Business context and reporting period
CVB Financial Corp. is a California bank holding company whose principal subsidiary, Citizens Business Bank, serves businesses, professionals and individuals, primarily in Southern and Central California. This Form 10-K reports the fiscal year ended December 31, 2017; financial comparisons are principally with 2016. The company completed its acquisition of Valley Commerce Bancorp in March 2017, including 296 days of post-acquisition operations in its 2017 results.
Financial performance and condition
| Metric | 2017 | 2016 |
|---|---|---|
| Net interest income, before loan-loss recapture | $278.9 million | $257.1 million |
| Noninterest income | $42.1 million | $35.6 million |
| Noninterest expense | $140.8 million | $136.7 million |
| Net earnings | $104.4 million | $101.4 million |
| Diluted earnings per share | $0.95 | $0.94 |
| Tax-equivalent net interest margin | 3.63% | 3.46% |
| Efficiency ratio | 43.84% | 46.73% |
Net earnings rose 2.94%. Excluding the $13.2 million one-time deferred-tax-asset revaluation charge from the Tax Reform Act, management reported adjusted net earnings of $117.6 million, up 15.96%, and adjusted diluted EPS of $1.07. The reported effective tax rate was 44.70%; excluding that charge, it was 37.70%.
At year-end, total assets were $8.27 billion, net loans and leases were $4.77 billion, deposits were $6.55 billion, and stockholders’ equity was $1.07 billion. Gross loans grew 9.91% to $4.83 billion, including $309.7 million acquired from VBB; excluding acquired loans, growth was 2.86%. Deposits increased 3.76%. Noninterest-bearing deposits made up 58.75% of year-end deposits.
Cash and cash equivalents were $144.4 million at year-end. Operating cash flow was $139.6 million, investing activities provided $138.9 million, financing activities used $255.7 million, and cash increased $22.7 million. Available-for-sale and held-to-maturity securities totaled $2.91 billion. Customer repurchase agreements were $553.8 million; the company had no other short-term borrowings outstanding at year-end. Junior subordinated debentures were $25.8 million, bearing interest at three-month LIBOR plus 1.38% and maturing in 2036.
Capital ratios remained well above regulatory well-capitalized thresholds: the company’s Tier 1 leverage ratio was 11.88%, CET1 ratio 16.43%, Tier 1 risk-based ratio 16.87%, and total risk-based ratio 18.01%. The company declared $0.54 per common share in dividends for 2017.
Material changes versus the prior comparable period
- Net interest income increased 8.50%, supported by loan growth and a higher net interest margin; the tax-equivalent margin rose from 3.46% to 3.63%.
- Noninterest income increased 18.47%, with notable contributions from a $2.9 million condemnation gain, a $906,000 branch-sale gain, and a $542,000 gain on sale of the former operations and technology center.
- Noninterest expense increased 2.93%, including higher compensation, occupancy, software and professional-service costs; the 2016 comparison included a $2.6 million asset impairment and a $1.5 million wage-hour settlement accrual.
- The $8.5 million loan-loss provision recapture was larger than the $6.4 million recapture in 2016. Net recoveries were $6.5 million, versus $8.8 million in 2016; the allowance declined to $59.6 million, or 1.23% of loans, from $61.5 million, or 1.40%.
- Nonperforming assets increased to $15.2 million from $11.7 million. Nonperforming loans rose to $10.7 million, or 0.22% of gross loans, from $7.2 million, or 0.16%.
- The VBB acquisition added assets, loans and deposits, while the company consolidated three acquired branches and sold the fourth.
Outlook, risks, contingencies and unusual items
The filing provides no formal earnings or revenue guidance. Management described the balance sheet as slightly asset-sensitive: its model estimated that a 200-basis-point rate increase would raise net interest income 3.17% over 12 months, while a 100-basis-point decrease would reduce it 2.70%. These are model estimates, not forecasts, and depend on assumptions about deposit pricing, customer behavior, prepayments and other factors.
- Pending merger: On February 26, 2018, CVB agreed to acquire Community Bank, whose year-end 2017 assets were approximately $3.75 billion, loans $2.74 billion and deposits $2.86 billion. The transaction was valued at approximately $878.3 million based on CVB’s February 23 share price and was expected to close in the third quarter of 2018, subject to shareholder, regulatory and other customary approvals. A successful closing could take the company above $10 billion in assets, triggering additional regulatory requirements and costs.
- Credit and concentration: Commercial real estate loans were approximately $3.40 billion; total CRE loans and unfunded commitments represented 251% of bank capital. Most real-estate collateral is in California. Dairy, livestock and agribusiness lending is exposed to commodity prices, weather, water availability and other operating risks.
- Credit-loss accounting: The company was evaluating CECL, effective for it beginning in fiscal 2020, and expected a one-time cumulative adjustment to the allowance; the amount and overall impact were not yet determinable.
- Tax and other unusual items: The 2017 results included the $13.2 million tax charge, acquisition costs, and the gains noted above. The Tax Reform Act reduced the federal corporate tax rate to 21% beginning in 2018; the filing also notes potential limits on FDIC-premium and executive-compensation deductions.
- Legal contingency: A wage-hour class-action settlement of $1.5 million had preliminary court approval, with final approval scheduled for March 2018. The company accrued the full amount and expected no further accrual for that settlement; other litigation outcomes could not be assured.
- Other key risks: Interest-rate and securities-value changes, deposit competition and funding access, California economic and real-estate conditions, acquisition integration, cybersecurity and third-party service-provider disruptions, and changes in banking regulation.
Important facts for investors to verify
- Whether reported earnings and margins remain strong after accounting for the one-time tax charge and gains from asset and branch sales.
- Whether loan growth excluding VBB continues, and whether nonperforming loans and CRE-related credit indicators improve or deteriorate.
- The assumptions supporting the allowance for loan losses and the future effect of CECL adoption.
- The Community Bank merger’s approvals, closing timetable, consideration, integration costs, expected benefits and impact on capital and regulatory costs.
- Deposit stability, funding costs, liquidity sources and the company’s sensitivity to changing interest rates.
- The final resolution of the wage-hour settlement and any material developments in other legal matters.