CVB Financial Corp (CVBF) 2012 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the fourth quarter and year-end 2012 CVB Financial Corp. and its 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 answer period. I would now like to turn the presentation over to your host for today's call Ms. 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 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 the 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 provisions contained in this 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, 2011, and, in particular, the information set forth in Item 1A, Risk Factors therein.

Now I will turn the call over to Chris Myers.

Thank you, Christina. Good morning everyone and thank you for joining us again this quarter. Yesterday we reported earnings of $22.1 million for the fourth quarter of 2012, compared with $9.3 million for the third quarter of 2012 and $21.7 million for the fourth quarter of 2011.

Earnings per share were $0.21 for the fourth quarter compared with $0.09 for the third quarter and $0.21 for the year-ago quarter.

For the year ended December 31, 2012, we earned $77.3 million compared with $81.7 million for the year ended December 31, 2011. Earnings per share were $0.74 for 2012.

2012 represented the second most profitable year in CVB Financial history, and would have been the most profitable year in our history had we not elected to take a one-time $20.4 million prepayment charge for paying $250 million in Federal Home Loan Bank debt back in August 2012.

The fourth quarter represented our 143rd consecutive quarter of profitability and 93rd consecutive quarter of paying a cash dividend to our shareholders. In fact, we actually also paid our 94th consecutive cash dividend to shareholders, accelerating payment of the fourth quarter dividend normally paid in January into December 2012. This was done to provide potential tax benefits to our shareholders, as personal income tax rates are scheduled to go higher for 2013.

Excluding the impact of the yield adjustment on covered loans, our tax-exempt net interest margin was 3.60% for the fourth quarter, consistent with 3.60% for the third quarter and down from 3.62% for the fourth quarter of 2011. The yield on investment securities continued to decline during 2012, partially driven by the Federal Reserve Bank's stimulus program of purchasing longer-term debt in the open market.

Lower rates on mortgages have resulted in larger volumes of refinancing, which, in turn, have impacted the prepayment speeds in our current portfolio. We also continue to see competitive pressure on yield in all classes of loans, particularly commercial real estate secured loans.

At December 31, 2012, we had $3.45 billion in total loans net of deferred fees and discounts, compared with $3.44 billion at September 30, 2012. Overall, non-covered loans increased $23.9 million during the fourth quarter to $3.25 billion, while covered loans decreased $12.1 million for an overall loan growth of $11.8 million for the quarter.

While this is the second quarter in a row of organic loan growth, our enthusiasm is tempered as dairy loans increased by $39.1 million for the fourth quarter. And most of that growth was seasonal, as many dairies chose to draw down on their line of credit to prepay feed expense.

Nonperforming assets -- defined as non-covered, nonaccrual loans plus OREO -- decreased in the fourth quarter to $72.8 million compared with $76.5 million for the prior quarter.

We once again reported zero provision for funded loan and lease losses for the fourth quarter. The allowance for loan and lease losses was $92.4 million or 2.84% of total non-covered loans at December 31, 2012, compared with $92.1 million or 2.85% of outstanding loans at September 30, 2012.

Net recoveries for the fourth quarter were $374,000 compared with net recoveries of $175,000 for the third quarter. Net charge-offs totaled $1.5 million for the full year 2012 compared with $18.4 million for 2011.

At December 31, 2012, we had loans delinquent 30 to 89 days, up $887,000 or 0.03% of total non-covered loans.

Classified loans for the fourth quarter were $314 million compared with $302.5 million for the prior quarter. The $11.5 million increase is primarily due to downgrading of dairy-related credits. We will have more detailed information on classified loans available in our year-end Form 10-K.

Moving onto covered loans. Covered loans represent losses in which we have loss-sharing projection protection from the FDIC as a result of our acquisition of San Joaquin Bank in October 2009. At December 31, 2012, we had $220.5 million in total covered loans resulting from the San Joaquin Bank acquisition with a carrying value of $195.2 million, compared with $235.9 million with a carrying value of $207.3 million at September 30, 2012. As of quarter end our remaining purchase discount was $25.3 million.

Now I would like to discuss deposits. We continue to grow our noninterest-bearing deposits. For the fourth quarter of 2012, our noninterest-bearing deposits grew to $2.42 billion compared with $2.32 billion for the prior quarter, and $2.03 billion for the same quarter a year ago.

This represents a 19.4% increase year-over-year, completely organic. Noninterest-bearing deposits now represent 50.7% of our total deposits.

Our total cost of deposits for the fourth quarter was 11 basis points compared with 12 basis points for the third quarter. At year-end 2012, our total deposits and customer repurchase agreements were $5.2 billion, $17.3 million higher than at September 30, 2012, and $133.3 million higher than at December 31, 2011.

Noninterest income. Noninterest income was $5.7 million for the fourth quarter of 2012, compared with $2.6 million for the third quarter. Noninterest income for the fourth quarter was reduced by a $2.6 million net decrease in the FDIC loss sharing asset compared with a $7.1 million net decrease for the third quarter.

Interest income and fees on loans for the fourth quarter totaled $47.2 million compared with $52.6 million for the third quarter. The $47.2 million for the fourth quarter included $3.3 million of discount accretion from principal reductions, payoffs, as well as improved credit loss experienced on covered loans. This compares to $7 million of discount accretion for the prior quarter.

So, if the discount accretion was eliminated, interest income and fees on loans declined by $1.7 million for the quarter or about 3.73%. The decline was primarily due to the refinancing and repricing of commercial real estate loans at lower rates.

Now expenses. We continue to closely monitor and manage our expenses. Noninterest expense for the fourth quarter was $29 million compared with $29.6 million for the third quarter, assuming the $20.4 million impact of pre-paying $250 million in FHLB debt was excluded from the third quarter.

Noninterest expense, excluding the FHLB debt termination expense, declined by $19.9 million in 2012. Expense reductions were primarily achieved in the legal and professional services expense area, which decreased $8.8 million; OREO-related expenses, which decreased $4.6 million; salaries and employees' benefits, which decreased $1.5 million; and regulatory assessments, which decreased $1.4 million.

One of our expense-related strategies is to examine our branch locations and look for opportunities to expand or contract as appropriate. In October 2012 we consolidated a branch location in Orange County, California, where we had three branch locations within a five-mile radius of each other. We anticipate approximately $350,000 to $400,000 in annual cost savings, and little or no revenue loss. Looking ahead, we will consider other branch closures or consolidations where we can realize cost savings without material loss of 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 31.7% for the fourth quarter compared with 25% for the prior quarter. The overall tax rate for the full year 2012 was 32.6%.

Now to our investment portfolio. During the fourth quarter of 2012 we provided an average of approximately $120.3 million in overnight funds to the Federal Reserve, and received a yield of approximately 25 basis points on collected balances. We also maintained $70 million in short-term CDs with other financial institutions, yielding approximately 69 basis points.

At December 31, 2012, investment securities totaled $2.45 billion, up $191.8 million from the third quarter of 2012. Investment securities currently represent approximately 38.5% of our total assets.

Our available for sale investment portfolio continued to perform well. At December 31, 2012, we had an unrealized gain of $74.6 million, a decrease from $83.6 million for the prior quarter. 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 four private label mortgage-backed securities totaling $1.2 million.

We have been strategically reinvesting our cash flow runoff from our investment portfolio, carefully weighing current rates and overall interest rate risk.

During the fourth quarter we purchased $110.4 million in mortgage-backed securities with an average yield of 1.61%. We also purchased about $150.5 million in US government callable agencies with an average yield of 1.92% and $114.7 million of small business pools with an average yield of 1.71%. Our new purchases of mortgage-backed securities and Small Business Administration pools have an average duration of approximately 7 years.

The purchase of securities in the fourth quarter substantially reduced our cash position, as we actually ended up for the year owing the Federal Home Loan Bank $26 million on an overnight basis. Our current strategy is to keep cash levels at or near zero to maximize our profitability.

We currently are experiencing about $50 million to $60 million in cash flow monthly from our securities portfolio, so we feel comfortable in reducing existing cash reserves. For the year 2012 we purchased $546.1 million of mortgage-backed securities with an average yield of 1.79%; $23.1 million of municipal securities with an average tax equivalent yield of 3.42%; $166 million of SBA pools with an average yield of 1.79%; and $176.5 million of callable agencies with an average yield of 1.74%.

Finding bank-qualified municipal securities that meet our investment criteria remains challenging, but desirable. We were not able to find any municipal securities to purchase in the fourth quarter that fit our investment criteria.

Now turning to our capital position. Our capital ratios are well above regulatory standards and we believe they remain above our peer group average. Our December 31, 2012, capital ratios will be released soon, concurrently with our fourth quarter Form 10-K.

Shareholders' equity increased by $48.2 million for the year 2012. We continue to look at many different opportunities to deploy our capital and liquidity.

Subsequent to year-end 2012, on January 7, 2013, we redeemed a portion of the outstanding capital in common securities issued by CVB Statutory Trust II for a total consideration of approximately $20.6 million. The cost of these securities was LIBOR -- three-months LIBOR plus 2.85%.This will save us approximately $600,000 annually.

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

Thanks, Rich. Now let's talk about the California economy. Overall California has had a bumpy ride in its past economic recovery, but the state has made progress and it continues to be a driving force behind the national economic recovery. According to local economists, California led the nation in job, income and consumer spending growth during 2012.

According to the state's Employment Development Division, the California unemployment rate fell to 9.8% in November compared with 10.1% in October 2012 and 11.3% all the way back in November 2011. Local economists are forecasting 2% job growth for 2013.

The housing sector continued to mend in 2012 with home sales and prices on the upswing. Home prices grew at approximately 7% in 2012 and are expected to grow at approximately 5% in 2013.

The state still faces major housing challenges. Despite having a more acute need for housing, California has lagged the nation in terms of growth in the number of new housing permits, largely due to significant regulatory, zoning and permit related constraints.

The recent adoption of two ballot propositions, 30 and 39, are projected to help California close its persistent budget deficits over the next few years and eventually return the state to surpluses, something we haven't enjoyed for the better part of the last decade. We remain skeptical.

Overall, California is currently one of the fastest-growing states in the nation and it is helping to drive the US economic recovery. We still have a long way to go before we can declare ourselves fully recovered, but the fundamentals of the economy are improving and are expected to continue to do so in 2013.

Our Dairy & Livestock clients continue to experience a difficult operating environment. Milk prices have increased, but high feed costs put pressure on profit margins. According to the California Department of Food and Agriculture data for the third quarter of 2012, feed costs in California represented 65.4% of total milk production costs compared with 65.0% of total milk production costs for the second quarter. Albeit modest, we would like to see this upward trend reverse itself in the next quarter.

Many of you are aware that our Founder and Chairman George Borba passed away in October. We remain committed to honoring George's legacy. We vow to never forget the strong culture George created here. His character, honor, integrity and tenacity served as the foundation for many of our Company's achievements.

As 2012 is now in the book, so to speak, I would like to thank our employees for their continued hard work and commitment, our customers for their loyalty, our shareholders for their support, and our Board of Directors for the continued wisdom and guidance.

And, last, we have established our official critical view for 2013. They are as follows. Grow loans. Expand credit product offerings and capabilities. Build core deposits. Drive service charge and fee income growth. Manage operating efficiency, and finally, grow through acquisitions.

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

(Operator Instructions). Hugh Miller, Sidoti.

I guess I wanted to start off with a question on the margin, and more specifically on the loan yield that we saw some contraction during the fourth quarter. You guys had referenced some pressure on the refinancing market in CRE. I was wondering if you could provide some color on that. And the follow-up was just with a -- if you could detail the benefit from pre-pays in the third quarter versus the fourth quarter.

I think, in general, we still are under a lot of pricing pressure. In the loans -- the commercial real estate loans that we have in the books that are 6% or 5.5% and have four, five, six years left on the maturity are all -- not all -- but a lot of those are coming around to us, and our customers want to reprice those loans, extend the maturities a lot of times or just modify the rate. And those negotiations are pretty active, and a lot of times they are going to other banks getting competitive offers and forcing our hand to redo those and modify those loans.

When we do modify those loans, we do -- the vast majority of our loans -- commercial real estate loans -- have prepayment penalties and embedded in those loans. And as you can see, I think in 2012 our total prepayment fees were somewhere around $3.7 million as compared to $1.9 million in 2011.

So, there was a lot more prepayment momentum, if you will come in 2012. And we are seeing that continue, but we are hoping it is going to slow down pretty soon, because we have already repriced a lot of these loans.

I am sorry; does that answer your question?

Yes, I guess it was more specifically, then, on the pre-pay benefit in 4Q relative to 3Q. And I guess in the CRE market, how aggressive would you categorize the competitive environment at this point?

You know what, I think it has been aggressive for a while, and if anything, it is getting a little bit more aggressive. But I am -- let me give you four numbers in a row here.

Sure, great.

Prepayments in the first quarter were $869,000, second quarter were $814,000, third quarter were $1.266 million, and in the fourth quarter were $751,000. So at least I am relieved to see we're $0.5 million lower than the third quarter and slightly lower than the first two quarters.

So, hopefully, that will start slowing down a little bit, but it is what it is. And we're trying to be smart about the way we do this. We are also -- we had the biggest interest rate swap year that we've had in our history, which means some of these deals and new pieces of business we put on in variable rates, which may affect our margin, but will help our interest-rate sensitivity going forward. And our interest-rate swap these were about -- I think $1.250 million for the year.

Okay, thanks for the color.

Aaron Deer, Sandler O'Neill & Partners.

Following up a little bit on Hugh's question, and then the mix data or thoughts that you gave on the California economy. I am just kind of curious what your sense is, in speaking with customers, what the loan demand is out there and where line usage stands, and just trying to get a sense what your outlook is for loan growth going forward.

Yes, line usage is pretty modest right now, and we're still not experiencing any great pickup in borrowings for our C&I borrowers out there. On the dairy side, line usage is higher, although I think the fourth quarter of 2012 was actually a pretty -- was an improving quarter for the dairy industry over the third quarter and second quarter.

As we look at loan growth and try to drive loan growth, the demand is not great out there. All a lot of it is the banks are competing against each other on a refinance basis. There is a lot of cautious outlook for a lot of our clients, and the economy is still relatively sluggish. We are not seeing huge loan demand.

But I would say one of the things we are doing to counterbalance that is we are driving new loan initiatives in the bank and we are setting those things up, and a couple of those things -- we have come out with our own residential mortgage program that we kicked off in the fourth quarter of 2012. I haven't talked much about that, because I want to make sure we start showing results before we talk about it. But that is something that we have got fully in force right now.

We are getting after that, and we are looking at expanding our equipment leasing and vehicle leasing business as we go forward. And then we are looking at different niches in other areas to drive loan -- to drive other aspects of loan growth. And that is -- when you saw our critical few, you saw that when I talked about it our expand credit product offerings and capabilities.

That is what that is all about, is finding ways that we can capture a bigger credit wallet of our clients out there and do more things for them without taking a lot of credit risk. Because, again, we are lending money out at 4% and 5%, or if it is variable, maybe even lower than that, and it is just -- we have to be smart in the way we build our asset book.

That is great. And then can you guys give some color on the expected accretion that you still expect to get on the $25 million loan discounts? I think you said it's around $16 million that should be realized as interest income. Is there a similar measure that you can give on the -- with respect to the FDIC loss share asset in terms of what percentage of that will be written down through the income statement?

Rich, what we have, [18-point-something] million dollars left in our loss sharing. And that is going to be -- that will fully extinguish itself by October of 2014. The discount accretion will materially extinguish itself by October 2014, but there will be some left, we anticipate, at that point in time, because there still is -- the market is what the market is. And it doesn't necessarily match up with the --

FDIC.

The loss share; FDIC loss share. Rich, do you have any comments to expand on that?

I would just echo what Chris indicated, is that we have $18.5 million worth of FDIC asset remaining at year-end. That asset is the receivable we have against claims that we would file with the FDIC for reimbursement. That reimbursement period ends October of 2014, so that $18.5 million has to be zero by that period of time, naturally.

So what we are doing is we are watching the claims that we file with the FDIC, and naturally withdraw that number down from losses that are incurred in the remaining SJB portfolio. And then any remaining asset that is there is a result of basically a difference in the credit quality and the credit performance of that portfolio, which will decrease the accretion -- the non-accretable accretion, which will then pay against that asset. So they will kind of stair-step down to the extent that there is improvement in the credit quality of that portfolio.

Okay, so I guess (multiple speakers)

I love that word, non-accretable accretion. I don't know what that means but I love that phrase.

It is basically the allowance for loan losses under the current accounting literature.

Yes, thank you, Rich.

I guess what I'm getting at is, what is the second half of that piece, the piece that will need to be written down through the income statement that is not actually applied to the FDIC? If the accretable yield is, say, $16 million of the $25 million, or let's call it half for the sake of argument, would half of the $18 million then be written down through the income statement? Is that a reasonable way of thinking about this?

The accretion is -- what we do every quarter, we look at that portfolio every quarter. And we try to forecast, because the accounting literature says that you can put loans that are homogeneous in pools, but loans that were not homogeneous have to be evaluated individually. So we look at both the individually assessed loans in that portfolio as well as the pool of loans and we try to go through and estimate the cash flows that are expected from the portfolio. And we estimate the severity of the losses on the cash flow model of the expected cash flows, and we try to estimate the best we can on the remaining losses that we expect to incur on that portfolio. So that is on the accretion side.

On the receivable side, what we do is we try to match that also against the recoveries that we have. And the expenses that we match against the FDIC, we have to file a loss-sharing certificate at the end of every single quarter of the losses incurred on that portfolio. And then when we receive the cash back from the FDIC, that goes against the receivable, naturally.

So, if it was just straight line we had no losses from the remainder of that portfolio, that FDIC receivable would have to come down on a pro rata share over the next year and three quarters, right?

Right.

We expect that there could be some continued losses in that portfolio, but we were trying to work with borrowers along the way to mitigate those losses. So it is hard to predict exactly how that receivable will come down. (multiple speakers)

But if you did it on a straight line basis, you're talking about a $900,000 charge to the P&L on a monthly basis, if it was just straight line and there was no losses incurred over the remaining life of the loss-sharing agreement with the FDIC.

Right, okay. (multiple speakers).

That is highly unlikely.

Step back.

That is not probable.

Yes.

Tim Coffey, FIG Partners.

Chris, you talked about this in your closing comments, about the changes that were done at the Board, happened to the Board this quarter. My question is how does this change or alter the strategic direction of the Company going forward?

Just to make sure I heard your question clearly, it is about the transition that we were going through on the Board, certainly with our Chairman passing away, and then bringing on new directors and what is the strategic direction? Is that correct?

Correct.

Certainly in the short run, I don't think there is any change in strategic direction. We still have four Board members who have been Board members for the last -- well, two of them had been Board members for the last 20-plus years. And two other Board members have been here that predated me. So, there is still a great level of experience on the Board.

I do think this is an opportunity for us to bring on new Board members. We have three new directors -- George Borba, Jr., which I think he is going to be a great director for us, and has been already in his first 90 days. He knows a lot about the dairy business, and is also -- is based in Bakersfield, where we have a big market share.

And then Steve Del Guercio is in LA businessman and an attorney, and very involved in the community and a friend of the bank for a long period time. And then Ray O'Brien is a very smart guy. In fact, he is heading up our balance sheet committee and was a former director of American Business Bank. So we have got some good experience coming on there.

And I look at us, as far a strategy going forward, I think right now it is probably status quo on the business side. But I do think you're going to see us really think hard about M&A going forward and potentially be less sensitive to dilution for the appropriate deal.

Okay, and then a follow-up question; does M&A concern just banks or would you also be considering leasing or equipment companies?

I think we would look at that, and we would also look at potential RIAs, registered investment advisors or other trust companies.

The one thing about an equipment company or an equipment leasing company, we would probably want that to be materially in California, because we don't want to just buy something to buy assets, and then watch them go away or let it run as a subsidiary. We would want to have the cross-sell potential in there and try to drive more relationships. And the relationship banking is really what we're all about.

And that is why you see, when you look at our deposits at 50.7% noninterest-bearing deposits, we truly are building each and every day a better relationship bank. And our cross-sell potential through the fee income is something that we are building out too, between our merchant bank card, our Treasury Services, improving our technology, International department, Citizens Trust, investment services. All those areas are add-ons to what the normal kind of deposit and loan businesses that we drive every day.

Great, thanks a lot.

Brian Zabora, Stifel Nicolaus.

Question on the securities. Was the cash deployment late in the quarter, because it looked like, I think, end of period available for sale securities were above the average rate, so I just wondered if you would confirm that or any details on that?

Yes, I think a good chunk of our securities were purchased in the last 45 days of the quarter, in the latter half of the quarter. So we didn't receive the full benefit of that pickup.

And the same thing on the branch closure that we talked about. That branch closure, we had to realize a lease that went through the end of the year and so forth in the fourth quarter. So we won't really realize the pickup of those cost savings until the first quarter of this year.

And, also, finally, we just paid back $20 million in trust preferreds, which we did on January 7 -- is that right, January 7?

That is correct.

Okay, so that is going to save us about $600,000 annually or $150,000 a quarter. So there are some good expense things that we're doing here. But the bottom line is the expense things are great, and they are great for efficiency and I'm really proud of our organization, the way we have handled that. But we have got to reverse our trend and get the top line moving in the right direction.

Okay. As a follow-up on the M&A side, could you maybe comment on how bid-ask spreads look, or just -- are conversations continuing to pick up with this current environment?

I think everybody is starting to enter the ring. I guess I will use a boxing analogy. Everybody is starting to enter the ring, but we are still a little apart from touching gloves and fighting, or getting after it.

There is still a bid -- the bid-ask is still wider than we would like. I think the realization of the net interest margin pressure that these banks are feeling, as are we feeling, is going to become a greater and greater concern as we go forward.

And one of the things is, I think if you are a small community bank, you don't have the fee income drivers that we do, notwithstanding what the big banks do, who are running 50% of their income in fee income. So that -- the spread banks and the real spread banks, which really the vast, vast majority of the Community Banks are spread banks, are going to feel more and more pressure going forward.

And they were able to stem the tide with improved credit in 2011 and probably more material in 2012. But that is going to start to dissipate in 2013 and then they're going to be standing there dealing with all the repricing pressure and being reliant, primarily reliant on the spread between deposits and loans.

Okay, thanks for taking my questions.

Julianna Balicka, KBW.

I have a couple questions. One, you have already talked about being more proactive on the M&A front going forward. But thinking about your TCE levels, which are building and are getting reasonably high, any thoughts about more proactive capital management from a higher dividend, special dividends, buybacks, et cetera?

We still are focused on our efficiency, what we are going to do with our stock, but our first choice is M&A, and it hasn't come in as quickly as we would like it to come. But we do feel like we are in a very good spot in terms of how many buyers are really out there for these $500 million to $1 billion in asset banks. There is not a tremendous number of buyers there who have our currency, have our capital that can go out and execute a deal.

So we feel like we are in the driver's seat; we are just waiting for the right opportunities and don't want to shoot our silver bullet, if you will, on a deal that isn't ready to be done. And in terms of the previous question, it was not the right -- the spread between the bid and the ask is still too wide.

But as we go forward we are looking at all those things, and if you look at the trust preferred, we are still buying -- we bought back trust -- we repurchased some trust preferred January 7. There is another $20 million out there that we're going to be looking heavily at here very quickly. That is still out there three-month LIBOR plus 2.85%. That is an opportunity.

And then -- and we have, I think, somewhere over 7 million shares of buyback potential that are still authorized by our Board of Directors that we haven't executed. And so I think it is -- a little over 7.7 million shares of buyback potentially we have. So that is an option too. But our first preference remains the -- using our capital to buy another banker by a trust company, or buy an equipment or vehicle leasing company.

Okay, that makes sense. And then just to follow up on the loan growth commentary that you were talking about for the coming year, on the micro question, is there any seasonality in the first quarter that we should be looking for?

More towards 2013 you discussed driving growth, including equipment leasing and then expanding into different niches. So can you give us a little bit more color and details around these different niches and loan growth expectations on 2013?

At the end of the year we have a seasonal buildup in dairy, and I think dairy loans were up $39 million for the fourth quarter. And I think the majority of that was seasonal buildup, so that will unwind itself here early in the first quarter. So there is -- it is not a huge amount of money, when we are talking about $3.4 billion in loans, but it is a little bit of a headwind for us there.

As far as our initiatives are, we are building those out. I think the one that we are prepared to talk about that is live, so to speak, is the residential lending initiative. And we are really focused on a lot of our relationships and cross-selling residential mortgages to our clients.

The products, we are keeping these on our books. We are not doing any 30-year fixed-rate paper. We are doing five-year, seven-year and 10-year fixed-rate paper, as much as a 30-year amortization. We are doing 15-year fully amortizing paper and we're also doing five-year and 10-year fixed-rate interest-only paper that adjusts to an ARM after that on a 30-year amortization basis.

So we are not trying to take a tremendous amount of interest-rate risk on this, but it is -- the way we have designed the program, it is more conducive to the jumbo loan market than I would say your Fannie Mae and those type of loans.

And those are going into your portfolio?

Yes.

And to ask another way, and then I will step back, the same question maybe then, since you're not prepared to talk about the initiatives, that makes sense, but barring any M&A organic loan growth of your legacy loans for the coming year, if you achieved 5% year-over-year growth in your legacy portfolio next year, would that be disappointing? Would that be on track? Would you hope to beat it?

It is a great question. You are pinning me down here. But the bottom line is our objectives for 2013 are to grow organically at a greater rate than 5%.

Okay, excellent. Thank you.

Gary Tenner, D.A. Davidson.

Just a follow-up on some M&A questions. Really you have touched on that a bit. Can you talk about the alternative, which I guess would be trying to hire specific lenders in areas you want to target and whether that has a better payoff in the near term than perhaps waiting for M&A?

Yes, no, it is something that we are looking at every day, and we're trying to look at teams and migrating those teams over to the bank. And we have been successful along the way in acquiring a few of those teams in 2012, and even more successful in the preceding few years before that. It is something we are looking at all the time.

I think most of the banks, their productive people, they have got their arms around them pretty well. So it is not that easy to just migrate these teams out of banks. And then a lot of times you get banks where their credit underwriting criteria might not be quite as disciplined as our credit underwriting criteria. So, some of these teams may be more successful in a looser credit atmosphere than they are going to be successful at CVB.

So we have to really carefully manage that process, and when we interview these people and go through their books and all that kind of stuff, we've got to do it very carefully, because what we don't want to do is spend money and buy something that is not going to be a successful expansion for us. And so -- but we are very much focused on it. We are looking at teams throughout our markets, particularly in LA County, Orange County and the Central Valley.

When you look at bringing teams over, if you are going to generalize on, say, a 12-month or 18-month basis, what sort of assumption do you make in terms of how much of their book they could bring over? Is there a general range you could give us?

Well, when we look at their -- the expense of paying them and their total, I guess, salary and bonus and all the different expense of bringing them over -- setting up the facilities -- we like to make sure that they are accretive to our earnings within that 12-month to 18-month period of time.

And so, depending on the magnitude of the team and depending on the level of the employee, that can be anywhere from $10 million, $15 million in loans per relationship manager to higher, depending on what we are compensating them.

Okay, thanks very much.

(Operator Instructions). Don Worthington, Raymond James.

Just a question on the unrealized gain in the securities portfolio. Would you at some point consider harvesting some of those gains?

Yes, we have had discussions about our unrealized gain. It did drop from the third quarter to the fourth quarter by, I think, $7 million or $8 million, or something like that. And it is something we are looking at, and we are also looking at, as we look at these prepayment speeds, do we reposition our portfolio a little bit to get away from some of these prepayment speeds? And that could come in, in the form of both selling securities that we have a gain and maybe selling some securities that we have a loss in, and rebalancing our portfolio a little bit.

Rich, I don't know if you have anything to add to that, but --?

That is exactly a strategy that we have been looking at.

And the other thing, you have seen we have been buying these SBA pools, which we haven't been buying before, and the reason we have been buying those is we can get a little bit more yield from them. They have slower -- they have slower pre-pays. And the only negative is that they go out longer on the curve. They are seven years or eight years in duration.

But when we look at our asset sensitivity, liability sensitivity of our Company right now, we are as asset-sensitive as we have ever been, or at least at the end of the third quarter -- we haven't measured at the end of the fourth quarter, but the end of the third quarter we were the most asset-sensitive we have been in at least the last 10 years. So that is a consideration in looking at going out a little further on the curve as we do have -- if you shock rates up 200 basis points or 300 basis points, we make more money.

Okay, great. Thank you. And then I assume the SEC inquiry is status quo over the last quarter?

I can't comment on the substance of the SEC investigation. But now we are in -- we're 2.5 years into this right now. And we and our outside counsel, we fully cooperated with the SEC staff and we will continue to do so, to the extent any further information is requested.

And, last, we have received no indication from the SEC staff as to when its investigation may be formally concluded, or whether at this point any additional information will be sought. It is really -- it is not something we are even focused on at this point.

Okay. Are you still incurring any legal fees there?

No, not on the SEC investigation side. On the shareholder lawsuit, we are. There is two cases there, two related cases. One is in federal court, and the other one is in state court. But let me give you a little procedural update, if I can.

And I have commented on this before. But as you may recall, the judge in the federal class-action dismissed the plaintiff's initial complaint in January 2012. This is a shareholder lawsuit. Holding that it did not meet the pleading threshold under the Private Securities Litigation Reform Act.

The plaintiffs then filed an amended complaint of February 2012 and we filed our motion to dismiss in March of 2012. The judge held a hearing on the amended complaint in June 2012, and issued an order dismissing the amended complaint this past August. So, we have had two dismissals on this.

For the record, the judge found additional deficiency in the plaintiff's claims, and again, twice in a row we have had this dismissed. However, the judge did give the plaintiffs leave to make a third attempt to plead a case against CVB Financial, and I guess that is typical.

And so the plaintiffs filed another amended complaint in September 2012. We filed our third consecutive motion to dismiss the latest version of this complaint, which is basically the same set of claims, in October 2012. The hearing on our motion to dismiss is currently scheduled for February 11, 2013, and we obviously cannot predict when the court may reach a decision on our motion or what the outcome will be.

But we intend to continue to vigorously contest the plaintiff's claims. We feel they are without merit. And as long as this action is allowed to continue, I would like to give you a dissertation on tort reform and all that kind of stuff, but you probably don't want to hear that.

In the meantime, the companion state court derivative shareholder action, which is the second part of this, is on hold until least March 2013 as both sides have essentially agreed to wait until we have resolution on the federal act -- federal action, which is the shareholder lawsuit. So that (multiple speakers).

Okay.

Probably about all I can comment on.

Great, thanks for the update.

On the legal fees, for the shareholder lawsuit -- and we are not really spending much on the derivative lawsuit and we're not spending anything right now on the SEC investigation. Those legal fees are materially, and I mean vast, vast majority of those, are reimbursed by insurance. So we may have to spend money, but we are getting our money -- the vast majority of that money back in insurance.

So you're going to see legal costs being not a big factor in 2013. And then I would hope, and obviously I can't predict, that our legal costs will go down in 2013 vis-a-vis 2012.

Okay, thanks, Chris, appreciate it.

Hugh Miller, Sidoti.

Chris, you made some comments just about the bank being more asset-sensitive than you have ever been. Was wondering if you could just talk about your strategy for the positioning of loans and securities for 2013. We have seen a little bit of a lift at the long end of the curve over the last month at the 10-year and 30-year period.

Just, I guess, wanted to get your outlook for that as we head into 2013 on the yield curve, and how you're thinking about that in terms of positioning the assets at the Bank.

We talk a lot about that. And it is hard to predict what is going to happen. But we do feel that the yield curve will materially probably not do -- not have a lot of changes in the first half of the year.

But as we get in the second half of the year, and we look at our government and supposedly their comments about not continuing to buy $80 billion of paper every single month, sometime that is going to stop or that is going to slow down. And what we have heard that is going to start slowing down in the fourth quarter or late third quarter of 2013.

So we are trying not to go out too far in the curve. On our loans we are trying to balance out relationship loans. We may put 10-year fixed-rate loans on the books for relationship type loans on the commercial real estate side.

But when we deal more of a transactional type of loan, which may have good credit merits, but not have the full relationship impact, we are trying more and more to swap those loans and do variable-rate interest on that, because we do feel that at some point rates are going to go back up. And we like to keep that asset sensitivity edge, which we have worked so hard to achieve by deleveraging our balance sheet over the last five years.

Okay, appreciate it. Thank you.

Julianna Balicka, KBW.

I have a couple of follow-ups. You started to talk a little bit about your reinvestment, some new strategies in terms of reinvesting your securities portfolio, but in one of your remarks you mentioned that 38% of your total assets are now in investment securities. So, aside from strategies for managing duration, are there any strategies or capital related issues you need to think about as that becomes a greater part of your total assets from managing the Bank's perspective, maybe from a regulatory oversight perspective. Or does that change anything?

We are constantly looking at the deployment of our liquidity. Clearly we like to, as Chris has indicated before, we would like to grow our loan portfolio, and that is the number one achievement that we are striving to get to.

And as loans have been a little sluggish, we have been trying to look at how to maximize the yield on our assets. And I would say that we constantly, through our balance sheet management committee and our -- the Board of Directors, as well as our liquidity committee of the management team of the Bank, we constantly look at yield curves. We constantly look at the type of instruments that are out there in the market.

We have really gone against putting credit risk in our investment portfolio. We are really looking to have pretty much rock-solid instruments in our investment portfolio. So, we really haven't got any sort of corporate debt and those types of things -- junk bonds and those types of things in our investment portfolio.

One thing to add on that, there is a little bit of a shift in our strategy in the fourth quarter on our investment portfolio. We were carrying typically $300 million, $400 million, maybe $250 million, whatever the number was, in excess cash that was going overnight to the Fed. And now we are managing that down to zero.

And so, why have we changed our strategy? Well, we have changed our strategy primarily because we are getting so much cash back on a monthly basis through -- from our investment portfolio and prepayment speeds and so forth, probably $55 million, $60 million a month, that even if we get to the point where we say, okay, you know what, we are at -- we are neutral. We are either neither a funds provider or a funds borrower with the Fed on average.

We could quickly rectify that and get back to that $250 million, $300 million in surplus cash levels over a short period time, several months, because of the amount of cash that we're getting in. So we're trying to put -- keep our money to work without taking too much duration risk.

But loan growth is the name of the game, quality loan growth, and M&A. And the M&A side is -- we have to -- unfortunately, there is still this bid-ask spread, and it is just not coming to us as fast as we would like.

We are having a lot of conversations. We are meeting with a lot of different people, and I think we are always on the list of -- at least within California, we are always on the list of the smaller banks to come and talk to because of our currency and I think the overall success of the Bank and consistency of the bank for the past 35 years.

That makes sense. Thank you very much.

Aaron Deer, Sandler O'Neill.

Sorry to drag out the call. Just one quick cleanup question; on the noninterest income breakout, the other line dropped by a little over $1 million from that level where it had been running over the past couple of quarters. Just wondering if there was some noise in there, or what we should expect for that line item going forward.

Yes, you know what, that is a really important area for us. In the fourth quarter we did have a little drop over the third quarter. One of the areas that we are feeling little bit more -- we feel it is going to be a challenge to increase fees in 2013 is in our merchant bank card area.

A lot of those -- that is getting -- the payment processing area and so forth is getting more competitive on a price basis all the time, so we're having to do stuff, having to lower prices, just like we are on our commercial real estate loans, to maintain that. So we did have a decline in that area.

And then what are the other components? I know there was a few others -- where are those lists? This is not what I'm looking for here.

And we also -- we also -- our trust business, our fees were down a couple hundred thousand dollars quarter-over-quarter in the trust area, and we are working hard to rectify that going forward. In fact, we have hired -- in the middle of the year we hired both a new Chief Investment Officer and a new head of Citizens Trust, and we really feel these two individuals are doing a great job and getting the trust company positioned for growth in 2013. So we have had a little transition here, and then -- and our service charges were also down little bit in the fourth quarter, not material, but a little bit down.

Okay, thanks, Chris.

(Operator Instructions). It appears that there are no further questions at this time. I would now like to turn the call back over to Mr. Myers for any closing remarks. Sir?

Yes, thank you. And thank you all 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 2013 earnings conference call in April. In the meantime, please feel free to contact me or Rich Thomas and have a great day. Take care.

And we thank you, sir, and to the rest of the management for your time, and you also have a great day. The conference has now concluded. Again, we thank you all for attending today's presentation. At this time you may disconnect your lines. Thank you and take care.