CVB Financial Corp. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; unaudited. CVB operates Citizens Business Bank, serving businesses and individuals primarily in California. Dollar amounts below are in millions unless stated otherwise.
Financial performance
- Q2 earnings: Net earnings were $59.1 million, up 15.4% year over year and 29.6% from Q1 2022. Diluted EPS was $0.42, versus $0.38 a year earlier and $0.31 in Q1.
- Revenue and margins: Net interest income was $121.9 million, up 15.7% year over year. Tax-equivalent net interest margin was 3.16%, compared with 3.06% in Q2 2021 and 3.03% for the first half of 2022, down from 3.12% a year earlier. Q2 noninterest income was $14.7 million, up 35.4% year over year.
- Credit costs and expenses: Q2 provision for credit losses was $3.6 million, versus a $2.0 million recapture in Q2 2021. Noninterest expense rose 9.3% to $50.9 million. The efficiency ratio improved to 37.24% from 40.05% in Q2 2021.
- Six-month results: Net earnings were $104.6 million, down 9.1% year over year; diluted EPS was $0.74 versus $0.85. Net interest income increased 12.4% to $234.8 million, while provision for credit losses was $6.1 million versus a $21.5 million recapture in the first half of 2021.
- Returns: Q2 annualized ROAA was 1.39%, ROAE 11.33%, and management-reported ROATCE 18.67% (non-GAAP).
Financial position, cash flow and liquidity
- Assets and loans: Total assets were $16.76 billion at June 30, up 5.5% from year-end 2021. Loans at amortized cost were $8.69 billion, up 10.2%; management attributed much of the increase to the Suncrest acquisition. Excluding acquired loans, seasonality and PPP forgiveness, reported core loan growth was $319.8 million, approximately 8% annualized.
- Deposits and funding: Deposits were $14.07 billion, up 8.4% from year-end; 63.1% were noninterest-bearing. Customer repurchase agreements were $502.8 million. The company reported no borrowings at June 30; repurchase agreements are a separate funding obligation.
- Cash flow, first half: Operating activities provided $128.4 million; investing activities used $776.2 million; financing activities used $388.0 million. Cash and cash equivalents declined by $1.04 billion to $696.7 million, reflecting, among other items, investment purchases and deposit/funding flows. The acquisition contributed $329.0 million of net cash acquired.
- Liquidity: Management cited available credit lines exceeding $4 billion, most secured by pledged loans, and described the balance sheet as having significant liquidity. Availability is subject to conditions. At June 30, $4.27 billion of loans and $2.20 billion of securities were pledged for deposits, repurchase agreements and borrowing capacity.
- Capital and equity: Company capital ratios were 8.85% Tier 1 leverage, 13.41% CET1 and Tier 1 risk-based, and 14.22% total risk-based. Stockholders’ equity was $1.98 billion, down $99.3 million from year-end; the decline included a $242.9 million after-tax OCI loss on securities, partly offset by earnings and shares issued for Suncrest.
Material changes and unusual items
- CVB completed its acquisition of Suncrest Bank on January 7, 2022, for $39.6 million cash and $197.1 million in stock. Suncrest brought approximately $1.38 billion of assets at fair value, including $765.9 million in net loans; the transaction added $102.1 million of goodwill. Five acquired branches remained after consolidations during Q2.
- First-half acquisition-related expenses were $6.0 million, including $375,000 in Q2. Q2 noninterest income included a $2.7 million net gain on sale of banking-center properties; management also cited a $1.3 million gain from a CRA-investment distribution.
- Rising rates materially reduced securities fair values. AFS securities had a $346.3 million pretax net unrealized loss at June 30; the after-tax securities loss reflected in AOCI was approximately $243.9 million. HTM securities had a $278.1 million gross unrealized loss and fair value of $2.13 billion versus $2.41 billion amortized cost. Management reported no identified credit losses on securities in unrealized-loss positions.
- CVB repurchased shares under a $70 million accelerated repurchase and its 2022 program. It reported 4.68 million shares purchased in the first half at an average $23.38, with 5.32 million shares remaining available under the authorization at June 30.
Credit, outlook and risks
- The allowance for credit losses was $80.2 million, or 0.92% of loans (0.93% excluding PPP loans), versus $65.0 million and 0.82% at year-end. First-half net recoveries were $498,000. Nonperforming loans increased to $13.0 million from $6.9 million at year-end; classified loans were $76.2 million. All $5.2 million of TDRs were performing.
- Loan concentration remains significant: commercial real estate represented 76.43% of total loans and real estate loans overall represented 80.12%. Management’s credit forecast incorporated modest GDP growth, lower commercial real estate values and higher unemployment; it warned that inflation, geopolitical events, supply disruptions and economic uncertainty could require higher future provisions.
- No specific earnings or financial guidance was provided. Management described the company as asset-sensitive: modeled 12-month net interest income rose 5.46% under a 200-basis-point rate increase and fell 6.07% under a 200-basis-point decrease. These are estimates dependent on assumptions, not forecasts.
- Disclosed risks include inflation, rising rates and economic slowdown; credit and real estate concentration; deposit and liquidity competition; cybersecurity and fraud; COVID-19-related uncertainty; and the LIBOR transition. The filing also describes ordinary-course litigation; management did not expect pending matters to have a material adverse effect, while noting outcomes remain uncertain.
Important facts for investors to verify
- How the Suncrest acquisition affects ongoing earnings, expenses, integration benefits and loan quality after the merger-related costs end.
- Whether securities unrealized losses, particularly in the AFS portfolio, affect capital, liquidity or future interest income as rates and deposit behavior change.
- Trends in commercial real estate and other classified/nonperforming loans, the adequacy of the allowance, and sensitivity to management’s economic assumptions.
- Whether core loan and deposit growth continues, and how rate increases affect net interest margin, funding costs and modeled rate sensitivity.
- The remaining share-repurchase authorization, dividends, and capital ratios relative to regulatory requirements under changing conditions.