CVB Financial Corp. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. CVB Financial is a California bank holding company whose principal subsidiary, Citizens Business Bank, serves businesses and individuals across California. The 2017 results include Valley Business Bank operations from the March 10, 2017 acquisition of Valley Commerce Bancorp.
Financial performance and condition
Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
| Metric | Q3 2017 | Comparable period | Nine months 2017 | Comparable period |
|---|---|---|---|---|
| Net interest income, before loan-loss recapture | $71.7 | $63.2 in Q3 2016; +13.6% | $207.7 | $191.6 in 2016; +8.4% |
| Net earnings | $29.7 | $25.4 in Q3 2016; +16.6% | $86.6 | $74.4 in 2016; +16.4% |
| Diluted earnings per share | $0.27 | $0.23 in Q3 2016 | $0.79 | $0.69 in 2016 |
| Noninterest income | $10.0 | $9.2 in Q3 2016; +9.3% | $29.5 | $27.1 in 2016; +8.8% |
| Noninterest expense | $34.7 | $33.0 in Q3 2016; +5.2% | $105.7 | $101.8 in 2016; +3.8% |
| Net interest margin, tax-equivalent | 3.70% | 3.30% in Q3 2016 | 3.62% | 3.46% in 2016 |
| Efficiency ratio | 42.44% | 45.62% in Q3 2016 | 44.56% | 46.54% in 2016 |
- Balance sheet at September 30: Assets were $8.30 billion, up 2.85% from December 31, 2016; loans and leases were $4.75 billion, up 8.0%; deposits were $6.61 billion, up 4.7%; and stockholders’ equity was $1.08 billion, up 8.6%. These comparisons include the acquired bank.
- Funding and liquidity: Cash and cash equivalents were $143.8 million. Noninterest-bearing deposits were $3.91 billion, or 59.15% of deposits. Customer repurchase agreements were $455.1 million and other borrowings were $63.0 million; junior subordinated debentures were $25.8 million. Cash from operating activities was $107.5 million for the nine months, versus $98.2 million in 2016; cash from investing activities was $156.1 million, while financing activities used $241.4 million. Ending cash was $143.8 million, versus $259.2 million a year earlier.
- Credit and capital: The allowance for loan losses was $60.6 million, or 1.28% of loans; the company recorded a $7.0 million provision recapture and $6.1 million of net recoveries for the nine months. Nonperforming loans were $11.6 million, or 0.24% of loans, and nonperforming assets were $16.1 million. Company capital ratios were 11.81% Tier 1 leverage, 16.62% common equity Tier 1, 17.06% Tier 1 risk-based, and 18.25% total risk-based; the filing states the company and bank exceeded “well-capitalized” requirements.
Material changes and drivers
- Higher loan balances and yields were principal contributors to stronger net interest income. Average loan yield and the shift toward loans within earning assets supported the margin increase; the company also cited higher variable rates.
- The Valley Commerce acquisition added approximately $405.9 million of assets, including $309.7 million of loans, and $361.8 million of deposits. The purchase generated $27.0 million of goodwill. Integration was completed in May; three acquired locations were consolidated in Q3, and sale of the Woodlake branch was expected in Q4 2017.
- Excluding acquired loans and seasonal declines in dairy, livestock and agribusiness lending, management reported loan growth of $124.8 million, or 2.84%, from year-end. Noninterest-bearing deposits rose, while customer repurchase agreements declined by $148.0 million from year-end.
- Q3 net earnings increased from Q2 2017 as well: $29.7 million versus $28.4 million; diluted EPS was $0.27 versus $0.26.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management described the balance sheet as generally well matched, with a slight asset-sensitive bias over two years. Modelled 12-month net interest income sensitivity was -1.15% for a 200-basis-point rate increase and -2.59% for a 100-basis-point decrease; management cautioned these are estimates, not forecasts.
- Q3 included a $1.5 million loan-loss provision recapture. For the first nine months, the $7.0 million recapture was greater than the $2.0 million recapture in the prior-year period. The allowance ratio was affected by acquired loans recorded at fair value without a corresponding allowance.
- Unusual income items included a $542,000 gain on sale of the former operations/technology center in Q3 and $775,000 of tax-free BOLI death-benefit income in the nine-month period. Adoption of stock-compensation guidance reduced nine-month income tax expense by approximately $1.5 million.
- Noninterest expense reflected acquisition integration and relocation/build-out costs. Acquisition-related expenses were $2.2 million for the nine months. Management cited higher compensation, occupancy and software costs, partly offset by lower regulatory assessments.
- Credit risks include California real-estate exposure: 77.42% of gross loans excluding purchased-credit-impaired loans were real-estate loans, and substantially all real-estate and construction loans were secured by California property. Management warned that economic conditions, interest rates, collateral values and borrower performance could require higher future provisions.
- A wage-and-hour class action settlement of $1.5 million had preliminary court approval; final approval was scheduled for February 2018. The company had accrued the amount and expected no further accrual for that settlement. For other proceedings, the filing states that potential losses could not always be assessed or estimated.
- Other stated risks include deposit and liquidity competition, interest-rate and securities-market changes, acquisition integration, regulatory requirements, cyber and vendor disruptions, and natural disasters. Management reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- How much of earnings growth reflects recurring operating performance versus the $7.0 million loan-loss recapture, acquisition effects, BOLI proceeds, and asset-sale gain.
- Underlying loan growth, credit quality and reserve adequacy, including the impact of acquired loans carried at fair value and the increase in nonperforming assets from year-end.
- Successful realization of Valley Commerce integration benefits, branch-sale completion and any remaining merger or relocation costs.
- Deposit stability, reliance on repurchase agreements and other borrowings, and the company’s liquidity under changing market conditions.
- Developments in the wage-and-hour settlement and other litigation, and any changes in regulatory, capital or interest-rate exposure.