CVBF

CVB Financial Corp. 10-Q Summary: Period Ended June 30, 2009

Business Context and Reporting Period

This report covers the quarterly period ended June 30, 2009, 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 a large accelerated filer and is not a shell company. As of August 4, 2009, there were 105,981,511 shares of common stock outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Earnings Decline: Net earnings decreased by $4.3 million (12.9%) year-over-year. This was driven primarily by a $37.3 million increase in the provision for credit losses and a $5.6 million increase in non-interest expenses.
• Provision Spike: The provision for credit losses surged to $42.0 million for the six-month period, compared to $4.7 million in the prior year, reflecting deteriorating economic conditions and an increase in classified loans.
• Net Interest Income Growth: Despite lower yields, net interest income increased by $16.8 million (18.1%) due to a significant reduction in interest expense (down $28.2 million) as the cost of interest-bearing liabilities dropped from 3.20% to 2.03%.
• Non-Interest Income: Total other operating income increased by $19.2 million (114.1%), largely due to a $21.5 million gain on the sale of investment securities.
• Asset Quality: Non-performing assets rose to $55.3 million (0.86% of total assets) from $24.2 million at year-end 2008. Net charge-offs totaled $21.2 million for the six months ended June 30, 2009.

Guidance, Outlook, and Risks

• Subsequent Event: On July 27, 2009, the Company consummated a public offering of 22,655,000 shares of common stock at $5.85 per share, raising approximately $132.5 million. Proceeds are intended to redeem preferred stock and repurchase the warrant issued to the U.S. Treasury under the Capital Purchase Program.
• Economic Outlook: Management notes significant deterioration in the California housing market, high unemployment, and a slowdown in construction activity. Approximately 22% of the loan portfolio is located in the Inland Empire region, which has been significantly impacted.
• Key Risks:
  • Credit Risk: Continued weakness in the local economy could lead to further loan delinquencies and defaults, necessitating additional provisions for credit losses.
  • Interest Rate Risk: The balance sheet is liability-sensitive; net interest margin may decrease in a rising rate environment.
  • Real Estate Exposure: The portfolio holds $2.3 billion in real estate loans and $303.6 million in construction loans, exposing the Company to declining property values.

Investor Verification Checklist

• Loan Loss Reserves: Verify the adequacy of the $74.8 million allowance for credit losses given the rapid increase in non-performing assets and net charge-offs.
• Real Estate Concentration: Assess the impact of the California housing downturn on the $2.3 billion real estate loan portfolio and $303.6 million construction loan portfolio.
• Capital Adequacy: Confirm the Company's ability to maintain "well-capitalized" status following the recent equity offering and potential future charge-offs.
• Securities Portfolio: Review the $2.27 billion available-for-sale securities portfolio for other-than-temporary impairment risks, particularly regarding municipal bonds and CMOs.
• FDIC Assessments: Monitor the impact of the one-time FDIC special assessment ($3.0 million) and ongoing insurance costs on operating expenses.