CVB Financial Corp. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are to December 31, 2015. Unaudited. CVB Financial is a California banking company operating through Citizens Business Bank, serving businesses and individuals primarily in California.
Financial results and condition
| Metric | Q1 2016 / March 31, 2016 | Prior comparable / change |
|---|---|---|
| Interest income | $64.5 million | $64.2 million in Q1 2015 |
| Net interest income | $62.5 million | $61.0 million in Q1 2015, up 2.5% |
| Net interest margin, tax-equivalent | 3.52% | 3.59% in Q1 2015 |
| Noninterest income | $8.7 million | $8.0 million in Q1 2015, up 8.4% |
| Noninterest expense | $34.4 million | $44.5 million in Q1 2015 |
| Net earnings / diluted EPS | $23.4 million / $0.22 | $15.8 million / $0.15 in Q1 2015 |
| Cash from operating activities | $31.3 million | $28.1 million in Q1 2015 |
| Cash and cash equivalents | $239.6 million | $106.1 million at year-end 2015 |
| Total assets / stockholders’ equity | $7.92 billion / $971.9 million | Assets up 3.25%; equity up 5.25% from year-end 2015 |
| Loans, net of allowance | $4.11 billion | $3.96 billion at year-end 2015 |
| Deposits | $6.22 billion | $5.92 billion at year-end 2015 |
Net earnings rose 47.7% year over year, but the comparison is affected by a $13.9 million debt termination charge recorded in Q1 2015. Excluding that charge, the efficiency ratio was 48.26% in Q1 2016 versus 44.34% in Q1 2015; noninterest expense as a share of average assets was 1.79% versus 1.67%. Q1 2016 also included a $1.1 million gain on sale of loans and $849,000 of CCB acquisition costs.
Q1 cash flows were $31.3 million provided by operations, $150.1 million provided by investing activities, and $47.9 million used in financing activities, resulting in a $133.5 million increase in cash and cash equivalents. The company declared a $0.12 per-share dividend.
At March 31, total borrowed funds, including customer repurchase agreements, were $631.9 million, down from $736.7 million at year-end; short-term borrowings were zero. Customer repurchase agreements were $626.9 million and junior subordinated debentures were $25.8 million. The company reported capital ratios above “well-capitalized” regulatory thresholds: consolidated Tier 1 leverage 11.39%, common equity Tier 1 16.27%, Tier 1 risk-based 16.74%, and total risk-based 18.00%.
Material changes and business developments
- CVB completed its acquisition of County Commerce Bank (CCB) on February 29, 2016, and included 31 days of CCB operations in the quarter. CCB added approximately $253 million in assets, four branches, and a presence on California’s central coast. Consideration was $20.6 million cash and $21.6 million stock; recorded goodwill was $13.9 million. Integration was completed in April 2016.
- Loans grew $156.5 million from year-end, including $167.3 million of acquired loans. Management reported $66.9 million, or approximately 1.8%, of quarterly loan growth excluding acquired CCB loans and the decline in dairy and agribusiness lending. Dairy and agribusiness balances fell $79.0 million, primarily from seasonal paydowns.
- Deposits increased $299.0 million, including $224.2 million assumed from CCB. Noninterest-bearing deposits were 53.93% of deposits. Average total deposit cost was 0.10% versus 0.09% a year earlier.
- Investment securities totaled $3.11 billion, down $112.1 million from year-end. Approximately 85% of the portfolio was issued by the U.S. government or government-sponsored enterprises. The company reported a $72.0 million pretax net unrealized gain on total securities, primarily reflecting interest-rate movements.
Credit, outlook, risks and contingencies
- No loan-loss provision was recorded in Q1 2016 or Q1 2015. The allowance was $59.3 million, or 1.42% of loans and leases, versus $59.2 million and 1.47% at year-end; Q1 included $180,000 of net recoveries.
- Nonperforming assets were $24.7 million, down from $28.0 million at year-end, and equaled 0.31% of assets. Nonperforming loans, including nonperforming troubled debt restructurings, were $18.1 million. Total TDRs were $49.7 million, of which $12.4 million were nonperforming and $37.3 million performing. Commercial real estate represented approximately 68.77% of gross loans excluding PCI loans; substantially all real estate and construction loans were secured by California property.
- Management described the balance sheet as generally well matched with a slight asset-sensitive bias over a two-year horizon. Its 12-month model estimated net interest income changes of -0.37% for a 200-basis-point rate increase and -0.27% for a 100-basis-point decrease. These are model estimates, not forecasts.
- The filing provides no formal earnings or financial guidance. Management cautioned that quarterly results are not necessarily indicative of full-year results. Risks include California real estate and borrower conditions, deposit funding and liquidity, interest-rate and securities-market changes, credit losses, and operational, regulatory, cybersecurity, and acquisition-integration risks.
- Two matters described as potentially material remain pending: a securities class action remanded for further proceedings and a consolidated wage-and-hour class action. The company reported no litigation reserves and said loss ranges could not be predicted; an adverse outcome could materially affect results, financial condition, or cash flows.
- The company assumed $5.0 million of CCB FHLB advances and repaid them in April 2016. Its $7.2 million reserve for unfunded loan commitments was unchanged. The filing also identifies commitments to extend credit of $891.0 million and letters of credit of $34.0 million; these amounts do not necessarily represent future cash requirements.
Important facts for investors to verify
- How much of subsequent loan, deposit, and earnings growth reflects CCB versus organic growth, and whether the acquisition produces expected benefits after integration.
- Whether the decline in net interest margin and loan yields persists, and how actual results compare with the filing’s interest-rate sensitivity scenarios.
- Credit trends in the large California commercial real estate portfolio, including criticized loans, nonperforming TDRs, and the adequacy of the allowance despite no quarterly provision.
- Whether normalized expense growth, including compensation and acquisition-related costs, is consistent with management’s longer-term cost performance.
- Developments in the securities and wage-hour litigation, including any change in potential exposure or reserves.