CVB Financial Corp. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; unaudited. CVB is a California bank holding company operating Citizens Business Bank, with lending, deposit-taking, investment, leasing, and trust businesses. Amounts below are in millions except per-share data and percentages.
Financial performance and condition
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net interest income | $59.7 | $60.0 | $181.3 | $179.5 |
| Noninterest income | $2.6 | $7.5 | $10.2 | $23.5 |
| Provision for credit losses | $0 | $0 | $0 | $7.1 |
| Noninterest expense | $50.0 | $32.9 | $109.2 | $106.3 |
| Pre-tax earnings | $12.4 | $34.6 | $82.3 | $89.6 |
| Net earnings | $9.3 | $22.4 | $55.1 | $60.0 |
| Diluted earnings per share | $0.09 | $0.21 | $0.53 | $0.57 |
- Margins: Q3 tax-equivalent net interest margin was 4.08%, or 3.60% excluding acquired-loan discount accretion, versus 4.11% and 3.81%, respectively, a year earlier. The reported nine-month tax-equivalent margin was 4.14%, versus 4.15%; excluding accretion, 3.69% versus 3.84%.
- Balance sheet at September 30: Total assets were $6.32 billion, down 2.5% from year-end 2011. Total loans net of deferred fees were $3.43 billion; non-covered loans increased $8.3 million year to date while covered loans declined $55.2 million. Available-for-sale securities were $2.26 billion.
- Funding and liquidity: Deposits were $4.78 billion, up 3.8% from year-end. Noninterest-bearing deposits rose 14.6% to $2.32 billion and represented 48.6% of deposits. Cash and cash equivalents were $248.2 million, down from $345.3 million at year-end. The nine-month average loans-to-deposits ratio was 73.22%. The company reported $2.54 billion of available lines of credit.
- Cash flow, nine months: Operating activities provided $115.3 million; investing activities used $6.2 million; financing activities used $206.2 million. Cash and cash equivalents decreased $97.2 million from year-end.
- Credit and capital: The allowance for credit losses was $92.1 million, 2.85% of non-covered loans, versus $94.0 million and 2.92% at year-end. Net charge-offs were $2.5 million, compared with $16.1 million in the prior-year period; no provision was recorded in 2012. Nonperforming assets were $76.5 million, broadly unchanged from year-end. Consolidated Tier 1 leverage, Tier 1 risk-based, and total risk-based capital ratios were 11.19%, 17.96%, and 19.23%, respectively, above “well-capitalized” thresholds. Stockholders’ equity was $754.2 million.
Material changes and unusual items
- Q3 net earnings fell 58.6% year over year, principally reflecting a $20.4 million pre-tax debt-termination charge after repayment of $250 million of fixed-rate FHLB advances. Management’s non-GAAP adjusted Q3 efficiency ratio, excluding that charge, was 47.52%, compared with the reported 80.20%.
- The FHLB repayment reduced borrowings and interest expense but lowered cash and earning assets. The prepaid advances had an average coupon of 3.39% and 2.6 years of weighted-average remaining life. CVB also redeemed junior subordinated debt securities during the period.
- Q3 noninterest income was pressured by a $7.1 million decrease in the FDIC loss-sharing asset; the nine-month decrease was $19.3 million. Management attributed the reduction to improved expected credit performance on acquired San Joaquin Bank loans, which also generated $19.3 million of nine-month discount accretion in interest income.
- Reported Q3 net interest income was nearly flat year over year. Management cited lower loan yields and refinancing of higher-yielding loans, partly offset by lower funding costs and acquired-loan accretion. It described loan competition as strong and said it remained cautious on credit quality.
- Management reported dairy and livestock borrowers facing higher feed costs, lower milk prices, and tighter margins. The filing identifies commercial real estate as a major portfolio concentration: approximately 63.6% of the total loan portfolio; substantially all real estate and construction loans are secured by California properties.
Outlook, risks, and contingencies
- The filing provides no specific earnings or financial guidance. Management described a strategy of growing commercial real estate and commercial and industrial lending cautiously, increasing noninterest-bearing deposits, and managing investment portfolio yield and interest-rate exposure.
- Management said the balance sheet was slightly asset-sensitive and estimated 12-month net interest income sensitivity of +1.32% for a 200-basis-point rate increase and -0.85% for a 100-basis-point decrease. These are model estimates, not forecasts; mortgage prepayment and extension risk remain relevant.
- The FDIC loss-sharing agreement covers acquired San Joaquin Bank assets. The related asset was $22.3 million at quarter-end, with an approximately two-year remaining contract life; its value depends on covered-asset performance and FDIC claims.
- The company disclosed an ongoing SEC investigation, begun with a 2010 subpoena, concerning credit-loss methodology, underwriting, loan grading, provisions, and certain investor communications. Related shareholder class-action litigation and a derivative action were pending. The company reported no significant litigation reserves and said outcomes and potential losses could not be predicted.
- Other stated risks include California real estate and borrower conditions, interest-rate and liquidity changes, regulatory developments, and fraud and cyber-security threats. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether recurring earnings and margins can withstand lower loan yields and the reduction in acquired-loan accretion, apart from the one-time debt-termination charge.
- Trends in nonperforming loans, impaired loans, troubled debt restructurings, and California commercial real estate exposure; TDRs totaled $84.7 million, including $33.1 million classified as nonperforming.
- Future changes in the FDIC loss-sharing asset and remaining reimbursement claims as acquired-loan estimates and contract coverage run off.
- Deposit growth, liquidity after the FHLB prepayment, and the cost and availability of contingent funding.
- Developments in the SEC investigation and related litigation, including potential financial, regulatory, or reputational consequences.