Earnings Call Transcript
CVB FINANCIAL CORP (CVBF)
Earnings Call Transcript - CVBF Q4 2024
Operator, Operator
Good morning, ladies and gentlemen, and welcome to the Fourth Quarter of 2024 CVB Financial Corporation and its subsidiary, Citizens Business Bank Earnings Conference Call. My name is Shuri, and I am your operator for today. 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.
Allen Nicholson, CFO
Thank you, Shuri, and good morning, everyone. Thank you for joining us today to review our financial results for the fourth 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 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.
David Brager, CEO
Thank you, Allen. Good morning, everyone. First, I want to say that our thoughts and prayers are with the victims and those impacted by the devastating wildfires that occurred in Los Angeles County. Citizens Business Bank organized a response around four key issues: our associates, our customers, our facilities, and our corporate response for our communities. First, we had over 50 associates that were impacted by the mandatory evacuation orders, and we will be providing direct support to them through a variety of methods. Second, we have identified 114 loans totaling approximately $105 million located in the fire zones. At this point, 14 properties have experienced some level of damage with seven of the properties completely destroyed, one commercial building and six residential properties totaling $7.4 million. All 14 of the impacted properties had insurance in place, and we have actually received proceeds to fully pay off one of the residential properties. Third, due to the mandatory evacuation orders or power outages, we had six centers temporarily closed at some point during the fires, and all the locations have now reopened. Fourth, we announced that we have donated $200,000 to four relief agencies working on the front lines to assist people in need and will be one of the banks participating in the California DFPI relief efforts to assist those impacted. Now to the quarter. For the fourth quarter of 2024, we reported net earnings of $51 million or $0.36 per share, representing our 191st consecutive quarter of profitability. We previously declared a $0.20 per share dividend for the fourth quarter of 2024, representing our 141st consecutive quarter of paying a cash dividend to our shareholders. We produced a return on average tangible common equity of 14.31% and a return on average assets of 1.3% for the fourth quarter of 2024. Our return on equity is impacted by our high level of capital, which is reflected in our common equity Tier 1 capital ratio of 16.2% and 9.8% tangible common equity ratio. In conjunction with our company’s capital planning, we announced in November of 2024 that our Board of Directors authorized a new $10 million share repurchase program. Our net earnings of $51 million or $0.36 per share compared with $51 million for the third quarter of 2024 or $0.37 per share and $48.5 million or $0.35 per share for the prior year quarter. Pretax income in the fourth quarter of $68 million was $423,000 higher than the third quarter of 2024. Net interest income decreased quarter-over-quarter by $3.2 million or 2.8%, primarily due to the actions we have taken to deleverage our balance sheet by reducing borrowings and other wholesale funds, therefore, reducing our earning assets. Noninterest income increased by $269,000 and noninterest expense decreased by $355,000 compared to the third quarter. We had a recapture of allowance for credit losses of $3 million in the fourth quarter. On September 26, 2024, we completed an early redemption of our $1.3 billion bank term funding program borrowing that was scheduled to mature in January of 2025. By redeeming this debt, we deleveraged our balance sheet, resulting in total average assets for the fourth quarter declining by almost $1 billion from the third quarter. The reduction in debt reduced interest expense by $15 million per quarter, driving a 13 basis point increase in our net interest margin for the fourth quarter. We were able to increase our return on average assets from 1.24% in the third quarter to 1.3% in the fourth quarter. We executed two sale-leaseback transactions in the fourth quarter of 2024 in which we sold and leased back two buildings under long-term leases, realizing gains on sale totaling $16.8 million. In conjunction with these real estate transactions, we sold $155 million of available-for-sale investment securities at a cumulative loss of $16.7 million. At December 31, 2024, our total deposits and customer repurchase agreements totaled $12.2 billion, a $505 million increase from December 31, 2023, including the growth of $315 million of non-maturity deposits. Although we generally experienced a decrease in deposits at the end of the fourth quarter each year, total deposits and customer repos grew on average by $150 million over the third quarter of 2024. Compared to the third quarter, non-maturity deposits grew on average by $188 million while time deposits declined on average by $130 million, inclusive of a $100 million brokered CD that we did not renew. By the end of the fourth quarter, we experienced a decrease in deposits and customer repos from the end of the third quarter of $257 million. Noninterest bearing deposits were 59% of total deposits for the fourth and third quarters of 2024, down from 63% at the end of 2023. We are optimistic about our ability to continue to grow low-cost deposits. 2024 was a relatively strong year for new deposit relationships. As an example, our specialty deposit group generated 75% more in new business in 2025 than the average for the prior two years. From December 31, 2019, to December 31, 2024, our total deposits and repos have grown by more than $3 billion. Excluding the deposits acquired from Suncrest Bank and brokered CDs, our core deposits and repos grew by approximately $1.6 billion, which represents a cumulative average growth rate of 3.3% over that five-year period.
Allen Nicholson, CFO
Our cost of deposits was 93 basis points for the fourth quarter of 2024, which compares to 98 basis points for the third quarter of 2024 and 62 basis points for the year ago quarter. Our cost of non-maturity deposits has grown from 60 basis points in December of 2023 to 81 basis points in December of 2024 while our cost of time deposits has grown from 1.84% in December of 2023 to 2.84% in December of 2024. Now let's discuss loans. Total loans at December 31, 2024, were $8.54 billion, a $36 million decrease from the end of the third quarter and a $368 million or 4% decline from December 31, 2023. The quarter-over-quarter decrease was led by a $111 million decline in commercial real estate loans. We also had an $11 million decrease in commercial and industrial loans and approximately $10 million decline in agribusiness loans. Dairy and livestock loans grew seasonally by $87 million from the end of the third quarter.
David Brager, CEO
We continue to experience limited demand for commercial real estate loans, and rate competition for the quality of loans we focus on has been very competitive. We average yields of 7% on new CRE loans in the fourth quarter, but by the end of the quarter, originations were in the high 6% range. C&I line utilization continues to be low, even though we have grown our total C&I loan commitments. Overall, total new loan commitments for 2024 were 90% of 2023's production, but balances funded on the new loan commitments was only 75% of 2023 levels as we originated a greater percentage of C&I loans in 2024. The decrease in loans from the end of 2023 included commercial real estate loans declining by $277 million and construction loans declining by $51 million as construction loan origination was minimal in 2024.
Allen Nicholson, CFO
C&I loans also declined by $45 million when comparing December 31, 2023, to December 31, 2024. In total, we ended the quarter with $19.3 million in OREO assets, including $17.7 million of loans that were classified as non-performing at the end of the third quarter of 2024 and were foreclosed during the fourth quarter and recorded as an OREO. An additional $1 million loan that was not past due at September 30, 2024, became an OREO asset at year-end. Net recoveries for the fourth quarter were $180,000, which compares to $156,000 in net recoveries for the third quarter of 2024. Total non-performing and delinquent loans decreased from $53.3 million at September 30, 2024, to $47.6 million at December 31, 2024.
David Brager, CEO
We had $30.7 million of past due and accruing loans as of September 30, 2024, of which $24.8 million became non-performing and approximately $1 million became OREO by the end of 2024. We reversed interest income of approximately $1.5 million during the fourth quarter for these non-performing assets. The remaining $4.9 million of past due and accruing loans at the end of the third quarter were paid off by the borrower or from the sale of loan collateral. Classified loans were $89.5 million at December 31, 2024, $25 million lower than the prior quarter and $17 million lower than the end of 2023.
Allen Nicholson, CFO
Classified loans as a percentage of total loans was 1.05% at the end of 2024. Classified dairy and livestock and agribusiness loans declined by $11 million as profitability is improving for these borrowers. Classified non-owner commercial real estate loans decreased by $27 million, including a reduction of $13 million for a group of multifamily loans to one borrower which we foreclosed on during the fourth quarter. Of this $13 million in loans, $9 million became OREO as of December 31, while the remaining $4 million was paid off through the sale of the collateral.
David Brager, CEO
Additionally, a $9.8 million loan on a senior living facility that was a participation entered into by Suncrest Bank was foreclosed during the fourth quarter and recorded as an OREO at December 31, 2024. We do not anticipate losses on the sale of the $19 million of OREO assets during the first quarter of 2025. The multifamily properties representing the $9 million of OREO have been or will be sold in January as sales of these properties have either closed or are under sales contracts awaiting title to clear in the next few days.
Allen Nicholson, CFO
There is also a signed purchase agreement for the senior living facility, which we expect to close in February. I will now turn the call over to Allen to further discuss our net interest income and additional aspects of our balance sheet.
David Brager, CEO
Thanks, Dave. We executed a deleveraging of our balance sheet at the end of the third quarter of 2024 by completing an early redemption of $1.3 billion bank term funding program borrowing in September of last year. As a result of this deleveraging, average borrowings during the fourth quarter of 2024 were $1.2 billion lower than the third quarter of last year. And average earning assets decreased by approximately $975 million from the third quarter. The use of cash to redeem the bank term funding program borrowing at the end of the third quarter resulted in our average funds on deposit at the Federal Reserve decreasing by approximately $750 million during the fourth quarter of 2024. Investment securities also declined on average between the third and fourth quarters of 2024 by $144 million as we executed on targeted sales of certain available-for-sale or AFS securities during the third and fourth quarters of 2024.
Allen Nicholson, CFO
We executed two sale-leaseback transactions during the fourth quarter of 2024, realizing gains on sale totaling $16.8 million. In conjunction with these real estate transactions, we sold approximately $155 million of available-for-sale investment securities at a cumulative loss of $16.7 million. During the fourth quarter of 2024, we purchased $385 million of securities, a combination of floating rate and 15-year fixed-rate mortgage-backed securities with an average yield at the time of purchase of more than 5%. We also sold more than $300 million of AFS securities during the third quarter of 2024 at a cumulative loss of $11.6 million, which was also timed in conjunction with the sale and leaseback of two banking center buildings during the third quarter.
David Brager, CEO
The building sales in the third quarter resulted in gains on sales totaling $9.1 million. The securities sold in the third quarter had an average book yield of less than 3%, while the securities sold in the fourth quarter had an average book yield of less than 2%. On a combined basis, over the third and fourth quarters of 2024, we sold $467 million of the low-yielding AFS securities and purchased $385 million of new investments with current yields in excess of 5%. Available for sale investment securities were approximately $2.54 billion at December 31, 2024, a $77 million increase from September 30, 2024. The unrealized loss on AFS securities increased by $80 million from $367 million at September 30, 2024, to $448 million on December 31, 2024.
Allen Nicholson, CFO
At the end of the third quarter of 2024, we had three paid fixed swaps that we recorded as fair value hedges totaling $1 billion in notional value. The bank received daily sober on these swaps. In December, we unwound one of these swaps, which matured in June of 2027 with a notional value of $300 million and a fixed rate of 3.95%. We netted less than $100,000 on the transaction. For the fourth quarter of 2024, we earned a positive carry on these swaps, generating $2.3 million of interest income compared to $4.3 million in the third quarter of 2024.
David Brager, CEO
At year-end, we continue to have $300 million of brokered CDs that have been swapped as cash flow hedges. But an additional $100 million brokered CD that was issued earlier in 2024 was not renewed during the fourth quarter. As of December 31, 2024, the market value of our remaining two fair value hedges, combined with our cash flow hedges, increased by approximately $27 million from the end of the third quarter. The net after-tax impact of changes in both the fair value of our AFS securities and our derivatives resulted in a $37 million decrease in other comprehensive income for the fourth quarter.
Allen Nicholson, CFO
Investment securities held to maturity or HTM securities totaled approximately $2.38 billion at December 31, 2024. The HTM portfolio declined by approximately $26 million from September 30. Our total investment portfolio declined by $500 million from December 31, 2023, including a decline in AFS securities of more than $400 million. As of December 31, 2024, we had $800 million in wholesale funds, including $500 million of Federal Home Loan Bank advances and $300 million of brokered CDs, which represents a $1.4 billion decrease from our wholesale funds on December 31, 2023.
David Brager, CEO
As a result of our balance sheet deleveraging and the Fed lowering short-term interest rates, our interest income in the fourth quarter declined by $18 million over the third quarter of 2024. Average earning assets declined by $974 million and the yield on earning assets declined by 19 basis points. The decrease in interest income was primarily due to an $11 million decline in interest from funds deposited at the Federal Reserve, reflecting a $748 million decrease in average balances at the Fed and a 65 basis point decline in the yield on these funds. Loans were also down on average by $83 million, which combined with a 16 basis point decrease in loan yields resulted in a $4.7 million decrease in interest income.
Allen Nicholson, CFO
This decline in loan interest income included the approximately $1.5 million of accrued interest that was reversed for loans that were classified as non-accrual during the fourth quarter. A better reflection of the decline in loan yield is the decline in our core loan yields, which decreased by 6 basis points from September to December of 2024. Interest expense decreased by $15 million over the prior quarter due to the $15 million decrease in interest on borrowings, reflecting the redemption of the $1.3 billion in BTFP borrowings. Our cost of funds decreased from 1.47% for the third quarter of 2024 to 1.13% in the fourth quarter. After our balance sheet repositioning, net interest income before provision for credit losses decreased by $3.2 million from the third to the fourth quarters of 2024, while our net interest margin expanded from 3.05% in the third quarter to 3.18% in the fourth quarter.
David Brager, CEO
For the fourth quarter of 2024, we recaptured $3 million in provision for credit losses, reducing our allowance for credit losses as of December 31, 2024, to $80 million. Our ACL at December 31, 2023, was $86.8 million, including approximately $6 million of reserves for specifically identified non-performing loans. Our reserves for specific loans was close to 0 at December 31, 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 both upside and downside risk weighted among multiple forecasts. The resulting economic forecast resulted in real GDP growing at a slower rate with GDP growth below 2% for 2025 through 2027, and the unemployment rate rising over 5% by 2026 and not moving below 5% until 2028. Commercial real estate prices are also forecasted to continue their decline in 2025 with only meaningful price appreciation starting in 2027.
Allen Nicholson, CFO
Now turning to our capital position. At December 31, 2024, our shareholders' equity was $2.2 billion, a $108 million increase from the end of 2023. The company’s tangible common equity ratio at December 31, 2024, was 9.8% compared with 8.5% at December 31, 2023. At December 31, 2024, our common equity Tier 1 capital ratio was 16.2% and our total risk-based capital ratio was 17.1%. Although the Board of Directors authorized a new 10b5-1 stock repurchase plan in November, there were no shares repurchased during the fourth quarter of 2024.
David Brager, CEO
Thank you, Allen. Moving on to noninterest income. Our noninterest income was $13.1 million for the fourth quarter of 2024 compared to $12.8 million for the third quarter and $19.2 million for the fourth quarter of 2023. The third quarter of 2024 included a net loss of $2.3 million between the sale-leaseback transactions and the accompanying bond sales, while the fourth quarter transactions essentially offset.
Allen Nicholson, CFO
BOLI income decreased by $1.1 million from the third quarter and by $5.5 million in the fourth quarter of 2023. These decreases were primarily the result of the BOLI restructuring during the fourth quarter of 2023. Income from CRA-related investments was approximately $1 million lower in the fourth quarter of 2024 compared to both the third quarter of 2024 and the fourth quarter of 2023. Our trust and wealth management fees increased by approximately $370,000 or more than 14% compared to the fourth quarter of 2023.
David Brager, CEO
Now expenses. Noninterest expense for the fourth quarter was $58.5 million compared with $58.8 million for the third quarter of 2024 and $65.9 million in the fourth quarter of 2023. The fourth quarter of 2023 included $9.2 million of additional expense related to the initial FDIC special assessment. A recapture provision for unfunded loan commitments totaled $750,000 in the third quarter of 2024 and $500,000 in the fourth quarter of 2023. Staff-related expenses declined by approximately $650,000 from the third quarter of 2024, while increasing by approximately $350,000 from the fourth quarter of 2023.
Allen Nicholson, CFO
Occupancy expense grew by $167,000 when compared with the fourth quarter of 2023, which includes the impact of the higher occupancy costs for the four offices involved in the sale-leaseback transactions. Excluding a decrease in building security expense, occupancy expense would have increased by approximately $400,000 from the fourth quarter of 2023 and would have been essentially the same in comparison to the third quarter of 2024. Noninterest expense totaled 1.49% of average assets for the fourth quarter of 2024 compared to 1.42% for the prior quarter and 1.62% for the fourth quarter of 2023. Our efficiency ratio was 46.3% for the fourth quarter of 2024, which compares with 46.5% for the third quarter and 47.6% in the year-ago quarter. This concludes today's presentation.
Operator, Operator
Now Allen and I will be happy to take any questions that you might have.
David Feaster, Analyst
I just wanted to start out maybe touching on the pulse of your clients. There's a lot of optimism out there with investors and analysts alike talking about improving demand, accelerating loan growth. I'm curious, have you started to see that in your pipeline yet? Just kind of the early read with your conversations and how clients, just their sense of optimism in their plans for 2025?
David Brager, CEO
Yes, I absolutely believe there's a sense of optimism going forward. And we have had a good start to the year on the loan front. The pipelines are improving but are still not where I would want them to be overall. But generally speaking, I don't think there's any question that people are a little more excited and looking forward to 2025. So I do believe that we'll be able to execute on loan growth, and it's something that all of our bankers understand. We're reaching out to our customers, talking about plans that they maybe had shelved before that they are now hoping to get done or get started. So absolutely believe there's some enthusiasm out there, which we haven't had in a couple of years.
David Feaster, Analyst
Okay. That's great. And then just wanted to touch on your capital priorities. You guys have been active, very active. You've got an extremely strong balance sheet. How do you think about deploying capital today? And where are you most interested? Are buybacks or additional restructurings on the table? And just any broader thoughts maybe on the M&A market as well?
David Brager, CEO
Yes. So I mean, obviously, we recognize we have an enormous amount of capital. And we have a number of things that we want to accomplish. First and foremost, we want to be able to grow and utilize the capital to grow internally. As far as the M&A market is concerned, conversations have definitely picked up. We've had numerous conversations over the last month or so with a number of banks, and we'll continue to do that. The challenge really has been most of the people on the other side look at this and say, well, here's what Citizens Business Bank can pay based on where they’re trading, and then we have to explain to them how much we are willing to pay, and there's usually a disconnect between those two numbers. It is an important part of 2025 for us. I do believe we're in a window from a regulatory perspective, from a business environment perspective, I think that we should be able to execute on something in 2025. But at this point, obviously, nothing imminent, nothing happening, but we are working very hard at that. And then beyond the M&A, we do have the 10b5-1 plan in place. We are disciplined, and it is somewhat opportunistic from where we're trading or at least where we were trading yesterday. And so there will be an opportunity, I believe, for us to continue to look at that if it hits certain numbers. So we're working on that. So I don't know, Allen, if you have anything you want to add, but...
Allen Nicholson, CFO
The only other thing I would mention, David, is that from a mergers and acquisitions perspective, it's clear that sellers' expectations might have become a bit too optimistic. Additionally, interest rates have increased, which you can see reflected in the impact on our other comprehensive income, and that makes the calculations a bit more difficult when considering acquisitions. So aside from the regulatory environment being favorable, those are some potential challenges. Please remember, as we stated last quarter, we have sufficient capital for both mergers and acquisitions as well as stock buybacks, and they are not mutually exclusive.
David Brager, CEO
Yes. And just one more thing, David, just to sort of tie the bow on this. It's not burning a hole in our pocket either from the sense of, I think there was a big bank CEO who said the capital is not burning a hole in our pocket. We're going to be disciplined in how we look at the uses of capital, whether that's through M&A, buybacks, other ways, we will continue to perform at a very high level, and we are going to generate additional capital, but we definitely want to put it to use, but we also want to make sure we put it to use in our normal disciplined way.
David Feaster, Analyst
Yes, that's great. You all have effectively managed interest-bearing deposit costs. I'm curious about the feedback you've received from clients. Have you encountered any pushback or seen any attrition? Additionally, how do you view your ability to further reduce deposit costs and your outlook for core deposit growth going forward?
David Brager, CEO
We included a slide in our presentation that highlights our 3.3% deposit growth based on a five-year cumulative average growth rate. This figure rises to 6% when including the acquisition and brokered deposits we’ve added. I am quite confident in this aspect. We have performed well, particularly over the past couple of years, even as commercial real estate demand has been slow. We’ve established many strong operating companies and commercial and industrial relationships. While this may not lead directly to loan growth due to low utilization, it does have positive implications in various areas. I sense an optimism in the market that may encourage our customers to start utilizing their lines of credit and to begin projects they’ve postponed. As activity picks up, deposits are likely to grow. We are also driving growth in our Specialty Banking and government services sectors, which present good opportunities. A significant amount of money has exited the system, as we’ve noted previously, with over $1 billion going to our trust group. Depending on interest rate changes, it’s possible that some of that may return if customers embark on new projects. Thus, I remain optimistic about our deposits. We continuously strive to demonstrate our value in this area and have been successful in doing so, and we will keep it up.
Operator, Operator
One moment for our next question. And that will come from the line of Andrew Terrell with Stephens.
Andrew Terrell, Analyst
I wanted to begin by discussing the margin. According to the presentation, the cost of total deposits was 90 basis points in December, which is slightly below the quarterly average. Can you provide any insights on the timing of rate reductions that occurred during the quarter? As we look ahead to 2025, should we consider that 90 basis points as the starting point for the year? Additionally, do you believe there are further reductions in costs that you can achieve in the deposit base without any additional rate decreases?
Allen Nicholson, CFO
So Andrew, if you look at that slide, I think you're mentioning, if you look at the top left, where you separate the cost of non-maturity versus time deposits. From the time deposit perspective, the bulk of what we have in time deposits is those cash flow hedge CDs. So those are unlikely near term to change. That said, the non-maturity deposits will probably continue to slowly go down in the near term. If the Fed does nothing, then obviously, it hit a floor. But I think over the next month or two, we probably will still see a little bit of a lag because the last Fed cut was in December. So there's still probably some decline for that to continue. And then we suspect that, that won't be doing anything this year and that will probably level out.
David Brager, CEO
And Andrew, just to add one comment on that, a little more technical. Basically, every money market rate in the bank that was 1% or over in the last rate cut, we matched that rate cut 100% on that. So to Allen's point, some of that occurred later in the month of December, and you're not seeing it in the monthly average, but there still should be some opportunity there. And look, it's also a big part of the mix, right? If we can continue to get operating deposits and move our non-interest-bearing deposits, keep them the same or move them up a little bit as a percent of total deposits, that should help too in the overall cost.
Andrew Terrell, Analyst
Got it. I appreciate it. And then for the $500 million of borrowings that are remaining, can you remind us the weighted average cost of those?
Allen Nicholson, CFO
I think it's in the low 4s, if I remember correctly, Andrew, I'll estimate like 4.25, if I recall correctly.
Andrew Terrell, Analyst
Okay. And then just one last question from me. The expenses have remained quite stable from one quarter to the next. I would like to hear your thoughts on the optimistic outlook for loan growth in 2025. How are you planning for expense growth in 2025? What are some key areas of investment you are concentrating on for that year?
Allen Nicholson, CFO
I would say that from a controllable expense perspective, we've probably been growing about 4% recently. Our goal is to keep it below that going forward, but we do plan on continuing to invest in technology. Some of those investments we have made and will make will help enhance our efficiency. The focus will continue to be on various initiatives to automate and improve overall efficiencies, rather than any single major technology.
Operator, Operator
One moment for our next question. And that will come from the line of Ahmad Hasan with D.A. Davidson.
Ahmad Hasan, Analyst
Any additional color on the timing of the $385 million in securities purchases?
Allen Nicholson, CFO
Timing of the purchases we did in the fourth quarter? The purchase that we did in the fourth quarter based on settlement dates, it was probably weighted more towards the end of the quarter versus the middle of the quarter, I guess, is the best way of explaining it to you.
Ahmad Hasan, Analyst
Right. That makes sense. And as a follow-up, any additional sale leaseback or securities transaction contemplated at this point?
David Brager, CEO
No. We originally had actually looked at selling six properties. Our timing was pretty good on this and both from a sales perspective is of the properties and the sale perspective of the securities. We actually sold all of the properties under a six cap and a couple of the properties under a five cap. Once we got to the four properties, we decided to not sell the other two properties to increase our expenses. So at this point, there are no contemplated sale-leaseback transactions, and we don't have anything listed for sale. I think our mini balance sheet restructuring for the most part is done.
Operator, Operator
One moment for our next question. And that will come from the line of Adam Butler with Piper Sandler.
Adam Butler, Analyst
This is Adam on for Matthew Clark. So just on the expense line, particularly occupancy and equipment expense, what was the timing of the sale-leaseback transaction? And how much of that 4Q run rate of $5.9 million includes the expected $1.8 million annualized increase in the expense line?
Allen Nicholson, CFO
The sales took place in October, which means the majority of the impact has been accounted for. Our occupancy expense includes various factors, and you can refer to our slide deck for the complete annual effect of the sale-leaseback transaction. Moreover, we have other strategies to lower our occupancy costs. As leases expire, we are negotiating lower payments and reducing the size of our office spaces. There are multiple initiatives we are implementing to keep our occupancy expenses manageable.
Adam Butler, Analyst
Okay. That's helpful. I was curious to hear your thoughts on being opportunistic with buybacks if rates remain elevated.
Allen Nicholson, CFO
Well, I think as Dave said, that buyback, we have a 10b5-1 in place. We typically do make those opportunistic. So we'll see. There’s always— I mean 2025 may be a volatile stock market. And so we buy on the dips, really, and that’s the way it’s designed.
Operator, Operator
One moment for our next question. And that will come from the line of Kelly Motta with KBW.
Kelly Motta, Analyst
I guess from a high level, we sometimes get pushed back from investors on the dynamics in California with population outflows migration. It's a terrible situation, but the wildfire certainly doesn't help the narrative. What would you say to those who question the outlook here in California? What are you seeing and what gives you optimism about your outlook ahead here?
David Brager, CEO
Yes, Allen and I often share similar thoughts. California is one of the largest economies in the world and has a very diversified economy spanning many industries, unlike many other states that tend to be more reliant on a single sector. Our market share in the areas we serve shows significant potential for growth; we currently hold about 2% or 3% of the market in California, which suggests ample opportunity. Although there has been some outmigration, businesses that are established here find it difficult to move entirely out of state. While we have followed some businesses that have relocated, especially in sectors like dairy and livestock, most decisions to move are personal, and many still generate their income in California. Despite the challenges the state faces, I see a great opportunity for us, and we have significant potential to attract the kinds of clients we want for our bank. I'm not overly pessimistic about the overall situation. Although individual cases can be problematic, we typically continue to support our customers; even when they move, we often still bank them, meaning they’re not leaving us from a business perspective.
Kelly Motta, Analyst
Understood. That's really useful. I also wanted to discuss the opportunities in the loan sector. I recall from your earlier comments that it's currently challenging to find commercial real estate opportunities that fit within your strict credit criteria. Could you remind us where new loans are being sourced? Additionally, if there were to be one or two rate cuts, do you believe you could mitigate that impact by reinvesting some of your cash flows into the loan production you are experiencing?
David Brager, CEO
Yes, I believe people are feeling optimistic, and while the pipelines are improving, they are not yet where we want them to be. There is an increase in commercial real estate that people are now more willing to engage with. As the 5-year and 10-year rates rise, the spreads are tightening, which requires us to be more competitive with our pricing as long as it fits within our credit parameters. We will not take on more credit risk than we usually would, but we do need to adjust our pricing strategy. As I mentioned earlier, the rates are coming in around 6.5% and possibly a bit higher. We are taking action—just yesterday we lost a deal that was a 10-year fixed rate at 4.8% to a large bank. That's not even the issue. The 10-year treasury is at 4.50% or so. I think a lot of the challenge is that everyone claims they will grow loans by 10%. The only ways to achieve that are to jeopardize credit quality or lower prices to win business. We are going to approach this thoughtfully, as we have historically at our bank. However, there is some irrational pricing occurring. We just have to ensure, as Allen frequently reminds me, that we can obtain mortgage-backed securities and other investments yielding over 5%, with zero credit risk and a zero risk rating. So why are we...
Allen Nicholson, CFO
No bonus paid on it.
David Brager, CEO
So we just need to be smart about how we do that. But the simple answer to your question is around 6.5% to 6.75% is probably the range, I would say, new things are coming on.
Operator, Operator
One moment for our next question. And that will come from the line of Tim Coffey with Janney Montgomery Scott.
Tim Coffey, Analyst
Dave, I hesitate to ask these questions because there is still an ongoing situation, but regarding the fire situation in your area, there will be some impacts on your balance sheet in the coming quarters. Therefore, I am curious if you expect that the funds you receive from insurance for rebuilding will be placed into overnight funds.
David Brager, CEO
Yes, asking the questions is fine. Tim, our direct impact is quite limited. We have 14 affected properties, and unfortunately, 7 of them were completely destroyed. For one of those, we've already received the insurance payout and settled the loan, so the funds are available in an account that we control. We plan to use that money for rebuilding once we find a contractor to start the process. Overall, I don't believe the impact will be significant. There are about $7.5 million in loans on properties that have been destroyed. The appraised value is approximately $23 million to $24 million, and we expect to receive around $20 million in insurance proceeds. I don't anticipate it will significantly affect us. We've agreed to participate in a few initiatives to aid in rebuilding, including one with the Department of Financial Protection and Innovation. We've offered relief, although no one has requested it yet. There are also efforts led by a supervisor in L.A. County to collaborate with community banks to support those affected in the rebuilding process. I don’t have too many details yet; our first meeting is tomorrow, so I will have more information after that. Overall, I don't expect a major impact. We have a decent amount of contractors as customers. They're all going to be busy for a long time on this. So I think that maybe should help us a little bit on the deposit side and potentially even the borrowing side. All in all, while it was obviously a terrible situation, I think from a business perspective for the bank, I see probably more upside opportunity than downside risk. At least at this point.
Tim Coffey, Analyst
I have a follow-up question regarding the loan side. I believe there will be opportunities for new development, especially in the fire-affected areas, which may not benefit the current property owners. This situation could lead to increased work for contractors. Do you feel prepared and willing to contribute to rebuilding the community? Are you comfortable with construction balances rising above the current level for some time?
David Brager, CEO
We have a low balance currently, but we have significant capacity. We maintain a disciplined approach on the construction side, typically operating with a loan to cost of around 50% to 60%. I’ve even discussed with our Chief Credit Officer the possibility of slightly relaxing that, especially for wildfire relief initiatives. This would still need to comply with all other credit considerations, but we might allow a loan to cost of 60% or 70%. While I don’t expect the number to rise dramatically to $300 million, it could potentially increase to $100 million or $150 million over the next couple of years. And Tim, I just want to say thank you regarding the donations as well. I appreciate your comments in the e-mail you sent me.
Tim Coffey, Analyst
Well, yes, of course, I mean, I'm in Northern California. So I've seen how devastating the wildfires can be to my community. So absolutely, I'll be of help.
Operator, Operator
I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. David Brager for any closing remarks.
David Brager, CEO
Thank you, Shuri. Citizens Business Bank continues to perform consistently in all operating environments. Our solid financial performance is highlighted by our 191 consecutive quarters or more than 47 years of profitability and 141 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'd like to thank our customers and our associates for their commitment and loyalty. Thank you for joining us this quarter. We appreciate your interest and look forward to speaking with you in April for our first quarter 2025 earnings call. Please let Allen or I know if you have any questions. Have a great day.
Operator, Operator
Thank you all for participating. This concludes today's program. You may now disconnect.