CVB Financial Corp. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; unaudited. CVB Financial operates Citizens Business Bank, a California-focused commercial bank serving businesses and individuals. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q3 2020 | Comparison |
|---|---|---|
| Net interest income, before credit-loss provision | $103.3 | Down 4.5% from Q3 2019; down 1.2% from Q2 2020 |
| Net interest margin, tax-equivalent | 3.34% | 4.34% in Q3 2019 |
| Provision for credit losses | $0 | $1.5 in Q3 2019; $11.5 in Q2 2020 |
| Noninterest income | $13.2 | Up 10.6% year over year |
| Noninterest expense | $49.6 | Up 4.3% year over year |
| Net earnings / diluted EPS | $47.5 / $0.35 | Net earnings down 5.8%; EPS was $0.36 in Q3 2019 |
| Return on average assets / equity | 1.38% / 9.51% | Q3 2019: 1.78% / 10.18% |
| Efficiency ratio | 42.57% | 39.60% in Q3 2019 |
For the nine months, net interest income was $310.2 million, down 5.6%; provision for credit losses was $23.5 million versus $5.0 million; noninterest income was $36.9 million, down 20.4%; net earnings were $127.1 million, down 18.8%; and diluted EPS was $0.93 versus $1.12.
At September 30, total assets were $13.82 billion, up 22.5% from December 31, 2019. Gross loans were $8.41 billion, including $1.10 billion of Paycheck Protection Program (PPP) loans. Excluding PPP loans, loans declined $257.8 million from year-end. Total deposits rose 28.3% to $11.17 billion; noninterest-bearing deposits were $6.92 billion, or 61.95% of deposits. Cash and cash equivalents were $1.48 billion, including $1.34 billion in interest-earning balances at the Federal Reserve.
The allowance for credit losses was $93.9 million, or 1.12% of loans (1.28% excluding PPP loans), compared with $68.7 million and 0.91% at December 31, 2019. Nonperforming loans were $11.8 million, or 0.14% of loans, versus $5.3 million at year-end; nonperforming assets were $16.0 million, or 0.12% of assets. Nine-month net charge-offs were $131,000.
Stockholders’ equity was $1.98 billion; tangible common equity was 9.78%. Consolidated regulatory capital ratios were 9.88% Tier 1 leverage, 14.60% common equity Tier 1, 14.89% Tier 1 risk-based, and 16.08% total risk-based. The company reported $25.8 million of junior subordinated debentures, $10.0 million of short-term FHLB borrowings, and $483.4 million of customer repurchase agreements.
For the first nine months, operating cash flow was $138.0 million, investing cash flow was negative $1.20 billion, and financing cash flow was positive $2.36 billion. Financing inflows were primarily deposit growth; investing outflows included loan growth and securities purchases.
Material changes and unusual items
- CVB adopted CECL on January 1, 2020, recording a $1.3 million after-tax reduction to opening retained earnings and a $1.8 million increase to the loan allowance. The $23.5 million first-half provision reflected COVID-19-related economic forecasts; there was no provision in Q3.
- PPP lending materially expanded reported loans: about 4,100 loans totaling $1.10 billion were outstanding at quarter-end. PPP interest and fee income was approximately $9.5 million in Q3.
- The lower interest-rate environment and a larger share of low-yield Federal Reserve balances reduced asset yields and net interest margin. Q3 loan yield was 4.47%, versus 5.23% a year earlier.
- Q3 noninterest income included a $1.68 million gain on sale of a bank-owned building. Nine-month 2019 income had included a $5.69 million eminent-domain gain and higher building-sale gains, contributing to the year-over-year decline in 2020 noninterest income.
- The company repurchased 4.94 million shares for approximately $92.7 million during the first nine months, then suspended its repurchase program on March 31, 2020. It declared a Q3 dividend of $0.18 per share.
- Nonperforming loans increased during Q3, including a $3.9 million increase in nonperforming commercial real estate loans. The filing reports $68.6 million of temporary payment deferments across 33 loans as of October 9, 2020; 89% were pass-rated.
Outlook, risks and contingencies
The company provided no specific earnings or financial guidance. Management said Q4 results remained highly uncertain: further COVID-19-related borrower stress could increase credit-loss provisions, while persistently low rates could reduce interest income. Its credit forecast incorporated downside scenarios alongside a Moody’s baseline; management cautioned that actual economic conditions and borrower performance could differ materially from assumptions.
Key exposures include California commercial real estate and other local business conditions, COVID-19 effects, and PPP eligibility, forgiveness and SBA audit or guarantee determinations. By November 5, 2020, 69 PPP loans totaling approximately $43 million had been submitted to the SBA and granted forgiveness; the company reported nearly 100% forgiveness for requests reviewed to date. The bank also elected to participate in three Federal Reserve Main Street Lending Program facilities, which carry borrower-eligibility, compliance, repayment and potential lender-recourse risks.
Management described liquidity as strong, citing core-deposit funding and more than $4 billion of available credit lines, most secured by pledged loans. Interest-rate simulations indicated asset sensitivity: a +200-basis-point scenario increased estimated net interest income 9.3% over 12 months, while a -100-basis-point scenario reduced it 0.6%. These model estimates depend on assumptions and are not forecasts. LIBOR transition is another stated risk for variable-rate loans, subordinated debt and swaps. The company reported that disclosure controls were effective and that pending litigation was not believed likely to have a material adverse effect, while acknowledging litigation outcomes remain uncertain.
Important facts for investors to verify
- Whether COVID-19 conditions, payment deferrals and changes in the credit outlook require additional provisions or reveal further deterioration in nonperforming loans.
- PPP loan forgiveness progress, SBA eligibility reviews and the extent to which guarantees remain applicable to loans not forgiven.
- Underlying loan growth and credit concentration, particularly California commercial real estate, after excluding PPP balances.
- Whether deposit growth persists and how low rates, excess Federal Reserve balances and deposit pricing affect margin and earnings.
- Capital and liquidity levels, including the effect of dividends, the suspended share-repurchase program and any future credit stress.
- Assumptions behind interest-rate sensitivity estimates and the company’s transition plans for LIBOR-linked products.