OREANDA-NEWS. Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDR) and Viability Rating (VR) of CVB Financial Corp. (CVBF) and its primary bank subsidiary, Citizens Business Bank, at 'BBB'. The Rating Outlook remains Stable. A full list of rating actions is at the end of this rating action commentary.


IDR and VR

The affirmation of CVBF's ratings reflects the company's solid capital position, consistent and strong financial performance and stable and improving asset quality. The Stable Outlook reflects Fitch's expectation that CVBF will continue to deliver sufficient, albeit spread-reliant core earnings while maintaining strong credit performance relative to peers.

CVBF's ratings remain solidly situated at their current levels given the company's asset and geographic concentrations. Loans secured by commercial real estate (CRE) account for just over 60% of total loans as of the second quarter of 2016 (2Q16). These CRE loans are largely concentrated in Los Angeles County, Orange County and the Inland Empire.

CVBF's non-performing assets (NPAs) ratio has shown significant improvement in recent years but at 1% is still one of the highest in the community bank peer group, although it is low based on long-term averages. The ratio is down from 3% at the end of 2014 as accruing troubled debt restructures (TDRs) have declined by nearly 50% in the first half of 2016. However, Fitch notes that CVBF's level of accruing TDRs remains a large portion of the bank's NPAs. At 2Q16, CVBF's accruing TDRs totalled $20.3 million, or 45% of total NPAs.

Fitch attributes part of this to CVBF's conservatism in not only recognizing TDRs but also ensuring a commercial credit has been cured under current market terms and conditions before taking it off TDR status. Therefore, Fitch expects NPAs to remain elevated versus similarly rated peers while the credit costs remain relatively lower.

CVBF's earnings continue to be some of the highest and most consistent within the community bank peer group as well as in Fitch's rating universe. The company's return on assets (ROA) over the past five quarters has averaged over 1.29%, driven by a fairly stable net interest margin (NIM), good cost controls and steady asset quality. Over the last year, a decline in assets yields and accretion income has been partially offset by interest recoveries. With a loan-to-deposit ratio of 64% at 2Q16, Fitch notes that management still has capacity to deploy cash and liquidity into loans.

Capital ratios continue to compare favourably relative to similarly rated peers and are supported by CVBF's good internal capital generation. Given the bank's previously noted concentrations, Fitch notes that robust capital levels help to support the current rating.

CVBF's Fitch Core Capital (FCC) ratio remains toward the top end of the peer group as do risk-based measures. Fitch expects CVBF to manage capital down over the intermediate term through repurchases and/or strategic acquisitions, which is encompassed in today's action.

Fitch notes that CVBF has not taken a provision in 21 quarters having released $38 million in provisions since 2013. While the bank continues to manage the reserve coverage ratio lower, it remains at the high end of the community bank peer group and stood at 1.44% of total loans the end of the 2Q16. The bank built an outsized reserve during the most recent financial crisis while remaining profitable.

Fitch is sensitive to potential credit deterioration CVBF's agribusiness and dairy & livestock loan portfolios given that these two portfolios account for around 5% of the bank's total loan portfolio as of 2Q16.

CVBF conducts most of its agribusiness and a portion of its dairy and livestock lending in the San Joaquin Valley. Significant drought conditions over the last few years have resulted in tighter operating margins and altered farmer's strategic plans in the area. Fitch notes that while there has been modest improvement in drought conditions, credit risk in this portfolio is expected to remain elevated in the near term.

Fitch believes CVBF's risk appetite is relatively conservative and views it as a rating strength and supports the current rating. Fitch notes that on average, CVBF's net charge-offs (NCOs) have consistently been lower than the industry and higher rated peers over the long term, pointing toward sound underwriting practices.

Even with consistent and high earnings, Fitch continues to view CVBF's earnings profile as a rating constraint relative to the Fitch rated bank universe. As a community bank, the company primarily relies on spread income for revenue generation. Net interest income through 2Q16 accounted for 88% of core revenue. This compares to the community bank average of between 70%-75%.

CVBF's liquidity and funding profile remain solid. The company consistently manages its loan-to-deposit ratio below the community bank peer group median which typically falls between 70%-80%. Fitch considers CVBF's ability to attract and maintain high-quality, low-cost deposits as a core competency and a ratings strength. Core deposits account for nearly 90% of total deposits based on regulatory definitions.


CVBF has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, CVBF is not systemically important and therefore, the probability of support is unlikely. The IDRs and VRs do not incorporate any support.


CVBF's preferred stock is notched five levels below its VR. These ratings are in accordance with Fitch's criteria and assessment of the instruments' non-performance and loss severity risk profiles. Thus, these ratings have been affirmed due to the affirmation of the VR. CVBF's preferred stock is notched 2x from the VR for loss severity, and 3x for non-performance.


The IDR and VR of CVBF are equalized with its operating company - Citizens Business Bank, reflecting its role as the bank holding company, which is mandated in the U. S. to act as a source of strength for its bank subsidiaries.


CVBF's uninsured deposit ratings at the subsidiary banks are rated one notch higher than the company's IDR and senior unsecured debt because U. S. uninsured deposits benefit from depositor preference. U. S. depositor preference gives deposit liabilities superior recovery prospects in the event of default.



CVBF's ratings are well-situated at 'BBB'. Upside is limited over the near-to-intermediate term given the relatively narrow business model and concentrated CRE loan portfolio. However, increased business and portfolio diversity could be a driver of positive rating momentum over the long term provided the company maintains its conservative risk management practices and continues to grow at a manageable rate.

Fitch expects CVBF to optimize its capital position either through share repurchases or strategic acquisitions. However, if capital management were to become more aggressive than Fitch's expectations, demonstrated by a greater than 200 basis points (bps) decline in the common equity tier 1 (CET 1) capital ratio over one year, negative rating action could ensue.

Fitch believes that asset quality improvement will moderate going forward and could even reverse nominally if credit metrics initiate a mean reverting path. However, if CVBF's credit trends reverse at a faster pace than peers, particularly if large loans become impaired or stressed or the agricultural portfolio deteriorates materially, negative rating action could be taken.

In the context of CVBF's spread reliant business model and while currently not expected, should CVBF's balance sheet prove to be significantly more liability sensitive than peers in a rising rate environment, negative rating action could also develop.


CVBF's Support Rating and Support Rating Floor are sensitive to Fitch's assumption as to capacity to procure extraordinary support in case of need.


All hybrid capital issued by CVBF and its subsidiaries is notched down from the VRs of CVBF in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. Their ratings are primarily sensitive to any change in the VRs of CVBF.


If CVBF became undercapitalized or increased double leverage significantly there is the potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies.


The ratings of long - and short-term deposits issued by CVBF and its subsidiaries are primarily sensitive to any change in the company's IDR. This means that should a Long-Term IDR be downgraded, deposit ratings could be similarly impacted.

Fitch has affirmed the following ratings with a Stable Outlook:

CVB Financial Corp.

--Long-Term Issuer Default Rating (IDR) at 'BBB';

--Short-Term IDR at 'F2';

--Viability Rating at 'bbb';

--Support floor at 'NF';

--Support at '5'.

Citizens Business Bank

--Long-Term IDR at 'BBB';

--Long-term deposit at 'BBB+';

--Short-Term IDR at 'F2';

--Short-term deposit at 'F2';

--Viability Rating at 'bbb';

--Support floor at 'NF';

--Support at '5'.

CVB Statutory Trust III

--Preferred stock at 'BB-'.