CVB Financial Corp. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; filed March 3, 2014. CVB Financial is a California bank holding company whose principal subsidiary, Citizens Business Bank, serves businesses and individuals, primarily in Southern and Central California.
Financial results and condition
| Metric | 2013 | 2012 |
|---|---|---|
| Net earnings | $95.6 million | $77.3 million |
| Diluted EPS | $0.91 | $0.74 |
| Net interest income | $216.3 million | $237.0 million |
| Net interest margin, tax-equivalent | 3.71% | 4.06% |
| Net interest margin excluding acquired-loan discount accretion, tax-equivalent | 3.49% | 3.66% |
| Noninterest income | $25.3 million | $15.9 million |
| Noninterest expense | $114.0 million | $138.2 million |
| Net cash from operating activities | $111.8 million | $154.8 million |
- Net earnings rose 23.7%, despite lower net interest income. Results included a $16.8 million loan-loss provision recapture and $4.1 million in insurance reimbursements for legal costs. The 2012 comparison included a $20.4 million debt-termination charge.
- Interest income fell to $232.8 million from $262.2 million; lower loan and investment yields and reduced acquired-loan discount accretion contributed. Interest expense declined to $16.5 million from $25.3 million as funding costs fell.
- Total assets were $6.665 billion, up 4.7% year over year. Net loans were $3.471 billion, including covered loans; deposits were $4.891 billion. Noninterest-bearing deposits were 52.4% of deposits.
- Investment securities available for sale totaled $2.664 billion. The portfolio moved from a $74.6 million pretax unrealized gain at year-end 2012 to a $16.1 million pretax unrealized loss at year-end 2013, primarily reflecting interest-rate changes. This reduced stockholders’ equity through accumulated other comprehensive income.
- Stockholders’ equity was $771.9 million and the equity-to-assets ratio was 11.58%. Company capital ratios were 11.30% leverage, 17.83% Tier 1 risk-based, and 19.09% total risk-based; management reported the Company and Bank were well capitalized.
- Borrowings totaled $911.5 million: $643.3 million in customer repurchase agreements, $199.2 million in FHLB advances, and $69.0 million in other borrowings. Junior subordinated debentures were $25.8 million. Cash and cash equivalents were $94.7 million.
- Cash flows were $111.8 million provided by operations, $378.5 million used in investing, and $262.9 million provided by financing. Cash and cash equivalents decreased $3.7 million.
- Credit measures improved: non-covered nonperforming assets fell to $46.4 million from $72.8 million; non-covered nonperforming loans were $40.0 million, or 1.18% of gross non-covered loans. Net charge-offs were $456,000. The allowance for non-covered loan losses was $75.2 million, or 2.22% of gross non-covered loans, versus $92.4 million, or 2.84%, in 2012.
Material changes and management commentary
- Non-covered loans increased $137.3 million, led by $217.4 million of commercial real estate growth; total loans increased $102.4 million as covered loans ran down. Commercial real estate was $2.21 billion of non-covered loans, concentrated in California.
- The allowance methodology changed in the fourth quarter to use a rolling 20-quarter historical loss period instead of a three-year period. Management cited insufficient loss data in the shorter period. The change, together with improving credit metrics, contributed to the year-end provision recapture.
- The efficiency ratio was 47.21%, compared with 54.64% in 2012; excluding 2012’s debt-termination charge, the prior-year ratio was 46.58%. Thus, the reported improvement largely reflects the unusual 2012 charge.
- Operating cash flow declined from 2012, while investing cash use increased, principally reflecting loan growth and investment activity. Management described liquidity as adequate and reported $2.68 billion in available lines of credit, of which $2.23 billion was secured.
- Management characterized the balance sheet as slightly liability-sensitive over a two-year horizon. The modeled 12-month net-interest-income impact was negative 2.42% under a 200-basis-point rate increase and negative 0.36% under a 100-basis-point decrease.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or revenue guidance. Management noted continued competition for loans and deposits, pressure on loan yields, and sensitivity to interest rates and California economic and real-estate conditions.
- Risks include the concentration of lending and collateral in California, substantial commercial real estate exposure, dairy and agribusiness exposure to commodity prices and water availability, deposit and funding risk, securities valuation and mortgage prepayment/extension risk, and cybersecurity, technology, regulatory, and compliance risks.
- The FDIC loss-sharing agreement related to the 2009 San Joaquin Bank acquisition was nearing expiration: the commercial-loan loss-sharing term expired in October 2014. The FDIC loss-sharing asset was $4.8 million at year-end 2013, and covered loans were $173.1 million gross. Reimbursements depend on compliance with agreement terms.
- The Company disclosed an ongoing SEC investigation concerning loan-loss methodology, underwriting, loan grading, and related investor communications. A consolidated shareholder securities action had been dismissed with prejudice and was on appeal; a related derivative action remained pending. No litigation reserves were recorded, and the Company could not estimate a potential loss range.
- After year-end, CVB announced an agreement to acquire American Security Bank for $57.0 million in cash. The target had approximately $412 million in assets at December 31, 2013; closing was expected in the second or third quarter of 2014, subject to regulatory approval and other conditions.
- New Basel III capital rules were scheduled to phase in beginning in 2015. Management said the Company and Bank would meet applicable requirements if fully phased in at year-end 2013 levels, while noting that capital rules could constrain dividends, repurchases, or growth.
Important facts for investors to verify
- How much of 2013 earnings growth came from the loan-loss recapture and legal-cost reimbursements, and what is the sustainable earnings level absent these items?
- Whether net interest income and margins stabilize as acquired-loan discount accretion declines and loan yields remain under competitive pressure.
- Credit performance and reserve adequacy following the allowance methodology change, particularly for commercial real estate and dairy and agribusiness loans.
- The effects of unrealized securities losses, interest-rate sensitivity, and funding mix on capital, liquidity, and future earnings.
- The resolution and potential financial impact of the SEC investigation and related litigation, and the status and economics of the proposed American Security Bank acquisition.