CVB Financial Corp (CVBF) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the second quarter 2012 CVB Financial Corp. and its subsidiary, Citizens Business Bank, earnings conference call. My name is Mike, and I'm your operator for today. At this time, all participants are in 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. Ms. Carrabino, the floor is yours, ma'am.

Thank you, Mike, and good morning, everyone. Thank you for joining us today to review our financial results for the second quarter of 2012. 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 our earnings announcement released yesterday. To obtain a copy, please visit our website at www.CBbank.com, and click on the 'our 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 provision 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 reports on Form 10-K for the year ended December 31, 2011, and, in particular, the information set forth in Item 1-A, risk factors therein.

Now I'll turn the call over to Chris Myers.

Thanks, Christina. Good morning, everyone, and thank you for joining us again this quarter.

Yesterday, we reported record earnings of $23.6 million for the second quarter of 2012 compared with $22.3 million for the first quarter of 2012 and up 12.3% from $21 million for the year-ago quarter. This is the highest earnings for a fiscal quarter in our Company history. In fact, the five most profitable quarters in our Company history are our five most recent quarters.

Earnings per share were $0.23 for the second quarter compared with $0.21 for the first quarter and $0.20 for the year-ago quarter. Through the first six months of 2012, we earned $45.9 million, up 22% from the same period in 2011. Earnings-per-share were $0.44 for the six-month period ending June 30, 2012, compared with $0.35 for the same period in 2011. The second quarter also represented our 141st consecutive quarter of profitability and 91st 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 3.77% for the second quarter compared with 3.69% for the first quarter and down from 3.92% for the second quarter of 2011.

During the second quarter, we had several non-performing loans that were paid in full, resulting in a 10-basis-point increase in interest income. Excluding this impact, net interest margin was slightly down, primarily due to the financing or runoff of higher-yielding loans. We continued to benefit from loan prepayment penalties, earning $814,000 for the second quarter compared with $431,000 for the second quarter of 2011.

Now let's talk about loans. At June 30, 2012, we had $3.39 billion in total loans net of deferred fees and discount compared with $3.43 billion at March 31, 2012. Non-performing assets, defined as non-covered, non-accrual loans, plus OREO, actually increased in the second quarter to $72 million compared with $67 million for the prior quarter. The increase was due to our $10.9 million participating interest in our only shared national credit loan that was transferred to non-accrual status. Based on the valuation of the most recent appraisal, there was no write-down taken against this loan in the second quarter. We will continue to evaluate our collateral position as we work towards the resolution of this credit.

We once again reported zero provision for funded loan and lease losses for the second quarter. The allowance for loan and lease losses was $91.9 million or 2.89% of outstanding loans at June 30, 2012. This was unchanged from the prior quarter.

Net charge-offs for the second quarter were $30,000 compared with $2 million for the first quarter of 2012. We recorded $1.6 million in recoveries for the second quarter. At June 30, 2012, we had loans delinquent 30 to 89 days of only $1.3 million for 0.04% of total non-covered loans. Classified loans decreased for the second quarter to $298.1 million compared with $334.1 million for the prior quarter. We will have more detailed information on classified loans available in our second-quarter Form 10-Q.

We had $3.18 billion in total non-covered loans and leases at the end of the second quarter, a decline of $8.8 million from the end of the first quarter. Our dairy and livestock portfolio decreased by $4.6 million and our single-family residential mortgage pools decreased by $5.8 million for the second quarter.

Commercial real estate loans totaled $2 billion at June 30, 2012, a decrease of $22.8 million when compared with March 31, 2012. This decline was offset by an increase of $26 million in commercial and industrial loans. The market remains very competitive for new loan originations for both commercial real estate and commercial and industrial loans. We continue to focus our sales efforts on these two key areas, but also remain extra cautious in terms of credit quality, due to the low interest rate environment.

Moving on to covered loans, covered loans represent loans in which we have loss-sharing protections in the FDIC as a result of our acquisition of San Joaquin Bank in October 2009. At June 30, 2012 we had $246.6 million in total covered loans remaining from the San Joaquin Bank acquisition compared with $305 million at March 31, 2012. These loans had a carrying value of $210.1 million at June 30, 2012, a decrease of $35.6 million from March 31, 2012.

As of quarter end, our remaining purchase discount was $36.5 million. It is anticipated that the majority of the $36.5 million in remaining purchase discounts will be extinguished by October 2014, which is the five-year anniversary of the San Joaquin Bank acquisition.

Now I would like to discuss deposits. We continued to grow our non-interest-bearing deposits. For the second quarter of 2012, our non-interest-bearing deposits grew to $2.25 billion compared with $2.12 billion for the prior quarter. This represents a 6.22% increase quarter over quarter, completely organic. Non-interest-bearing deposits now represent approximately 48% of our total deposits. We're getting close to that 50%; we're hoping.

Our total cost of deposits for the second quarter was 13 basis points compared with 14 basis points for the first quarter. If customer repurchase agreements are included, our cost of deposits was 15 basis points for the second quarter. We have been refining our focus on the true variable cost of our deposits, which includes not only the interest paid to customers, but also the service charge fee income collected from customers and the third-party hard dollar payments paid by the bank to vendors on behalf of our customers. By putting our focus on a more comprehensive approach to the true total cost of deposits, we feel we are positioning ourselves to be as cost-effective as possible.

At June 30, 2012 our total deposits and customer repurchase agreements were $5.2 billion, $9 million higher than quarter end, March 31, 2012.

Moving on to non-interest income, non-interest income was $2.3 million for the second quarter of 2012 compared with $5.3 million the prior quarter. Non-interest income for the second quarter included $2 million in gain on sale of 11 covered loans held for sale. Non-interest income was reduced by a $9.3 million net decrease in the FDIC loss-sharing asset. The decrease in the loss-sharing asset was primarily due to the improved credit loss experienced in our covered loan portfolio. Comparatively, non-interest income for the first quarter of 2012 was reduced by a $2.9 million decrease in the FDIC loss-sharing asset and a $1.2 million impairment charge for a large held-for-sale note included in other non-interest income. So if these items are excluded from both quarters, normalized non-interest income was $9.6 million and up slightly from $9.4 million for the first quarter.

Interest income and fees on loans for the second quarter of 2012 totaled $55.2 million compared with $50.7 million for the prior quarter. The $55.2 million included $7.5 million of discount accretion from accelerated principal reductions, payoffs and the improved credit loss experience on covered loans acquired from San Joaquin Bank. The $50.7 million for the prior quarter, the first quarter, included $4.7 million of discount accretion.

Now, expenses -- we continued to benefit from closely monitoring and managing our expenses. Non-interest expense for the second quarter was $28.9 million, a decrease of $1.3 million from $30.2 million for the first quarter and a decrease of $8.2 million from $37.2 million in the year-ago quarter. Overall, we continue to be pleased with our ongoing progress in reducing expenses.

Now I'll 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 34.4% for the six months ended June 30, 2012, compared with 33.8% for the first quarter. This increase was due to higher taxable income related to current earnings trends. Overall, our effective tax rate is estimated and may fluctuate based upon the ratio of taxable income to total income, considering tax-advantaged municipal bond income and nondeductible expenses.

Now, turning to our investment portfolio, during the second quarter of 2012, we provided an average of approximately $256.9 million in overnight funds to the Federal Reserve and received approximately 25 basis points on collected balances. We also maintained about $60 million in short-term CDs and money markets with other financial institutions, yielding approximately 67 basis points.

At June 30, 2012, our available-for-sale investment securities totaled $2.3 billion, down $113.2 million from March 31, 2012. Investment securities currently represent approximately 35% of our total assets.

Our available-for-sale investment portfolio continued to perform well. At June 30, 2012, we had an unrealized gain of $75.1 million, up from $71.4 million for the prior quarter. Virtually all our mortgage-backed securities are issued by Freddie Mac or Fannie Mae, which have the implied guarantee of the US government. We have six private-label mortgage-backed issues totaling relatively modest $3.4 million.

We continued to strategically reinvest our cash flow from our investment portfolio, carefully weighing current rates and overall interest rate risk. During the second quarter, we purchased only $30.9 million in mortgage-backed securities as our average yield was only 1.6%. 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 under five years to avoid material extension risk as interest rates may rise in the future.

We also purchased $6.5 million in municipal securities with an average tax-equivalent yield of 3.17%. Finding bank qualified municipal securities that meet our investment criteria remains challenging, but still desirable.

At the end of the second quarter we held $1.58 billion in mortgage-backed securities and $634.9 million in municipal securities. Combined, these represent 98% of our $2.3 billion investment portfolio.

Now turning to our capital position, our capital ratios are well above what -- regulatory standards and remain above our peer group average. Our June 30, 2012 capital ratios will be released soon, concurrently with our second-quarter Form 10-Q.

Shareholders' equity increased by $18.3 million to $748.3 million for the second quarter. This increase is attributable to retained profits of $23.6 million, an increase in unrealized gain on investment securities of $2.2 million and $1.4 million for various stock-based compensation items, partially offset by $8.9 million in cash dividends. Effective June 17, 2012, we redeemed 50% of the trust preferred securities in CVB Statutory Trust 1. We paid approximately $20 million for this redemption, and this will save us about $664,000 annually.

I will turn the call back to Chris for his closing remarks.

Thanks, Rich. Now let's talk about the California economy. Recent reports provided by local economists forecast continued growth in California, albeit slow, through 2012 and beyond. Most major sectors in California are growing again, and the recovery has spread from coastal areas to all parts of California, including inland regions, such as Riverside and San Bernardino Counties. The industrial real estate market in the Inland Empire's East Valley, where many international companies have distribution hubs, is in full recovery, according to real estate brokers. Leasing activity and empty office space absorption were strong in the second quarter, indicating that the market is continuing to stabilize.

Employment growth in the public sector slowed in both California and nationally during the second quarter of 2012. The good news is that private-sector employment in California continued to rise and outstrip the nation in terms of year-over-year growth during March and April, the first time since March 2011. The dairy industry has been struggling through a period of industry downturn, which began in the fall of 2011 as a result of lower milk prices and higher feed costs. Although this downturn has continued into 2012, the downward trend for milk price futures appears to have reached bottom in mid-June. According to the Daily Dairy Report, milk futures are increasing from $1 to $3 per hundredweight for the months of July 2012 through 2013. US exports of nonfat dry milk and skim milk topped 100 million pounds in May, which is the highest volume since October 2010. In addition, the growing popularity of Greek style yogurt is now expanding beyond processing plants in New York State as construction has started on the first new plant in Idaho for this product.

Feed prices have continued an upward trend as drought and high temperatures in the Midwest continue to impact corn production. Despite the recent lower forecast and weather conditions, the National Corn Growers Association reports that adequate amounts of corn will still be available to the market until the new season, which commences in October 2012. The full effects of the drought are yet to be determined.

Financial results for our dairy portfolio were mixed for the first quarter of 2012 with many customers still showing profits despite the downturn. It seems that the most profitable dairy farms tend to be the larger operations with the capacity to grow their own roughages for feed stuffs.

In closing, we are pleased with our strong second-quarter results. It was the most profitable quarter in our Company's history. We attribute our continued success to being selective with our clientele, our focus on relationship banking, our strong credit culture and conservative nature and a very solid capital position.

That concludes today's presentation. Now, Rich and I will be happy to take any questions that you might have.

(Operator instructions) Todd Hagerman, Sterne Agee.

A couple questions for you -- first, Chris, just in terms of the spread income and the margin this quarter, obviously you had a benefit from the NPLs coming off. I'm just wondering if you'd talk a little bit about just how we should think about the margin spread going forward. If I think about the core margin at 367, you had the trups redemption with the cost savings there. Certainly, you've consistently said that it's really a function of improving your loan growth. So I'm just wondering, A, what's the outlook in terms of the NPLs coming off in terms of another benefit in the coming quarters; and just the dynamics between your loan growth versus -- you purchased securities at 1.6 this quarter and then the trups redemption. How should I think about margin with those moving parts in the spread?

Obviously a good question, and everybody is very focused on our margin, as appropriate. The margin has a lot of moving parts to it. And in general, I can tell you this. Our loans are repricing, and when they are repricing, they are going down. And our securities are repricing; and when they reprice, they're going down. Our cost of funds is going down as well. Historically, I think over the last year or so, those things have probably paralleled each other, but our cost of funds is going to be difficult to decrease that as fast as that top-line income is going, given our asset levels stay proportionately the same. And that's why loan growth is very important.

However, when you look at non-performing loans -- in fact, let's look at the second quarter. Yes, we did have some loans that we got paid off on and we captured some interest income, and we said that was 10 basis points. But remember, this $10.9 million loan that this national shared credit that I talked about -- remember, we also took the last 90 days of interest -- and by the way, we are getting paid interest on that loan; it just became non-performing. We put it on nonperforming for various reasons. But that interest that we've got in the 90 days was wiped out, and then that goes down to paying down principal. Right? Once a loan becomes a non-performing loan, any interest paid on that goes to principal, it doesn't go to interest. And then some day, if we get paid off in full on that loan, that interest comes back into interest income. And so that's what happened in the second quarter in terms of that 10-basis-point stuff. But, also, we had that $10.9 million go the other way on us, too, which is roughly $100,000 or something like on that one.

So there are some moving parts going along the way here. We're also capturing a lot of prepayment penalties. As we refinance loans for our customers and even keep the loans, we're capturing prepayment penalties. And if you look at the prepayment penalties in the second quarter were $814,000, and we were about the same, I think, in the first quarter. So we're running about -- we're about $1.6 million-ish for the first half of the year, and that's about double what we were last year. So that's a factor in that NIM as well.

So I think it's hard to project what's going to happen in the future because we don't know exactly what's going to go on. But I don't feel like we're going to have this big drop in NIM or anything like that because we have a lot of things that could positively come in there.

One of the other things -- and this is a long answer, and I apologize, but I think it hopefully is revealing to you guys. But remember, we have a bunch of loans. We've charged off $120 million in loans over the last four-plus years. And now just throw out a ballpark; $80 million of those loans might not be recoverable at all, but there's still $40 million in charge-offs and things or loans that we've put on non-performing that if we get paid in full, there's going to be some recapture on those charge-offs. And if we get paid in full on a loan that was non-performing that became performing, once that gets fully paid off, we're going to capture more income.

So I think you're going to see that continue, that you're going to see us have some lift in margin on recovering non-performing loans in full going forward. But I just can't project what that's going to be.

Okay, that's helpful. Like you say, there's a lot of moving parts. But again, it still seems to be the function of the loan growth, improving credit -- but again, you've got the pressure on the earning asset yields and you've got to offset that.

One thing, Todd, is let's look at our NIM for the past four quarters -- 3.81% for the third quarter of 2011, 3.62% for the fourth quarter of 2011, 3.69% for the first quarter of 2012 and 3.77% for the second quarter. So, despite the fact there's been some bouncing around, we're still operating within a 20-basis-point range over the last year.

No, that's fair. And then just secondly, just on the expenses, obviously that's always been a focus and a hallmark of the Company. I'm just wondering if you can give us an update, again, just in terms of some of the efficiency initiatives. Again, as you mentioned, year-over-year, the costs are down substantially. I'm just wondering, some future projects and think about whether it's brand consolidation or the like that perhaps we haven't yet seen in the numbers.

Yes. We have a lot of initiatives going on, and they're starting to be vetted through here and you're starting to see some of the results, and that's why our expenses are down. But, for instance, one of the things we're looking at is being as efficient as possible on the occupancy side with our leases. And we are actually closing an office in North Orange County, and consolidating that within -- we have three offices within a four-mile range of each other. We're closing one of those offices; we'll get some savings from that. We're consolidating another operation that we have in the bank. So we're picking up things here and there.

If you look at our occupancy expense, for instance, from the first quarter to the second quarter, we are down $350,000 quarter over quarter on occupancy expense and down almost $400,000 from where we were at 12/31 of 2011 on a quarterly basis. So let's say we can run $400,000 less than we did a year before. That's $1.6 million in saved expenses right there. We've talked a lot about professional services, which includes legal bills. We're down $290,000 -- $288,000 quarter over quarter in terms of professional services expenses. Last year, that was running tremendously higher. So a lot of that is the function of improved credit quality, and also the function of the SEC and shareholder litigation and those legal expenses associated with are dramatically down. And we're also going to see some reimbursements on that side because our insurance is kicking in on those legal expenses for the shareholder lawsuit, derivative lawsuit. And we're also going after monies that we've spent in the past on the SEC lawsuit because it's all tied together.

So those are some of the things. We also have -- we're looking at things like our printing charges in the bank, our courier charges in the bank, how much money that we are actually paying on behalf of our clients. We are trying to leave no stone unturned in terms of our expense side. But we have to be smart about what we do, too, because service and long-term relationships are paramount to us so we don't want to get penny-wise/pound-foolish.

And based on that, it sounds as if, again, expenses could actually continue to trend modestly lower over the balance of the year, given these initiatives. Is that fair?

Yes. We've tried to drive that. You saw our efficiency ratio this quarter at 44.63%, I think it was. And in my mind, I really -- my goal was to be at 45% at the end of the year, and we've kind of already achieved that goal. And the question is, can we even drive that lower? And I'm hoping the answer is yes, but I can't make any promises there. But we've got to do this in the right way so that we're not cutting off any offense from the bank because we're still on offense. But, yes, we can get lean and mean.

And if we look at our customers, our business customers, they are doing the same thing in this economy right now. We're all in this sluggish economy, and we wish we had a more robust growth environment. But right now, the best companies are really looking at their operations, looking internally at how they can be more efficient without cutting off their offense.

Hugh Miller, Sidoti & Company.

Good morning, Chris. The first question, I guess, was just with regards to you gave us some color on the local economy. And I wanted to hear what you are hearing from your business clientele regarding demand for loans, any products. Obviously, we saw an improvement in C&I with some pressure on the CRE. But what's the appetite for borrowing that you're hearing from your business clients? Is there any chance for a meaningful improvement on the horizon here?

It's still sluggish. I think a lot of our borrowers, they're looking at refinancing their debt, trying to get as efficient as possible in their costs. We are seeing some activity on the M&A side; bigger companies buying smaller companies; managers buying out other minority managers in their company that have smaller shares. So we're seeing a lot of that consolidation type of stuff and efficiency type of things that you would expect, and we are getting some new loans from that. We've seen a few good deal lately that are kind of M&A-oriented where a company is buying out another company or one of the principles is buying out another principle or something like that. So we're seeing some activity there.

But most of our customers, if you sit around at a table, which we do quite frequently at lunch and different meetings and ask them what's going on, they're saying, you know what? We're cautious in our optimism and we're looking at the whole world right now and we're trying to be as efficient as possible in the way we manage our business.

In terms of expansion, the risk/reward, I don't think, is robustly there for them to really want to take a lot of risk in expanding their business unless they are sure they can bring some good money to the bottom line, because when you look at the cost of healthcare, the uncertainty about taxes, what's going on with the European debt crisis, what's going on with the state of California and all these things put together -- workers compensation insurance is starting to creep up a little bit. Business owners are concerned about all these factors. And the good news is most of these businesses have gotten through the tough stages here and they are hunkered down and they're waiting for their opportunity to seize the day, just like CVB Financial is waiting for the opportunity to seize the day, but it's just not quite there yet. So what we're doing is being as efficient as possible, just like our customers. And we're going to try to pick up some opportunities here and there. So I think, in a nutshell, that's about it. Our loan demand is better than it was a year ago, but still not where we want it to be.

Okay, great insight there. And then the follow-up question is just with regards to looking at the other opportunity to leverage the balance sheet. Can you just give us an update on the M&A landscape, what you're seeing there, and at this point what's holding you back from pulling the trigger on something?

Well, actually we're in a lot of discussions with a lot of different financial institutions. And financial institutions actually reach out to us quite often, because I think they look at our stock and see that it's got some activity to it and we've got some trading volume that goes on. A lot of these smaller banks don't have that; their stocks are relatively illiquid. So that's compelling for them.

But I still think there's a differential in the price expectation of what we think things are worth and what a lot of these different principles of smaller banks think their bank is worth. In a nutshell, I look at these banks and I say, are they really going to be worth more to me a year from now or two years from now than they are today? And, given the sluggish loan demand and the lack of loan growth in a lot of these different banks and the prospects for lower yield on earning assets in terms of loans and securities and the inability to reduce costs or cost of deposits that much more than already has been done -- those are all factors that go into my belief that a lot of these banks aren't going to be worth any more money a year or two from now. So how do you pay them a multiple on earnings growth and so forth when you may not see that earnings growth?

The earnings growth coming out of these smaller banks is really oriented towards improvement in their non-performing assets and recapturing some of the income off that. It's not as much on offense inside. So that gap between what the project income could be and what I think it might be, given the environment we're in, is, I think, not only prevalent for our bank, but a lot of different banks and why you're not seeing more rapid consolidation of medium-sized banks like us buying smaller banks.

Great color there, I appreciate it, thank you very much.

Aaron Deer, Sandler O'Neill & Partners.

Just, I guess, maybe a follow-up question from the M&A discussion of capital. Share buybacks -- you were active with them for a little while in the back half of last year, but we haven't seen much so far this year. If it sounds like it does, that M&A just isn't going to materialize given the price expectations, might we see that come back on the table?

Well, potentially, it could, but we're not giving up on the M&A side. We're pedaling the bicycle hard; we're meeting with a lot of different people. But it just hasn't happened yet. But we're not going to force something there, either. We're not an organization that we feel cannot grow organically. We can grow organically and we will grow organically. I certainly -- that's my goal. Right? And we've been doing it tremendously on the deposit side and not on the interest-bearing deposit side, but on the non-interest-bearing deposit side. And you've seen our fee income growing, too. So we're accomplishing a lot of good things; it just hasn't translated into loan size.

When you look at our loans, I do want to address this, because if you look at our loans over the last -- let's flash back to June 30, 2011. Our total loans, net loans in the bank, were $3.43 billion; and today, we're at $3 billion -- or, at the end of June, we were at $3.293 billion. That's a decrease of roughly -- what is that, $137 million. If you look at that, on non-covered loans, we're only down $12 million. It's all in the covered loans area, or the vast majority of it is in the covered loan area. So I know I've been using that excuse here because we've had to deal with these covered loans and downsizing them. But our loans are pretty much flat year-over-year on the noncovered side. So we're close, we're close to growing loans.

And we're pushing pretty hard on that.

That's great. And then just a credit-related question. I noticed the TDRs ticked up just a bit. What's it going to take to start seeing some of those move back to just regular performing status? I recognize that they're performing; I just -- what's going to bring them off TDR status?

Yes, you know, I think when we look at these TDRs we're still -- we're not in a 2002-2003-2004 economy, where there's no new non-performing assets coming online and there's not any more negotiations with people about restructuring their loan or helping them out by giving them a six-month interest-only period to help them get back on their feet or lease up a property or something. We're still dealing with a lot of that, and that's what's causing the slight uptick in troubled debt restructured loans is that we're still feeling a little bit of that sluggishness in the economy and in having to help clients work through situations. But what we are seeing is a lot of the firming up of the appraisal values of these properties. Appraisals that we are seeing now -- and it's not across the board, but quite frequently we are seeing appraisal amounts that are actually at the same level or higher than they were a year ago, and that's a good sign. So as we are reappraising property, we're not having to further write down most of these things. In fact, sometimes we're having an uptick in appraisal values, and that's kind of an interesting dynamic on the other side.

So I do think that our TDRs are -- they could creep up a little bit more; it's hard to tell because we're just dealing one by one by one of these. And a lot of these TDRs are clients that we want to keep. So we have some good borrowers that we had to help through a situation that are doing well, and we've restructured their loan and they are in a good place right now, whether we gave them a temporary restructure of X number of months interest-only or had to extend their amortization a little longer than it was before. But a lot of these TDRs, we feel, are -- don't have loss content in them.

That's great, thanks for the update, Chris.

Tim Coffey, FIG Partners.

Good morning, gentlemen. Chris, I wonder if you could kind of talk to me about the cash position that you're holding at the bank. It continues to be elevated. I'm wondering, is there any reason that you're holding it that high?

A great question, and our cash position is a challenge for us because if you saw this quarter, we bought 30-something-million, what was it, in mortgage-backed securities and CMO? $31.6 million; is that right?

$30.6 million.

$30.6 million in mortgage-backed securities and CMOs. Now, that's not enough to cover the runoff that we are having of our securities portfolio on a quarterly basis. So the reason we didn't buy more of those is because of the 1.6% yield. Typically, we are buying 15-year mortgage-backs. And I think that have an average life of 4.9 years. And we're getting a 1.6% yield on it. It's gut-wrenching, right? So what we're trying to do is we'd rather grow loans, we'd rather find an alternative and we'd rather look at some other alternatives than that. So sometimes, when the price ticks down, we are hoping the price ticks back up.

One of the things that we've been looking at buying right now are SBA-guaranteed loans, which are actually the securities of SBA-guaranteed loans, which yield a little bit over 2% and provide, I guess -- is it zero risk?

Zero risk weight factor.

It's a zero risk weight factor, so it's fully guaranteed by the government. And right now, that gives us a little bit more term risk, because average life of those is seven-plus years. But by buying some of those, we get a yield of 2.10% or 2.20% or something like that. So we are shifting away a little bit from the mortgage-backed securities and CMOs are starting to buy those SBA securities, if you will, even though the duration is a little bit longer; they are 20-year loans that fully amortize.

So we'll be capturing a lot more cash flow in the last 10 years of than in the first 10 years of that. So -- but we'd much rather grow loans, but loan pricing competition is tremendous as well.

Okay. (multiple speakers).

It's a real fun environment.

My follow-up question, then, is, given the cash position, given the (inaudible) you were just talking about and your capital position, have you thought about increasing the cash dividend at all?

You know, we do talk about that at our board meetings and we have had those discussions. But so far, we've just elected not to do it. Typically, the board meeting that we are talking about our dividend is the board meeting in the month prior to -- or, actually, the month of the close of the quarter. So we talk about that in June and September, so it will probably be September before we talk about that next.

Okay, well, thanks.

Julianna Balicka, KBW.

I wanted to ask a couple questions. One, could you talk a little bit about what's going on in the San Bernardino area with the city bankruptcy, what kind of impact, if any, direct or indirect, we may be seeing at CVB?

Okay, and why don't I address -- there's two cities that have actually declared bankruptcy -- declared bankruptcy in the state of California, so far. There's Stockton, and there's Mammoth. And the city of San Bernardino has not yet declared bankruptcy, although the city council approved it. But yet, officially, they haven't gone bankrupt.

As far as our exposure to those two cities, the city of Mammoth and the city of Stockton, it's nominal. We do have some relationship with one of those two, but our loss exposure, we feel, is very minimal or nothing.

In terms of the city of San Bernardino, we do have a relationship with them. We also feel our loss exposure with the city of San Bernardino, should they go bankrupt, is nominal, if at all.

Okay, great, thank you. And then also, I wanted to follow up on the loans that you sold this quarter, that held for sale group of loans, what was the collateral on those?

These are our church loans; right, Rich?

Yes, they are.

Well, what happened is San Joaquin Bank had a church lending program which is, I think, a tricky lending area -- I'll be diplomatic on that. And these church loans were not only located in California, but they were located throughout the nation. And so we, for the past year, have been pressing hard on the FDIC to allow us to sell these loans as opposed to have to go foreclose on these loans throughout the country because it's going to be a difficult and expensive thing to do, and you may not get to the finish line when you're going into Louisiana to foreclose on some local church.

So we sold these loans. And Rich, do you have the numbers as far as the gross loan balance, where they were marked and what we actually sold them for?

I do, Chris. The gross loan balance, Juliana, was about $17.6 million. We had a mark on those to where we were carrying those at and held for sale on our balance sheet. That balance was about $3.7 million in the held for sale on the balance sheet. We actually got net proceeds on that sale of $5.9 million, and we recognized a gain of about $2 million on that.

But the gain, remember, the gain is then shared back in another category because we only keep 20% of that gain.

It's included in the decrease of the FDIC receivable line item. So it's -- about $1.8 million of that $2 million went back to the FDIC as sort of a recovery for their loss that they've guaranteed us with the loss share agreement.

So all that work for a measly couple hundred grand for us. But anyway, that's the negative side of these FDIC-assisted acquisitions, is these loans you're working on, you're killing yourself to work these things out. And at the end of the day, there's just not that big of a differential between if we lose a little or gain a little; it's just what category it's going in and out of. But it's good to get those off the books because we don't have to, now, work those, what was it, 11 loans or something like that?

11 loans.

It was 11 loans. We don't have to work those 11 loans and have a special asset person or persons dedicated to dealing with all those things.

That makes sense. Thank you very much for that color.

Brian Zabora, Stifel Nicolaus.

A question on C&I. Was the increase due to increased line utilization or extension of new credits?

New credit. I think our line utilization is still sluggish. I think a lot of these companies are hunkering down and they're making a little bit of money and there paying things down. But no; we had some good new business volume on some deals on C&I. And we're working really hard there, but again, it's a lot of effort for not as much results as we'd like. But hopefully, that lot of effort will pay off in the long run.

And can you give a sense of loan pipeline maybe at the end of the quarter versus first quarter?

I'd say the pipeline is fairly flat (multiple speakers) or maybe a little bit up. We had some really good pipeline in the second quarter. But remember, if you look at our non-covered loans quarter over quarter, on a discounted basis, this just means net of our discount, we were down $36 million during the quarter. So $36 million of our decline quarter over quarter was due to the FDIC covered loans, not due to the non-covered loans. And when you look at -- if you really look at the non-covered loans quarter over quarter, we were only down $8 million. And that was a function of really the slight decline in the dairy, the continued rundown of our mortgage pools and then some decline in commercial real estate, which is loans that are paying off because of a refinance or something like that and we're usually capturing prepayment penalty fees on those.

And just lastly, you recently hired a new head of commercial banking. Do you have a sense of what that means, maybe what that means as far as adding additional lenders?

Well, we've hired a whole -- we've hired several people in the commercial lending space. We hired a new asset -- a new head of asset-based lending for us who has just joined us in the last couple of months and came from a larger bank here based in Los Angeles. I won't say what bank. The head of our commercial banking -- I've got to do a redo on that. He actually went back to his former company, which is a little bit of an embarrassment. But it is what it is. But we're still building out the C&I, and we have good internal C&I people. A year and a half ago, we also recruited in a deputy chief credit officer who's a real C&I guy.

So I think we've got the infrastructure in place to really grow this, and now it's about recruiting the right teams in who can help us do it. But we still have some pretty good teams internally that have done a good job. It's just that we'd like to pick up the pace.

Great, thanks for taking my questions.

Gary Tenner, D.A. Davidson.

I just had a follow-up question regarding the securities reinvestment. You had talked about buying some of those SBA-guaranteed loans. Do you think that you might be purchasing or just reinvesting between securities and SBA enough in the third quarter to offset runoff, or would it be more than that to eat into the excess cash position in the third quarter?

Well, what we're trying to do is to keep our cash position between our money that's going to the FDIC and our deposits. We have about $60 million -- is that about right, Rich?

Right.

-- in deposits that we have with other financial institutions that we have an average yield of, what was it, 50 --?

67 basis points.

67 basis points, which is kind of interesting. Right? And they're quality financial institutions. So neither here nor there on that. So, between those two areas, we target around $300 million in cash, is what we're looking to carry right now. At the end of the fourth quarter, we were higher than that; in fact, we were over $400 million.

So we probably will try to work that down. But if rates are just so low it just doesn't look compelling, then we will keep a little bit more cash there, even though we are getting 25 basis points overnight. And we'll keep it shorter and wait for an opportunity to jump in where we can get a little higher yield if the market turns.

So that's the objective. But we can't keep accumulating cash. We don't want to see that cash get up to $500 million or $600 million. It just simply is something that we need to manage very closely.

But if you look at our overall deposits, we really haven't grown our overall deposits. And that is on purpose. Right? I'll tell you, and I've said this to several of you maybe independently. If you can fog a mirror right now in the banking business, you can go deposits. The question is, what's the quality of those deposits? What's the cost of those deposits? And what's the stickiness of those deposits when rates go back up?

So we are really refining our game as much as possible to just bring on what we think are sticky deposits that are high-quality that are low cost. And usually, that's non-interest-bearing deposits. And that's why we're sitting at 48% non-interest-bearing deposits right now.

And then, Rich, I don't know if you mentioned it. I may have missed it. What was the non-covered loan yield this quarter versus the first quarter?

I don't have that right at my fingertips.

I'm glad you asked Rich that question.

Our non-covered loan yield on -- I don't know that I have that here.

I don't have that right in front of me.

Okay, I thought you may have mentioned it when you were running through some yields earlier. But I thought I'd missed it, perhaps.

In one of our 40 charts that we have in front of us, I don't know if it's in there. But we can get back to you on that.

Okay, great, thanks guys.

Joe Gladue, B. Riley.

Hi. I wanted to follow up a little bit about this C&I segment. I heard from some other bankers that competition is very tough and there's some banks going out there offering extended terms at these low rates, and just wondering if you can comment a little bit on the competitive environment and how long you're willing to extend loans out and what types of terms and rates you're getting on your C&I loans right now.

Well, Joe, thank you for the question, but I have to be a little careful how I answer this because I can give information to my competitors that I don't want to give. So I will be a little bit guarded in my remarks. But there's no question; it's competitive out there. We are seeing reduced prices, particularly in our quality dairy loans. And some of those we're seeing a lot of price competition for the strong dairy loans. And rates are, if anything, going down in that segment -- not the okay dairies and not the lousy dairies, so the ones that are just performing mediocre or performing poorly. But the dairies that are performing well, there's no question that there's a lot of price competition.

And I think that's the same thing on commercial and industrial side, is that if it's a good deal and it's a good company, the pricing can get very competitive. And we are seeing extension of duration in some of those commercial loans. And, typically, we'll want to see a five-year amortization on a commercial loan if it's a term loan. And that can get extended in this kind of environment on a C&I term loan.

As far as our ability to compete, our cost of deposits and our efficiency ratio is pretty much as good as anybody in the game. So I think we can buy quality all day long. But at these rates you just can't take a lot of credit risk. So the guys that are doing crazy things are unnecessarily giving away guarantees and doing some other things to win business -- that's not going to be our game. So we may miss some opportunities along the way because I'm not saying we wouldn't give up a guarantee on a loan, but it's got to be for the right borrower in the right situation. But typically, we want a guarantee from that borrower. These are closely held, family-owned, privately-held businesses. And they should be supporting our businesses. They're -- I should be supporting their business.

Okay, thank you.

(Operator instructions) Don Worthington, Raymond James.

In terms of the investment portfolio, the unrealized gain, would you plan on harvesting any of those?

It's extremely tempting. So I think we're over $75 million, weren't we, Rich, for the quarter?

$75.1 million.

$75.1 million, and I think about 60% of that is attributed to the municipals and 40% is the CMOs and the mortgage backs. I don't know that we would -- never say never on that, but we'd have to figure out, okay, what are we going to do with those proceeds? And that's a big question. And it's -- potentially we could look at paying down FHLB debt, prepaying our trust preferred. We still have $60 million of trust preferred at LIBOR plus 3.25%, 30-day LIBOR plus 3.25%. That's right, Rich?

90-day LIBOR plus 3.25%. Right?

So those are all potential things that we could do if we were to harvest some of those gains. I think, if we were going to harvest any of those gains, it would be against the mortgage-backs and CMOs and probably not in the municipals because we're looking for good municipals all day long. And we've been able to be pretty successful, knock on wood, in buying the right municipal securities along the way.

So I would say never say never, but it's not -- we are searching for yield and searching for quality. And unless we feel that we're going to lose money somehow by not selling these things or we have a great opportunity to redeploy the money somewhere else, I don't know that it's a front burner thing for us right now.

Okay, thank you. And then any update on the SEC inquiry?

The ongoing SEC investigation and so forth -- so let me give you the whole update on the SEC and also the shareholder lawsuit. So on the SEC, the investigation is almost -- has been pending for just about two years. I think it was announced in early August of 2010, so we're almost two years into this. We and our counsel have fully operated with the SEC staff and will continue to do so, to the extent any further information is requested or we have further conversations with them. And last -- we've received no indication from the staff as to when its investigation will be concluded formally or whether there's any additional information will be sought. There's really not much going on there.

In terms of the shareholder lawsuit, we advised everybody last quarter that in January 2012 the federal judge in the class-action dismissed the plaintiffs' initial complaint because it did not meet the pleading thresholds under the Private Securities Litigation Reform Act. But as we expected, the judge gave the plaintiffs leave to file an amended complaint, which they did. And then the plaintiffs filed their amended and restated complaint in February, and we filed our motion to dismiss this amended complaint in March.

The federal judge held a hearing in early June, and we believe this went well for our side. But both sides are currently awaiting the judge's ruling and order, now that the briefs and arguments are complete. And this is based on the amended complaint, again.

We intend to continue to vigorously contest the plaintiffs' claims, which we believe are entirely without merit, as long as this action is allowed to continue, which we can't control.

In the meantime, the companion state court derivative shareholder action is on hold until September. And that's really going to be a product of what happens with the shareholders' lawsuit.

So that's pretty much all I've got for you on that. But we feel pretty good about where we are. We feel very confident in our litigation suits, both with the shareholder and the derivative side. Simply look at our numbers, look at our performance. And in my humble opinion, we did a good job along the way here in a very, very difficult situation, difficult economy and in the way we handled the vast majority of our credits.

So here we are. And I wish I had that magic answer for you saying that the SEC went away and then closed this investigation, but that's really beyond our control.

Okay, thank you.

Eric Grubelich, Highlander Bank Holdings.

Good morning, thanks for all the prior color. That shared national credit that you talked about earlier in the call -- I didn't see any detail on that in the press release. Did you say that was about a $10 million credit? And could you give us any other color as to the industry? And was it an exam-related item for all banks?

Yes, I will be happy to do that. The credit is roughly $55 million or $50 million-$55 million in aggregate. We have a 20% participation in that. It's a construction loan on retail property. It's [agented] by a major bank, one of the 10 largest banks in the country, and two of the 10 largest banks in the country are both -- one's the agent and one is a participant. There are four banks, total, in the whole deal. And we have a 20% participation level, so our exposure is $10.9 million.

So was that because the lead decided to classify it? Or was it driven by a SNC exam-related issue?

The latter.

Okay, that's what I thought.

And one thing I want to talk about, which I think you -- analysts should look at along the way here because I think it's -- I always say this to Rich on the accounting side, and I think he looks at me and smiles and shakes his head.

So let's talk about this credit that we had, this $10.9 million credit that we have as a participation. We have this graded internally as a substandard credit, and we reserve against our substandard credits typically somewhere between, call it 5% and 15%, on all our substandard credits. We typically have a reserve of 5% to 15% of the actual loan amount.

So what happens is, when this credit actually becomes non-performing, we have to do an impairment analysis, and so the impairment analysis, based on what ultimately is the value of the property and etc., etc.

Well, we do the impairment analysis, and we take our most recent appraisal or take the most recent appraisal conducted by the agent of this credit, and we have zero impairment for the second quarter. So now what I had was, previously, I had a 10% or 15% reserve allocated to this credit. And now impairment comes through, and the impairment analysis shows we have zero impairment.

So we're sitting there, and I felt a lot more comfortable having my substandard reserve against this than I do have zero impairment. So what you're seeing is that you look at our loan loss reserve and the loan loss allowance, and you're seeing as we go quarter over quarter we have more and more unallocated reserve. And then unallocated reserve is based on stuff like this, where something goes from substandard where it had a reserve, to non-performing. And I want to kind of keep a reserve in there, but legally and accounting wise, we can't do that.

So we want to increase our unallocated reserve for the unknown factors. And whether those unknown factors are European debt crisis or a credit that we only are a 20% participant in, which we are not really controlling in terms of the decision-making and what's going to happen with this -- we'd like to put the pedal to the metal. And sometimes the agents and so forth aren't quite as aggressive as we would be.

So that's kind of strange thing that goes on here. But we're thinking very carefully through those different things, and that's why you're seeing our reserve -- why we're not adding to our reserve. You are seeing us not eviscerate our reserves or release our reserves because of these moving parts that are out there that we just want to make sure that we are covered for, whether it's the European debt crisis, California economy, city bankruptcies that are accelerating in California -- whatever it is, we want more and more unallocated reserve to cover the unknowns.

I don't think you'll get any argument from anybody on the phone about that. That's great.

And then just a follow-up on Don Worthington's question about the securities portfolio. Maybe the other side of that, the MBS -- it looks like you've got $33 million pre-tax gain. On a balanced basis, it looks like it's about 2 points. How does that compare to where you are in those securities above par? What I'm just trying to understand is what your potential risk is if prepayments accelerate and you not only lose the nice gain you have, but also any premium you may have paid for the securities as well.

What we do, Eric, is on a monthly basis we look at a number of reports that are out there, CUSIP specific about prepayment speeds. We go through the entire portfolio CUSIP by CUSIP, look at the CPR, PSA rates, and we modify our amortization of those premiums accordingly. So we are very active. And then I would tell you that in addition to that we have guests that come in every other month to our full board, to our balance sheet management committee, and we have nondisclosure agreements with these individuals or individual companies. And they get a tape drive of our portfolio, and they do the same thing and look at prepayments and potential prepayments and where accelerations might be coming down the road in the next one, two months. And so we're looking for third-party verification of the methodology that we use to solidify, I guess, the sanity of all the exercise we go through.

And we continue to look at Bloomberg screens, and we look at other services that are out there that we engage to help us monitor on a go-forward basis our MBS portfolio for exactly that reason.

I don't know if you can be specific or not, but if you looked at the portfolio in aggregate, are you in this at like 1.04, 1.05 and the portfolio is marked at like 1.06, 1.07?

We do have premiums, Eric, in our portfolio. But those premiums are being amortized over what we anticipate the average lives of those securities. And we continue to adjust them. I don't have in front of me exactly what the net premium to total portfolio is, at this point in time, as far as a ratio, the 1.02 or 1.05. But we try to be very conservative on our amortization of those premiums, based upon all the scenarios that I just painted for you earlier, and make sure that we are amortizing those premiums over as short a life as we need to.

One thing to add to that -- all these things are built into the price of security. Right?

Right.

So for us to try to say, you know what, we are expecting faster prepayment speeds to happen -- well, in a perfect market economy that should already be built into the price of that security. So it's a little bit of a guessing game there. And we are very fortunate to have a very strong person who runs our treasury group and has been managing this for several years for us. And we have great advisors, too. Not only do we have the advisors of many of -- some of the nation's best investment companies that come in here every other month to present to us on these very things, but we also have a consultant. We use George Starling as our consultant. He comes in quarterly and gives us a whole evaluation of our balance sheet and our interest rates and our exposure and all those types of things. So we've got a lot of things that we're listening to.

And there are people who come in and say, listen, we're anticipating faster prepayment speeds, and advising us on these different things. So we are looking at exactly what you're talking about. But one of the things that we've got to project is, how much of that is already built into the securities? And is there really something in there that we could niche and make something better off?

And then what are we going to do with that money? And right now, we're floating in cash like crazy. And I'd love to prepay some of our FHLB debt. But, boy, that is huge prepayment penalties on that stuff. I mean, we roughly have $450 million in FHLB debt, and, my guess, the prepayment penalty, all in, it's going to be over $40 million on that portfolio.

But we also have $60 million of our roughly $85 million-$87 million in trust preferred left that's sitting in there at that LIBOR plus 3.25%. So that's something that we may chip away at, as we did in the second quarter. We paid down $20 million of that, and that's going to save us $664,000. And we may look to continue to do that because we want to get as lean and mean on the cost side and the funding cost side as we can.

Okay, thanks very much.

At this time there are no more questions. So I would like to turn the conference back over to Mr. Myers for any closing remarks. Sir?

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

You, too, sir. And we thank you to the rest of management for your time. The conference call is now concluded. At this time, you may disconnect your lines. Thank you and take care.