11:56 AM PDT on Wednesday, August 11, 2010

Special to The Press-Enterprise

CVB Financial Corp. shares lost 22.3 percent of their value Tuesday after the parent company of Citizens Business Bank said it received a subpoena from the Securities and Exchange Commission, seeking information about how the company handles troubled loans.

CVB Financial received the subpoena from the Los Angeles office of the SEC on July 26, according to a quarterly 10-Q filing by the Ontario-based bank late Monday.

“I can’t really comment beyond what was in our filing,” said Christopher D. Myers, president and chief executive officer of CVB Financial. “I have full confidence that we will go through this investigation and our management practices will prevail.”

The subpoena requests information about the bank’s loan underwriting guidelines, its allowance for credit losses and the way it calculates its allowance for loan losses, according to the quarterly filing. The federal regulator also wants to know about CVB’s methodology for grading loans and how it makes provisions for loan losses.

CVB shares declined $2.30, or 22.3 percent, to close Tuesday at $8 per share on the Nasdaq stock market. By the end of trading Tuesday, more than 13.17 million shares had changed hands, well beyond the stock’s average daily activity of 851,848 shares, according to Nasdaq.

The subpoena was issued five days after CVB announced record earnings of $19 million, or 18 cents per share in the second quarter, compared to income of $15.9 million, or 17 cents per share, for the same period last year. For the second quarter, CVB set aside an $11 million provision for credit losses, the bank said.

Overall, the allowance for credit losses increased from $108.9 million as of Dec. 31, 2009, to $118.5 million as of June 30, 2010. The increase was primarily due to a provision for credit losses of $23.2 million during the first six months of 2010, offset by net loan charge-offs of $13.6 million.

The subpoena also requests information about presentations CVB has given or conferences the bank has attended with analysts, brokers, investors or prospective investors.

“We do not know the events that caused the SEC to request information on these subjects, and the SEC does not make this information known,” CVB said in the filing. However, the subpoena stated the investigation does not mean the SEC has concluded “that you or anyone else has broken the law.”

“CVB is fully complying with the SEC’s requests, and we look forward to a speedy resolution,” the company said.

In a research report issued Tuesday, Cantor Fitzgerald analyst Michael Diana attributed the SEC’s investigation to allegations by short sellers “that CVB Financial is in effect a fraud,” but to date “have been frustrated in their attempts to convince others.”

On May 10, federal regulators completed their annual examination of CVB Financial, “which judging by the Q2 results was a ‘clean’ exam.”

“Our view of the SEC subpoena … is that the shorts may have written the SEC a letter that was so inflammatory that, especially in the current regulatory environment, the SEC decided that is had no choice but to pursue an investigation,” Diana wrote.

“We believe that there is a high probability that the SEC investigation will have the same positive outcome as the examination recently completed by bank regulators.”

Diana also reiterated his firm’s buy rating on CVB shares, with a $13 target price based on their 2011 earnings per share estimate of 91 cents.

“CVB Financial runs a pretty conservative operation,” said Michael R. Natzic, senior vice president with Stone & Youngberg’s Community Bank Group in Big Bear Lake. “I don’t really have any major concerns at the moment. Like everyone else, I’m waiting for more news.”


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