CVB Financial Corp. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited results are for CVB Financial Corp. and subsidiaries, including Citizens Business Bank. The company operates primarily in California, serving businesses and individuals through 58 banking centers and three trust offices.
Financial performance and condition
- Q3 earnings: Net earnings were $49.8 million, or $0.37 per diluted share, versus $47.5 million and $0.35 in Q3 2020. Earnings were $51.2 million, or $0.38 per diluted share, in Q2 2021.
- Nine-month earnings: Net earnings were $164.8 million, or $1.21 per diluted share, up 29.7% from $127.1 million, or $0.93, in the first nine months of 2020. The improvement was significantly influenced by a $25.5 million credit-loss provision recapture in 2021, compared with a $23.5 million provision in 2020.
- Revenue and margins: Q3 net interest income was $103.3 million, essentially unchanged year over year; nine-month net interest income rose 0.6% to $312.2 million. Tax-equivalent net interest margin fell to 2.89% in Q3 from 3.34% a year earlier, and to 3.04% for nine months from 3.68%. Q3 noninterest income was $10.5 million, down 20.3% year over year, partly because Q3 2020 included a $1.7 million building-sale gain and higher swap fees. Nine-month noninterest income declined 5.3% to $35.0 million.
- Expenses and returns: Q3 noninterest expense declined 3.0% year over year to $48.1 million; the efficiency ratio was 42.27% versus 42.57%. Nine-month expense decreased 2.0% to $141.8 million and the efficiency ratio improved to 40.85% from 41.66%. Q3 return on average assets was 1.26% and return on average equity was 9.49%; nine-month figures were 1.46% and 10.73%.
- Assets and loans: Total assets were $16.20 billion, up 12.4% from December 31, 2020. Loans at amortized cost were $7.85 billion, down 6.0%, principally reflecting a $552 million reduction in PPP balances and seasonal agricultural repayments. Excluding PPP and seasonality, management reported loan growth of $134.3 million, or about 3% annualized. Commercial real estate loans were $5.73 billion, 73.1% of total loans; 76.99% of the loan portfolio was real-estate-related.
- Credit quality: The allowance for credit losses was $65.4 million, or 0.83% of loans (0.87% excluding PPP), versus $93.7 million and 1.12% at year-end 2020. Nine-month net charge-offs were $2.8 million. Nonperforming loans were $8.4 million, or 0.11% of loans, down from $14.3 million at year-end; there was no OREO at quarter-end. All $8.0 million of TDRs were performing.
- Deposits, liquidity and debt: Deposits totaled $12.93 billion, up 10.2% since year-end; noninterest-bearing deposits were 64.27% of deposits. Cash and cash equivalents were $2.56 billion. The company had no other borrowings at September 30 and redeemed $25.8 million of junior subordinated debentures in June. Customer repurchase agreements were $659.6 million. Management reported more than $4 billion in available credit lines, subject to conditions.
- Cash flow: For the first nine months, operating cash flow was $136.6 million, investing cash outflow was $835.9 million, and financing cash inflow was $1.30 billion, resulting in a $603.2 million increase in cash and cash equivalents.
- Capital and shareholder returns: Stockholders’ equity was $2.06 billion; tangible common equity ratio was 8.85%. Company consolidated Tier 1 leverage, CET1, Tier 1 risk-based, and total risk-based capital ratios were 9.22%, 14.94%, 14.94%, and 15.74%, respectively; the company and bank exceeded “well-capitalized” regulatory thresholds. Q3 dividends were $0.18 per share, and 390,336 shares were repurchased for $7.4 million at an average $18.97 per share.
Material changes and management commentary
- Growth in deposits and investment securities expanded the balance sheet, while elevated cash balances and lower-yielding securities, together with lower market rates, weighed on asset yields and net interest margin. Q3 average interest-earning assets grew 15.3% year over year, but their average yield declined to 2.92% from 3.45%.
- Investment securities increased 55.7% from year-end to $4.64 billion. AFS securities had a $8.8 million pretax net unrealized gain at September 30; securities-related OCI reduced equity by $32.3 million after tax for the nine-month period.
- Management attributed the credit-loss recapture to improving economic forecasts, government stimulus, and vaccine availability. Its weighted forecast assumed GDP growth of 5.7% in 2021 and unemployment of 5.7% in 2021, declining to 5.3% in 2023. Management cautioned that forecast uncertainty could lead to higher future provisions.
- CVB agreed to acquire Suncrest Bank, which had approximately $1.4 billion of assets, $821 million of gross loans, and $1.2 billion of deposits at September 30. Suncrest shareholders approved the merger on October 27, 2021; regulatory approval remained pending. Closing was anticipated in Q4 2021 or Q1 2022. Q3 included $0.8 million in acquisition-related expenses.
- Interest-rate sensitivity analysis indicated an asset-sensitive position: a modeled +200 basis-point ramp implied a 12.66% increase in one-year net interest income, while a −100 basis-point ramp implied a 5.05% decrease. The filing cautions that these are model estimates, not forecasts. LIBOR transition planning was underway for affected loans and swaps.
Outlook, risks and contingencies
- The filing provides no formal earnings or revenue guidance. Management said continued low rates could pressure interest income and that pandemic-related economic stress could increase credit provisions.
- Key risks include COVID-19 and its effects on borrowers and California markets; real estate and borrower credit conditions; deposit funding and liquidity; interest-rate and securities-market movements; PPP eligibility, forgiveness, and SBA guarantee risks; and operational, cybersecurity, legal, and regulatory matters.
- The Suncrest transaction remained subject to regulatory approval and closing conditions. Integration could entail employee, customer, credit, execution, and cost risks, and anticipated synergies may not be realized.
- The company described lawsuits and threatened lawsuits in the ordinary and non-ordinary course. It did not believe pending matters would have a material adverse effect, while noting that litigation outcomes are uncertain and a material effect remains possible.
Important facts for investors to verify
- Whether the Suncrest merger received regulatory approval, closed on schedule, and delivered expected benefits and costs.
- Whether reported loan growth excluding PPP and seasonal effects is sustained, and how the concentrated California commercial real estate exposure performs.
- Whether the $65.4 million loan-loss allowance remains adequate as economic forecasts, delinquencies, charge-offs, and PPP forgiveness outcomes evolve.
- How continued low rates, deposit growth, excess liquidity, and securities purchases affect net interest margin and the unrealized value of the securities portfolio.
- The sustainability of earnings growth after accounting for provision recaptures, PPP fees, unusual prior-year comparison items, and acquisition-related costs.