FORM 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

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 North Haven Ave, Suite 350, Ontario, California (Address of Principal Executive Offices)		91764 (Zip Code)
(Registrant’s telephone number, including area code)		(909) 980-4030

     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 whether the registrant is a large accelerated filer, accelerated filer, non-accelerated filer or smaller reporting company. See definition 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 Exchange Act).
Yes o No þ

Number of shares of common stock of the registrant: 83,252,010 outstanding as of August 5, 2008.

 

 

CVB FINANCIAL CORP.
2008 QUARTERLY REPORT ON FORM 10-Q

PART I — FINANCIAL INFORMATION (UNAUDITED)

ITEM 1. FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

OVERVIEW

CRITICAL ACCOUNTING POLICIES

ANALYSIS OF THE RESULTS OF OPERATIONS

RESULTS BY BUSINESS SEGMENTS

ANALYSIS OF FINANCIAL CONDITION

RISK MANAGEMENT

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4. CONTROLS AND PROCEDURES

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 1A. RISK FACTORS

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

ITEM 5. OTHER INFORMATION

ITEM 6. EXHIBITS

SIGNATURES

EXHIBIT 31.1

EXHIBIT 31.2

EXHIBIT 32.1

EXHIBIT 32.2

PART I — FINANCIAL INFORMATION (UNAUDITED)

ITEM 1. FINANCIAL STATEMENTS

CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
Dollar amounts in thousands

		June 30,				December 31,
		2008				2007
ASSETS
Cash and due from banks		$	110,966			$	89,486
Investment securities available-for-sale			2,490,677				2,390,566
Investment securities held-to-maturity			7,380				—
Interest-bearing balances due from depository institutions			475				475
Investment in stock of Federal Home Loan Bank (FHLB)			90,987				79,983
Loans and lease finance receivables, net			3,516,243				3,495,144
Allowance for credit losses			(37,310	)			(33,049	)
Total earning assets			6,068,452				5,933,119
Premises and equipment, net			45,206				46,855
Bank owned life insurance			105,644				103,400
Accrued interest receivable			28,650				29,734
Deferred tax asset			5,981				—
Intangibles			12,815				14,611
Goodwill			55,097				55,167
Other assets			21,035				21,591
TOTAL ASSETS		$	6,453,846			$	6,293,963
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Noninterest-bearing		$	1,281,838			$	1,295,959
Interest-bearing			1,931,795				2,068,390
Total deposits			3,213,633				3,364,349
Demand Note to U.S. Treasury			77				540
Repurchase agreements			650,306				586,309
Short-term borrowings			1,189,850				1,048,500
Long-term borrowings			805,000				705,000
Deferred tax liabilities			—				1,307
Accrued interest payable			11,897				13,312
Deferred compensation			8,658				8,166
Junior subordinated debentures			115,055				115,055
Other liabilities			25,176				26,477
TOTAL LIABILITIES			6,019,652				5,869,015
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 83,221,358 (2008) and 83,164,906 (2007)			354,729				354,249
Retained earnings			85,183				66,569
Accumulated other comprehensive (loss)/income, net of tax			(5,718	)			4,130
Total stockholders’ equity			434,194				424,948
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	6,453,846			$	6,293,963

See accompanying notes to the consolidated financial statements.

CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
Dollar amounts in thousands, except per share

		For the Three Months								For the Six Months
		Ended June 30,								Ended June 30,
		2008				2007				2008				2007
Interest income:
Loans, including fees		$	52,211			$	53,726			$	106,257			$	106,440
Investment securities:
Taxable			22,430				21,717				43,306				44,810
Tax-preferred			7,111				7,305				14,299				14,536
Total investment income			29,541				29,022				57,605				59,346
Dividends from FHLB stock			1,205				967				2,299				2,105
Federal funds sold and Interest bearing deposits with other institutions			12				14				27				20
Total interest income			82,969				83,729				166,188				167,911
Interest expense:
Deposits			8,537				17,928				20,816				35,086
Short-term borrowings			13,210				6,490				28,398				16,619
Long-term borrowings			11,025				19,252				20,789				34,584
Junior subordinated debentures			1,714				1,776				3,573				3,575
Total interest expense			34,486				45,446				73,576				89,864
Net interest income before provision for credit losses			48,483				38,283				92,612				78,047
Provision for credit losses			3,000				—				4,700				—
Net interest income after provision for credit losses			45,483				38,283				87,912				78,047
Other operating income:
Service charges on deposit accounts			3,807				3,211				7,552				6,487
Trust and Investment Services			1,975				1,747				3,888				3,698
Bankcard services			618				639				1,199				1,241
BOLI income			1,146				1,019				2,218				1,915
Other			1,156				980				1,986				2,153
Total other operating income			8,702				7,596				16,843				15,494
Other operating expenses:
Salaries and employee benefits			15,501				13,583				31,044				27,655
Occupancy and Equipment			5,099				4,160				9,619				8,300
Professional services			1,874				1,587				3,415				2,691
Amortization of intangibles			898				588				1,796				1,177
Other			7,006				4,927				12,903				10,922
Total other operating expenses			30,378				24,845				58,777				50,745
Earnings before income taxes			23,807				21,034				45,978				42,796
Income taxes			6,655				5,080				12,642				11,700
Net earnings		$	17,152			$	15,954			$	33,336			$	31,096
Comprehensive (loss)/income		$	(11,338	)		$	(1,589	)		$	23,488			$	18,984
Basic earnings per common share		$	0.21			$	0.19			$	0.40			$	0.37
Diluted earnings per common share		$	0.21			$	0.19			$	0.40			$	0.37
Cash dividends per common share		$	0.085			$	0.085			$	0.17			$	0.17

See accompanying notes to the consolidated financial statements.

CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)
Amounts and shares in thousands

														Accumulated
		Common												Other
		Shares				Common				Retained				Comprehensive				Comprehensive
		Outstanding				Stock				Earnings				Income				Income				Total
Balance January 1, 2008			83,165			$	354,249			$	66,569			$	4,130							$	424,948
Issuance of common stock			127				328																328
Repurchase of common stock			(71	)			(650	)															(650	)
Tax benefit from exercise of stock options							101																101
Stock-based Compensation Expense							701																701
Adoption of EITF 06-4 Split Dollar Life Insurance											(571	)											(571	)
Cash dividends ($0.17 per share)											(14,151	)											(14,151	)
Comprehensive income:
Net earnings											33,336							$	33,336				33,336
Other comprehensive loss:
Unrealized loss on securities available-for-sale, net															(9,848	)			(9,848	)			(9,848	)
Comprehensive income																		$	23,488
Balance June 30, 2008			83,221			$	354,729			$	85,183			$	(5,718	)						$	434,194

														Accumulated
		Common												Other
		Shares				Common				Retained				Comprehensive				Comprehensive
		Outstanding				Stock				Earnings				Loss				Income				Total
Balance January 1, 2007			84,282			$	366,082			$	34,464			$	(13,221	)						$	387,325
Issuance of common stock			70				394																394
Repurchase of common stock			(1,354	)			(16,330	)															(16,330	)
Shares issued for the acquisition of First Coastal Bank			1,606				18,046																18,046
Tax benefit from exercise of stock options							143																143
Stock-based Compensation Expense							655																655
Cash dividends ($0.17 per share)											(14,333	)											(14,333	)
Comprehensive income:
Net earnings											31,096							$	31,096				31,096
Other comprehensive loss:
Unrealized loss on securities available-for-sale, net															(12,112	)			(12,112	)			(12,112	)
Comprehensive income																		$	18,984
Balance June 30, 2007			84,604			$	368,990			$	51,227			$	(25,333	)						$	394,884

		At June 30,
		2008				2007
Disclosure of reclassification amount
Unrealized losses on securities arising during the period		$	(16,980	)		$	(20,882	)
Tax benefit			7,132				8,770
Net unrealized loss on securities		$	(9,848	)		$	(12,112	)

See accompanying notes to the consolidated financial statements.

CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) Dollar amounts in thousands
Dollar amounts in thousands

		For the Six Months
		Ended June 30,
		2008				2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest and dividends received		$	165,547			$	170,063
Service charges and other fees received			16,834				15,955
Interest paid			(74,990	)			(90,395	)
Cash paid to vendors and employees			(59,221	)			(58,878	)
Income taxes paid			(8,846	)			(2,450	)
Net cash provided by operating activities			39,324				34,295
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from repayment of MBS			182,420				242,393
Proceeds from repayment of Fed Funds Sold			—				52,000
Proceeds from maturity of investment securities			21,320				11,455
Purchases of investment securities available-for-sale			—				(34,360	)
Purchases of investment securities held-to-maturity			(7,712	)			—
Purchases of MBS			(320,402	)			(8,826	)
Purchases of FHLB stock			(11,944	)			(2,927	)
Net decrease in loans and lease finance receivables			(19,196	)			(93,243	)
Proceeds from sales of premises and equipment			67				90
Purchase of premises and equipment			(2,165	)			(3,590	)
Cash paid for purchase of First Coastal Bancshares, net of cash acquired			—				(743	)
Purchase of Bank Owned Life Insurance			(28	)			—
Net cash (used in)/provided by investing activities			(157,640	)			162,249
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in transaction deposits			(83,903	)			(130,071	)
Net (decrease)/increase in time deposits			(66,813	)			38,207
Advances from Federal Home Loan Bank			300,000				600,000
Repayment of advances from Federal Home Loan Bank			(50,000	)			(360,000	)
Net decrease in other borrowings			(9,113	)			(481,391	)
Net increase in repurchase agreements			63,997				163,125
Cash dividends on common stock			(14,151	)			(14,333	)
Repurchase of common stock			(650	)			(16,330	)
Proceeds from exercise of stock options			328				394
Tax benefit related to exercise of stock options			101				143
Net cash provided by/(used in) financing activities			139,796				(200,256	)
NET INCREASE/DECREASE IN CASH AND CASH EQUIVALENTS			21,480				(3,712	)
CASH AND CASH EQUIVALENTS, beginning of period			89,486				146,411
CASH AND CASH EQUIVALENTS, end of period		$	110,966			$	142,699

See accompanying notes to the consolidated financial statements.

CVB FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(unaudited)
Dollar amounts in thousands

		For the Six Months
		Ended June 30,
		2008				2007
RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net earnings		$	33,336			$	31,096
Adjustments to reconcile net earnings to net cash provided by operating activities:
(Gain)/Loss on sale of premises and equipment			46				(3	)
Increase in bank owned life insurance			(2,218	)			(1,915	)
Net amortization of premiums on investment securities			845				1,627
Provisions for credit losses			4,700				—
Stock-based compensation			701				655
Depreciation and amortization			5,568				4,286
Decrease in accrued interest receivable			1,084				185
Decrease in accrued interest payable			(1,415	)			(531	)
Change in other assets and liabilities			(3,323	)			(1,105	)
Total adjustments			5,988				3,199
NET CASH PROVIDED BY OPERATING ACTIVITIES		$	39,324			$	34,295
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
Other Real Estate Owned (OREO)		$	1,137			$	—
Purchase of First Coastal Bancshares:
Assets acquired		$	—			$	194,304
Goodwill & Intangibles			—				28,826
Liabilities assumed			—				(204,341	)
Stock issued			—				(18,046	)
Purchase price of acquisition, net of cash received		$	—			$	743

See accompanying notes to the consolidated financial statements.

CVB FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
For the six months ended June 30, 2008 and 2007

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The accompanying condensed consolidated unaudited financial statements and notes thereto have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for Form 10-Q and conform to practices within the banking industry and include all of the information and disclosures required by accounting principles generally accepted in the United States of America for interim financial reporting. The results of operations for the six months ended June 30, 2008 are not necessarily indicative of the results for the full year. These financial statements should be read in conjunction with the financial statements, accounting policies and financial notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007 filed with the Securities and Exchange Commission. In the opinion of management, the accompanying condensed consolidated unaudited financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair representation of financial results for the interim periods presented. A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows.

     Principles of Consolidation - The consolidated financial statements include the accounts of CVB Financial Corp. (the “Company”) and its wholly owned subsidiary: Citizens Business Bank (the “Bank”) after elimination of all intercompany transactions and balances. The Company also has three 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 and CVB Statutory Trust III. 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 also acquired trust preferred securities through the acquisition of First Coastal Bancshares (“FCB”). In accordance with Financial Accounting Standards Board Interpretation No. 46R “Consolidation of Variable Interest Entities” (“FIN No. 46R”), these trusts do not meet the criteria for consolidation.

     Nature of Operations - The Company’s primary operations are related to traditional banking activities, including the acceptance of deposits and the lending and investing of money through the operations of the Bank. The Bank also provides automobile and equipment leasing and brokers mortgage loans to customers through its Citizens Financial Services Division (formerly known as Golden West Financial Division) and offers trust services to customers through its CitizensTrust Division. The Bank’s customers consist primarily of small to mid-sized businesses and individuals located in San Bernardino County, Riverside County, Orange County, Los Angeles County, Madera County, Fresno County, Tulare County, and Kern County. The Bank operates 44 Business Financial Centers and three Commercial Banking Groups with its headquarters located in the city of Ontario.

     The Company’s operating business units have been combined into two main segments: Business Financial Centers and Treasury. Business Financial Centers (branches) is comprised of loans, deposits, products and services the Bank offers to the majority of its customers. The other segment is Treasury, which manages the investment portfolio of the Company. The Company’s remaining centralized functions and eliminations of inter-segment amounts have been aggregated and included in “Other.”

     The internal reporting of the Company considers all business units. Funds are allocated to each business unit based on its need to fund assets (use of funds) or its need to invest funds (source of funds). Net income is determined based on the actual net income of the business unit plus the allocated income or expense based on the sources and uses of funds for each business unit. Non-interest income and non-interest expense are those items directly attributable to a business unit.

     Cash and due from banks — Cash on hand, cash items in the process of collection, and amounts due from correspondent banks and the Federal Reserve Bank are included in Cash and due from banks.

     Investment Securities - The Company classifies as held-to-maturity those debt securities that the Company has 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. Available-for-sale securities 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 effective-yield method over the terms of the securities. 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 Company’s investment in Federal Home Loan Bank (“FHLB”) stock is carried at cost.

     Loans and Lease Finance Receivables - Loans and lease finance receivables are reported at the principal amount outstanding, less deferred net loan origination fees. Interest on loans and lease finance receivables is credited to income based on the principal amount outstanding. Interest income is not recognized on loans and lease finance receivables when collection of interest is deemed by management to be doubtful. In the ordinary course of business, the Company enters into commitments to extend credit to its customers. These commitments are not reflected in the accompanying consolidated financial statements. As of June 30, 2008, the Company entered into commitments with certain customers amounting to $797.4 million compared to $747.5 million at December 31, 2007. Letters of credit at June 30, 2008, and December 31, 2007, were $64.3 million and $60.9 million, respectively.

     The Bank receives collateral to support loans, lease finance receivables, and commitments to extend credit for which collateral is deemed necessary. The most significant categories of collateral are real estate, principally commercial and industrial income-producing properties, real estate mortgages, and assets utilized in agribusiness.

     Nonrefundable fees and direct costs associated with the origination or purchase of loans are deferred and netted against outstanding loan balances. The deferred net loan fees and costs are recognized in interest income over the loan term using the effective-yield method.

     Provision and Allowance for Credit Losses - 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 management’s 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 that would deserve current recognition in estimating inherent credit losses. The estimate is reviewed quarterly by management and periodically by various regulatory entities and, as adjustments become necessary, they are reported in earnings in the periods in which they become known. The provision for credit losses is charged to expense. During the first six months of 2008, we recorded a provision for credit losses of $4.7 million. The allowance for credit losses was $37.3 million as of June 30, 2008. This represents an increase of $4.3 million when compared with an allowance for credit losses of $33.0 million as of December 31, 2007.

     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 in the liabilities section of the balance sheet in other liabilities. Provisions to this reserve are included in other expense. For the six months of 2008, the Company recorded an increase of $1.3 million in the reserve for undisbursed commitments. As of June 30, 2008, the balance in this reserve was $4.1 million.

     A loan for which collection of principal and interest according to its original terms is not probable is considered to be impaired. The Company’s policy is to record a specific valuation allowance, which is included in the allowance for credit losses, or charge off that portion of an impaired loan that exceeds its fair value. Fair value is usually based on the value of underlying collateral.

     At June 30, 2008, the Company had classified as impaired, four loans with a balance of $4.2 million. The loans are supported by collateral with a fair value less selling costs, net of prior liens, of $2.3 million. The amount of specific reserve for these loans was $1.9 million as of June 30, 2008. Of the four loans, one loan represents $3.1 million of the total impaired loan balance. At December 31, 2007, the Bank had one impaired loan with a balance of $1.1 million.

     Premises and Equipment - Premises and equipment are stated at cost, less accumulated depreciation, which is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives using the straight-line method. Properties under capital lease and leasehold improvements are amortized over the shorter of estimated economic lives of 15 years or the initial terms of the leases. Estimated lives are 3 to 5 years for computer and equipment, 5 to 7 years for furniture, fixtures and equipment, and 15 to 40 years for buildings and improvements. Long-lived assets are reviewed periodically for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. The impairment is calculated as the difference in fair value of assets and their carrying value. The impairment loss, if any, would be recorded in noninterest expense.

     Other Real Estate Owned - Other real estate owned (“OREO”) represents real estate acquired through foreclosure in satisfaction of commercial and real estate loans and is stated at fair value, minus estimated costs to sell (fair value at time of foreclosure). Loan balances in excess of fair value of the real estate acquired at the date of acquisition are charged against the allowance for credit losses. Any subsequent operating expenses or income, reduction in estimated values, and gains or losses on disposition of such properties are charged to current operations. As of June 30, 2008, we had $1.1 million in Other Real Estate Owned (“OREO”), which represents one foreclosed condominium construction project. A majority of the loan was charged-off in the fourth quarter of 2007. The subject loan was participated with another financial institution and the resulting OREO asset is owned jointly with that financial institution. There was no OREO at December 31, 2007.

     Business Combinations and Intangible Assets - The Company has engaged in the acquisition of financial institutions and the assumption of deposits and purchase of assets from other financial institutions in its market area. The Company has paid premiums on certain transactions, and such premiums are recorded as intangible assets, in the form of goodwill or other intangible assets. In accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, goodwill is not being amortized whereas identifiable intangible assets with finite lives are amortized over their useful lives. On an annual basis, the Company tests goodwill and intangible assets for impairment. The Company has not yet completed its annual impairment test as of July 1, 2008, but does not expect to record any impairment of goodwill.

     At June 30, 2008 goodwill was $55.1 million. As of June 30, 2008, intangible assets that continue to be subject to amortization include core deposit premiums of $12.8 million (net of $14.3 million of accumulated amortization). Amortization expense for such intangible assets was

$1.8 million for the six months ended June 30, 2008. Estimated amortization expense, for the remainder of 2008 is expected to be $1.8 million. Estimated amortization expense, for the succeeding five fiscal years is $3.0 million for year one, $2.9 million for year two, $2.8 million for year three, $1.6 million for year four and $653,000 for year five. The weighted average remaining life of intangible assets is approximately 3.5 years.

     Bank Owned Life Insurance - The Bank invests in Bank-Owned Life Insurance (BOLI). BOLI involves the purchasing of life insurance by the Bank on a select group of employees. The Bank is the owner and beneficiary of these policies. BOLI is recorded as an asset at cash surrender value. Increases in the cash value of these policies, as well as insurance proceeds received, are recorded in other non-interest income and are not subject to income tax.

     As of January 1, 2008, the Company adopted EITF 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” EITF 06-4 requires that for a split-dollar life insurance arrangement, an employer should recognize a liability for future benefits in accordance with SFAS 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” or APB Opinion No. 12, “Omnibus Opinion — 1967.” The adoption did not have a material effect on the Company’s consolidated financial position or results of operations. The cumulative effect of the adoption was recorded in equity.

     Income Taxes - Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryback or carryforward periods available under the tax law. Based on historical and future expected taxable earnings and available strategies, the Company considers the future realization of these deferred tax assets more likely than not.

     The Company adopted FIN 48, Accounting for Uncertainty in Income Taxes. FIN 48 clarifies the accounting for uncertainty in tax positions taken or expected to be taken on a tax return and provides that the tax effects from an uncertain tax position can be recognized in the financial statements only if, based on its merits, the position is more likely than not to be sustained on audit by the taxing authorities. Management believes that all tax positions taken to date are highly certain and, accordingly, no accounting adjustment has been made to the financial statements. Interest and penalties related to uncertain tax positions are recorded as part of other operating expense.

     Earnings per Common Share - Basic earnings per common share are computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding during each period. The computation of diluted earnings per common share considers the number of tax-effected shares issuable upon the assumed exercise of outstanding common stock options. Share and per share amounts have been retroactively restated to give effect to all stock dividends and splits. The number of shares outstanding at June 30, 2008 was 83,221,358. The tables below presents the reconciliation of earnings per share for the periods indicated.

Earnings Per Share Reconciliation
(Dollars and shares in thousands, except per share amounts)
For the Six Months
Ended June 30,

		2008												2007
						Weighted												Weighted
		Income				Average Shares				Per Share				Income				Average Shares				Per Share
		(Numerator)				(Denominator)				Amount				(Numerator)				(Denominator)				Amount
BASIC EPS
Income available to common stockholders		$	33,336				83,128			$	0.40			$	31,096				83,692			$	0.37
EFFECT OF DILUTIVE SECURITIES
Incremental shares from assumed exercise of outstanding options			—				328				—				—				521				—
DILUTED EPS
Income available to common stockholders		$	33,336				83,456			$	0.40			$	31,096				84,213			$	0.37

Earnings Per Share Reconciliation
(Dollars and shares in thousands, except per share amounts)
For the Three Months
Ended June 30,

		2008												2007
						Weighted												Weighted
		Income				Average Shares				Per Share				Income				Average Shares				Per Share
		(Numerator)				(Denominator)				Amount				(Numerator)				(Denominator)				Amount
BASIC EPS
Income available to common stockholders		$	17,152				83,105			$	0.21			$	15,954				83,490			$	0.19
EFFECT OF DILUTIVE SECURITIES
Incremental shares from assumed exercise of outstanding options			—				373				—				—				654				—
DILUTED EPS
Income available to common stockholders		$	17,152				83,478			$	0.21			$	15,954				84,144			$	0.19

     Stock-Based Compensation - At June 30, 2008, the Company has three stock-based employee compensation plans, two of which are described more fully in Note 15 in the Company’s Annual Report on Form 10-K.

     At the annual shareholders meeting in May 2008, the shareholders approved the 2008 Equity Incentive Plan which authorizes the issuance of up to 3,949,891 shares of Company common stock for grants of stock options and restricted stock to employees, officers, consultants and directors of the Company and its subsidiaries, and expires in 2018. The plan authorizes the issuance of incentive and non-qualified stock options, as well as, restricted stock awards. No further grants will be made under the 2000 Stock Option Plan, but shares may continue to be issued under such plan pursuant to grants previously made.

     There were 371,500 options and 66,500 restricted stock awards granted under the new plan in June 2008. The options and stock awards will vest, in equal installments, over a five-year period. The options and restricted stock awards were issued at the stock price on the date of grant at $9.46. The fair value of each stock option granted was estimated on the date of grant using the following weighted-average assumptions:

		2008
Dividend Yield			3.5	%
Volatility			41.0	%
Risk-free interest rate			3.6	%
Expected life		7.5		years
Fair Value		$	3.07

     The expected volatility is solely based on the daily historical stock price volatility over the expected option life. The expected life of options granted is derived from the output of the option valuation model and represents the period of time an optionee will hold an option before exercising it. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury five-year constant maturity yield curve in effect at the time of the grant.

     Option activity under the Company’s stock compensation plans as of June 30, 2008 and changes for the six months ended June 30, 2008 were as follows:

		Number of								Weighted
		Stock				Weighted				Average				Aggregate
		Options				Average				Remaining				Intrinsic
		Outstanding				Exercise				Contractual				Value
Options		(000)				Price				Term (in Years)				($000)
Outstanding at January 1, 2008			2,040			$	10.66
Granted			377			$	9.46
Exercised			(61	)		$	5.41
Forfeited or expired			(31	)		$	14.55
Outstanding at June 30, 2008			2,325			$	10.55				6.10			$	2,148
Vested or expected to vest at June 30, 2008			1,377			$	9.71				4.41			$	2,137
Exercisable at June 30, 2008			1,384			$	9.71				4.41			$	2,148

     As of June 30, 2008, there was $3.3 million of total unrecognized compensation costs related to non-vested options granted under the plans. The cost is expected to be recognized over a weighted-average period of approximately 3.5 years. The expense recognized for stock options was $339,000 and $625,000 for the three and six months ended June 30, 2008.

     A summary of the activity of the Company’s non-vested restricted shares as of June 30, 2008 and changes during the six months ended June 30, 2008, is presented below:

		2008
						Weighted
		Shares				Average
Nonvested Restricted Shares		(000)				Fair Value
Nonvested at January 1,			44			$	13.02
Granted			67			$	9.46
Vested			—			$	—
Forfeited			—			$	—
Nonvested at June 30,			111			$	10.88

     As of June 30, 2008, there was $625,000 of total unrecognized compensation costs related to non-vested shares granted under the plans. The cost is expected to be recognized over a weighted-average period of approximately 5.0 years. The expense recognized for restricted stock was $40,000 and $76,000 for the three and six months ended June 30, 2008.

     Derivative Financial Instruments - The Company accounts for derivatives in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted. Pursuant to the requirements of SFAS No. 133, all derivative instruments, including certain derivative instruments embedded in other contracts, are to be recognized on the consolidated balance sheet at fair value. For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings.

Changes in fair value of derivatives designated and accounted for as cash flow hedges, to the extent they are effective as hedges, are recorded in “Other Comprehensive Income,” net of deferred taxes and are subsequently reclassified to earnings when the hedged transaction affects earnings. Any hedge ineffectiveness would be recognized in the income statement line item pertaining to the hedged item.

     The Bank is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are market risk and interest rate risk. As of June 30, 2008, the Bank entered into eleven interest-rate swap agreement with a customer and eleven with a counterparty bank. The swaps are not designated as hedging instruments. The purpose of entering into offsetting derivatives not designated as a hedging instrument is to provide the Bank a variable-rate loan receivable and provide the customer the financial effects of a fixed-rate loan without creating volatility in the bank’s earnings.

     The structure of the swaps is as follows. The Bank enters into a swap with its customers to allow them to convert variable rate loans to fixed rate loans, and at the same time, the Bank enters into a swap with the counterparty bank to allow the Bank to pass on the interest-rate risk associated with fixed rate loans. The net effect of the transaction allows the Bank to receive interest on the loan from the customer at a variable rate based on LIBOR plus a spread. The changes in the market value of the swaps primarily offset each other and therefore do not have a significant impact on the Company’s results of operations.

     As of June 30, 2008, the total notional amount of the Bank’s swaps with customers was $30.1 million and the notional amount of the Bank’s swaps with the counterparty bank was $30.1 million. The following tables present the location of the asset and liability and the amount of gain recognized as of and for the quarter ended June 30, 2008.

Fair Value of Derivative Instruments

Asset Derivatives

Liability Derivatives

June 30, 2008

June 30, 2008

(amounts in thousands)

Balance Sheet

Balance Sheet

Derivatives Not Designated as Hedging Instruments

Location

Fair Value

Location

Fair Value

Interest Rate Swaps

Other Assets

$

150

Other Liabilities

$

150

Total Derivatives

$

150

$

150

The Effect of Derivative Instruments on the Consolidated Statement of Earnings for
the six months ended June 30, 2008
(amounts in thousands)

						Amount of Gain
Derivatives Not Designated as		Location of Gain Recognized in				Recognized in Income
Hedging Instruments		Income on Derivative				on Derivative
						June 30, 2008
Interest Rate Swaps		Other Income				$	298
Total						$	298

     Statement of Cash Flows - Cash and cash equivalents as reported in the statements of cash flows include cash and due from banks. Cash flows from loans and deposits are reported net.

     CitizensTrust - This division provides trust, investment and brokerage related services, as well as financial, estate and business succession planning services. The Company maintains funds in trust for customers. CitizensTrust has approximately $2.5 billion in assets under administration and $807 million in assets under management. The amount of these funds and the related liability have not been recorded in the accompanying consolidated balance sheets because they are not assets or liabilities of the Bank or Company, with the exception of any funds held on deposit with the Bank.

     Use of Estimates in the Preparation of Financial Statements - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for credit losses. Other significant estimates which may be subject to change include fair value disclosures, impairment of investments and goodwill, and valuation of deferred tax assets and other intangibles.

     Recent Accounting Pronouncements - In December 2007, the FASB issued a revision to SFAS No. 141, “Business Combinations,” SFAS No. 141(R). SFAS No. 141(R) requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the Statement. This replaces SFAS No. 141’s cost-allocation process, which required the cost of the acquisition to be allocated to the individual assets acquired and liabilities assumed based on their estimated fair values. SFAS No. 141(R) is applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply it before that date. The Company does not expect the adoption of SFAS 141(R) to have a material effect on the Company’s consolidated financial position or results of operations.

     In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interest in Consolidated Financial Statements — an amendment of ARB No. 51.” SFAS No. 160 amends ARB No. 51 to establish accounting and reporting standards for non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 is effective for fiscal years, and interim periods, within those fiscal years, beginning on or after December 15, 2008. Early adoption is prohibited. The Company does not expect the adoption of SFAS 160 to have a material effect on the Company’s consolidated financial position or results of operations.

     In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” SFAS 161 amends and expands SFAS No. 131, requiring enhanced disclosures that would enable financial-statement users to understand how and why a company uses derivative instruments and better understand their effects on an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years, and interim periods, within those fiscal years, beginning on or after November 15, 2008. The Company does not expect the adoption of SFAS 161 to have a material effect on the Company’s consolidated financial position or results of operations.

     Reclassification - Certain amounts in the prior periods’ financial statements and related footnote disclosures have been reclassified to conform to the current presentation with no impact on previously reported net income or stockholders’ equity.

     Shareholder Rights Plan - The Company has a shareholder rights plan designed to maximize long-term value and to protect shareholders from improper takeover tactics and takeover bids which are not fair to all shareholders. In accordance with the plan, preferred share purchase

rights were distributed as a dividend at the rate of one right to purchase one one-thousandth of a share of the Company’s Series A Participating Preferred Stock at an initial exercise price of $50.00 (subject to adjustment as described in the terms of the plan) upon the occurrence of certain triggering events. For additional information concerning this plan, see Note 11 to Consolidated Financial Statements, “Commitments and Contingencies” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

     Other Contingencies - In the ordinary course of business, the Company becomes involved in litigation. Based upon the Company’s internal records and discussions with legal counsel, the Company records reserves for estimates of the probable outcome of all cases brought against them. At June 30, 2008, the Company does not have any litigation reserves and is not aware of any material pending legal action or complaints asserted against the Company.

     Business Segments - The Company has identified two principal reportable segments: Business Financial Centers and the Treasury Department. The Company’s subsidiary bank has 44 Business Financial Centers (branches), organized in 6 geographic regions, which are the focal points for customer sales and services. The company utilizes an internal reporting system to measure the performance of various operating segments within the Bank which is the basis for determining the Bank’s reportable segments. The Chief Operating Decision Maker (currently our CEO) regularly reviews the financial information of these segments in deciding how to allocate resources and assessing performance. The Bank’s geographic regions are considered operating segments and have been aggregated for segment reporting purposes because the products and services are similar and are sold to similar types of customers, have similar production and distribution processes, have similar economic characteristics, and have similar reporting and organizational structures. The Treasury Department’s primary focus is managing the Bank’s investments, liquidity, and interest rate risk. Information related to the Company’s remaining operating segments which include construction lending, dairy and livestock lending, SBA lending and leasing, centralized functions have been aggregated and included in “Other.” In addition, the Company allocates internal funds transfer pricing to the segments using a methodology that charges users of funds interest expense and credits providers of funds interest income with the net effect of this allocation being recorded in administration.

     The following table represents the selected financial information for these two business segments. Accounting principles generally accepted in the United States of America do not have an authoritative body of knowledge regarding the management accounting used in presenting segment financial information. The accounting policies for each of the business units is the same as those policies identified for the consolidated Company and identified in the footnote on the summary of significant accounting policies. The income numbers represent the actual income and expenses of each business unit. In addition, each segment has allocated income and expenses based on management’s internal reporting system, which allows management to determine the performance of each of its business units. Loan fees, included in the “Business Financial Centers” category are the actual loan fees paid to the Company by its customers. These fees are eliminated and deferred in the “Other” category, resulting in deferred loan fees for the consolidated financial statements. All income and expense items not directly associated with the two business segments are grouped in the “Other” category. Future changes in the Company’s management structure or reporting methodologies may result in changes in the measurement of operating segment results.

     The following tables present the operating results and other key financial measures for the individual reportable segments for the three and six months ended June 30, 2008 and 2007:

		Three Months Ended June 30, 2008
		Business
		Financial
		Centers				Treasury				Other				Eliminations				Total
Interest income, including loan fees		$	41,381			$	30,754			$	10,834			$	—			$	82,969
Credit for funds provided (1)			8,417				—				765				(9,182	)			—
Total interest income			49,798				30,754				11,599				(9,182	)			82,969
Interest expense			8,344				23,305				2,837				—				34,486
Charge for funds used (1)			4,098				1,579				3,505				(9,182	)			—
Total interest expense			12,442				24,884				6,342				(9,182	)			34,486
Net interest income			37,356				5,870				5,257				—				48,483
Provision for credit losses			—				—				3,000				—				3,000
Net interest income after provision for credit losses		$	37,356			$	5,870			$	2,257			$	—			$	45,483
Non-interest income			5,717				6				2,979				—				8,702
Non-interest expense			12,012				312				18,054				—				30,378
Segment pretax profit (loss)		$	31,061			$	5,564			$	(12,818	)		$	—			$	23,807
		Three Months Ended June 30, 2007
		Business
		Financial
		Centers				Treasury				Other				Eliminations				Total
Interest income, including loan fees		$	42,068			$	30,020			$	11,641			$	—			$	83,729
Credit for funds provided (1)			15,100				—				3,413				(18,513	)			—
Total interest income			57,168				30,020				15,054				(18,513	)			83,729
Interest expense			15,846				24,996				4,604				—				45,446
Charge for funds used (1)			3,572				7,915				7,026				(18,513	)			—
Total interest expense			19,418				32,911				11,630				(18,513	)			45,446
Net interest income			37,750				(2,891	)			3,424				—				38,283
Provision for credit losses			—				—				—				—				—
Net interest income after provision for credit losses		$	37,750			$	( 2,891	)		$	3,424			$	—			$	38,283
Non-interest income			4,913				—				2,683				—				7,596
Non-interest expense			10,505				291				14,049				—				24,845
Segment pretax profit (loss)		$	32,158			$	( 3,182	)		$	( 7,942	)		$	—			$	21,034

		Six Months Ended June 30, 2008
		Business
		Financial
		Centers				Treasury				Other				Eliminations				Total
Interest income, including loan fees		$	83,160			$	59,925			$	23,103			$	—			$	166,188
Credit for funds provided (1)			20,918				—				1,963				(22,881	)			—
Total interest income			104,078				59,925				25,066				(22,881	)			166,188
Interest expense			20,355				46,856				6,365				—				73,576
Charge for funds used (1)			8,159				5,740				8,982				(22,881	)			—
Total interest expense			28,514				52,596				15,347				(22,881	)			73,576
Net interest income			75,564				7,329				9,719				—				92,612
Provision for credit losses			—				—				4,700								4,700
Net interest income after provision for credit losses		$	75,564			$	7,329			$	5,019			$	—			$	87,912
Non-interest income			10,597				6				6,240				—				16,843
Non-interest expense			23,962				608				34,207				—				58,777
Segment pretax profit (loss)		$	62,199			$	6,727			$	(22,948	)		$	—			$	45,978
Segment assets as of June 30, 2008		$	3,363,086			$	2,446,755			$	644,005			$	—			$	6,453,846

		Six Months Ended June 30, 2007
		Business
		Financial
		Centers				Treasury				Other				Eliminations				Total
Interest income, including loan fees		$	81,829			$	61,503			$	24,579			$	—			$	167,911
Credit for funds provided (1)			30,986				—				7,112				(38,098	)			—
Total interest income			112,815				61,503				31,691				(38,098	)			167,911
Interest expense			30,630				50,624				8,610				—				89,864
Charge for funds used (1)			6,815				15,833				15,450				(38,098	)			—
Total interest expense			37,445				66,457				24,060				(38,098	)			89,864
Net interest income			75,370				(4,954	)			7,631				—				78,047
Provision for credit losses			—				—				—								—
Net interest income after provision for credit losses		$	75,370			$	(4,954	)		$	7,631			$	—			$	78,047
Non-interest income			8,958				—				6,536				—				15,494
Non-interest expense			21,180				545				29,020				—				50,745
Segment pretax profit (loss)		$	63,148			$	(5,499	)		$	(14,853	)		$	—			$	42,796
Segment assets as of June 30, 2007		$	3,390,132			$	1,958,761			$	787,181			$	—			$	6,136,074