CVB Financial Corp. — Q3 2023 Form 10-Q
Business and period: Unaudited results for the quarter and nine months ended September 30, 2023. CVB Financial operates Citizens Business Bank, a California-focused commercial bank serving businesses and individuals. The Bank had 62 banking centers and three trust offices.
Financial performance
Amounts in millions, except per-share data and ratios.
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net interest income | $123.4 | $133.3 | $368.6 | $368.1 |
| Provision for credit losses | $2.0 | $2.0 | $4.0 | $8.1 |
| Noninterest income | $14.3 | $11.6 | $40.2 | $37.5 |
| Noninterest expense | $55.1 | $53.0 | $164.0 | $162.1 |
| Net earnings | $57.9 | $64.6 | $172.9 | $169.3 |
| Diluted EPS | $0.42 | $0.46 | $1.24 | $1.20 |
| Net interest margin | 3.29% | 3.45% | 3.31% | 3.16% |
- Q3 net earnings fell 10.5% year over year; net interest income declined 7.5%. Higher funding costs outweighed growth in interest income. Management cited a $484.2 million reduction in average earning assets and a 15-basis-point decline in margin year over year.
- Q3 pretax, pre-provision income was $82.6 million, versus $91.9 million a year earlier. Q3 return on average assets was 1.40%, return on average equity 11.33%, and efficiency ratio 39.99% (36.59% in Q3 2022).
- For the first nine months, earnings rose 2.2% and diluted EPS increased to $1.24 from $1.20. Net interest income was nearly flat as rising asset yields were largely offset by much higher deposit and borrowing costs.
Financial condition, liquidity and capital
- Total assets were $15.90 billion at September 30, down 3.5% from year-end 2022. Gross loans were $8.88 billion, down 2.2%; net loans were $8.79 billion. Commercial real estate was 77.1% of gross loans, indicating significant CRE concentration.
- Total deposits were $12.36 billion, down $477.5 million (3.7%) from year-end. Noninterest-bearing deposits fell $577.7 million to $7.59 billion, or 61.4% of deposits. Management said customers transferred approximately $720 million from bank deposits to higher-yielding investments through CitizensTrust, including $170 million during Q3. The filing reports no brokered deposits.
- At quarter-end, borrowings included $870 million from the Federal Reserve’s Bank Term Funding Program at 4.87% and $250 million in short-term FHLB advances at approximately 5%; the FHLB advances were due in Q4 2023. Customer repurchase agreements were $269.6 million. The Bank reported substantial unused secured and unsecured borrowing capacity.
- Cash and cash equivalents were $240.7 million at quarter-end. For nine months, operating cash flow was $247.0 million, investing activities provided $543.5 million, and financing activities used $753.2 million; cash increased $37.2 million over the period.
- Stockholders’ equity was $1.95 billion. Regulatory capital ratios remained above “well-capitalized” thresholds: consolidated CET1 14.38%, Tier 1 leverage 10.00%, and total risk-based capital 15.25%. The quarterly dividend was $0.20 per share. The 10b5-1 repurchase plan expired in March; no new plan was in place.
Credit, securities and notable items
- The allowance for credit losses was $89.0 million, or 1.00% of loans, versus $85.1 million and 0.94% at year-end 2022. Nine-month net charge-offs were $122,000. Nonperforming loans rose to $10.0 million from $4.9 million at year-end; classified loans were $92.2 million. Management’s forecast incorporated a modest recession in early 2024, 0.3% GDP growth for 2024 and unemployment reaching 5.7% in 2025.
- Available-for-sale securities had a $628.4 million pretax unrealized loss at quarter-end; held-to-maturity securities had a $520.1 million unrealized loss. Management attributed unrealized losses primarily to interest-rate movements and said it did not intend to sell the securities, while warning that forced sales to meet liquidity needs could crystallize losses.
- Q3 noninterest income included approximately $2.6 million from a CRA investment equity-fund distribution. Q3 noninterest expense included a $0.9 million recapture of the provision for unfunded loan commitments. The company entered into $1.0 billion notional pay-fixed interest-rate swaps in June; these generated $3.8 million of Q3 interest income and had a $24.9 million fair value at quarter-end.
- Management cited higher rates, deposit competition, inflation, lower CRE values and potential recession as risks. The filing also highlights banking-sector confidence and liquidity risks, uninsured deposits, unrealized securities losses, possible goodwill impairment, increased regulatory scrutiny, cybersecurity threats and litigation. Management reported no expectation that pending litigation would materially affect results, but noted outcomes are uncertain.
- The filing provides no specific forward-looking earnings or financial guidance. Management’s economic assumptions and interest-rate sensitivity analyses are estimates, not forecasts of actual results.
Important facts for investors to verify
- Deposit stability, customer transfers to CitizensTrust, uninsured balances and the cost and availability of replacement funding.
- Whether CRE concentrations, rising classified and nonperforming loans, and the economic forecast result in higher credit provisions or charge-offs.
- Magnitude and duration of unrealized securities losses, collateral pledges, borrowing capacity and any need to sell securities.
- Net interest margin and earnings sensitivity as deposits reprice and borrowings mature; confirm repayment or refinancing of the $250 million FHLB advances due in Q4 2023 and $870 million BTFP advances maturing in 2024.
- Whether the Q3 CRA-related distribution and unfunded-commitment recapture are nonrecurring, and whether swap income and hedge effects persist.