CVB FINANCIAL CORP annual report, FY2021

CVB Financial Corp. — 2021 Form 10-K

Business context and reporting period. CVB Financial Corp. is a California bank holding company whose principal subsidiary, Citizens Business Bank, operates a community banking business serving businesses and individuals in California. The filing covers the fiscal year ended December 31, 2021; comparisons are primarily with 2020. Suncrest Bank was acquired on January 7, 2022, after the reporting period.

Financial performance and position

Metric20212020
Net earnings$212.5 million$177.2 million
Diluted earnings per share$1.56$1.30
Net interest income$414.6 million$416.1 million
Noninterest income$47.4 million$49.9 million
Net interest margin, tax-equivalent2.97%3.59%
Efficiency ratio41.09%41.40%
Return on average assets1.38%1.37%
Return on average equity10.30%8.90%
  • Balance sheet: Total assets were $15.88 billion, up 10.2%; deposits were $12.98 billion, up 10.6%; net loans were $7.82 billion; and shareholders’ equity was $2.08 billion, up 3.7%.
  • Loans and securities: Gross loans declined 5.5% to $7.89 billion, mainly as PPP balances ran off. Excluding PPP loans, core loans grew 3.15%. Investment securities increased 71.6% to $5.11 billion as the Bank invested excess liquidity.
  • Credit quality: The allowance for credit losses was $65.0 million, or 0.82% of gross loans (0.84% excluding PPP loans), compared with $93.7 million and 1.12% in 2020. Net charge-offs were $3.2 million; nonperforming loans fell to $6.9 million from $14.3 million.
  • Cash flow: Operating activities provided $195.2 million; investing activities used $1.73 billion; financing activities provided $1.31 billion. Cash and cash equivalents ended at $1.73 billion, down $225.6 million during the year.
  • Funding and debt: Noninterest-bearing deposits were $8.10 billion, or 62.45% of deposits. Average total deposit cost was 0.04%, and average cost of funds was 0.05%. The Bank had $642.4 million of customer repurchase agreements and $2.3 million of overnight borrowings at year-end. CVB redeemed $25.8 million of junior subordinated debentures in June 2021.
  • Capital and shareholder returns: CVB’s year-end CET1 ratio was 14.86%, total risk-based capital ratio 15.63%, and Tier 1 leverage ratio 9.18%; both the Company and Bank were reported well-capitalized. The Company declared $0.72 per share in dividends and repurchased 390,336 shares for $7.4 million.

Material changes versus 2020

  • Net earnings rose 20.0%, while net interest income edged down 0.4%. The improvement in earnings was substantially supported by a $25.5 million credit-loss recapture in 2021, versus a $23.5 million provision in 2020.
  • Lower loan and securities yields, alongside a larger share of earning assets held in low-yielding cash, reduced tax-equivalent net interest margin to 2.97% from 3.59%. Lower funding costs partially offset the pressure.
  • Noninterest income declined 5.0%, chiefly because swap fee income fell $4.6 million; noninterest expense declined 1.6% to $189.8 million.
  • Deposit growth funded a significant expansion of the securities portfolio. A decline in the market value of available-for-sale securities reduced 2021 other comprehensive income by $39.3 million after tax.

Outlook, commentary, risks, and unusual items

  • The filing provides no formal earnings or growth guidance. Management’s credit-loss forecast assumed GDP growth of 2.7% in 2022, 2% in 2023, and 3% in 2024; unemployment was forecast above 5% in 2022 and 2023, then 4.8% in 2024. These are model assumptions, not company guidance.
  • Management said pandemic impacts remained uncertain and that renewed economic stress could increase credit-loss provisions. The 2021 recapture reflected improved forecasts, government support, and vaccine availability.
  • Key exposures include concentration in California real estate and commercial real estate lending; CRE loans were 263% of risk-based capital. Risks also include agricultural borrower conditions, interest-rate and securities-value changes, deposit liquidity, cyber threats, regulation, and the LIBOR transition.
  • Suncrest acquisition consideration was approximately $237 million, comprising about 8.6 million CVB shares and $39.6 million in cash. Suncrest had approximately $1.4 billion of assets at December 31, 2021; branch integration included planned consolidation of two locations in 2022.
  • On February 1, 2022, the Company authorized a new repurchase program for up to 10 million shares, including an initial $70 million accelerated share repurchase agreement.
  • KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. The audit identified the collective commercial real estate allowance estimate as a critical audit matter, citing significant estimation uncertainty and judgment.
  • The Company disclosed lawsuits and threatened lawsuits in the ordinary and non-ordinary course, but said it did not presently expect their resolution to have a material adverse effect. Outcomes remain uncertain.

Important facts for investors to verify

  1. How much of 2021 earnings growth is repeatable without the credit-loss recapture, and how sensitive future provisions are to economic assumptions.
  2. The difference between reported year-end PPP balances: the filing cites approximately $186.6 million in some sections and $183.6 million at amortized cost in others.
  3. How rising rates affect deposit pricing, net interest margin, and the market value of the expanded securities portfolio; the filing’s sensitivity analyses depend on modeling assumptions.
  4. Whether core loan growth and deposit retention continue after PPP runoff, and how the Suncrest acquisition affects integration costs, capital, and per-share results.
  5. Future credit performance in the concentrated California CRE portfolio and the adequacy of the allowance under less favorable economic conditions.