CVB Financial Corp. — Q1 2020 Form 10-Q
Period: Three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019. Unaudited. Unless otherwise stated, dollar amounts below are in millions. CVB operates Citizens Business Bank, a California-focused commercial bank serving businesses and individuals.
Financial results and condition
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior year-end |
|---|---|---|
| Net interest income, before credit-loss provision | $102.3; down 6.6% | $109.5 in Q1 2019 |
| Provision for credit losses | $12.0 | $1.5 in Q1 2019 |
| Net earnings | $38.0; down 26.5% | $51.6 in Q1 2019 |
| Diluted earnings per share | $0.27 | $0.37 in Q1 2019 |
| Net interest margin, tax-equivalent | 4.08% | 4.39% in Q1 2019 |
| Total assets | $11,606.9 | $11,282.5 at Dec. 31, 2019 |
| Total loans, gross | $7,466.2 | $7,568.3 at Dec. 31, 2019 |
| Allowance for credit losses | $82.6; 1.11% of loans | $68.7; 0.91% at Dec. 31, 2019 |
| Total deposits | $9,113.6 | $8,704.9 at Dec. 31, 2019 |
| Stockholders’ equity | $1,941.4 | $1,994.1 at Dec. 31, 2019 |
Interest income declined 7.1% year over year to $107.1 million, reflecting lower loan yields and balances. The average loan yield was 4.95%, versus 5.27% a year earlier. Interest expense fell 16.4% to $4.8 million. Noninterest income declined 28.6% to $11.6 million, principally because Q1 2019 included a $4.5 million building-sale gain. Noninterest expense fell 5.7% to $48.6 million; lower acquisition costs and regulatory assessments were partly offset by higher employee costs. The efficiency ratio was 42.69%, versus 41.01%; return on average assets was 1.34%, versus 1.84%.
Operating cash flow was $75.5 million, investing cash flow $206.0 million, and financing cash flow $238.7 million. Cash and cash equivalents increased $520.2 million during the quarter to $705.7 million. Noninterest-bearing deposits were $5,572.6 million, or 61.15% of deposits; management noted approximately $100 million of short-term deposits inflated quarter-end growth. Customer repurchase agreements were $368.9 million. The company reported no short-term borrowings or other borrowings at quarter-end and $25.8 million of junior subordinated debentures. Management reported more than $4 billion of available credit lines, most secured by pledged loans.
Capital remained above regulatory well-capitalized thresholds: consolidated Tier 1 leverage was 11.60%, common equity Tier 1 was 14.13%, and total risk-based capital was 15.49%. Tangible common equity was 11.3%. The company repurchased 4.94 million shares for approximately $91.7 million during the quarter and suspended its repurchase plan on March 31. It declared dividends of $0.18 per share.
Material changes and key drivers
- Net earnings fell 26.5% year over year, primarily reflecting a $10.5 million higher credit-loss provision, lower net interest income, and the absence of the prior-year building-sale gain.
- The Federal Reserve’s rate cuts contributed to lower asset yields and a 31-basis-point year-over-year decline in tax-equivalent net interest margin.
- Gross loans declined $102.2 million from year-end, largely due to seasonal paydowns in dairy, livestock, and agribusiness lending. Excluding that category, loans increased $13.2 million.
- Deposits rose $408.7 million from year-end. Cash at the Federal Reserve increased substantially, while total investment securities declined $92.7 million.
- Available-for-sale securities recorded a $58.5 million pretax unrealized gain at quarter-end, up from $21.9 million at year-end; this contributed to higher accumulated other comprehensive income.
Outlook, risks, contingencies, and unusual items
- COVID-19 and credit: Management said the pandemic’s impact on full-year results was highly uncertain and warned further economic stress could increase provisions. CECL adoption on January 1, 2020 reduced opening retained earnings by $1.3 million after tax and added $1.8 million to the opening loan allowance. The quarter’s $12.0 million provision reflected the expected-loss methodology and a deteriorating economic forecast. The filing’s forecast assumed a nearly 20% GDP decline in Q2 2020 and unemployment above 9% in that quarter.
- Borrower assistance and PPP: Through May 3, 2020, CVB had approved about 3,800 PPP loans totaling approximately $1.25 billion and granted 90-day payment deferrals on 620 loans totaling $940 million, about 13% of the March 31 loan portfolio. PPP approvals and deferrals are subsequent developments reported in the filing. The company cited uncertainty around borrower eligibility, loan calculations, forgiveness, and continued SBA guarantee coverage.
- Portfolio concentration: Real estate represented 77.08% of gross loans; commercial real estate alone was 71.63%. Substantially all real estate and construction lending was secured by California properties. Nonperforming loans were $6.4 million, or 0.09% of gross loans; nonperforming assets were $11.3 million. These quarter-end measures may not capture the effects of pandemic-related payment deferrals.
- Rates and funding: Management described the balance sheet as asset-sensitive. Its model estimated net interest income increases of 5.20% over 12 months under a 200-basis-point rate rise and declines of 0.50% under a 100-basis-point fall. These are model estimates, not forecasts. LIBOR transition also presents risks for certain loans, debentures, and swaps.
- Other contingencies: The company is party to lawsuits arising in the ordinary and non-ordinary course; management did not expect pending matters to have a material adverse effect, while noting outcomes are uncertain. Disclosure controls were reported effective, with no material quarterly change in internal control over financial reporting.
- Guidance: The filing provides no specific earnings or financial guidance; management emphasized uncertainty about the pandemic’s duration and effects.
Important facts for investors to verify
- Subsequent-quarter credit performance, allowance assumptions, and whether economic deterioration requires additional provisions.
- Performance of the $940 million in deferred loans, including borrower payment resumption, delinquencies, and any extensions.
- PPP loan funding, processing and forgiveness outcomes, and whether SBA guarantees remain available for loans later found ineligible or not forgivable.
- Deposit stability, including the approximately $100 million of short-term deposits noted by management, and continued liquidity and capital levels.
- Commercial real estate and California borrower exposure, especially as business closures and property-market conditions evolve.
- Net interest margin effects from low rates, asset sensitivity, and the transition away from LIBOR.