CVB Financial Corp. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; unaudited. CVB is a California bank holding company whose principal subsidiary, Citizens Business Bank, serves businesses and individuals. Results include County Commerce Bank (CCB) from its February 29, 2016 acquisition.
Financial and operating performance
Amounts below are in millions of dollars except per-share data and ratios.
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net interest income | $66.0 | $62.8 | $128.5 | $123.8 |
| Noninterest income | $9.3 | $8.3 | $18.0 | $16.4 |
| Noninterest expense | $34.4 | $31.5 | $68.8 | $76.0 |
| Net earnings | $25.5 | $26.8 | $48.9 | $42.6 |
| Diluted earnings per share | $0.23 | $0.25 | $0.45 | $0.40 |
| Net interest margin, tax-equivalent | 3.57% | 3.65% | 3.55% | 3.62% |
- Q2 net earnings rose $2.1 million from Q1 2016 but declined $1.3 million year over year. First-half earnings increased 14.7% year over year.
- Q2 return on average assets was 1.28%; return on average equity was 10.39%. The Q2 efficiency ratio was 45.78% (45.76% excluding debt termination expense).
- At June 30, total assets were $8.31 billion, up 8.4% from December 31, 2015. Net loans and leases were $4.18 billion, up $219 million; deposits were $6.59 billion, up $669 million.
- Cash and cash equivalents were $699.2 million, versus $106.1 million at year-end 2015. For the first half, operating cash flow was $58.6 million, investing cash flow $255.0 million, and financing cash flow $279.4 million.
- Total liabilities were $7.32 billion and stockholders’ equity $991.5 million. Customer repurchase agreements were $590.5 million; short-term borrowings were zero. Junior subordinated debentures were $25.8 million, bearing three-month LIBOR plus 1.38% and maturing in 2036.
- Capital ratios remained well above regulatory “well-capitalized” thresholds: consolidated Tier 1 leverage 11.24%, common equity Tier 1 16.54%, Tier 1 risk-based 17.01%, and total risk-based 18.26%.
Changes, credit quality, and unusual items
- CCB added approximately $252 million of assets at acquisition and expanded the company’s footprint into California’s central coast. The purchase consideration was $20.6 million cash and $21.6 million stock; recorded goodwill was $13.9 million. First-half acquisition-related expenses were $1.2 million.
- Loan growth included $158.6 million acquired from CCB. Commercial real estate loans were $2.88 billion, about 69% of gross non-PCI loans; substantially all real estate and construction lending is secured by California property. Dairy, livestock, and agribusiness loans declined $92.6 million, primarily due to seasonal paydowns.
- Nonperforming assets were $23.5 million, down from $28.0 million at year-end; the ratio to loans and OREO was 0.55%, versus 0.70%. Nonaccrual loans excluding acquired PCI loans were $17.5 million. Nonperforming loans and OREO were concentrated in part: two customer relationships represented $10.2 million, or 58.1%, of nonperforming loans.
- The allowance for loan losses was $60.9 million, or 1.44% of loans and leases. There was no loan-loss provision or recapture in the first half of 2016, compared with a $2.0 million recapture in first-half 2015. The period included $1.8 million in net recoveries.
- Q2 included $2.6 million of nonaccrued interest and loan-fee recapture after payoff of three troubled debt restructured (TDR) loans. Total TDRs were $32.3 million; $12.0 million were nonperforming and $20.3 million performing.
- First-half noninterest expense was lower year over year mainly because 2015 included $13.9 million of debt termination expense. Excluding that item, first-half 2016 expense increased $6.7 million, or 10.7%, including higher staffing, health-care, occupancy, and acquisition costs.
- Investment securities totaled $2.97 billion, down 7.7% from year-end. The portfolio had a $69.0 million pretax net unrealized gain; management attributed valuation changes primarily to interest-rate movements. Approximately 86% of securities were issued by the U.S. government or government-sponsored entities.
Outlook, risks, and contingencies
- The filing provides no specific earnings, revenue, margin, or loan-growth guidance. Management described the balance sheet as generally well matched with a slight asset-sensitive bias over a two-year horizon. Its model estimated 12-month net interest income sensitivity of +0.62% for a 200-basis-point rate increase and -0.51% for a 100-basis-point decrease; management cautioned that these are estimates, not forecasts.
- Key stated risks include California real-estate and economic conditions, borrower credit deterioration, deposit and funding availability, interest-rate and market movements, regulatory and legal developments, cybersecurity, and reliance on vendors. The loan-loss allowance and other valuation estimates involve significant judgment.
- Two principal legal matters remained pending: a shareholder securities class action remanded for further proceedings, and a consolidated wage-and-hour class action. The company had no litigation reserves at June 30 and said it could not predict a loss range or whether a loss was probable; an unfavorable outcome could materially affect results, financial condition, or cash flows.
- The company declared a quarterly dividend of $0.12 per share. Future dividends are discretionary and subject to legal, regulatory, and contractual restrictions.
- The company was evaluating the new expected-credit-loss standard (CECL), then scheduled to take effect for periods beginning after December 15, 2019; the filing did not quantify the expected impact.
Most important facts for investors to verify
- Whether loan growth and deposit growth persist after separating CCB’s contribution and the unusually large increase in cash balances.
- Whether net interest margin stabilizes or continues to decline, and how deposit pricing and interest-rate changes affect earnings.
- Credit trends in commercial real estate and the concentrated nonperforming customer relationships, including adequacy of the allowance.
- Whether acquisition-related costs, staffing growth, and other expenses are absorbed as CCB integration proceeds.
- Developments and potential financial exposure in the pending securities and wage-and-hour litigation, despite no reserve being recorded.