CVB Financial Corp. — 2019 Form 10-K
Business context and period. For the fiscal year ended December 31, 2019, CVB operated Citizens Business Bank, a California community bank serving businesses and individuals, primarily in Central and Southern California. The company reported one operating segment. Comparisons with 2018 are affected by the August 2018 Community Bank acquisition: 2018 results included only 143 post-merger days.
Key financial metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Net interest income | $435.8 million | $349.0 million |
| Noninterest income | $59.0 million | $43.5 million |
| Net earnings | $207.8 million | $152.0 million |
| Diluted earnings per share | $1.48 | $1.24 |
| Net interest margin, tax-equivalent | 4.36% | 4.03% |
| Efficiency ratio | 40.16% | 45.83% |
| Return on average assets | 1.84% | 1.60% |
| Return on average equity | 10.71% | 11.00% |
At year-end, total assets were $11.28 billion, net loans $7.50 billion, deposits $8.70 billion and shareholders’ equity $1.99 billion. Cash and cash equivalents were $185.5 million. 2019 cash flows were $208.2 million provided by operations, $325.3 million provided by investing activities and $511.9 million used in financing activities, producing a $21.6 million net cash increase.
The allowance for loan losses was $68.7 million, or 0.91% of gross loans. Nonaccrual loans were $5.3 million, down from $20.0 million; nonperforming assets were $10.2 million, or 0.09% of assets. Regulatory capital ratios exceeded well-capitalized thresholds: company CET1 14.83%, Tier 1 leverage 12.33%, and total risk-based capital 16.01%.
Deposits declined 1.39% year over year; noninterest-bearing deposits were 60.26% of year-end deposits. Borrowings were $428.7 million, consisting of customer repurchase agreements; there were no short-term borrowings or FHLB advances at year-end. Junior subordinated debentures were $25.8 million. The Bank reported $3.18 billion of available FHLB secured borrowing capacity.
Material changes versus 2018
- Net earnings increased 36.7%, while net interest income rose 24.9%; management attributed much of the income growth to the acquired loan and deposit base, higher loan yields and a higher net interest margin.
- Year-end assets declined 2.1%, net loans declined $200.0 million (2.6%), and deposits declined $122.6 million (1.4%). Management cited loan prepayments, competition for originations and repayments on acquired loans.
- Provision for loan losses increased to $5.0 million from $1.5 million; net recoveries fell to $47,000 from $2.5 million. The allowance-to-loans ratio rose from 0.82% to 0.91%.
- Noninterest income included unusual gains of $5.7 million from an eminent-domain settlement and $4.8 million from building sales. Noninterest expense increased 10.5%, including higher compensation and acquired-intangible amortization, partly offset by lower merger costs.
- Cash dividends declared rose to $0.72 per share from $0.56. The company repurchased approximately 48,000 shares during 2019.
Outlook, commentary, risks and contingencies
- The filing provides no quantitative earnings or growth guidance. Management said it did not expect adoption of the CECL credit-loss standard in first-quarter 2020 to materially affect the allowance; adoption remained subject to estimation uncertainty.
- Management described the balance sheet as asset-sensitive: its model estimated net interest income would increase 5.2% over 12 months under a 200-basis-point rate increase and decline 2.1% under a 100-basis-point decrease. These are modeled sensitivities, not forecasts.
- Key exposures include California economic and real-estate conditions, concentration in commercial real estate (CRE), interest-rate and funding changes, agricultural borrower conditions, competition, cybersecurity and third-party service providers, regulation, and the transition away from LIBOR. CRE loans and unfunded commitments equaled 265% of Bank capital.
- The company reported $1.54 billion of commitments to extend credit and $53.1 million of letters of credit. Management did not anticipate material losses from these arrangements. It stated pending litigation was not expected to have a material adverse effect, while noting outcomes are inherently uncertain.
- CEO Christopher Myers was scheduled to retire March 15, 2020; David Brager was appointed CEO effective March 16, 2020. The filing also identifies the novel coronavirus as a potential risk, but does not quantify an effect on results.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor found controls effective as of year-end.
Important facts for investors to verify
- How much of earnings growth reflects recurring operations versus acquired-business contributions, acquired-loan discount accretion and the 2019 property-related gains.
- Whether loan growth resumes and whether CRE concentration, California property values and agricultural credit performance remain manageable.
- The adequacy of the allowance and the actual capital and earnings effects of CECL adoption.
- Deposit stability, funding costs, liquidity availability and sensitivity to interest-rate movements, including the LIBOR transition.
- CEO succession, post-acquisition integration benefits and expenses, and any material developments in litigation or regulatory obligations.