CVB Financial Corp. — 2018 Form 10-K
Business context and period. Annual report for the fiscal year ended December 31, 2018; figures are consolidated unless noted. CVB is a California bank holding company whose principal subsidiary, Citizens Business Bank, serves businesses and individuals, primarily in Southern and Central California. The bank has one reportable operating segment.
On August 10, 2018, CVB acquired Community Bank (CB), issuing approximately 29.8 million shares and paying $180.7 million in cash. 2018 results include CB only from the acquisition date (143 days). The merger added 16 banking centers and substantially increased the company’s scale.
Financial performance and condition
| Metric | 2018 | 2017 |
|---|---|---|
| Total interest income | $361.9 million | $287.2 million |
| Net interest income | $349.0 million | $278.9 million |
| Net interest margin, tax-equivalent | 4.03% | 3.63% |
| Noninterest income | $43.5 million | $42.1 million |
| Noninterest expense | $179.9 million | $140.8 million |
| Net earnings | $152.0 million | $104.4 million |
| Diluted earnings per share | $1.24 | $0.95 |
| Return on average assets / equity | 1.60% / 11.00% | 1.26% / 9.84% |
| Efficiency ratio | 45.83% | 43.84% |
- Fourth quarter: net interest income was $113.0 million, provision for loan losses was $3.0 million, net earnings were $43.2 million, and diluted EPS was $0.31. The filing provides quarterly results but not a clear quarterly revenue or margin summary in the supplied text.
- Comparability and earnings quality: Reported net earnings rose 45.6%. Excluding the $13.2 million one-time deferred-tax-asset remeasurement charge in 2017, 2017 net earnings were $117.6 million and 2018 growth was 29.2%. The 2018 tax rate was 28.0%, versus 44.7% reported in 2017 (37.7% excluding that charge).
- Reported 2018 tax-equivalent NIM benefited from acquisition-related loan discount accretion and nonrecurring nonaccrual interest totaling $18.6 million, compared with $7.4 million in 2017. Excluding these items, adjusted NIM was 3.80% versus 3.53%.
- Acquisition-related expense was $16.4 million in 2018. Excluding it, the adjusted efficiency ratio was 41.66%, compared with 43.14% in 2017; these are company-presented non-GAAP measures.
Balance sheet, funding and capital at December 31
- Assets were $11.53 billion, up 39.4%; net loans were $7.70 billion, deposits $8.83 billion, and shareholders’ equity $1.85 billion. The increases chiefly reflect CB’s acquisition.
- Loans grew 60.7% to $7.76 billion before allowance; excluding $2.73 billion of acquired CB loans, growth was 4.1%. Commercial real estate loans were $5.39 billion. Approximately 75% of gross loans were real-estate-related, and substantially all real estate collateral was in California.
- Deposits grew 34.8%; noninterest-bearing deposits were $5.20 billion, or 59.0% of deposits. Average total deposit cost increased to 0.13% from 0.09%; total cost of funds increased to 0.16% from 0.12%.
- Borrowings included $442.3 million of customer repurchase agreements and $280.0 million of short-term FHLB borrowings; junior subordinated debentures were $25.8 million. The debentures bear interest at three-month LIBOR plus 1.38% and mature in 2036.
- Cash and cash equivalents were $163.9 million. Annual operating cash flow was $168.4 million; investing activities provided $807.7 million and financing activities used $956.5 million. Investing cash flow included proceeds from liquidation of CB’s acquired securities.
- Company regulatory capital ratios: 10.98% Tier 1 leverage, 13.04% common equity Tier 1, 13.32% Tier 1 risk-based, and 14.13% total risk-based. The company and bank exceeded applicable well-capitalized thresholds.
Material changes and credit quality
- CB contributed $2.73 billion of acquired loans and $2.87 billion of deposits. The acquisition generated approximately $550.0 million of goodwill and a $52.2 million core deposit intangible. CB loan fair values, particularly impaired loans, remained provisional at year-end and could be adjusted within the measurement period.
- The allowance for loan losses was $63.6 million, or 0.82% of loans, versus $59.6 million and 1.23% a year earlier. Management said the lower coverage ratio was affected by acquired CB loans recorded at fair value without a corresponding allowance. The year included a $1.5 million provision, $291,000 of charge-offs and $2.8 million of recoveries.
- Nonperforming loans were $20.0 million, or 0.26% of loans, versus $10.7 million, or 0.22%, in 2017; $12.3 million were acquired from CB. Total nonperforming assets were $20.4 million. Total TDRs declined to $7.1 million from $9.0 million.
- Net interest income growth reflected CB’s post-merger contribution, higher loan yields and acquired-loan discount accretion. Expense growth reflected merger costs, added personnel, occupancy, technology and intangible amortization. The reported efficiency ratio worsened, while the acquisition-expense-adjusted ratio improved.
- Available-for-sale securities totaled $1.73 billion and included a $23.6 million pretax unrealized loss; the total investment portfolio was $2.48 billion. Management attributed unrealized losses primarily to interest rates and reported no other-than-temporary impairment charges in 2018.
Outlook, risks and contingencies
- The filing provides no specific earnings or growth guidance. Management described the balance sheet as asset-sensitive: its model estimated that a 200-basis-point rate rise would increase net interest income by 3.8% over 12 months, while a 200-basis-point decline would reduce it by 5.29%. These are model estimates, not forecasts, and depend on assumptions about rates, deposits, prepayments and customer behavior.
- Management expects added regulatory and compliance costs after crossing $10 billion in assets, including CFPB oversight. The debit-card interchange-fee cap was expected to apply beginning July 1, 2019; management did not expect a material income impact. New CECL credit-loss accounting was scheduled for 2020; the company was evaluating the effect and could not yet estimate the allowance or capital impact.
- Key risks include California and commercial-real-estate concentration, borrower and collateral deterioration, dairy and agricultural exposures, deposit funding costs and liquidity, interest-rate and LIBOR-transition risk, regulatory changes, cybersecurity and third-party service providers, and successful integration and realization of CB synergies. Commercial real estate loans and unfunded commitments represented 289% of bank capital.
- CVB reported $666.5 million of goodwill and no impairment in its annual test. It cautioned that future impairment could affect earnings and capital.
- Litigation: In the Dunagan matter, a court awarded plaintiffs approximately $1.34 million plus fees and costs; CVB appealed and said insurance may cover all or a substantial portion. Management did not expect a material adverse effect, but noted litigation outcomes remain uncertain.
- The company declared $0.56 per common share in dividends during 2018 and repurchased 340,283 shares for an average $19.49 per share in the fourth quarter. Future dividends remain subject to board discretion, bank earnings, capital and regulatory restrictions.
- Management and KPMG reported effective internal control over financial reporting; KPMG issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- How much of 2018 earnings and NIM improvement is recurring after isolating CB’s contribution, loan discount accretion, one-time items and merger expenses.
- CB integration progress, actual cost savings and revenue synergies, and any final purchase-accounting adjustments to acquired impaired loans, goodwill or intangibles.
- Credit trends in acquired loans and the California CRE portfolio, including nonperforming loans, criticized/classified balances, collateral values and reserve adequacy after CECL adoption.
- Deposit retention and repricing costs, liquidity availability, use of short-term FHLB funding, and sensitivity to interest rates and the LIBOR transition.
- Capital, dividend and regulatory-cost implications of the company’s post-acquisition size, including interchange-fee limits and any CECL transition effects.
- Outcome and insurance recovery in the Dunagan appeal, and whether any other legal or regulatory matter could become material.