CVB Financial Corp. — 2022 Form 10-K
Business context and reporting period
CVB Financial Corp. is a California bank holding company whose principal subsidiary, Citizens Business Bank, operates a community bank focused on small and midsized businesses, real estate investors, organizations and individuals. This summary covers the fiscal year ended December 31, 2022; comparisons are primarily with 2021.
On January 7, 2022, CVB completed its acquisition of Suncrest Bank for approximately $237 million in stock and cash. Suncrest added approximately $1.38 billion in assets at fair value, including $765.9 million in acquired net loans. CVB issued about 8.6 million shares, assumed approximately $1.2 billion in deposits, and recorded $102.1 million of goodwill. Integration, including the consolidation of two branches, was completed in the second quarter.
Financial and operating performance
| Metric | 2022 | 2021 |
|---|---|---|
| Net interest income, before credit provision | $505.5 million | $414.6 million |
| Noninterest income | $50.0 million | $47.4 million |
| Noninterest expense | $216.6 million | $189.8 million |
| Net earnings | $235.4 million | $212.5 million |
| Diluted earnings per share | $1.67 | $1.56 |
| Tax-equivalent net interest margin | 3.30% | 2.97% |
| Efficiency ratio | 38.98% | 41.09% |
| Return on average assets | 1.39% | 1.38% |
| Return on average equity | 11.39% | 10.30% |
Net earnings rose 10.8%. Pretax, pre-provision income increased to $338.9 million from $272.1 million. Net interest income benefited from higher earning-asset yields and growth in average interest-earning assets; the Federal Reserve raised its target rate by 425 basis points during the year. The average cost of total deposits, including customer repurchase agreements, remained 0.05% for the year, while the average cost of funds rose to 0.06% from 0.05%.
Credit provision was $10.6 million in 2022, versus a $25.5 million provision recapture in 2021. The 2022 figure included $4.9 million for acquired Suncrest loans not classified as purchased credit deteriorated; an additional $8.6 million allowance was established for Suncrest PCD loans at acquisition. Net recoveries were $893,000, compared with $3.2 million of net charge-offs in 2021.
Financial condition, cash flow and liquidity
- Assets and loans: Total assets were $16.48 billion, up 3.7%. Gross loans were $9.08 billion, up 15.1%; excluding Suncrest and PPP forgiveness, core loans grew $634.3 million, or 8.2%.
- Loan concentration and credit quality: Commercial real estate loans totaled $6.88 billion, or 75.8% of gross loans. The Bank reported CRE loans equal to 283% of risk-based capital. Nonperforming loans were $4.9 million, or 0.05% of loans, versus $6.9 million, or 0.09%, a year earlier. The allowance for credit losses was $85.1 million, or 0.94% of loans, versus $65.0 million, or 0.82%.
- Deposits and funding: Deposits were $12.84 billion, down 1.1%. Noninterest-bearing deposits were $8.16 billion, or 63.6% of deposits. Year-end funding included $995 million of overnight FHLB borrowings at 4.65% and $565.4 million of customer repurchase agreements. Total borrowings including repos were $1.56 billion.
- Liquidity: Cash and cash equivalents fell to $203.5 million from $1.73 billion as excess Federal Reserve balances were deployed into securities and loans. Management reported $10.11 billion of remaining borrowing capacity in one discussion; elsewhere it reported $3.85 billion of available secured capacity and total available credit lines of $6.77 billion. These figures refer to different liquidity measures and should be checked against the filing’s detailed disclosures.
- Securities: The portfolio totaled $5.81 billion: $3.26 billion available-for-sale (AFS) and $2.55 billion held-to-maturity (HTM). AFS securities had a $500.2 million pretax unrealized loss; the after-tax AFS loss in accumulated other comprehensive income was $352.2 million. HTM fair value was $2.16 billion versus $2.55 billion amortized cost.
- Equity and capital: Shareholders’ equity was $1.95 billion, down $133.0 million. The decline included a $350.8 million after-tax reduction in other comprehensive income, primarily from lower AFS securities values. Company capital ratios were 9.53% Tier 1 leverage, 13.55% CET1 and 14.37% total risk-based capital; the Company and Bank met well-capitalized standards.
- Cash flows: Operating activities provided $273.7 million, investing activities used $1.18 billion and financing activities used $625.9 million. Cash decreased $1.53 billion during 2022.
Material changes, outlook and risks
Compared with 2021, net interest margin improved as asset yields rose, while net interest expense remained relatively low for the year. Expenses increased 14.1%, including $6.0 million of Suncrest acquisition costs, added staffing and occupancy, and technology spending. Noninterest income included a $2.7 million gain on a building sale and a $2.1 million CRA investment distribution; BOLI income fell by $3.1 million. A large trust relationship with more than $800 million in assets moved to another financial institution, with its expected fee-income impact in 2023.
Management did not provide formal company earnings or growth guidance. Its weighted economic forecast assumed GDP growth of 0.3% in 2023, including a decline in the first half, followed by 1.3% growth in 2024 and 2.8% in 2025; unemployment was forecast at 4.8% in 2023. Management said borrowings could moderate in the first half of 2023 with seasonal deposit inflows and investment cash flows, but warned that higher rates, inflation and competition could continue to pressure deposits and liquidity.
Key risks include the California and commercial-real-estate concentration of lending; potential declines in property values and borrower repayment capacity; inflation, interest-rate changes and deposit competition; unrealized securities losses; and cyber, regulatory, legal and operational risks. The Company reported no material cybersecurity losses to date, but cautioned that threats remain. Pending or threatened litigation is described, though management did not believe its ultimate resolution would materially affect results, financial condition or cash flows; outcomes remain uncertain. The filing states that all remaining LIBOR-linked instruments were expected to transition, primarily to CME Term SOFR, before June 2023.
For 2022, CVB declared $0.77 per share in dividends and repurchased approximately $114.9 million of shares through its accelerated and 10b5-1 programs. The Board’s February 2023 executive incentive plan permits awards ranging from 10% to 200% of a participant’s base salary. The financial statements and internal control over financial reporting received unqualified KPMG opinions.
Important facts for investors to verify
- Deposit trends and funding costs after year-end, including the duration and cost of the $995 million overnight FHLB borrowing and the potential for deposit repricing or outflows.
- The scale and sensitivity of CRE exposure, including office and other property types, California collateral values, and the impact of higher rates on refinancing and borrower cash flow.
- AFS and HTM securities’ unrealized losses, duration, liquidity implications and treatment in regulatory capital; CVB elected to exclude AOCI from regulatory capital.
- Credit quality and allowance assumptions as economic forecasts evolve, particularly for CRE, commercial and industrial, and dairy and agribusiness loans.
- The 2023 earnings impact of the departing trust relationship, acquisition integration, buybacks and share issuance, and any changes to dividends or repurchase plans.
- Management’s stated borrowing-capacity figures and the applicable availability, collateral requirements and conditions.