CVB Financial Corp. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited consolidated results cover CVB Financial Corp. and Citizens Business Bank, a California-focused commercial bank. The year-over-year comparison is affected by the August 2018 acquisition of Community Bank (CB): Q2 2019 includes CB, while Q2 2018 does not.
Key financial results
| Metric | Q2 2019 | Comparable period / change |
|---|---|---|
| Net interest income | $111.1 million | Up 52.8% from Q2 2018 |
| Noninterest income | $18.2 million | Up 87.8% from Q2 2018 |
| Net earnings | $54.5 million | Up 54.0% from Q2 2018; $51.6 million in Q1 2019 |
| Diluted EPS | $0.39 | $0.32 in Q2 2018; $0.37 in Q1 2019 |
| Tax-equivalent net interest margin | 4.49% | 3.82% in Q2 2018 |
| Efficiency ratio | 39.09% | 41.58% in Q2 2018 |
| Return on average assets | 1.95% | 1.73% in Q2 2018 |
| Return on average equity | 11.38% | 13.08% in Q2 2018 |
First-half results: Net interest income was $220.6 million, noninterest income $34.5 million, and net earnings $106.1 million, versus $143.2 million, $22.6 million, and $70.3 million, respectively, in first-half 2018. Diluted EPS was $0.76 versus $0.64. First-half tax-equivalent net interest margin was 4.44%, up from 3.75%.
Financial position, liquidity and credit
- At June 30, 2019, total assets were $11.17 billion, down 3.1% from year-end 2018. Total loans, net of deferred fees and before allowance, were $7.54 billion, down 3.0%; management cited seasonal dairy and livestock paydowns and loan payoffs. Commercial real estate represented $5.42 billion of gross loans.
- Total deposits were $8.66 billion, down 1.9% from year-end. Noninterest-bearing deposits were $5.25 billion, or 60.61% of deposits. Customer repurchase agreements were $421.3 million; the company reported no short-term borrowings, compared with $280.0 million at year-end. Junior subordinated debentures were $25.8 million.
- Cash and cash equivalents were $175.8 million. For the six months, operating cash flow was $82.6 million, investing cash flow was positive $438.5 million, financing cash flow was negative $509.2 million, and cash increased $11.9 million. Investing cash flow included loan repayments and securities cash flows; financing outflows included deposit reductions, debt repayment, and dividends.
- The allowance for loan losses was $67.1 million, or 0.89% of loans, versus $63.6 million and 0.82% at year-end. The six-month provision was $3.5 million, compared with a $2.0 million provision recapture in first-half 2018. Management considered the allowance appropriate, while noting future economic or borrower deterioration could increase provisions. Acquired CB loans carry credit discounts and were recorded without a corresponding allowance; remaining credit-related discounts were $41.4 million.
- Nonperforming assets were $13.6 million, or 0.12% of assets, versus $20.4 million at year-end. Nonperforming loans were $11.3 million, or 0.15% of gross loans. One OREO property was carried at $2.3 million.
- Consolidated capital ratios were strong: Tier 1 leverage 11.94%, common equity Tier 1 14.23%, Tier 1 risk-based 14.51%, and total risk-based 15.39%. The company and bank exceeded regulatory “well-capitalized” thresholds.
Material changes and unusual items
- Growth in earnings and net interest income primarily reflects the CB acquisition, higher average loan balances, improved loan yields, and acquired-loan discount accretion. Q2 loan interest included $9.4 million of acquired-loan discount accretion and nonrecurring nonaccrual interest, versus $2.1 million a year earlier.
- Q2 noninterest income included a $5.7 million gain from an eminent-domain condemnation settlement involving a Bakersfield banking-center building. First-half results also included a $4.5 million gain on sale of a building. These gains are nonrecurring.
- Noninterest expense rose 47.5% year over year in Q2, reflecting CB-related staffing, occupancy, intangible amortization, and $2.6 million in acquisition-related expenses, primarily associated with branch consolidations. Ten centers were consolidated in the first half of 2019; four were consolidated in Q2.
- CB’s systems integration was completed in November 2018 and the purchase-price allocation was finalized in Q2 2019. Goodwill from the acquisition was approximately $547.1 million; the core deposit intangible was $52.2 million.
- After-tax other comprehensive income was $13.7 million in Q2 and $26.6 million in the first half, mainly reflecting improved market values of investment securities. The securities portfolio’s pre-tax unrealized position moved from a $23.6 million loss at year-end to a $15.3 million gain at June 30.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management describes the balance sheet as asset-sensitive; modeled net interest income sensitivity at June 30 was +3.80% over 12 months and +7.59% cumulatively over 24 months for a 200-basis-point rate increase, and −4.63% and −9.24%, respectively, for a 200-basis-point decrease. These are model estimates, not forecasts.
- Key disclosed risks include California economic and real-estate conditions, borrower credit quality, deposit and funding availability and cost, interest-rate and market changes, acquisition integration and realization of benefits, and regulatory, legal, cyber, vendor, and operational risks. The company was assessing the anticipated LIBOR phase-out, which affects some loans, subordinated debt, and swaps.
- The company disclosed ordinary-course and other litigation. A previously adverse judgment in the Dunagan matter was settled in June 2019 for a substantially reduced amount, paid by insurance. Management did not believe pending lawsuits would have a material adverse effect, but acknowledged litigation outcomes remain uncertain.
- The company paid $0.18 per share in Q2 dividends and declared $0.36 per share for the first half. Future dividends remain subject to board discretion, law, regulatory restrictions, and debt covenants. Disclosure controls were deemed effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- How much of earnings and margin improvement is sustainable after separating CB acquisition effects, acquired-loan accretion, and nonrecurring interest from ongoing performance.
- Whether loan balances stabilize or resume growth, and whether deposit outflows or rising funding costs pressure margins.
- Credit quality trends, especially acquired CB exposures, commercial real estate concentration, allowance adequacy, and the effect of adopting the expected-credit-loss standard (CECL).
- Progress and remaining costs from branch consolidation and integration, and the company’s ability to manage elevated goodwill and intangible amortization.
- Interest-rate sensitivity and LIBOR transition exposure, including the assumptions underlying management’s simulations.