CVB Financial Corp. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. CVB Financial operates Citizens Business Bank, a California-focused commercial bank serving businesses and individuals through 51 banking centers and three trust offices.
Financial performance
- Earnings: Net earnings were $34.9 million, up 22.5% from $28.5 million in Q1 2017. Diluted EPS was $0.32 versus $0.26. Pre-tax earnings were $48.5 million; the effective tax rate was 28.0%.
- Interest income and margin: Interest income was $72.7 million, up 7.8% year over year. Net interest income before loan-loss recapture was $70.5 million, up 7.8%; tax-equivalent net interest margin was 3.68%, versus 3.51%.
- Noninterest income and expenses: Noninterest income rose 48.1% to $12.9 million, principally due to a $3.5 million gain on sale of an OREO property. Noninterest expense increased 5.4% to $35.9 million, including $0.8 million of costs related to the proposed Community Bank merger. The efficiency ratio improved to 43.08% from 46.01%.
- Cash flow: Operating activities provided $40.4 million, compared with $57.1 million in Q1 2017. Investing activities provided $190.7 million and financing activities provided $80.7 million. Cash and cash equivalents increased $311.9 million during the quarter to $456.2 million.
- Balance sheet and liquidity: Total assets were $8.36 billion, up 1.0% from December 31, 2017. Deposits were $6.71 billion, up 2.5%; noninterest-bearing deposits were $4.06 billion, or 60.55% of deposits. Loans and leases were $4.79 billion, down 0.7%, mainly reflecting seasonal agricultural paydowns. The average cost of deposits was 0.09%.
- Debt and capital: Customer repurchase agreements totaled $487.3 million; junior subordinated debentures were $25.8 million and mature in 2036. The company reported no short-term borrowings. Company capital ratios included a 12.20% Tier 1 leverage ratio, 16.85% common equity Tier 1 ratio, and 18.44% total risk-based capital ratio; the filing states both the company and bank exceeded “well-capitalized” thresholds.
- Credit and securities: The allowance for loan losses was $59.9 million, or 1.25% of loans. Nonperforming assets were $10.2 million, or 0.12% of assets, down from $15.2 million at year-end, partly because the OREO property was sold. Available-for-sale securities had a $28.5 million pre-tax unrealized loss; after-tax other comprehensive loss was $22.7 million, primarily reflecting interest-rate movements.
Material changes versus comparable periods
- Compared with Q1 2017, net interest income increased $5.1 million, reflecting higher average loan balances and yields; loan interest income rose $6.6 million. Investment securities income declined $1.5 million as average securities balances fell.
- The Q1 2018 loan-loss recapture was $1.0 million, versus $4.5 million in Q1 2017. Net recoveries were $1.35 million versus $2.17 million.
- Noninterest income benefited from the OREO sale and a $475,000 recovery on a Valley Business Bank loan previously charged off. These items contributed to the year-over-year increase and may not recur.
- Compared with December 31, 2017, total equity declined $2.4 million as investment-security marks reduced accumulated other comprehensive income, partly offset by earnings and stock-based compensation.
- Q4 2017 net earnings included a one-time $13.2 million deferred-tax-asset remeasurement charge. Excluding that charge, Q4 adjusted net earnings were $31.1 million and adjusted diluted EPS was $0.28; Q1 2018 reported earnings were $34.9 million and diluted EPS was $0.32.
Outlook, management commentary, risks and contingencies
- On February 26, 2018, CVB agreed to acquire Community Bank, which had approximately $3.75 billion in assets, $2.74 billion in gross loans and $2.86 billion in deposits at year-end 2017. The stated transaction value was approximately $885.2 million. Consideration is 9.4595 CVB shares plus $56 cash per Community Bank share, subject to agreement adjustments. Closing was expected in Q3 2018, subject to shareholder and regulatory approvals and other conditions. No earnings guidance is provided in the supplied filing text.
- Management described the loan-loss allowance as appropriate but cautioned that adverse economic conditions, borrower deterioration, interest-rate changes and other factors could require higher future provisions. The loan portfolio is concentrated in California real estate; 78.09% of gross loans excluding PCI loans were real-estate loans.
- Interest-rate simulations indicated estimated net interest income sensitivity of +3.32% over 12 months under a +200 basis-point scenario and -2.53% under a -100 basis-point scenario. Management characterized the balance sheet as slightly asset-sensitive and cautioned that model estimates are not forecasts.
- Market-rate changes produced unrealized securities losses. Management attributed these mainly to interest rates, stated it intended and was able to hold the securities until recovery or maturity, and did not consider them other-than-temporarily impaired.
- A wage-and-hour class-action settlement for $1.5 million received final court approval in March 2018; distribution was substantially completed by quarter-end. The company reported other lawsuits and threatened lawsuits in the ordinary and non-ordinary course, and said their outcomes are uncertain, though it did not then expect pending matters to have a material adverse effect.
- Other disclosed risks include deposit and liquidity competition, California real-estate conditions, credit quality, interest-rate and securities-market movements, regulation, cybersecurity and vendor reliance, and execution and approval risks for mergers. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Progress, approvals, final terms, financing, integration costs and expected benefits of the Community Bank merger.
- Whether loan growth and the 3.68% tax-equivalent net interest margin are sustained as rates and deposit costs change.
- Credit quality trends, especially California commercial real estate and agricultural exposures, and the adequacy of the $59.9 million allowance.
- Whether securities unrealized losses, reported at $28.5 million pre-tax for AFS holdings, deepen or recover, and the effect on equity and liquidity.
- How much earnings depend on nonrecurring items, including the $3.5 million OREO gain and $475,000 acquired-loan recovery.
- Developments in legal contingencies and the effect of adopting the forthcoming CECL credit-loss standard; the company was still evaluating CECL’s impact.