CVB Financial Corp. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. CVB Financial Corp. operates Citizens Business Bank, serving businesses and individuals primarily in California. The unaudited results include Valley Business Bank (VBB) from its March 10, 2017 acquisition date.
Financial results
Amounts are in millions of dollars unless otherwise noted. Income-statement comparisons are year over year; balance-sheet comparisons are to December 31, 2016.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Interest income | $72.6 | $68.0 | $140.0 | $132.5 |
| Net interest income, before loan-loss recapture | $70.5 | $66.0 | $135.9 | $128.5 |
| Noninterest income | $10.8 | $9.3 | $19.5 | $18.0 |
| Noninterest expense | $36.9 | $34.4 | $71.0 | $68.8 |
| Net earnings | $28.4 | $25.5 | $56.9 | $48.9 |
| Diluted earnings per share | $0.26 | $0.23 | $0.52 | $0.45 |
| Tax-equivalent net interest margin | 3.63% | 3.57% | 3.57% | 3.55% |
| Efficiency ratio | 45.38% | 45.78% | 45.68% | 46.99% |
- Q2 net earnings rose 11.2% year over year, but were down $0.1 million from Q1 2017. First-half net earnings increased 16.3% year over year.
- Q2 net interest income increased 6.9% year over year, reflecting growth in average earning assets; the tax-equivalent margin improved six basis points.
- Loan-loss provision recaptures added $1.0 million to Q2 results and $5.5 million to first-half results. First-half net recoveries were $4.2 million.
- Noninterest income growth included a $775,000 tax-free BOLI death benefit, $443,000 of recoveries on previously charged-off loans, and a $402,000 securities-sale gain. Acquisition expenses were $1.3 million in Q2 and $1.9 million for the first half.
Financial position, liquidity and capital
- Total assets were $8.42 billion, up 4.3% from year-end; net loans were $4.63 billion, up $294.0 million. Deposits totaled $6.70 billion, up 6.1%, including $361.8 million assumed from VBB.
- Noninterest-bearing deposits were $3.93 billion, or 58.67% of deposits. Average total deposit cost was 0.09% in Q2; deposit cost including customer repurchase agreements was 0.11%.
- Cash and cash equivalents were $184.7 million at quarter-end. For the first half, operating cash flow was $66.4 million, investing cash flow $105.6 million, financing cash flow negative $108.9 million, and cash increased $63.1 million.
- Customer repurchase agreements were $546.1 million; there were no short-term borrowings, compared with $53.0 million at year-end. Junior subordinated debentures were $25.8 million and mature in 2036. Total liabilities were $7.36 billion and stockholders’ equity was $1.06 billion.
- Basel III capital ratios remained above well-capitalized thresholds: consolidated Tier 1 leverage 11.48%, common equity Tier 1 16.31%, Tier 1 risk-based 16.75%, and total risk-based 17.93%.
- Cash dividends declared were $0.14 per share for Q2; first-half dividends were $0.26 per share.
Material changes, credit and unusual items
- CVB acquired VCBP for $23.2 million cash and $37.6 million in stock. VBB brought approximately $406.1 million of assets, including $309.7 million of loans, and $368.5 million of liabilities, including $361.8 million of deposits. Goodwill recorded was $29.7 million. Systems integration was completed in May; branch consolidation and sale of the Woodlake branch were expected by year-end 2017.
- Loan growth included VBB’s acquired portfolio. Excluding acquired loans and seasonal declines in dairy, livestock and agribusiness lending, first-half loans increased $90.9 million, or 2.24%. Commercial real estate accounted for $3.27 billion of gross loans; most real estate lending is secured by California property.
- The allowance for loan losses was $60.2 million, or 1.28% of loans, down from $61.5 million and 1.40% at year-end. Management noted that the acquired VBB loans carry a fair-value credit mark and no corresponding allowance. Nonperforming loans were $12.2 million versus $7.2 million at year-end; nonperforming assets were $16.7 million, or 0.20% of assets, versus $11.7 million and 0.14%.
- Troubled debt restructurings totaled $21.0 million: $4.4 million nonperforming and $16.6 million performing. One $3.1 million commercial real estate TDR modified during the prior 12 months subsequently defaulted.
- Management attributed investment-security unrealized losses primarily to interest-rate changes and did not consider them other-than-temporary impairments. The portfolio was $3.14 billion; approximately 89% was issued by the U.S. government or government-sponsored entities.
Outlook, risks and contingencies
- The filing provides no numerical earnings or revenue guidance. Management described the balance sheet as generally well matched, with a slight asset-sensitive bias over two years; modeled net interest income sensitivity was negative 1.05% under a 200-basis-point rise and negative 2.78% under a 100-basis-point decline over 12 months. These are model estimates, not forecasts.
- Key disclosed risks include California economic and real-estate conditions, credit deterioration and reserve estimation, deposit funding and liquidity, interest-rate and securities valuation changes, acquisition integration and expected synergies, regulatory changes, and operational, cybersecurity and vendor risks.
- The company had a $1.5 million accrual for a proposed wage-and-hour class settlement, subject to court approval; preliminary approval was scheduled for August 17, 2017. The filing says it could not assess probable loss or estimate exposure for certain other pending or threatened matters.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. No material risk-factor changes from the 2016 Form 10-K were reported.
Important facts for investors to verify
- Whether VBB integration, planned branch actions, and anticipated acquisition benefits progress as expected, and how much reported growth reflects the acquisition.
- Whether credit quality and nonperforming loans stabilize, particularly in commercial real estate and acquired loans, and whether the allowance remains adequate after the $5.5 million first-half recapture.
- Whether deposit growth and low funding costs persist, and how rate changes affect net interest income, securities values and liquidity.
- Whether the wage-and-hour settlement receives court approval and whether any other legal matters require additional accruals.
- Whether one-time BOLI proceeds, loan recoveries, securities gains and acquisition expenses materially affect comparisons with future periods.