CVB Financial Corp. (CVBF) — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited consolidated results include Citizens Business Bank. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial results and key metrics
| Metric | Q2 2021 | Comparable period / change |
|---|---|---|
| Net interest income | $105.4 million | Up 0.8% from Q2 2020; up 1.9% from Q1 2021 |
| Net interest margin, tax-equivalent | 3.06% | 3.70% in Q2 2020 |
| Net earnings | $51.2 million | Up 22.9% from Q2 2020; down 19.9% from Q1 2021 |
| Diluted EPS | $0.38 | $0.31 in Q2 2020; $0.47 in Q1 2021 |
| Return on average assets / equity | 1.35% / 10.02% | 1.33% / 8.51% in Q2 2020 |
| Efficiency ratio | 40.05% | 39.75% in Q2 2020 |
For the six months ended June 30, net earnings were $115.1 million, versus $79.6 million in 2020; diluted EPS was $0.85 versus $0.58. Net interest income was $208.9 million versus $206.9 million, while tax-equivalent net interest margin fell to 3.12% from 3.88%. The six-month efficiency ratio improved to 40.15% from 41.20%.
Q2 interest income was $107.0 million and interest expense was $1.6 million. The $2.0 million recapture of credit-loss provision supported earnings; Q2 2020 included an $11.5 million provision. Six-month results included a $21.5 million provision recapture, compared with a $23.5 million provision in the first half of 2020.
Financial position, liquidity and capital
- Total assets were $15.54 billion at June 30, up 7.8% from year-end 2020. Cash and cash equivalents were $2.33 billion; investment securities totaled $3.97 billion.
- Total loans at amortized cost were $8.07 billion, down 3.3% from year-end. Commercial real estate loans were $5.67 billion; PPP loans were $657.8 million. Excluding PPP and seasonal effects, management reported loan growth of $51.0 million, or about 1.4% annualized.
- Deposits were $12.67 billion, up 8.0%; noninterest-bearing deposits were $8.07 billion, or 63.7% of total deposits. Customer repurchase agreements were $578.2 million. The company had no other borrowings at quarter-end and redeemed $25.8 million of junior subordinated debentures in June.
- Six-month cash flows: $70.7 million provided by operations, $689.1 million used in investing, and $992.1 million provided by financing; cash and cash equivalents increased $373.7 million. Financing inflows included deposit growth, while investing included securities purchases.
- Stockholders’ equity was $2.06 billion. Tangible common equity ratio was 9.17%. Company consolidated capital ratios included 9.38% Tier 1 leverage, 15.08% CET1 and 15.94% total risk-based capital; management said the bank and company exceeded “well-capitalized” thresholds.
Credit quality and material changes
- The allowance for credit losses was $69.3 million, or 0.86% of loans (0.94% excluding PPP), versus $93.7 million and 1.12% at December 31, 2020. Management attributed the reduction mainly to improved economic forecasts and government stimulus; first-half net charge-offs were $2.9 million.
- Nonperforming loans were $8.5 million, or 0.10% of loans, versus $14.3 million at year-end. There was no OREO at June 30. Performing troubled debt restructurings totaled $8.2 million; no TDRs were nonperforming.
- Asset growth was funded largely by deposits. Securities increased $991.4 million from year-end, while loans declined $277.5 million, including approximately $600 million of PPP forgiveness over the first half. Lower rates and a higher share of low-yield Federal Reserve balances weighed on asset yields and margin.
- Six-month comprehensive income was $93.0 million, below net earnings of $115.1 million, reflecting a $22.1 million after-tax decline in other comprehensive income, principally from securities valuation changes.
Outlook, risks and unusual items
- No formal earnings or financial guidance is provided. Management’s credit forecast assumed GDP growth of 6.1% in 2021, 2.7% in 2022 and 2.5% in 2023, with unemployment at 6.1% in 2021 and 2022 before declining to 5.3% in 2023. These are forecast assumptions, not company guidance.
- Management cautioned that COVID-19 effects remain uncertain and could lead to renewed credit provisions or lower interest income if the low-rate environment persists. PPP eligibility, forgiveness and SBA guarantee determinations are additional risks; the program ended May 31, 2021.
- On July 27, 2021, after quarter-end, CVB agreed to acquire Suncrest Bank in a transaction valued at approximately $204 million at the stated reference share price. Suncrest reported $1.4 billion in assets, $870 million in gross loans and $1.2 billion in deposits at June 30. Closing, expected in Q4 2021 or Q1 2022, is subject to shareholder and regulatory approvals and other conditions; integration, execution and anticipated benefits are uncertain.
- Interest-rate risk remains material: the company reported modeled 12-month net interest income sensitivity of +11.91% under a 200-basis-point rise and −5.44% under a 100-basis-point decline. These are model estimates, not forecasts. LIBOR transition, concentrated California lending, real estate conditions, deposit funding, cyber and operational risks, and litigation are also identified risks. The company said pending legal matters were not currently expected to have a material adverse effect, while noting outcomes remain uncertain.
- Q2 noninterest income was down 10.8% year over year, mainly because swap fee income fell $2.2 million; Q2 2020 had higher swap activity. First-half BOLI income included death benefits. The filing reports effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether loan growth excluding PPP and seasonal repayments continues, and how PPP forgiveness affects reported balances, fee income and interest income.
- Whether the lower allowance remains appropriate as COVID-related effects, borrower performance and economic forecasts evolve; review commercial real estate concentrations and criticized loan trends.
- Whether deposit growth persists and how excess liquidity is redeployed, particularly given securities yields, loan yields and margin pressure.
- Suncrest transaction approvals, final terms, closing timing, integration costs and realization of expected benefits.
- Capital, dividend capacity, interest-rate sensitivity assumptions and the company’s progress replacing LIBOR-linked contracts.