CVB Financial Corporation

Good morning, ladies and gentlemen, and welcome to the third quarter 2024 CVB Financial Corporation and its subsidiary Citizens Business Bank earnings conference call. My name is Cherie and I'm your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. Please note this call is being recorded. I would now like to turn the presentation over to your host for today's call, Alan Nicholson, executive vice president and chief financial officer. You may proceed.

Thank you, Cherie, and good morning, everyone. Thank you for joining us today to review our financial results for the third quarter of 2024. Joining me this morning is Dave Brager, president and chief executive officer. Our comments today will refer to the financial information that was included in the earnings announcement released yesterday. To obtain a copy, please visit our website at .cbbanks.com and click on the investors tab. The speakers on this call claim the protection of the safe harbor provisions contained in the private securities litigation reform act of 1995. For more complete discussion of the risks and uncertainties that may cause actual results to differ materially from our forward-looking statements, please see the company's annual report on form 10K for the year ended December 31, 2023, and in particular, the information set forth in item 1A, risk factors therein. For a more complete version of the company's safe harbor disclosure, please see the company's earnings release issued in connection with this call. I'll now turn the call over to Dave Brager. Thank

you, Alan. Good morning, everyone. For the third quarter of 2024, we reported net earnings of $51 million, or 37 cents per share, representing our 190th consecutive quarter of profitability. We previously declared a 20 cents per share dividend for the third quarter of 2024, representing our 140th consecutive quarter of paying a cash dividend to our shareholders. We produced a return on average tangible common equity of .93% and a return on average assets of .23% for the third quarter of 2024. Our net earnings of $51 million, or 37 cents per share, compares with $50 million for the second quarter of 2024, or 36 cents per share, and $57.9 million, or 42 cents per share, for the prior year quarter. Quarter over quarter, our pre-tax, pre-provision income grew by 2%, excluding net gains and losses. Total revenue, excluding gains and losses, grew by 2.9%, or $3.7 million, compared to the second quarter of 2024, primarily due to a $2.8 million increase in net interest income. Our core net non-interest expense increased by 3.8%, or $2 million, compared to the prior quarter. On September 26, we completed an early redemption of our $1.3 billion bank term funding program borrowing that was scheduled to mature in January of 2025. Total assets declined by approximately $750 million from the end of the second quarter of 2024, as the BTFP redemption was offset by more than $400 million of growth in deposits and customer repos. As part of our strategy to pay off the BTFP borrowings and deleverage our balance sheet, we executed two sale leaseback transactions in which we sold and leased back two banking center buildings under long-term leases, realizing gain on sale totaling $9.1 million. In conjunction with these real estate transactions, we sold more than $300 million of -for-sale investment securities at a cumulative loss of $11.6 million. Although total assets declined to $15.4 billion by September 30, 2024, average earning assets grew by $262 million, or .8% from the second quarter of 2024 to the third quarter of 2024, which drove the $2.8 million quarter over quarter increase in net interest income. Our net interest margin was .05% in the third quarter, the same as the prior quarter. The third quarter is generally a strong deposit quarter for our bank. We experienced an increase in deposits and customer repos of $408 million from the end of the second quarter to September 30, 2024. The quarter over quarter growth in average deposits and customer repos was $251 million. Our average -interest-bearing deposits were greater than 59% of our average total deposits for the third quarter of 2024. At September 30, 2024, our total deposits and customer repurchase agreements totaled $12.5 million, a $760 million, $62 million increase from December 31, 2024. The increase in total deposits and customer repos includes the addition of $400 million in broker time deposits that were added to the balance sheet during the first quarter of 2024. For the first nine months of 2024, approximately $200 million of deposits have moved to Citizens Trust. These funds were invested in higher-yielding liquid assets such as Treasury notes. This compares to $800 million that was transferred during 2023. Our cost of deposits and customer repos was 101 basis points for the third quarter of 2024, which compares to 87 basis points for the second quarter of 2024 and 51 basis points for the year-ago quarter. Our cost of non-maturity deposits has grown from 60 basis points in December 2023 to 88 basis points in September of 2024, while our cost of time deposits has grown from .84% in December of 2023 to .24% in September of 2024. From the first quarter of 2022 through the third quarter of 2024, our cost of deposits has increased by 95 basis points. Our deposit data on non-maturity deposits from the beginning of the Fed's 525 basis point increasing rate cycle through the end of the third quarter of 2024 was 16%. Now, let's discuss loans. Commercial real estate loan demand continues to be tepid. CNI line utilization also continues to be low, even though we have grown our total CNI loan commitments. Total loans at September 30th, 2024 were $8.6 billion, a $109 million or 1% decrease from the end of the second quarter, and a $332 million decline from December 31st, 2023. The -over-quarter decrease was led by a $46 million decline in commercial real estate loans, a $38 million decline in construction loans, and a $20 million decrease in commercial and industrial loans. The decrease in loans from the end of 2023 included a $77 million decrease in dairy and livestock loans. Dairy and livestock loans see higher line utilization at year-end, which is reflected in the 80% utilization rate at the end of the fourth quarter of 2023 compared to the 71% utilization rate at September 30th, 2024. Commercial real estate loans declined by $166 million from December 31st, 2023, as commercial real estate loan demand has weakened. Our CRE loan production for the first nine months of 2024 has lagged the same period in 2023 by more than 30%. Construction loans declined by $52 million over the same period as construction loan origination has been minimal. C&I loans declined by $33 million when comparing the third quarter in balance to December 31st, 2023. C&I line utilization continues to be at a rate of less than 30%. We compete on loans very selectively, which can impact new loan production and loan yields. Even considering the high credit quality of our new loan origination, new loan originations, yields on new loans in 2024 have been greater than 7.25%. However, loan rates have been under pressure recently from competition and near-term originations will likely average below 7%. Our continued focus on banking the best small and medium-sized businesses and their owners, providing them our full array of products, has resulted in a higher percentage of new loans in 2024 that are either owner-occupied or C&I loans. -owner-occupied loan originations in 2024 have been approximately 16% of total loan originations, which compares to approximately 26% for the same nine-month period in 2023. We believe our asset quality remains strong as non-performing loans declined by $3 million and our classified loans remain relatively flat quarter over quarter. Our allowance for credit losses totaled approximately $83 million at September 30th, the same as June 30th, 2020. Net recoveries in the third quarter were $156,000 compared to net chargeoffs of $31,000 in the second quarter of this year. At quarter end, non-performing assets defined as non-accrual loans plus other real estate owned were $22.6 million or 15 basis points of total assets. The $22.6 million in non-performing loans compares with $25.6 million for the prior quarter. Classified loans were $125 million for both the third quarter and the prior quarter. Classified loans as percentage of total loans was .45% at quarter end. Classified dairy and livestock and agribusiness loans declined by $3.5 million due to pay downs while classified commercial and industrial loans increased by $3.5 million, primarily due to the addition of one classified commercial and industrial loan. At September 30th, we had approximately $31 million of commercial real estate loans that were past due more than 30 days but less than 90 days. Two loans that comprised approximately 80% of these past due loans went on non-accrual in October. We believe that these loans are well-secured and there are no anticipated chargeoffs. In October, we also foreclosed on three non-performing loans, one of which was a $2.2 million loan that was fully paid off by a third party that purchased the asset at foreclosure. Of the two remaining loans, a $4.8 million loan has become an OREO asset but we have multiple offers that exceed our book value. The third loan is the previously discussed senior living facility participated loan acquired in the Suncrest merger. In October, the loan was foreclosed and became an OREO asset of approximately $4 million. There are multiple offers on this property which we will believe, in which we believe will result in a recovery of most or all of the chargeoff we took in the first quarter of 2024. I will now turn the call over to Alan to further discuss our net interest income and additional aspects of our balance sheet.

Alan. Thanks, thanks Dave. Interest income grew by $6.7 million over the prior quarter. Our average balance of funds at the Federal Reserve increased from the second quarter by more than $500 million to approximately $1.2 billion. This growth generated an increase in interest income of $7.2 million. Interest income from our security portfolio declined by $1.2 million as we accelerated the decline in this low-yielding bond portfolio by selling $300 million of AFS securities during the third quarter which contributed to $127 million decline in average balance of our investment securities. Although average loans declined by $126 million compared to the second quarter of 2024, interest income on loans increased by more than $700,000 due to a five basis point increase in loan yields. Interest expense increased by $3.9 million over the prior quarter, reflecting a nine basis point increase in our cost of funds. The increase in interest expense and our cost of funds was primarily due to an increase in interest expense on deposits and customer repos of $5.1 million. Interest bearing deposits and customer repos grew on average by $279 million and the cost of deposits and customer repos grew by 14 basis points. Third quarter borrowing costs decreased by $1.2 million as average borrowings declined by $121 million. Our total investment portfolio declined by $305 million from the end of the second quarter of 2024 and by $550 million from December 31, 2023. AFS securities declined by $280 million from the end of the second quarter as we sold AFS securities during the third quarter with a book value of approximately $310 million. These security sales resulted in a pre-tax net loss of $11.6 million. The unrealized loss on AFS securities declined by $120 million from $488 million at June 30, 2024 to $368 million on September 30, 2024. Investment securities held to maturity or HTM securities totaled approximately $2.41 billion at September 30, 2024. The HTM portfolio declined by approximately $25 million from June 30, 2024. The tax equivalent yield on the entire investment portfolio was .67% for the third quarter of 2024 compared to .71% for the prior quarter. We continue to have positive carry on the fair value hedges we executed in late June of 2023. We received daily SOFR on these pay fixed swaps which have a weighted average fixed rate of approximately 3.8%. We recorded $4.3 million of interest income in the third quarter related to these swaps based on the spread of 170 basis points. The Federal Reserve's 50 basis point rate reduction in September and the anticipated rate reductions in November and December will reduce the spread we earn on these swaps. The market value of our fair value hedges combined with our cash flow hedges declined by approximately $35 million from the end of the prior quarter. As Dave noted previously, we executed two sale lease back transactions and we sold two properties for an aggregate sale price of $17 million. We simultaneously entered into lease agreements with respective purchasers for initial terms of 15 and 18 years. These sale lease back transactions resulted in a pre-tax net gain of $9.1 million during the third quarter of 2024. We currently anticipate two additional sale lease back transactions during the fourth quarter of 2024. Once these transactions close, we expect to offset the corresponding gains with some lost rates from our AFS portfolio. Cash and cash equivalents declined to $453 million of September 30th as a result of the redemption of the $1.3 billion of bank term funding program borrowings on September 26th. Our allowance for credit losses as of September 30th, 2024 was $83 million, same level as the ACL was on June 30th, 2024. Our third quarter ACL was .97% of total loans, which compares to .95% on June 30th. Our ACL at December 31st, 2023 was $86.8 million, which included a $5.9 million reserve for specifically identified non-performing loans. Our reserves for specific loans have been essentially zero since the end of the first quarter of 2024. We did not record a provision in the first three quarters of 2024. Our economic forecast continues to be a blend of multiple forecasts produced by Moody's. We continue to have the largest individual scenario waiting on Moody's baseline forecast with downside risk weighted among multiple forecasts. The resulting economic forecast resulted in real GDP declining slightly in the fourth quarter of 2024 and continuing to be negative in the first quarter of 2025. GDP growth is forecast to be less than 1% for all of 2025 before increasing to .4% in 2026 and then growth of .9% in 2027. Unemployment is forecast to increase with unemployment averaging .5% for all of 2025. The unemployment rate is forecast to stay higher than .5% until late 2027. Now turning to our capital position, at September 30th, 2024, our shareholders' equity increased from the end of 2023 by $120 million to $2.2 billion. The company's tangible common equity ratio at September 30th, 2024, was .7% compared with .7% at June 30th, 2024 and .5% at December 31st, 2023. Our regulatory capital ratios continue to grow and are among the highest in the industry. At September 30th, 2024, our common equity tier one capital ratio was .8% and our total risk-based capital ratio was 16.6%. Our effective tax rate decreased during the third quarter of this year as a result of investments in tax credits, bringing our -to-date effective tax rate to 26.25%. I'll now turn the call back to Dave for further discussions

of our third quarter earnings. Thank you, Alan. Moving on to noninterest income, our noninterest income was $12.8 million for the third quarter of 2024 or $15.3 million when net gains and losses are excluded. This compares with $14.4 million for the prior quarter. Third quarter bully income increased by $557,000 quarter over quarter, including the receipt of $320,000 in death benefits that exceeded the cash surrender values in the third quarter of 2024. In addition, our trust and wealth management fees increased by approximately $140,000 compared to the second quarter of 2024. Now expenses. Noninterest expense for the third quarter was $58.8 million compared with $56.5 million for the second quarter of 2024. The $2.3 million quarter over quarter increase was primarily due to a $1.2 million increase in staff related expense as annual salary increases became effective at the beginning of July. We also had an increase in regulatory assessment expense of approximately $700,000 due to the reduction of our accrual for the special FDIC assessment in the second quarter of 2024. Occupancy expense grew by $330,000 or 7% when compared with the prior quarter, including the impact of the higher occupancy costs for the two banking centers involved in the sale lease back transactions. More than half the growth in occupancy expense was seasonal in nature due to higher utility costs. The third quarter of 2024 included $750,000 in recapture provision for unfunded loan commitments compared to $500,000 in recapture in the second quarter of 2024. Noninterest expense totaled .42% of average assets for the third quarter of 2024 compared with .4% for the prior quarter. Our efficiency ratio was .53% for the third quarter of 2024. This compares with .1% for the second quarter. This concludes today's presentation. Now, I'll be happy to take any questions that you might have.

Thank you. To ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. One moment while we compile the Q&A roster. And our first question will come from the line of Matthew Clark with Piper Sandler. Your line is open.

Hey, good morning,

guys. Good morning, Matthew.

First one for me, just around the repayment of the BTFP. Wanted to get the yield on the securities sold, and then it looks like you also used some cash to pay that off. Can you just give us the moving parts in terms of the yield give up so we can calculate the lift that you'll get in your NIM from the smaller, from the deal averaging?

Yeah, I mean, the book yield, market yield would be different, but the book yield on the securities sold was less than 3%.

Okay. Any other pieces to the puzzle there, or is it just cash and those securities?

Cash and securities, I mean, of course, as Dave mentioned, we grew deposits, obviously, which generated additional cash that we deployed.

Okay. Okay. And it looks like deposit costs have stabilized in September based on slides 41 and 47. What are your thoughts on deposit costs in general from here, assuming we get the forward curve?

Yeah, so a couple of things. During the last rate cut, you know, we obviously lagged the market on the way up with 16%, 18%, you know, beta. But for us, we did lower some of our money market rates on the first cut. On any future cuts, we'll probably be more, we'll be closer to more of 100% beta on the downside. We were about a 50% beta maybe on the downside in the first cuts, which really obviously haven't shown up in those deposit costs yet. And we had a little movement, obviously, just going down below 60% on non-interest varying, but still right there. So I think all in all, it's definitely stabilized. We're still seeing some requests for higher rates, but the vast majority of those situations are being handled a little bit differently than in the rising rate environment. So on the next cut, we'll take a little bit deeper dive into rates that are probably, you know, .5% or higher and look at those. So we did the first round on rates that were .5% or higher. So we'll just keep kind of ratcheting that down as the Fed makes moves. I don't know, Alan, do you have anything to add? No, I think that covers it.

Okay, great. And then last one for me, just on M&A and buybacks, any update on whether or not you think you might be able to announce a deal before your end and if not, whether or not a buyback is likely?

Yeah, so obviously we're sitting on an enormous amount of capital. One of the, I'll say, restricting factors, you know, prior to maybe the last couple of quarters was our GCE ratio. That's obviously much less of a problem today than it was a couple of quarters ago. Working hard at putting together deals, you know, banks are sold, not bought, so we have to, you know, stick to our knitting as far as our pricing and the way we structure deals and sometimes that stops us from announcing anything, but we are working hard to do something. And M&A is definitely, you know, I would say option 1A. Notwithstanding the M&A conversation, we still believe that we have the opportunity to do more capital management with respect to buybacks and that's something that we are, you know, evaluating and discussing. And I imagine, you know, we'll have something coming out on that relatively shortly.

Great, thank you.

Thank you. One moment for our next question. And that will come from the line of David Feaster with Raymond James. Your line is open.

Hi, good morning everybody.

Morning David. David, how are you? Yeah, everything's

good.

Okay, just checking.

Yeah, thank you. I wanted to touch on the growth outlook. You know, you talked about tepid demand and you talked about competition being real headwinds. It's not exactly a great environment to be trying to grow in. You know, I'm curious, how do you think about growth? Where are you seeing opportunities and how do you win in a type of, that type of environment, right, where competition seems to be mispricing

credit to an extent? Ladies and gentlemen, please stand by. One moment please. Please remain on the line. Your conference will resume shortly. Thank you and we do have our

speakers

back.

David, it wasn't that we didn't want to answer the question, I promise.

It was such a good question that you guys got kicked off the call, right?

No, I don't know what happened. We got disconnected, so I apologize for that. Sorry about that. Just speaking to the long growth, demand is slow, competition is fierce. I mean, I've seen a couple of deals we've lost to rates below 6%, which is unbelievable to me. But at the end of the day, we are still growing relationships. They're primarily more C&I operating companies. The investor commercial real estate side has been, you know, very tepid. I think that, you know, as rates sort of stabilize and front end of the curve goes down maybe a little bit more, maybe the 10-year stays around where it is, I think we'll start to see a pickup in the investor commercial real estate side of things. Because remember, that's all funded debt. And we need to make sure that even on the C&I stuff that we do, we're getting, you know, 20 to 30% utilization on, you just have to do a lot more of it to hit the same number as doing an investor commercial real estate loan. But the pipelines are okay. The deposit pipelines are good still. The loan pipelines are a little lighter. But we're very focused on relationship, which includes loans and deposits and fee income opportunities. So we'll continue to focus on that. And then, you know, I think, as I've said in the past, you know, we'll have a little, there's a little seasonality in the fourth quarter. But we're really sort of setting up the bank for how we're going to perform in 25 and beyond with the payoff of the BTFP. And we have liquidity. We have, you know, the ability to do more. So we're really focused on growing those relationships. But I still think it's going to be kind of a little tough sliding going ahead.

Okay. And I just want to touch on credit. You touched on this in your prepared remarks, just talking about the credit migration, that we're, you know, maybe additional credit migration in October, the commentary on the ORE trends. But, you know, look, your ability to sell at or above loan value and some of the other commentary talks about, you know, speaks to your credit underwriting discipline. I guess I was hoping you could just touch on the trends you're seeing in the book. You know, we've touched on AG pressures in the past, but I'm curious, what are you hearing from your clients? Where are they seeing pressures? Is there anything specific? And to what extent does declining rates kind of help alleviate a lot of the pressures that these folks are seeing?

Yeah. So the issues we've had and the items that I mentioned in our prepared remarks are really totally unrelated to the interest rate environment. Those are, there's basically two relationships. The first three loans that I mentioned were all multifamily properties, extremely low loan to values, like between 25 and 45% loan to value, where our borrower just went dark on us. And, you know, we worked with him and literally a month and a half before, he brought in a million and a half dollars to bring everything current and then he disappeared again. And so we ended up putting two up for sale. We got outbid at one at the foreclosure. The second one we took into OREO. We should be closing that this quarter. You won't even see that as an REO theoretically, assuming everything goes, you know, according to what is under contract right now. So I think the situations we've experienced have been sort of really one-off. The senior living facility, unfortunately, were a participant. We're not the agent. And I candidly would have moved a lot faster on this than the agent bank did. And so we've sort of just been, you know, the tail wagging the dog there a little bit and trying to get them to move. But now we're finally, we finally have that property. We have an operator in there. The operator wants to buy the property. The property is performing better. We're getting offers that, I mean, again, theoretically hasn't happened yet. Should fully pay us off. Plus, we would recover the amount that we charged off in the first quarter. So I feel good about that as well. So really the credit quality has been very stable. Ag during livestock has improved significantly. And there's just not a lot that's happening there other than these sort of one-off, very unique situations. So I don't know, Allen, if you have anything to add to that. But, you know, it's been very stable. And there are customers. The rates really haven't been a problem. We haven't had borrowers really to a large extent. There have been a few have to right size loans on repricing or maturity. So all in all, it's been very stable. And you're right. It's based on how we underwrote those loans at origination that gives us that cushion, to make sure that we're not losing money even if we have to go through the unfortunate process of foreclosure.

Okay. That's a good caller. And then last one for me, you touched on the healthy deposit pipeline. It's great to see the increase in NIV balances this quarter. I'm curious, kind of when you look at your pipeline and what drove that increase this quarter, I mean, how much is existing clients versus where you're winning more of the wallet share versus new clients coming over and where you're having success driving core deposit growth today?

Yeah. So as you know, we have a couple of, I'd say, heavy non-interest bearing lines of business that we really focus on. And so our government services group, our title escrow group, property management group, they've all done well. And remember those title escrow property managers, their deposits are at probably a couple of year lows just generally from existing customers because there's no refinances, there's no escrows open for sales. So we just not seeing the same deposit level we had a year ago or a year and a half ago for sure. So I think we'll start to see some pickup there. But to answer your question, it's really been new relationships and it's across the board. It's all different types of operating companies, our title escrow group, title escrow property management group is having their best year in Originations. The government services group has done a great job. And so it's really across the board, across all industries. But I do think that we'll, you know, remember historically for us, we have some seasonality. Generally, the second and third quarters are better. The fourth and first quarters are a little bit worse. But I do think a lot of the excess has been taken out. So I don't know that we'll see, you know, exactly the same thing because a lot of the, I'll say excess deposits have been moved into our trust group or moved outside investments outside of our trust group. So I think from a relationship side and the deposit side, we're doing a great job. And on the on the loan side, you know, there's just we need to win our fair share of the right deals. And, you know, we may have to get a little more aggressive on pricing in order to do that.

Okay, that's great, Caller. Thank you.

Thank you. One moment for our next question. And that will come from the line of Andrew Turrell with Stevens. Your line is open.

Hey, good morning.

Good morning, Andrew.

Maybe just a follow up on anyone on Matt's questions around the securities that were sold during the quarter. Do you have the specific timing during the third quarter the securities were sold?

Well, in many ways, they were sold throughout the quarter, but it was probably a little heavier on the back end, particularly in the last month. But I you could probably equate the average balance versus the point to point change and estimated from there.

Yeah, okay. And we should just kind of make the assumption that the securities that were sold have a yield that's pretty much in line with the current AFS portfolio or maybe a little bit below. I think it was 3.02 in the third quarter.

It's probably, you know, if you're saying the average of the portfolios, and this is a market yield, but 270, the book yield on these was closer to 3%.

Got it. Okay. And

then maybe I wanted to maybe dive a little more into some of the deposit cost commentary. Looking at the kind of non-maturity deposits by month that you guys split out in the presentation, it looks like 88 basis points in September still kind of elevated versus the rest of the quarter. And I know that the rate cuts probably weren't overly impactful to that number on a full month basis. But just taking some of the commentary you gave around still getting some rate requests versus going at a 50% beta for the first cut. I was just hoping to get maybe a better sense of maybe not necessarily the exit yield, but should we expect that 88 basis point non-maturity cost in September has kind of moderated so far?

Yeah, I think for the most part that's accurate. There's obviously a lot of moving parts because we do get some rate increases. That's slowed down quite a bit. Even when we did that first reduction in rates, we really didn't hit everybody. But in the next reduction in rates, we're going to move farther down sort of the rate spectrum of our customers and probably be closer to 100% beta on the second rate cut, assuming it's 25 basis points. So I think moderate is probably a good word. I mean, there's a lot of puts and takes, ups and downs. But all in all, we should see that sort of stabilize, if not decline slightly.

Yep. Okay. And then just one more actually on the securities portfolio. I think there was a hedge in place

against

the bond book. I'm curious if anything changed from a hedging standpoint during the quarter, given you did sell some bonds?

No, Andrew. We also continue to have capacity to sell more in the fourth quarter. The hedges were put on with the AFS portfolio. There's a lot of excess capacity. And so we should foresee any issues there. Now, we may evaluate in the fourth quarter. There's three different fair value hedges. They are shortening. And so the implications from a fair value hedge perspective may change a little bit as we move forward. So we may evaluate unwinding some of that. But that's just a possibility. But certainly not all of it.

Yep. Okay. Makes sense. Thank you for taking the questions.

Thank you.

Thank you. One moment for our next question. And that will come from the line of Gary Tenner with DA Davidson. Your line is open.

Thanks. Good morning. Morning, Gary. I wanted to ask, hey, regarding plans to do possibly another -lease-back transaction with AFS sales, would the expectation or goal there be to reinvest or maybe go towards reducing other wholesale funding or broker deposits?

Gary, there's probably a couple things on the table that we're evaluating. I think it's likely that to some extent we'll be reinvesting and maybe all of it be reinvested. We're also evaluating, as I just mentioned, whether we want to take any of the hedges off the balance sheet. And then we, from a wholesale funding perspective, we have $500 million with FHLB. I don't think we're really considering doing anything with that. We have $400 million in brokered CDs, $300 million of which are cash flow hedges. I don't think we'll do anything with those. But there is $100 million that's 90-day resets. And so we'll evaluate how that helps us from an interest rate risk perspective versus cost of funding as we go through the quarter. So, but definitely we'll reinvest some of it.

Okay, I appreciate that. And just with regards to the loan yields here in the third quarter, the five basis points expansion, just wondering if there was any noise within that at all? And as we were thinking about the fourth quarter, kind of ballparked the impact of the 50 basis point rate cut on loan yields all else equal.

Yeah, we didn't have anything really unusual. I would say it's just, it was sort of part of what we've been seeing, you know, a slow increase and the impact from the Fed was somewhat muted. So the way I would look at it, we look at our variable loans as loans that would reprice within a year. And depending on the dairy borrowings, that could be 25 to 27% of the portfolio. But we only have roughly 10 or a little bit more than 10% that immediately reset. And so we saw that happen. But there's other ones that reset, you know, quarterly or over three months or maybe a full month and the full month obviously reset didn't happen until October. So the impact of that 50 basis points will sort of bleed out over time.

Thank you.

Thank you. As a reminder, if you would like to ask a question, please press star 11. One moment for our next question. And that will come from the line of Kelly Mata with KBW. Your line is open.

Good morning. Thanks for the question. I guess, I guess turning back to margin, now that you've paid down the BTFP, I mean, you're borrowing, Farine, you have the 500 million of FHLB that you've obviously disclosed previously. Wondering of the repos in there, if there's any color as to where those rates currently are, so we can kind of back into how to think of that, those like customer accounts as we look ahead.

Are you talking about the repurchase agreement sweep deposit accounts?

Yep. That's correct.

So we did have some movement into our repos in the last quarter. There was some movement from non-interest bearing into that that sort of impacted some of those rates. They were looking for a little bit higher rate. But obviously, depending on what the Fed does as far as rate cuts going forward, those rates will, you know, or should start to come down as well. But the repurchase agreement sweeps, albeit they show up as borrowings, they're really just cash management tools that our customers use for excess deposits. So the majority of the portfolio is very low priced. There are a few relationships that are a little bit higher. And depending, again, on what the Fed does, those rates could start to come down a little bit. So I don't know, Alan, if you have anything you want to add to that. Kelly,

our customer repos really experienced a very low beta until the most recent quarter where we had some movement out of non-interest bearing. So, you know, the average cost of those rose in over 2%. But now they're also going to probably fall quicker than they would have as well.

Got it. Putting together the moving pieces of NII, and I appreciate you guys don't necessarily give guidance, but, you know, you paid down some of that BTFP with a negative carry. Net-net with rates lower and additional pressure on NII from here, at least initially, off this 114 level, is that fair? Or do you think the actions you took should more than offset kind of the initial hit from lower rates?

Well, I think if you think about NII, remember, we had a positive carry on that BTFP, and so that's, as I mentioned in I think our prepared remarks, that was over $7 million. So that's a headwind from a net interest income perspective. Also, we made $4.3 million on that carry on the pay-fix swaps, the fair value hedges. So that's going to diminish to some extent, certainly based on the Fed moves, at the end of September, and depending on what they do in November and December, it could eventually go negative. Right? So it's not going to go negative in the fourth quarter. So those are both headwinds from an NII perspective, you know, going forward.

Okay, got it. And I apologize. I was a little late to the call. Have you quantified your expectation for future security sales as we start to think through the size of the balance sheet?

Well, we sold, as we mentioned, about $300 million in the prior quarter. I anticipate it will probably be less than that. The security sales we do sell probably will have a lower yield than what I referenced earlier in our remarks as well. Certainly, rates are up since the third quarter, certainly since we sold a lot of our security. So those unrealized losses we would take may expand, which may mitigate some of the cash we would get from some of it. So it could be a third to a half of the size would be my guess.

Okay, that's helpful. I will step back. Thank you.

Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Breger for any closing remarks.

Great. Thank you, Sharif. Citizens Business Bank continues to perform consistently in all operating environments. Our solid financial performance is highlighted by our 190 consecutive quarters, or more than 47 years of profitability, and 140 consecutive quarters of paying cash dividends. We remain focused on our mission of banking the best small to medium-sized businesses and their owners through all economic cycles. I would like to thank our customers and associates for their commitment and loyalty. Thanks for joining us this quarter. We appreciate your interest and look forward to speaking with you in January for our fourth quarter 2024 earnings call. Please let Alan or I know if you have any questions. Have a great day.

This concludes today's program. Thank you all for participating. You may now disconnect.