CVB Financial Corp. — 2012 Form 10-K
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 in Southern and Central California. The filing reports the fiscal year ended December 31, 2012; quarterly results are unaudited. The Bank operated 41 Business Financial Centers, five Commercial Banking Centers and three trust offices. Its two reportable segments are Centers and Treasury.
Financial performance and condition
| Metric | 2012 | Prior comparable period |
|---|---|---|
| Total assets at year-end | $6.36 billion | $6.48 billion at December 31, 2011 |
| Net earnings | $77.3 million | $81.7 million in 2011 |
| Diluted earnings per share | $0.74 | $0.77 in 2011 |
| Net interest income, before provision | $237.0 million | $234.7 million in 2011 |
| Net interest margin, tax-equivalent, excluding acquired-loan discount accretion | 3.66% | 3.78% in 2011 |
| Noninterest income | $15.9 million | $34.2 million in 2011 |
| Noninterest expense | $138.2 million | $141.0 million in 2011 |
| Net cash provided by operating activities | $154.8 million | $130.0 million in 2011 |
- Profitability and margins: Return on average assets was 1.19% and return on average equity was 10.31%, versus 1.26% and 12.00%, respectively, in 2011. The reported efficiency ratio was 54.64%; excluding debt termination expense, management reported 46.58%, compared with 51.21% in 2011.
- Credit: The company recorded no provision for credit losses in 2012, versus $7.1 million in 2011. The allowance for non-covered loans was $92.4 million, or 2.84% of gross non-covered loans. Non-covered nonperforming assets were $72.8 million, down from $76.5 million; non-covered nonaccrual loans were $58.0 million. Management reported net charge-offs of $1.5 million, compared with $18.4 million in 2011.
- Loans and securities: Net loans and lease finance receivables were $3.36 billion, including $3.16 billion in non-covered loans and $195.2 million in covered loans. Commercial real estate was the largest loan category. Available-for-sale securities totaled $2.45 billion, with a $74.6 million pretax unrealized gain.
- Funding, debt and liquidity: Deposits rose 3.7% to $4.77 billion. Noninterest-bearing deposits increased to $2.42 billion, 50.7% of deposits. Borrowings were $698.2 million, down 27.1%, and junior subordinated debentures were $67.0 million. Cash and cash equivalents fell to $98.4 million from $345.3 million. Operating cash flow was positive; investing and financing activities used $221.1 million and $180.6 million, respectively. The company reported $2.63 billion of available credit lines.
- Capital and shareholder returns: Stockholders’ equity was $763.0 million, or 11.99% of assets. Company capital ratios were 11.50% Tier 1 leverage, 18.23% Tier 1 risk-based and 19.49% total risk-based; management said the Company and Bank exceeded well-capitalized thresholds. The annual common dividend remained $0.34 per share.
Material changes versus 2011
- Net earnings declined 5.45%, principally reflecting a $20.4 million pretax charge to terminate $250 million of FHLB advances. The repayment was intended to reduce future interest costs; the advances had a 3.39% average coupon and 2.6-year weighted-average remaining life.
- Noninterest income fell by $18.3 million, primarily because the FDIC loss-sharing asset declined by $21.9 million in 2012, compared with a $0.2 million increase in 2011. There were no securities-sale gains in either year; 2010 included $38.9 million of gains.
- Credit indicators improved overall: nonperforming assets and net charge-offs declined, and the provision fell to zero. Non-covered loans increased modestly while covered SJB loans continued to run off.
- Noninterest-bearing deposits grew by $393.1 million year over year. The company prepaid $250 million of FHLB advances and redeemed $48.0 million of junior subordinated debentures. It also reported redeeming an additional $20.6 million of Trust II securities on January 7, 2013.
- Fourth-quarter 2012 net earnings were $22.1 million, or $0.21 per diluted share, compared with $21.7 million and $0.21 in fourth-quarter 2011. Fourth-quarter net interest income was $55.6 million; no credit-loss provision was recorded.
Outlook, commentary, risks and unusual items
- No quantified earnings, margin, loan-growth or other forward guidance is provided. Management said it remained focused on commercial real estate and commercial and industrial originations while maintaining caution on credit quality, and continued to emphasize growth in noninterest-bearing deposits.
- Management described the balance sheet as slightly asset-sensitive over a one-year horizon. Its modeled 12-month net interest income sensitivity was +3.17% for a 200-basis-point rate increase and +1.99% for a 100-basis-point decrease; these are estimates, not forecasts.
- The SJB FDIC loss-sharing asset was $18.5 million at year-end, and management expected approximately $16.4 million of remaining acquired-loan discount to accrete into interest income. The remaining asset amortization was subject to the contract’s remaining life, stated as approximately 1.75 years. Coverage is conditional on compliance with the FDIC agreement.
- Key exposures include California commercial real estate and other real-estate lending, construction credit, dairy and livestock borrowers exposed to commodity and feed costs, interest-rate and securities-value changes, deposit and funding access, regulatory change, and cybersecurity and third-party technology risks.
- Legal matters include an ongoing SEC investigation into credit-loss methodology, underwriting and loan grading, a consolidated shareholder securities action (second amended complaint filed; motion to dismiss under submission), and a related derivative action. The company reported no litigation reserves and could not estimate a loss range or determine whether a loss was probable.
- The $20.4 million debt termination charge and the $21.9 million reduction in the FDIC loss-sharing asset materially affected reported results. No goodwill impairment or investment-securities impairment charge was recorded in 2012. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Whether core earnings and margins can hold up as acquired-loan discount accretion and FDIC-related income diminish, and as securities yields remain low.
- Current performance, collateral values and risk ratings for the California commercial real estate, construction and dairy/livestock portfolios; also monitor nonperforming loans, restructured loans and the allowance.
- The timing, reimbursement eligibility and remaining value of FDIC loss-sharing claims, including compliance with agreement terms and expiration periods.
- How the reduced cash balance, deposit mix, large-denomination certificates of deposit and remaining borrowings affect liquidity and funding costs.
- Developments in the SEC investigation and related lawsuits, including any effect on expenses, reserves or financial statements.
- The effect of proposed capital rules and dividend restrictions, and whether the $0.34 annual dividend remains supportable.