CVBF

Business Context and Reporting Period

Company: CVB Financial Corp. (CVB)
Reporting Period: Fiscal year ended December 31, 2009
Business Overview: CVB is a bank holding company headquartered in Ontario, California, with its principal asset being Citizens Business Bank. The company operates 46 Business Financial Centers and 5 Commercial Banking Centers across Southern and Central California. Its primary business involves traditional banking activities, including accepting deposits and extending commercial, real estate, and consumer loans.

Key Event: On October 16, 2009, CVB acquired substantially all assets and liabilities of San Joaquin Bank (SJB) in an FDIC-assisted transaction. This acquisition added $489.1 million in loans, $530.0 million in deposits, and resulted in a pre-tax bargain purchase gain of $21.1 million.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Earnings: Increased by $2.3 million (3.72%) to $65.4 million. This increase was driven by a $28.6 million rise in net interest income and a $21.1 million gain on the SJB acquisition, partially offset by a $53.9 million increase in the provision for credit losses.
• Provision for Credit Losses: Rose significantly to $80.5 million in 2009 from $26.6 million in 2008, reflecting deteriorating economic conditions and an increase in classified loans.
• Net Interest Income: Increased 14.76% due to a substantial decrease in interest expense ($50.3 million reduction) outweighing a decrease in interest income ($21.8 million reduction). The cost of interest-bearing liabilities dropped to 1.97% from 3.01%.
• Deposits: Grew by $930.5 million (26.52%) to $4.44 billion, driven by organic growth and the SJB acquisition.
• Capital Structure: In July 2009, the company raised $132.5 million in gross proceeds from a common stock offering. These proceeds were used to repurchase the Series B Preferred Stock and warrant issued to the U.S. Treasury under the TARP Capital Purchase Program in December 2008.

Guidance, Outlook, and Risks

Management Commentary: Management notes that while the company remains well-capitalized, the economic downturn in California, particularly in the real estate and construction sectors, continues to impact credit quality. The company expects continued weakness in commercial real estate and potential increases in loan delinquencies.

Risks and Contingencies:

• Credit Risk: Significant exposure to California real estate markets. Non-performing assets (non-covered) increased to 1.81% of total loans. The allowance for credit losses was increased to 3.02% of non-covered loans.
• Acquisition Risk: Integration of San Joaquin Bank assets carries risks regarding loan performance and customer retention, though an FDIC loss-sharing agreement covers 80% of losses on covered assets up to $144 million.
• Interest Rate Risk: The balance sheet is liability-sensitive. A rise in interest rates could compress the net interest margin, while a decline could expand it.
• Regulatory Risk: Increased FDIC assessments and potential new regulations regarding capital and executive compensation.

Investor Verification Checklist

• Credit Quality Trends: Verify the trajectory of non-performing loans and the adequacy of the allowance for credit losses given the concentration in California real estate.
• FDIC Loss Sharing: Review the specific terms of the loss-sharing agreement with the FDIC regarding the San Joaquin Bank acquisition to understand the extent of protection against future loan losses.
• Capital Adequacy: Confirm that the company maintains "well-capitalized" status under regulatory guidelines following the repayment of TARP funds and the increase in loan loss provisions.
• Deposit Stability: Assess the composition of the $930 million deposit growth to determine the stability of the funding base (e.g., non-interest bearing vs. time deposits).
• Non-Interest Income: Analyze the sustainability of the $28.4 million gain on sale of securities and the $21.1 million acquisition gain, as these were significant contributors to 2009 earnings.