CVB FINANCIAL CORP quarterly report, Q3 FY2011

Vollständiges Dokument

CVB Financial Corp. — Third-Quarter 2011 Form 10-Q

Business context and reporting period. CVB Financial Corp. is a California bank holding company whose principal subsidiary, Citizens Business Bank, provides commercial banking, lending, leasing, and trust services. This unaudited report covers the quarter and nine months ended September 30, 2011; balance-sheet comparisons are to December 31, 2010. Amounts are in millions unless otherwise noted.

Financial performance and position

  • Q3 earnings: Net earnings were $22.4 million, up 24.9% from $17.9 million a year earlier. Diluted EPS was $0.21 versus $0.17.
  • Nine-month earnings: Net earnings were $60.0 million, up 13.1% from $53.1 million; diluted EPS was $0.57 versus $0.50. Annualized return on average assets was 1.24% and return on average equity was 11.97%.
  • Revenue and net interest: Q3 interest income was $68.5 million and net interest income before provision was $60.0 million. For the first nine months, interest income was $206.2 million and net interest income was $179.5 million. Nine-month net interest income fell 10.3% year over year, as lower interest income more than offset reduced funding costs.
  • Margins: Tax-equivalent net interest margin was 4.11% in Q3, unchanged year over year; it was 4.15% for the first nine months, compared with 4.37% a year earlier. The nine-month margin decline was partly related to lower accelerated accretion on acquired San Joaquin Bank (SJB) loans.
  • Credit costs: Q3 provision for credit losses was zero, compared with $25.3 million in Q3 2010. Nine-month provision was $7.1 million, down from $48.5 million. Nine-month net charge-offs were $16.1 million, versus $52.1 million a year earlier.
  • Assets and loans: Total assets were $6.53 billion, up 1.5% from year-end 2010. Total loans, net of deferred fees and allowance, were $3.36 billion, down from $3.64 billion. Available-for-sale securities increased to $2.17 billion from $1.79 billion.
  • Credit quality and allowance: Non-covered non-performing assets were $81.2 million, or 1.24% of assets, versus $162.3 million, or 2.52%, at year-end 2010. The allowance was $95.5 million, 3.01% of non-covered loans, compared with $105.3 million, or 3.12%, at year-end. Commercial real estate is a large portfolio exposure; most real estate loans are in California.
  • Deposits, liquidity, and debt: Deposits were $4.59 billion, up 1.6% from year-end; noninterest-bearing deposits rose to 43.1% of deposits from 37.7%. Cash and cash equivalents were $442.9 million. Reported borrowings were $548.6 million, customer repurchase agreements $485.3 million, and junior subordinated debentures $115.1 million. Nine-month operating cash flow was $51.9 million; cash and equivalents increased $38.7 million from year-end.
  • Capital and shareholder returns: Company and Bank Tier 1 risk-based capital ratios were 17.6% and 17.4%, respectively; both were described as well-capitalized. The company declared $0.255 per share in dividends for the first nine months and repurchased 1.50 million shares in Q3 at an average $7.83 per share.

Material changes versus comparable periods

  • Q3 earnings improved despite lower interest income, principally as the prior-year quarter included a $30.1 million securities-sale gain, a $13.0 million borrowing prepayment charge, and a $25.3 million credit provision. No securities-sale gain or borrowing prepayment charge was reported in Q3 2011.
  • Nine-month other operating income declined to $23.5 million from $49.9 million, mainly because 2010 included a $38.9 million securities-sale gain. Lower reductions in the FDIC loss-sharing asset partly offset this comparison.
  • Operating expenses fell to $32.9 million in Q3 from $49.3 million, and to $106.3 million for the first nine months from $126.7 million. Professional-services expense increased, including legal costs associated with the SEC inquiry, litigation, loan workouts, and foreclosures.
  • Non-performing assets and impaired loans declined substantially from year-end 2010, while non-covered OREO increased to $16.0 million from $5.3 million.
  • Stockholders’ equity rose to $699.9 million from $643.9 million, including a significant increase in accumulated other comprehensive income related primarily to unrealized gains on available-for-sale securities.

Outlook, risks, contingencies, and unusual items

  • The filing provides no specific numerical earnings or growth guidance. Management described California economic conditions as weak, loan demand as moderate, and borrowers as cautious about investment. Management noted recent improvement in non-performing loans and classified assets, while warning that economic weakness could hurt demand and credit quality.
  • Management described the balance sheet as moderately liability-sensitive. Its simulation estimated net interest income sensitivity of negative 1.80% for a 200-basis-point rate increase and positive 0.55% for a 100-basis-point decrease; the filing cautions these estimates are not forecasts.
  • SJB-related covered assets remain subject to FDIC loss-sharing estimates. Nine-month accelerated discount accretion on covered loans was $11.6 million, down from $22.3 million in 2010. The FDIC loss-sharing asset was $56.5 million at quarter-end, compared with $101.5 million at year-end 2010.
  • The company recognized $546,000 of credit-related impairment on a held-to-maturity Alt-A mortgage security during the first nine months. It also recorded write-downs on OREO and a $1.7 million write-off of a held-for-sale loan following an adverse preliminary court decision concerning lien priority.
  • The company received an SEC subpoena in July 2010 and said it was cooperating; it could not predict the investigation’s timing or outcome. A consolidated shareholder class action and a derivative action were pending. The company reported no significant litigation reserves and said a material adverse outcome was possible but not predictable.
  • Newly highlighted risks included financial-market disruption and cybersecurity attacks. Management also identified California real-estate values, borrower performance, credit losses, funding access, interest rates, and regulatory changes as risks.

Important facts for investors to verify

  • Whether improving non-performing asset and classified-loan trends continue, and whether the allowance remains adequate as California real-estate and borrower conditions evolve.
  • How much future earnings depend on SJB loan accretion and FDIC reimbursements, including the assumptions and collectability underlying the loss-sharing asset.
  • Whether core net interest income and margins can hold up as loan balances, asset yields, funding costs, and interest rates change.
  • Developments and potential financial exposure from the SEC investigation and pending shareholder litigation.
  • Regulatory capital and liquidity measures, including deposit mix, contractual funding maturities, and the company’s capacity to sustain dividends and share repurchases.