CVB Financial Corp. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited consolidated results; dollar amounts below are in millions unless noted. CVB Financial operates Citizens Business Bank, a California-focused commercial bank.
Financial performance and position
| Metric | Q2 2023 | Comparable period / change |
|---|---|---|
| Net interest income | $119.5 | Down 2.0% year over year; down 4.9% from Q1 2023 |
| Net interest margin | 3.20% GAAP; 3.22% tax-equivalent | Tax-equivalent margin was 3.16% in Q2 2022 |
| Noninterest income | $12.7 | Down 13.7% year over year |
| Noninterest expense | $54.0 | Up 6.2% year over year |
| Provision for credit losses | $0.5 | $3.6 in Q2 2022; includes separate $0.4 provision for unfunded commitments in expense |
| Net earnings / diluted EPS | $55.8 / $0.40 | Net earnings $59.1 and diluted EPS $0.42 in Q2 2022 |
| Efficiency ratio | 40.86% | 37.24% in Q2 2022 |
| Returns | ROAA 1.36%; ROAE 11.03%; ROATCE 18.39% | ROATCE is a non-GAAP measure |
For the first half of 2023, net interest income was $245.3, up 4.5%; net earnings were $115.0, up 10.0%; and diluted EPS was $0.82, versus $0.74 in the first half of 2022. The first-half efficiency ratio improved to 40.17% from 41.85%.
- Balance sheet at June 30: Assets $16.48 billion; total deposits $12.40 billion; stockholders’ equity $2.00 billion. Total assets were nearly unchanged from December 31, 2022.
- Loans and credit: Gross loans at amortized cost were $8.91 billion, down 1.9% from year-end. The allowance for credit losses was $87.0, or 0.98% of loans, versus $85.1 and 0.94% at year-end. First-half net charge-offs were $0.15.
- Loan concentration: Commercial real estate was $6.90 billion, 77.5% of gross loans; real estate loans overall were 81.2%. The portfolio is primarily California-based.
- Deposits and borrowings: Deposits declined $438.7, or 3.4%, from year-end. Noninterest-bearing deposits were $7.88 billion, 63.6% of deposits. Other borrowings rose $500 to $1.50 billion, consisting of $695 from the Federal Reserve’s Bank Term Funding Program at 4.7% and $800 of FHLB advances at about 5%.
- Liquidity and cash flow: Cash and cash equivalents were $618.4 at June 30, up from $203.5 at December 31. First-half operating cash flow was $162.1, investing cash flow provided $381.5, and financing activities used $128.7. The company reported $4.1 billion of unused secured FHLB capacity, $1.3 billion of secured Federal Reserve capacity, more than $550 million of additional unpledged AFS securities, and $300 million of unsecured credit lines.
- Capital: Company CET1 ratio was 14.07%, Tier 1 leverage 9.81%, and total risk-based capital 14.92%. The company and bank exceeded regulatory “well-capitalized” thresholds.
Material changes and notable items
- Q2 net earnings fell 5.6% year over year despite higher asset yields: interest income increased, but funding costs rose sharply. Q2 interest expense was $29.7 versus $1.3 a year earlier; average cost of funds rose to 0.83% from 0.04%.
- Loan yield rose to 5.01% from 4.31% in Q2 2022. Management attributed the increase to higher interest rates. Loan balances declined mainly because of seasonal reduction in dairy and livestock utilization and lower consumer, construction, SBA, and PPP balances.
- Q2 noninterest income included $0.8 of BOLI death benefits. The prior-year quarter included $2.7 of gains on building sales and a CRA investment distribution; these items contributed to lower year-over-year noninterest income.
- AFS securities were $3.07 billion and had a $497.7 pretax net unrealized loss; HTM securities had a $404.1 fair-value deficit relative to amortized cost. Management said the losses primarily reflected interest-rate changes and reported no identified credit losses on securities. The filing warns that forced sales to meet liquidity needs could crystallize losses.
- In June, the company entered into $1.0 billion notional pay-fixed, receive-SOFR interest-rate swaps to hedge AFS securities; their fair value was $11.1 at quarter-end.
- First-half operating cash flow increased from $128.4 in 2022. Investing cash flow was positive largely alongside loan repayments and securities cash flows; financing outflows included deposit and repo reductions, dividends, and share repurchases.
- Q2 dividend declared was $0.20 per share. No open-market repurchases occurred in Q2; the prior 10b5-1 plan expired March 2, 2023. Employee tax-withholding share settlements continued.
Outlook, risks and contingencies
No specific earnings or financial guidance was provided. Management said borrowings may moderate in the second half of 2023 if loan demand remains slow, securities cash flows continue, and customary third-quarter deposit inflows occur. It cautioned that higher short-term rates and inflation could continue to pressure deposits and liquidity.
- Management’s weighted credit forecast assumes GDP growth of 1.5% in 2023, 0.8% in 2024, and 2.0% in 2025; unemployment is forecast at 3.8% in 2023 and 5.0% in 2024 and 2025. Management cited weaker CRE values and higher unemployment as factors increasing projected loss rates.
- Deposits and customer repurchase agreements included $6.7 billion that was neither collateralized nor insured; the filing separately states 52% of deposits and repos were uninsured and uncollateralized. The bank had no brokered deposits.
- Interest-rate sensitivity modeling estimated net interest income changes of +1.48% under a 200-basis-point rate increase and -0.98% under a 200-basis-point decrease over 12 months. Management cautioned that assumptions and customer behavior can change, and deposit declines could increase reliance on costly borrowing.
- Risks highlighted include regional-bank confidence and deposit outflows, interest-rate-driven securities and loan valuation losses, CRE and geographic concentration, economic deterioration, cybersecurity and fraud, potential increased regulatory scrutiny, and goodwill impairment.
- The company is involved in lawsuits and threatened claims in the ordinary and non-ordinary course. It said it does not presently expect pending matters to have a material adverse effect, while noting outcomes are uncertain. No material changes to previously disclosed risk factors were reported apart from the additions described.
Important facts for investors to verify
- Deposit stability, uninsured/uncollateralized balances, and the extent to which customers continue moving funds to higher-yielding alternatives.
- Borrowing costs and maturities, especially the $800 million of FHLB advances due over the next two quarters and the $695 million Federal Reserve program borrowing due in May 2024.
- Potential capital and liquidity effects if AFS or HTM securities must be sold, and how unrealized losses evolve as rates change.
- CRE portfolio performance, classified-loan trends, nonperforming loans, and whether the 0.98% allowance remains adequate under changing economic conditions.
- Whether management’s expected seasonal deposit inflows and borrowing moderation materialize, and whether margins withstand further deposit repricing.
- Future legal, regulatory, cybersecurity, or goodwill developments that could create material costs or losses.