Few areas of the country have been as hard hit by the real estate downturn as Southern California's Inland Empire, and, in the last few months, some banks there that were active lenders to residential developers have seen their loan losses mount and their market values plummet.
But one banking company that has largely escaped the damage is the $6.4 billion-asset CVB Financial Corp. in Ontario, Calif., which last week reported earnings that topped last year's first-quarter profits by nearly 7% and beat analysts' estimates by 2 cents.
While the temptation was there to ramp up its construction lending as the Inland Empire's population was increasing by about 25% this decade, chief executive officer Christopher D. Myers said CVB's banking unit, Citizens Business Bank, resisted because it felt too many potential borrowers were unwilling to put their own money into a project.
"We certainly were interested in the residential construction market, because the margins are very good," Mr. Myers said in an interview this week. "But we stuck to our guns in terms of our credit underwriting standards" whereas "a lot of other institutions got very aggressive."
The Inland Empire, which consists of Riverside and San Bernardino counties, has been one of the fastest-growing areas of the country, as people and businesses continue to flee the costlier coastal areas for the more affordable inland valleys.
But building in the region has been so fast and furious that supply now exceeds demand, and many residential developers are struggling to sell newly built homes and repay their bank loans.
Two other banking companies based there, the $4.4 billion-asset PFF Bancorp Inc. in Rancho Cucamonga and the $2.5 billion-asset Vineyard National Bancorp in Corona, have had significant loan losses in recent quarters because nearly a third of their portfolios are in residential construction loans.
Only about 4% of Citizens Business Bank's loans are in residential construction.
The bank primarily makes commercial real estate, business operating, and agricultural loans, Mr. Myers said. It has expertise in these lending lines, which helps attract more customers who tend to stick with Citizens longer than residential developers. Moreover, the bank can generally get more core deposits from such customers, as well as fee income for deposit services.
CVB's first-quarter net income rose 6.68%, to $16.2 million, or 19 cents a share. Much of the earnings increase was attributed to a 23-basis-point increase in its margin, to 3.25%, from a year earlier, due mainly to deposits and borrowings repricing faster than loans. (More than 50% of CVB's loans are fixed-rate.)
Perhaps more notably, CVB's earnings were not hurt by loss provisions, which analysts had expected to be higher simply because of the market CVB is in. CVB's provision was $1.7 million in the first quarter; it had no provision in the first quarter of 2007.
In contrast, PFF warned investors on April 3 that it was expecting loss provisions for the quarter that ended March 31 to exceed $168 million. PFF is not expected to report its earnings for the quarter and its just-concluded fiscal year until May, but analysts predict it could post a quarterly loss of more than $66 million. Its shares are down 88% from their 52-week high.
Likewise, Vineyard has said that a recent evaluation of its loan portfolio could result in higher losses than it has previously reported; at yearend the company had about $39.6 million of nonaccruing loans.
Aaron J. Deer, an analyst at Sandler O'Neill & Partners LP in San Francisco, said CVB has benefited from having a wide mix of loans: 50% are commercial real estate loans, 10% are business operating loans, 15% are ag loans, 15% are consumer loans, including mortgages, and 10% are construction and land development loans, including those for commercial projects.
"They've got a fairly good diversity of business, which helps them to reduce their overall risk exposure," Mr. Deer said.
In the first quarter CVB's ratio of nonperforming loans to total loans was 0.11%, versus 0% a year earlier.
CVB recorded a higher provision in the fourth quarter — $4 million — which resulted in a 16% drop in net income, to $13.4 million. Mr. Deer said the company had needed to increase its reserves, which had dropped to historically low levels. Still, even with the $4 million provision CVB's ratio of nonperforming loans to total loans was just 0.04% at Dec. 31, against 0% a year earlier.
Brett Rabatin, an analyst at First Horizon National Corp.'s FTN Midwest Securities Research Corp. in Nashville, said CVB's credit quality has also been solid because of its stellar underwriting standards. During better times, its lenders did not waver on terms to get more deals.
CVB's loan-to-value ratios range between 60% and 70%, where most of its peers' LTV values are above 70%, Mr. Rabatin said.
Joseph K. Morford 3rd, an analyst with Royal Bank of Canada's RBC Capital Markets in San Francisco, said CVB's traditional business bank model also helps it bring in more low-cost deposits from business customers. More than 37% of its deposits do not bear interest, which helps to lower its cost of funds. In the first quarter CVB's cost of funds fell to 3.45%, from 4.15% for the first quarter of 2007.
Mr. Morford said CVB also has a higher-than average level of investment securities on its books — $2.55 billion at March 31. Since most of its investments have not matured, it has not had to reinvest at lower rates and reduce its margin. "They are clearly bucking the trend on their margin — they have one of the few banks in the West to see their margin go up," Mr. Morford said.
He said he expects CVB's margin to continue to rise as the effects of the Federal Reserve Board's rate cuts are fully realized in future quarters, especially if the Fed cuts rates further. He raised his 2008 earnings-per-share estimate to 82 cents, from 78 cents.
