CVB Financial Corp. — Q3 2019 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2019. CVB operates Citizens Business Bank, a California-focused commercial bank serving businesses and individuals through 58 banking centers and three trust offices. Comparisons with 2018 are affected by the August 2018 acquisition of Community Bank; the 2018 results include its operations only after the acquisition date.
Financial performance and condition
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income, before provision | $108.2 | $92.8 | $328.8 | $236.0 |
| Noninterest income | $11.9 | $10.1 | $46.4 | $32.7 |
| Net earnings | $50.4 | $38.6 | $156.5 | $108.8 |
| Diluted earnings per share | $0.36 | $0.30 | $1.12 | $0.94 |
| Tax-equivalent net interest margin | 4.34% | 4.06% | 4.41% | 3.87% |
| Efficiency ratio | 39.60% | 47.49% | 39.89% | 44.31% |
- Q3 net earnings were down from $54.5 million in Q2 2019; diluted EPS was $0.39 in Q2.
- Q3 return on average assets was 1.78% and return on average equity was 10.18%. For the nine-month period, these were 1.86% and 10.89%, respectively.
- Operating cash flow for the first nine months was $147.4 million, versus $116.6 million in 2018. Investing activities provided $538.3 million and financing activities used $412.1 million. Cash and cash equivalents increased $273.6 million to $437.5 million.
- At September 30, total assets were $11.33 billion, down 1.7% from year-end 2018. Loans, net of deferred fees, were $7.49 billion, down 3.5%; total investment securities were $2.27 billion, down 8.2%.
- Deposits were $8.79 billion, down 0.4% from December 31, 2018. Noninterest-bearing deposits were $5.39 billion, or 61.23% of deposits. Customer repurchase agreements were $407.9 million; other borrowings were $4.9 million, compared with $280.0 million at year-end. Junior subordinated debentures were $25.8 million and mature in 2036.
- Allowance for loan losses was $68.7 million, or 0.92% of loans, versus $63.6 million and 0.82% at year-end. Nine-month provision expense was $5.0 million, compared with a $1.5 million provision recapture in 2018.
- Nonperforming assets were $16.1 million, or 0.14% of assets, including $6.6 million of nonperforming loans and $9.5 million of other real estate owned. Nonperforming assets were $20.4 million at year-end 2018.
- CVB reported Tier 1 leverage of 12.23%, common equity Tier 1 of 14.64%, Tier 1 risk-based capital of 14.93%, and total risk-based capital of 15.83%; the filing states the Company and Bank exceeded “well-capitalized” thresholds.
Material changes and unusual items
- Year-over-year nine-month net earnings rose 43.8%, while net interest income increased 39.3%. Management attributed much of the scale and income growth to the Community Bank acquisition, higher loan yields, and a larger average loan balance. These year-over-year comparisons are not like-for-like.
- Q3 net interest income increased 16.5% year over year, but declined $2.9 million from Q2 2019. Q3 earnings declined $4.1 million sequentially, partly reflecting lower noninterest income, which fell $6.3 million from Q2.
- Nine-month noninterest income included a $5.7 million gain on an eminent-domain condemnation and a $4.5 million gain on sale of a bank-owned building. Q3 also included higher BOLI income; the nine-month period included $468,000 of BOLI death benefits.
- Nine-month noninterest expense increased 25.7% year over year, mainly from employee costs, acquired core-deposit intangible amortization, and merger-related operating costs. Q3 expense was lower year over year largely because Q3 2018 had $6.6 million of acquisition-related expense; Q3 2019 included increased compensation expense associated with the retiring CEO’s amended employment and consulting arrangements.
- Loan balances contracted despite the larger post-acquisition scale. Management cited seasonal dairy and livestock repayments, competition for originations, and prepayments. Commercial real estate represented 71.69% of gross loans; substantially all real-estate and construction loans are secured by California property.
Outlook, risks and contingencies
- The filing provides no specific earnings, revenue, margin, or loan-growth guidance. Management says the allowance is appropriate but cautions that economic or borrower deterioration could require higher future provisions.
- Management’s interest-rate model characterized the balance sheet as asset-sensitive: estimated net interest income changed +4.5% under a +200-basis-point scenario over 12 months and -2.3% under a 100-basis-point decline. The filing cautions these model estimates are not forecasts and depend on assumptions about rates, deposits, prepayments, and customer behavior.
- Risks include California real-estate concentration, borrower credit deterioration, deposit funding and liquidity, interest-rate movements, acquisition integration and benefits, regulatory requirements associated with assets exceeding $10 billion, and model-estimation uncertainty. The company was assessing the expected phase-out of LIBOR after 2021.
- Off-balance-sheet commitments to extend credit totaled $1.58 billion and letters of credit $50.2 million. Management notes many commitments may expire undrawn; a $9.0 million reserve for unfunded commitments was recorded in other liabilities.
- The company is involved in lawsuits and threatened lawsuits in the ordinary and non-ordinary course. It did not believe their resolution would have a material adverse effect, but states outcomes are inherently uncertain and a material effect remains possible. No material changes to previously disclosed risk factors were reported.
- Controls and procedures were assessed as effective, with no material quarterly change in internal control over financial reporting reported.
Important facts for investors to verify
- Separate acquisition-driven growth from underlying organic performance, particularly in year-over-year interest income, expenses, and earnings.
- Track loan growth, especially commercial real estate concentration, California collateral exposure, criticized loans, nonperforming assets, and the adequacy of the allowance.
- Assess deposit stability and funding costs, including the proportion of noninterest-bearing deposits and reliance on repurchase agreements or other borrowing sources.
- Evaluate sustainability of earnings after the one-time building and condemnation gains, acquired-loan discount accretion, and BOLI income.
- Review interest-rate sensitivity assumptions and the company’s LIBOR transition plans, alongside capital ratios and capacity to maintain dividends.
- Monitor the conversion and expected funding of off-balance-sheet commitments, and developments in litigation and regulatory matters.