CVB Financial Corp. — FY 2011 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2011, with year-end balance-sheet comparisons to December 31, 2010. CVB Financial is a California bank holding company whose principal subsidiary, Citizens Business Bank, serves businesses, professionals and individuals in Southern and Central California. The Bank reported 42 Business Financial Centers and five Commercial Banking Centers at year-end.
Financial performance and condition
| Metric | FY 2011 / Dec. 31, 2011 | Prior comparable period |
|---|---|---|
| Total assets | $6.483 billion | $6.437 billion at year-end 2010 |
| Net interest income | $234.7 million | $259.3 million in 2010 |
| Other operating income | $34.2 million | $57.1 million in 2010 |
| Net earnings | $81.7 million; diluted EPS $0.77 | $62.9 million; diluted EPS $0.59 in 2010 |
| Net interest margin | 3.87%; 4.04% on a tax-equivalent basis | 4.11%; 4.28% tax-equivalent in 2010 |
| Efficiency ratio | 53.86% | 66.02% in 2010 |
| Deposits | $4.605 billion | $4.519 billion at year-end 2010 |
| Loans, net | $3.383 billion, including covered loans | $3.642 billion at year-end 2010 |
| Cash and cash equivalents | $345.3 million | $404.3 million at year-end 2010 |
| Stockholders’ equity | $714.8 million; 11.03% of assets | $643.9 million; 10.00% of assets |
| Operating cash flow | $130.0 million | $102.9 million in 2010 |
Net earnings rose 29.9% year over year, chiefly because the provision for credit losses fell by $54.1 million and operating expenses declined by $27.5 million. Those improvements more than offset lower net interest income and other operating income. The 2010 comparison also included $38.9 million of securities-sale gains, versus none in 2011.
Credit costs and asset quality improved: the provision for credit losses was $7.1 million, compared with $61.2 million in 2010; non-covered nonaccrual loans were $62.7 million, down from $157.0 million; and non-covered nonperforming assets were $76.5 million, or 1.18% of assets, versus $162.3 million, or 2.52%. The non-covered allowance for credit losses was $94.0 million, or 2.92% of gross non-covered loans. Total net charge-offs, including covered loans, were approximately $18.4 million.
Year-end funding included $509.4 million of customer repurchase agreements, $448.7 million of FHLB and other borrowings, and $115.1 million of junior subordinated debentures. The loan-to-deposit ratio averaged 77.80% in 2011, down from 85.69% in 2010. The Company and Bank were well-capitalized; the Bank’s total risk-based, Tier 1 risk-based and leverage ratios were 18.63%, 17.36% and 10.92%, respectively.
Net cash used in investing activities was $86.7 million and net cash used in financing activities was $102.3 million, resulting in a $58.9 million decrease in cash and cash equivalents. The company declared $0.34 per share in cash dividends and repurchased about 1.59 million shares during 2011.
Material changes versus 2010
- Interest income declined $47.6 million, while interest expense fell $22.9 million; net interest income consequently decreased $24.6 million.
- The tax-equivalent yield on earning assets declined 59 basis points, partly offset by a 42-basis-point reduction in the cost of interest-bearing liabilities. Tax-equivalent net interest margin fell 24 basis points.
- Accelerated accretion on acquired San Joaquin Bank loans declined to $12.6 million from $26.7 million. Management expected further declines as acquired loans run off.
- Other operating expenses fell to $141.0 million from $168.5 million, including lower borrowing prepayment penalties ($3.3 million versus $18.7 million). Professional services increased, in part due to legal and SEC-related costs.
- Available-for-sale securities increased to $2.202 billion from $1.792 billion; the net unrealized holding gain rose to $71.5 million from $11.1 million. The portfolio’s weighted-average yield declined to 2.99% from 3.25%.
- Non-covered loans declined about 4.6%, including lower construction, dairy and livestock, and mortgage-pool balances. Deposits increased, with noninterest-bearing deposits reaching 44.0% of year-end deposits versus 37.7% a year earlier.
Outlook, risks and unusual items
The filing provides no formal numerical earnings or revenue guidance. Management described recent improvement in nonperforming loans and classified assets but cautioned that economic weakness, especially in California real estate, could impair loan demand and credit quality. Management continued to consider organic growth and acquisitions, including FDIC-assisted transactions.
- Concentrated credit exposure: The portfolio is heavily real-estate-oriented and concentrated in California. Commercial real estate loans totaled $2.17 billion; construction loans totaled $94.8 million. Dairy, livestock and agribusiness loans were also exposed to commodity and feed-price volatility.
- Interest-rate exposure: Management characterized the balance sheet as slightly liability-sensitive. Its model estimated net interest income would decline 12.78% under a 200-basis-point rate increase and rise 0.29% under a 100-basis-point decrease; these are model estimates, not forecasts.
- San Joaquin Bank / FDIC loss sharing: At year-end, covered assets were subject to FDIC loss-sharing terms with finite coverage periods. The filing reports $59.5 million in the loss-sharing asset and notes that reimbursement depends on compliance with the agreement. Acquired-loan discount accretion is expected to diminish over time.
- Legal matters: The Company was cooperating with an SEC investigation into its credit-loss methodology, underwriting, loan grading and related presentations. A consolidated securities class action was dismissed with leave to amend; plaintiffs filed an amended complaint on February 27, 2012. A shareholder derivative action remained pending. The Company said it could not estimate a loss range or determine whether a loss was probable; it had no significant litigation reserves at year-end.
- Other items: A $656,000 impairment loss was recognized on an investment security. The Company recorded no goodwill impairment. Dodd-Frank and prospective Basel III requirements could increase compliance costs and capital or liquidity requirements. The Company reported effective internal control over financial reporting, and KPMG issued unqualified opinions on the financial statements and internal controls.
Investor verification priorities
- Verify the sustainability of earnings growth given the large year-over-year reduction in credit-loss provisions and the decline in recurring net interest income.
- Track nonperforming loans, charge-offs, troubled debt restructurings, OREO and allowance adequacy, particularly for California commercial real estate and construction exposure.
- Assess the runoff of San Joaquin Bank acquired loans, remaining discount accretion, FDIC reimbursements and compliance with loss-sharing terms.
- Monitor deposit mix and funding costs, borrowings and repurchase agreements, liquidity, and sensitivity to rising rates.
- Follow the SEC investigation and amended securities complaint, including any subsequent disclosure of outcomes, costs or potential liabilities.