CVB Financial Corp. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Unaudited results are for CVB Financial Corp. and its banking subsidiary, Citizens Business Bank. Amounts below are in millions of dollars unless noted.
Business context and results
CVB is a California-focused commercial bank serving businesses and individuals through 51 banking centers and three trust offices. Its principal lending concentrations include commercial real estate and dairy, livestock and agribusiness.
| Metric | Q2 2018 | Q2 2017 | H1 2018 | H1 2017 |
|---|---|---|---|---|
| Net interest income | $72.7 | $70.5 | $143.2 | $135.9 |
| Net interest margin, tax-equivalent | 3.82% | 3.63% | 3.75% | 3.57% |
| Noninterest income | $9.7 | $10.8 | $22.6 | $19.5 |
| Noninterest expense | $34.3 | $36.9 | $70.2 | $71.0 |
| Net earnings | $35.4 | $28.4 | $70.3 | $56.9 |
| Diluted EPS | $0.32 | $0.26 | $0.64 | $0.52 |
| Efficiency ratio | 41.58% | 45.38% | 42.34% | 45.68% |
Q2 net earnings rose 24.7% year over year; H1 earnings rose 23.6%. Management attributed stronger net interest income and margin to higher loan yields, loan growth on an average-balance basis, and a greater share of loans in earning assets. Lower expenses also supported earnings. H1 noninterest income included a $3.5 million gain from selling an OREO property.
Financial position, credit and liquidity
- At June 30: Total assets were $8.09 billion, down 2.14% from year-end 2017; total equity was $1.08 billion.
- Loans and securities: Net loans and leases were $4.76 billion, down 0.3% from year-end. Total investment securities were $2.70 billion, down 7.2%; available-for-sale securities had a $34.3 million pretax unrealized loss, primarily attributed to interest-rate changes. Management said it had the ability and intent to hold the securities and did not consider them other-than-temporarily impaired.
- Funding and debt: Deposits totaled $6.54 billion, approximately unchanged from year-end. Noninterest-bearing deposits were $3.98 billion, or 60.91% of deposits. Customer repurchase agreements fell to $384.1 million from $553.8 million. There were no short-term borrowings; junior subordinated debentures were $25.8 million and mature in 2036.
- Cash flow, H1: Operating activities provided $68.3 million; investing activities provided $180.3 million; financing activities used $211.5 million. Cash and cash equivalents increased $37.1 million to $181.5 million.
- Credit quality: The allowance for loan losses was $59.6 million, or 1.24% of loans. The company recorded a $2.0 million provision recapture and $2.0 million of net recoveries in H1. Nonperforming assets were $10.2 million, or 0.13% of assets; nonperforming loans were 0.21% of gross loans. There was no OREO at quarter-end.
- Capital: Company ratios were 12.55% Tier 1 leverage, 17.06% common equity Tier 1, 17.49% Tier 1 risk-based and 18.63% total risk-based—above stated “well-capitalized” thresholds.
Material changes and unusual items
- Q2 noninterest income declined 10.0% year over year, including lower BOLI income and trust fees and the absence of a $0.4 million investment-security sale gain recorded in Q2 2017. H1 noninterest income increased 16.0%, primarily because of the $3.5 million OREO sale gain.
- Net other comprehensive income was a $27.3 million loss for H1, compared with $1.0 million of income in H1 2017, largely reflecting declines in the fair value of securities. Accumulated other comprehensive income/loss moved from $1.5 million of income at year-end to a $25.5 million loss.
- The effective tax rate was 28.0% in Q2 2018 versus 37.49% a year earlier, reflecting the lower federal corporate tax rate and tax-advantaged income.
- The bank terminated the FDIC loss-sharing agreement covering certain acquired residential loans on July 20, 2018, after quarter-end.
Outlook, transaction and risks
The filing gives no specific earnings or revenue guidance. CVB expected to close its announced merger with Community Bank on August 10, 2018; shareholders of both companies had approved it and regulatory approvals had been received. Community Bank reported approximately $3.71 billion in assets, $2.79 billion in gross loans and $2.86 billion in deposits at June 30. Consideration was 9.4595 CVB shares plus $56 cash per Community Bank share, subject to agreement terms; the stated transaction value was approximately $885.2 million using CVB’s February 26 share price.
Key risks include California economic and real-estate conditions, the concentration of lending in real estate, interest-rate and securities-value changes, deposit and liquidity competition, and merger execution and integration. The company noted that crossing $10 billion in assets could bring additional regulatory requirements. It disclosed the Dunagan litigation, seeking more than $2 million plus punitive damages; CVB maintained no accrual, stating potential liability was not reasonably estimable. Management said it did not believe pending lawsuits would have a material adverse effect, while acknowledging litigation outcomes are uncertain.
Important facts for investors to verify
- Whether the Community Bank merger closed as expected and the actual integration costs, synergies, dilution and resulting capital and regulatory position.
- Whether loan growth and margins persist as interest rates, loan yields and funding costs change.
- Credit performance and reserve adequacy, particularly in California commercial real estate and dairy/agriculture lending.
- The duration and potential earnings or capital effects of unrealized securities losses, and the impact of interest-rate scenarios on deposits and asset values.
- Post-quarter developments in the Dunagan litigation and the effect of ending the FDIC loss-sharing arrangement.