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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-K
 
 
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
    For the fiscal year ended December 31, 2007
or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
    For the transition period from     N/A     to     N/A     
 
Commission file number 1-10140
CVB FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
 
     
California   95-3629339
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
701 N. Haven Avenue, Suite 350
Ontario, California
  91764
(Zip Code)
(Address of Principal Executive Offices)    
 
 
Registrant’s telephone number, including area code (909) 980-4030
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
     
Title of Class
 
Name of Each Exchange on Which Registered
Common Stock, no par value
Preferred Stock Purchase Rights
  NASDAQ Stock Market, LLC
NASDAQ Stock Market, LLC
 
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o
                                                         (Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act)  Yes o     No þ
 
As of June 30, 2007, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $933,180,796.
 
Number of shares of common stock of the registrant outstanding as of February 15, 2008: 84,164,906.
 
     
Documents Incorporated By Reference
 
Part of
 
Definitive Proxy Statement for the Annual Meeting of Stockholders which will
be filed within 120 days of the fiscal year ended December 31, 2007
  Part III of Form 10-K
 


 

 
CVB FINANCIAL CORP.
 
2007 ANNUAL REPORT ON FORM 10-K
 
TABLE OF CONTENTS
 
 
             
      BUSINESS   2
      RISK FACTORS   11
      UNRESOLVED STAFF COMMENTS   15
      PROPERTIES   15
      LEGAL PROCEEDINGS   15
      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS   15
 
      MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES   17
      SELECTED FINANCIAL DATA   19
      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS   20
        GENERAL   20
        OVERVIEW   20
        CRITICAL ACCOUNTING POLICIES AND ESTIMATES   21
        ANALYSIS OF THE RESULTS OF OPERATIONS   23
        ANALYSIS OF FINANCIAL CONDITION   34
        RISK MANAGEMENT   45
      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   55
      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA   56
      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE   56
      CONTROLS AND PROCEDURES   56
      OTHER INFORMATION   58
 
      DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE   59
      EXECUTIVE COMPENSATION   59
      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS   59
      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE   60
      PRINCIPAL ACCOUNTANT FEES AND SERVICES   60
 
      EXHIBITS AND FINANCIAL STATEMENT SCHEDULES   61
 EXHIBIT 3.1
 EXHIBIT 23.1
 EXHIBIT 23.2
 EXHIBIT 31.1
 EXHIBIT 31.2
 EXHIBIT 32.1
 EXHIBIT 32.2


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INTRODUCTION
 
Certain statements in this report constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, or Exchange Act, and as such involve risk and uncertainties. These forward-looking statements relate to, among other things, expectations of the environment in which we operate, projections of future performance, perceived opportunities in the market and strategies regarding our mission and vision. Our actual results may differ significantly from the results discussed in such forward-looking statements. Factors that might cause such a difference include but are not limited to economic conditions, competition in the geographic and business areas in which we conduct our operations, fluctuations in interest rates, credit quality, ability to access funding resources, and government regulation. For additional information concerning these factors, see “Item 1A. Risk Factors” and any additional information we set forth in our periodic reports filed pursuant to the Securities Exchange Act of 1934, as amended. We do not undertake any obligation to update our forward-looking statements to reflect occurrences or unanticipated events or circumstances arising after the date of such statement except as required by law.
 
PART I
 
Item 1.   Business
 
CVB Financial Corp.
 
CVB Financial Corp. (referred to herein on an unconsolidated basis as “CVB” and on a consolidated basis as “we” or the “Company”) is a bank holding company incorporated in California on April 27, 1981 and registered under the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”). The Company commenced business on December 30, 1981 when, pursuant to a reorganization, it acquired all of the voting stock of Chino Valley Bank. On March 29, 1996, Chino Valley Bank changed its name to Citizens Business Bank (the “Bank”). The Bank is our principal asset. The Company has three other inactive subsidiaries: CVB Ventures, Inc.; Chino Valley Bancorp; and ONB Bancorp. The Company is also the common stockholder of CVB Statutory Trust I, CVB Statutory Trust II, CVB Statutory Trust III, and FCB Trust I and II. CVB Statutory Trusts I and II were created in December 2003 and CVB Statutory Trust III was created in January 2006 to issue trust preferred securities in order to raise capital for the Company. The Company acquired FCB Trust I and II (which were also created to raise capital) through the acquisition of First Coastal Bancshares (“FCB”) in June 2007.
 
CVB’s principal business is to serve as a holding company for the Bank and for other banking or banking related subsidiaries, which the Company may establish or acquire. We have not engaged in any other activities to date. As a legal entity separate and distinct from its subsidiaries, CVB’s principal source of funds is, and will continue to be, dividends paid by and other funds advanced from the Bank. Legal limitations are imposed on the amount of dividends that may be paid and loans that may be made by the Bank to CVB. See “Item 1. Business — Supervision and Regulation — Dividends and Other Transfers of Funds.” At December 31, 2007, the Company had $6.29 billion in total consolidated assets, $3.50 billion in net loans and $3.36 billion in deposits.
 
On June 22, 2007, we acquired First Coastal Bancshares (“FCB”). The Company issued 1,605,523 common shares and $18.0 million in cash to FCB shareholders in connection with the acquisition. FCB had total assets of $190.7 million, total loans of $140.0 million and total deposits of $193.5 million as of the acquisition date, June 22, 2007. FCB had four offices, in Manhattan Beach, El Segundo, Marina Del Rey, and Gardena. These four offices are operating as business financial centers of the Bank. The acquisition was not considered significant to the overall financial position of the Company.
 
The principal executive offices of CVB and the Bank are located at 701 North Haven Avenue, Suite 350, Ontario, California. Our phone number is (909) 980-4030.
 
Citizens Business Bank
 
The Bank commenced operations as a California state chartered bank on August 9, 1974. The Bank’s deposit accounts are insured under the Federal Deposit Insurance Act up to applicable limits. The Bank is not a member of


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the Federal Reserve System. At December 31, 2007, the Bank had $6.28 billion in assets, $3.50 billion in net loans and $3.36 billion in deposits.
 
As of December 31, 2007, we had 44 Business Financial Centers located in the San Bernardino County, Riverside County, Orange County, Los Angeles County, Madera County, Fresno County, Tulare County, and Kern County areas of California. Of the 44 offices, we opened thirteen as de novo branches and acquired the other thirty-one in acquisition transactions. In 2007, we acquired four offices through the acquisition of FCB and opened one de novo branch in Stockton, California.
 
Through our network of banking offices, we emphasize personalized service combined with a full range of banking and trust services for businesses, professionals and individuals located in the service areas of our offices. Although we focus the marketing of our services to small-and medium-sized businesses, a full range of retail banking services are made available to the local consumer market.
 
We offer a wide range of deposit instruments. These include checking, savings, money market and time certificates of deposit for both business and personal accounts. We also serve as a federal tax depository for our business customers.
 
We provide a full complement of lending products, including commercial, agribusiness, consumer, real estate loans and equipment and vehicle leasing. Commercial products include lines of credit and other working capital financing, accounts receivable lending and letters of credit. Agribusiness products are loans to finance the operating needs of wholesale dairy farm operations, cattle feeders, livestock raisers, and farmers. We provide lease financing for municipal governments. Financing products for consumers include automobile leasing and financing, lines of credit, and home improvement and home equity lines of credit. Real estate loans include mortgage and construction loans.
 
We also offer a wide range of specialized services designed for the needs of our commercial accounts. These services include cash management systems for monitoring cash flow, a credit card program for merchants, courier pick-up and delivery, payroll services, electronic funds transfers by way of domestic and international wires and automated clearinghouse, and on-line account access. We make available investment products to customers, including mutual funds, a full array of fixed income vehicles and a program to diversify our customers’ funds in federally insured time certificates of deposit of other institutions.
 
We offer a wide range of financial services and trust services through CitizensTrust (formerly known as Financial Advisory Services Group). These services include fiduciary services, mutual funds, annuities, 401K plans and individual investment accounts.
 
Business Segments
 
We are a community bank with two reportable operating segments: Business Financial Centers (branches) and Treasury Department. Our Business Financial Centers are the focal points for customer sales and services. As such, these Business Financial Centers comprise the biggest segment of the Company. Our other reportable segment, Treasury Department manages all of the investments for the Company. All administrative and other smaller operating departments are combined into “Other” category for reporting purposes. See the sections captioned “Results of Segment Operations” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 19 — Business Segments in the notes to consolidated financial statements.
 
Competition
 
The banking and financial services business is highly competitive. The increasingly competitive environment faced by banks is a result primarily of changes in laws and regulation, changes in technology and product delivery systems, and the accelerating pace of consolidation among financial services providers. We compete for loans, deposits, and customers with other commercial banks, savings and loan associations, savings banks, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market funds, credit unions, and other nonbank financial service providers. Many competitors are much larger in total assets and capitalization, have greater access to capital markets, including foreign-ownership, and/or offer a broader range of financial services.


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Economic Conditions, Government Policies, Legislation, and Regulation
 
Our profitability, like most financial institutions, is primarily dependent on interest rate differentials. In general, the difference between the interest rates paid by us on interest-bearing liabilities, such as deposits and other borrowings, and the interest rates received by us on our interest-earning assets, such as loans to customers and securities held in the investment portfolio, will comprise the major portion of our earnings. These rates are highly sensitive to many factors that are beyond our control, such as inflation, recession and unemployment, and the impact which future changes in domestic and foreign economic conditions might have on us cannot be predicted.
 
Our business is also influenced by the monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the Board of Governors of the Federal Reserve System (the “FRB”). The FRB implements national monetary policies (with objectives such as curbing inflation and combating recession) through its open-market operations in U.S. Government securities by adjusting the required level of reserves for depository institutions subject to its reserve requirements, and by varying the target federal funds and discount rates applicable to borrowings by depository institutions. The actions of the FRB in these areas influence the growth of bank loans, investments, and deposits and also affect interest earned on interest-earning assets and interest paid on interest-bearing liabilities. The nature and impact on us of any future changes in monetary and fiscal policies cannot be predicted.
 
From time to time, federal and state legislation is enacted which may have the effect of materially increasing the cost of doing business, limiting or expanding permissible activities, or affecting the competitive balance between banks and other financial services providers. We cannot predict whether or when potential legislation will be enacted, and if enacted, the effect that it, or any implementing regulations, would have on our financial condition or results of operations. In addition, the outcome of any investigations initiated by state authorities or litigation raising issues such as whether state laws are preempted by federal law may result in necessary changes in our operations, additional regulation and increased compliance costs.
 
Supervision and Regulation
 
General
 
We and our subsidiaries are extensively regulated under both federal and certain state laws. This regulation and supervision by the federal and state banking agencies is intended primarily for the protection of depositors and the deposit insurance fund and not for the benefit of stockholders. Set forth below is a summary description of key laws and regulations which relate to our operations. These descriptions are qualified in their entirety by reference to the applicable laws and regulations.
 
The Company
 
As a bank holding company, we are subject to regulation and examination by the FRB under the Bank Holding Company Act of 1956, as amended (the “BHCA”). We are required to file with the FRB periodic reports and such additional information as the FRB may require.
 
The FRB may require us to terminate an activity or terminate control of or liquidate or divest certain subsidiaries, affiliates or investments if the FRB believes the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or stability of any bank subsidiary. The FRB also has the authority to regulate provisions of certain bank holding company debt, including the authority to impose interest ceilings and reserve requirements on such debt. Under certain circumstances, we must file written notice and obtain FRB approval prior to purchasing or redeeming our equity securities. Further, we are required by the FRB to maintain certain levels of capital. See “Capital Standards.”
 
We are required to obtain prior FRB approval for the acquisition of more than 5% of the outstanding shares of any class of voting securities or substantially all of the assets of any bank or bank holding company. Prior FRB approval is also required for the merger or consolidation of a bank holding company with another bank holding company. Similar state banking agency approvals may also be required. Certain competitive, management, financial and other factors are considered by the bank regulatory agencies in granting these approvals.


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With certain exceptions, bank holding companies are prohibited from acquiring direct or indirect ownership or control of more than 5% of the outstanding voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or furnishing services to subsidiaries. However, subject to prior notice or FRB approval, bank holding companies may engage in any, or acquire shares of companies engaged in, those nonbanking activities determined by the FRB to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.
 
It is the policy of the FRB that each bank holding company serve as a source of financial and managerial strength to its subsidiary bank or banks. A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the FRB to be an unsafe and unsound banking practice or a violation of FRB regulations or both. The FRB’s bank holding company rating system emphasizes risk management and evaluation of the potential impact of nondepository entities on safety and soundness.
 
We are also a bank holding company within the meaning of the California Financial Code. As such, the Company and its subsidiaries are subject to examination by, and may be required to file reports with, the California Department of Financial Institutions (“DFI”).
 
The Bank
 
As a California chartered bank, the Bank is subject to primary supervision, periodic examination, and regulation by the DFI and the Federal Deposit Insurance Corporation (“FDIC”), as well as certain regulations promulgated by the FRB. If, as a result of an examination, the FDIC determines that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of our banking operations are unsatisfactory or that we are violating or have violated any law or regulation, various remedies are available to the FDIC, including the power to enjoin “unsafe or unsound” practices; restrict the Bank’s growth geographically, by products and services, or by mergers and acquisitions; require affirmative action to correct any conditions resulting from any violation or practice; issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict our growth; assess civil monetary penalties; remove officers and directors; and ultimately to terminate deposit insurance, which would result in a revocation of the Bank’s charter. See “Safety and Soundness Standards.”
 
The DFI also possesses broad powers to take corrective and other supervisory actions to resolve the problems of California state-chartered banks. These enforcement powers include cease and desist orders, the imposition of fines, the ability to take possession of the Bank and the ability to close and liquidate the Bank.
 
Changes such as the following in federal or state banking laws or the regulations, policies or guidance of the federal or state banking agencies could have an adverse cost or competitive impact on our bank operations:
 
(i) In December, 2006, the federal banking agencies issued final guidance to reinforce sound risk management practices for bank holding companies and banks in commercial real estate (CRE) loans which establishes CRE concentration thresholds as criteria for examiners to identify CRE concentration that may warrant further analysis. The implementation of these guidelines could result in increased reserves and capital costs for banks with “CRE concentration.” The Bank’s CRE portfolio as of December 31, 2007 would meet the definition of CRE concentration as set forth in the guidelines. The Bank analyzes this concentration on a quarterly basis and monitors same through various reports it prepares. The Bank believes that it complies with the analytical and monitoring expectations as set forth in the aforementioned guidance. Furthermore, this concentration is considered in the methodology for the Allowance for Credit Losses.
 
(ii) In September, 2006, the federal banking agencies issued final guidance on alternative residential mortgage products that allow borrowers to defer repayment of principal and sometimes interest, including “interest-only” mortgage loans, and “payment option” adjustable rate mortgages where a borrower has flexible payment options, including payments that have the potential for negative amortization. While acknowledging that innovations in mortgage lending can benefit some consumers, the final guidance states that management should (1) assess a borrower’s ability to repay the loan, including any principal balances added through negative amortization, at the fully indexed rate that would apply after the introductory period, (2) recognize that certain nontraditional mortgages are untested in a stressed environment and warrant strong risk


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management standards as well as appropriate capital and loan loss reserves, and (3) ensure that borrowers have sufficient information to clearly understand loan terms and associated risks prior to making a product or payment choice. The Bank believes its products and disclosures are in conformance with the requirements of the guidance.
 
(iii) Pursuant to the Financial Services Regulatory Relief Act of 2006, the Securities and Exchange Commission (“SEC”) and the FRB have released, as Regulation R, joint rules to implement exceptions provided for in the Gramm-Leach-Bliley Act (“GLBA”) for bank securities activities which banks may conduct without registering with the SEC as securities brokers or moving such activities to a broker-dealer affiliate. The FRB’s final Regulation R provides exceptions for networking arrangements with third party broker-dealers and authorizes compensation for bank employees who refer and assist retail and high net worth bank customers with their securities, including sweep accounts to money market funds, and with related trust, fiduciary, custodial and safekeeping needs. The final rules which will not be effective until 2009 and are not expected to have a material effect on the current securities activities which the Bank currently conducts for customers.
 
Because California permits commercial banks chartered by the state to engage in any activity permissible for national banks, the Bank can form subsidiaries to engage in the many so-called “closely related to banking” or “nonbanking” activities commonly conducted by national banks in operating subsidiaries, but also expanded financial activities to the same extent as a national bank, subject to the state or FDIC requirements. However, in order to form a financial subsidiary, the Bank must be “well-capitalized”; “well-managed” and in satisfactory compliance with the Community Reinvestment Act. Further, the Bank must exclude from its assets and equity all equity investments, including retained earnings, in a financial subsidiary. The assets of the subsidiary may not be consolidated with the Bank’s assets. The Bank must also have policies and procedures to assess financial subsidiary risk and protect the Bank from such risks and potential liabilities and would be subject to the same capital deduction, risk management and affiliate transaction rules as applicable to national banks. Generally, a financial subsidiary is permitted to engage in activities that are “financial in nature” or incidental thereto, even though they are not permissible for the national bank to conduct directly within the Bank. The definition of “financial in nature” includes, among other items, underwriting, dealing in or making a market in securities, including, for example, distributing shares of mutual funds. The subsidiary may not, however, under present law engage as principal in underwriting insurance (other than credit life insurance), issue annuities or engage in real estate development or investment or merchant banking.
 
Interstate Banking and Branching
 
Subject to certain size limitations under the Riegle-Neal Interstate Banking Act, bank holding companies and banks have the ability to acquire and merge with banks in other states; and, subject to certain state restrictions, banks may also acquire or establish new branches outside their home states. Interstate branches are subject to certain laws of the states in which they are located.
 
The Sarbanes-Oxley Act
 
The Sarbanes-Oxley Act of 2002 addressed accounting oversight and corporate governance matters and, among other things,
 
  •  required executive certification of financial presentations;
 
  •  increased requirements for board audit committees and their members;
 
  •  enhanced disclosure of controls and procedures and internal control over financial reporting;
 
  •  enhanced controls on, and reporting of, insider trading; and
 
  •  increased penalties for financial crimes and forfeiture of executive bonuses in certain circumstances.
 
The legislation and its implementing regulations have resulted in increased costs of compliance, including certain outside professional costs. To date these costs have not had a material impact on our operations.


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Dividends and Other Transfers of Funds
 
Dividends from the Bank constitute the principal source of income to the Company. An FRB policy statement provides that a bank holding company should pay cash dividends only to the extent that the holding company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the holding company’s capital needs, asset quality and overall financial condition. The policy statement also provides that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the federal prompt corrective action regulations, the FRB may prohibit a bank holding company from paying any dividends if the holding company’s bank subsidiary is classified as “undercapitalized.” See “Prompt Corrective Action and Other Enforcement Mechanisms” below.
 
The Bank is subject to various statutory and regulatory restrictions on its ability to pay dividends. Under such restrictions, the amount available for payment of dividends to the Company by the Bank totaled $98.6 million at December 31, 2007. In addition, the banking agencies have the authority to prohibit the Bank from paying dividends, depending upon the Bank’s financial condition, if such payment is deemed to constitute an unsafe or unsound practice.
 
   Capital Standards
 
The federal banking agencies have adopted risk-based minimum capital guidelines for bank holding companies and banks which are intended to provide a measure of capital that reflects the degree of risk associated with a banking organization’s operations for both transactions reported on the balance sheet as assets and transactions which are recorded as off balance sheet items. The risk-based capital ratio is determined by classifying assets and certain off-balance sheet financial instruments into weighted categories, with higher levels of capital being required for those categories perceived as representing greater risk. Under the capital guidelines, a banking organization’s total capital is divided into tiers. “Tier I capital” consists of (1) common equity, (2) qualifying noncumulative perpetual preferred stock, (3) a limited amount of qualifying cumulative perpetual preferred stock and (4) minority interests in the equity accounts of consolidated subsidiaries (including trust-preferred securities), less goodwill and certain other intangible assets. Qualifying Tier I capital may consist of trust-preferred securities, subject to certain criteria and quantitative limits for inclusion of restricted core capital elements in Tier I capital . “Tier II capital” consists of hybrid capital instruments, perpetual debt, mandatory convertible debt securities, a limited amount of subordinated debt, preferred stock and trust-preferred securities that do not qualify as Tier I capital, a limited amount of the allowance for loan and lease losses and a limited amount of unrealized holding gains on equity securities. “Tier III capital” consists of qualifying unsecured subordinated debt. The sum of Tier II and Tier III capital may not exceed the amount of Tier I capital.
 
The risk-based capital guidelines require a minimum ratio of qualifying total capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4%. In addition to the risk-based guidelines, the federal bank regulatory agencies require banking organizations to maintain a minimum amount of Tier 1 capital to total assets, referred to as the leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets must be 3%.
 
The federal banking agencies possess broad power under the Federal Deposit Insurance Act, or FDI Act, to take “prompt corrective action” to resolve the problems of insured depository institutions, including but not limited to those institutions that fall within any undercapitalized category. Each federal banking agency has promulgated regulations defining the following five categories in which an insured depository institution will be placed, based on its capital ratios:
 
  •  “well capitalized”;
 
  •  “adequately capitalized”;
 
  •  “undercapitalized”;
 
  •  “significantly undercapitalized”; and
 
  •  “critically undercapitalized.”


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The regulations use an institution’s risk-based capital, leverage capital and tangible capital ratios to determine the institution’s capital classification. An institution is treated as well capitalized if its total capital to risk-weighted assets ratio is 10.00% or more; its core capital to risk-weighted assets ratio is 6.00% or more; and its core capital to adjusted total assets ratio is 5.00% or more. The regulatory capital guidelines as well as our actual capitalization on a consolidated basis and for the Bank as of December 31, 2007 are set forth below and confirm that both the Bank and the Company capital ratios exceed the minimum percentage of the federal bank regulatory agencies for being deemed “well capitalized.”
 
The following table presents the amounts of regulatory capital and the capital ratios for the Company, compared to its minimum regulatory capital requirements as of December 31, 2007:
 
                                                 
    As of December 31, 2007  
    Actual     Required     Excess  
    Amount     Ratio     Amount     Ratio     Amount     Ratio  
    (Amounts in thousands)  
 
Leverage ratio
  $ 461,864       7.6 %   $ 244,372       4.0 %   $ 217,492       3.6 %
Tier 1 risk-based ratio
  $ 461,864       11.0 %   $ 168,410       4.0 %   $ 293,454       7.0 %
Total risk-based ratio
  $ 502,770       11.9 %   $ 336,864       8.0 %   $ 165,906       3.9 %
 
The following table presents the amounts of regulatory capital and the capital ratios for the Bank, compared to its minimum regulatory capital requirements as of December 31, 2007:
 
                                                 
    As of December 31, 2007  
    Actual     Required     Excess  
    Amount     Ratio     Amount     Ratio     Amount     Ratio  
    (Amounts in thousands )  
 
Leverage ratio
  $ 435,857       7.1 %   $ 244,520       4.0 %   $ 191,337       3.1 %
Tier 1 risk-based ratio
  $ 435,857       10.4 %   $ 167,799       4.0 %   $ 268,058       6.4 %
Total risk-based ratio
  $ 471,762       11.2 %   $ 335,774       8.0 %   $ 135,988       3.2 %
 
The current risk-based capital guidelines are based upon the 1988 capital accord of the International Basel Committee on Banking Supervision. A new international accord, referred to as Basel II, which emphasizes internal assessment of credit, market and operational risk; supervisory assessment and market discipline in determining minimum capital requirements, currently becomes mandatory for large international banks outside the U.S. in 2008, and is optional for others, and must be complied with in a “parallel run” for two years along with the existing Basel I standards. A separate rule is expected to be released and issued in final by the federal regulatory agencies in 2008 to offer U.S. banks that will not adopt Basel II an alternative “standardized approach under Basel II” option and address concerns that the Basel II framework may offer significant competitive advantages for the largest U.S. and international banks. The U.S. banking agencies have indicated, however, that they will retain the minimum leverage requirement for all U.S. banks.
 
The Federal Deposit Insurance Act (“FDI Act”) gives the federal banking agencies the additional broad authority to take “prompt corrective action” to resolve the problems of insured depository institutions that fall within any undercapitalized category, including requiring the submission of an acceptable capital restoration plan. The federal banking agencies have also adopted non-capital safety and soundness standards to assist examiners in identifying and addressing potential safety and soundness concerns before capital becomes impaired. The guidelines set forth operational and managerial standards relating to: (i) internal controls, information systems and internal audit systems, (ii) loan documentation, (iii) credit underwriting, (iv) asset quality and growth, (v) earnings, (vi) risk management, and (vii) compensation and benefits.
 
FDIC Insurance
 
Through the Deposit Insurance Fund (“DIF), the FDIC insures our customer deposits up to prescribed limits for each depositor. The amount of FDIC assessments paid by each DIF member institution is based on its relative risk of default as measured by regulatory capital ratios and other supervisory factors. The FDIC may increase or decrease the assessment rate schedule on a semi-annual basis. The Federal Deposit Insurance Reform Act of 2006, or FDIRA, and implementing regulations provide for changes in the formula and factors to be considered by the


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FDIC in calculating the FDIC reserve ratio, assessments and dividends, including business line concentrations and risk of failure and severity of loss in the event of failure. It is unclear whether the FDIC may need to increase assessments in the near term or longer term to address the risks and costs of any increase in bank failures.
 
The FDIC may terminate a depository institution’s deposit insurance upon a finding that the institution’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices that pose a risk to the DIF or that may prejudice the interest of the bank’s depositors. The termination of deposit insurance for the Bank would also result in the revocation of the Bank’s charter by the DFI.
 
Loans-to-One Borrower Limitations
 
With certain limited exceptions, the maximum amount of obligations, secured or unsecured, that any borrower (including certain related entities) may owe to a California state bank at any one time may not exceed 25% of the sum of the shareholders’ equity, allowance for loan losses, capital notes and debentures of the bank. Unsecured obligations may not exceed 15% of the sum of the shareholders’ equity, allowance for loan losses, capital notes and debentures of the bank. The Bank has established internal loan limits which are lower than the legal lending limits for a California bank.
 
Extensions of Credit to Insiders and Transactions with Affiliates
 
The Federal Reserve Act and FRB Regulation O place limitations and conditions on loans or extensions of credit to:
 
  •  a bank or bank holding company’s executive officers, directors and principal shareholders (i.e., in most cases, those persons who own, control or have power to vote more than 10% of any class of voting securities);
 
  •  any company controlled by any such executive officer, director or shareholder; or
 
  •  any political or campaign committee controlled by such executive officer, director or principal shareholder.
 
Such loans and leases:
 
  •  must comply with loan-to-one-borrower limits;
 
  •  require prior full board approval when aggregate extensions of credit to the person exceed specified amounts;
 
  •  must be made on substantially the same terms (including interest rates and collateral) and follow credit-underwriting procedures no less stringent than those prevailing at the time for comparable transactions with non-insiders;
 
  •  must not involve more than the normal risk of repayment or present other unfavorable features; and
 
  •  in the aggregate limit not exceed the bank’s unimpaired capital and unimpaired surplus.
 
California has laws and the DFI has regulations which adopt and also apply Regulation O to the Bank.
 
The Bank also is subject to certain restrictions imposed by Federal Reserve Act Sections 23A and 23B and FRB Regulation W on any extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of, any affiliates, the purchase of, or investments in, stock or other securities thereof, the taking of such securities as collateral for loans, and the purchase of assets of any affiliates. Affiliates include parent holding companies, sister banks, sponsored and advised companies, financial subsidiaries and investment companies whereby the Bank’s affiliate serves as investment advisor. Sections 23A and 23B and Regulation W generally:
 
  •  prevent any affiliates from borrowing from the Bank unless the loans are secured by marketable obligations of designated amounts;
 
  •  limit such loans and investments to or in any affiliate individually to 10.0% of the Bank’s capital and surplus;
 
  •  limit such loans and investments to or in any affiliate in the aggregate to 20.0% of the Bank’s capital and surplus; and


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  •  requires such loans and investments to or in any affiliate to be on terms and under conditions substantially the same or at least as favorable to the Bank as those prevailing for comparable transactions with nonaffiliated parties.
 
Additional restrictions on transactions with affiliates may be imposed on the Bank under the FDI Act prompt corrective action provisions and the supervisory authority of the federal and state banking agencies.
 
USA PATRIOT Act and Anti-Money Laundering Compliance
 
The USA PATRIOT Act of 2001 and its implementing regulations significantly expanded the anti-money laundering and financial transparency laws, including the Bank Secrecy Act. The Bank has adopted comprehensive policies and procedures to address the requirements of the USA PATRIOT Act. Material deficiencies in anti-money laundering compliance can result in public enforcement actions by the banking agencies, including the imposition of civil money penalties and supervisory restrictions on growth and expansion. Such enforcement actions could also have serious reputation consequences for the Company and the Bank.
 
Consumer Laws
 
The Bank and the Company are subject to many federal and state consumer protection statutes and regulations and laws prohibiting unfair or fraudulent business practices, untrue or misleading advertising and unfair competition, including:
 
  •  The Home Ownership and Equity Protection Act of 1994, or HOEPA, requires extra disclosures and consumer protections to borrowers from certain lending practices, such as practices deemed to be “predatory lending.”
 
  •  Privacy policies are required by federal and state banking laws regulations which limit the ability of banks and other financial institutions to disclose nonpublic information about consumers to nonaffiliated third parties.
 
  •  The Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act, or the FACT Act, requires financial firms to help deter identity theft, including developing appropriate fraud response programs, and gives consumers more control of their credit data.
 
  •  The Equal Credit Opportunity Act, or ECOA, generally prohibits discrimination in any credit transaction, whether for consumer or business purposes, on the basis of race, color, religion, national origin, sex, marital status, age (except in limited circumstances), receipt of income from public assistance programs, or good faith exercise of any rights under the Consumer Credit Protection Act.
 
  •  The Truth in Lending Act, or TILA, requires that credit terms be disclosed in a meaningful and consistent way so that consumers may compare credit terms more readily and knowledgeably.
 
  •  The Fair Housing Act regulates many lending practices, including making it unlawful for any lender to discriminate in its housing-related lending activities against any person because of race, color, religion, national origin, sex, handicap or familial status.
 
  •  The Community Reinvestment Act, or CRA, requires insured depository institutions, while operating safely and soundly, to help meet the credit needs of their communities; directs the federal regulatory agencies, in examining insured depository institutions, to assess a bank’s record of helping meet the credit needs of its entire community, including low- and moderate-income neighborhoods, consistent with safe and sound banking practices and further requires the agencies to take a financial institution’s record of meeting its community credit needs into account when evaluating applications for, among other things, domestic branches, mergers or acquisitions, or holding company formations. In its last examination for CRA compliance, as of February 2005, the Bank was rated “satisfactory.”
 
  •  The Home Mortgage Disclosure Act, or HMDA, includes a “fair lending” aspect that requires the collection and disclosure of data about applicant and borrower characteristics as a way of identifying possible discriminatory lending patterns and enforcing anti-discrimination statutes.


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  •  The Real Estate Settlement Procedures Act, or RESPA, requires lenders to provide borrowers with disclosures regarding the nature and cost of real estate settlements and prohibits certain abusive practices, such as kickbacks.
 
The National Flood Insurance Act, or NFIA, requires homes in flood-prone areas with mortgages from a federally regulated lender to have flood insurance.
 
Federal Home Loan Bank (“FHLB”) System
 
The Bank is a member of the Federal Home Loan Bank of San Francisco. Among other benefits, each FHLB serves as a reserve or central bank for its members within its assigned region. Each FHLB is financed primarily from the sale of consolidated obligations of the FHLB system. Each FHLB makes available loans or advances to its members in compliance with the policies and procedures established by the Board of Directors of the individual FHLB. FHLB members are required to own a certain amount of capital stock in the FHLB.
 
Federal Reserve System
 
The Federal Reserve Board requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts (primarily checking, NOW, and Super NOW checking accounts) and non-personal time deposits. At December 31, 2007, we were in compliance with these requirements.
 
Non-bank Subsidiaries
 
The Company’s non-bank subsidiaries also are subject to regulation by the FRB and other applicable federal and state agencies. Other non-bank subsidiaries of the Company are subject to the laws and regulations of both the federal government and the various states in which they conduct business.
 
Employees
 
At February 15, 2008, we employed 773 persons, 545 on a full-time and 228 on a part-time basis. We believe that our employee relations are satisfactory.
 
Available Information
 
Reports filed with the Securities and Exchange Commission (the “Commission”) include our proxy statements, annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. These reports and other information on file can be inspected and copied at the public reference facilities of the Commission on file at 450 Fifth Street, N.W., Washington D.C., 20549. The public may obtain information on the operation of the public reference loans by calling the SEC at 1-800-SEC-0330. The Commission maintains a Web Site that contains the reports, proxy and information statements and other information we file with them. The address of the site is http://www.sec.gov. The Company also maintains an Internet website at http://www.cbbank.com. We make available, free of charge through our website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and current Report on Form 8-K, and any amendment there to, as soon as reasonably practicable after we file such reports with the SEC. None of the information contained in or hyperlinked from our website is incorporated into this Form 10-K.
 
Item 1A.   Risk Factors
 
Risk Factors That May Affect Future Results — Together with the other information on the risks we face and our management of risk contained in this Annual Report or in our other SEC filings, the following presents significant risks which may affect us. Events or circumstances arising from one or more of these risks could adversely affect our business, financial condition, operating results and prospects and the value and price of our common stock could decline. The risks identified below are not intended to be a comprehensive list of all risks we face and additional risks that we may currently view as not material may also impair our business operations and results.


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Changes in economic conditions could materially hurt our business — Our business is directly affected by changes in economic conditions, including finance, legislative and regulatory changes and 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:
 
  •  problem assets and foreclosures may increase and we may be required to increase our provision for loan losses,
 
  •  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 Central and Southern California, we may be particularly susceptible to the adverse economic conditions in the state of California and in counties in Central and Southern California where our business is concentrated.
 
Our business is subject to interest rate risk and variations in interest rates may negatively affect our financial performance — 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, 2007 our balance sheet was liability sensitive and, as a result, our net interest margin tends to decline in a rising interest rate environment and expand 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 and loan origination volume.
 
We face strong competition from financial services companies and other companies that offer banking services — We conduct our operations almost 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 institutions, 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. 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. If we are unable to attract and retain banking customers, we may be unable to continue our loan growth and level of deposits.
 
Our loan portfolio is predominantly secured by real estate and thus we have a higher degree of risk from a downturn in our real estate markets. — 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, such as earthquakes and national disasters particular to California or acts of terrorism. If real estate prices decline, particularly in California, the value of real estate collateral securing our loans could be significantly 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, 2007, approximately 75% of


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the book value of our loan portfolio consisted of loans collateralized 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.
 
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 seek additional deposits by offering deposit products that are competitive with those offered by other financial institutions in our markets. We cannot assure you that these efforts will be successful.
 
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, 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 key executives and certain other employees.
 
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.
 
We are subject to extensive government regulation. These regulations may hamper our ability to increase our assets and earnings — Our operations are subject to extensive regulation by federal, 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, regulations and supervisory guidance and policies applicable to us are subject to regular modification and change. Perennially various laws, rules and regulations are proposed, which, if adopted, could impact our operations by making compliance much more difficult or expensive, restricting our ability to originate or sell loans or further restricting the amount of interest or other charges or fees earned on loans or other products.
 
The short term and long term impact of the new Basel II capital standards and the forthcoming new capital rules to be proposed for non-Basel II U.S. banks is uncertain — As a result of the recent deterioration in the global credit markets and the potential impact of increased liquidity risk and interest rate risk, it is unclear what the short term impact of the implementation Basel II may be or what impact a pending alternative standardized approach to Basel II option for non-Basel II U.S. banks may have on the cost and availability of different types of credit and the potential compliance costs of implementing the new capital standards.
 
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, and results of operations. 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


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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 — We rely heavily on third-party service providers for much of our communications, information, operating and financial control systems technology, including our internet banking services and data processing systems. Any failure or interruption of these services or systems or breaches 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. The occurrence of any failures or interruptions may require us to identify 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.
 
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.
 
Changes in stock market prices could reduce fee income from our brokerage, asset management and investment advisory businesses — We earn substantial wealth management fee income for managing assets for others and providing brokerage and investment advisory services. Because investment management and advisory fees are often based on the value of assets under management, a fall in the market prices of those assets could reduce our fee income. Changes in stock market prices could affect the trading activity of investors, reducing commissions and other fees we earn from our brokerage business.
 
Our stock price can be volatile due to many factors — Our stock price can fluctuate widely in response to a variety of factors, in addition to those described above, including:
 
  •  general business and economic conditions
 
  •  changes in laws or government regulations
 
  •  recommendations by securities analysts
 
  •  new technology used, or services offered, by our competitors
 
  •  operating and stock price performance of other companies that investors deem comparable to us
 
  •  news reports relating to trends, concerns and other issues in the financial services industry
 
  •  natural disasters, such as earthquakes
 
  •  geopolitical conditions such as acts or threats of terrorism or military conflicts
 
Negative publicity could damage our reputation — Reputation risk, or the risk to our earnings and capital from negative publicity or public opinion, is inherent in our business. Negative publicity or public opinion could adversely affect our ability to keep and attract customers and expose us to adverse legal and regulatory


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consequences. Negative public opinion could result from our actual or perceived conduct in any number of activities, including lending practices, corporate governance, regulatory compliance, mergers and acquisitions, and disclosure, sharing or inadequate protection of customer information, and from actions taken by government regulators and community organizations in response to that conduct.
 
Recent negative developments in the financial industry and U.S. and global credit markets may impact our operations and results — Negative developments in the latter half of 2007 in the subprime mortgage market and the securitization markets for such loans have resulted in uncertainty in the financial markets generally and the expectation of a general economic downturn beginning in 2008. Commercial as well as consumer loan portfolio performances have deteriorated at many institutions and the competition for deposits and quality loans has increased significantly. In addition, the values of real estate collateral supporting many commercial loans and home mortgages have declined and may continue. Bank and bank holding company stock prices have been negatively affected as has the ability of banks and bank holding companies to raise capital or borrow in the debt markets compared to recent years. As a result, there is a potential for new federal or state laws and regulations regarding lending and funding practices and liquidity standards, and bank regulatory agencies are expected to be very aggressive in responding to concerns and trends identified in examinations, including the expected issuance of many formal enforcement orders. Negative developments in the financial industry and the impact of new legislation in response to those developments could negatively impact our operations by restricting our business operations, including our ability to originate or sell loans, result in an decline in the value of collateral securing our loans and a corresponding increase in our allowance for loan losses, and adversely impact our financial performance.
 
We may face other risks.  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. Management’s Discussion and Analysis of Financial Condition and the Results of Operations — Risk Management.”
 
Item 1B.   Unresolved Staff Comments
 
None
 
Item 2.   Properties
 
The principal executive offices of the Company and the Bank are located in Ontario, California, and are owned by the Company.
 
At December 31, 2007, the Bank occupied the premises for thirty-eight of its offices under leases expiring at various dates from 2008 through 2020, at which time we can exercise options that could extend certain leases through 2026. We own the premises for twelve of our offices, including our operations center, located in Ontario, California.
 
Our total occupancy expense, exclusive of furniture and equipment expense, for the year ended December 31, 2007, was $10.5 million. We believe that our existing facilities are adequate for our present purposes. The Company believes that if necessary, it could secure suitable alternative facilities on similar terms without adversely affecting operations. For additional information concerning properties, see Notes 6 and 11 of the Notes to the Consolidated Financial Statements included in this report. See “Item 8. Financial Statements and Supplemental Data.”
 
Item 3.   Legal Proceedings
 
From time to time the Company and the Bank are parties to claims and legal proceedings arising in the ordinary course of business. After taking into consideration information furnished by counsel, we believe that the ultimate aggregate liability represented thereby, if any, will not have a material adverse effect on our consolidated financial position or results of operations.
 
Item 4.   Submission of Matters to a Vote of Security Holders
 
No matters were submitted to shareholders during the fourth quarter of 2007.


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Item 4A.   Executive Officers of the Company
 
The following tables set forth certain information regarding our executive officers as of February 28, 2008:
 
Executive Officers:
 
             
Name
 
Position
 
Age
 
Christopher D. Myers
  President and Chief Executive Officer of the Company and the Bank     45  
Edward J. Biebrich Jr. 
  Chief Financial Officer of the Company and Executive Vice President and Chief Financial Officer of the Bank     64  
Jay W. Coleman
  Executive Vice President/Sales Division of the Bank     65  
Edward J. Mylett, Jr. 
  Executive Vice President/Credit Management Division of the Bank     59  
Christopher A. Walters
  Executive Vice President/CitizensTrust Division of the Bank     44  
 
Mr. Myers assumed the position of President and Chief Executive Officer of the Company and the Bank on August 1, 2006. Prior to that, Mr. Myers served as Chairman of the Board and Chief Executive Officer of Mellon First Business Bank from 2004 to 2006. From 1996 to 2003, Mr. Myers held several management positions with Mellon First Business Bank, including Executive Vice President, Regional Vice President, and Vice President/Group Manager.
 
Mr. Biebrich assumed the position of Chief Financial Officer of the Company and Executive Vice President/Chief Financial Officer of the Bank on February 2, 1998.
 
Mr. Coleman assumed the position of Executive Vice President of the Bank on December 5, 1988.
 
Mr. Mylett assumed the position of Executive Vice President and Senior Loan Officer of the Bank on March 1, 2006. Prior to that, he served as Senior Vice President Regional Manager of the Bank from July 2003 to March 2006 and the Burbank Business Financial Center Manager from June 2002 to July 2003. Prior to that, Mr. Mylett served as Executive Vice President, Chief Operating Officer and Senior Credit Officer for Western Security Bank from 1992 to June 2002.
 
Mr. Walters assumed the position of Executive Vice President of the Bank on June 27, 2007. From 2005 to 2006, he served as Senior Vice President for Atlantic Trust. From 2002 to 2004, he was Director of Private Banking for Citigroup. From 1994 to 2002, he served as a member of the Executive Committee and held a variety of management positions for Mellon Private Wealth Management.


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PART II
 
Item 5.   Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
Our common stock is traded on the Nasdaq National Market under the symbol “CVBF.” The following table presents the high and low closing sales prices and dividend information for our common stock during each quarter for the past two years. The Company had approximately 1,938 shareholders of record as of February 15, 2008.
 
Two Year Summary of Common Stock Prices
 
                         
Quarter
                 
Ended   High     Low     Dividends  
 
 3/31/2006
  $ 15.60     $ 14.71     $ 0.09 Cash Dividend  
 6/30/2006
  $ 15.59     $ 13.25     $ 0.09 Cash Dividend  
 9/30/2006
  $ 14.24     $ 12.83     $ 0.09 Cash Dividend  
12/31/2006
  $ 14.13     $ 12.83     $ 0.085 Cash Dividend  
                      10% Stock Dividend  
 3/31/2007
  $ 13.38     $ 11.42     $ 0.085 Cash Dividend  
 6/30/2007
  $ 12.40     $ 10.63     $ 0.085 Cash Dividend  
 9/30/2007
  $ 12.71     $ 9.51     $ 0.085 Cash Dividend  
12/31/2007
  $ 11.97     $ 9.98     $ 0.085 Cash Dividend  
 
For information on the ability of the Bank to pay dividends and make loans to the Company, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Cash Flow”.
 
Issuer Purchases of Equity Securities
 
On February 21, 2007, the Company’s Board of Directors approved a program to repurchase up to 2,000,000 shares of our common stock. This program was combined with the 775,163 shares that remained from our previous stock repurchase program, approved in October 2001. All but 55,389 of the 2,775,163 shares were repurchased through September 30, 2007 for a total price of $30.0 million.
 
On August 15, 2007, the Company’s Board of Directors approved a new program to repurchase up to 5,000,000 shares of our common stock. This program was combined with the 55,389 shares remaining from our previous stock repurchase program, approved in February 2007. During the fourth quarter of 2007, 375,143 shares were repurchased for a total price of $3.9 million. There is no expiration date for our current stock repurchase program. As of December 31, 2007, 4,680,246 shares are available to be repurchased in the future under this repurchase plan.
 
Issuer Purchases of Equity Securities
 
                                 
                      Maximum
 
                      Number of
 
                Total Number of
    Shares that
 
                Shares Purchased as
    May Yet Be
 
    Total Number
    Average
    Part of Publicly
    Purchased
 
    of Shares
    Price Paid
    Announced
    Under the
 
Period
  Purchased     per Share     Programs     Program  
 
10/1/07 - 10/31/07
                               
11/1/07 - 11/30/07
    375,143     $ 10.32       375,143       4,680,246  
12/1/07 - 12/31/07
                               
                                 
Total
    375,143     $ 10.32       375,143       4,680,246  
                                 


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Performance Graph
 
The following Performance Graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.
 
The following graph compares the yearly percentage change in CVB Financial Corp.’s cumulative total shareholder return (stock price appreciation plus reinvested dividends) on common stock (i) the cumulative total return of the Nasdaq National Market; and (ii) a published index comprised by Hemscott, Inc. of banks and bank holding companies in the Pacific region (the industry group line depicted below). The graph assumes an initial investment of $100 on January 1, 2003, and reinvestment of dividends through December 31, 2007. Points on the graph represent the performance as of the last business day of each of the years indicated. The graph is not necessarily indicative of future price performance. On June 11, 2001, CVB Financial Corp’s common stock ceased trading on the American Stock Exchange and began trading on the Nasdaq National Market System on the following business day.
 
COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG CVB FINANCIAL CORP.,
NASDAQ MARKET INDEX AND HEMSCOTT GROUP INDEX
 
(PERFORMANCE GRAPH)
 
                                                             
      2002     2003     2004     2005     2006     2007
CVB FINANCIAL CORP
      100.00         107.41         151.07         146.96         133.81         108.29  
HEMSCOTT GROUP INDEX
      100.00         151.45         184.88         193.62         202.01         144.94  
NASDAQ MARKET INDEX
      100.00         150.36         163.00         166.58         183.68         201.91  
                                                             


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ITEM 6.   Selected Financial Data.
 
The following table reflects selected financial information at and for the five years ended December 31. Throughout the past five years, the Company has acquired other banks. This may affect the comparability of the data.
 
                                         
    At December 31,  
    2007     2006     2005     2004     2003  
    (Amounts and numbers in thousands except per share amounts)  
 
Interest Income
  $ 341,277     $ 316,091     $ 246,884     $ 197,257     $ 166,346  
Interest Expense
    180,135       147,464       77,436       46,517       37,053  
                                         
Net Interest Income
    161,142       168,627       169,448       150,740       129,293  
                                         
Provision for Credit Losses
    4,000       3,000                    
Other Operating Income
    31,325       33,258       27,505       27,907       29,989  
Other Operating Expenses
    105,404       95,824       90,053       89,722       77,794  
                                         
Earnings Before Income Taxes
    83,063       103,061       106,900       88,925       81,488  
Income Taxes
    22,479       32,481       36,710       27,698       28,656  
                                         
NET EARNINGS
  $ 60,584     $ 70,580     $ 70,190     $ 61,227     $ 52,832  
                                         
Basic Earnings Per Common Share(1)
  $ 0.72     $ 0.84     $ 0.83     $ 0.74     $ 0.64  
                                         
Diluted Earnings Per Common Share(1)
  $ 0.72     $ 0.83     $ 0.83     $ 0.73     $ 0.63  
                                         
Cash Dividends Declared Per Common Share
  $ 0.340     $ 0.355     $ 0.420     $ 0.480     $ 0.480  
                                         
Cash Dividends paid
    28,479       27,876       27,963       23,821       21,638  
Dividend Pay-Out Ratio(3)
    47.01 %     39.50 %     39.60 %     38.74 %     40.96 %
Weighted Average Common Shares(1):
                                       
Basic
    83,600,316       84,154,216       84,139,254       83,221,496       82,813,541  
Diluted
    84,005,941       84,813,875       84,911,893       84,258,933       84,408,373  
Common Stock Data:
                                       
Common shares outstanding at year end(1)
    83,164,906       84,281,722       84,073,227       83,416,193       82,997,315  
Book Value Per Share(1)
  $ 5.11     $ 4.60     $ 4.07     $ 3.81     $ 3.45  
Financial Position:
                                       
Assets
  $ 6,293,963     $ 6,092,248     $ 5,422,283     $ 4,510,752     $ 3,854,349  
Investment Securities available-for-sale
    2,390,566       2,582,902       2,369,892       2,085,014       1,865,782  
Net Loans
    3,462,095       3,042,459       2,640,660       2,117,580       1,738,659  
Deposits
    3,364,349       3,406,808       3,424,045       2,875,039       2,660,510  
Borrowings
    2,339,809       2,139,250       1,496,000       1,186,000       786,500  
Junior Subordinated debentures
    115,055       108,250       82,476       82,746       82,476  
Stockholders’ Equity
    424,948       387,325       342,189       317,224       286,721  
Equity-to-Assets Ratio(2)
    6.75 %     6.36 %     6.31 %     7.03 %     7.44 %
Financial Performance:
                                       
Return on:
                                       
Beginning Equity
    15.64 %     20.63 %     22.13 %     21.44 %     20.33 %
Average Equity
    15.00 %     19.45 %     20.77 %     20.33 %     19.17 %
Average Assets
    1.00 %     1.22 %     1.44 %     1.47 %     1.54 %
Net Interest Margin (TE)
    3.03 %     3.30 %     3.86 %     3.99 %     4.18 %
Efficiency Ratio
    55.93 %     48.18 %     45.72 %     50.10 %     48.84 %


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    At December 31,  
    2007     2006     2005     2004     2003  
    (Amounts and numbers in thousands except per share amounts)  
 
Credit Quality:
                                       
Allowance for Credit Losses
  $ 33,049     $ 27,737     $ 23,204     $ 22,494     $ 21,282  
Allowance/Total Loans
    0.95 %     0.90 %     0.87 %     1.05 %     1.21 %
Total Non Performing Loans
  $ 1,435     $     $     $ 2     $ 548  
Non Performing Loans/Total Loans
    0.04 %     0.00 %     0.00 %     0.00 %     0.03 %
Allowance/Non Performing Loans
    2,303 %                 1,124,698 %     3,884 %
Net (Recoveries)/Charge-offs
  $ 1,358     $ (1,533 )   $ 46     $ (1,212 )   $ 1,418  
Net (Recoveries)/Charge-Offs/Average Loans
    0.04 %     −0.05 %     0.00 %     −0.06 %     0.09 %
Regulatory Capital Ratios
                                       
For the Company:
                                       
Leverage Ratio
    7.6 %     7.8 %     7.7 %     8.3 %     8.6 %
Tier 1 Capital
    11.0 %     12.2 %     11.3 %     12.6 %     13.2 %
Total Capital
    11.9 %     13.0 %     12.0 %     13.4 %     14.5 %
For the Bank:
                                       
Leverage Ratio
    7.1 %     7.0 %     7.3 %     7.8 %     8.6 %
Tier 1 Capital
    10.4 %     11.0 %     10.8 %     11.9 %     13.2 %
Total Capital
    11.2 %     11.8 %     11.5 %     12.7 %     14.2 %
 
 
(1) All earnings per share information has been retroactively adjusted to reflect the 10% stock dividend declared December 20, 2006 and paid January 19, 2007, the 5-for-4 stock split declared on December 21, 2005, which became effective January 10, 2006, the 5-for-4 stock split declared December 15, 2004, which became effective December 29, 2004, the 10% stock dividend declared December 17, 2003 and paid January 2, 2004, and the 5-for- 4 stock split declared December 18, 2002, which became effective January 3, 2003. Cash dividends declared per share are not restated in accordance with generally accepted accounting principles.
 
(2) Stockholders’ equity divided by total assets.
 
(3) Cash dividends divided by net earnings.
 
Item 7.   Management’s Discussion and Analysis of Financial Condition and the Results of Operations.
 
GENERAL
 
Management’s discussion and analysis is written to provide greater detail of the results of operations and the financial condition of CVB Financial Corp. and its subsidiaries. This analysis should be read in conjunction with the audited financial statements contained within this report including the notes thereto.
 
OVERVIEW
 
We are a bank holding company with one bank subsidiary, Citizens Business Bank. We have three other inactive subsidiaries: CVB Ventures, Inc.; Chino Valley Bancorp and ONB Bancorp. We are also the common stockholder of CVB Statutory Trust I, CVB Statutory Trust II and CVB Statutory Trust III which were formed to issue trust preferred securities in order to increase the capital of the Company. Through our acquisition of First Coastal Bancshares (“FCB”) in June 2007, we acquired FCB Capital Trust I and II. We are based in Ontario, California in what is known as the “Inland Empire”. Our geographical market area encompasses the City of Stockton (the middle of the Central Valley) in the center of California to the City of Laguna Beach (in Orange County) in the southern portion of California. Through our acquisition of FCB our geographic market has expanded to include the South Bay region of Los Angeles County. Our mission is to offer the finest financial products and services to professionals and businesses in our market area.

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Our primary source of income is from the interest earned on our loans and investments and our primary area of expense is the interest paid on deposits, borrowings, salaries and benefits. As such our net income is subject to fluctuations in interest rates and their impact on our income statement. Our net interest margin has been compressed over the last 2 years as a result of the interest rate environment. We are also subject to competition from other financial institutions, which may affect our pricing of products and services, and the fees and interest rates we can charge on them.
 
Economic conditions in our California service area impact our business. We have seen housing slow down and this has had an impact on us by means of the slower growth in construction loans and the decrease in deposit balances from escrow companies. Unemployment remains low, but job growth is slowing. The inland empire has been hit hardest in this downturn thus far. Approximately 29% of the total loan portfolio of $3.5 billion is located in the Inland Empire region of California. The rest of the portfolio is from outside of this region. Weaknesses in the local economy could adversely affect us through diminished loan demand and credit quality deterioration.
 
Over the past few years, we have been active in acquisitions and we will continue to pursue acquisition targets and engage in de novo branch activities to enable us to meet our business objectives and enhance shareholder value. Since 2000, we have acquired four banks and a leasing company, and we have opened four de novo branches in; Glendale, Bakersfield, Fresno, and Madera. In May 2007, we opened another de novo branch in Stockton, California. In February 2008, we opened our first Commercial Banking Group in Encino, California. This group will operate primarily as a sales office and focus on business clients and their principals, professionals, and high net-worth individuals.
 
Our growth in loans during 2007 compared with 2006 has allowed our interest income to grow. The Bank has always had an excellent base of interest free deposits primarily due to our specialization in businesses and professionals as customers. This has allowed us to have a low cost of deposits, currently 2.03% for the year ended December 31, 2007. However, the rise in interest expense resulting primarily from an increase in average interest-bearing liabilities and an increase in the cost of these liabilities has caused our net interest margin to decline to 3.03% for 2007, compared to 3.30% for 2006.
 
Our net income decreased to $60.6 million in 2007 compared with $70.6 million in 2006, a decrease of $10.0 million or 14.16%. Diluted earnings per share decreased $0.11, from $0.83 in 2006 to $0.72 in 2007. The decrease of $10.0 million is primarily the result of a decrease of $7.5 million in net interest income and an increase in non-interest expense of $9.6 million, offset by a $10.0 million reduction in our tax provision.
 
CRITICAL ACCOUNTING ESTIMATES
 
Critical accounting estimates are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that our most critical accounting estimates upon which our financial condition depends, and which involve the most complex or subjective decisions or assessment, are as follows:
 
Allowance for Credit Losses:  Arriving at an appropriate level of allowance for credit losses involves a high degree of judgment. Our allowance for credit losses provides for probable losses based upon evaluations of known and inherent risks in the loan and lease portfolio. The determination of the balance in the allowance for credit losses is based on an analysis of the loan and lease finance receivables portfolio using a systematic methodology and reflects an amount that, in our judgment, is adequate to provide for probable credit losses inherent in the portfolio, after giving consideration to the character of the loan portfolio, current economic conditions, past credit loss experience, and such other factors as deserve current recognition in estimating inherent credit losses. The provision for credit losses is charged to expense. For a full discussion of our methodology of assessing the adequacy of the allowance for credit losses, see “Risk Management” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Investment Portfolio:  The investment portfolio is an integral part of our financial performance. We invest primarily in fixed income securities. Accounting estimates are used in the presentation of the investment portfolio and these estimates do impact the presentation of our financial condition and results of operations. Many of the securities included in the investment portfolio are purchased at a premium or discount. The premiums or discounts


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are amortized or accreted over the life of the security. For mortgage-backed securities (“MBS”), the amortization or accretion is based on estimated average lives of the securities. The lives of these securities can fluctuate based on the amount of prepayments received on the underlying collateral of the securities. The amount of prepayments varies from time to time based on the interest rate environment (i.e., lower interest rates increase the likelihood of refinances) and the rate of turn over of the mortgages (i.e., how often the underlying properties are sold and mortgages are paid-off). We use estimates for the average lives of these mortgage backed securities based on information received from third parties whose business it is to compile mortgage related data and develop a consensus of that data. We adjust the rate of amortization or accretion regularly to reflect changes in the estimated average lives of these securities.
 
We classify securities as held-to-maturity those debt securities that we have the positive intent and ability to hold to maturity. Securities classified as trading are those securities that are bought and held principally for the purpose of selling them in the near term. All other debt and equity securities are classified as available-for-sale. Securities held-to-maturity are accounted for at cost and adjusted for amortization of premiums and accretion of discounts. Trading securities are accounted for at fair value with the unrealized holding gains and losses being included in current earnings. Securities available-for-sale are accounted for at fair value, with the net unrealized gains and losses, net of income tax effects, presented as a separate component of stockholders’ equity. At each reporting date, available-for-sale securities are assessed to determine whether there is an other-than-temporary impairment. Such impairment, if any, is required to be recognized in current earnings rather than as a separate component of stockholders’ equity. Realized gains and losses on sales of securities are recognized in earnings at the time of sale and are determined on a specific-identification basis. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Our investment in Federal Home Loan Bank (“FHLB”) stock is carried at cost.
 
Income Taxes:  We account for income taxes using the asset and liability method by deferring income taxes based on estimated future tax effects of differences between the tax and book basis of assets and liabilities considering the provisions of enacted tax laws. These differences result in deferred tax assets and liabilities, which are included in our balance sheets. We must also assess the likelihood that any deferred tax assets will be recovered from future taxable income and establish a valuation allowance for those assets determined to not likely be recoverable. Our judgment is required in determining the amount and timing of recognition of the resulting deferred tax assets and liabilities, including projections of future taxable income. Although we have determined a valuation allowance is not required for any of our deferred tax assets, there is no guarantee that these assets are recoverable.
 
Goodwill and Intangible Assets:  We have acquired entire banks and branches of banks. Those acquisitions accounted for under the purchase method of accounting have given rise to goodwill and intangible assets. We record the assets acquired and liabilities assumed at their fair value. These fair values are arrived at by use of internal and external valuation techniques. The excess purchase price is allocated to assets and liabilities respectively, resulting in identified intangibles. The identified intangibles are amortized over the estimated lives of the assets or liabilities. Any excess purchase price after this allocation results in goodwill. Goodwill is tested on an annual basis for impairment.


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ANALYSIS OF THE RESULTS OF OPERATIONS
 
The following table summarizes net earnings, earnings per common share, and key financial ratios for the periods indicated.
 
                         
    For the Years Ended December 31,  
    2007     2006     2005  
    (Dollars in thousands, except per share amounts)  
 
Net earnings
  $ 60,584     $ 70,580     $ 70,190  
Earnings per common share:
                       
Basic(1)
  $ 0.72     $ 0.84     $ 0.83  
Diluted(1)
  $ 0.72     $ 0.83     $ 0.83  
Return on average assets
    1.00 %     1.22 %     1.44 %
Return on average shareholders’ equity
    15.00 %     19.45 %     20.77 %
 
 
(1) All earnings per share information has been retroactively adjusted to reflect the 10% stock dividend declared December 20, 2006 and paid January 19, 2007 and the 5-for-4 stock split declared on December 21, 2005, which became effective January 10, 2006.
 
Earnings
 
We reported net earnings of $60.6 million for the year ended December 31, 2007. This represented a decrease of $10.0 million, or 14.16%, from net earnings of $70.6 million for the year ended December 31, 2006. Net earnings for 2006 increased $392,000 to $70.6 million, or 0.56%, over net earnings of $70.2 million for the year ended December 31, 2005. Diluted earnings per share were $0.72 in 2007, as compared to $0.83 in 2006, and $0.83 in 2005. Basic earnings per share were $0.72 in 2007, as compared to $0.84 in 2006, and $0.83 in 2005. Diluted and basic earnings per share have been adjusted for the effects of a ten percent stock dividend declared December 20, 2006 and paid on January 19, 2007 and a 5-for-4 stock split declared December 21, 2005, which became effective January 10, 2006.
 
The decrease in net earnings for 2007 compared to 2006 was primarily the result of a decrease in net interest margin and increase in other operating expenses. Our financial results and operations have been affected by competition which has manifested itself with increased pricing pressures for loans and deposits, thus compressing our net interest margin. In addition, as interest rates have risen, the costs of our borrowings have increased at a faster rate than the increase in the yield on our investments. Because of the pressure on the net interest margin, other operating income has become a more important element in the total revenue of the Company. The increase in net earnings for 2006 compared to 2005 was primarily the result of an increase in other operating income, offset by a decrease in net interest margin and an increase in other operating expenses.
 
For 2007, our return on average assets was 1.00%, compared to 1.22% for 2006, and 1.44% for 2005. Our return on average stockholders’ equity was 15.00% for 2007, compared to a return of 19.45% for 2006, and 20.77% for 2005.
 
Net Interest Income
 
The principal component of our earnings is net interest income, which is the difference between the interest and fees earned on loans and investments (earning assets) and the interest paid on deposits and borrowed funds (interest-bearing liabilities). Net interest margin is the taxable-equivalent of net interest income as a percentage of average earning assets for the period. The level of interest rates and the volume and mix of earning assets and interest-bearing liabilities impact net interest income and net interest margin. The net interest spread is the yield on average earning assets minus the cost of average interest-bearing liabilities. Our net interest income, interest spread, and net interest margin are sensitive to general business and economic conditions. These conditions include short-term and long-term interest rates, inflation, monetary supply, and the strength of the economy, in general, and the local economies in which we conduct business. Our ability to manage net interest income during changing interest rate environments will have a significant impact on our overall performance. Our balance sheet is currently liability-


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sensitive; meaning interest-bearing liabilities will generally reprice more quickly than earning assets. Therefore, our net interest margin is likely to decrease in sustained periods of rising interest rates and increase in sustained periods of declining interest rates. We manage net interest income through affecting changes in the mix of earning assets as well as the mix of interest-bearing liabilities, changes in the level of interest-bearing liabilities in proportion to earning assets, and in the growth of earning assets.
 
Our net interest income, after provision for credit losses totaled $157.1 million for 2007. This represented a decrease of $8.5 million, or 5.12%, from net interest income of $165.6 million for 2006. Net interest income for 2006 decreased $3.8 million, or 2.25%, from net interest income of $169.4 million for 2005. The decrease in net interest income of $8.5 million for 2007 resulted from an increase of $25.2 million in interest income offset by an increase of $32.7 million in interest expense and a $1.0 million increase in provision for credit losses. The increase in interest income of $25.2 million resulted from the $297.7 million increase in average earning assets and the increase in yield on earning assets to 6.17% in 2007 from 6.04% in 2006. The increase of $32.7 million in interest expense resulted from the increase in the average rate paid on interest-bearing liabilities to 4.11% in 2007 from 3.70% in 2006, and an increase of $359.9 million in average interest-bearing liabilities.
 
The major reason for the decrease in net interest income was the flattening of the yield curve and its affect on our liabilities. Our interest-bearing liabilities are comprised of customer deposits and borrowings from primarily the FHLB or other correspondent banks. The borrowings are at market rates and have reset upwards as average rates rose in 2007. As a result of increased competition, our rates on customer deposits have risen also, but slower than rates on borrowings.
 
The decrease in net interest income of $3.8 million for 2006 as compared to 2005 resulted from an increase of $69.2 million in interest income offset by a $70.0 million increase in interest expense and a $3.0 million increase in provision for credit losses. This increase in interest income of $69.2 million resulted from the $848.9 million increase in average earning assets and the increase in yield on earning assets to 6.04% in 2006 from 5.57% in 2005. The increase of $70.0 million in interest expense was the result of an increase in the average rate paid on interest-bearing liabilities to 3.70% in 2006 from 2.49% in 2005, and an increase of $877.8 million in average interest-bearing liabilities.
 
Interest income totaled $341.3 million for 2007. This represented an increase of $25.2 million, or 7.97%, compared to total interest income of $316.1 million for 2006. For 2006, total interest income increased $69.2 million, or 28.03%, over total interest income of $246.9 million for 2005. The increase in total interest income was primarily due to an increase in volume of interest earning assets and increase in interest rates in 2007, 2006, and 2005 on total earning assets.
 
Interest expense totaled $180.1 million for 2007. This represented an increase of $32.7 million, or 22.15%, over total interest expense of $147.5 million for 2006. For 2006, total interest expense increased $70.0 million, or 90.43%, over total interest expense of $77.4 million for 2005. The increase in total interest expense was primarily due to an increase in average interest-bearing liabilities and increases in average rates in 2007, 2006, and 2005 on total interest-bearing liabilities.


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Table 1 represents the composition of average interest-earning assets and average interest-bearing liabilities by category for the periods indicated, including the changes in average balance, composition, and yield/rate between these respective periods:
 
TABLE 1 — Distribution of Average Assets, Liabilities, and Stockholders’ Equity;
Interest Rates and Interest Differentials
 
                                                                         
    Twelve-Month Period Ended December 31,  
    2007     2006     2005  
    Average
          Average
    Average
          Average
    Average
          Average
 
    Balance     Interest     Rate     Balance     Interest     Rate     Balance     Interest     Rate  
    (Amounts in thousands)  
 
ASSETS
Investment Securities Taxable
  $ 1,722,605     $ 85,899       4.99 %   $ 1,907,713     $ 91,029       4.80 %   $ 1,774,842     $ 76,573       4.31 %
Tax preferenced(1)
    666,278       29,231       5.88 %     604,222       26,545       5.90 %     425,877       19,078       5.99 %
Investment in FHLB stock
    80,789       4,229       5.23 %     74,368       3,721       5.00 %     64,144       2,559       3.99 %
Federal Funds Sold & Interest Bearing Deposits with other institutions
    1,876       109       5.81 %     1,843       92       4.99 %     8,908       253       2.84 %
Loans(2)(3)
    3,226,086       221,809       6.88 %     2,811,782       194,704       6.92 %     2,277,304       148,421       6.52 %
                                                                         
Total Earning Assets
    5,697,634       341,277       6.17 %     5,399,928       316,091       6.04 %     4,551,075       246,884       5.57 %
Total Non Earning Assets
    382,869                       363,892                       317,676                  
                                                                         
Total Assets
  $ 6,080,503                     $ 5,763,820                     $ 4,868,751                  
                                                                         
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Savings Deposits(4)
  $ 1,288,745     $ 31,764       2.46 %   $ 1,220,441     $ 26,637       2.18 %   $ 1,140,703     $ 13,907       1.22 %
Time Deposits
    844,667       37,533       4.44 %     940,634       40,543       4.31 %     539,433       15,001       2.78 %
                                                                         
Total Deposits
    2,133,412       69,297       3.25 %     2,161,075       67,180       3.11 %     1,680,136       28,908       1.72 %
Other Borrowings
    2,214,108       110,838       4.94 %     1,826,532       80,284       4.40 %     1,429,632       48,528       3.39 %
                                                                         
Interest Bearing Liabilities
    4,347,520       180,135       4.11 %     3,987,607       147,464       3.70 %     3,109,768       77,436       2.49 %
                                                                         
Non-interest bearing deposits
    1,285,857                       1,354,014                       1,382,968                  
Other Liabilities
    43,285                       59,296                       38,057                  
Stockholders’ Equity
    403,841                       362,903                       337,958                  
                                                                         
Total Liabilities and Stockholders’ Equity
  $ 6,080,503                     $ 5,763,820                     $ 4,868,751                  
                                                                         
Net interest income
          $ 161,142                     $ 168,627                     $ 169,448          
                                                                         
Net interest spread — tax equivalent
                    2.06 %                     2.34 %                     3.08 %
Net interest margin
                    2.86 %                     3.13 %                     3.73 %
Net interest margin — tax equivalent
                    3.03 %                     3.30 %                     3.86 %
Net interest margin excluding loan fees
                    2.76 %                     3.02 %                     3.52 %
Net interest margin excluding loan fees — tax equivalent
                    2.93 %                     3.19 %                     3.65 %
 
 
(1) Includes tax-exempt income of $9.9 million for 2007, $8.7 million for 2006 and $6.1 million for 2005. Non tax equivalent rate was 4.39% for 2007, 4.44% for 2006, and 4.64% for 2005.
 
(2) Loan fees are included in total interest income as follows, (000)s omitted: 2007, $5,584; 2006, $5,818; 2005, $8,003
 
(3) Non performing loans are included in net loans as follows, (000)s omitted: 2007, $1,435; 2006, $0; 2005, $0
 
(4) Includes interest bearing demand and money market accounts


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As stated above, the net interest margin measures net interest income as a percentage of average earning assets. Our tax effected (TE) net interest margin was 3.03% for 2007, compared to 3.30% for 2006, and 3.86% for 2005. The decreases in the net interest margin over the last three years are the result of the increasing interest rate environment, which impacted interest earned and interest paid as a percent of earning assets. Although the yield on earning assets increased, this was offset by higher interest paid on interest-bearing liabilities.
 
It is difficult to attribute the net interest margin changes to any one factor. However, the banking and financial services businesses in our market areas are highly competitive. This competition has an influence on the strategies we employ. In addition, the general increase in interest rates had an impact on interest earned and interest paid as a percent of earning assets. Although the yield on earning assets increased, this was offset by higher interest paid on interest-bearing liabilities. During the fourth quarter of 2007, the decline in interest rates have helped improve our margins. We expect that the decline in interest rates will continue into 2008.
 
Our non-interest-bearing deposits declined in 2007. This was due primarily to the competition for these types of deposits. As a result, we needed to borrow more funds through advances from FHLB, increasing our costs and decreasing our net interest income.
 
The decline in net interest margin is due to the cost of interest-bearing liabilities rising faster than the increase in yields on earning assets. This decline in net interest margin has been mitigated by the strong growth in the balance sheet. Average earning assets increased from $4.6 billion in 2005, to $5.4 billion in 2006, and to $5.7 billion in 2007. This represents a 5.51% increase in 2007 from 2006 and an 18.65% increase in 2006 from 2005. In addition, the Company has approximately $1.30 billion, or 38.52%, of its deposits in interest free demand deposits as of December 31, 2007.
 
The net interest spread is the difference between the yield on average earning assets less the cost of average interest-bearing liabilities. The net interest spread is an indication of our ability to manage interest rates received on loans and investments and paid on deposits and borrowings in a competitive and changing interest rate environment. Our net interest spread (TE) was 2.06% for 2007, 2.34% for 2006, and 3.08% for 2005. The decrease in the net interest spread for 2007 as compared to 2006 resulted from a 13 basis point increase in the yield on earning assets offset by a 41 basis point increase in the cost of interest-bearing liabilities, thus generating a 28 basis point decrease in the net interest spread. The decrease in the net interest spread for 2006 resulted from a 47 basis point increase in the yield on earning assets and a 121 basis point increase in the cost of interest-bearing liabilities, thus generating a 74 basis point decrease in the net interest spread.
 
The yield (TE) on earning assets increased to 6.17% for 2007, from 6.04% for 2006, and reflects an increasing average interest rate environment and a change in the mix of earning assets. Investments as a percent of earning assets decreased to 41.93% in 2007 from 46.52% in 2006. The yield on loans for 2007 decreased slightly to 6.88% as compared to 6.92% for 2005. The yield on investments for 2007 increased to 5.24% as compared to 5.06% in 2006. The yield on loans for 2006 increased to 6.92% as compared to 6.52% for 2005. The yield on investments increased to 5.06% in 2006 as compared to 4.64% in 2005.
 
The cost of average interest-bearing liabilities increased to 4.11% for 2007 as compared to 3.70% for 2006 and 2.49% for 2005. These variations reflected a change in the mix of interest-bearing liabilities and an increasing interest rate environment in 2007 and 2006. Borrowings as a percent of interest-bearing liabilities increased to 50.93% for 2007 as compared to 45.81% for 2006 and 45.97% for 2005. Borrowings typically have a higher cost than interest-bearing deposits. The cost of interest-bearing deposits for 2007 increased to 3.25% as compared to 3.11% for 2006 and 1.72% for 2005, reflecting an increasing interest rate environment in 2006 and 2007. The cost of borrowings for 2007 increased to 4.94% as compared to 4.40% for 2006, and 3.39% for 2005, also reflecting the same increasing interest rate environment. The FDIC has approved the payment of interest on certain demand deposit accounts. This could have a negative impact on our net interest margin, net interest spread, and net earnings, should this be implemented fully. Currently, the only deposits for which we pay interest on are NOW, Money Market and TCD Accounts.
 
Table 2 presents a comparison of interest income and interest expense resulting from changes in the volumes and rates on average earning assets and average interest-bearing liabilities for the years indicated. Changes in interest income or expense attributable to volume changes are calculated by multiplying the change in volume by


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the initial average interest rate. The change in interest income or expense attributable to changes in interest rates is calculated by multiplying the change in interest rate by the initial volume. The changes attributable to interest rate and volume changes are calculated by multiplying the change in rate times the change in volume.
 
                                                                 
    Comparison of Years Ended December 31,  
    2007 Compared to 2006
    2006 Compared to 2005
 
    Increase (Decrease) Due to     Increase (Decrease) Due to  
                Rate/
                      Rate/
       
    Volume     Rate     Volume     Total     Volume     Rate     Volume     Total  
    (Amounts in thousands)  
 
Interest Income:
                                                               
Taxable investment securities
  $ (8,822 )   $ 3,622     $ 70     $ (5,130 )   $ 6,211     $ 8,467     $ (222 )   $ 14,456  
Tax-advantaged securities
    3,606       (121 )     (799 )     2,686       10,299       (383 )     (2,449 )     7,467  
Fed funds sold & interest-bearing deposits with other institutions
    2       15             17       (201 )     192       (152 )     (161 )
Investment in FHLB stock
    321       171       17       509       408       648       106       1,162  
Loans
    28,670       (1,125 )     (440 )     27,105       34,848       9,109       2,326       46,283  
                                                                 
Total interest on earning assets
    23,777       2,562       (1,152 )     25,187       51,565       18,033       (391 )     69,207  
                                                                 
Interest Expense:
                                                               
Savings deposits
    1,489       3,417       249       5,155       973       10,951       821       12,745  
Time deposits
    (4,136 )     1,223       (125 )     (3,038 )     11,153       8,253       6,121       25,527  
Other borrowings
    17,290       10,000       3,265       30,555       13,642       14,640       3,474       31,756  
                                                                 
Total interest on interest-bearing liabilities
    14,643       14,640       3,389       32,672       25,768       33,844       10,416       70,028  
                                                                 
Net Interest Income
  $ 9,134     $ (12,078 )   $ (4,541 )   $ (7,485 )   $ 25,797     $ (15,811 )   $ (10,807 )   $ (821 )
                                                                 
 
Interest and Fees on Loans
 
Our major source of revenue is interest and fees on loans, which totaled $221.8 million for 2007. This represented an increase of $27.1 million, or 13.92%, over interest and fees on loans of $194.7 million for 2006. For 2006, interest and fees on loans increased $46.3 million, or 31.18%, over interest and fees on loans of $148.4 million for 2005. The increase in interest and fees on loans for 2007 reflects the increase in average loan balances offset by a slight decrease in loan yield. For 2006, interest and fees on loans reflects increases in the average balance of loans and increases in interest rates. The yield on loans decreased to 6.88% for 2007, compared to 6.92% for 2006 and 6.52% 2005. Deferred loan origination fees, net of costs, totaled $11.9 million at December 31, 2007. This represented an increase of $1.2 million, or 11.61%, from deferred loan origination fees, net of costs, of $10.6 million at December 31, 2006.
 
In general, we stop accruing interest on a loan after its principal or interest becomes 90 days or more past due. When a loan is placed on non-accrual, all interest previously accrued but not collected is charged against earnings. There was no interest income that was accrued and not reversed on non-performing loans at December 31, 2007, 2006, and 2005. For 2007, we had $1.4 million of non-performing loans. Had non-performing loans for which interest was no longer accruing complied with the original terms and conditions of their notes, interest income would have been $90,000 greater for 2007. For 2006 and 2005 we had no non-performing loans.
 
Fees collected on loans are an integral part of the loan pricing decision. Loan fees and the direct costs associated with the origination of loans are deferred and deducted from total loans on our balance sheet. Deferred


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net loan fees are recognized in interest income over the term of the loan using the effective-yield method. We recognized loan fee income of $5.6 million for 2007, $5.8 million for 2006 and $8.0 million for 2005.
 
Table 3 summarizes loan fee activity for the Bank for the years indicated.
 
                         
    2007     2006     2005  
    (Amounts in thousands)  
 
Fees Collected
  $ 6,818     $ 5,261     $ 10,634  
Fees and costs deferred
    (2,734 )     (2,376 )     (7,342 )
Accretion of deferred fees and costs
    1,501       2,933       4,711  
                         
Total fee income reported
  $ 5,585     $ 5,818     $ 8,003  
                         
Deferred net loan origination fees at end of year
  $ 11,857     $ 10,624     $ 10,766  
                         
 
Interest on Investments
 
The second most important component of interest income is interest on investments, which totaled $119.5 million for 2007. This represented a decrease of $1.9 million, or 1.58%, from interest on investments of $121.4 million for 2006. For 2006, interest on investments increased $22.9 million, or 23.28%, over interest on investments of $98.5 million for 2005. The decrease in interest on investments for 2007 as compared to 2006 reflected the increase in interest rates partially offset by decreases in average balances. The interest rate environment and the investment strategies we employ directly affect the yield on the investment portfolio. We continually adjust our investment strategies in response to the changing interest rate environments in order to maximize the rate of total return consistent within prudent risk parameters, and to minimize the overall interest rate risk of the Company. The weighted-average yield on investments was 5.24% for 2007, compared to 5.06% for 2006 and 4.64% for 2005.
 
Provision for Credit Losses
 
We maintain an allowance for inherent credit losses that is increased by a provision for credit losses charged against operating results. Provision for credit losses is determined by management as the amount to be added to the allowance for probable credit losses after net charge-offs have been deducted to bring the allowance to an adequate level which, in management’s best estimate, is necessary to absorb probable credit losses within the existing loan portfolio. As such, we made a provision for credit losses of $4.0 million in 2007 and $3.0 million in 2006. We did not make a provision for credit losses during 2005. We believe the allowance is appropriate. The ratio of the allowance for credit losses to total loans as of December 31, 2007 and 2006 was 0.95% and 0.90%, respectively. No assurance can be given that economic conditions which adversely affect the Company’s service areas or other circumstances will not be reflected in increased provisions for credit losses in the future. The nature of this process requires considerable judgment. The net charge-offs totaled $1.4 million in 2007, net recoveries totaled $1.5 million in 2006, and net charge-offs totaled $46,000 in 2005. See “Risk Management — Credit Risk” herein.


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Other Operating Income
 
The components of other operating income were as follows:
 
                         
    For the Years Ended December 31,  
    2007     2006     2005  
    (Dollars in thousands, except per share amounts)  
 
Service charges on deposit accounts
  $ 13,381     $ 13,080     $ 13,251  
CitizensTrust
    7,226       7,385       6,652  
Bankcard services
    2,530       2,486       2,453  
BOLI Income
    3,839       3,051       2,797  
Other
    4,349       6,199       4,668  
Gain/(Loss) on sale of securities, net
          1,057       (46 )
Impairment charge on investment securities
                (2,270 )
                         
Total other operating income
  $ 31,325     $ 33,258     $ 27,505  
                         
 
Other operating income, totaled $31.3 million for 2007. This represents a decrease of $1.9 million, or 5.81%, from other operating income, including realized gains on the sales of investment securities, of $33.3 million for 2006. During 2006, other operating income, including realized gains on the sales of investment securities, increased $5.8 million or 20.91%, over other operating income, including realized losses on the sales of investment securities, of $27.5 million for 2005.
 
Other operating income as a percent of net revenues (net interest income before loan loss provision plus other operating income) was 16.28% for 2007, as compared to 16.47% for 2006 and 13.97% for 2005.
 
Service charges on deposit accounts totaled $13.4 million in 2007. This represented an increase of $301,000 or 2.30% over service charges on deposit accounts of $13.1 million in 2006. Service charges for demand deposit (checking) accounts for business customers are generally charged based on an analysis of their activity and include an earnings allowance based on their average balances. Service charges on deposit accounts in 2006 decreased $171,000 or 1.29% from service charges on deposit accounts of $13.3 million in 2005. Service charges on deposit accounts represented 42.72% of other operating income in 2007, as compared to 39.33% in 2006 and 48.18% in 2005.
 
CitizensTrust consists of Trust Services and Investment Services. Trust Services provides a variety of services, which include asset management services (both full management services and custodial services), estate planning, retirement planning, private and corporate trustee services, and probate services. Investment Services provides mutual funds, certificates of deposit, and other non-insured investment products. CitizensTrust generated fees of $7.2 million in 2007. This represents a decrease of $159,000, or 2.15% from fees generated of $7.4 million in 2006. Fees generated by CitizensTrust represented 23.07% of other operating income in 2007, as compared to 22.20% in 2006 and 24.19% in 2005.
 
Bankcard Services, which provides merchant bankcard services, generated fees totaling $2.5 million in each of the three years 2007, 2006 and 2005. Fees generated by Bankcard represented 8.08% of other operating income in 2007, as compared to 7.48% in 2006 and 8.92% in 2005.
 
Bank Owned Life Insurance (“BOLI”) income totaled $3.8 million in 2007. This represents an increase of $788,000, or 25.84%, over BOLI income generated of $3.1 million for 2006. BOLI income in 2006 increased $254,000, or 9.08% over BOLI income generated of $2.8 million for 2005. The increase in BOLI income was due to the purchase of $25.0 million in BOLI in September 2006.
 
Other fees and income, which includes wire fees, other business services, international banking fees, check sale, ATM fees, miscellaneous income, etc, generated fees totaling $4.3 million in 2007. This represented a decrease of $1.8 million, or 29.83% from other fees and income generated of $6.2 million in 2006. The increase in 2006 is primarily due to the gain on sale of the Arcadia and former Operations Center buildings of $726,000 and a legal settlement of $750,000.


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We recorded an impairment charge on investment securities of $2.3 million in 2005. This charge was due to two issues of Federal Home Loan Mortgage Corporation (“Freddie Mac”) preferred stock which were determined to be other-than-temporarily impaired. Although these securities reset with LIBOR (one issue resets to the 3-month LIBOR rate every three months and the other resets to the 12-month LIBOR every twelve months), the market value of the Freddie Mac preferred stock had not recovered accordingly. Since there was a loss of value that was deemed to be other-than-temporary, we charged $2.3 million against the earnings in 2005 to adjust for the impairment of the two issues of preferred stock. During the third quarter of 2006, we sold all of our shares of Freddie Mac Preferred Stock at a net gain of $1.1 million based on our book values after write downs of $8.6 million in prior periods.
 
The sales of securities generated a realized gain of $1.1 million in 2006 and a realized loss of $46,000 in 2005. The gains/losses on sales of securities in prior years were primarily due to repositioning of the investment portfolio to take advantage of the current interest rate cycle.
 
Other Operating Expenses
 
The components of other operating expenses were as follows:
 
                         
    For the Years Ended December 31,  
    2007     2006     2005  
    (Dollars in thousands, except per
 
    share amounts)  
 
Salaries and employee benefits
  $ 55,303     $ 50,509     $ 51,535  
Occupancy
    10,540       8,572       8,327  
Equipment
    7,026       7,025       7,578  
Stationery and supplies
    6,712       6,492       5,569  
Professional services
    6,274       5,896       4,268  
Promotion
    5,953       6,251       5,835  
Amortization of Intangibles
    2,969       2,353       2,061  
Other
    10,627       8,726       4,880  
                         
Total other operating expenses
  $ 105,404     $ 95,824     $ 90,053  
                         
 
Other operating expenses totaled $105.4 million for 2007. This represents an increase of $9.6 million, or 10.0%, over other operating expenses of $95.8 million for 2006. During 2006, other operating expenses increased $5.8 million, or 6.41%, over other operating expenses of $90.1 million for 2005.
 
For the most part, other operating expenses reflect the direct expenses and related administrative expenses associated with staffing, maintaining, promoting, and operating branch facilities. Our ability to control other operating expenses in relation to asset growth can be measured in terms of other operating expenses as a percentage of average assets. Operating expenses measured as a percentage of average assets decreased to 1.73% for 2007, compared to 1.97% for 2006, and 1.85% for 2005. The decrease in the ratio in 2007 indicates that management is controlling greater levels of assets with proportionately smaller operating expenses, an indication of operating efficiency.
 
Our ability to control other operating expenses in relation to the level of net revenue (net interest income plus other operating income) is measured by the efficiency ratio and indicates the percentage of net revenue that is used to cover expenses. For 2007, the efficiency ratio was 55.93%, compared to 48.18% for 2006 and 45.72% for 2005. The increase in 2007 is due to increases in salaries and related expenses and other expenses as discussed below.
 
Salaries and related expenses comprise the greatest portion of other operating expenses. Salaries and related expenses totaled $55.3 million for 2007. This represented an increase of $4.8 million, or 9.49%, over salaries and related expenses of $50.5 million for 2006. Salary and related expenses decreased $1.0 million, or 1.99%, from salaries and related expenses of $51.5 million for 2005. At December 31, 2007, we employed 766 persons, 541 on a full-time and 225 on a part-time basis, this compares to 752 persons, 522 on a full-time and 230 on a part-time basis at December 31, 2006, and 719 persons, 493 on a full-time and 226 on a part-time basis at December 31, 2005. The increases primarily resulted from increased staffing levels as a result of the overall growth of the Company and the


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addition of new business financial centers through the FCB acquisition. Salaries and related expenses as a percent of average assets decreased to 0.91% for 2007, compared to 1.04% for 2006, and 1.06% for 2005.
 
Stationery and supplies expense totaled $6.7 million for 2007, compared to $6.5 million in 2006 and $5.6 million in 2005. The increase was primarily due to the overall internal growth of the business and the addition of new business financial centers through the FCB acquisition.
 
Professional services totaled $6.3 million for 2007. This represented an increase of $378,000 or 6.41%, over expense of $5.9 million for 2006. For 2006, professional services increased $1.6 million, or 38.13%, over expense of $4.3 million for 2005. The increases were primarily due to professional expenses incurred for recruitment of new associates and legal fees due to outstanding litigation.
 
Promotion expense totaled $6.0 million for 2007. This represented a decrease of $298,000, or 4.77%, from expense of $6.3 million for 2006. Promotion expense increased in 2006 by $417,000, or 7.14%, over expense of $5.8 million for 2005. The increase in 2006 of promotional expenses was primarily associated with increases in advertising expense as we expand our market area.
 
Other operating expenses totaled $10.6 million for 2007. This represented an increase of $1.9 million, or 21.79%, over expense of $8.7 million for 2006. The increase in 2007 was primarily due to $1.2 million increase in the provision for unfunded commitments during 2007 and $675,000 related to the Bank’s share of allocable losses from certain tax-preferenced investments. The increase in provision for unfunded commitments in 2007 compared to 2006 was primarily due to an increase in loan commitments and more specifically, an increase in classified loans related to those commitments. Other operating expenses increased for 2006 by $3.8 million, or 78.81%, over an expense of $4.9 million for 2005. The increase in 2006 was primarily due to the reversal of our prior accrual for the settlement of a robbery loss of $2.6 million in the first quarter of 2005 and increases in third-party data processing and loan expenses during 2006.
 
Results of Segment Operations
 
We have two reportable business segments, which are Business Financial Centers and Treasury. The results of these two segments are included in the reconciliation between business segment totals and our consolidated total. Our business segments do not include the results of administration units that do not meet the definition of an operating segment.


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Business Financial Centers
 
Key measures we use to evaluate the Business Financial Center’s performance are included in the following table for years ended December 31, 2007, 2006 and 2005. The table also provides additional significant segment measures useful to understanding the performance of this segment.
 
                         
    For the Years Ended December 31,  
    2007     2006     2005  
    (Dollars in thousands)  
 
Key Measures:
                       
Statement of Operations
                       
Interest income
  $ 234,142     $ 219,663     $ 157,474  
Interest expense
    77,848       58,469       26,232  
Non-interest income
    18,148       15,136       12,256  
Non-interest expense
    44,558       41,258       38,064  
                         
Segment pretax profit
  $ 129,884     $ 135,072     $ 105,434  
                         
Balance Sheet
                       
Average loans
  $ 3,226,086     $ 2,811,782     $ 2,277,304  
Average interest-bearing deposits
  $ 2,133,412     $ 2,161,075     $ 1,680,136  
Yield on loans
    6.88 %     6.92 %     6.52 %
Rate paid on deposits
    3.25 %     3.11 %     1.72 %
 
For 2007, interest income increased $14.5 million, or 6.59%, when compared with interest income during 2006. For 2006, interest income increased $62.2 million, or 39.49%, when compared with interest income during 2005. This is due to the increase in balances outstanding on loans and increases in interest rates. Average loan balances increased year over year by $414.3 million, or 14.73% in 2007 and $534.5 million, or 23.47% in 2006.
 
For 2007, interest expense increased $19.4 million, or 33.14%, when compared with interest expense during 2006. For 2006, interest expense increased $32.2 million, or 122.89%, when compared with interest income during 2005. The rapid increase in interest expense is due to the continued increase in interest rates offered on deposit products. Pricing pressures on deposits continue to take place in the market place. Deposit costs increased by 14 basis points while loan yields decreased by 4 basis points.
 
Non-interest income and non-interest expense also had increases when compared to the prior periods. The increases have been consistent year over year, primarily due to the growth of the Company. Non-interest income increased $3.0 million or 19.90% during 2007 over 2006 and increased $2.9 million, or 23.50% during 2006 over 2005. Non-interest expense also increased $3.3 million, or 8.00% for 2007 and $3.2 million, or 8.39% for 2006.


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Treasury
 
Key measures we use to evaluate the Treasury’s performance are included in the following table for the years ended December 31, 2007, 2006, and 2005. The table also provides additional significant segment measures useful to understanding the performance of this segment.
 
                         
    For the Years Ended December 31,  
    2007     2006     2005  
    (Dollars in thousands)  
 
Key Measures:
                       
Statement of Operations
                       
Interest income
  $ 119,544     $ 121,438     $ 98,524  
Interest expense
    129,698       115,839       75,746  
Non-interest income
    1       1,058       2  
Non-interest expense
    1,148       1,123       3,538  
                         
Segment pretax profit (loss)
  $ (11,301 )   $ 5,534     $ 19,242  
                         
Balance Sheet
                       
Average investments
  $ 2,471,548     $ 2,588,146     $ 2,273,771  
Average borrowings
  $ 2,214,108     $ 1,826,532     $ 1,429,632  
Yield on investments-TE
    5.24 %     5.06 %     4.64 %
Non-tax equivalent yield
    4.39 %     4.44 %     4.54 %
Rate paid on borrowings
    4.94 %     4.40 %     3.39 %
 
For 2007, interest income decreased $1.9 million, or 1.56% from 2006. The decrease is due to the planned reduction of the investment portfolio. Average investment balances decreased $116.6 million during 2007. Since September 2006, we have allowed $253.0 million in investment balances to roll off the balance sheet, allowing us to de-leverage our balance sheet. Our current strategy is to allow a portion of the cash flow from our investment portfolio to either pay down borrowings or fund loans. For 2006, interest income increased $22.9 million, or 23.26% over 2005. The increase in 2006 is attributed to higher average investment balances and an increase in investment yields.
 
For 2007, interest expense increased $13.9 million or 11.96%, when compared with 2006. For 2006, interest expense increased $40.1 million, or 52.93%, when compared with 2005. This is due to the re-pricing of FHLB Advances which fund the investment portfolio. Short-term funding rates have remained higher than the longer term rates; and since most of our advances had a maturity date of one year or less, they re-priced to a higher interest rate while our investment portfolio did not re-price as quickly. The cost of funding increased to 4.94% in 2007 from 4.40% in 2006 and 3.39% in 2005.
 
The result of increases in cost of funds reduced the Treasury segment pretax income from $19.2 million in 2005 to $5.5 million in 2006 and to a net loss of $11.3 million in 2007.
 
There are no provisions for credit losses or taxes in the segments as these are accounted for at the corporate level.


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Other
 
                         
    For The Years Ended December 31,  
    2007     2006     2005  
    (Dollars in thousands)  
 
Key Measures:
                       
Statement of Operations
                       
Interest income
  $ 61,360     $ 52,879     $ 35,490  
Interest expense
    46,358       51,045       20,062  
                         
Net interest income
  $ 15,002     $ 1,834     $ 15,428  
                         
Provision for Credit Losses
    4,000       3,000        
Non-interest income
    13,176       17,064       15,247  
Non-interest expense
    59,698       53,443       48,451  
                         
Pre-tax loss
  $ (35,520 )   $ (37,545 )   $ (17,776 )
                         
 
The Company’s administration and other operating departments reported pre-tax loss of $35.5 million for the year ended December 31, 2007. This represented a decrease of $2.0 million, or 5.39%, from pre-tax loss of $37.5 million for the year ended December 31, 2006. Pre-tax loss for 2006 increased $19.8 million to $37.5 million, or 111.2%, over pre-tax loss of $17.8 million for 2005. The increase in 2006 is attributed to increased interest expense due to an increasing interest rate environment resulting in higher charge for funds used and an increase in non-interest expense and provision for credit losses.
 
Income Taxes
 
Our effective tax rate for 2007 was 27.06%, compared to 31.52% for 2006, and 34.34% for 2005. The effective tax rates are below the nominal combined Federal and State tax rates as a result of the increase in tax-preferenced income from certain investments and municipal loans/leases as a percentage of total income for each period. In 2007, the percentage of tax-preferenced income to total income increased, resulting in lower tax rate compared to prior year. The majority of tax preferenced income is derived from municipal securities.
 
ANALYSIS OF FINANCIAL CONDITION
 
The Company reported total assets of $6.3 billion at December 31, 2007. This represented an increase of $201.7 million, or 3.31%, over total assets of $6.1 billion at December 31, 2006.
 
Investment Securities
 
The Company maintains a portfolio of investment securities to provide interest income and to serve as a source of liquidity for its ongoing operations. The tables below set forth information concerning the composition of the investment securities portfolio at December 31, 2007, 2006, and 2005, and the maturity distribution of the investment securities portfolio at December 31, 2007. At December 31, 2007, we reported total investment securities of $2.39 billion. This represents a decrease of $192.3 million, or 7.45%, from total investment securities of $2.58 billion at December 31, 2006. During 2007, it has been the intent of the Company to reduce the investment portfolio, using the cash flows to fund the growth in the loan portfolio.
 
Under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, securities held as “available-for-sale” are reported at current market value for financial reporting purposes. The related unrealized gain or loss, net of income taxes, is recorded in stockholders’ equity. At December 31, 2007, securities held as available-for-sale had a fair market value of $2.37 billion, representing 100.00% of total investment securities with an amortized cost of $2.36 billion. At December 31, 2007, the net unrealized holding gain on securities available-for-sale was $7.1 million that resulted in accumulated other comprehensive gain of $4.1 million (net of $3.0 million in deferred taxes).


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The composition of the investment portfolio at December 31, 2007 consists of the following:
 
                                                                                         
    Maturing  
          Weighted
    After One Year
    Weighted
    After Five
    Weighted
          Weighted
    Balance as of
    Weighted
       
    One Year
    Average
    through Five
    Average
    Years through
    Average
    After Ten
    Average
    December 31,
    Average
    % to
 
    or Less     Yield     Years     Yield     Ten Years     Yield     Years     Yield     2007     Yield     Total  
 
U.S. Treasury Obligations
  $ 998       4.83 %   $       0.00 %   $       0.00 %   $       0.00 %   $ 998       4.83 %     0.04 %
Government agency and government-sponsored enterprises
    23,129       4.21 %     27,706       5.23 %           0.00 %           0.00 %   $ 50,835       4.76 %     2.13 %
Mortgage-backed securities
    1,172       4.49 %     883,481       4.57 %     137,933       5.42 %     475       5.81 %   $ 1,023,061       4.68 %     42.80 %
CMO/REMICs
    18,052       5.17 %     554,545       4.88 %     50,209       5.23 %           0.00 %   $ 622,806       4.92 %     26.05 %
Municipal bonds(1)
    34,943       5.35 %     201,776       4.96 %     264,973       4.28 %     191,174       4.00 %   $ 692,866       4.45 %     28.98 %
                                                                                         
TOTAL
  $ 78,294       4.95 %   $ 1,667,508       4.73 %   $ 453,115       4.73 %   $ 191,649       4.00 %   $ 2,390,566       4.68 %     100.00 %
                                                                                         
 
 
(1) The weighted average yield is not tax-equivalent. The tax-equivalent yield is 5.90%.
 
The above table excludes securities without stated maturities. The maturity of each security category is defined as the contractual maturity except for the categories of mortgage-backed securities and CMO/REMICs whose maturities are defined as the estimated average life. The final maturity of mortgage-backed securities and CMO/REMICs will differ from their contractual maturities because the underlying mortgages have the right to repay such obligations without penalty. The speed at which the underlying mortgages repay is influenced by many factors, one of which is interest rates. Mortgages tend to repay faster as interest rates fall and slower as interest rate rise. This will either shorten or extend the estimated average life. Also, the yield on mortgages-backed securities and CMO/REMICs are affected by the speed at which the underlying mortgages repay. This is caused by the change in the amount of amortization of premiums or accretion of discount of each security as repayments increase or decrease. The Company obtains the estimated average life of each security from independent third parties.
 
The weighted-average yield (TE) on the investment portfolio at December 31, 2007 was 4.68% with a weighted-average life of 4.7 years. This compares to a weighted-average yield of 4.61% at December 31, 2006 with a weighted-average life of 4.7 years. The weighted average life is the average number of years that each dollar of unpaid principal due remains outstanding. Average life is computed as the weighted-average time to the receipt of all future cash flows, using as the weights the dollar amounts of the principal pay-downs.
 
                                                 
    At December 31,  
    2007     2006     2005  
    Amount     Percent     Amount     Percent     Amount     Percent  
    (Amounts in thousands)  
 
U.S. Treasury Obligations
  $ 998       0.04 %   $ 970       0.04 %   $ 497       0.02 %
Government agency and government- sponsored enterprises
    50,835       2.13 %     68,300       2.64 %     54,089       2.28 %
Mortgage-backed securities
    1,023,061       42.80 %     1,077,851       41.73 %     1,184,608       49.99 %
CMO/REMICs
    622,806       26.05 %     787,270       30.48 %     609,912       25.74 %
Municipal bonds
    692,866       28.98 %     645,785       25.00 %     463,900       19.57 %
FHLMC Preferred Stock
                            56,070       2.37 %
Other securities
                2,726       0.11 %     816       0.03 %
                                                 
TOTAL
  $ 2,390,566       100.00 %   $ 2,582,902       100.00 %   $ 2,369,892       100.00 %
                                                 
 
Approximately 70% of securities issued by the U.S. government or U.S. government-sponsored agencies guarantee payment of principal and interest.


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Composition of the Fair Value and Gross Unrealized Losses of Securities
Available-for-Sale:
 
                                                 
    December 31, 2007  
    Less than 12 months     12 Months or Longer     Total  
          Gross
          Gross
          Gross
 
          Unrealized
          Unrealized
          Unrealized
 
          Holding
          Holding
          Holding
 
Description of Securities
  Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
    (Amounts in thousands)  
 
U.S. Treasury Obligations
  $     $     $     $     $     $  
Government agency & government- sponsored enterprises
                10,434       55       10,434       55  
Mortgage-backed securities
    26,109       30       703,159       9,723       729,268       9,753  
CMO/REMICs
    26,131       32       140,779       842       166,910       874  
Municipal bonds
    196,945       2,108       78,479       1,119       275,424       3,227  
                                                 
    $ 249,185     $ 2,170     $ 932,851     $ 11,739     $ 1,182,036     $ 13,909  
                                                 
 
                                                 
    December 31, 2006  
    Less than 12 months     12 Months or Longer     Total  
          Gross
          Gross
          Gross
 
          Unrealized
          Unrealized
          Unrealized
 
          Holding
          Holding
          Holding
 
Description of Securities
  Fair Value     Losses     Fair Value     Losses     Fair Value     Losses  
                (Amounts in thousands)              
 
U.S. Treasury Obligations
  $ 970     $ 1     $     $     $ 970     $ 1  
Government agency & government- sponsored enterprises
    12,040       45       41,101       458       53,141       503  
Mortgage-backed securities
    74,274       388       880,162       27,218       954,436       27,606  
CMO/REMICs
    53,681       241       454,693       6,343       508,374       6,584  
Municipal bonds
    276,512       3,474       60,065       1,381       336,577       4,855  
                                                 
    $ 417,477     $ 4,149     $ 1,436,021     $ 35,400     $ 1,853,498     $ 39,549  
                                                 
 
The table above shows the Company’s investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2007 and 2006. We have reviewed individual securities classified as available-for-sale to determine whether a decline in fair value below the amortized cost basis is other-than-temporary. If it is probable that we will be unable to collect all amounts due according to the contractual terms of a debt security not impaired at acquisition, an other-than-temporary impairment shall be considered to have occurred. If an other-than-temporary impairment occurs the cost basis of the security would be written down to its fair value as a new cost basis and the write down would be accounted for as a realized loss. A summary of our analysis of these securities and the unrealized losses is described more fully in Note 2 — Investment Securities in the notes to the consolidated financial statements.
 
Loans
 
At December 31, 2007, the Company reported total loans, net of deferred loan fees, of $3.50 billion. This represents an increase of $424.9 million, or 13.84%, over total loans of $3.07 billion at December 31, 2006.


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Table 4 presents the distribution of our loan portfolio at the dates indicated.
 
                                         
    December 31,  
    2007     2006     2005     2004     2003  
    (Amounts in thousands)  
 
Commercial and Industrial
  $ 365,214     $ 264,416     $ 223,330     $ 284,795     $ 289,597  
Real Estate
                                       
Construction
    308,354       299,112       270,436       235,849       156,287  
Commercial Real Estate
    1,805,946       1,642,370       1,363,516       1,057,140       904,705  
SFR Mortgage
    365,849       284,725       271,237       116,282       50,697  
Consumer, net of unearned discount
    58,999       54,125       59,801       51,187       44,645  
Municipal Lease Finance Receivables
    156,646       126,393       108,832       71,675       37,866  
Auto and equipment leases
    58,505       51,420       39,442       34,753       28,497  
Dairy and Livestock
    387,488       358,259       338,035       297,659       255,039  
                                         
Gross Loans
    3,507,001       3,080,820       2,674,629       2,149,340       1,767,333  
                                         
Less:
                                       
Allowance for Credit Losses
    33,049       27,737       23,204       22,494       21,282  
Deferred Loan Fees
    11,857       10,624       10,765       9,266       7,392  
                                         
Total Net Loans
  $ 3,462,095     $ 3,042,459     $ 2,640,660     $ 2,117,580     $ 1,738,659  
                                         
 
Commercial and industrial loans are loans to commercial entities to finance capital purchases or improvements, or to provide cash flow for operations. Real estate loans are loans secured by conforming first trust deeds on real property, including property under construction, commercial property and single family and multifamily residences. Consumer loans include installment loans to consumers as well as home equity loans and other loans secured by junior liens on real property. Municipal lease finance receivables are leases to municipalities. Dairy and livestock loans are loans to finance the operating needs of wholesale dairy farm operations, cattle feeders, livestock raisers, and farmers.
 
As of December 31, 2007, the Company had $308.4 million in construction loans. This represents 8.8% of the total loans outstanding of $3.5 billion. Of this $308.4 million in construction loans, approximately 52%, or $159.2 million, were for single-family residences and land loans. The remaining construction loans, totaling $149.2 million, were related to commercial construction. The Company does not make “subprime” mortgage loans.


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Table 5 provides the maturity distribution for commercial and industrial loans, real estate construction loans and agribusiness loans as of December 31, 2007. The loan amounts are based on contractual maturities although the borrowers have the ability to prepay the loans. Amounts are also classified according to re-pricing opportunities or rate sensitivity.
 
TABLE 5 — Loan Maturities and Interest Rate Category at December 31, 2007
 
                                 
          After One
             
          But
             
    Within
    Within
    After
       
    One Year     Five Years     Five Years     Total  
    (Amounts in thousands)  
 
Types of Loans:
                               
Commercial and industrial
  $ 153,768     $ 91,508     $ 119,938     $ 365,214  
Commercial Real Estate
    98,504       277,798       1,429,644       1,805,946  
Construction
    268,793       26,487       13,074       308,354  
Dairy and Livestock
    308,090       79,136       262       387,488  
Other
    15,430       99,739       524,830       639,999  
                                 
    $ 844,585     $ 574,668     $ 2,087,748     $ 3,507,001  
                                 
Amount of Loans based upon:
                               
Fixed Rates
  $ 36,165     $ 192,540     $ 1,239,143     $ 1,467,848  
Floating or adjustable rates
    808,420       382,128       848,605       2,039,153  
                                 
    $ 844,585     $ 574,668     $ 2,087,748     $ 3,507,001  
                                 
 
As a normal practice in extending credit for commercial and industrial purposes, we may accept trust deeds on real property as collateral. In some cases, when the primary source of repayment for the loan is anticipated to come from the cash flow from normal operations of the borrower, real property as collateral is not the primary source of repayment but has been taken as an abundance of caution. In these cases, the real property is considered a secondary source of repayment for the loan. Since we lend primarily in Southern and Central California, our real estate loan collateral is concentrated in this region. At December 31, 2007, substantially all of our loans secured by real estate were collateralized by properties located in California. This concentration is considered when determining the adequacy of our allowance for credit losses.
 
Non-performing Assets
 
Non-performing assets include non-performing loans, non-accrual loans, loans 90 days or more past due and still accruing interest, and restructured loans (see “Risk Management — Credit Risk” herein). At December 31, 2007, we had $1.4 million in non-performing loans. Of this amount, one loan of $1.1 million was classified as impaired. We had no non-performing loans and no loans classified as impaired at December 31, 2006. A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts (contractual interest and principal) according to the contractual terms of the loan agreement.
 
At December 31, 2007, we had $1.4 million of non-accrual loans. At December 31, 2006, we had no loans on which interest was no longer accruing (non-accrual). Loans are put on non-accrual after 90 days of non-performance. They can also be put on non-accrual if, in the judgment of management, the collectability is doubtful. All accrued and unpaid interest is reversed out. The Bank allocates specific reserves which are included in the allowance for credit losses for potential losses on non-accrual loans.
 
A restructured loan is a loan on which terms or conditions have been modified due to the deterioration of the borrower’s financial condition. At December 31, 2007, and 2006 we had no loans that were classified as restructured.


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Table 6 provides information on non-performing loans and other real estate owned at the dates indicated.
 
TABLE 6 — Non-Performing Assets
 
                                         
    December 31,  
    2007     2006     2005     2004     2003  
    (Amounts in thousands)  
 
Nonaccrual loans
  $ 1,435     $     $     $ 2     $ 548  
Loans past due 90 days or more
                             
Restructured loans
                             
Other real estate owned (OREO)
                             
                                         
Total nonperforming assets
  $ 1,435     $     $     $ 2     $ 548  
                                         
Percentage of nonperforming assets to total loans outstanding & OREO
    0.04 %     0.00 %     0.00 %     0.00 %     0.03 %
                                         
Percentage of nonperforming assets to total assets
    0.02 %     0.00 %     0.00 %     0.00 %     0.01 %
                                         
 
Except for non-performing loans as set forth in Table 6 and loans disclosed as impaired, (see “Risk Management — Credit Risk” herein) we are not aware of any loans as of December 31, 2007 for which known credit problems of the borrower would cause serious doubts as to the ability of such borrowers to comply with their present loan repayment terms, or any known events that would result in the loan being designated as non-performing at some future date. We cannot, however, predict the extent to which the deterioration in general economic conditions, real estate values, changes in general rates of interest, change in the financial conditions or business of a borrower may adversely affect a borrower’s ability to pay.
 
At December 31, 2007, and 2006 the Company held no properties as other real estate owned.
 
Deposits
 
The primary source of funds to support earning assets (loans and investments) is the generation of deposits from our customer base. The ability to grow the customer base and deposits from these customers are crucial elements in the performance of the Company.
 
We reported total deposits of $3.36 billion at December 31, 2007. This represented a decrease of $42.5 million, or 1.25%, from total deposits of $3.41 billion at December 31, 2006. The decrease in deposits is primarily the result of increased competition for deposits.
 
The amount of non-interest-bearing demand deposits in relation to total deposits is an integral element in achieving a low cost of funds. Non-interest-bearing deposits represented 38.52% of total deposits as of December 31, 2007 and 40.02% of total deposits as of December 31, 2006. Non-interest-bearing demand deposits totaled $1.30 billion at December 31, 2007. This represented a decrease of $67.5 million, or 4.95%, from total non-interest-bearing demand deposits of $1.36 billion at December 31, 2006.


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Table of Contents

Table 7 provides the remaining maturities of large denomination ($100,000 or more) time deposits, including public funds, at December 31, 2007.
 
Table 7 — Maturity Distribution of Large Denomination Time Deposits
 
         
    (Amount in thousands)  
 
3 months or less
  $ 513,054  
Over 3 months through 6 months
    153,960  
Over 6 months through 12 months
    2,652  
Over 12 months
    15,835  
         
Total
  $ 685,501  
         
 
Other Borrowed Funds
 
To achieve the desired growth in earning assets we fund that growth through the sourcing of funds. The first source of funds we pursue is non-interest-bearing deposits (the lowest cost of funds to the Company), next we pursue growth in interest-bearing deposits and finally we supplement the growth in deposits with borrowed funds. Borrowed funds, as a percent of total funding (total deposits plus demand notes plus borrowed funds), was 41.02% at December 31, 2007, as compared to 38.65% at December 31, 2006.
 
During 2007 and 2006, we entered into short-term borrowing agreements with the Federal Home Loan Bank (FHLB). We had outstanding balances of $954.0 million and $887.9 million under these agreements at December 31, 2007 and 2006, respectively. FHLB held certain investment securities of the Bank as collateral for those borrowings. On December 31, 2007 and 2006, we entered into an overnight agreement with certain financial institutions and our customers to borrow an aggregate of $430.8 million and $301.4 million, respectively. The increase was primarily due to funding for the growth of earning assets.
 
In June 2006, the Company purchased securities totaling $250.0 million. This purchase was funded by a repurchase agreement of $250.0 million with a double cap embedded in the repurchase agreement. The interest rate on this agreement is tied to three-month LIBOR and reset quarterly. In November 2006, we began a repurchase agreement product with our customers. This product, known as Citizens Sweep Manager, sells our securities overnight to our customers under an agreement to repurchase them the next day. As of December 31, 2007, total funds borrowed under these agreements were $586.3 million.


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Table of Contents

The following table summarizes the short-term borrowings:
 
                         
    Federal Funds
             
    Purchased and
    Other
       
    Repurchase
    Short-term
       
    Agreements     Borrowings     Total  
    (Dollars in thousands)  
 
At December 31, 2007
                       
Amount outstanding
  $ 430,809     $ 954,000     $ 1,384,809  
Weighted-average interest rate
    3.85 %     4.67 %     4.42 %
For the year ended December 31, 2007
                       
Highest amount at month-end
  $ 510,112     $ 1,554,000     $ 2,064,112  
Daily-average amount outstanding
  $ 373,746     $ 1,100,858     $ 1,474,604  
Weighted-average interest rate
    4.45 %     3.71 %     3.90 %
At December 31, 2006
                       
Amount outstanding
  $ 301,350     $ 887,900     $ 1,189,250  
Weighted-average interest rate
    5.08 %     4.28 %     4.49 %
For the year ended December 31, 2006
                       
Highest amount at month-end
  $ 301,350     $ 1,677,000     $ 1,978,350  
Daily-average amount outstanding
  $ 101,756     $ 1,295,704     $ 1,397,460  
Weighted-average interest rate
    5.06 %     3.90 %     3.99 %
 
During 2007 and 2006, we entered into long-term borrowing agreements with the FHLB. We had outstanding balances of $700.0 million under these agreements at both December 31, 2007 and 2006, with weighted-average interest rate of 4.9% in 2007 and 2006. We had an average outstanding balance of $622.2 million and $319.0 million as of December 31, 2007 and 2006, respectively. The FHLB held certain investment securities of the Bank as collateral for those borrowings.
 
The Bank acquired subordinated debt of $5.0 million from the acquisition of FCB in June 2007 which is included in long-term borrowings in Item 15 — Exhibits and Financial Statement Schedules. The debt has a variable interest rate which resets quarterly at three-month LIBOR plus 1.65%. The debt matures on January 7, 2016, but becomes callable on January 7, 2011.
 
At December 31, 2007, borrowed funds totaled $2.30 billion. This represented an increase of $193.9 million, or 9.03%, over total borrowed funds of $2.10 billion at December 31, 2006. For 2006, total borrowed funds increased $644.1 million, or 42.87%, over a balance of $1.50 billion at December 31, 2005. The maximum outstanding at any month-end was $2.76 billion during 2007, $2.08 billion during 2006, and $1.50 billion during 2005.
 
At December 31, 2007, junior subordinated debentures totaled $115.1 million, an increase of $6.8 million, or 6.29%, over junior subordinated debentures of $108.3 million at December 31, 2006. The increase was due to the trust preferred securities acquired through the FCB acquisition in June 2007. During the fourth quarter of 2007, we paid-off the principal and interest of $804,000 on FCB Capital Trust I, which was callable.


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Aggregate Contractual Obligations
 
The following table summarizes the aggregate contractual obligations as of December 31, 2007:
 
                                         
    Maturity by Period  
          Less Than
    One Year
    Four Year
    After
 
          One
    to Three
    to Five
    Five
 
    Total     Year     Years     Years     Years  
    (Amounts in thousands)  
 
2007
                                       
Deposits
  $ 3,364,349     $ 3,343,388     $ 16,791     $ 734     $ 3,436  
FHLB and Other Borrowings
    2,340,349       1,390,349       700,000       250,000        
Junior Subordinated Debentures
    115,055                         115,055  
Deferred Compensation
    8,166       709       1,417       1,337       4,703  
Operating Leases
    26,434       5,468       8,155       5,553       7,258  
                                         
Total
  $ 5,854,353     $ 4,739,914     $ 726,363     $ 257,624     $ 130,452  
                                         
 
Deposits represent non-interest bearing, money market, savings, NOW, certificates of deposits, brokered and all other deposits held by the Company.
 
FHLB and Other Borrowings represent the amounts that are due to the Federal Home Loan Bank. These borrowings have fixed maturity dates. Other borrowings represent the amounts that are due to overnight Federal funds purchases, Treasury, Tax and Loan amounts.
 
Junior subordinated debentures represent the amounts that are due from the Company to CVB Statutory Trust I, CVB Statutory Trust II & CVB Statutory Trust III. The debentures have the same maturity as the Trust Preferred Securities. CVB Statutory Trust I matures in 2033 and becomes callable in whole or in part in 2008. CVB Statutory Trust II matures in 2034 and becomes callable in whole or in part in 2009. CVB Statutory Trust III which matures in 2036 and becomes callable in whole or in part in 2011. It also represents one Trust Preferred Security acquired through the FCB acquisition in June 2007. FCB Capital Trust II matures in 2033 and becomes callable in 2008.
 
Deferred compensation represents the amounts that are due to former employees’ based on salary continuation agreements as a result of acquisitions.
 
Operating leases represent the total minimum lease payments under non-cancelable operating leases.
 
Off-Balance Sheet Arrangements
 
At December 31, 2007, we had commitments to extend credit of approximately $747.5 million, obligations under letters of credit of $60.9 million and available lines of credit totaling $621.1 million from certain financial institutions. Commitments to extend credit are agreements to lend to customers, provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Commitments are generally variable rate, and many of these commitments are expected to expire without being drawn upon. As such, the total commitment amounts do not necessarily represent future cash requirements. We use the same credit underwriting policies in granting or accepting such commitments or contingent obligations as it does for on-balance sheet instruments, which consist of evaluating customers’ creditworthiness individually.
 
Standby letters of credit written are conditional commitments issued by the Bank to guarantee the financial performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. When deemed necessary, we hold appropriate collateral supporting those commitments. We do not anticipate any material losses as a result of these transactions.


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The following table summarizes the off-balance sheet items:
 
                                         
    Maturity by Period  
                One Year
    Four Year
       
          Less Than
    to Three
    to Five
    After Five
 
    Total     One Year     Years     Years     Years  
    (Amounts in thousands)  
 
2007
                                       
Commitment to extend credit
  $ 747,504     $ 257,878     $ 49,755     $ 54,032     $ 385,839  
Obligations under letters of credit
    60,934       49,105       11,829              
                                         
Total
  $ 808,438     $ 306,983     $ 61,584     $ 54,032     $ 385,839  
                                         
 
Liquidity and Cash Flow
 
Since the primary sources and uses of funds for the Bank are loans and deposits, the relationship between gross loans and total deposits provides a useful measure of the Bank’s liquidity. Typically, the closer the ratio of loans to deposits is to 100%, the more reliant the Bank is on its loan portfolio to provide for short-term liquidity needs. Since repayment of loans tends to be less predictable than the maturity of investments and other liquid resources, the higher the loans to deposit ratio the less liquid are the Bank’s assets. For 2007, the Bank’s loan to deposit ratio averaged 94.35%, compared to an average ratio of 79.99% for 2006 and 74.35% for 2005.
 
CVB is a company separate and apart from the Bank that must provide for its own liquidity. Substantially all of CVB’s revenues are obtained from dividends declared and paid by the Bank. The remaining cash flow is from rent paid by a third party on office space in our corporate headquarters. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to CVB. At December 31, 2007, approximately $108.9 million of the Bank’s equity was unrestricted and available to be paid as dividends to CVB. Management of CVB believes that such restrictions will not have an impact on the ability of CVB to meet its ongoing cash obligations. See “Item 1. Business — Dividends and Other Transfers of Funds.” As of December 31, 2007, neither the Bank nor CVB had any material commitments for capital expenditures.
 
For the Bank, sources of funds normally include principal payments on loans and investments, other borrowed funds, and growth in deposits. Uses of funds include withdrawal of deposits, interest paid on deposits, increased loan balances, purchases, and other operating expenses.
 
Net cash provided by operating activities totaled $71.1 million for 2007, $70.9 million for 2006, and $89.1 million for 2005. The increase in 2007 compared to 2006 was primarily the result of an increase in interest and dividends received on loans and investments and a decrease in income taxes paid during 2007 offset by interest paid on deposits and borrowings. The decrease in income taxes paid during 2007 which was attributed to a lower effective tax rate.
 
Cash used in investing activities totaled $21.1 million for 2007, compared to $680.7 million for 2006 and $761.4 million for 2005. The decrease in 2007 compared to 2006 is due to decreases in the purchase of investments securities during 2007.
 
Net cash used by financing activities totaled $106.9 million for 2007, compared to funds provided by financing activities of $626.0 million for 2006 and $718.0 million for 2005. The increase in net cash used by financing activities was primarily the result of decreases in short-term borrowings and transaction deposits, offset by advances and repayments from Federal Home Loan Bank.
 
At December 31, 2007, cash and cash equivalents totaled $89.5 million. This represented a decrease of $56.9 million, or 38.88%, from a total of $146.4 million at December 31, 2006.
 
Capital Resources
 
Historically, the primary source of capital for the Company has been the retention of operating earnings. In order to ensure adequate levels of capital, we conduct an ongoing assessment of projected sources and uses of capital in conjunction with projected increases in assets and the level of risk.


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Total stockholders’ equity was $424.9 million at December 31, 2007. This represented an increase of $37.6 million, or 9.71%, over total stockholders’ equity of $387.3 million at December 31, 2006. For 2006, total stockholders’ equity increased $45.1 million, or 13.19%, over total stockholders’ equity of $342.2 million at December 31, 2005.
 
For further information about our capital ratios, see Item 1. Business — Capital Standards.
 
During 2007, the Board of Directors of the Company declared quarterly cash dividends that totaled $0.34 per share for the full year. We do not believe that the continued payment of cash dividends will impact the ability of the Company to continue to exceed the current minimum capital standards.


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RISK MANAGEMENT
 
We have adopted a Risk Management Plan to ensure the proper control and management of all risk factors inherent in the operation of the Company and the Bank. Specifically, credit risk, interest rate risk, liquidity risk, transaction risk, compliance risk, strategic risk, reputation risk, price risk and foreign exchange risk, can all affect the market risk exposure of the Company. These specific risk factors are not mutually exclusive. It is recognized that any product or service offered by us may expose the Bank to one or more of these risks.
 
Credit Risk
 
Credit risk is defined as the risk to earnings or capital arising from an obligor’s failure to meet the terms of any contract or otherwise fail to perform as agreed. Credit risk is found in all activities where success depends on counter party, issuer, or borrower performance. Credit risk arises through the extension of loans and leases, certain securities, and letters of credit.
 
Credit risk in the investment portfolio and correspondent bank accounts is addressed through defined limits in the Bank’s policy statements. In addition, certain securities carry insurance to enhance credit quality of the bond. Limitations on industry concentration, aggregate customer borrowings, geographic boundaries and standards on loan quality also are designed to reduce loan credit risk. Senior Management, Directors’ Committees, and the Board of Directors are provided with information to appropriately identify, measure, control and monitor the credit risk of the Bank.
 
Implicit in lending activities is the risk that losses will occur and that the amount of such losses will vary over time. Consequently, we maintain an allowance for credit losses by charging a provision for credit losses to earnings. Loans determined to be losses are charged against the allowance for credit losses. Our allowance for credit losses is maintained at a level considered by us to be adequate to provide for estimated probable losses inherent in the existing portfolio, and unused commitments to provide financing, including commitments under commercial and standby letters of credit.
 
The allowance for credit losses is based upon estimates of probable losses inherent in the loan and lease portfolio. The nature of the process by which we determine the appropriate allowance for credit losses requires the exercise of considerable judgment. The amount actually realized in respect of these losses can vary significantly from the estimated amounts. We employ a systematic methodology that is intended to reduce the differences between estimated and actual losses.
 
Our methodology for assessing the appropriateness of the allowance is conducted on a regular basis and considers all loans. The systematic methodology consists of two major elements.
 
The first major element includes a detailed analysis of the loan portfolio in two phases. The first phase is conducted in accordance with SFAS No. 114, “Accounting by Creditors for the Impairment of a Loan”, as amended by SFAS No. 118, “Accounting by Creditors for Impairment of a Loan — Income Recognition and Disclosures.” Individual loans are reviewed to identify loans for impairment. A loan is impaired when principal and interest are deemed uncollectible in accordance with the original contractual terms of the loan. Impairment is measured as either the expected future cash flows discounted at each loan’s effective interest rate, the fair value of the loan’s collateral if the loan is collateral dependent, or an observable market price of the loan (if one exists). Upon measuring the impairment, we will ensure an appropriate level of allowance is present or established.
 
Central to the first phase and our credit risk management is our loan risk rating system. The originating credit officer assigns borrowers an initial risk rating, which is reviewed and possibly changed by Credit Management, which is based primarily on a thorough analysis of each borrower’s financial capacity in conjunction with industry and economic trends. Approvals are made based upon the amount of inherent credit risk specific to the transaction and are reviewed for appropriateness by senior line and credit management personnel. Credits are monitored by line and credit management personnel for deterioration in a borrower’s financial condition, which would impact the ability of the borrower to perform under the contract. Risk ratings are adjusted as necessary.
 
Loans are risk rated into the following categories: Loss, Doubtful, Substandard, Special Mention and Pass. Each of these groups is assessed for the proper amount to be used in determining the adequacy of our allowance for


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losses. The Impaired and Doubtful loans are analyzed on an individual basis for allowance amounts. The other categories have formulae used to determine the needed allowance amount.
 
The Bank began a credit review function engaging an outside party to review our loans. This was done in the last quarter of 2006 and was performed quarterly in 2007. The purpose of this review is to determine the loan rating and if there is any deterioration in the credit quality of the portfolio.
 
Based on the risk rating system, specific allowances are established in cases where we have identified significant conditions or circumstances related to a credit that we believe indicates the probability that a loss has been incurred. We perform a detailed analysis of these loans, including, but not limited to, cash flows, appraisals of the collateral, conditions of the marketplace for liquidating the collateral and assessment of the guarantors. We then determine the inherent loss potential and allocate a portion of the allowance for losses as a specific allowance for each of these credits.
 
The second phase is conducted by evaluating or segmenting the remainder of the loan portfolio into groups or pools of loans with similar characteristics in accordance with SFAS No. 5, “Accounting for Contingencies.” In this second phase, groups or pools of homogeneous loans are reviewed to determine a portfolio formula allowance. In the case of the portfolio formula allowance, homogeneous portfolios, such as small business loans, consumer loans, agricultural loans, and real estate loans, are aggregated or pooled in determining the appropriate allowance. The risk assessment process in this case emphasizes trends in the different portfolios for delinquency, loss, and other-behavioral characteristics of the subject portfolios.
 
The second major element in our methodology for assessing the appropriateness of the allowance consists of our considerations of all known relevant internal and external factors that may affect the collectability of a loan. This includes our estimates of the amounts necessary for concentrations, economic uncertainties, the volatility of the market value of collateral, and other relevant factors. The relationship of the two major elements of the allowance to the total allowance may fluctuate from period to period.
 
In the second major element of the analysis which considers all known relevant internal and external factors that may affect a loan’s collectability, we perform an evaluation of various conditions, the effects of which are not directly measured in the determination of the formula and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments. The conditions evaluated in connection with the second element of the analysis of the allowance include, but are not limited to the following conditions that existed as of the balance sheet date:
 
  •  then-existing general economic and business conditions affecting the key lending areas of the Company,
 
  •  then-existing economic and business conditions of areas outside the lending areas, such as other sections of the United States, Asia and Latin America,
 
  •  credit quality trends (including trends in non-performing loans expected to result from existing conditions),
 
  •  collateral values
 
  •  loan volumes and concentrations,
 
  •  seasoning of the loan portfolio,
 
  •  specific industry conditions within portfolio segments,
 
  •  recent loss experience in particular segments of the portfolio,
 
  •  duration of the current business cycle,
 
  •  bank regulatory examination results and
 
  •  findings of the Company’s external credit examiners.
 
We review these conditions in discussion with our senior credit officers. To the extent that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date,


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our estimate of the effect of such condition may be reflected as a specific allowance applicable to such credit or portfolio segment. Where any of these conditions is not evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, our evaluation of the inherent loss related to such condition is reflected in the second major element of the allowance. Although we have allocated a portion of the allowance to specific loan categories, the adequacy of the allowance must be considered in its entirety.
 
We maintain an allowance for inherent credit losses that is increased by a provision for credit losses charged against operating results. The allowance for credit losses is also increased by recoveries on loans previously charged off and reduced by actual loan losses charged to the allowance. We recorded a $4.0 million and $3.0 million provision for credit losses for 2007 and 2006, respectively. We did not record a provision for credit losses for 2005.
 
At December 31, 2007, we reported an allowance for credit losses of $33.0 million. This represents an increase of $5.3 million, or 19.15%, over the allowance for credit losses of $27.7 million at December 31, 2006. During 2007, we recorded a provision for credit losses of $4.0 million and net charge-offs of $1.4 million. We acquired $2.7 million in allowance for credit losses as a result of the FCB acquisition. At December 31, 2006, we reported an allowance for credit losses of $27.7 million. This represented an increase of $4.5 million, or 19.54%, over the allowance for credit losses of $23.2 million at December 31, 2005. During the year 2006, we recorded a provision for credit losses of $3.0 million and net recoveries of $1.5 million. (See Table 8 — Summary of Credit Loss Experience.)
 
At December 31, 2007, we had $1.4 million in non-performing loans. Of this amount, $1.1 million consisted of one loan classified as impaired. We had no non-performing loans and no loans classified as impaired at December 31, 2006.
 
For 2007, total loans charged-off were $2.1 million, offset by the recoveries of loans previously charged-off of $739,000 resulting in net charge-offs of $1.4 million. For 2006, total loans charged-off were $200,000, offset by the recoveries of loans previously charged-off of $1.7 million resulting in net recoveries of $1.5 million.
 
In addition to the allowance for credit losses, the Company also has a reserve for undisbursed commitments for loans and letters of credit. This reserve is carried on the liabilities section of the balance sheet in other liabilities. Provisions to this reserve are included in other expense. For 2007, the Company recorded an increase of $1.2 million in the reserve for undisbursed commitments. As of December 31, 2007, the balance in this reserve was $2.9 million. The increase in provision for unfunded commitments was primarily due to an increase in loan commitments and more specifically, an increase in classified loans related to those commitments.


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Table 8 presents a comparison of net credit losses, the provision for credit losses (including adjustments incidental to mergers), and the resulting allowance for credit losses for each of the years indicated.
 
TABLE 8 — Summary of Credit Loss Experience
 
                                         
    As of and For Years Ended December 31,  
    2007     2006     2005     2004     2003  
    (Amounts in thousands)  
 
Amount of Total Loans at End of Period(1)
  $ 3,495,144     $ 3,070,196     $ 2,663,863     $ 2,140,074     $ 1,759,941  
                                         
Average Total Loans Outstanding(1)
  $ 3,226,086     $ 2,811,782     $ 2,277,304     $ 1,905,145     $ 1,529,944  
                                         
Allowance for Credit Losses at Beginning of Period
  $ 27,737     $ 23,204     $ 22,494     $ 21,282     $ 21,666  
                                         
Loans Charged-Off:
                                       
Real Estate
    1,748             780       1,002       982  
Commercial and Industrial
    127       90       243       943       1,507  
Lease Finance Receivables
    182       79       91       110       396  
Consumer Loans
    41       31       266       265       132  
                                         
Total Loans Charged-Off
    2,098       200       1,380       2,320       3,017  
                                         
Recoveries:
                                       
Real Estate Loans
    82       1,140       572       775       336  
Commercial and Industrial
    465       400       543       2,558       889  
Lease Finance Receivables
    148       82       101       86       262  
Consumer Loans
    44       111       118       113       112  
                                         
Total Loans Recovered
    739       1,733       1,334       3,532       1,599  
                                         
Net Loans Charged-Off (Recovered)
    1,359       (1,533 )     46       (1,212 )     1,418  
                                         
Provision Charged to Operating Expense
    4,000       3,000                    
                                         
Adjustments Incident to Mergers and reclassifications
    2,671             756             1,034  
                                         
Allowance for Credit Losses at End of period
  $ 33,049     $ 27,737     $ 23,204     $ 22,494     $ 21,282  
                                         
Net Loans Charged-Off (Recovered) to Average Total Loans
    0.04 %     —0.05 %     0.00 %     —0.06 %     0.09 %
Net Loans Charged-Off (Recovered) to Total Loans at End of Period
    0.04 %     —0.05 %     0.00 %     —0.06 %     0.08 %
Allowance for Credit Losses to Average Total Loans
    1.02 %     0.99 %     1.02 %     1.18 %     1.39 %
Allowance for Credit Losses to Total Loans at End of Period
    0.95 %     0.90 %     0.87 %     1.05 %     1.21 %
Net Loans Charged-Off (Recovered) to Allowance for Credit Losses
    4.11 %     —5.53 %     0.20 %     —5.39 %     6.66 %
Net Loans Recovered to Provision for Credit Losses
    33.98 %     —51.10 %                  
 
 
(1) Net of deferred loan origination fees.


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While we believe that the allowance at December 31, 2007, was adequate to absorb losses from any known or inherent risks in the portfolio, no assurance can be given that economic conditions which adversely affect our service areas or other circumstances will not be reflected in increased provisions or credit losses in the future.
 
Table 9 provides a summary of the allocation of the allowance for credit losses for specific loan categories at the dates indicated. The allocations presented should not be interpreted as an indication that loans charged to the allowance for credit losses will occur in these amounts or proportions, or that the portion of the allowance allocated to each loan category represents the total amount available for future losses that may occur within these categories.
 
                                                                                 
    December 31,  
    2007     2006     2005     2004     2003  
          % of Loans
          % of Loans
          % of Loans
          % of Loans
          % of Loans
 
          to Total
          to Total
          to Total
          to Total
          to Total
 
    Allowance
    Loans in
    Allowance
    Loans in
    Allowance
    Loans in
    Allowance
    Loans in
    Allowance
    Loans in
 
    for Credit
    Each
    for Credit
    Each
    for Credit
    Each
    for Credit
    Each
    for Credit
    Each
 
    Losses     Category     Losses     Category     Losses     Category     Losses     Category     Losses     Category  
    (Amounts in thousands)  
 
Real Estate
  $ 12,724       46.8 %   $ 9,905       46.8 %   $ 10,536       42.7 %   $ 7,214       36.6 %   $ 3,892       30.8 %
Commercial and Industrial
    19,398       51.5 %     17,215       51.5 %     15,408       49.2 %     16,232       55.8 %     15,508       62.9 %
Consumer
    506       1.7 %     297       1.7 %     224       8.1 %     126       7.6 %     149       6.3 %
Unallocated
    421               320               (2,964 )             (1,078 )             1,733          
                                                                                 
Total
  $ 33,049       100.0 %   $ 27,737       100.0 %   $ 23,204       100.0 %   $ 22,494       100.0 %   $ 21,282       100.0 %
                                                                                 
 
Market Risk
 
In the normal course of its business activities, we are exposed to market risks, including price and liquidity risk. Market risk is the potential for loss from adverse changes in market rates and prices, such as interest rates (interest rate risk). Liquidity risk arises from the possibility that we may not be able to satisfy current or future commitments or that we may be more reliant on alternative funding sources such as long-term debt. Financial products that expose us to market risk includes securities, loans, deposits, debt, and derivative financial instruments.


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The table below provides the actual balances as of December 31, 2007 of interest-earning assets (net of deferred loan fees and allowance for credit losses) and interest-bearing liabilities, including the average rate earned or paid for 2007, the projected contractual maturities over the next five years, and the estimated fair value of each category determined using available market information and appropriate valuation methodologies.
 
                                                                 
                Maturing  
    Balance
    Average
                            Five Years
    Estimated
 
    December 31,     Rate     One Year     Two Years     Three Years     Four Years     and Beyond     Fair Value  
    (Amounts in thousands)  
 
2007
                                                               
Interest-Earning Assets
                                                               
Investment securities available for sale
  $ 2,390,566       4.68 %   $ 15,311     $ 9,225     $ 19,265     $ 27,563     $ 2,319,202     $ 2,390,566  
Loans and lease finance receivables, net
    3,462,095       6.88 %     844,585       211,227       117,568       110,341       2,178,374       3,489,626  
                                                                 
Total interest earning assets
  $ 5,852,661             $ 859,896     $ 220,452     $ 136,833     $ 137,904     $ 4,497,576     $ 5,880,192  
                                                                 
Interest-Bearing Liabilities
                                                               
Interest-bearing deposits
  $ 2,068,390       3.25 %   $ 2,047,432     $ 8,449     $ 8,339     $ 458     $ 3,712       2,068,785  
Demand note to U.S. Treasury
    540       4.17 %     540                               540  
Borrowings
    2,339,809       4.85 %     1,389,809       200,000       400,000       100,000       250,000       2,373,954  
Junior subordinated debentures
    115,055       6.62 %                             115,055       106,385  
                                                                 
Total interest-bearing liabilities
  $ 4,523,794             $ 3,437,781     $ 208,449     $ 408,339     $ 100,458     $ 368,767     $ 4,549,664  
                                                                 
 
Interest Rate Risk
 
During periods of changing interest rates, the ability to re-price interest-earning assets and interest-bearing liabilities can influence net interest income, the net interest margin, and consequently, our earnings. Interest rate risk is managed by attempting to control the spread between rates earned on interest-earning assets and the rates paid on interest-bearing liabilities within the constraints imposed by market competition in our service area. Short-term re-pricing risk is minimized by controlling the level of floating rate loans and maintaining a downward sloping ladder of bond payments and maturities. Basis risk is managed by the timing and magnitude of changes to interest-bearing deposit rates. Yield curve risk is reduced by keeping the duration of the loan and bond portfolios relatively short. Options risk in the bond portfolio is monitored monthly and actions are recommended when appropriate.
 
We monitor the interest rate “sensitivity” risk to earnings from potential changes in interest rates using various methods, including a maturity/re-pricing gap analysis. This analysis measures, at specific time intervals, the differences between earning assets and interest-bearing liabilities for which re-pricing opportunities will occur. A positive difference, or gap, indicates that earning assets will re-price faster than interest-bearing liabilities. This will generally produce a greater net interest margin during periods of rising interest rates, and a lower net interest margin during periods of declining interest rates. Conversely, a negative gap will generally produce a lower net interest margin during periods of rising interest rates and a greater net interest margin during periods of decreasing interest rates.


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TABLE 10 — Asset and Liability Maturity/Repricing Gap
 
                                         
          Over
    Over
             
    90 Days
    90 Days to
    180 Days to
    Over
       
    or Less     180 Days     365 Days     365 Days     Total  
    (Amounts in thousands)  
 
2007
                                       
Earning Assets:
                                       
Investment Securities at carrying value
  $ 122,700     $ 126,059     $ 218,086     $ 1,923,721     $ 2,390,566  
Total Loans
    1,130,451     $ 173,951     $ 298,425     $ 1,859,268       3,462,095  
                                         
Total
  $ 1,253,151     $ 300,010     $ 516,511     $ 3,782,989     $ 5,852,661  
Interest Bearing Liabilities
                                       
Savings Deposits
  $ 745,571     $     $     $ 532,465     $ 1,278,036  
Time Deposits
    558,410     $ 142,184     $ 68,685     $ 21,075       790,354  
Demand Note to U.S. Treasury
    540                               540  
Other Borrowings
    1,089,809     $     $ 550,000     $ 700,000       2,339,809  
Junior subordinated debentures
    32,579             41,238       41,238       115,055  
                                         
Total
    2,426,909       142,184       659,923       1,294,778       4,523,794  
                                         
Period GAP
  $ (1,173,758 )   $ 157,826     $ (143,412 )   $ 2,488,211     $ 1,328,867  
                                         
Cumulative GAP
  $ (1,173,758 )   $ (1,015,932 )   $ (1,159,344 )   $ 1,328,867          
                                         
2006
                                       
Earning Assets:
                                       
Investment Securities at carrying value
  $ 140,153     $ 152,523     $ 214,686     $ 2,075,540     $ 2,582,902  
Total Loans
    1,003,580     $ 157,742     $ 281,823     $ 1,599,314       3,042,459  
                                         
Total
  $ 1,143,733     $ 310,265     $ 496,509     $ 3,674,854     $ 5,625,361  
Interest Bearing Liabilities
                                       
Savings Deposits
  $ 780,720     $     $     $ 434,699     $ 1,215,419  
Time Deposits
    596,882     $ 128,776     $ 71,080     $ 31,240       827,978  
Demand Note to U.S. Treasury
    7,245                               7,245  
Other Borrowings
    1,234,250     $ 85,000     $ 120,000     $ 700,000       2,139,250  
Junior subordinated debentures
                      108,250       108,250  
                                         
Total
    2,619,097       213,776       191,080       1,274,189       4,298,142  
                                         
Period GAP
  $ (1,475,364 )   $ 96,489     $ 305,429     $ 2,400,665     $ 1,327,219  
                                         
Cumulative GAP
  $ (1,475,364 )   $ (1,378,875 )   $ (1,073,446 )   $ 1,327,219          
                                         
 
Table 10 provides the Bank’s maturity/re-pricing gap analysis at December 31, 2007, and 2006. We had a negative cumulative 180-day gap of $1.02 billion and a negative cumulative 365-days gap of $1.16 billion at December 31, 2007. This represented a decrease of $362.9 million, over the 180-day cumulative negative gap of $1.38 billion at December 31, 2006. In theory, this would indicate that at December 31, 2007, $1.02 billion more in liabilities than assets would re-price if there were a change in interest rates over the next 180 days. If interest rates increase, the negative gap would tend to result in a lower net interest margin. If interest rates decrease, the negative gap would tend to result in an increase in the net interest margin. However, we do have the ability to anticipate the increase in deposit rates, and the ability to extend interest-bearing liabilities, offsetting, in part, the negative gap.
 
The interest rates paid on deposit accounts do not always move in unison with the rates charged on loans. In addition, the magnitude of changes in the rates charged on loans is not always proportionate to the magnitude of


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changes in the rate paid on deposits. Consequently, changes in interest rates do not necessarily result in an increase or decrease in the net interest margin solely as a result of the differences between re-pricing opportunities of earning assets or interest-bearing liabilities. The fact that the Bank reported a negative gap at December 31, 2007 for changes within the following 365 days does not necessarily indicate that, if interest rates decreased, net interest income would increase, or if interest rates increased, net interest income would decrease.
 
Approximately $1.65 billion, or 69.58%, of the total investment portfolio at December 31, 2007 consisted of securities backed by mortgages. The final maturity of these securities can be affected by the speed at which the underlying mortgages repay. Mortgages tend to repay faster as interest rates fall, and slower as interest rates rise. As a result, we may be subject to a “prepayment risk” resulting from greater funds available for reinvestment at a time when available yields are lower. Conversely, we may be subject to “extension risk” resulting, as lesser amounts would be available for reinvestment at a time when available yields are higher. Prepayment risk includes the risk associated with the payment of an investment’s principal faster than originally intended. Extension risk is the risk associated with the payment of an investment’s principal over a longer time period than originally anticipated. In addition, there can be greater risk of price volatility for mortgage-backed securities as a result of anticipated prepayment or extension risk.
 
We also utilize the results of a dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. The sensitivity of our net interest income is measured over a rolling two-year horizon.
 
The simulation model estimates the impact of changing interest rates on interest income from all interest-earning assets and interest expense paid on all interest-bearing liabilities reflected on our balance sheet. This sensitivity analysis is compared to policy limits, which specify a maximum tolerance level for net interest income exposure over a one-year horizon assuming no balance sheet growth, given a 200 basis point upward and a 200 basis point downward shift in interest rates. A parallel and pro rata shift in rates over a 12-month period is assumed.
 
The following reflects our net interest income sensitivity analysis as of December 31, 2007:
 
     
Simulated
  Estimated Net Interest
Rate Changes
 
Income Sensitivity
 
+ 200 basis points
  (3.51%)
− 200 basis points
  2.23%
 
The Company is currently more liability sensitive. The estimated sensitivity does not necessarily represent a forecast and the results may not be indicative of actual changes to our net interest income. These estimates are based upon a number of assumptions including: the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, pricing strategies on loans and deposits, and replacement of asset and liability cash-flows. While the assumptions used are based on current economic and local market conditions, there is no assurance as to the predictive nature of these conditions including how customer preferences or competitor influences might change. See NOTE 17 — of the Notes to the Consolidated Financial Statements.
 
Liquidity Risk
 
Liquidity risk is the risk to earnings or capital resulting from our inability to meet obligations when they come due without incurring unacceptable losses. It includes the ability to manage unplanned decreases or changes in funding sources and to recognize or address changes in market conditions that affect our ability to liquidate assets quickly and with minimum loss of value. Factors considered in liquidity risk management are stability of the deposit base; marketability, maturity, and pledging of investments; and the demand for credit.
 
In general, liquidity risk is managed daily by controlling the level of fed funds and the use of funds provided by the cash flow from the investment portfolio. To meet unexpected demands, lines of credit are maintained with correspondent banks, the Federal Home Loan Bank and the FRB. The sale of bonds maturing in the near future can also serve as a contingent source of funds. Increases in deposit rates are considered a last resort as a means of raising funds to increase liquidity.


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Transaction Risk
 
Transaction risk is the risk to earnings or capital arising from problems in service or product delivery. This risk is significant within any bank and is interconnected with other risk categories in most activities throughout the Bank. Transaction risk is a function of internal controls, information systems, associate integrity, and operating processes. It arises daily throughout the Bank as transactions are processed. It pervades all divisions, departments and branches and is inherent in all products and services the Bank offers.
 
In general, transaction risk is defined as high, medium or low by the internal auditors during the audit process. The audit plan ensures that high risk areas are reviewed at least annually. We utilize a third party audit firm to provide internal audit services.
 
The key to monitoring transaction risk is in the design, documentation and implementation of well-defined procedures. All transaction related procedures include steps to report events that might increase transaction risk. Dual controls are also a form of monitoring.
 
Compliance Risk
 
Compliance risk is the risk to earnings or capital arising from violations of, or non-conformance with, laws, rules, regulations, prescribed practices, or ethical standards. Compliance risk also arises in situations where the laws or rules governing certain Bank products or activities of the Bank’s customers may be ambiguous or untested. Compliance risk exposes the Bank to fines, civil money penalties, payment of damages, and the voiding of contracts. Compliance risk can also lead to a diminished reputation, reduced business value, limited business opportunities, lessened expansion potential, and lack of contract enforceability.
 
There is no single or primary source of compliance risk. It is inherent in every Bank activity. Frequently, it blends into operational risk and transaction processing. A portion of this risk is sometimes referred to as legal risk. This is not limited solely to risk from failure to comply with consumer protection laws; it encompasses all laws, as well as prudent ethical standards and contractual obligations. It also includes the exposure to litigation from all aspects of banking, traditional and non-traditional.
 
Our Compliance Management Policy and Program and the Code of Ethical Conduct are the cornerstone for controlling compliance risk. An integral part of controlling this risk is the proper training of associates. The Compliance Officer is responsible for developing and executing a comprehensive compliance training program. The Compliance Officer will ensure that each associate receives adequate training with regard to their position to ensure that laws and regulations are not violated. All associates who deal in compliance high risk areas are trained to be knowledgeable about the level and severity of exposure in those areas and the policies and procedures in place to control such exposure.
 
Our Compliance Management Policy and Program includes an audit program aimed at identifying problems and ensuring that problems are corrected. The audit program includes two levels of review. One is in-depth audits performed by an external firm and the other is periodic monitoring performed by the Compliance Officer.
 
The Bank utilizes an external firm to conduct compliance audits as a means of identifying weaknesses in the compliance program itself. The external firm’s audit plan includes a periodic review of each branch and department of the Bank.
 
The branch or department that is the subject of an audit is required to respond to the audit and correct any violations noted. The Compliance Officer will review audit findings and the response provided by the branch or department to identify areas which pose a significant compliance risk to the Bank.
 
The Compliance Officer conducts periodic monitoring of the Bank’s compliance efforts with a special focus on those areas that expose the Bank to compliance risk. The purpose of the periodic monitoring is to ensure that Bank associates are adhering to established policies and procedures adopted by the Bank. The Compliance Officer will notify the appropriate department head and the Compliance Committee of any violations noted. The branch or department that is the subject of the review will be required to respond to the findings and correct any noted violations.


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The Bank recognizes that customer complaints can often identify weaknesses in the Bank’s compliance program which could expose the Bank to risk. Therefore, all complaints are given prompt attention. The Bank’s Compliance Management Policy and Program includes provisions on how customer complaints are to be addressed. The Compliance Officer reviews all complaints to determine if a significant compliance risk exists and communicates those findings to Senior Management.
 
Strategic Risk
 
Strategic risk is the risk to earnings or capital arising from adverse decisions or improper implementation of strategic decisions. This risk is a function of the compatibility between an organization’s goals, the resources deployed against those goals and the quality of implementation.
 
Strategic risks are identified as part of the strategic planning process. Offsite strategic planning sessions are held annually. The strategic review consists of an economic assessment, competitive analysis, industry outlook and legislative and regulatory review.
 
A primary measurement of strategic risk is peer group analysis. Key performance ratios are compared to three separate peer groups to identify any sign of weakness and potential opportunities. The peer group consists of:
 
1. All banks of comparable size
 
2. High performing banks
 
3. A list of specific banks
 
Another measure is the comparison of the actual results of previous strategic initiatives against the expected results established prior to implementation of each strategy.
 
The corporate strategic plan is formally presented to all branch managers and department managers at an annual leadership conference.
 
Reputation Risk
 
Reputation risk is the risk to capital and earnings arising from negative public opinion. This affects the Bank’s ability to establish new relationships or services, or continue servicing existing relationships. It can expose the Bank to litigation and, in some instances, financial loss.
 
Price and Foreign Exchange Risk
 
Price risk arises from changes in market factors that affect the value of traded instruments. Foreign exchange risk is the risk to earnings or capital arising from movements in foreign exchange rates.
 
Our current exposure to price risk is nominal. We do not have trading accounts. Consequently, the level of price risk within the investment portfolio is limited to the need to sell securities for reasons other than trading. The section of this policy pertaining to liquidity risk addresses this risk.
 
We maintain deposit accounts with various foreign banks. Our Interbank Liability Policy limits the balance in any of these accounts to an amount that does not present a significant risk to our earnings from changes in the value of foreign currencies.
 
Our asset liability model calculates the market value of the Bank’s equity. In addition, management prepares, on a monthly basis, a capital volatility report that compares changes in the market value of the investment portfolio. We have as our target to always be well-capitalized by regulatory standards.
 
The Balance Sheet Management Policy requires the submission of a Fair Value Matrix Report to the Balance Sheet Management Committee on a quarterly basis. The report calculates the economic value of equity under different interest rate scenarios, revealing the level or price risk of the Bank’s interest sensitive asset and liability portfolios.


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Recent Accounting Pronouncements
 
See Note 1, Summary of Significant Accounting Policies, Recent Accounting Pronouncements, in the accompanying notes to the consolidated financial statements.
 
Item 7A.   Quantitative And Qualitative Disclosures About Market Risk
 
Market risk is the risk of loss from adverse changes in the market prices and interest rates. Our market risk arises primarily from interest rate risk inherent in our lending and deposit taking activities. We currently do not enter into futures, forwards, or option contracts. For greater discussion on the risk management of the Company, see Item 7. Management’s Discussion and Analysis of Financial Condition and the Results of Operations — Risk Management.


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Item 8.   Financial Statements And Supplementary Data
 
 
CVB FINANCIAL CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
 
         
    Page
 
Consolidated Financial Statements
       
    63  
    64  
    65  
    66  
    68  
    99  
 
All schedules are omitted because they are not applicable, not material or because the information is included in the financial statements or the notes thereto.
 
For information about the location of management’s annual reports on internal control, our financial reporting and the audit report of KPMG, LLP thereon. See “Item 9A. Controls and Procedures.”
 
Item 9.   Changes In And Disagreements With Accountants On Accounting And Financial Disclosure
 
On June 1, 2007, the Company elected KPMG, LLP as the Company’s independent auditors. During the 2006 and 2007 fiscal years and through the interim period ended June 30, 2007, there were no disagreements between the Company and McGladrey & Pullen, LLP, our predecessor auditors, on any matter of accounting principles or practices, internal controls, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of McGladrey & Pullen, LLP, would have caused it to make reference to the subject matter of the disagreement in connection with its reports.
 
Item 9A.   Controls And Procedures
 
1) Management’s Report on Internal Control over Financial Reporting
 
Management of CVB Financial Corp., together with its consolidated subsidiaries (the Company), is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.
 
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on our financial statements.
 
As of December 31, 2007, management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2007 is effective. KPMG, LLP, independent registered public accounting firm, has issued an unqualified opinion on the effectiveness of internal control over financial reporting as of December 31, 2007.


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2) Auditor attestation
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors and Stockholders
CVB Financial Corp.:
 
We have audited CVB Financial Corp. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, CVB Financial Corp. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of CVB Financial Corp. and subsidiaries as of December 31, 2007, and the related consolidated statements of earnings, stockholders’ equity and comprehensive income, and cash flows for the year then ended, and our report dated February 28, 2008 expressed an unqualified opinion on those consolidated financial statements.
 
  /s/  KPMG, LLP  
KPMG, LLP
 
Costa Mesa, California
February 28, 2008


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3) Changes in Internal Control over Financial Reporting
 
We maintain controls and procedures designed to ensure that information is recorded and reported in all filings of financial reports. Such information is reported to our management, including our Chief Executive Officer and Chief Financial Officer to allow timely and accurate disclosure based on the definition of “disclosure controls and procedures” in SEC Rule 13a-15(e) and 15d-15(e).
 
As of the end of the period covered by this report, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer. Based on the foregoing, our Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report.
 
During the fiscal quarter ended December 31, 2007, there have been no changes in our internal control over financial reporting that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
 
Item 9B.   Other Information
 
None.


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PART III
 
Item 10.   Directors, Executive Officers and Corporate Governace
 
Except as hereinafter noted, the information concerning directors and executive officers of the Company and our audit committee financial expert is incorporated by reference from the section entitled “Discussion of Proposals recommended by the Board — Proposal 1: Election of Directors” and “Beneficial Ownership Reporting Compliance” and “Audit Committee” of our definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year. For information concerning directors and executive officers of the Company, see Item 1 of part I “Business — Executive Officers and Directors.”
 
The Company has adopted a Code of Ethics that applies to all of the Company’s employees, including the Company’s principal executive officer, the principal financial and accounting officer, and all employees who perform these functions. A copy of the Code of Ethics is available to any person without charge by submitting a request to the Company’s Chief Financial Officer at 701 N. Haven Avenue, Suite 350, Ontario, CA 91764.
 
Item 11.   Executive Compensation
 
Information concerning management remuneration and transactions is incorporated by reference from the section entitled “Executive Compensation” of our definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year.
 
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
The following table summarizes information as of February 15, 2008 relating to our equity compensation plans pursuant to which grants of options, restricted stock, or other rights to acquire shares may be granted from time to time.
 
Equity Compensation Plan Information
 
                         
                Number of Securities
 
                Remaining Available for
 
    Number of Securities to
    Weighted-average
    Future Issuance Under
 
    be Issued Upon Exercise
    Exercise Price of
    Equity Compensation Plans
 
    of Outstanding Options,
    Outstanding Options,
    ( excluding securities
 
Plan Category
  Warrants and Rights (a)     Warrants and Rights (b)     reflected in column (a)) ( c )  
 
Equity compensation plans approved by security holders
    1,853,193     $ 11.19       3,951,439  
Equity compensation plans not approved by security holders
                 
                         
Total
    1,853,193     $ 11.19       3,951,439  
                         
 
Information concerning security ownership of certain beneficial owners and management is incorporated by reference from the sections entitled “Stock Ownership” of our definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year.


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Item 13.   Certain Relationships and Related Transactions, and Director Independence
 
Information concerning certain relationships and related transactions with management and others and information regarding director independence is incorporated by reference from the section entitled “Executive Compensation — Certain Relationships and Related Transactions” of our definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year.
 
Item 14.   Principal Accountant Fees and Services
 
Information concerning principal accounting fees and services is incorporated by reference from the section entitled “Ratification of Appointment of Independent Public Accountants” of our definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year.


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PART IV
 
Item 15.   Exhibits and Financial Statement Schedules
 
Financial Statements
 
Reference is made to the Index to Financial Statements at page 56 for a list of financial statements filed as part of this Report.
 
Exhibits
 
See Index to Exhibits at Page 101 of this Form 10-K.


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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 28th day of February 2008.
 
Cvb Financial Corp.
 
  By: 
/s/  Christopher D. Myers
Christopher D. Myers
President and Chief Executive Officer
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
 
             
Signature
 
Title
 
Date
 
         
/s/  George A. Borba

George A. Borba
  Chairman of the Board   February 28, 2008
         
/s/  John A. Borba

John A. Borba
  Director   February 28, 2008
         
/s/  Ronald O. Kruse

Ronald O. Kruse
  Vice Chairman   February 28, 2008
         
/s/  Robert M. Jacoby

Robert M. Jacoby
  Director   February 28, 2008
         
/s/  James C. Seley

James C. Seley
  Director   February 28, 2008
         
/s/  San E. Vaccaro

San E. Vaccaro
  Director   February 28, 2008
         
/s/  D. Linn Wiley

D. Linn Wiley
  Vice Chairman   February 28, 2008
         
/s/  Christopher D. Myers

Christopher D. Myers
  Director, President and Chief Executive Officer (Principal Executive Officer)   February 28, 2008
         
/s/  Edward J. Biebrich, Jr.

Edward J. Biebrich, Jr.
  Chief Financial Officer (Principal Financial and Accounting Officer)   February 28, 2008


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Table of Contents

 
CVB FINANCIAL CORP. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
                 
    December 31,
    December 31,
 
    2007     2006  
    (Amounts in thousands)  
 
ASSETS
Cash and due from banks
  $ 89,486     $ 146,411  
Investment securities available-for-sale
    2,390,566       2,582,902  
Interest-bearing balances due from depository institutions
    475        
Investment in stock of Federal Home Loan Bank (FHLB)
    79,983       78,866  
Loans and lease finance receivables
    3,495,144       3,070,196  
Allowance for credit losses
    (33,049 )     (27,737 )
                 
Total earning assets
    5,933,119       5,704,227  
Premises and equipment, net
    46,855       44,963  
Cash value life insurance
    103,400       99,861  
Accrued interest receivable
    29,734       29,146  
Deferred tax asset
          13,487  
Intangibles
    14,611       10,121  
Goodwill
    55,167       31,531  
Other assets
    21,591       12,501  
                 
TOTAL ASSETS
  $ 6,293,963     $ 6,092,248  
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
               
Deposits:
               
Noninterest-bearing
  $ 1,295,959     $ 1,363,411  
Interest-bearing
    2,068,390       2,043,397  
                 
Total deposits
    3,364,349       3,406,808  
Demand Note to U.S. Treasury
    540       7,245  
Repurchase agreements
    586,309       344,350  
Short-term borrowings
    1,048,500       1,094,900  
Long-term borrowings
    705,000       700,000  
Deferred tax liabilities
    1,307        
Accrued interest payable
    13,312       16,156  
Deferred compensation
    8,166       7,946  
Junior subordinated debentures
    115,055       108,250  
Other liabilities
    26,477       19,268  
                 
TOTAL LIABILITIES
    5,869,015       5,704,923  
                 
COMMITMENTS AND CONTINGENCIES
               
Stockholders’ Equity:
               
Preferred stock (authorized, 20,000,000 shares without par; none issued or outstanding)
           
Common stock (authorized, 122,070,312 shares without par; issued and outstanding 83,164,906 (2007) and 84,281,722 (2006)
    354,249       366,082  
Retained earnings
    66,569       34,464  
Accumulated other comprehensive income (loss), net of tax
    4,130       (13,221 )
                 
TOTAL STOCKHOLDERS’ EQUITY
    424,948       387,325  
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 6,293,963     $ 6,092,248  
                 
 
See accompanying notes to the consolidated financial statements.


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Table of Contents

 
CVB FINANCIAL CORP. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF EARNINGS
Three Years Ended December 31, 2007
 
                         
    2007     2006     2005  
    (Amounts in thousands,
 
    except earnings per share)  
 
INTEREST INCOME:
                       
Loans, including fees
  $ 221,809     $ 194,704     $ 148,421  
                         
Investment securities:
                       
Taxable
    85,899       91,029       76,573  
Tax-advantaged
    29,231       26,545       19,078  
                         
      115,130       117,574       95,651  
                         
Dividends from FHLB
    4,229       3,721       2,559  
Federal funds sold
    9       32       2  
Interest-bearing deposits with other institutions
    100       60       251  
                         
Total interest income
    341,277       316,091       246,884  
                         
INTEREST EXPENSE:
                       
Deposits
    69,297       67,180       28,908 &n