CVB Financial Corp. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are to December 31, 2021 unless stated otherwise. CVB Financial operates Citizens Business Bank, a California-focused commercial bank serving businesses and individuals. Figures below are in U.S. dollars; financial amounts are rounded to millions unless otherwise noted.
Business context and material developments
- Completed the acquisition of Suncrest Bank on January 7, 2022, extending the company’s presence in California’s Central Valley and Sacramento area. The transaction added approximately $1.38 billion of assets at fair value, including $765.9 million of net loans; consideration was $39.6 million in cash and $197.1 million in CVB shares. Results include 83 days of Suncrest operations.
- CVB operated 65 banking centers and three trust offices at quarter-end. Two banking centers were expected to be consolidated in Q2 2022, with integration and consolidations expected to be completed by the end of that quarter.
Financial performance
| Metric | Q1 2022 | Comparable period |
|---|---|---|
| Net interest income, before credit provision | $112.8 million | $103.5 million in Q1 2021 |
| Provision for (recapture of) credit losses | $2.5 million provision | $19.5 million recapture in Q1 2021 |
| Noninterest income | $11.3 million | $13.7 million in Q1 2021 |
| Noninterest expense | $58.2 million | $47.2 million in Q1 2021 |
| Net earnings | $45.6 million | $63.9 million in Q1 2021 |
| Diluted earnings per share | $0.31 | $0.47 in Q1 2021 |
| Net interest margin, tax-equivalent | 2.90% | 3.18% in Q1 2021 |
| Efficiency ratio | 46.93%; 42.38% excluding acquisition expense | 40.26% in Q1 2021 |
| Return on average assets / equity | 1.06% / 8.24% | 1.79% / 12.75% in Q1 2021 |
Net interest income increased 9.1% year over year, supported by growth in average earning assets and investment income. The tax-equivalent yield on earning assets fell to 2.93% from 3.24%; loan yield was 4.27% versus 4.50%. Management reported return on average tangible common equity of 13.08%.
Noninterest income declined 17.7%, mainly because Q1 2021 included larger BOLI death benefits, swap fees, and a gain on OREO. Noninterest expense rose 23.5%, including $5.6 million of Suncrest acquisition costs. The effective tax rate was 28.10%, compared with 28.60% in Q1 2021.
Financial position, liquidity and capital
- Assets and loans: Total assets were $17.54 billion, up 10.4% from year-end. Loans at amortized cost were $8.59 billion, up $704.0 million; acquired Suncrest loans contributed $774.5 million. Management reported core loan growth of $144.5 million, or approximately 8% annualized, after adjusting for acquired loans, seasonality, and PPP forgiveness.
- Deposits and funding: Deposits were $14.49 billion, up 11.7%; noninterest-bearing deposits were $9.11 billion, or 62.86% of deposits. Customer repurchase agreements were $598.9 million. The company reported no borrowings at March 31, 2022.
- Cash flow and liquidity: Operating cash flow was $75.1 million; investing cash flow was negative $330.3 million and financing cash flow was positive $175.7 million. Cash and cash equivalents ended at $1.65 billion, down $79.5 million during the quarter. The Bank reported available credit lines exceeding $4 billion, subject to conditions.
- Investments and equity: Securities totaled $6.01 billion. Available-for-sale securities had a $203.4 million pretax net unrealized loss. After-tax other comprehensive loss was $142.3 million, contributing to a $146.3 million accumulated other comprehensive loss at quarter-end. Total stockholders’ equity was $2.08 billion.
- Capital: Company consolidated Tier 1 leverage, common equity Tier 1, and total risk-based capital ratios were 8.67%, 13.56%, and 14.36%, respectively. CVB and the Bank exceeded regulatory “well-capitalized” thresholds.
- Shareholder returns: The quarterly dividend was $0.18 per share. Under a new authorization to repurchase up to 10 million shares, CVB repurchased 3.08 million shares during the quarter, including a $70 million accelerated repurchase; 6.92 million shares remained authorized for repurchase at quarter-end.
Credit quality, outlook and risks
- The allowance for credit losses was $76.1 million, or 0.89% of loans (0.90% excluding PPP loans), versus $65.0 million at year-end. It included $8.6 million established for acquired Suncrest purchased-credit-deteriorated loans. Net charge-offs were $5,000.
- Nonperforming loans increased to $13.3 million, or 0.15% of loans, from $6.9 million at year-end; $4.0 million were acquired from Suncrest. All $5.3 million of troubled debt restructurings were performing. Commercial real estate represented 75.32% of total loans, and 79.14% of the portfolio consisted of real estate loans, creating material property and geographic concentration exposure.
- Management’s weighted economic forecast assumed GDP growth of 2.6% in 2022 and 1.3% in 2023, with unemployment of 4.3% and 5.2%, respectively. Management considered the allowance appropriate but cautioned that inflation, geopolitical events, supply-chain disruption, pandemic uncertainty, and economic deterioration could increase future credit provisions. These are assumptions, not company earnings guidance.
- Management described the balance sheet as asset-sensitive: modeled net interest income increased 7.62% under a gradual +200-basis-point scenario over 12 months and declined 2.66% under a -100-basis-point scenario. The filing cautions that these model results are not forecasts and depend on assumptions about rates, deposits, and prepayments.
- Other disclosed risks include rising interest rates and inflation, cybersecurity threats, LIBOR transition uncertainty, and legal proceedings. The company said pending litigation was not presently expected to have a material adverse effect, while noting outcomes remain uncertain. No material change to previously disclosed risk factors was reported apart from the updates described in the filing.
Most important facts for investors to verify
- Whether Suncrest integration, branch consolidation, and expected cost benefits proceeded as planned after the quarter.
- How the substantial unrealized securities losses, interest-rate changes, and securities portfolio positioning affect tangible capital and future net interest income.
- Whether acquired-loan fair values and the allowance for credit losses changed as provisional purchase-accounting estimates were finalized.
- Whether nonperforming loans, classified credits, commercial real estate concentrations, and the economic outlook materially changed after March 31, 2022.
- Subsequent deposit and liquidity trends, capital ratios, dividends, and execution of the remaining share repurchase authorization.