CVB Financial Corp (CVBF) 2011 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the fourth quarter and year-end 2011 CVB Financial Corporation and it's subsidiary Citizens Business Bank earnings conference call. My name is Mike, and I am your operator for today. At this time all participants are in a listen-only mode. Later we will conduct a question and answer period. I would now like to turn the presentation over to your host for today's call, Christina Carrabino, you may proceed, ma'am.

Thank you, Mike, and good morning, everyone. Thank you for joining us today to review our financial results for the fourth quarter and year-end 2011. Joining me this morning is Chris Myers, President and Chief Executive Officer; and Rich Thomas, Executive Vice President and Chief Financial Officer. Our comments today will refer to the financial information that was included in the earnings announcement released yesterday. To obtain a copy, please visit our website at www.cbbank.com and click on the CVB investors tab.

Before we get started, let me remind you that today's conference call will include some forward-looking statements. These forward-looking statements relate to, among other things, current plans, expectations, events, and industry trends that may affect the Company's future operating results and financial position. Such statements involve risks and uncertainties, and future activities and results may differ materially from these expectations. The speakers on this call claim the protection of the Safe Harbor provisions contained in the Private Securities Litigation Reform Act of 1995. For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from our forward looking statements, please see the Company's annual report on Form 10-K for the year ended December 31, 2010 and in particular the information set forth in item 1-A, risk factors therein. Now I will turn the call over to Chris Myers.

Thanks Christina. Good morning everyone and thank you for joining us again this quarter. Yesterday we reported earnings of $21.7 million for the fourth quarter of 2011 compared with $22.4 million for the third quarter of 2011 and up 119.9% from $9.9 million for the fourth quarter of 2010. Fourth-quarter earnings were negatively impacted by our decision to prepay $100 million in Federal Home Loan Bank debt. Which resulted in a $3.3 million prepayment charge. Had we not elected to prepay this debt, fourth-quarter earnings would have been $23.9 million or $0.23 per share. Notwithstanding, actual earnings per share were $0.21 for the fourth quarter compared with $0.21 for the third quarter and $0.09 for the year ago quarter.

For the year ended December 31, 2011 we earned $81.7 million up 29.9% from the same period in 2010. Earnings per share were $0.77 for 2011 compared with $0.59 per share for 2010. We are proud to report that this is our highest reported annual earnings in Company history. Our previous record was established in 2006 as we reported $70.6 million in earnings. The fourth quarter also represented our 139th consecutive quarter of profitability and 89th consecutive quarter of paying a cash dividend to our shareholders.

Excluding the impact of the yield adjustment on covered loans, our tax exempt net interest margin was 3.62% for the fourth quarter, down from 3.81% for the third quarter, and down from 3.66% for the fourth quarter of 2010. Lower yield on securities and loans was the primary reason for the declining net interest margins. $100 million FHLB debt prepayment which occurred in late December 2011 should help offset future net interest margin pressure to an extent.

Now let's talk about loans beginning with our noncovered loan portfolio. Nonperforming assets continued to decline in the fourth quarter, representing the fifth straight quarter we have experienced a decline. We once again, reported zero provision for funded loan and lease losses for the fourth quarter. The allowance for loan and lease losses was $94 million or 2.92% of outstanding loans at December 31, 2011, compared with $95.5 million or 3.01% of outstanding loans at September 30, 2011. Net charge-offs for the fourth quarter were $1.6 million compared with $1.4 million for the third quarter. In total, our nonperforming assets defined as noncovered, nonaccrual loans plus OREO totaled $76.5 million at December 31, 2011, a decrease of $4.7 million from $81.2 million at September 30, 2011.

At year end, we had loans delinquent 30 to 89 days of $5.5 million or 0.17% of total noncovered loans. Classified loans increased slightly for the fourth quarter to $358.7 million, compared with $357.2 million for the prior quarter. We will have more detailed information on classified loans available in our year-end Form 10-K. We had $3.2 billion in total noncovered loans and leases at the end of the fourth quarter, an increase of $49.6 million from the end of the third quarter. Dairy and livestock loans increased $51.5 million during the fourth quarter, due primarily to the seasonal borrowing patterns of these customers. So, basically, our loans were flat quarter over quarter. Most of our dairy and livestock clients continue to show profitable operations.

Moving onto covered loans. Covered loans represent loans in which we have lost sharing protection from the FDIC as a result of our acquisition of San Joaquin Bank in October 2009. At year-end, we had $330.4 million in total covered loans resulting from the San Joaquin Bank acquisition. These loans have a carrying value of $262.5 million. At the acquisition date, the initial purchase discount was $199.8 million. Today our remaining discount is $67.9 million. The discount accretion was $948,000 for the fourth quarter, compared with $4 million for the prior quarter. Our quarter-by-quarter discount accretion has slowed down considerably from where it was in 2010.

Now, I would like to discuss deposits. We continue to grow our non-interest bearing deposits. For the fourth quarter of 2011, our non-interest bearing deposits grew to $2.03 billion compared with $1.7 billion for the same quarter a year ago. This represents a 19.2% increase year over year, completely organic. Non-interest bearing deposits now represent over 44% of our total deposits. Our total cost of deposits for the fourth quarter was 15 basis points, compared with 17 basis points for the third quarter. At year-end 2011, our total deposits and customer repurchase agreements were $5.1 billion, a mere $52.9 million increase over year-end 2010. While the growth in total deposits has been modest over the past year, our overall mix and type of deposits has improved. From a strategic standpoint, we are seeking to grow what we refer to as sticky deposits, deposits that we believe will be more inclined to stick with us when interest rates rise. These deposits include non-interest bearing accounts, business checking accounts, savings accounts, and NOW accounts. Our ongoing objective is to maintain a low-cost, stable source of funding for our loans and securities. We believe that stability and low-cost nature of our core deposit client base is one of the key strengths of our organization.

Moving on to non-interest income. Non-interesting income was $10.7 million for the fourth quarter of 2011, compared with $7.5 million for the third quarter of 2011. An increase in FDIC loss sharing asset of $2.1 million was the primary difference between the two quarters. But even if you take that out, we were still up over $1 million quarter over quarter.

Now, expenses, we continue to closely monitor our expenses. Non-interest expense for the fourth quarter of 2011 was $34.7 million, an increase of $1.8 million from $32.9 million for the third quarter of 2011. However, if we eliminate the $1.65 million reduction in unfunded loan commitments from the third quarter, and eliminate the $3.3 million prepayment penalty for the fourth quarter, we actually decreased other operating expenses by approximately $3.1 million, or about 9% quarter over quarter. Expenses were reduced in the following segments; professional services which includes legal expenses, $1.1 million quarter over quarter; salaries and employee benefits, $1 million; and miscellaneous other expenses, $800,000. We believe that we are realizing the benefits of the expense reduction initiatives that were enacted in mid 2011. In October 2011, we closed down a small branch location in McFarland, California, which is located about 60 miles northeast of Bakersfield. We consolidated this branch into our Delano business financial center located about six miles away. We acquired the McFarland branch through our acquisition of Kaweah Bank in 2003 and the Delano branch through our San Joaquin Bank acquisition in 2009. We anticipate no material loss of business from this move. Looking ahead, we may consider other branch closures where we can realize cost savings without material loss in business. Now, I will turn the call over to Rich Thomas to discuss our effective tax rate, investment portfolio, and overall capital position. Rich?

Thanks, Chris, good morning, everyone. Our effective tax rate was 30.5% for the fourth quarter. Lower than the prior quarter's 35.4%. The decrease is due to the estimated total income which impacted the overall effective tax rate for the entire physical year. The overall tax rate for the full-year 2011 was 32.3%. During the fourth quarter, we provided an average of approximately $474 million in overnight funds to the Federal Reserve and received a yield of 25 basis points on collected balances.

Now our investment portfolio. At December 31, 2011, investment securities totaled $2.2 billion, up $34.2 million from the third quarter of 2011. Investment securities represented approximately 34% of our total assets. These securities are broken down as follows; mortgage-backed securities, $1.49 billion; municipal securities, $652 million; agency securities, $46.5 million; and $10.5 million in newly purchased trust preferred securities. 99.9% of these securities are considered available-for-sale. Our available-for-sale investment portfolio continues to perform well. At December 31, 2011, we had an unrealized gain of $71.5 million, up from $68 million for the prior quarter. We purchased $10.5 million of trust preferred securities in the fourth quarter of 2011. Virtually all of our mortgage-backed securities are issued by Freddie Mac or Fannie Mae, which have the implied guarantee of the US government. We have seven private label mortgage-backed securities totaling $4.8 million. We have been strategically reinvesting our cash flow runoff from our investment portfolio, carefully weighing current rates and overall interest rate risk.

For the fourth quarter of 2011, we purchased $153 million in mortgage-backed securities with an average yield of 1.93%. For the year 2011, we purchased $761.6 million in mortgage-backed securities with an average yield of 2.41%. We attempt to maintain a neutral position at the short end of the treasury curve by reinvesting in mortgage-backed securities with an average duration of about 3.4 years in order to avoid material extension risk as interest rates may rise in the future. For the fourth quarter of 2011, we also purchased $5.8 million in municipal securities with an average tax-equivalent yield of 4.73%. For the year 2011, we purchased $34.2 million of municipal securities with an average tax-equivalent yield of 5.63%. Finding bank qualified municipal securities that meet our investment criteria remains challenging. Yet we continue to be opportunistic whenever possible.

Now turning to our capital position. We paid out approximately $8.9 million in cash dividends during the fourth quarter of 2011, and $35.8 million for the year 2011. Despite this, shareholders equity increased by $71 million to $714.8 million for the year 2011. We attribute about 50% of this $71 million increase in capital to a $35.3 million increase in our unrealized appreciation of our investment portfolio. The other 50% can be attributed to the retention of earnings. For the year 2011, we produced $81.7 million in net earnings, of which $35.8 million or 44% was paid in cash dividends to our shareholders. We also repurchased approximately 1.6 million shares of our common stock at an average price of $7.86 per share. This reduced our capital position by about $12.5 million. We are pleased that we were able to return about $48.3 million in aggregate to our shareholders through cash dividends and stock repurchase, and still improve our shareholders' equity by $71 million for 2011. With the strengthening of our capital position, we continue to look at many different opportunities to deploy our capital and liquidity. Subsequent to year-end, 2011, on January 7, 2012, we redeemed all the outstanding capital and common securities issued by First Coast Capital Trust II for total consideration of approximately $6.8 million. The cost of these securities was three-month LIBOR plus 3.25% per annum. This will save us about $250,000 annually.

Our capital ratios remain well above regulatory standards and above our peer group average. Our December 31, 2011 capital ratios will be released concurrently with our Form 10-K for 2011. We anticipate these ratios to be at or above their September 30, 2011 levels. Now, we will return the call back to Chris for some closing remarks.

Thanks Rich. I will now talk briefly about the California economy and our outlook. This most recent outlook comes from various reports and data provided by local economists. Economists are generally more optimistic about the California economy as 2012 unfolds. Our economy is showing signs of stabilization, including employment, commercial real estate, and housing. Some of the local analysts expect economic growth to accelerate beginning in 2013. Job gains have occurred in recent months, but the California unemployment rate remains well above the national average. The decline in California's unemployment rate should outpace the nation's, but most economists still do not see it falling to single-digits until late 2013 or early 2014. Job growth has helped stabilize office and industrial vacancies, and available sublease space has declined in most areas. The coastal markets are generally stronger than inland areas where there is still a great deal of excess supply. Housing sales trends have improved, but prices remain under pressure and are relatively flat. Overall, we are gaining in optimism-. The economy is not robust but it feels as if things are picking up.

In summary, we are very proud of our accomplishments during 2011. We achieved record earnings by over 15% from our most successful year ever. We attribute our continued success to being selective with our clientele, our focus on relationship banking and low-cost deposit generation, and our strong credit culture. I would like to thank our employees for their continued hard work and diligence, our customers for their loyalty, our shareholders for their support, and our Board of Directors for their continued wisdom and guidance. In looking forward, we've established our critical view for 2012. These are grow non-interest bearing deposits, grow loan outstandings in our core segments, grow non-interest income, manage expenses, and finally, grow through acquisition. That concludes today's presentation. And now Rich and I will be happy to take any questions that you might have.

(Operator Instructions) Robert Greene, Sterne Agee.

I had a couple quick question on the margin, obviously it's down about 19 bips quarter over quarter. You alluded to lower overall asset yields as one of the key drivers, but I was wondering if you could give a little more color on new money yields kind of mid-quarter and going into next year?

You mean in terms of, when you say new money yields in terms of the investment portfolio and the loan portfolio and the new stuff we are putting on the books?

Exactly.

Yes, I think if you look at it in the press release we just said I think the stuff we bought in the fourth quarter, the mortgage backs we brought the yield was a little bit under 2% I think it was about 1.97% or something like that, 1.93% is that right Rich?

Yes.

So that is down from what we were buying earlier in the year, no question about it. In terms of loans, most of the loan pricing we are getting on commercial real estate is ranging in the I would say somewhere in the 4.5 % to 5.25% range for most of the deals that we are doing right now unless we swap it. If we do an interest rate swap then we are typically getting somewhere around 3% on a variable rate-ish for commercial real estate. On the C&I portfolio, most of the stuff is we are somewhere in the I would say in average in the on a variable rate basis in the mid 3% to 4% range.

Okay, terrific, very helpful. And then, I guess my follow-up would be, on liquidity mitigation efforts. I know you mentioned the FHLB prepayment, any plans on sort of anything like that the future?

I also want to finish the thought process on what you just said on the loan yields and so forth. Remember our organization. We want to buy quality and the strength of our organization is our low-cost of funds. I think if you look at our cost deposits at 15 basis points, and if you include repos, I think it was 17 basis points for the fourth quarter; that is the essence of this Company is strong cost of funds, strong funding. So, we don't have to chase yield on loans, we can buy quality. So, we are going to continue to buy quality even if the yields are little bit lower than what we like to get.

In terms of liquidity and what we are going to do with our excess liquidity, our first option is, we want to make loans and we want to make good loans. And really if you look at the fourth quarter, we were up quarter over quarter in our loan growth. Now, a lot of that probably is attributable to the seasonality of the dairy business, but the bottom-line is that even if you take that out we were pretty flat quarter over quarter and we haven't been able to accomplish that for quite sometime. So, we feel like that is picking up that we are feeling pretty good about that.

As far as looking forward to -- we did pay down $100 million in Federal Home Loan Bank debt. That debt carried a coupon of 2.89% and it expired in April of 2013, so we really prepaid that five quarters early at a cost of $3.3 million. The rest of our debt expires in either 2015 or 2016, the rest of the $450 million so we'll have to look at that. But right now, probably not something we are looking at real hard. There are large prepayments on that debt.

Okay. Terrific, thank you very much.

Tim Coffey, FIG Partners.

Chris, can you talk about some of the challenges in reducing classified assets right now?

Well, one of the things on classified assets is you saw that we were slightly up quarter over quarter, but that is a little deceptive because we have actually were probably down in real terms and the reason is is at the end of the year, our dairy customers tend to borrow money and it's for seasonal borrowing needs. So if you look at our classified loans we were up about $1.5 million-ish quarter over quarter, but if you look at about $10.7 million of that increase was due to dairy loans. So, some of these guys drew on their lines at the end of the year and normally will prepay them pretty quickly or pay them down, if you will, early in 2012. So, we feel like we made positive progress third-quarter to fourth quarter even though the numbers don't say that.

Okay.

That make sense?

It does, earlier you mentioned that you felt the dairy business was relatively healthy right now, would you say it is healthier now than it was say a year ago?

Tough to gauge that. I think the dairy business is not robust right now, but most of our dairies, we feel will show positive income for 2011 and I can't speak to what is going to help happen going forward. It is a grind it out business, right now. But we're feeling that most of our dairies will make money in 2011.

Great, thank you.

Hugh Miller, Sidoti & Company.

I was wondering, you guys alluded to growth via M&A and we've been talking about this for sometime. I was wondering if you could just maybe give us an update on how that landscape kind of looks now relative to the last conference call? I think you guys had mentioned that one of your hold-backs on consummating a deal is just that growing that franchise after you finally acquire it. And I was wondering what you're kind of seeing there, has your tone kind of changed at all and what is the landscape for competition for other banks looking to acquire regionals?

You know what, I can only go by what it kind of feels like right now and discussions and kind of interactions with other CEOs and investment bankers. It feels like things are getting ready to move. I was just at the CPA Annual Presidents Conference in Santa Barbara and it was a pretty dynamic meeting in terms of conversations and thoughts and it just felt like things were going to start to come together. I don't have any tangible proof for you on that, but it just felt like more conversations were going on. I think banks are realizing who they are, what they are, whether they are going to be a survivor, our whether they are better off partnering up. I think that clarity is starting to come together.

I don't have anything, again I don't have anything tangible for you, but I'd do think it is going to start to heat up. We feel like we are in a really good position. Our stock is trading at 1.75, 1.8 times tangible book right now so we are in a driver seat versus a lot of the competition in terms of acquisitions and using our shares or cash to be able to do a deal. There are going to be some tough competitors out there who are in the same position, but there's not that many of them. So, we are hoping that we can get a deal done in 2012.

Okay. Thank you very much.

Julianna Balicka, KBW.

To follow-up or elaborate on the M&A topic just brought up, in terms of the capital management this quarter you had slowed down your buyback activity and that you alluded to -- you feel like the M&A starting -- or things are getting ready to move, should we expect a lack or a small amount of buybacks from you in the next few quarters or when should we expect expiration of buybacks or how should we think about capital management?

Yes, capital management, we really are -- we kind of form priorities of our capital management. Our first priority is to take what we feel is our excess capital and deploy it via acquisitions. In the absence of that, we kind of have two or three other areas that we look at. Number one is our cash dividend that we supply and that's been $0.085 for quarter over quarter for a while now. And so that is one-way we return investment dollars to our shareholders. The stock repurchase, we did some of that in the third quarter and a little bit of that in the fourth quarter. That's another option.

The other thing you have seen us do is really deploy our capital. I don't know if this is considered a deployment of capital, but it is in the sense that when we prepay debt, that is a hit to our capital and that was $3.3 million in the fourth quarter. And then we also bought back the trust preferred securities on January 7, 2012 for what was that, about $6 million?

$6.8 million.

$6.8 million, right Rich? Which was the First Coastal redeemed -- we redeemed their trust preferred. So that is another hit to capital. So these are all areas that we are trying to -- we are trying to look at the totality of what our income statement is in our balance sheet and when we prepay debt and we redeemed trust preferred what are we trying to do? Well we are trying to help our net interest margin and lower our cost of funds, and acquisition is certainly going to be more offensive, but that is a defensive move. But all of those things need to work together to make us try to preserve our net interest margin and then until we can get an acquisition done.

To follow-up on exactly that comment in terms of the net interest margin, how should we think about, and that make sense in terms of kind of waiting a little bit for the acquisition to finally come together, in terms of the margin drivers going forward, I mean realistically, can you give us a little bit more tangible way to think about it in terms of the upcoming compression because at a certain point in time you are just kind of -- the market forces are just aligned against any good bank?

Yes, there is no question that we are having a lot of discussions with customers about refinancing their existing loans with us on the commercial real estate and lowering their rates. The good news is that we have prepayment penalties imbedded in the vast majority of these loans so we are able to harvest of these prepayment penalties and use that as leverage when we do refinance it. But the refinancings are still existing and we are dealing with it on a day-by-day, week-by-week basis. So that is a challenge and we are having to redo a lot of our existing loans to protect them and keep them in-house so to speak. As cash flow comes off our portfolios, securities portfolio, we are reinvesting in at lower levels than what it was yielding before, so that's really why the net interest margin was down because of those two things in the fourth quarter. We have, again, we are trying to lower our cost of borrowings where we can. Our cost of deposits although there is not much teeth left in lowering our deposits, we're at 15 interest points right now, so those are all things that we are working on.

That $100 million prepayment of the FHLB debt, that is going to save us $2.6 million annualized for 2012. It really is about $650,000 a quarter, because if you take the 2.89% we were paying and assume that those dollars were going into -- going over to the Federal into Fed funds overnight at 25 basis points, 2.89% minus 25 basis points is 2.64%; multiply that by $100 million and you get your $2.64 million annualized. So that is going to help our net interest margin or give us a little boost for 2012, but at the same time, we are still dealing with the repricing of our investments and the repricing of our loans. But you are not going to get me to give you a number on net interest margins or what I think it's going to be.

I appreciate the color other than the actual number, though.

Yes, thanks.

Thanks.

Aaron Deer, Sandler O'Neill & Partners.

Sticking with the theme on the margin, I'm curious, obviously there was some pressure in the yield in the quarter, but it looked like a fair bit of that also stemmed from a lower level of accretions of your covered portfolio. When I look to see where the run rate has been on the accretions and obviously that is going to diminish over time, but it does seem like there was a market step down in the fourth quarter. Is it likely that we see that kind of come back up before then continuing its drift lower?

I know you looked at that step down for the $4 million to the $900,000, but when you look at the whole discount accretion in its totality of what the impact was quarter over quarter, it really, after you get through our expenses and meaning we have OREO expenses, we have loan and legal and professional expenses that are attributed to this stuff. Let me give you some numbers for 2011 of what actually our pretax impact or what we think our pretax impact was based on discount accretions all in. Because you can't just look at the gross figures, you got to look at all the expenses that are tied to it. So first quarter of 2011, we look at it as about $1.8 million in positive impact pretax. Second quarter of 2011, $1.6 million of positive impact in pretax. Third quarter of 2011, about $850,000 positive impact, and in the fourth quarter, about $950,000-ish in positive impact. So it definitely has slowed, but if you add all those numbers together, the total net pretax impact in terms of our discount accretion and all the expenses that go was a positive $5.2 million for 2011 on a pretax basis.

I get that, it's just that, for our purposes we don't have visibility into the breakout of each of the individual line items with respect to what is tied to the FDIC deal. So, just trying to understand what the normal level of accretion is going to be on the margin is what I'm trying to get at and again I understand too that it's going to diminish.

We are going to give you a breakdown, you will have a breakdown. I think we had -- did we have -- that was in our 10-Q in the third quarter, it gives you a breakdown line-by-line and we will have that in our 10-K for the fourth quarter, you'll be able to see the categories are interest income based on accelerated accretion, there's other income, a gain on loss sale of covered OREO, there's expenses, legal and professional, there is expenses OREO write down, and there's other miscellaneous expenses. So all of that stuff is broken down in the 10-Q and 10-K.

Okay.

And we added a table in the 10-Q as Chris indicated to try to provide more transparency into the overall effect of the bottom-line on a pretax basis. So, we anticipate providing that same data in the 10-K this end of the year.

Okay, and I recognize that, I was just trying to get a feel for that in advance of waiting for that. So, very well. And then just a quick follow-up on the tax rate. You noted that that was -- there was some true-up in that in the fourth quarter, is the full-year number a reasonable expectation for what that should look like going forward?

Well on a go forward basis, Aaron, I think you have to consider I'll call it the permanent differences that drive that rate down from the regular rate, the 41.5% and a lot of that is due to the interest income from our municipal portfolio of securities, and municipal leases that have tax benefits on them. We try as we indicated in our discussion earlier today, we are trying to look at more municipal securities, but the bank qualified or high-quality bank qualified municipals that we are interested in, the supply is pretty thin, as you are probably well aware of. So, as we continue to get payments on our municipal portfolio and unless we can add to that portfolio, that ratio of municipal interest to our total income is going to be coming down. So, you could see some creep there but it is too early to tell at this point in time.

Okay. Great. Thanks for taking my question.

Joe Stephen, Stephen Capital.

Most of my questions have been already answered, but first of all, good quarter. This is a question I have asked every single quarter for you guys. What is happening with the SEC and securities litigation stuff? That's my final question, thanks.

Thanks, Joe, and I have heard that question from you before. Well as you know, I haven't commented on the past on the SEC matter and I'm not going to do it now. We have fully cooperated with the SEC which is one of our primary regulators and we are going to continue to do that. I am pleased, however, that the class actions lawsuit against us which sought to draft onto the SEC's investigation was dismissed last week, I don't know if you saw that, in its entirety by the federal court in Los Angeles. And as is customary, the court gave the class plaintiffs 45 days to try to write a new complaint, but we think the court's 66 page opinion speaks for itself and we were really encouraged by the court's dismissal.

I did not see the full 66 pages, so, thanks for that.

It's really exciting.

Thanks for the abridged version. Okay. Thank you.

Jo Gladue, B. Riley.

Just wanted to get a little color I guess on TDRs, just wondering, if you could tell us where performing TDRs stood and I guess just a little color on any -- how many of those are eventually end up slipping back into non-accrual and the way those things are going?

Our performing TDRs at the end of the quarter were about $38.5 million and consisted of, I don't know, maybe there's about 15 of them I think, roughly, 16. To move something from nonperforming to performing TDR, if that moves up, excuse me, is a process for us. It usually requires, and this isn't a perfect science, but it usually requires us to have six months of consistent on-time payments before we will do that in agreement to whatever type of restructuring we have done for them. So not only do we -- it's not just as if we have a new agreement, they've got to show that they can pay that new agreement for six months in a row before we will take them from a nonperforming TDR to a performing TDR. So we hope that these performing TDRs are here to stay. And our best guess is is that while I don't know if we can't -- I can't give any assurance, there. But they at least have that six months of runway of paying us before we go ahead and say we're going to go ahead and put this back as an accruing albeit troubled debt restructured loan.

All right, and I'm wondering if you could I guess also just touch on and I'm sorry if I missed this, but inflows to nonaccruals this quarter and how that relates to inflows last quarter?

In terms of inflows of nonaccruals, our nonaccrual loans were down I think about $5 million-ish quarter over quarter I'm doing this off the top of my head, let me look at this real quick, it -- they were down nonperforming, yes nonperforming loans were actually down a little bit less than $3 million quarter over quarter. And in terms of total nonperforming assets, we were down closer to $5 million quarter over quarter. So, the pace of the deceleration or the pace of our nonperforming loans coming down clearly slowed from third quarter to fourth quarter, but we are starting to get to a number at $62 million on $3.3 billion in loans or $3.4 billion in loans is a small number. We are under 2% in terms of our nonperforming loans vis-a-vis our total noncovered loans.

All right. Thank you, that's all I had.

Brian Zabora, Stifel Nicolaus.

Quick question on expense days. You mentioned that you realize some cost savings from your plan you initiated mid last year, I was just wondering how far you're along on the plan and how much more expense days could we see realized?

Things are starting to kick in on that and we are feeling pretty good about it. The -- let me give you some quarter over quarter figures on one of the areas that we are feeling -- we're feeling pretty good about. Professional services, we've talked a lot about that. In the first and second quarter combined of 2011, we were over $8.6 million. In the last two quarters of the year combined, we're about $5.4 million. So that is a good savings, in fact the fourth quarter, was almost $1 million in expense less than the third quarter in professional services, about $950,000 difference.

So, we are excited about that and think that there is some more room, hopefully, in that area. But we cannot predict all these different things, what's going to happen with the SEC and the litigation, hopefully that stuff -- the greatest thing would be for it to go away and that would really help us a lot, but there is no question that the expenses related to that have come down dramatically. And then other areas, we have a bank-wide expense initiative that we are deploying and we are looking at everything from our relationship with vendors to our courier charges to how we deal with third-party cash vault and cash letter and all these different things, the way we process things trying to get more and more efficient. Because we do believe that this is with margins where they are this is a kind of grind it out market and we've got to be we've really got to pay attention to every dollar that we are spending.

Okay, and then also on the commercial real estate, vouchers were flat, that's an improvement from what we've seen in the previous quarters. Are you seeing new originations or just less paydowns or if you are seeing new originations, in what areas or segments are showing better strength?

If you look at us kind of quarter over quarter, you are right, commercial real estate was flat. If you look at C&I, it was up and that is a positive. C&I was up about $13 million quarter over quarter and commercial real estate was flat. Part of that is is we really haven't been down in those two categories, materially over the last couple of years. And we are doing better I think than we were over the last couple of years, but really it is the pace of the non-core lending assets and non-core lending areas, the deceleration of that has slowed dramatically because we simply just don't have made if you look at the end of 2010 we had $223 million in construction loans. Well now we only have $95 million in construction loans. So, the pace of that run down in construction loans is simply not going to be as dramatic between 2011 and 2012 because physically it couldn't be, right, we'd have to go to negative numbers. And the same thing on mortgage pools. When you look at our mortgage pools, they're down close to $50 million year over year so all of that stuff contributes to the downsizing our loan portfolio. But those non-core lending segments have already been downsized materially and yes, they may still leak down a little bit further, but it is just not as material as it was a year or two ago. So I think it has the effect of our initiatives to grow loans and all of that are going to have more of an effect and hopefully we can grow loans quarter over quarter and the fourth quarter of 2011 we think was a positive step in that direction.

Great. Thanks for taking my questions.

Chris Stulpin, Raymond James.

All of my questions have been asked, but I would like to circle back to the discount on acquired loans and something associated with that. What is the average life of the acquired loans from the San Joaquin Bank acquisition? Trying to get a sense of how long that will play out this discount accretion?

I don't know if I have a figure on that, do you have anything on that offhand?

We haven't made a calculation on that, because what ends up happening is we are working through a number of assets that we acquired in that acquisition, now. As you have seen and as you have tracked it quarter over quarter, we've had some acceleration that is why we have had acceleration -- accelerated accretion because we present valued it at day one the anticipated cash flows and we have been doing better than what we originally forecasted. So, it depends on the number of loans, we've had some payoffs, we've had some foreclosures into OREO and et cetera. And so it depends upon the activities in those portfolios that's going to drive that.

One other thing, Chris, is that when we look at these loans, we are very much aware of our five-year loss sharing window if you will, which expires in October 2014. So, as we have to look at extending our renegotiating these loans along the way or we have problem loans that we are dealing with, we are cognizant of that five years so we really need to make sure that we at the end of five years were not stuck with a loan that or we're trying to do our best in this regard that we really don't want. Our goal is that as of October 2014 any loan that is sitting on our books at that point in time is something that we chose to continue because the loss sharing will go away.

Perfect and thanks for reminding me about that five-year window, that's very helpful. Just one follow-up, regarding loan growth, it is net positive loan growth return will turn positive sooner than what I had anticipated given your footprint, frankly. But it was good news, but it turned positive net positive. What are you thinking going forward, can you maintain this or what are your expectations if you care to speak to that?

Well, we're certainly we've got all ores in the water rowing pretty hard in that direction, hard to predict whether we can continue that or not, but be mindful of the fact that the fourth quarter the dairy seasonality contributed to that almost $50 million in growth. So, from a -- in real a dollar standpoint if you take back what we think is that seasonality, we were basically flat quarter over quarter if you take that seasonality out. So, the way we are looking at it, the way our salespeople are driving at it is, this is the real quarter that we need to show, we need to show real growth and you may even see it first quarter remember that seasonality inflated the loans a little bit at the end of the year, so, it's going to be more difficult for us to show growth in the first quarter because the dairy guys drew down on their lines at the end of the year. And so, but notwithstanding that fact, we're making good progress in that area, so I can't predict what it's going to be, but we feel like we're doing better.

And okay not to take up too much more time, but it looks like I know dairy lending can be volatile or can be hard to predict, but last year linked quarter in your fourth quarter of 2010, the linked quarter increase was $12.5 million and this year I'm calculating to be around $32 million so can we read anything into that at all?

Well remember when that -- the reason in general that the dairies will draw down on their lines of credit is to prepay feed, they are on cash basis accounting. So if they prepay feed they can expense the cost of that feed in 2011 as opposed to 2012 and reduce their tax impact or defer their taxes really to the future year. So that's why they do it. Is they prepay feed so they can expense more dollars against profitable operations. I think what you would say and I don't want to speak to our portfolio about this but in general you would say that's a good sign that the dairies are profitable right because if they have to shelter income by drawing down and prepaying feed that's a good thing. Right? So in general terms that would be an observation that I would make just about the industry, that is a good sign. Not to say that the dairy business doesn't have its challenges going forward, but it -- that's a good sign that they did draw down on some of those lines of credit and prepay the feed at the end of the year.

Sure. Okay. Thank you very much.

Gary Tenner, DA Davidson.

I just had a couple of follow-up questions just as related to the expense items. You talked about the professional services line obviously that's come down quite a bit the last few quarters, on the personnel line that's also come down quite a bit from second quarter, it's down about 9% or over 9% from second quarter, how much of that would be related to the internal efforts in terms of generally reducing expenses versus just lower incentive accruals or just changes in incentive accrual timing and how do we think of that line item in 2012?

Well, I think that we've really again we're looking at every aspect of where we are in our efficiencies and the people side is no different. One of the advantages that we did have in the fourth quarter is I think we had close to a $0.5 million pickup because we kind of implemented a new vacation policy so people could not take over -- couldn't carryover as much vacation going forward so that causes them to have to take their vacation earlier so the contingent liability goes away. So we are a little bit more disciplined in things like that but it is all just about a lot of the little things that we are doing that together are going to add up to good expense savings and I think that is just good management in what we are trying to achieve and good discipline. And whether it is our professional services, it's our equipment expense, it's our occupancy expense.

One thing we haven't talked about is occupancy. We have 47 locations, really branch or commercial banking centers, commercial banking center business financial center locations, plus we have our operation center, plus we have our headquarters, and plus we leased out a loan documentation servicing facility. So we add all that, that's 50 different locations. Well, there are some efficiencies to be gained from renegotiating leases, closing down offices, and so forth and so on. Now we don't have a massive program to do that in place but we are looking at that opportunistically and we did a lot of that in 2011 and some of those benefits are going to be felt in 2012.

Okay. I was just wondering just real quickly on the other fee income line that has come up the last couple of quarters. Is there any one primary driver of that, of that move up on that line item?

No. The other fee income drivers, again the $2.1 million, we talked about was really based on the discount accretion and the difference in that so it really doesn't -- it's not something that we look at as real dollars, but it is really about we're hitting a bunch of singles in that area and whether it is our investment services group which is our brokerage services was up quarter over quarter, our bank card services our merchant bank card services were up quarter over quarter. So all these areas, it's $100,000 here $200,000 there, we did have a gain on OREO in the fourth quarter that was greater than the gain on OREO in the third quarter, that added a $0.5 million there. So it is just a bunch of things that are coming together to produce a better result.

And again it is just more disciplined and really hands-on grind it out management that we are trying to achieve because I think the devil is in the details right now in terms of making sure that we are operating efficiently, capturing every fee income we can, saving every dollar we can on the expense side, trying to preserve our margin as best as we can, and then with the thought that all of these things are keeping us profitable and efficient waiting for us to get that acquisition done to grow the organization and go forward.

Okay. Thanks for taking my question.

(Operator Instructions) Hugh Miller, Sidoti & Co.

I just had a quick follow up on something you guys alluded to with regards to the expiration of the FDIC loss sharing agreement. I guess thinking longer-term strategy how do you think about kind of managing the work down of those loans just given trying to manage risk ahead of that expiration? How should we be thinking about kind of the work down there and the pace of work down as we look into '12 and '13.

We made tremendous progress already and I feel like you can get that number from just look at the amount of loans, look at the amount of progress that we have made. When we look at our covered loans, if you will, a year ago, we had $374 million in covered loans. This is net of the discount. And today we are at $257 million. So, we're down $100 some million and our purchase discount has gone from $115 million at the end of 2010 to $51 million at the end of 2011 so that is a big movement there, but let's just put this in real terms. So, how are we dealing with problems and I'll just give you an example, we might have a deal where we have a commercial real estate loan that we took over and the guys' having problems paying us and maybe have a maturity that goes beyond the five years expiration of the loss sharing. Well our choices are do we foreclose on that property, do we work with the borrower, what are we going to do with that? Well if we're going to work with that borrower, we would be inclined to try to shorten that maturity to before the five-year period of time so that at least if there was a problem going forward, we would have a matured loan prior to the five-year expiration of our loss sharing. So that's a way that we can if we have a problem loan that maybe expires in 2020 and we want to work with them we want to give them some time to get back on track and lease the property up or whatever the issue is, we want to make sure that we try to shorten that maturity before the five-year expiration so that we're at the table with them before that date determining whether we really want that loan to be on our books and we really want to extend it going forward. And hopefully if we shorten that to say October 2013, we have a year to make sure that this is the loan that we want to keep. And if not then we still have enough time to foreclose on the property if they can't pay us. Does that make sense?

Yes, it definitely does and I appreciate the color on that, that is very helpful. I guess in thinking about that strategy, do you guys find, obviously nobody wants to see their property go into foreclosure, but how receptive are people who are having some challenges meeting with cash flow or whatever it may be, to kind of reducing the maturity on when they're going to have to repay a loan?

Well, here's our alternative. So let's say you are someone that has a commercial real estate loan and you come to us and your payments are $50,000 a month on that commercial real estate loan and you say guys I just can't make the payments anymore, can you work with me, can you give me an interest-only period until I can get this thing leased up? Well we'll look at that and say we might be able to help you, but I'm not going to give you an interest-only period with this 2020 maturity, so I'll tell you what, if you agree to shorten your maturity to 2013, I'll give you six months or a year interest-only to get the thing back leased up and then we'll return to your normal payment program after that. So it's really, hey, you help me by shortening the maturity, and I'll help you by giving you an interest-only period. That's just an example, don't think that we do that on every deal. It has to be a negotiation that we would make because we are getting something, the shorter maturity so we have leverage and they're getting something because they don't have to pay us $50,000 a month they can only pay us what the interest is for a period of time until they can lease the property and get it back on track.

Okay, appreciate that, that is very help.

Julianna Balicka, KBW.

Actually my follow-up which was going to be on loan growth maturity has been answered. So thank you.

(Operator Instructions) It appears that we have no further questions at this time. I would like to turn the conference back over to Mr. Myers for any closing remarks.

Well, thank you very much for joining us on our call today. We truly appreciate your interest and look forward to speaking with you again on our first-quarter 2012 earnings conference call in April. In the meantime, just please feel free to contact me or Rich and have a great day. Take care.

All right, you to Mr. Myers and to the rest of Management we thank you for your time. The conference is now concluded. We thank you all for attending today's presentation. At this time you may disconnect your lines. Thank you, and have a good day.