Detailed Narrative
Merger Integration and Strategy
The merger with Heritage Bank of Commerce closed successfully, marking the largest acquisition in the company's history. The immediate focus is on integrating new associates, acclimating them to CVB's culture and systems, and leveraging the expanded capacity and product array, particularly in the Bay Area. The combined organization aims to provide a wider range of products and services to clients, with Clay Jones and Julie joining the Board and senior leadership team.
Loan Portfolio Dynamics
Total loans increased by $280 million (3.3%) year-over-year to $8.64 billion at March 31, 2026. This growth was primarily driven by commercial real estate loans ($141 million), dairy and livestock/agribusiness loans ($62 million), construction loans ($43 million), and SBA 504 loans ($34 million). Quarter-over-quarter, total loans declined by $56 million due to seasonal decreases in dairy/livestock ($117 million) and C&I line utilization ($21 million), partially offset by growth in CRE ($57 million), SBA 504 ($13 million), and construction loans ($22 million).
Loan Origination and Competition
Loan originations started the year strong, approximately 90% higher than Q1 FY25 and 15% higher than Q4 FY25, with pipelines remaining robust. Commercial real estate loan originations have been strengthening, while C&I originations remained consistent. However, intense rate competition for high-quality loans is noted, leading to average origination yields of approximately 6%, which is about 25 basis points lower than the prior quarter. Management emphasizes competing on service and monetizing the entire client relationship.
Deposit Trends and Funding Costs
Average total deposits and customer repurchase agreements for Q1 FY26 were $12.5 billion. Noninterest-bearing deposits declined on average by $112 million year-over-year and $107 million quarter-over-quarter, representing 58% of total deposits. The cost of deposits and repos decreased to 82 basis points for the quarter, down from 86 bps in Q4 FY25 and 87 bps in Q1 FY25, reflecting a 7 basis point decrease in the overall cost of funds.
Credit Quality Overview
Total nonperforming loans increased by $1.5 million to $6.1 million at March 31, 2026, representing 0.07% of total loans. This increase was primarily due to the downgrade of a $2.9 million C&I loan, for which a specific reserve was established. Classified loans increased to $83.1 million from $52.7 million quarter-over-quarter, mainly due to two C&I relationships, but remain below 1% of total loans. Management stated these are isolated situations with strong collateral positions.
Economic Outlook and CECL
The company's economic forecast, based on Moody's scenarios, projects real GDP below 1% in the second half of 2026 and below 2% through 2027. The unemployment rate is forecasted to reach 5% by mid-2026 and remain above 5% through 2028. Commercial real estate prices are expected to continue their decline through year-end 2026 before experiencing growth in the second half of 2027. The allowance for credit losses increased by $3 million to $80.2 million, primarily due to the establishment of specific reserves totaling $3.2 million.