CVB Financial Corp. — Q2 2020 Form 10-Q
Business context and reporting period. CVB Financial Corp., through Citizens Business Bank, provides traditional banking and trust services, primarily to businesses and individuals in California. This unaudited filing covers the quarter and six months ended June 30, 2020. Results were shaped by the COVID-19 downturn, Federal Reserve rate cuts, and substantial participation in the SBA Paycheck Protection Program (PPP). Dollar amounts below are in millions unless stated otherwise.
Key financial metrics
| Metric | Q2 2020 | Comparable period |
|---|---|---|
| Net interest income, before credit-loss provision | $104.6 | $111.1 in Q2 2019; down 5.8% |
| Provision for credit losses | $11.5 | $2.0 in Q2 2019 |
| Noninterest income | $12.2 | $18.2 in Q2 2019 |
| Noninterest expense | $46.4 | $50.5 in Q2 2019 |
| Net earnings | $41.6 | $54.5 in Q2 2019; down 23.6% |
| Diluted earnings per share | $0.31 | $0.39 in Q2 2019 |
| Net interest margin (tax-equivalent) | 3.70% | 4.49% in Q2 2019 |
| Efficiency ratio | 39.75% | 39.09% in Q2 2019 |
- For the six months ended June 30, net earnings were $79.6 million versus $106.1 million in 2019; diluted EPS was $0.58 versus $0.76. Net interest income was $206.9 million versus $220.6 million, and provision expense was $23.5 million versus $3.5 million.
- Q2 return on average assets was 1.33% and return on average equity was 8.51%. The six-month efficiency ratio was 41.20%, compared with 40.04% in 2019.
- Q2 revenue included approximately $8.5 million of PPP loan interest and fee income. Lower loan and investment yields, including reduced acquired-loan discount accretion, weighed on interest income. Q2 2019 noninterest income included a $5.7 million eminent-domain gain; first-half 2019 also included a $4.5 million building-sale gain.
- Six-month operating cash flow was $97.1 million versus $82.6 million. Investing activities used $541.5 million, while financing activities provided $2.19 billion. Cash and cash equivalents rose to $1.93 billion from $185.5 million at year-end, mainly reflecting deposit growth; this cash-flow movement should not be read as recurring operating cash generation.
Financial position, liquidity, and capital
- Total assets were $13.75 billion at June 30, up 21.9% from December 31, 2019. Total loans were $8.40 billion, including $1.10 billion of PPP loans; excluding PPP, loans declined $259.2 million from year-end. Commercial real estate represented 63.85% of total loans, and 68.76% of the portfolio was real-estate-related.
- Deposits rose 26.2% to $10.98 billion. Noninterest-bearing deposits were $6.90 billion, or 62.83% of deposits. Management attributed growth largely to PPP proceeds and customers retaining greater liquidity. Average total deposit cost was 0.12% in Q2.
- The allowance for credit losses was $94.0 million, or 1.12% of loans (1.29% excluding PPP loans), versus $68.7 million and 0.91% at year-end. Six-month net charge-offs were only $17,000. The reserve for unfunded loan commitments was $9.0 million.
- Reported borrowings included $468.2 million of customer repurchase agreements, $10.0 million of interest-free FHLB advances, and $25.8 million of junior subordinated debentures. The company reported more than $4 billion of available credit lines, mostly secured by pledged loans and subject to conditions. It stated that assets were funded almost entirely with core deposits.
- Stockholders’ equity was $1.96 billion, down 1.8% from year-end; tangible common equity ratio was 9.63%. Company Tier 1 leverage, CET1, Tier 1 risk-based, and total risk-based ratios were 10.59%, 14.47%, 14.76%, and 15.97%, respectively. The Bank and Company exceeded regulatory “well-capitalized” thresholds.
Material changes, outlook, and risks
- Credit and COVID-19 exposure: The company adopted CECL on January 1, 2020, reducing opening retained earnings by $1.3 million after tax and increasing the opening loan allowance by $1.8 million. The $23.5 million first-half provision reflected expected lifetime losses and a deteriorating pandemic-related economic forecast. Management cautioned that further deterioration could increase future provisions.
- Through July 10, the Bank had granted temporary payment deferrals on 820 loans with a gross balance of $1.27 billion, about 15% of the June 30 loan portfolio; roughly 80% deferred both principal and interest, and 6% had received a second deferral. Most deferred balances were commercial real estate loans. The filing says additional deferrals were likely; deferral status can keep delinquency metrics static during the relief period.
- The Bank originated approximately 4,100 PPP loans totaling $1.10 billion. Management identified uncertainty around evolving SBA eligibility, loan-calculation, forgiveness, audit, and guarantee requirements. The Bank also registered as a lender under three Federal Reserve Main Street Lending Program facilities; the filing describes related compliance, borrower-credit, servicing, and recourse risks.
- Management’s economic assumptions used in credit-loss modeling anticipated a severe 2020 contraction and elevated unemployment, with recovery uncertain. These are modeling assumptions, not company earnings guidance. The filing provides no specific company earnings or revenue guidance for the remainder of 2020.
- Interest-rate sensitivity analysis characterized the balance sheet as asset-sensitive over one and two years; modeled NII sensitivity was +5.8% and +11.3% under a 200-basis-point increase, and -0.9% and -2.0% under a 100-basis-point decrease. Management cautioned that these estimates depend on assumptions and are not forecasts. LIBOR transition affects certain variable-rate loans, subordinated debt, and swaps.
- Q2 dividends declared were $0.18 per share. The company suspended its 10b5-1 repurchase program on March 31 amid pandemic uncertainty, after repurchasing about 4.94 million shares for $91.7 million in the first half.
- Management reported no expected material adverse effect from pending litigation, while noting that outcomes are uncertain and could be material. Disclosure controls were reported effective, with no material quarterly change in internal controls.
Most important facts for investors to verify
- Whether pandemic-related borrower stress, especially among California commercial real estate borrowers, leads to renewed deferrals, rising delinquencies, charge-offs, or additional CECL provisions.
- How much of the $1.10 billion PPP portfolio is forgiven or repaid, and whether SBA reviews affect eligibility, forgiveness, or the government guarantee.
- Whether the unusually high deposit balances persist and how cash deployed at the Federal Reserve, lower asset yields, and rate movements affect net interest margin.
- The quality and concentration of the $1.27 billion of loans granted payment relief, including the status of second deferrals and classified credits.
- Capital and liquidity after dividends and the suspended buyback, including availability and conditions on secured credit lines and collateral pledged.
- Progress on LIBOR replacement and the effect of any transition on customer contracts and swap arrangements.