| CVB FINANCIAL CORP Item 1A Risk Factors Risk Factors That May Affect Future Results — In addition to the other information contained in this annual report, the following risks may affect us |
| If any of these risks occurs, our business, financial condition, operating results and prospects could be adversely affected |
| In addition to other information contained in this report, the following discusses certain factors which may adversely affect our business’ financial results and operations and should be considered in evaluating the Company |
| Our Southern and Central California business focus and economic conditions in Southern and Central California could adversely affect our operations — Our operations are concentrated in Southern and Central California, and in particular in San Bernardino County, Riverside County, Orange County, Madera County, Fresno County, Tulare County, Kern County, and the eastern portion of Los Angeles County in Southern California |
| As a result of this geographic concentration, our business is directly affected by factors such as economic, political and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in government monetary and fiscal policies and inflation, all of which are beyond our control |
| Deterioration in economic conditions could result in the following consequences, any of which could have a material adverse effect on our business, financial condition, results of operations and prospects: • problem assets and foreclosures may increase, • demand for our products and services may decline, • low cost or non-interest bearing deposits may decrease, and • collateral for loans made by us, especially real estate, may decline in value, in turn reducing customers’ borrowing power, and reducing the value of assets and collateral associated with our existing loans |
| In view of the concentration of our operations and the collateral securing our loan portfolio in Southern and Central California, we may be particularly susceptible to the adverse effects of any of these consequences, 15 _________________________________________________________________ [78]Table of Contents any of which could have a material adverse effect on our business, financial condition, results of operations and prospects |
| We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects — Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of qualified persons with knowledge of, and experience in, the California community banking industry |
| The process of recruiting personnel with the combination of skills and attributes required to carry out our strategies is often lengthy |
| Our success depends to a significant degree upon our ability to attract and retain qualified management, credit quality, loan origination, finance, administrative, marketing and technical personnel and upon the continued contributions of our management and personnel |
| In particular, our success has been and continues to be highly dependent upon the abilities of our executive officers |
| The loss of the services of any one of our key executives or other executives or our inability to find suitable replacements could have a material adverse effect on our business, financial condition, results of operations and prospects |
| Our business is subject to interest rate risk and variations in interest rates may negatively affect our financial performance — Our earnings are impacted by changing interest rates |
| Changes in interest rates impact the level of loans, deposits and investments, the credit profile of existing loans and the rates received on loans and securities and the rates paid on deposits and borrowings |
| Significant fluctuations in interest rates may have a material adverse affect on our financial condition and results of operations |
| A substantial portion of our income is derived from the differential or “spread” between the interest earned on loans, securities and other interest-earning assets, and interest paid on deposits, borrowings and other interest-bearing liabilities |
| Because of the differences in the maturities and repricing characteristics of our interest-earning assets and interest-bearing liabilities, changes in interest rates do not produce equivalent changes in interest income earned on interest-earning assets and interest paid on interest-bearing liabilities |
| At December 31, 2005 our balance sheet was asset sensitive and, as a result, our net interest margin tends to expand in a rising interest rate environment and decline in a declining interest rate environment |
| Accordingly, fluctuations in interest rates could adversely affect our interest rate spread and, in turn, our profitability |
| In addition, loan origination volumes are affected by market interest rates |
| Rising interest rates, generally, are associated with a lower volume of loan originations while lower interest rates are usually associated with higher loan originations |
| Conversely, in rising interest rate environments, loan repayment rates may decline and in falling interest rate environments, loan repayment rates may increase |
| In addition, in a rising interest rate environment, we may need to accelerate the pace of rate increases on our deposit accounts as compared to the pace of future increases in short-term market rates |
| Accordingly, changes in levels of market interest rates could materially and adversely affect our net interest spread, asset quality, loan origination volume, business, financial condition, results of operations and prospects |
| The types of loans in our portfolio have a higher degree of risk and a downturn in our real estate markets could hurt our business — A downturn in our real estate markets could hurt our business because many of our loans are secured by real estate |
| Real estate values and real estate markets are generally affected by changes in national, regional or local economic conditions, fluctuations in interest rates and the availability of loans to potential purchasers, changes in tax laws and other governmental statutes, regulations and policies and acts of nature |
| If real estate prices decline, particularly in California, the value of real estate collateral securing our loans could be reduced |
| Our ability to recover on defaulted loans by foreclosing and selling the real estate collateral would then be diminished and we would be more likely to suffer losses on defaulted loans |
| As of December 31, 2005, approximately 42dtta75prca of the book value of our loan portfolio consisted of loans collateralized or secured by various types of real estate |
| Substantially all of our real estate collateral is located in California |
| If there is a significant decline in real estate values, especially in California, the collateral for our loans will provide less security |
| Real estate values could also be affected by, among other things, earthquakes and national disasters particular to California |
| Any such downturn could have a material adverse effect on our business, financial condition, results of operations and prospects |
| We are subject to extensive government regulation |
| These regulations may hamper our ability to increase our assets and earnings — Our operations and those of the bank are subject to extensive regulation by federal, 16 _________________________________________________________________ [79]Table of Contents state and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of our operations |
| Because our business is highly regulated, the laws, rules and regulations applicable to us are subject to regular modification and change |
| We cannot assure you that these proposed laws, rules and regulations or any other laws, rules or regulations will not be adopted in the future, which could make compliance much more difficult or expensive, restrict our ability to originate, broker or sell loans, further limit or restrict the amount of commissions, interest or other charges earned on loans originated or sold by us or otherwise adversely affect our business, financial condition, results of operations or cash flows |
| We are exposed to risk of environmental liabilities with respect to properties to which we take title — In the course of our business, we may foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties |
| We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean-up hazardous or toxic substances, or chemical releases at a property |
| The costs associated with investigation or remediation activities could be substantial |
| In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property |
| If we become subject to significant environmental liabilities, our business, financial condition, results of operations and prospects could be adversely affected |
| If we cannot attract deposits, our growth may be inhibited — Our ability to increase our asset base depends in large part on our ability to attract additional deposits at favorable rates |
| We intend to seek additional deposits by offering deposit products that are competitive with those offered by other financial institutions in our markets and by establishing personal relationships with our customers |
| We cannot assure you that these efforts will be successful |
| Our inability to attract additional deposits at competitive rates could have a material adverse effect on our business, financial condition, results of operations and prospects |
| Our allowance for credit losses may not be adequate to cover actual losses — A significant source of risk arises from the possibility that we could sustain losses because borrowers, guarantors, and related parties may fail to perform in accordance with the terms of their loans and leases |
| The underwriting and credit monitoring policies and procedures that we have adopted to address this risk may not prevent unexpected losses that could have a material adverse effect on our business, financial condition, results of operations and cash flows |
| Unexpected losses may arise from a wide variety of specific or systemic factors, many of which are beyond our ability to predict, influence, or control |
| Like all financial institutions, we maintain an allowance for credit losses to provide for loan and lease defaults and non-performance — Our allowance for credit losses may not be adequate to cover actual loan and lease losses, and future provisions for credit losses could materially and adversely affect our business, financial condition, results of operations and cash flows |
| The allowance for credit losses reflects our estimate of the probable losses in our loan and lease portfolio at the relevant balance sheet date |
| Our allowance for credit losses is based on prior experience, as well as an evaluation of the known risks in the current portfolio, composition and growth of the loan and lease portfolio and economic factors |
| The determination of an appropriate level of the allowance for credit losses is an inherently difficult process and is based on numerous assumptions |
| The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, that may be beyond our control and these losses may exceed current estimates |
| Federal and state regulatory agencies, as an integral part of their examination process, review our loans and leases and allowance for credit losses |
| While we believe that our allowance for credit losses is adequate to cover current losses, we cannot assure you that we will not increase the allowance for credit losses further or that regulators will not require us to increase this allowance |
| Either of these occurrences could have a material adverse affect on our business, financial condition, results of operations and prospects |
| We rely on communications, information, operating and financial control systems technology from third-party service providers, and we may suffer an interruption in those systems that may result in lost business and we may not be able to obtain substitute providers on terms that are as favorable if our relationships with our 17 _________________________________________________________________ [80]Table of Contents existing service providers are interrupted — We rely on third-party service providers for much of our communications, information, operating and financial control systems technology |
| Any failure or interruption or breach in security of these systems could result in failures or interruptions in our customer relationship management, general ledger, deposit, servicing and/or loan origination systems |
| We cannot assure you that such failures or interruptions will not occur or, if they do occur, that they will be adequately addressed by us or the third parties on which we rely |
| The occurrence of any failures or interruptions could have a material adverse effect on our business, financial condition, results of operations and cash flows |
| If any of our third-party service providers experience financial, operational or technological difficulties, or if there is any other disruption in our relationships with them, we may be required to locate alternative sources of such services, and we cannot assure you that we could negotiate terms that are as favorable to us, or could obtain services with similar functionality as found in our existing systems without the need to expend substantial resources, if at all |
| Any of these circumstances could have a material adverse effect on our business, financial condition, results of operations, and prospects |
| We face strong competition from financial services companies and other companies that offer banking services which could hurt our business — We conduct our operations exclusively in California |
| Increased competition in our markets may result in reduced loans and deposits |
| Ultimately, we may not be able to compete successfully against current and future competitors |
| Many competitors offer the banking services that we offer in our service areas |
| These competitors include national banks, regional banks and other community banks |
| We also face competition from many other types of financial institutions, including savings and loan associations, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries |
| In particular, our competitors include major financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous locations and mount extensive promotional and advertising campaigns |
| Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions may have larger lending limits which would allow them to serve the credit needs of larger customers |
| Areas of competition include interest rates for loans and deposits, efforts to obtain loan and deposit customers and a range in quality of products and services provided, including new technology-driven products and services |
| Technological innovation continues to contribute to greater competition in domestic and international financial services markets as technological advances enable more companies to provide financial services |
| We also face competition from out-of-state financial intermediaries that have opened loan production offices or that solicit deposits in our market areas |
| If we are unable to attract and retain banking customers, we may be unable to continue our loan growth and level of deposits and our business, financial condition, results of operations and prospects may be adversely affected |
| Anti-takeover provisions and federal law may limit the ability of another party to acquire us, which could cause our stock price to decline — Various provisions of our articles of incorporation and by-laws could delay or prevent a third-party from acquiring us, even if doing so might be beneficial to our shareholders |
| These provisions provide for, among other things, a shareholder rights plan and the authorization to issue “blank check” preferred stock by action of the board of directors acting alone, thus without obtaining shareholder approval |
| The Bank Holding Company Act of 1956, as amended, and the Change in Bank Control Act of 1978, as amended, together with federal regulations, require that, depending on the particular circumstances, either Federal Reserve approval must be obtained or notice must be furnished to the Federal Reserve and not disapproved prior to any person or entity acquiring “control” of a state member bank, such as the bank |
| These provisions may prevent a merger or acquisition that would be attractive to shareholders and could limit the price investors would be willing to pay in the future for our common stock |
| From time to time, we detail other risks with respect to our business and/or financial results in our filings with the Commission |
| For further discussion on additional areas of risk, see “Item 7 |