CVB Financial Corp. — Q3 2022 Form 10-Q
Business and period: CVB Financial Corp. operates Citizens Business Bank, a California-focused commercial bank. This unaudited filing covers the quarter and nine months ended September 30, 2022. The January 7, 2022 acquisition of Suncrest Bank is included in results from its closing date.
Financial performance and condition
| Metric | Q3 2022 | Comparison |
|---|---|---|
| Net interest income | $133.3 million | Up 29.1% year over year and 9.4% from Q2 2022 |
| Net earnings | $64.6 million | Up 29.9% year over year and 9.5% from Q2 2022 |
| Diluted EPS | $0.46 | Versus $0.37 in Q3 2021 and $0.42 in Q2 2022 |
| Net interest margin, tax-equivalent | 3.46% | Versus 2.89% in Q3 2021 |
| Efficiency ratio | 36.59% | Versus 42.27% in Q3 2021 |
| Annualized returns | ROAA 1.52%; ROAE 12.72%; ROATCE 21.34% | ROATCE is a non-GAAP measure |
Nine-month results: Net interest income was $368.1 million, up 17.9%; net earnings were $169.3 million, up 2.7%; diluted EPS was $1.20, versus $1.21 in 2021. The company recorded $8.1 million of provision for credit losses, compared with a $25.5 million recapture in the prior-year period. Net cash provided by operating activities was $202.8 million.
Balance sheet at September 30: Total assets were $16.35 billion, deposits $13.87 billion, and stockholders’ equity $1.88 billion. Loans at amortized cost were $8.77 billion, with $8.69 billion net of allowance. The allowance for credit losses was $82.6 million, or 0.94% of loans. Noninterest-bearing deposits were $8.76 billion, 63.18% of deposits. Cash and cash equivalents were $318.5 million.
Funding and capital: The company reported no borrowings at quarter-end; customer repurchase agreements were $467.8 million. It reported more than $4 billion in available credit lines, mostly secured by pledged loans. Company capital ratios were 9.08% Tier 1 leverage, 13.49% CET1, 13.49% Tier 1 risk-based, and 14.31% total risk-based; the company and bank exceeded well-capitalized thresholds.
Material changes and notable items
- Loans increased $886.4 million from December 31, 2021, including $774.5 million of Suncrest-acquired loans. Management reported $407.8 million of core loan growth after adjusting for acquisition, seasonality, and PPP forgiveness.
- Deposits increased $896.0 million from year-end, including deposits assumed in the Suncrest acquisition. Noninterest-bearing deposits remained a substantial, low-cost funding source.
- Investment securities totaled $5.88 billion. Available-for-sale securities had a $540.5 million pretax unrealized loss; held-to-maturity securities had $406.9 million of unrealized losses. Management attributed the declines primarily to rising interest rates and reported no identified credit losses on securities in unrealized-loss positions.
- Accumulated other comprehensive loss widened to $383.5 million from $4.0 million at year-end, primarily reflecting securities valuation changes. Equity also reflected $169.3 million in nine-month earnings, $80.2 million in declared dividends, Suncrest acquisition stock issuance, and $116.2 million of repurchases, including the $70 million accelerated repurchase.
- Suncrest acquisition consideration comprised $39.6 million cash and $197.1 million in stock; it added approximately $102.1 million of goodwill. The company incurred $6.0 million of acquisition-related expenses during the first nine months, with none in Q3.
- Q3 provision for credit losses was $2.0 million, versus a $4.0 million recapture in Q3 2021. Nine-month net recoveries were $877,000, compared with $2.8 million in net charge-offs in the prior-year period.
Outlook, commentary, and risks
The filing provides no formal company earnings or revenue guidance. Management’s credit-loss forecast, rather than company guidance, assumed GDP growth of 0.4% in 2023, 1.6% in 2024, and 2.5% in 2025, with unemployment of 5.0%, 5.3%, and 5.1%, respectively. The forecast incorporated downside scenarios and greater weighting for stagflation. Management cited inflation, rising rates, weaker GDP expectations, and lower commercial real estate values as factors affecting expected credit losses.
- The loan portfolio is concentrated in real estate: commercial real estate represented 76.19% of loans, and total real estate loans 80.07%. Much of the portfolio is in California.
- Management described the balance sheet as asset-sensitive. A modeled 200-basis-point rate increase was estimated to raise net interest income 3.11% over 12 months; a 200-basis-point decrease was estimated to reduce it 5.64%. These are model estimates, not forecasts, and depend on assumptions about deposits, repricing, and prepayments.
- Interest-rate increases also reduced securities fair values and could affect deposit costs, customers, credit quality, and loan and deposit growth. Deposit pricing pressure was beginning to emerge.
- Other disclosed risks include economic and geopolitical uncertainty, inflation, cybersecurity and fraud, climate or natural disasters, regulatory and legal matters, and transition away from LIBOR. The company said it did not expect pending litigation to have a material adverse effect, while noting outcomes remain uncertain.
- At quarter-end, commitments to extend credit were $1.82 billion and letters of credit $47.4 million; many commitments may expire undrawn. The reserve for unfunded commitments was $8.0 million.
Most important facts for investors to verify
- Whether deposit balances and the very low cost of funds remain durable as market rates rise.
- How securities unrealized losses, liquidity needs, and any securities sales may affect capital and earnings.
- Credit trends in the concentrated commercial real estate portfolio, including nonperforming loans, classified loans, and the adequacy of the $82.6 million loan-loss allowance.
- Whether reported core loan growth and Suncrest integration benefits continue, and how acquisition-related costs or acquired-loan marks evolve.
- How actual results compare with modeled interest-rate sensitivity and management’s economic assumptions; the filing cautions that model estimates are not forecasts.