CVBF

CVB Financial Corp. 10-Q Summary: Quarter Ended September 30, 2007

Business Context and Reporting Period

This report covers the quarterly period ended September 30, 2007, 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. A significant event during the period was the acquisition of First Coastal Bancshares (FCB) in June 2007, expanding the Company's geographic footprint to the South Bay region of Los Angeles County.

Key Financial Metrics

Material Changes vs. Prior Period

• Decline in Net Earnings: Net earnings decreased 10.8% for the quarter and 13.7% year-to-date compared to the prior year. This was driven by a compression in the net interest margin and increased operating expenses.
• Net Interest Margin Compression: The tax-equivalent net interest margin declined to 3.02% for the nine months ended September 30, 2007, from 3.42% in the prior year. This resulted from a 67 basis point increase in the cost of interest-bearing liabilities (to 4.18%) outpacing a 20 basis point increase in the yield on earning assets (to 6.20%).
• Increased Operating Expenses: Non-interest expenses rose 20.3% for the quarter and 10.8% year-to-date. Increases were primarily due to salaries, occupancy costs, and amortization of intangibles associated with the FCB acquisition.
• Asset Growth: Total loans increased 7.9% to $3.31 billion compared to December 31, 2006, while investment securities decreased 7.5% as the Company allowed the portfolio to roll off to fund loan growth.
• Stock Repurchases: The Company repurchased approximately 2.72 million shares of common stock for $30.0 million during the first nine months of 2007.

Outlook, Risks, and Management Commentary

• Interest Rate Sensitivity: The Company is currently liability-sensitive, meaning interest-bearing liabilities reprice faster than earning assets. Management notes that net interest margin is likely to decrease in sustained periods of rising interest rates. A simulation model indicated a 1.83% decrease in net interest income if rates rose 200 basis points.
• Acquisition Integration: The acquisition of First Coastal Bancshares contributed to asset growth and increased intangible amortization expenses. Management expects continued integration costs.
• Credit Quality: Non-performing assets were $3.5 million (0.10% of total loans) at September 30, 2007, up from zero at December 31, 2006. Impaired loans totaled $2.9 million. Management recorded no provision for credit losses in 2007, attributing the increase in the allowance primarily to the acquisition of FCB's reserves.
• Liquidity: The loan-to-deposit ratio averaged 92.53% for the first nine months of 2007, up from 78.65% in the prior year, indicating increased reliance on borrowed funds and loan repayments for liquidity.
• Correction of Error: The Company revised prior year financial statements to correct immaterial errors related to tax credits and FHLB dividend income, resulting in a decrease to previously reported net income.

Investor Verification Checklist

• Verify the sustainability of the loan-to-deposit ratio (92.53%) and the Company's reliance on wholesale funding (borrowed funds) versus core deposits.
• Monitor the trend in the cost of interest-bearing liabilities versus loan yields to assess future net interest margin pressure.
• Review the composition of the $3.5 million in non-performing assets and the adequacy of the $30.4 million allowance for credit losses given the economic slowdown in the housing sector.
• Assess the impact of the FCB acquisition on future amortization expenses and the integration of the new South Bay branches.
• Confirm the status of the stock repurchase program, noting that 5.06 million shares remain authorized for purchase under the August 2007 program.