CVB Financial Corp. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. CVB is a California-based bank holding company whose principal subsidiary, Citizens Business Bank, serves businesses and individuals primarily in California.
Financial results and position
| Metric | Q3 2016 | Comparable period |
|---|---|---|
| Net interest income, before loan-loss recapture | $63.2 | $65.9 in Q3 2015; down 4.2% |
| Net earnings | $25.4 | $27.9 in Q3 2015; down 8.7% |
| Diluted EPS | $0.23 | $0.26 in Q3 2015 |
| Net interest margin, tax-equivalent | 3.30% | 3.72% in Q3 2015 |
| Return on average assets / equity | 1.23% / 10.05% | 1.45% / 12.11% in Q3 2015 |
- For the first nine months, net interest income before recapture was $191.6 million, up 1.0%; net earnings were $74.4 million, up 5.4%; diluted EPS was $0.69 versus $0.66. Tax-equivalent net interest margin was 3.46%, down from 3.65%.
- Q3 noninterest income was $9.2 million, up 9.2% year over year, including a $548,000 securities-sale gain. Noninterest expense was $33.0 million, up 0.8%. The Q3 efficiency ratio was 45.62%, versus 44.05%.
- The Q3 results included a $2.0 million recapture of loan-loss provision. Reported net interest income after that recapture was $65.2 million. The prior-year quarter included $2.8 million of recovered interest from a nonperforming loan; Q2 2016 included $2.6 million from TDR loan payoffs.
- At September 30, total assets were $8.045 billion, up 4.9% from year-end 2015. Loans and leases were $4.295 billion gross, with $4.234 billion net of allowance; deposits were $6.321 billion. Stockholders’ equity was $1.003 billion.
- Cash and cash equivalents were $259.2 million. Nine-month operating cash flow was $98.2 million, investing cash flow was positive $64.8 million, and financing cash flow was negative $10.0 million; cash increased $153.1 million from year-end.
- The allowance for loan losses was $61.0 million, or 1.42% of loans and leases. Nine-month net recoveries were $3.8 million. Nonperforming assets were $13.5 million, or 0.17% of assets, compared with $28.0 million and 0.37% at year-end 2015.
- Regulatory capital ratios remained well above “well-capitalized” thresholds: consolidated Tier 1 leverage 11.06%, common equity Tier 1 16.58%, Tier 1 risk-based 17.05%, and total risk-based 18.30%.
- Customer repurchase agreements were $578.0 million; the company reported no short-term borrowings. Junior subordinated debentures were $25.8 million, bearing three-month LIBOR plus 1.38% and maturing in 2036. Noninterest-bearing deposits represented 57.86% of deposits. The reported average total deposit cost was 0.09% for Q3.
Material changes and business developments
- Loans increased $278.2 million, or 6.9%, from December 31, 2015, including $158.7 million acquired from County Commerce Bank (CCB). Commercial real estate and commercial and industrial lending were principal sources of growth; dairy, livestock, and agribusiness loans declined $67.2 million, primarily from seasonal paydowns.
- Noninterest-bearing deposits rose $407.4 million from year-end, while time deposits fell $284.1 million, including approximately $240 million of California state deposits that matured and were not renewed.
- CVB completed its CCB acquisition on February 29, 2016, for $20.6 million cash and $21.6 million in stock. CCB brought approximately $252 million of assets; systems integration was completed in April. Nine-month CCB-related merger expenses were approximately $1.3 million.
- On September 22, CVB agreed to acquire Valley Commerce Bancorp, whose subsidiary had four branches and approximately $416 million of assets. Management expected closing in Q1 2017, subject to regulatory and shareholder approvals.
- The nine-month expense comparison is affected by $13.9 million of debt-termination expense in 2015. Excluding debt-termination costs, 2016 nine-month noninterest expense increased 7.3%, principally reflecting CCB, new hires, and higher occupancy costs.
Outlook, risks, and unusual items
- No formal earnings or financial guidance is provided. The Valley Commerce transaction timing is an expectation, not a completed acquisition.
- Management attributed margin pressure to low rates, competitive loan pricing, loan repricing, and lower prepayment penalties. Q3 tax-equivalent NIM was down 42 basis points year over year; management’s rate model estimated NII sensitivity of -0.56% over 12 months and +2.27% over 24 months for a 200-basis-point increase, and -1.62% and -3.64%, respectively, for a 100-basis-point decrease. Management cautioned that the model is not a forecast.
- Credit risks include the concentration of real estate lending in California, borrower and collateral deterioration, and exposure to dairy/agriculture and local economic conditions. Management said the allowance was appropriate but warned that future conditions could require higher provisions.
- Investment securities had a $64.6 million pretax net unrealized gain at quarter-end, primarily reflecting interest-rate movements. Management reported no OTTI charges in the first nine months and said it intended and was able to hold securities with unrealized losses until recovery or maturity.
- A shareholder securities class action was subject to a September 2016 memorandum of understanding, pending court approval; the proposed resolution would be funded solely by insurance and include no admission of liability. Separate wage-and-hour class claims and a PAGA demand remain disputed; the company had no litigation reserves and could not estimate a loss range.
- The board declared a $0.12-per-share quarterly dividend. It expanded the repurchase authorization to 10 million shares in August; no shares were repurchased in Q3. Dividend continuation is not assured.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether core net interest income and margins stabilize as asset yields and funding costs change, separating recurring performance from loan-loss recaptures, loan payoff income, and securities gains.
- Credit quality trends, particularly criticized dairy/agriculture exposures, commercial real estate concentrations, the allowance methodology, and the sustainability of net recoveries.
- Deposit mix and funding stability after the maturity of large state time deposits, alongside liquidity and collateral requirements for repurchase funding.
- Completion, purchase accounting, integration costs, and expected benefits of the proposed Valley Commerce acquisition; also the realized costs and performance of the CCB acquisition.
- Developments and potential financial exposure in the shareholder, wage-hour, and PAGA matters, including court approval of the proposed shareholder settlement.
- Interest-rate sensitivity assumptions and the effect of securities valuation changes on accumulated other comprehensive income and capital.