CVBF

CVB Financial Corp. 10-Q Summary: Period Ended September 30, 2010

Business Context and Reporting Period

This report covers the quarterly period ended September 30, 2010, for CVB Financial Corp., a bank holding company headquartered in Ontario, California. The Company operates primarily through its subsidiary, Citizens Business Bank, serving small to mid-sized businesses and individuals in Southern and Central California. The Company is an accelerated filer and is not a shell company. As of November 3, 2010, there were 105,918,076 shares of common stock outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Earnings: Net earnings for the nine months ended September 30, 2010, increased by $4.7 million (9.74%) compared to the same period in 2009. However, for the third quarter alone, net earnings decreased by $1.4 million (7.21%) compared to Q3 2009.
• Net Interest Income: Increased significantly due to a $22.3 million discount accretion on covered loans acquired from San Joaquin Bank (SJB). Interest expense decreased by $19.3 million year-over-year for the nine-month period, driven by lower borrowing costs and reduced average borrowings.
• Asset Quality: Non-performing assets (non-covered) rose sharply to $176.3 million from $73.7 million at year-end 2009. This increase was primarily driven by a $46.8 million addition to non-performing loans from the Company's largest borrowing relationship in the third quarter, following a $33.8 million charge-off.
• Operating Expenses: Other operating expenses increased by $32.5 million (34.46%) for the nine-month period. This was largely due to an $18.7 million prepayment charge on borrowings and increased legal expenses related to the SEC investigation and loan collection efforts.
• Investment Portfolio: The Company recognized a $38.9 million gain on the sale of investment securities for the nine-month period, compared to $28.4 million in the prior year.

Guidance, Outlook, Risks, and Unusual Items

• Unusual Items: The results were impacted by a $14.8 million reduction in the FDIC loss sharing asset and a $18.7 million prepayment charge on borrowings. The third quarter included a $13.0 million one-time prepayment charge.
• Legal Proceedings: The Company is subject to an ongoing investigation by the Securities and Exchange Commission (SEC) initiated in July 2010. Additionally, two class-action lawsuits were filed in August and September 2010 alleging violations of the Securities Exchange Act. The Company cannot currently estimate potential liability.
• Regulatory Risks: The Company notes potential impacts from the Dodd-Frank Wall Street Reform and Consumer Protection Act, which may increase operating costs or affect capital treatment of trust preferred securities.
• Outlook: Management anticipates future provisions for credit losses will be required given the current economic conditions. The Company remains liability-sensitive, meaning net interest margin may decrease in a rising rate environment.

Investor Verification Checklist

• Credit Concentration: Verify the status and recovery prospects of the largest borrowing relationship, which contributed significantly to the rise in non-performing assets and charge-offs.
• Legal Exposure: Monitor the progress of the SEC investigation and the two pending class-action lawsuits for potential financial impact or settlement costs.
• Asset Quality Trends: Track the ratio of non-performing assets to total loans, which increased to 5.12% for non-covered loans, and the adequacy of the allowance for credit losses (3.08% of total loans).
• Regulatory Capital: Confirm continued compliance with "well-capitalized" status under new Dodd-Frank regulations, particularly regarding the treatment of trust preferred securities.
• FDIC Loss Sharing: Assess the impact of the $14.8 million reduction in the FDIC loss sharing asset on future non-interest income.