CVB Financial Corp. Reports Third Quarter Earnings for 2014

CVB Financial Corp. (NASDAQ:CVBF) and its subsidiary, Citizens Business Bank (“the Company”), announced earnings for the quarter ended September 30, 2014.

CVB Financial Corp. reported net income of $24.3 million for the third quarter of 2014, compared with $24.2 million for the third quarter of 2013. Diluted earnings per share were $0.23 for the third quarter of 2014, compared to $0.23 for the same period last year.

The allowance for loan losses was reduced by $1.0 million for the quarter. This follows a reduction of $7.6 million for the second quarter of 2014, $7.5 million for the first quarter of 2014, $6.8 million for the fourth quarter of 2013, $3.8 million for the third quarter of 2013, $6.2 million for the second quarter of 2013, and zero provision for loan losses for the previous eight fiscal quarters.

Chris Myers, President and CEO of Citizens Business Bank (“CBB”), commented, “We are pleased with the overall financial results for the third quarter of 2014, which included $85 million in overall loan growth and a $75 million increase in noninterest-bearing deposits, quarter-over-quarter.”

Net income of $24.3 million for the third quarter of 2014 produced a return on beginning equity of 11.46%, a return on average equity of 11.26% and a return on average assets of 1.31%. The efficiency ratio for the third quarter of 2014 was 46.91%, compared to 43.63% for the third quarter of 2013.

Net income totaled $78.4 million for the nine months ended September 30, 2014. This represented an increase of $8.1 million, or 11.55%, when compared with net income of $70.3 million for the same period of 2013. Diluted earnings per share were $0.74 for the nine months ended September 30, 2014, compared to $0.67 for the same period of 2013. Net income for the nine months ended September 30, 2014 produced a return on beginning equity of 13.59%, a return on average equity of 12.77% and a return on average assets of 1.49%. The efficiency ratio for the nine months ended September 30, 2014 was 47.04%, compared to 46.94% for the nine months ended September 30, 2013.

Interest income and fees on loans for the third quarter of 2014 totaled $46.9 million, which included $1.4 million of discount accretion from principal reductions, payoffs and improved credit loss experienced on covered loans acquired from San Joaquin Bank (“SJB”). This represented an increase of $3.4 million when compared to total interest income on loans of $43.6 million for the second quarter of 2014. The second quarter included $1.5 million of SJB discount accretion, compared to $2.9 million of SJB discount accretion for the year ago quarter.

Noninterest income was $8.0 million for the third quarter of 2014, an increase of $959,000 over the second quarter of 2014 and an increase of $3.1 million over the third quarter of 2013. The net decrease in the FDIC loss sharing asset was $479,000 for the third quarter of 2014, compared to a $1.5 million net decrease for the second quarter of 2014 and a $3.2 million net decrease for the third quarter of 2013.

Noninterest expense for the third quarter of 2014 was $32.5 million, compared to $31.3 million for the second quarter of 2014 and $25.7 million for the third quarter of 2013. The quarter-over-quarter increase was principally due to expenses related to the acquisition of American Security Bank (“ASB”). For the three and nine months ended September 30, 2014, non-recurring ASB acquisition related costs were $640,000 and $1.9 million, respectively. In the latter half of the third quarter, we converted the ASB core operating system into the CBB application infrastructure, consolidated two branch locations, and closed two electronic banking vestibules. We should realize greater cost synergies in the fourth quarter due to these consolidations and closures. Noninterest expense for the third quarter of 2014 also included a $1.3 million reduction of the reserve for unfunded loan commitments. As a percentage of average assets, noninterest expense was 1.75%, compared to 1.79% for the second quarter of 2014 and 1.58% for the third quarter of 2013.

Net Interest Income and Net Interest Margin

Net interest income, before provision for loan losses, was $61.2 million for the third quarter of 2014. This was an increase of $4.0 million from $57.2 million for the second quarter of 2014 and an increase of $7.2 million from $54.0 million for the third quarter of 2013. Excluding the impact of the yield adjustment on covered loans, our net interest margin (tax equivalent) was 3.53% for the third quarter of 2014, compared to 3.46% for the second quarter of 2014, and 3.48% for the third quarter of 2013. Total average earning asset yields (excluding the discount on covered loans) increased to 3.76% for the third quarter of 2014 from 3.70% for the second quarter of 2014 and 3.75% for the third quarter of 2013. Total cost of funds was 0.25% for the third quarter of 2014, compared to 0.26% for the second quarter of 2014. Cost of funds was 0.29% for the third quarter of 2013.

Income Taxes

Our effective tax rate for the nine months ended September 30, 2014 was 36.25%, compared with 33.50% for the same period of 2013. Our estimated annual effective tax rate varies depending upon tax-advantaged income as well as available tax credits. We benefited from approximately $1.1 million of enterprise zone tax credits in the first half of 2013, many of which have been eliminated in 2014.

Assets

The Company reported total assets of $7.42 billion at September 30, 2014. This represents an increase of $757.9 million, or 11.37%, from total assets of $6.66 billion at December 31, 2013. Earning assets of $7.05 billion at September 30, 2014 increased $722.0 million, or 11.42%, when compared with $6.32 billion at December 31, 2013. The increase in earning assets was primarily due to a $496.2 million increase in investment securities, a $156.3 million increase in total loans, and a $128.1 million increase in interest-earning deposits with the Federal Reserve Bank. This was partially offset by a $51.7 million decrease in interest-earning deposits with other institutions.

Total assets of $7.42 billion at September 30, 2014 increased $865.6 million, or 13.20%, from total assets of $6.56 billion at September 30, 2013. Earning assets totaled $7.05 billion at September 30, 2014, an increase of $868.6 million, or 14.06%, when compared with earning assets of $6.18 billion at September 30, 2013. The increase in earning assets was primarily due to a $542.5 million increase in investment securities, a $261.6 million increase in total loans, and a $130.3 million increase in interest-earning deposits with the Federal Reserve Bank. This was partially offset by a $51.7 million decrease in interest-earning deposits with other institutions and a $14.1 million decrease in FHLB stock.

Investment Securities

Investment securities were $3.16 billion at September 30, 2014, an increase of $496.2 million from $2.67 billion at December 31, 2013, and an increase of $542.5 million from $2.62 billion at September 30, 2013. As of September 30, 2014, we had a pre-tax unrealized gain of $31.2 million on our overall securities portfolio.

MBS totaled $2.24 billion at September 30, 2014, compared to $1.75 billion at December 31, 2013. Virtually all of our mortgage-backed securities are issued by Freddie Mac or Fannie Mae, which have the implied guarantee of the U.S. Government. We have one Alt-A bond, with a carrying value of $1.6 million as of September 30, 2014, which has had $1.9 million in net other-than-temporary impairment (“OTTI”) loss to date since it was purchased in early 2008. No additional OTTI was recorded for the quarter ended September 30, 2014.

Our municipal securities, totaling $588.0 million, are located in 29 states, and approximately $27.5 million, or 4.7%, are located within the state of California. Our largest concentrations of holdings are in Michigan at 12.8%, New Jersey at 10.8% and Texas at 8.7%. All municipal bond securities are performing.

In the third quarter of 2014, we purchased $253.8 million of MBS with an average yield of 2.09%. Our new purchases of MBS have an average duration of approximately four years. We also purchased $7.7 million in municipal securities with an average tax-equivalent yield of 3.79%.

Loans

Total loans and leases, net of deferred fees and discount on covered loans, totaled $3.71 billion at September 30, 2014. This was an increase of $156.3 million, or 4.40%, from December 31, 2013 and an increase of $85.3 million, or 2.36%, from June 30, 2014. Quarter-over-quarter, non-covered loans increased by $91.6 million, and covered loans decreased by $6.3 million. The $91.6 million quarter-over-quarter increase in non-covered loans was due to increases of $65.1 million in commercial real estate loans, $12.9 million in dairy & livestock and agribusiness loans, $7.8 million in construction loans, and $6.3 million in SFR mortgage loans.

Total loans and leases, net of deferred fees and discount on covered loans, of $3.71 billion at September 30, 2014, increased by $261.5 million, or 7.59%, from $3.44 billion at September 30, 2013. Non-covered loans increased by $292.5 million year-over-year, while covered loans declined by $31.0 million. The year-over-year increase in total loans included approximately $236 million of loans as a result of the ASB acquisition on May 15, 2014.

Deposits & Customer Repurchase Agreements

Deposits of $5.76 billion and customer repurchase agreements of $528.8 million totaled $6.29 billion at September 30, 2014. This represents an increase of $754.2 million, or 13.63%, when compared with total deposits and customer repurchase agreements of $5.53 billion at December 31, 2013. Deposits and customer repurchase agreements increased by $826.7 million, or 15.14%, when compared with $5.46 billion in total deposits and customer repurchase agreements reported at September 30, 2013.

Noninterest-bearing deposits were $3.04 billion at September 30, 2014, an increase of $474.1 million, or 18.50%, compared to $2.56 billion at December 31, 2013, and an increase of $498.6 million, or 19.64%, when compared to September 30, 2013. At September 30, 2014, noninterest-bearing deposits were 52.73% of total deposits, compared to 52.41% at December 31, 2013 and 51.85% at September 30, 2013.

Our average cost of total deposits was 0.09% for the quarter ended September 30, 2014, compared to 0.10% for the same period last year. Our cost of total deposits including customer repurchase agreements was 0.10% for the quarter ended September 30, 2014, compared to 0.12% for the same period of 2013.

FHLB Advances, Other Borrowings and Debentures

We had $199.4 million in FHLB advances at September 30, 2014, compared to $199.2 million at December 31, 2013 and $199.1 million at September 30, 2013.

At September 30, 2014, we had $25.8 million of junior subordinated debentures, unchanged from December 31, 2013 and September 30, 2013.

Asset Quality

We have separated the discussion of asset quality into two sections: non-covered loans and covered loans. The non-covered loans represent the legacy and ongoing Citizens Business Bank loans and exclude all loans acquired in the SJB acquisition. The SJB loans are “covered” loans as defined in the loss sharing agreement with the FDIC, which expired October 16, 2014. These loans were marked to fair value at the acquisition date.

Citizens Business Bank Asset Quality (Non-covered loans)

The allowance for loan losses decreased to $59.6 million at September 30, 2014, compared to $61.0 million at June 30, 2014 and $75.2 million at December 31, 2013. The quarter-over-quarter decrease was primarily due to a $1.0 million reduction in the allowance for loan losses for the third quarter of 2014, principally due to improved credit quality. The allowance for loan losses was 1.67%, 1.75%, 2.11%, 2.22%, and 2.46% of total non-covered loans and leases outstanding at September 30, 2014, June 30, 2014, March 31, 2014, December 31, 2013, and September 30, 2013, respectively.

Nonperforming loans, defined as nonaccrual loans and nonperforming troubled debt restructured loans (“TDR’s”), were $37.1 million at September 30, 2014, or 1.04% of total loans. This compares to nonperforming loans of $44.0 million, or 1.26% of total loans, at June, 30, 2014 and $40.0 million, or 1.18% of total loans, at December 31, 2013. The $37.1 million in nonperforming loans at September 30, 2014 are summarized as follows: $14.8 million in commercial real estate, $9.7 million in commercial construction, $6.7 million in commercial and industrial, $4.0 million in SFR mortgage, $1.5 million in dairy & livestock and agribusiness, and $461,000 in other loans. The $6.9 million decrease in nonperforming loans quarter-over-quarter was principally due to decreases of $3.7 million in nonperforming dairy & livestock and agribusiness loans, $2.8 million in nonperforming SFR mortgage loans, and $303,000 in nonperforming commercial and industrial loans.

We had $6.2 million in OREO at September 30, 2014, compared to $6.5 million in OREO at December 31, 2013 and September 30, 2013. As of September 30, 2014, we had five OREO properties compared with two OREO properties at December 31, 2013. During the first nine months of 2014, we acquired three OREO properties from ASB and added three additional properties. We sold three properties with a carrying value of $2.2 million, realizing a net gain on sale of $203,000.

At September 30, 2014, we had loans delinquent 30 to 89 days of $688,000. This compares to $3.3 million at December 31, 2013 and $1.7 million at September 30, 2013. As a percentage of total loans, delinquencies, excluding nonaccruals, were 0.02% at September 30, 2014, 0.10% at December 31, 2013, and 0.05% at September 30, 2013. All loans delinquent 90 days or more were categorized as nonperforming.

At September 30, 2014, we had $55.6 million in performing TDR loans, compared to $61.9 million in performing TDR loans at June 30, 2014 and $67.0 million in performing TDR loans at December 31, 2013. In terms of the number of loans, we had 39 performing TDR loans at September 30, 2014, 42 performing TDR loans at June 30, 2014, and 47 performing TDR loans at December 31, 2013.

Nonperforming assets, defined as non-covered nonaccrual loans and other real estate owned, totaled $43.3 million at September 30, 2014, $46.4 million at December 31, 2013, and $56.0 million at September 30, 2013.

Classified loans are loans that are graded “substandard” or worse. At September 30, 2014, classified loans totaled $147.2 million, compared to $156.8 million at June 30, 2014, $219.0 million at March 31, 2014 and $245.6 million at December 31, 2013. The $9.6 million quarter-over-quarter reduction in classified loans was primarily due to a decrease of $6.6 million in our classified dairy & livestock portfolio.

San Joaquin Bank Asset Quality (Covered loans)

At September 30, 2014, we had $140.6 million of gross loans remaining from SJB with a carrying value of $132.4 million, compared to $148.2 million of gross loans at June 30, 2014 with a carrying value of $138.7 million. We had $173.1 million of gross loans from SJB with a carrying value of $160.3 million at December 31, 2013. Of the gross loans, we had $7.9 million in nonperforming loans as of September 30, 2014, or 5.65%, compared to $18.5 million in nonperforming loans at December 31, 2013, or 10.70%. We had three properties in OREO totaling $590,000 at September 30, 2014, compared to two properties totaling $655,000 at June 30, 2014 and two properties totaling $504,000 at December 31, 2013. For the nine months ended September 30, 2014, there were two additions to OREO totaling $340,000. During the first nine months of 2014, we sold one property with a carrying value of $189,000.

CitizensTrust

CitizensTrust had approximately $2.45 billion in assets under management and administration, including $1.84 billion in assets under management, as of September 30, 2014. Revenues were $2.0 million for the third quarter of 2014 and $6.1 million for the first nine months of 2014, unchanged from the same periods in 2013. CitizensTrust provides trust, investment and brokerage related services, as well as financial, estate and business succession planning.

Corporate Overview

CVB Financial Corp. is the holding company for Citizens Business Bank. The Bank is the largest financial institution headquartered in the Inland Empire region of Southern California with assets of $7.42 billion. Citizens Business Bank serves 42 cities with 40 Business Financial Centers, six Commercial Banking Centers and three trust office locations serving the Inland Empire, Los Angeles County, Orange County, San Diego County and the Central Valley areas of California.

Shares of CVB Financial Corp. common stock are listed on the NASDAQ under the ticker symbol of CVBF. For investor information on CVB Financial Corp., visit our Citizens Business Bank website at www.cbbank.com and click on the “Investors” tab.

Conference Call

Management will hold a conference call at 7:30 a.m. Pacific time/10:30 a.m. Eastern time on Thursday, October 23, 2014 to discuss the Company’s third quarter 2014 financial results.

To listen to the conference call, please dial (877) 506-3368. A taped replay will be made available approximately one hour after the conclusion of the call and will remain available through November 6, 2014 at 6:00 a.m. Pacific time/9:00 a.m. Eastern time. To access the replay, please dial (877) 344-7529, passcode 10053008.

The conference call will also be simultaneously webcast over the Internet; please visit our Citizens Business Bank website at www.cbbank.com and click on the “Investors” tab to access the call from the site. Please access the website 15 minutes prior to the call to download any necessary audio software. This webcast will be recorded and available for replay on the Company’s website approximately two hours after the conclusion of the conference call, and will be available on the website for approximately 12 months.

Disclosure

This press release contains certain non-GAAP financial disclosures for tangible common equity, earnings before income taxes, which we refer to as “pre-tax earnings”, and net interest income and net interest margin adjusted for discount accretion on covered loans. The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. Please refer to the tables at the end of this release for a presentation of performance ratios in accordance with GAAP and a reconciliation of the non-GAAP financial measures to the GAAP financial measures.

Safe Harbor

Certain matters set forth herein (including the exhibits hereto) constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including forward-looking statements relating to the Company's current business plans and expectations regarding the Company’s future financial position and operating results. These forward-looking statements are subject to risks and uncertainties that could cause actual results, performance and/or achievements to differ materially from those projected. These risks and uncertainties include, but are not limited to, local, regional, national and international economic and market conditions and events and the impact they may have on us and our customers; our ability to attract deposits and other sources of funding or liquidity; supply and demand for real property inventory and periodic deterioration in values of California real estate, both residential and commercial; a prolonged slowdown or decline in construction or sales activity; changes in the financial performance and/or condition of our borrowers or certain key vendors or counterparties; changes in the level of nonperforming assets and charge-offs; the cost or effect of acquisitions we may make; the effect of changes in laws and regulations (including laws, regulations and judicial decisions concerning financial reforms, taxes, banking capital levels, securities and securities trading and hedging, employment, executive compensation, insurance, vendor management and information security) with which we and our subsidiaries must comply; changes in estimates of future reserve requirements and minimum capital requirements based upon the periodic review thereof under relevant regulatory and accounting requirements, including changes in the Basel Committee framework establishing capital standards for credit, operations and market risk; inflation, interest rate, securities market and monetary fluctuations; changes in government interest rates or monetary policies; changes in the amount and availability of deposit insurance; cyber-security threats, including loss of system functionality or theft or loss of Company or customer data or money; political instability; acts of war or terrorism, or natural disasters, such as earthquakes, or the effects of pandemic diseases; the timely development and acceptance of new banking products and services and the perceived overall value of these products and services by customers and potential customers; the Company’s relationships with and reliance upon vendors with respect to the operation of certain of the Company key internal and external systems and applications; changes in consumer spending, borrowing and savings preferences or habits; technological changes and the expanding use of technology in banking (including the adoption of mobile banking applications); the ability to retain and increase market share, retain and grow customers and control expenses; changes in the competitive environment among financial and bank holding companies, banks and other financial service providers; continued volatility in the credit and equity markets and its effect on the general economy or local or regional business conditions; fluctuations in the price of the Company’s stock; the effect of changes in accounting policies and practices, as may be adopted from time-to-time by the regulatory agencies, as well as by the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard-setters; changes in our organization, management, compensation and benefit plans, and our ability to retain or expand our management team and/or our board of directors; the costs and effects of legal, compliance and regulatory changes and developments, including the resolution of legal proceedings or regulatory or other governmental inquiries or investigations and the results of regulatory examinations or reviews; our success at managing the risks involved in the foregoing items and all other factors set forth in the Company's public reports including its Annual Report on Form 10-K for the year ended December 31, 2013, and particularly the discussion of risk factors within that document. The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements except as required by law.