CVB Financial - Q3 2024

Executive Summary

• Q3 2024 EPS was $0.37 on net earnings of $51.2M; NIM held at 3.05% while efficiency ratio rose to 46.53% from 45.10% in Q2.
• Deposits and customer repos grew $408M QoQ; noninterest-bearing deposits were ~59% of total, supporting low funding costs while borrowings fell to $500M after early redemption of $1.3B BTFP debt.
• Noninterest income included a $9.1M gain from two sale-leasebacks, offset by an $11.6M loss on $312M of AFS securities sold (strategic deleveraging and repositioning).
• Management flagged near-term NII headwinds from the loss of positive carry on BTFP and shrinking hedge carry as rates decline; deposit costs have stabilized and are expected to decline with future Fed cuts (near-100% downside beta on non-maturity deposits).
• Wall Street consensus from S&P Global was unavailable due to request limits; estimate beat/miss cannot be determined (S&P Global data unavailable).

What Went Well and What Went Wrong

• What Went Well

  • Strong liability management: repaid $1.3B BTFP early, reducing borrowings to $500M and improving capital ratios (CET1 15.8%, TCE 9.7%).
  • Core franchise resilience: noninterest-bearing deposits averaged ~59% of total; deposits and repos rose $408M QoQ; NII increased $2.8M QoQ.
  • Strategic actions: sale-leasebacks generated $9.1M gains, and AFS repositioning set up more flexible balance sheet; CEO: “We are pleased with our third quarter results…190th consecutive quarter of profitability”.

• What Went Wrong

  • Loan growth pressure: loans declined $109M QoQ (CRE, construction, C&I down), reflecting weak demand and competitive pricing below CVBF’s hurdle rates.
  • Margin/funding headwinds: efficiency ratio worsened to 46.53%; deposit costs rose (cost of funds +9bps QoQ) and hedge carry will diminish with Fed cuts.
  • Credit watch items: past due 30–89 days increased to $30.8M; two large CRE loans moved to nonaccrual in October, though management expects minimal losses given collateral value.

Transcript

Gary Tenner (Analyst)

Good morning, ladies and gentlemen, and welcome to the third quarter two thousand and twenty-four 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, Allen Nicholson, Executive Vice President and Chief Financial Officer. You may proceed.

David Brager (CEO)

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 www.cbbank.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 a 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 10-K for the year ended December thirty-first, two thousand and twenty-three, 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 $0.37 per share, representing our one hundred and ninetieth consecutive quarter of profitability.

We previously declared a $0.20 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 14.93% and a return on average assets of 1.23% for the third quarter of 2024. Our net earnings of $51 million or $0.37 per share compares with $50 million for the second quarter of 2024, or $0.36 per share, and $57.9 million or $0.42 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 non-interest expense increased by 3.8% or $2 million compared to the prior quarter. On September 26th, 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 available-for-sale investment securities at a cumulative loss of $11.6 million. Although total assets declined to $15.4 billion by September thirtieth, 2024, average earning assets grew by $262 million or 1.8% 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 3.05% 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 non-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 billion, a $762 million increase from December 31, 2023.

The increase in total deposits and customer repos includes the addition of $400 million in brokered 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 2024, while our cost of time deposits has grown from 1.84% in December 2023 to 3.24% in September 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 beta 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. C&I line utilization also continues to be low, even though we have grown our total C&I loan commitments.

Total loans at September 30, 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 31, 2023. The quarter-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 30, 2024.

Commercial real estate loans declined by $166 million from December 31, 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-end balance to December 31, 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 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 to 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. Non-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 nonperforming loans declined by $3 million and our classified loans remained relatively flat quarter over quarter. Our allowance for credit losses totaled approximately $83 million at September 30, the same as June 30, 2024.

Net recoveries in the third quarter were $156,000, compared to net charge-offs of $31,000 in the second quarter of this year. At quarter end, nonperforming assets, defined as nonaccrual loans plus other real estate owned, were $22.6 million or 15 basis points of total assets. The $22.6 million in nonperforming 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 a percentage of total loans was 1.45% 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 nonaccrual in October. We believe that these loans are well secured and there are no anticipated charge-offs. In October, we also foreclosed on three nonperforming loans, one of which was a $2.2 million dollar 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, in which we believe will result in a recovery of most or all of the charge-off we took in the first quarter of 2024. I will now turn the call over to Allen to further discuss our net interest income and additional aspects of our balance sheet. Allen?

E. Allen Nicholson (EVP and CFO)

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 a $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 fourteen 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 pretax 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 2.67% for the third quarter of 2024, compared to 2.71% 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 leaseback 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 leaseback transactions resulted in a pretax net gain of $9.1 million during the third quarter of two thousand and twenty-four. We currently anticipate two additional sale leaseback transactions during the fourth quarter of two thousand and twenty-four.

Once these transactions close, we expect to offset the corresponding gains with some loss trades from our AFS portfolio. Cash and cash equivalents declined to $453 million as 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 0.97% of total loans, which compares to 0.95% 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 weighting 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 forecasted to be less than 1% for all of 2025 , before increasing to 1.4% in 2026, and then growth of 1.9% in 2027.

Unemployment is forecasted to increase, with unemployment averaging 5.5% for all of 2025. The unemployment rate is forecasted to stay higher than 5.5% until late 2027. Now turning to our capital position. At September 30, 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 30, 2024, was 9.7%, compared with 8.7% at June 30, 2024, and 8.5% at December 31, 2023. Our regulatory capital ratios continue to grow and are among the highest in the industry.

At September 30, 2024, our Common Equity Tier 1 capital ratio was 15.8%, 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 year-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.

David Brager (CEO)

Thank you, Allen. Moving on to non-interest income. Our non-interest 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 BOLI 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. Non-interest 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 leaseback 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 1.42% of average assets for the third quarter of 2024, compared with 1.4% for the prior quarter. Our efficiency ratio was 46.53% for the third quarter of 2024. This compares with 45.1% for the second quarter. This concludes today's presentation. Now, Allen and I will be happy to take any questions that you might have.

Operator (participant)

Thank you. To ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one 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.

Matthew Clark (Analyst)

Hey, good morning, guys.

David Brager (CEO)

Good morning, Matthew.

Matthew Clark (Analyst)

First one for me, just around the repayment of the BTFP. Wanted to get the yield on the security 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, and so we can calculate the lift that you, you'll get in your NIM from the smaller, from the deleveraging?

E. Allen Nicholson (EVP and CFO)

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

Matthew Clark (Analyst)

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

E. Allen Nicholson (EVP and CFO)

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

Matthew Clark (Analyst)

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?

David Brager (CEO)

Yeah, so a couple of things. During the last rate cut, you know, we obviously lagged the market on the way up with a 16-18% beta, you know. But, for us, we did lower some of our money market rates on the first cut. On any future cuts, we'll be closer to more of a 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 noninterest-bearing, 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, 1.5% or higher and look at those. So we did the first one round on rates that were 2.5% or higher. So we'll just keep kind of ratcheting that down as the Fed makes moves. I don't know, Allen, do you have anything to add?

E. Allen Nicholson (EVP and CFO)

No, I think that covers it.

Matthew Clark (Analyst)

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 year-end? And if not, whether or not a buyback is likely.

David Brager (CEO)

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 TCE 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 one-A. 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.

Matthew Clark (Analyst)

Great. Thank you.

Operator (participant)

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.

David Feaster (Analyst)

Hi, good morning, everybody.

David Brager (CEO)

Morning, David. David, how are you?

David Feaster (Analyst)

Yeah, everything's good.

David Brager (CEO)

Okay, just checking.

David Feaster (Analyst)

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 that type of environment, right? Where competition seems to be mispricing credit to an extent.

Operator (participant)

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 Brager (CEO)

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

David Feaster (Analyst)

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

David Brager (CEO)

No, I don't know what happened. We got disconnected, so I apologize for that. Sorry about that.

David Feaster (Analyst)

Yeah.

David Brager (CEO)

So just speaking to the loan 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 ten-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, is we're getting, you know, 20%-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.

Then, you know, I think, as I've said in the past, you know, there is 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 2025 and beyond with the payoff of the BTFP. 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 gonna be kind of a little tough sledding going ahead.

David Feaster (Analyst)

Okay. I just wanted 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 CRE or the OREO trends. But you know, 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?

David Brager (CEO)

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 $1.5 million to bring everything current, and then he disappeared again. 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 OREO, 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, we're 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's 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, dairy, and 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 our 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.

You're right, it's based on how we underwrote those loans at origination that gives us that cushion, you know, to make sure that we're not losing money, even if we have to go through the unfortunate process of foreclosure.

David Feaster (Analyst)

Okay. That's good color. And then last one for me. You know, you touched on the healthy deposit pipeline. It's great to see the increase in IB 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 are you having success driving core deposit growth today?

David Brager (CEO)

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, you know, remember those title escrow property managers, their deposits are at probably a couple year lows, just generally from existing customers, because there's no refinances, there's no escrows open for sales. You know, so we're 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, you know, 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 to outside investments outside of our trust group, so I think from a relationship side and a deposit side, we're doing a great job.

And 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.

David Feaster (Analyst)

Okay. That's great color. Thank you.

Operator (participant)

Thank you. One moment for our next question, and that will come from the line of Andrew Terrell with Stephens. Your line is open.

Andrew Terrell (Analyst)

Hey, good morning.

David Brager (CEO)

Good morning, Andrew.

Andrew Terrell (Analyst)

Maybe just a follow-up on, I think, one of 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?

David Brager (CEO)

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 you could probably equate the average balance versus the point to point change and estimate it from there.

Andrew Terrell (Analyst)

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.

David Brager (CEO)

It probably, you know, if you, if you're saying the average of the portfolios, now this is a market yield, but you have 2.70. The book yield on these was closer to 3%.

Andrew Terrell (Analyst)

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, you know, 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 you know, just taking some of the commentary you gave around still getting some rate requests versus, you know, 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?

E. Allen Nicholson (EVP and CFO)

Yeah. I think for the most part, that's accurate. You know, 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.

Andrew Terrell (Analyst)

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, you know, if anything changed from a hedging standpoint during the quarter, given you did sell some bonds?

E. Allen Nicholson (EVP and CFO)

No, Andrew. We also continue to have capacity to sell more in the fourth quarter. You know, the hedges were put on with the AFS portfolio. There was a lot of excess capacity, and so we shouldn't foresee any issues there. Now, we may evaluate in the fourth quarter. You know, there's three different fair value hedges. You know, 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.

Andrew Terrell (Analyst)

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

E. Allen Nicholson (EVP and CFO)

Thank you.

Operator (participant)

Thank you. One moment for our next question, and that will come from the line of Gary Tenner with D.A. Davidson. Your line is open.

Gary Tenner (Analyst)

Thanks. Good morning.

E. Allen Nicholson (EVP and CFO)

Morning, Gary.

Gary Tenner (Analyst)

I wanted to ask, hey, regarding plans to do, you know, possibly another sale-leaseback transaction, with AFS sales, would the expectation there or goal there be to, reinvest or maybe go towards reducing other, wholesale funding or brokered deposits?

David Brager (CEO)

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, from a wholesale funding perspective, you know, 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 callable hedges. I don't think we'll do anything with those, but there is $100 million that's ninety-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.

But definitely we'll reinvest some of it.

Gary Tenner (Analyst)

Okay, I appreciate that. And just with regard 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 you know, we're thinking about the fourth quarter, kind of ballpark the impact of the fifty basis point rate cut on loan yields, all else equal.

David Brager (CEO)

Yeah, we didn't have anything really unusual. I would say it just 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 is we look at our variable loans as loans that would reprice within a year. And depending on the dairy borrowings, that could be 25%-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, at quarterly or over three months or maybe a full month, and the full month, obviously, reset didn't happen till October. So the impact of that 50 basis points will sort of bleed out over time.

Gary Tenner (Analyst)

Thank you.

Operator (participant)

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

Kelly Motta (Analyst)

Good morning. Thanks for the question. I guess turning back to margin, now that you've paid down the BTFP, I mean, you're borrowing there. I know 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 in to have a think of that, those like customer accounts as we look ahead?

David Brager (CEO)

Are you talking about the repurchase agreement sweep deposit accounts?

Kelly Motta (Analyst)

Yes. Yep, that's correct.

David Brager (CEO)

Yeah, so we did have some movement into our repos in the last quarter. There was some movement from non-interest-bearing into 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. 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 list-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.

E. Allen Nicholson (EVP and CFO)

Yeah, 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 the other way as well, so.

Kelly Motta (Analyst)

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 1.14 level, is that fair? Or do you think the actions you took should more than offset kind of the initial hit from lower rates?

E. Allen Nicholson (EVP and CFO)

I think if you think about NII, remember, we had a positive carry on that BTFP, right? 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-fixed swaps, right, the fair value hedges. So that's going to diminish to some extent, certainly based on the Fed moves at end of September. And depending on what they do in November and December, you know, it could eventually go negative, right? It's not going to go negative into the fourth quarter. So those are both headwinds from an NII perspective, you know, going forward.

Kelly Motta (Analyst)

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?

E. Allen Nicholson (EVP and CFO)

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 securities. So those unrealized losses we would take, you know, 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.

Kelly Motta (Analyst)

Okay. That's helpful. I will step back. Thank you.

Operator (participant)

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. Brager for any closing remarks.

David Brager (CEO)

Great. Thank you, Cherie. Citizens Business Bank continues to perform consistently in all operating environments. Our solid financial performance is highlighted by our one hundred and ninety consecutive quarters, or more than forty-seven years of profitability, and one hundred and forty consecutive quarters of paying cash dividends. We remain focused on our mission of banking the best small and 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 Allen or I know if you have any questions. Have a great day.