Summary of CVB FINANCIAL CORP

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 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. Our mission is to offer the finest financial products and services to professionals and businesses in our market area.
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 and borrowings, and salaries and benefits expense. As such our net income is subject to fluctuations in interest rates which impact our income statement. 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 a significant decline in the housing market resulting in slower growth in construction loans and a decrease in deposit balances from escrow companies. Unemployment is increasing and the Inland Empire and other areas of our marketplace have been significantly impacted as economic conditions, both nationally and in California, continue to deteriorate. Approximately 22% of our total loan portfolio of $3.7 billion is located in the Inland Empire region of California. The balance of the portfolio is from outside of this region. Weaknesses in the local and state economy could adversely affect us through diminished loan demand, credit quality deterioration, and increases in loan delinquencies and defaults.
Over the past few years, we have been active in acquisitions and we will continue to pursue acquisition targets which will 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 five de novo branches in the following California cities: Glendale, Bakersfield, Fresno, Madera, and Stockton. We have also pursued growth organically. In 2008, we opened four Commercial Banking Centers. Although able to take deposits, these centers operate primarily as sales offices and focus on business clients and their principals, professionals, and high net-worth individuals. One of these centers is located in the San Fernando Valley. The other three centers are located within a Business Financial Center in each of San Bernardino, Los Angeles, and Orange Counties.
The decrease in interest rates during 2008 as compared with 2007 has allowed our net 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 an overall low cost of deposits which contributed to a substantial reduction in interest expense in 2008 as compared to 2007.
Our net income increased to $63.1 million in 2008 compared with $60.6 million in 2007, an increase of $2.5 million or 4.11%. Diluted earnings per common share increased $0.03, from $0.72 in 2007 to $0.75 in 2008. The increase of $2.5 million in net income is primarily the result of a substantial decrease

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in interest expense, offset by a decline in interest income, increase in other operating expense and $22.6 million increase in our provision for credit losses.

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 Operation.
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. 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, 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 effective-yield 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

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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.
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,
                                                  2008            2007          2006
                                                       (Dollars in thousands,
                                                     except per share amounts)
    Net earnings                              $   63,073        $ 60,584     $ 70,580
    Earnings per common share:
    Basic (1)                                 $     0.75        $   0.72     $   0.84
    Diluted (1)                               $     0.75        $   0.72     $   0.83
    Return on average assets                        0.99 %          1.00 %       1.22 %
    Return on average shareholders' equity         13.75 %         15.00 %      19.45 %

(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.

Earnings
We reported net earnings of $63.1 million for the year ended December 31, 2008. This represented an increase of $2.5 million, or 4.11%, over net earnings of $60.6 million for the year ended December 31, 2007. Net earnings for 2007 decreased $10.0 million to $60.6 million, or 14.16%, from net earnings of $70.6 million for the year ended December 31, 2006. Diluted earnings per common share were $0.75 in 2008, as compared to $0.72 in 2007, and $0.83 in 2006. Basic earnings per common share were $0.75 in 2008, as compared to $0.72 in 2007, and $0.84 in 2006. Diluted and basic earnings per common share have been adjusted for the effects of a ten percent stock dividend declared December 20, 2006 and paid on January 19, 2007.
The increase in net earnings for 2008 compared to 2007 was primarily the result of an increase in net interest income and other operating income, offset by an increase in loan loss provision and other operating expenses. The decrease in net earnings for 2007 compared to 2006 was primarily the result of a decrease in net interest income and increase in other operating expenses. The net earnings in 2008 and 2007 reflect the fluctuations in interest rates during those years and the impact on our net interest margin.
For 2008, our return on average assets was 0.99%, compared to 1.00% for 2007, and 1.22% for 2006. Our return on average stockholders' equity was 13.75% for 2008, compared to a return of 15.00% for 2007, and 19.45% for 2006. 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

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environments will have a significant impact on our overall performance. Our balance sheet is currently liability-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 $167.1 million for 2008. This represented an increase of $9.9 million, or 6.32%, over net interest income of $157.1 million for 2007. Net interest income for 2007 decreased $8.5 million, or 5.12%, from net interest income of $165.6 million for 2006. The increase in net interest income of $9.9 million for 2008 resulted from a decrease of $41.3 million in interest expense offset by a decrease of $8.8 million in interest income and a $22.6 million increase in provision for credit losses. The decrease in interest expense of $41.3 million resulted from the decrease in average rate paid on interest-bearing liabilities to 3.01% in 2008 from 4.11% in 2007, offset by an increase of average interest-bearing liabilities of $259.1 million. The decrease of $8.8 million in interest income resulted from the decrease in the average yield on interest-earning assets to 5.71% in 2008 from 6.17% in 2007, offset by an increase of $341.6 million in average interest-earning assets.
The decrease in net interest income of $8.5 million for 2007 as compared to 2006 resulted from an increase of $25.2 million in interest income offset by a $32.7 million increase in interest expense and a $1.0 million increase in provision for credit losses. This increase in interest income of $25.2 million resulted from the $297.7 million increase in average interest-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 was the result of an 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.
Interest income totaled $332.5 million for 2008. This represented a decrease of $8.8 million, or 2.57%, compared to total interest income of $341.3 million for 2007. For 2007, total interest income increased $25.2 million, or 7.97%, over total interest income of $316.1 million for 2006. The decrease in total interest income during 2008 was primarily due to the decrease in interest rates, partially offset by the growth in average earning assets. The increase in 2007 was due to the increase in volume of interest-earning assets and increase in interest rates on total earning assets.
Interest income includes dividends earned on our investment in FHLB capital stock. For the year ended December 31, 2008, 2007 and 2006, our interest income from dividends earned on FHLB stock totaled $4.6 million, $4.2 million and $3.7 million, respectively. The FHLB recently announced that they would not pay any dividends on its capital stock in the first quarter of 2009, and there can be no assurance that the FHLB will pay dividends at the same rate it has paid in the past, or that it will pay any dividends in the future, which, in both cases, would adversely affect our interest income as compared to prior periods.
Interest expense totaled $138.8 million for 2008. This represented a decrease of $41.3 million, or 22.93%, from total interest expense of $180.1 million for 2007. For 2007, total interest expense increased $32.7 million, or 22.15%, over total interest expense of $147.5 million for 2006. The decrease in interest expense during 2008 was due to the decrease in interest rates on deposits and borrowed funds, partially offset by the increase in average borrowed funds. The increase in interest expense for 2007 was primarily due to an increase in average interest-bearing liabilities and increase in the cost of total interest-bearing liabilities.
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:

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TABLE 1 - Distribution of Average Assets, Liabilities, and Stockholders' Equity;
Interest Rates and Interest Differentials

                                                                                    Twelve-month period ended December 31,
                                                2008                                                 2007                                                 2006
                             Average                           Average            Average                           Average            Average                           Average
ASSETS                       Balance         Interest         Yield/Rate          Balance         Interest         Yield/Rate          Balance         Interest         Yield/Rate
                                                                               (amounts in thousands)
Investment Securities
Taxable                    $ 1,766,754       $  86,930               4.97 %     $ 1,722,605       $  85,899               4.99 %     $ 1,907,713       $  91,029               4.80 %
Tax preferenced (1)            675,309          28,371               5.91 %         666,278          29,231               5.88 %         604,222          26,545               5.90 %
Investment in FHLB
stock                           89,601           4,552               5.08 %          80,789           4,229               5.23 %          74,368           3,721               5.00 %
Federal Funds Sold &
Interest Bearing
Deposits with other
institutions                     1,086              39               3.59 %           1,876             109               5.81 %           1,843              92               4.99 %
Loans (2) (3)                3,506,510         212,626               6.06 %       3,226,086         221,809               6.88 %       2,811,782         194,704               6.92 %

Total Earning Assets         6,039,260         332,518               5.71 %       5,697,634         341,277               6.17 %       5,399,928         316,091               6.04 %
Total Non Earning
Assets                         355,653                                              382,869                                              363,892

Total Assets               $ 6,394,913                                          $ 6,080,503                                          $ 5,763,820

LIABILITIES AND
STOCKHOLDERS' EQUITY
Savings Deposits (4)       $ 1,238,810       $  16,413               1.32 %     $ 1,288,745       $  31,764               2.46 %     $ 1,220,441       $  26,637               2.18 %
Time Deposits                  769,827          19,388               2.52 %         844,667          37,533               4.44 %         940,634          40,543               4.31 %

Total Deposits               2,008,637          35,801               1.78 %       2,133,412          69,297               3.25 %       2,161,075          67,180               3.11 %
Other Borrowings             2,597,943         103,038               3.97 %       2,214,108         110,838               4.94 %       1,826,532          80,284               4.40 %

Interest Bearing
Liabilities                  4,606,580         138,839               3.01 %       4,347,520         180,135               4.11 %       3,987,607         147,464               3.70 %

Non-interest bearing
deposits                     1,268,548                                            1,285,857                                            1,354,014
Other Liabilities               61,119                                               43,285                                               59,296
Stockholders' Equity           458,666                                              403,841                                              362,903

Total Liabilities and
Stockholders' Equity       $ 6,394,913                                          $ 6,080,503                                          $ 5,763,820


Net interest income                          $ 193,679                                            $ 161,142                                            $ 168,627


Net interest spread -
tax equivalent                                                       2.70 %                                               2.06 %                                               2.34 %
Net interest margin                                                  3.22 %                                               2.86 %                                               3.13 %
Net interest margin -
tax equivalent                                                       3.41 %                                               3.03 %                                               3.30 %
Net interest margin
excluding loan fees                                                  3.13 %                                               2.76 %                                               3.02 %
Net interest margin
excluding loan fees -
tax equivalent                                                       3.32 %                                               2.93 %                                               3.19 %

(1) Non tax-equivalent rate was 4.20% for 2008, 4.39% for 2007, and 4.44% for 2006.

(2) Loan fees are included in total interest income as follows, (000)s omitted:
2008,$5,399;
2007, $5,585;
2006, $5,818

(3) Non performing loans are included in net loans as follows, (000)s omitted: 2008, $17.7 million; 2007, $1,435; 2006, $0

(4) Includes interest bearing demand and money market accounts

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 3.41% for 2008, compared to 3.03% for 2007, and 3.30% for 2006. The increase in the net interest margin in 2008 and the decrease in net interest margin in 2007 is primarily the result of the changing interest rate environment, which impacted interest earned and interest paid as a percent of earning assets. This was partially offset by changes in the mix of assets and liabilities as discussed in the following paragraphs. Generally, our net interest margin improves in a decreasing interest rate environment as our deposits and borrowings reprice much faster than our loans and securities.
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 2.70% for 2008, 2.06% for 2007, and 2.34% for 2006. The increase in the net interest spread for 2008 as compared to 2007 resulted from a 110 basis point decrease in the cost of interest-bearing liabilities offset by a 46 basis point decrease in the yield on earning assets, thus generating a 64 basis point increase in the net interest spread. The decrease in rates during 2008 had a smaller impact on our assets since a majority of our assets are fixed rate; while deposits and borrowings benefited from the rate decrease. 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 yield (TE) on earning assets decreased to 5.71% for 2008, from 6.17% for 2007, and reflects a decreasing interest rate environment and a change in the mix of earning assets. Investments as a percent of earning assets decreased to 40.44% in 2008 from 41.93% in 2007. The yield on loans for 2008 decreased to 6.06% as compared to 6.88% for 2007. The yield on investments for 2008 decreased slightly to 5.23% as compared to 5.24% in 2007. The yield on loans for 2007 increased to 6.88% as compared to 6.92% for 2006. The yield on investments increased to 5.24% in 2007 as compared to 5.06% in 2006.

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The cost of average interest-bearing liabilities decreased to 3.01% for 2008 as compared to 4.11% for 2007 and 3.70% for 2006. These variations reflected the changing interest rate environment in 2008 and 2007, as well as the change in the mix of interest-bearing liabilities. Borrowings as a percent of interest-bearing liabilities increased to 56.40% for 2008 as compared to 50.93% for 2007 and 45.81% for 2006. Borrowings typically have a higher cost than interest-bearing deposits. The cost of interest-bearing deposits for 2008 was 1.78% as compared to 3.25% for 2007 and 3.11% for 2006, reflecting a decreasing interest rate environment in 2008 and increasing interest rate environment in 2007. The cost of borrowings for 2008 was 3.97% as compared to 4.94% for 2007, and 4.40% for 2006, also reflecting the same fluctuating 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 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.
TABLE 2 - Rate and Volume Analysis for Changes in Interest Income, Interest Expense and Net Interest Income

                                                         Comparison of years ended December 31,
                                     2008 Compared to 2007                                     2007 Compared to 2006
. . .