | $(399,627) | $2,155,587 | 100.00% |

As of September 30, 2023, approximately $32.0 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.

The following table presents the Company’s available-for-sale investment securities, by investment category, in an unrealized loss position for which an allowance for credit losses has not been recorded as of September 30, 2023 and December 31, 2022.

*(Dollars in thousands)*

| Investment securities available-for-sale: | September 30, 2023 Less Than 12 Months Fair Value | Gross Unrealized Holding Losses | 12 Months or Longer Fair Value | Gross Unrealized Holding Losses | Total Fair Value | Gross Unrealized Holding Losses |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Government agency/GSE | $34,109 | $(17) | $— | $— | $34,109 | $(17) |
| Mortgage-backed securities | 825 | (16) | 2,435,125 | (488,743) | 2,435,950 | (488,759) |
| CMO/REMIC | 3 | — | 377,495 | (136,663) | 377,498 | (136,663) |
| Municipal bonds | 5,699 | (451) | 16,948 | (2,558) | 22,647 | (3,009) |
| Total available-for-sale securities | $40,636 | $(484) | $2,829,568 | $(627,964) | $2,870,204 | $(628,448) |
| Investment securities held-to-maturity: |  |  |  |  |  |  |
| Government agency/GSE | $— | $— | $410,833 | $(123,981) | $410,833 | $(123,981) |
| Mortgage-backed securities | — | — | 539,123 | (134,290) | 539,123 | (134,290) |
| CMO/REMIC | — | — | 617,769 | (194,237) | 617,769 | (194,237) |
| Municipal bonds | 109,966 | (7,127) | 288,267 | (60,492) | 398,233 | (67,619) |
| Total held-to-maturity securities | $109,966 | $(7,127) | $1,855,992 | $(513,000) | $1,965,958 | $(520,127) |

*(Dollars in thousands)*

| Investment securities available-for-sale: | December 31, 2022 Less Than 12 Months Fair Value | Gross Unrealized Holding Losses | 12 Months or Longer Fair Value | Gross Unrealized Holding Losses | Total Fair Value | Gross Unrealized Holding Losses |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Mortgage-backed securities | $1,658,331 | $(187,842) | $1,129,257 | $(215,207) | $2,787,588 | $(403,049) |
| CMO/REMIC | 54,005 | (4,796) | 385,295 | (91,170) | 439,300 | (95,966) |
| Municipal bonds | 24,507 | (1,177) | — | — | 24,507 | (1,177) |
| Total available-for-sale securities | $1,736,843 | $(193,815) | $1,514,552 | $(306,377) | $3,251,395 | $(500,192) |
| Investment securities held-to-maturity: |  |  |  |  |  |  |
| Government agency/GSE | 179,348 | (39,866) | 255,080 | (74,477) | 434,428 | (114,343) |
| Mortgage-backed securities | 188,480 | (9,042) | 412,449 | (96,825) | 600,929 | (105,867) |
| CMO/REMIC | 376,540 | (60,598) | 319,076 | (71,132) | 695,616 | (131,730) |
| Municipal bonds | 312,702 | (35,656) | 53,350 | (12,031) | 366,052 | (47,687) |
| Total held-to-maturity securities | $1,057,070 | $(145,162) | $1,039,955 | $(254,465) | $2,097,025 | $(399,627) |

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 September 30, 2023 and December 31, 2022.

Refer to Note 5 – *Investment Securities* of the notes to the unaudited condensed consolidated financial statements of this report for additional information on our investment securities portfolio.

### Loans

Total loans and leases, at amortized cost, of $8.88 billion at September 30, 2023 decreased by $201.8 million, or 2.22%, from December 31, 2022. After adjusting for seasonality of dairy & livestock loans, our core loans declined by $114.8 million, or 1.32%, from December 31, 2022. The $201.8 million decrease in total loans included decreases of $87.0 million in dairy & livestock loans, $41.9 million in commercial real estate loans, $25.2 million in construction loans, $10.6 million in commercial and industrial loans, $7.8 million in SBA loans, $5.9 million in PPP loans, and $24.9 million in consumer and other loans. Commercial and industrial line utilization was 27% at September 30, 2023, compared to 33% at the end of 2022. The decline in dairy & 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 78% at December 31, 2022 to 73% at September 30, 2023.

The following table presents our loan portfolio by type as of the dates presented.

### Distribution of Loan Portfolio by Type

*(Dollars in thousands)*

|  | September 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Commercial real estate | $6,843,059 | $6,884,948 |
| Construction | 63,022 | 88,271 |
| SBA | 283,124 | 290,908 |
| SBA - Paycheck Protection Program (PPP) | 3,233 | 9,087 |
| Commercial and industrial | 938,064 | 948,683 |
| Dairy & livestock and agribusiness | 351,463 | 433,564 |
| Municipal lease finance receivables | 75,621 | 81,126 |
| SFR mortgage | 268,171 | 266,024 |
| Consumer and other loans | 51,875 | 76,781 |
| Total loans, at amortized cost | 8,877,632 | 9,079,392 |
| Less: Allowance for credit losses | (88,995) | (85,117) |
| Total loans and lease finance receivables, net | $8,788,637 | $8,994,275 |

As of September 30, 2023, $509.2 million, or 7.44% of the total commercial real estate loans included loans secured by farmland, compared to $517.8 million, or 7.52%, at December 31, 2022. The loans secured by farmland included $133.2 million for loans secured by dairy & livestock land and $376.0 million for loans secured by agricultural land at September 30, 2023, compared to $140.5 million for loans secured by dairy & livestock land and $377.3 million for loans secured by agricultural land at December 31, 2022. As of September 30, 2023, dairy & livestock and agribusiness loans of $351.5 million were comprised of $301.5 million for dairy & livestock loans and $50.0 million for agribusiness loans, compared to $433.6 million comprised of $388.5 million of dairy & livestock loans and $45.1 million of agribusiness loans December 31, 2022.

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 September 30, 2023, the Company had $205.9 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 September 30, 2023, the Company had $77.2 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 September 30, 2023, the Company had $63.0 million in construction loans. This represented 0.71% 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 September 30, 2023.

Our loan portfolio is geographically disbursed throughout our marketplace. The following is the breakdown of our total held-for-investment commercial real estate loans, by region as of September 30, 2023.

*(Dollars in thousands)*

|  | September 30, 2023 Total Loans |  | Commercial Real Estate Loans |  |
| --- | ---: | ---: | ---: | ---: |
| Los Angeles County | $3,298,588 | 37.2% | $2,398,206 | 35.1% |
| Central Valley and Sacramento | 2,131,675 | 24.0% | 1,708,303 | 25.0% |
| Orange County | 1,123,168 | 12.7% | 703,971 | 10.3% |
| Inland Empire | 999,132 | 11.2% | 891,787 | 13.0% |
| Central Coast | 471,612 | 5.3% | 395,575 | 5.8% |
| San Diego | 336,651 | 3.8% | 338,110 | 4.9% |
| Other California | 154,574 | 1.7% | 90,674 | 1.3% |
| Out of State | 362,232 | 4.1% | 316,433 | 4.6% |
|  | $8,877,632 | 100.0% | $6,843,059 | 100.0% |

The table below breaks down our commercial real estate portfolio.

*(Dollars in thousands)*

| Commercial real estate: | September 30, 2023 Loan Balance | Percent | Percent Owner- Occupied (1) | Average Loan Balance |
| --- | ---: | ---: | ---: | ---: |
| Industrial | $2,283,225 | 33.4% | 49.1% | $1,625 |
| Office | 1,141,149 | 16.7% | 24.3% | 1,691 |
| Retail | 957,917 | 14.0% | 11.5% | 1,701 |
| Multi-family | 834,082 | 12.2% | 0.2% | 1,604 |
| Secured by farmland (2) | 509,243 | 7.4% | 99.0% | 1,553 |
| Medical | 314,847 | 4.6% | 33.5% | 1,528 |
| Other (3) | 802,596 | 11.7% | 43.9% | 1,592 |
| Total commercial real estate | $6,843,059 | 100.0% | 36.1% | $1,629 |

(1) Represents percentage of reported owner-occupied at origination in each real estate loan category.

(2) The loans secured by farmland included $133.2 million for loans secured by dairy & livestock land and $376.0 million for loans secured by agricultural land at September 30, 2023.

(3) Other loans consist of a variety of loan types, none of which exceeds 2.0% of total commercial real estate loans at September 30, 2023.

### Nonperforming Assets

The following table provides information on nonperforming assets as of the dates presented.

*(Dollars in thousands)*

|  | September 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Nonaccrual loans | $9,963 | $4,930 |
| Loans past due 90 days or more and still accruing interest | — | — |
| Nonperforming modified loans / troubled debt restructured loans (TDRs) | — | — |
| **Total nonperforming loans** | 9,963 | 4,930 |
| OREO, net | — | — |
| **Total nonperforming assets** | $9,963 | $4,930 |
| **Modified loans / Performing TDRs** | $7,304 | $7,817 |
| Total nonperforming loans and performing modified loans/TDRs | $17,267 | $12,747 |
| Percentage of nonperforming loans and performing modified loans/TDRs to total loans, at amortized cost | 0.19% | 0.14% |
| Percentage of nonperforming assets to total loans, at amortized cost, and OREO | 0.11% | 0.05% |
| Percentage of nonperforming assets to total assets | 0.06% | 0.03% |

### 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.

The table below reflects the amortized cost of loans by type made to borrowers experiencing financial difficulty that were modified during the three months ended September 30, 2023.

*(Dollars in thousands)*

|  | Term Extension Amortized Cost Basis at September 30,2023 | % of Total Class of Financing Receivables |
| --- | ---: | ---: |
| Commercial real estate loans | $1,815 | 0.02% |
| Dairy & livestock and agribusiness | 4,799 | 0.05% |
| **Total** | $6,614 |  |
|  | **Combination-Term Extension and Interest Rate Reduction** |  |
|  | **Amortized Cost Basis** | **% of Total Class of** |
|  | **at September 30,2023** | **Financing Receivables** |
| Commercial real estate loans | $690 | 0.01% |
| **Total** | $690 |  |

57

The following table describes the financial effect of the loan modifications made to borrowers experiencing financial difficulty during the three months ended September 30, 2023.

| Loan Type | Financial Effect |
| --- | --- |
|  | **Term Extension** |
| Commercial real estate loans | Added a weighted-average 1.0 years to the life of loans, which reduced monthly payment amounts for the borrowers. |
| Dairy & livestock and agribusiness | Added a weighted-average 0.5 years to the life of loans, which reduced monthly payment amounts for the borrowers. |
|  | **Combination-Term Extension and Interest Rate Reduction** |
| Commercial real estate loans | Added a weighted-average 7.6 years to the life of loans, which reduced monthly payment amounts for the borrowers; reduced weighted-average contractual interest rate from 10% to 7.25%. |

As of September 30, 2023, the Company did not have any loans made to borrowers experiencing financial difficulty that were modified during the third quarter of 2023 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 that were modified on or after January 1, 2023, the date we adopted ASU 2022-02.

*(Dollars in thousands)*

|  | Payment Status (amortized cost basis) Current | 30-89 Days Past Due | 90+ Days Past Due |
| --- | ---: | ---: | ---: |
| Commercial real estate loans | $2,505 | $— | $— |
| Dairy & livestock and agribusiness | 4,799 | — | — |
| **Total** | $7,304 | $— | $— |

### Troubled Debt Restructurings (“TDRs”)

Prior to January 1, 2023, loans reported as TDRs were considered impaired and charge-off amounts were taken on an individual loan basis, as deemed appropriate. The majority of restructured loans are loans for which the terms of repayment have been renegotiated, resulting in a reduction in interest rate or deferral of principal. Refer to Note 3 – Summary of Significant Accounting Policies, included in our Annual Report on Form 10-K for the year ended December 31, 2022 for a more detailed discussion regarding TDRs.

Total TDRs $7.8 million at December 31, 2022. At December 31, 2022, all of our TDRs were performing and accruing interest as restructured loans. Our performing TDRs were generally provided a modification of loan repayment terms in response to borrower financial difficulties. The performing restructured loans represent the only loans accruing interest at each respective reporting date. A performing restructured loan is categorized as such if we believe that it is reasonably assured of repayment and is performing in accordance with the modified terms.

The following table provides a summary of TDRs as of the dates presented.

*(Dollars in thousands)*

| Performing TDRs: | December 31, 2022 Balance | Number of Loans |
| --- | ---: | ---: |
| Commercial real estate | $— | — |
| Construction | — | — |
| SBA | — | — |
| Commercial and industrial | 4,826 | 4 |
| Dairy & livestock and agribusiness | 2,000 | 1 |
| SFR mortgage | 991 | 5 |
| Consumer and other | — | — |
| Total performing TDRs | $7,817 | 10 |
| Nonperforming TDRs: |  |  |
| Commercial real estate | $— | — |
| Construction | — | — |
| SBA | — | — |
| Commercial and industrial | — | — |
| Dairy & livestock and agribusiness | — | — |
| SFR mortgage | — | — |
| Consumer and other | — | — |
| Total nonperforming TDRs | $— | — |
| Total TDRs | $7,817 | 10 |

At September 30, 2023 and December 31, 2022, there was no ACL allocated to modified loans to borrowers experiencing financial difficulty under the ASU 2022-02 or under TDRs, respectively. Impairment amounts identified are typically charged off against the allowance at the time the loan is considered uncollectible. There were no charge-offs on modified loans to borrowers experiencing financial difficulty or TDRs for the nine months ended September 30, 2023 and 2022.

### Nonperforming Assets and Delinquencies

The table below provides trends in our nonperforming assets and delinquencies as of the dates presented.

*(Dollars in thousands)*

| Nonperforming loans: | September 30, 2023 |  | June 30, 2023 | March 31, 2023 | December 31, 2022 | September 30, 2022 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial real estate | $3,655 |  | $3,159 | $2,634 | $2,657 | $6,705 |
| Construction | — |  | — | — | — | — |
| SBA | 1,050 |  | 629 | 702 | 443 | 1,065 |
| SBA - PPP | — |  | — | — | — | — |
| Commercial and industrial | 4,672 |  | 2,039 | 2,049 | 1,320 | 1,308 |
| Dairy & livestock and agribusiness | 243 |  | 273 | 406 | 477 | 1,007 |
| SFR mortgage | 339 |  | 354 | 384 | — | — |
| Consumer and other loans | 4 |  | — | — | 33 | 32 |
| **Total** | **$9,963** | (1) | **$6,454** | **$6,175** | **$4,930** | **$10,117** |
| **% of Total loans** | **0.11%** |  | **0.07%** | **0.07%** | **0.05%** | **0.12%** |
| **Past due 30-89 days (accruing):** |  |  |  |  |  |  |
| Commercial real estate | $136 |  | $532 | $425 | $— | $— |
| Construction | — |  | — | — | — | — |
| SBA | — |  | — | 575 | 556 | — |
| Commercial and industrial | — |  | — | — | — | — |
| Dairy & livestock and agribusiness | — |  | 555 | 183 | — | — |
| SFR mortgage | — |  | — | — | 388 | — |
| Consumer and other loans | — |  | — | — | 175 | — |
| **Total** | **$136** |  | **$1,087** | **$1,183** | **$1,119** | **$—** |
| **% of Total loans** | **0.00%** |  | **0.01%** | **0.01%** | **0.01%** | **0.00%** |
| **OREO:** |  |  |  |  |  |  |
| Commercial real estate | $— |  | $— | $— | $— | $— |
| SBA | — |  | — | — | — | — |
| SFR mortgage | — |  | — | — | — | — |
| **Total** | **$—** |  | **$—** | **$—** | **$—** | **$—** |
| **Total nonperforming, past due, and OREO** | **$10,099** |  | **$7,541** | **$7,358** | **$6,049** | **$10,117** |
| **% of Total loans** | **0.11%** |  | **0.08%** | **0.08%** | **0.07%** | **0.12%** |
| **Classified Loans** | **$92,246** |  | **$77,834** | **$66,977** | **$78,658** | **$63,651** |

(1) Includes $2.6 million of nonaccrual loans past due 30-89 days at September 30, 2023.

Nonperforming loans, defined as nonaccrual loans, nonperforming TDR loans and loans past due 90 days or more and still accruing interest, were $10.0 million at September 30, 2023, or 0.11% of total loans. This compares to nonperforming loans of $4.9 million, or 0.05% of total loans, at December 31, 2022 and $10.1 million, or 0.12% of total loans, at September 30, 2022. The $5.0 million increase in nonperforming loans from December 31, 2022 was primarily due to an increase of $3.4 million in commercial and industrial loans and $1.0 million in commercial real estate loans. Classified loans are loans that are graded “substandard” or worse. Classified loans of $92.2 million increased $14.4 million quarter-over-quarter, primarily due to a $24.4 million increase in classified commercial real estate loans, partially offset by an $11.4 million decrease in classified dairy & livestock loans.

At September 30, 2023, December 31, 2022, and September 30, 2022 we had no OREO properties. There were no additions to OREO properties for the nine months ended September 30, 2023.

### Allowance for Credit Losses

The allowance for credit losses totaled $89.0 million as of September 30, 2023, compared to $85.1 million as of December 31, 2022 and $82.6 million as of September 30, 2022. Our allowance for credit losses at September 30, 2023 was 1.00% of total loans. This compares to 0.94% and 0.94% at December 31, 2022 and September 30, 2022, respectively. The ACL was increased by $3.9 million for the first nine month of 2023, including $4.0 million in provision for credit losses. The ACL increased by $17.6 million for the nine months ended September 30, 2022, including $8.6 million for the acquired Suncrest PCD loans and $8.1 million in provision for credit losses. Net charge-offs were $122,000 for the nine months ended September 30, 2023, which compares to $877,000 in net recoveries for the same period of 2022.

The allowance for credit losses as of September 30, 2022 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 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 (excluding Paycheck Protection Program 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 which individually reflect various degrees of an economic recession in 2024 and early 2025. The resulting economic forecast reflects a modest decline in GDP in the first half of 2024, but a more significant decrease in Commercial Real Estate values that persists through all of 2025 and unemployment rising through 2025. As of September 30, 2023, the resulting weighted forecast assumes GDP will increase by 2.1% in 2023, followed by a modest recession at the beginning of 2024 and full year GDP growth of just 0.3% for all of 2024. GDP then grows at 1.1% in 2025. The unemployment rate is forecasted to be 3.8% in 2023 and 5.2% in 2024, with peak unemployment of 5.7% in 2025. As there is continued uncertainty around the assumptions that impact our economic forecast, no assurance can be given that economic conditions that adversely affect the Company's service areas and customers will not be reflected in an increased allowance for credit losses in future periods.

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.

*(Dollars in thousands)*

|  | As of and For the Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Allowance for credit losses at beginning of period | $85,117 | $65,019 |
| Charge-offs: |  |  |
| Commercial real estate | — | — |
| Construction | — | — |
| SBA | (207) | — |
| Commercial and industrial | (16) | (66) |
| Dairy & livestock and agribusiness | — | — |
| SFR mortgage | — | — |
| Consumer and other loans | (1) | (4) |
| Total charge-offs | (224) | (70) |
| Recoveries: |  |  |
| Commercial real estate | — | — |
| Construction | 9 | 9 |
| SBA | 69 | 99 |
| Commercial and industrial | 14 | 456 |
| Dairy & livestock and agribusiness | 10 | 383 |
| SFR mortgage | — | — |
| Consumer and other loans | — | — |
| Total recoveries | 102 | 947 |
| Net (charge-offs) recoveries | (122) | 877 |
| Initial ACL for PCD loans at acquisition | — | 8,605 |
| Provision recorded at acquisition | — | 4,932 |
| Provision for credit losses | 4,000 | 3,168 |
| Allowance for credit losses at end of period | $88,995 | $82,601 |
| Summary of reserve for unfunded loan commitments: |  |  |
| Reserve for unfunded loan commitments at beginning of period | $8,000 | $8,000 |
| Provision for unfunded loan commitments | — | — |
| Reserve for unfunded loan commitments at end of period | $8,000 | $8,000 |
| Reserve for unfunded loan commitments to total unfunded loan commitments | 0.43% | 0.43% |
| Amount of total loans at end of period (1) | $8,877,632 | $8,774,136 |
| Average total loans outstanding (1) | $8,905,697 | $8,612,166 |
| Net (charge-offs) recoveries to average total loans | -0.001% | 0.010% |
| Net (charge-offs) recoveries to total loans at end of period | -0.001% | 0.010% |
| Allowance for credit losses to average total loans | 1.00% | 0.96% |
| Allowance for credit losses to total loans at end of period | 1.00% | 0.94% |
| Net (charge-offs) recoveries to allowance for credit losses | -0.14% | 1.06% |
| Net (charge-offs) recoveries to provision for credit losses | -3.05% | 10.83% |

(1) Net of deferred loan origination fees, costs and discounts (amortized cost).

The Bank’s ACL methodology also produced an allowance of $8.0 million for our off-balance sheet credit exposures as of September 30, 2023, compared to $8.0 million as of December 31, 2022 and September 30, 2022.

While we believe that the allowance at September 30, 2023 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, 2022.

### Deposits

The primary source of funds to support earning assets (loans and investments) is the generation of deposits.

Total deposits were $12.36 billion at September 30, 2023. This represented a decrease of $477.5 million, or 3.72%, over total deposits of $12.84 billion at December 31, 2022. The composition of deposits is summarized as of the dates presented in the table below.

*(Dollars in thousands)*

|  | September 30, 2023 Balance | Percent | December 31, 2022 Balance | Percent |
| --- | ---: | ---: | ---: | ---: |
| Noninterest-bearing deposits | $7,586,649 | 61.39% | $8,164,364 | 63.60% |
| Interest-bearing deposits |  |  |  |  |
| Investment checking | 560,223 | 4.53% | 723,870 | 5.64% |
| Money market | 3,414,862 | 27.63% | 3,070,674 | 23.92% |
| Savings | 491,325 | 3.98% | 582,711 | 4.54% |
| Time deposits | 305,727 | 2.47% | 294,626 | 2.30% |
| Total Deposits | $12,358,786 | 100.00% | $12,836,245 | 100.00% |

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. Noninterest-bearing deposits totaled $7.59 billion at September 30, 2023, representing a decrease of $577.7 million, or 7.08%, from noninterest-bearing deposits of $8.16 billion at December 31, 2022. Noninterest-bearing deposits represented 61.39% of total deposits at September 30, 2022, compared to 63.60% of total deposits at December 31, 2022 and over the last five quarters have been consistently greater than 61%.

Savings deposits, which include savings, interest-bearing demand, and money market accounts, totaled $4.47 billion at September 30, 2023, representing an increase of $89.2 million, or 2.04%, from savings deposits of $4.38 billion at December 31, 2022.

Time deposits totaled $305.7 million at September 30, 2023, representing an increase of $11.1 million, or 3.77%, from total time deposits of $294.6 million for December 31, 2022.

Our deposits are 100% relationship based core deposits and customer repurchase agreements ("repos"). We had zero brokered deposits at the end of the third quarter of 2023 with 75% of our deposits consisting of business deposits and 25% consisting 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.

Our customer deposit relationships represent a diverse set of industries. The industry classification with the largest concentration is manufacturing, which represents 11% of our deposits. Overall, there are 15 different industry classifications that represent 2% or more of our deposits as of September 30, 2023. Our depositors have typically banked with us for many years. As of September 30, 2023, 46% of our deposit relationships have banked with us more than 10 years and 77% of our deposit relationships have been with us for three or more years.

The unprecedented increase in short-term interest rates impacted our deposit levels. Total deposits and customer repos were $12.63 billion at September 30, 2023, a $221.6 million, or 1.72%, decrease from June 30, 2023. At the end of third quarter of 2023, deposits and customer repos were $773.3 million lower than the end of 2022. This decline includes the impact of $720 million in customer deposits that were moved by customers into Citizens Trust, where these funds were invested in higher yielding liquid assets such as United States treasury notes or bonds. The velocity of deposits moving to CitizensTrust continued to moderate in the third quarter of 2023, with approximately $170 million transferred off balance sheet in the quarter, compared to $180 million in the second quarter of 2023, and $370 million in the first quarter of 2023.

### Borrowings

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 September 30, 2023 and December 31, 2022, total funds borrowed under these agreements were $269.6 million and $565.4 million, respectively, with a weighted average interest rate of 0.29% for the third quarter of 2023 and 0.10% for the fourth quarter of 2022.

As a result of declining deposit balances, we borrowed on average $1.32 billion during the third quarter of 2023. As of September 30, 2023, total short-term borrowings, consisted of $870.0 million of one-year advances from the Federal Reserve’s Bank Term Funding Program at a cost of 4.87%, which replaced higher cost borrowings from the FHLB, and $250 million of short-term FHLB advances, at an average cost of approximately 5%. These FHLB advances will mature in the fourth quarter of November 2023.

At September 30, 2023, loans with a carrying value of $4.35 billion were pledged to secure available lines of credit from the FHLB and the Federal Reserve Bank.

At September 30, 2023, investment securities with carrying value of $2.16 billion were pledged to secure various types of deposits, including $1.34 billion of public funds. In addition, investment securities with carrying values of $2.94 billion were pledged to secure $433.5 million for repurchase agreements, $870 million for outstanding borrowings, $1.58 billion for unused borrowing capacity and approximately $52 million for other purposes as required or permitted by law.

### Aggregate Contractual Obligations

The following table summarizes the aggregate contractual obligations as of September 30, 2023.

*(Dollars in thousands)*

|  | Total | Maturity by Period Less Than One Year | One Year Through Three Years | Four Years Through Five Years | Over Five Years |
| --- | ---: | ---: | ---: | ---: | ---: |
| Deposits (1) | $12,358,786 | $12,342,695 | $12,714 | $3,106 | $271 |
| Customer repurchase agreements (1) | 269,552 | 269,552 | — | — | — |
| Other borrowings | 1,120,000 | 1,120,000 | — | — | — |
| Deferred compensation | 22,130 | 574 | 1,152 | 1,150 | 19,254 |
| Operating leases | 27,213 | 7,210 | 12,339 | 6,763 | 901 |
| Equity investments | 22,995 | 18,385 | 4,297 | 42 | 271 |
| Total | $13,820,676 | $13,758,416 | $30,502 | $11,061 | $20,697 |

(1) Amounts exclude accrued interest.

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 13 – *Leases* of the notes to the Company’s unaudited condensed consolidated financial statements for a more detailed discussion about leases.

### Off-Balance Sheet Arrangements

The following table summarizes the off-balance sheet items at September 30, 2023.

*(Dollars in thousands)*

| Commitment to extend credit: | Total | Maturity by Period Less Than One Year | One Year Through Three Years | Four Years Through Five Years | After Five Years |
| --- | ---: | ---: | ---: | ---: | ---: |
| Commercial real estate | 416,239 | 77,465 | 166,022 | 146,265 | 26,487 |
| Construction | 28,767 | 25,439 | — | — | 3,328 |
| SBA | 97 | — | — | — | 97 |
| SBA - PPP | — | — | — | — | — |
| Commercial and industrial | 989,737 | 769,221 | 197,848 | 2,755 | 19,913 |
| Dairy & livestock and agribusiness (1) | 230,637 | 132,342 | 98,295 | — | — |
| Municipal lease finance receivables | — | — | — | — | — |
| SFR Mortgage | 6,539 | 4,163 | — | — | 2,376 |
| Consumer and other loans | 127,189 | 13,462 | 5,886 | 3,527 | 104,314 |
| Total commitment to extend credit | 1,799,205 | 1,022,092 | 468,051 | 152,547 | 156,515 |
| Obligations under letters of credit | 56,323 | 32,542 | 23,763 | — | 18 |
| Total | $1,855,528 | $1,054,634 | $491,814 | $152,547 | $156,533 |

(1) Total commitments to extend credit to agribusiness were $28.2 million at September 30, 2023.

As of September 30, 2023, we had commitments to extend credit of approximately $1.8 billion, and obligations under letters of credit of $56.3 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 September 30, 2023 and December 31, 2022, the balance in this reserve was $8.0 million and was included in other liabilities.

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 $2.9 million, or 0.15%, to $1.95 billion at September 30, 2023, compared to total equity of $1.95 billion at December 31, 2022. Increases to equity included $172.9 million in net earnings, partially offset by a $72.3 million decrease in other comprehensive income. At the end of the second quarter of 2023, we entered into pay-fixed rate swaps to mitigate the risks of rising interest rates. This resulted in a fair value remeasurement of this swap derivative, resulting in an after tax increase in other comprehensive income of $17.6 million at September 30, 2023. Decreases from December 31, 2022 included $83.7 million in cash dividends. We engaged in no stock repurchases during the second and third 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. Our tangible book value per share at June 30, 2023 was $8.39.

During the third quarter of 2023, 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"), including by means of (i) an initial $70 million dollar Accelerated Share Repurchase, or ASR Plan, and (ii) one or more Rule 10b5-1 plans or other appropriate buy-back arrangements, including open market purchases and private transactions. We completed the execution of the $70 million accelerated stock repurchase program in the second quarter of 2022, and retired a total of 2,993,551 shares of common stock at an average price of $23.38. During the nine month period ended September 30, 2022 we also repurchased, under our 10b5-1 stock repurchase plan, 1,914,590 shares of common stock, at an average repurchase price of $23.43, totaling $44.9 million. 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 second quarter of 2023. This 10b5-1 plan expired on March 2, 2023 and no new plan has been put in place since that time.

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 September 30, 2023, 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, 2022.

At September 30, 2023, the Bank and the Company exceeded the minimum risk-based capital ratios and leverage ratios, under the revised capital framework referred to as Basel III, required to be considered “well-capitalized” for regulatory purposes. 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.

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 | September 30, 2023 CVB Financial Corp. Consolidated | Citizens Business Bank | December 31, 2022 CVB Financial Corp. Consolidated | Citizens Business Bank |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Tier 1 leverage capital ratio | 4.00% | 4.00% | 5.00% | 10.00% | 9.91% | 9.53% | 9.42% |
| Common equity Tier 1 capital ratio | 4.50% | 7.00% | 6.50% | 14.38% | 14.25% | 13.55% | 13.39% |
| Tier 1 risk-based capital ratio | 6.00% | 8.50% | 8.00% | 14.38% | 14.25% | 13.55% | 13.39% |
| Total risk-based capital ratio | 8.00% | 10.50% | 10.00% | 15.25% | 15.12% | 14.37% | 14.22% |

67

### ASSET/LIABILITY AND MARKET RISK MANAGEMENT

### 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. The Bank has available lines of credit totaling approximately $5.8 billion, of which $3.5 billion is secured by pledged loans and another $2 billion is secured by investment securities. In addition to having more than $200 million of cash on the balance sheet at September 30, 2023, we had substantial sources of off-balance sheet liquidity. These sources of available liquidity include $4.7 billion of secured and unused capacity with the Federal Home Loan Bank, $1.2 billion of secured unused borrowing capacity at the Fed’s discount window or Bank Term Funding Program, more than $260 million of unpledged AFS securities that could be pledged at the discount window or the Fed’s Bank Term Funding Program and $300 million of unsecured lines of credit. In addition to these borrowing sources, the Bank has not utilized any brokered deposits as of September 30, 2023. We can also obtain additional liquidity from deposit growth by utilizing state and national wholesale markets.

Our primary sources and uses of funds for the Company are deposits, customer repurchase agreements and loans. Total deposits and customer repos of $12.63 billion at September 30, 2023 decreased $773.3 million, or 5.77%, over total deposits and customer repos of $13.40 billion at December 31, 2022. As a result of declining deposit balances, we borrowed on average $1.32 billion during the third quarter of 2023. We had no brokered deposits throughout the quarter. As of September 30, 2023, total short-term borrowings, consisted of $870 million of one-year advances from the Federal Reserve’s Bank Term Funding Program at a cost of 4.87%, which replaced higher cost borrowings from the FHLB, and $250 million of short-term FHLB advances, at an average cost of approximately 5%. These FHLB advances will mature in the fourth quarter of 2023. 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 September 30, 2023, our deposits and customer repurchase agreements that are neither collateralized nor insured were approximately $6.5 billion.

In addition to the increase in short-term borrowing during the first nine months of 2023, we shrank our investment portfolio by not reinvesting the approximately $350 million of cashflows generated by our investments during the first nine months of 2023. Our total investment portfolio declined by $447 million from December 31, 2022 to $5.36 billion as of September 30, 2023. The decrease was primarily due to a $382 million decline in AFS securities. AFS securities totaled $2.87 billion dollars at the end of the third quarter, inclusive of a pre-tax net unrealized loss of $628 million.

Below is a summary of our average cash position and statement of cash flows for the nine months ended September 30, 2023 and 2022. 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

*(Dollars in thousands)*

|  | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Average cash and cash equivalents | $462,132 | $1,205,065 |
| Percentage of total average assets | 2.82% | 7.05% |
| Net cash provided by operating activities | $246,951 | $202,846 |
| Net cash provided by (used in) investing activities | 543,501 | (962,037) |
| Net cash used in financing activities | (753,218) | (654,818) |
| Net increase (decrease) in cash and cash equivalents | $37,234 | $(1,414,009) |

Average cash and cash equivalents decreased by $742.9 million, or 61.65%, to $462.1 million for the nine months ended September 30, 2023, compared to $1.21 billion for the same period of 2022.

At September 30, 2023, cash and cash equivalents totaled $240.7 million. This represented a decrease of $77.8 million, or 24.44%, from $318.5 million at September 30, 2022.

### 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 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.

| Interest Rate Scenario | Estimated Net Interest Income Sensitivity (1) September 30, 2023 12-month Period | 24-month Period (Cumulative) | Interest Rate Scenario | December 31, 2022 12-month Period | 24-month Period (Cumulative) |
| --- | ---: | ---: | --- | ---: | ---: |
| + 200 basis points | 3.15% | 5.01% | + 200 basis points | 2.32% | 4.96% |
| - 200 basis points | -3.06% | -5.65% | - 200 basis points | -2.28% | -6.83% |

(1) Percentage change from base scenario.

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 September 30, 2023 and December 31, 2022, the EVE profile indicates a decline in net balance sheet value due to instantaneous downward changes in rates, compared to an increase resulting from an increase in rates.

### Economic Value of Equity Sensitivity

| Instantaneous Rate Change | September 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| 400 bp decrease in interest rates | -17.0% | N/A |
| 300 bp decrease in interest rates | -8.5% | N/A |
| 200 bp decrease in interest rates | -5.1% | -12.8% |
| 100 bp decrease in interest rates | -1.6% | -4.4% |
| 100 bp increase in interest rates | -0.2% | 1.2% |
| 200 bp increase in interest rates | 0.4% | 2.2% |
| 300 bp increase in interest rates | 1.0% | 3.8% |
| 400 bp increase in interest rates | 1.4% | 5.3% |

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.

## Market risk

As filed, 1,000 characters.

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. All remaining financial instruments indexed to LIBOR have been transitioned to a replacement index, as of June 30, 2023. 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, 2022. 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.

## Controls and procedures

As filed, 778 characters.

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 September 30, 2023, 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.

## Risk factors

As filed, 9,634 characters.

Except as discussed below 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, 2022. The materiality of any risks and uncertainties identified in our Forward Looking Statements contained in this report together with those previously disclosed in our current Form 10-K and any subsequent Form 10-Q 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.

***Recent negative developments affecting the banking industry could adversely impact our liquidity.***

The recent high-profile bank failures have generated significant market volatility among publicly traded bank holding companies and, in particular, regional community banks like CBB. These market developments have negatively impacted customer confidence in the safety and soundness of smaller regional and community banks. As a result, customers may choose to maintain deposits with larger more systematically important financial institutions or invest in higher yielding and higher-rated short-term fixed income securities, all of which could materially adversely impact CBB’s liquidity, loan funding capacity, net interest margin, capital and results of operations. While CBB currently has access to substantial borrowing capacity from the Federal Reserve Bank, the Federal Home Loan Bank and credit facilities established with larger banks, there can be no assurance that customer confidence in regional banks and the banking system more broadly will be fully restored or that potential liquidity concerns will recede or that such access will continue unimpaired.

***Rising interest rates have decreased the market value of the Company’s available for sale and held-to-maturity securities and loan portfolios, and the Company would realize losses if it were required to sell such securities or loans to meet liquidity needs.***

As a result of inflationary pressures and the resulting rapid increases in interest rates initiated by the Federal Reserve over the last year, the mark-to-market values of previously issued government and other fixed income securities have declined significantly. These securities make up a majority of the securities portfolios of most banks in the U.S., including the Company’s, resulting in unrealized losses embedded in the available-for-sale and held-to-maturity portion of U.S. banks’ securities and loan portfolios. While the Company does not currently intend to sell these securities or loans, if the Company were required to sell such securities or loans to meet liquidity needs, it could incur losses, which could impair the Company’s capital, financial condition, and results of operations, thereby negatively impacting our profitability. While the Company has taken actions to maximize its funding sources, there is no guarantee that such actions will be successful or sufficient in the event of sudden liquidity needs. Furthermore, while the Federal Reserve Board has announced a Bank Term Funding Program available to eligible depository institutions secured by U.S. treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral at par, to mitigate the risk of potential losses on the sale of such instruments, there is no guarantee that this program or the Company's other borrowing facilities will be effective in addressing the Company's liquidity needs as they arise.

***If the goodwill that we recorded in connection with business acquisitions becomes impaired, it could require charges to earnings, which would have a negative impact on our financial condition and results of operations.***

Goodwill resulting from business combinations represents the excess of the purchase price over the fair value of the net assets of the businesses we acquired. Goodwill has an indefinite useful life and is not amortized, however, it is tested for impairment at least annually, or more frequently, if events and circumstances exist that indicate that the carrying value of the asset might be impaired, including as a result of a decline in our stock price and market capitalization below our stated book value. We determine impairment by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. Estimates of fair value are determined based on a complex model using, among other things, discounted cash flows, the fair value of our Company as determined by our stock price, and peer company comparisons. Adverse events in the banking sector have caused market volatility and declines in the stock market prices for many community and regional banks, including the Company’s, resulting in a recent decline in the Company’s market capitalization. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. Any such adjustments are reflected in our results of operations in the periods in which they become known. There can be no assurance that our future evaluations of goodwill will not result in findings of impairment and related write-downs, which may have a material adverse effect on our financial condition and results of operations.

***Any enhanced regulatory examination scrutiny or new regulatory requirements arising from the recent events in the banking industry could increase the Company’s expenses and affect the Company’s operations and acquisition opportunities.***

Recent events in the banking industry could result in increased regulatory scrutiny in the course of routine examinations and otherwise, and new regulations directed towards regional banks, designed to address the recent negative developments in the banking industry, could increase the Company’s costs of doing business, lead to an increased risk of regulatory oversight actions or restrictions, result in decreased regulatory support for merger and acquisition activity, and reduce our profitability. Among other things, there may be an increased focus by both regulators and investors on deposit composition, levels of uninsured deposits, embedded interest rate risk on bank balance sheets, and bank risk management programs generally. As a primarily commercial bank, CBB has a relatively higher percentage of uninsured deposits compared to larger national banks or smaller community banks with a stronger focus on retail deposits. As a result, CBB could face increased scrutiny or be viewed as higher risk by regulators and the investor community.

***Changes in economic, market and political conditions can adversely affect our operating results and financial condition.***

We are subject to macroeconomic and interest rate risk due to domestic and global economic instability that has resulted in higher inflation than the United States has experienced in more than 40 years and resulted in increases to prevailing interest rates. The Federal Reserve’s Open Market Committee (“FOMC”) raised the target range for the federal funds rate to 5.25% to 5.50% in September 2023, resulting in a cumulative increase of 5.25% from March of 2022. These recent increases in prevailing interest rates and the expectation that interest rates may stay high or increase further for the near term are likely to impact both our customers and many aspects of our business. Higher interest rates will not only impact the interest we receive on loans and investment securities and the amount of interest we pay our depositors, but could also impact our ability to grow loans and deposits. Rising interest rates, higher commodity prices, and an overall slowdown in economic growth could also impact the fair value of our assets and adversely impact our asset quality.

***The occurrence of fraudulent activity, breaches or failures of information security controls or cybersecurity-related incidents to either our information systems or information systems provided by third party vendors could have a material adverse effect on our business, financial condition and results of operations.***

As a financial institution, we are susceptible to fraudulent activity, information security breaches and other cybersecurity-related incidents and attacks that may be committed against us, our customers or our key vendors and business partners, which in turn may result in financial losses or increased costs to us, our customers, or our key vendors and business partners, disclosure or misuse of our information or our customer information, theft or misappropriation of assets (including bank or customer funds), privacy breaches against us or our customers, litigation, regulatory enforcement actions, and damage to our reputation. The U.S. government has warned financial institutions of the potential increase in the frequency and severity of malicious cyber-attacks and other activities involving critical infrastructure, specifically including the financial sector, and has encouraged the banking sector to enhance cyber-defenses, and these risks have increased in connection with the current conflict in Europe initiated by Russia against Ukraine. While CBB has taken measures to protect its own and customer funds and confidential information against cyber-attacks, as well as other malicious activities, there can be no assurance that such measures will be successful in thwarting such attacks and activities.

Filed Nov 9, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-061771. Last ingested by Listed: Oct 24, 2026, 14:56 ET. No prices; not investment advice.