CVB Financial (CVBF) - 2020 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION (UNAUDITED) Condensed Consolidated Financial Statements This section presents CVB Financial Corp.'s unaudited condensed consolidated financial statements, including balance sheets, earnings, equity, and cash flows, for Q1 2020 Condensed Consolidated Balance Sheet Highlights (As of March 31, 2020 vs. December 31, 2019) | Metric | March 31, 2020 (in millions) | December 31, 2019 (in millions) | | :--- | :--- | :--- | | Total Assets | $11,606.89 | $11,282.45 | | Total Cash and Cash Equivalents | $705.74 | $185.52 | | Net Loans and Lease Finance Receivables | $7,383.51 | $7,495.92 | | Total Investment Securities | $2,322.01 | $2,414.71 | | Total Liabilities | $9,665.50 | $9,288.35 | | Total Deposits | $9,113.60 | $8,704.93 | | Total Stockholders' Equity | $1,941.39 | $1,994.10 | Condensed Consolidated Earnings Highlights (For the three months ended March 31) | Metric | 2020 (in millions) | 2019 (in millions) | | :--- | :--- | :--- | | Net Interest Income | $102.31 | $109.54 | | Provision for Credit Losses | $12.00 | $1.50 | | Noninterest Income | $11.64 | $16.30 | | Noninterest Expense | $48.64 | $51.60 | | Net Earnings | $37.98 | $51.64 | | Diluted Earnings Per Share | $0.27 | $0.37 | Notes to the Condensed Consolidated Financial Statements This section details accounting policies, including CECL adoption's impact on retained earnings, and provides specifics on investment securities, loan portfolio, credit quality, and COVID-19 loan modifications - The company adopted ASU No. 2016-13 (CECL) on January 1, 2020, using the modified retrospective method, resulting in a net decrease to beginning retained earnings of $1.3 million (net of tax) and a $1.8 million increase to the allowance for credit losses[33] - Due to the COVID-19 pandemic, the company implemented a short-term loan modification program, granting temporary payment deferrals for 90 days on 620 loans totaling $940 million through May 3, 2020, which is approximately 13% of the total loan portfolio[82] Loan Portfolio Composition (March 31, 2020) | Loan Type | Gross Loans (in millions) | Percentage of Total | | :--- | :--- | :--- | | Commercial real estate | $5,347.93 | 71.63% | | Commercial and industrial | $960.76 | 12.87% | | SBA | $313.07 | 4.19% | | SFR mortgage | $278.74 | 3.73% | | Dairy & livestock and agribusiness | $272.11 | 3.64% | | Construction | $128.05 | 1.72% | | Other | $165.49 | 2.22% | | Total Gross Loans | $7,466.15 | 100.00% | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2020 financial performance, highlighting the impact of COVID-19 and CECL adoption, resulting in $38.0 million net earnings, increased credit loss provisions, and strong liquidity - The COVID-19 pandemic led to a significant deterioration in the economic environment, prompting the company to increase its provision for credit losses by $12.0 million in Q1 2020[119][127] - The company is an active participant in the SBA's Paycheck Protection Program (PPP), obtaining approvals for about 3,800 loans totaling approximately $1.25 billion as of May 3, 2020[119][172] - The company suspended its 10b5-1 stock repurchase program on March 31, 2020, due to uncertainty from the COVID-19 pandemic, after repurchasing 4.9 million shares for $91.7 million in Q1 2020[156][205] Key Performance Metrics (Q1 2020 vs. Q1 2019) | Metric | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Net Earnings (in millions) | $37.98 | $51.64 | | Diluted EPS | $0.27 | $0.37 | | Return on Average Assets | 1.34% | 1.84% | | Return on Average Equity | 7.61% | 11.14% | | Efficiency Ratio | 42.69% | 41.01% | Analysis of the Results of Operations Q1 2020 net earnings decreased to $38.0 million due to a $10.5 million increase in credit loss provision, $7.2 million lower net interest income, and reduced noninterest income and expenses - Net interest income decreased by $7.2 million (6.6%) YoY, as the net interest margin (TE) compressed from 4.39% in Q1 2019 to 4.08% in Q1 2020, reflecting the impact of lower interest rates[144] - The provision for credit losses was $12.0 million, a significant increase from $1.5 million in Q1 2019, driven by CECL adoption and severe economic disruption from COVID-19[147] - Noninterest income decreased by $4.7 million YoY, primarily because Q1 2019 included a $4.5 million gain on the sale of a building, which did not recur in 2020[150] - Noninterest expense decreased by $3.0 million YoY, mainly due to the absence of $3.1 million in acquisition-related expenses that were present in Q1 2019[153] Analysis of Financial Condition Total assets increased to $11.61 billion by Q1 2020, driven by cash growth, while loans decreased to $7.47 billion and deposits rose to $9.11 billion, with the allowance for credit losses increasing to $82.6 million due to CECL and pandemic impacts Loan and Deposit Balances (As of March 31, 2020 vs. Dec 31, 2019) | Metric | March 31, 2020 (in millions) | Dec 31, 2019 (in millions) | Change (in millions) | | :--- | :--- | :--- | :--- | | Gross Loans | $7,466.15 | $7,564.58 | ($98.43) | | Total Deposits | $9,113.60 | $8,704.93 | $408.68 | | Noninterest-bearing Deposits | $5,572.65 | $5,245.52 | $327.13 | - Nonperforming assets as a percentage of total assets remained low at 0.10% as of March 31, 2020, a slight increase from 0.09% at year-end 2019[177] - The allowance for credit losses to total loans ratio increased to 1.11% at March 31, 2020, up from 0.91% at December 31, 2019, reflecting CECL adoption and increased economic uncertainty[147][186] Regulatory Capital Ratios (Consolidated) | Ratio | March 31, 2020 | Well-Capitalized Minimum | | :--- | :--- | :--- | | Tier 1 Leverage | 11.60% | 5.00% | | Common Equity Tier 1 | 14.13% | 6.50% | | Tier 1 Risk-Based | 14.42% | 8.00% | | Total Risk-Based | 15.49% | 10.00% | Asset/Liability and Market Risk Management The company maintains a highly liquid, asset-sensitive balance sheet, primarily funded by core deposits, with over $4 billion in credit lines, projecting net interest income increases in rising rate environments - The company is well-positioned with a highly liquid balance sheet, funded almost entirely with core deposits and having access to over $4 billion in available credit lines[210] Net Interest Income (NII) Sensitivity Analysis (12-month Period) | Interest Rate Scenario | Estimated NII Sensitivity (March 31, 2020) | | :--- | :--- | | +200 basis points | +5.20% | | -100 basis points | -0.50% | Economic Value of Equity (EVE) Sensitivity Analysis | Instantaneous Rate Change | EVE Sensitivity (March 31, 2020) | | :--- | :--- | | +200 basis points | +34.5% | | +100 basis points | +19.5% | | -100 basis points | -28.3% | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with an emerging focus on assessing the impact and transition from LIBOR to alternative reference rates for various financial instruments - The company is actively assessing the impact of the expected phase-out of LIBOR after 2021 and is exploring alternative reference rates for its affected financial instruments, including variable-rate loans, subordinated debentures, and interest rate swaps[219] Controls and Procedures Senior management concluded that disclosure controls and procedures were effective as of March 31, 2020, with no material changes to internal controls over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by the report (March 31, 2020)[221] - No changes in internal controls over financial reporting occurred during the first quarter of 2020 that materially affected, or are reasonably likely to materially affect, these controls[221] PART II – OTHER INFORMATION Legal Proceedings The company is involved in ordinary course lawsuits, with management assessing probable losses, but does not anticipate a material adverse effect on financial condition or results - The company is party to various lawsuits in the ordinary course of business but does not currently believe their resolution will have a material adverse effect on its financial condition or results[224] Risk Factors This section highlights new material risks, primarily from the COVID-19 pandemic's impact on the economy and credit quality, and uncertainties related to the Paycheck Protection Program (PPP) participation - The COVID-19 pandemic presents a significant risk, with potential negative impacts on the economy, loan demand, and credit quality. The company has already increased its allowance for credit losses by $12.0 million in Q1 2020 in anticipation of these effects[225][227] - Participation in the federal Paycheck Protection Program (PPP) introduces significant risks related to the uncertain application of new and evolving SBA rules regarding borrower eligibility, loan calculations, and forgiveness, which could impact the SBA's loan guarantee[229][230] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 4.94 million shares of common stock for $18.54 per share in Q1 2020, suspending the program on March 31, 2020, with 4.59 million shares remaining available Share Repurchases in Q1 2020 | Period | Shares Purchased (in millions) | Average Price Paid | | :--- | :--- | :--- | | Jan 1 - 31, 2020 | 0 | N/A | | Feb 1 - 29, 2020 | 0.35 | $19.59 | | Mar 1 - 31, 2020 | 4.59 | $18.46 | | Total | 4.94 | $18.54 | - The company suspended its 10b5-1 stock repurchase program on March 31, 2020. As of this date, 4.59 million shares were still available for repurchase under the program[232] Exhibits This section lists exhibits filed with the quarterly report, including amended bylaws, an employment agreement, and CEO/CFO certifications