CVB Financial Corp. (CVBF) Q1 2013 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the First Quarter 2013 CVB Financial Corp. and its subsidiary, Citizens Bank -- Business Bank Earnings Conference Call. My name is Jessica and I am your operator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Christina Carrabino. You may proceed. Ms. Carrabino, you may proceed. [Technical Difficulty]

Good morning, ladies and gentlemen, and welcome to the First Quarter 2013 CVB Financial Corp. and its subsidiary, Citizens Business Bank Earnings Conference Call. My name is Jessica and I am your operator for today. [Operator Instructions] I would now like to turn your presentation over to your host for today's call, Christina Carrabino. You may proceed.

Thank you, Jessica, and good morning, everyone. Thank you for joining us today to review our financial results for the first quarter of 2013. Joining me this morning is Chris Myers, President and Chief Executive Officer; and Francene LaPoint, Senior Vice President and Controller. Rich Thomas, our Chief Financial Officer, is not on the call today due to a death in his family. 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. Speakers on this call claim the protection of the Safe Harbor provisions contained in the Private Securities Litigation Reform Act of 1995. For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from our forward-looking statements, please see the company's annual report on Form 10-K for the year ended December 31, 2012, 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 $21.6 million for the first quarter of 2013 compared with $22.1 million for the fourth quarter of 2012 and $22.3 million for the first quarter of 2012. Earnings per share were $0.21 for the first quarter compared with $0.21 for the fourth quarter and $0.21 for the year-ago quarter. The first quarter represented our 144th consecutive quarter of profitability and 94th 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 3.54% for the first quarter compared with 3.60% for the fourth quarter and down from 3.69% for the year-ago quarter. The yield on investment securities continued to decline, 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 refinancings, which have impacted the prepayment speeds within our current portfolio. We also continued to see competitive pressure on rates in all classes of loans, particularly commercial real estate secured loans. At March 31, 2013, we had $3.37 billion in total loans, net of deferred fees and discounts compared with $3.45 billion at December 31, 2012. Overall, noncovered loans decreased $62.8 million from the first quarter to $3.19 billion. The majority of the decline was due to the seasonality of our dairy and livestock portfolio. Covered loans decreased $16.5 million for the fourth -- for the first quarter to $178.7 million. Our dairy and livestock loan portfolio decreased by $49.1 million from the fourth quarter of 2012 to the first quarter of 2013, primarily due to the seasonal borrowing patterns of these customers, as they draw down on their line of credit during the fourth quarter and then repay them during the first quarter. January and February 2013 were slow months in terms of overall loan demand. However, we are now starting to see signs of improvement and our current loan pipeline appears to be gaining momentum. In addition, we are also seeing positive progress in our new single-family residential mortgage product, which we introduced in the fourth quarter of 2012. In terms of loan quality, nonperforming assets, defined as noncovered, nonaccrual loans, plus OREO, decreased in the first quarter to $68.5 million compared with $72.8 million for the prior quarter. We once again reported 0 provision for funded loan and lease losses for the first quarter. This represents the eighth consecutive quarter we have reported a 0 provision. The allowance for loan and lease losses was $92.2 million or 2.89% of total noncovered loans at March 31, 2013, compared with $92.4 million or 2.84% of outstanding loans at December 31, 2012. Net charge-offs for the first quarter were $223,000 compared with net recoveries of $374,000 for the fourth quarter of 2012. Over the last 4 fiscal quarters, we have recorded net recoveries totaling $296,000. At March 31, 2013, we had loans delinquent 30 to 89 days of $4.7 million or 0.15% of total noncovered loans. Classified loans for the first quarter were $319.5 million compared with $314 million for the prior quarter. The increase in classified loans quarter-over-quarter was due to an $8 million increase in our dairy and livestock classified loan portfolio. We will have more detailed information on classified loans available in our first quarter Form 10-Q. Moving on to covered loans. Covered loans represent loans in which we have loss-sharing protection from the FDIC as a result of our acquisition of San Joaquin Bank in October 2009. At March 31, 2013, we had $199.6 million in total covered loans with a carrying value of $178.7 million compared with $220.5 million with a carrying value of $195.2 million at December 31, 2012. As of quarter end, our remaining purchase discount was $20.9 million. Now I'd like to discuss deposits. For the first quarter of 2013, our noninterest-bearing deposits decreased to $2.37 billion compared with $2.42 billion for the prior quarter and increased from $2.12 billion for the same quarter a year ago. This represents an 11.6% increase year-over-year, completely organic. Noninterest-bearing deposits now represent 50.5% of our total deposits. Our total cost of deposits and customer repurchase agreements for the first quarter was 12 basis points compared with 12 basis points for the prior quarter. No change. At March 31, 2013, our total deposits and customer repurchase agreements were $5.19 billion compared with $5.16 billion for the same quarter a year ago and $5.25 billion at December 31, 2012. Our ongoing objective is to maintain a low-cost, stable source of funding for our loans and securities. Noninterest income. Noninterest income was $6.7 million for the first quarter of 2013 compared with $5.7 million for the fourth quarter of 2012. Noninterest income for the first quarter was positively impacted by a $2.1 million net pretax gain on the sale of 13 investment securities with a par value of $94.2 million and was reduced by a $4 million net decrease in the FDIC loss-sharing asset. By comparison, the loss-sharing asset decreased by only $2.6 million for the fourth quarter of 2012. Interest income and fees on loans for the first quarter totaled $46 million compared with $47.2 million for the fourth quarter of 2012. The $46 million for the first quarter included $4.4 million of discount accretion from principal reductions, payoffs, as well as the improved credit loss experienced on covered loans. This compares to $3.3 million of discount accretion for the prior quarter. So if the discount accretion was eliminated, interest income and fees on loans declined by $2.2 million for the quarter or about 5%. For the first quarter of 2013, we continued to see competitive pressure on our loan yields, resulting from the refinancing and repricing of commercial real estate and commercial and industrial loans at lower rates. Now expenses. We continue to closely monitor and manage our expenses. Noninterest expense for the first quarter was $30.8 million compared with $29 million for the fourth quarter. The quarter-over-quarter increase in expenses was primarily due to the release of $1 million in reserves for unfunded commitments experienced during the fourth quarter of 2012 and a $1.2 million increase in other noninterest expense. $1 million of this $1.2 million increase was due to an accrual for potential interest and penalties associated with previous year's federal and state income tax returns. Now I'd like to turn the call over to Francene LaPoint to discuss our effective tax rate, investment portfolio and overall capital position. Francene?

Thanks, Chris. Good morning, everyone. Our effective tax rate was 29.2% for the first quarter compared with 31.7% for the prior quarter. Our effective tax rate varies depending upon tax-advantaged income, as well as available tax credit. We benefited from $1.4 million of enterprise zone tax credits reflected during the first quarter of 2013. Now to our investment portfolio. During the first quarter of 2013, we provided an average of approximately $22.2 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 70 basis points. At March 31, 2013, investment securities totaled $2.39 billion, down $58.8 million from the fourth quarter 2012. Investment securities currently represent approximately 38.2% of our total assets. Our available-for-sale investment portfolio continued to perform well. During the first quarter, we identified 13 securities with a par value of $94.2 million that were experiencing accelerated prepayment speeds, resulting in a deterioration in yields. We elected to sell these securities, for which we recognized a net gain of $2.1 million. We used these proceeds to reinvest in additional securities. At March 31, 2013, we had an unrealized gain of $60.8 million in our total investment portfolio, down from $74.6 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 U.S. government. We also have 4 private-label, mortgage-backed securities totaling $1.1 million. We have been strategically reinvesting our cash flow runoff from our investment portfolio, carefully weighing current rates and overall interest rate risks. During the first quarter, we purchased $159.2 million in mortgage-backed securities with an average yield of 1.81%. Our new purchases of mortgage-backed securities have an average duration of approximately 4 years. Our present strategy is to keep cash levels at or near 0 to maximize our profitability. We currently are experiencing about $45 million to $50 million in cash inflow monthly from our securities portfolio. We also purchased $8.2 million in municipal securities during the first quarter with an average tax equivalent yield of 3.16%. Finding bank qualified municipal securities that meet our investment criteria remains challenging but still desirable. Now turning to our capital position. Our capital ratios are well above regulatory standards and we believe they still remain above our peer group average. Our March 31, 2013, capital ratios will be released later this month concurrently with our first quarter Form 10-Q. Shareholders' equity increased by $5.2 million to $768.2 million for the first quarter. We continue to look at many different opportunities to deploy our capital and liquidity. During the first quarter, we redeemed 50% of the outstanding capital and common securities issued by CVB Statutory Trust II in the amount of $20.6 million. The cost of these securities was 3 months LIBOR plus 2.85%. This will save us about $600,000 annually. And on April 7, 2013, we also redeemed the remaining outstanding capital and common securities issued by CVB Statutory Trust II in the amount of $20.6 million. This will save us another $600,000 annually. I will now turn the call back to Chris for some closing remarks.

Thanks, Francene. Many of our investors ask questions about the dairy industry and I'm sure a lot of you have read recent articles in various publications about the state of the industry. Our dairy and livestock clients continue to experience a difficult operating environment. Milk prices are up but high feed costs continue to put pressure on profit margins. According to the California Department of Food and Agriculture, the CDFA, data for the fourth quarter of 2012, feed cost in California represented 66% of total milk production costs compared with 65.4% of total milk production costs for the third quarter. It seems that the most profitable dairy farms tend to be the larger operations, with the capacity to grow their own roughages for feedstuffs. Now let's talk about the California economy. Employment is up across the state and across a diverse set of industries. According to the state's Employment Deployment division, the California unemployment rate fell to 9.6% in February 2013 compared with 9.8% in January and 10.8% back in February 2012. Local economists are forecasting 2% job growth for 2013. According to various reports by local economists, real estate has been one of the major shifts in California's economy over the past 12 months. The residential real estate market, including both home ownership and rentals, has become a growth driver. The median price of an existing single-family home increased 23% last year in California overall and 19% in Southern California. Hotel occupancy, room rates, airport traffic and port exports all continue to improve. Tourism is certainly a bright spot with hotel occupancy rates over 70% in February. This exceeds the national average of 62%. Overall, California appears to have turned the corner from the depths of the Great Recession. We have recovered slightly more than half of the jobs lost during the economic downturn and almost every economic indicator continues to show improvement, albeit slow. We still have ways to go but there is a reason for optimism about the future. In terms of business strategy, we remain focused on quality loan growth, fee income growth, increasing core deposits and driving operating efficiency. These 4 areas represent our organic growth opportunity. On the mergers and acquisitions side, we continue to have discussions with numerous banks about their future plans. As margin and regulatory pressures mount, we feel more M&A opportunities may come our way in the future. And that concludes today's presentation. And now, Francene and I will be happy to take any questions that you might have.

[Operator Instructions] As there are no questions, we would like to turn the call back to Mr. Myers.

Okay. I guess I'm a little surprised you don't have any questions. Why don't we check on that again if we can, operator, just to see if there are any questions queuing up? Maybe there's a delay or something because usually we have several questions but -- so let's give it another minute or so.

[Operator Instructions] Our first question will come from Hugh Miller from Sidoti & Company. Hugh M. Miller - Sidoti & Company, LLC: Just I guess, you commented on kind of -- in the press release you talked about some of the challenges for loan growth and then you commented on the call how, late in the quarter, you were seeing kind of a pickup in the pipeline. Could you just give us some color on kind of anything in particular? Is there a specific product that you're seeing it more with and what you think is changing that sentiment and your expectations going forward?

I don't know what it was but we got really concerned in January and February because we booked more new loans in March than we did in January and February, total. So that's unusual, that 1 month would total more than the previous 2 months. And I don't know whether that was because of all the year-end issues concerning the whole budget and so forth, negotiations that were going on and I just don't know what it is. But it really has picked up tremendously and we have a good pipeline going into April right now. So we're feeling a little bit relieved with that. We weren't pleased with the quarter-over-quarter decline in loans, although we knew we had a $50 million headwind in dairy and we were still down a little bit from that. But we think things are picking up right now and we're feeling cautious optimism, I guess, is the best way to put it. Hugh M. Miller - Sidoti & Company, LLC: Okay. I mean, would you say, though, that kind of you'd characterize it as pickup given the slowness in the prior months? Or I know you have kind of roundtable meetings with your clients. Are you noticing a change in sentiment from their standpoint and a willingness to kind of borrow and grow their business operations? Or is that kind of status quo?

Yes. I think we are seeing a pickup and more activity. What we're not seeing is a lot of these business owners, when we meet with them, talk about how they're hiring a lot of people. They're still pretty cautious about the hiring side. There's still a lot of questions about what's going to go on with taxation, about health care, about QE3, QE, whatever is going to happen there in terms of interest rates. And so that uncertainty, I think, is still somewhat of a cloud. But what -- we have more irons in the fire on the lending side. And on the residential real estate, we're seeing -- we have a good pipeline there. We're seeing that pick up and we're getting really excited about that. Not that it's going to be a huge windfall for us, but it's just another kind of base hit along the way. Our commercial real estate pipeline is very strong and our C&I pipeline is -- and we've really put a lot of effort into C&I. We hired a new head of asset-base about -- asset-based lending about 9 months ago. We've hired some other C&I lenders. We've hired another credit administrator on the C&I side. So we're seeing more pickup on the C&I side, too. So we feel good about that. And same thing on the Equipment Leasing side or equipment financing side. We're seeing a little pickup there. So we feel like those 4 areas, we're seeing some positive trends and some positive pipelines on. Hugh M. Miller - Sidoti & Company, LLC: Okay, great color there. And then just on the follow up. On the M&A side, I mean, you commented about how, with kind of rising regulatory costs, you could see more opportunities in the coming quarters. But are you seeing kind of that concern starting to play a factor in kind of the sellers' expectations? Any kind of change in the discussions and the tone of those that you're having relative to prior quarters?

Well, I'll tell you, the first quarter of 2013, we looked at more deals coming around the bend here. They were all small deals, though. And we actually went and did due diligence on one deal. And so we are -- in terms of that, we're not going to get to the finish line on that one. But that's a good sign. We're seeing more and more activity. We feel optimistic about it but I still think there's -- it's the smaller deals we're seeing so far. Smaller being defined as under $500 million in assets. And as we see this continue, and we -- and we're confident that we see interest rates stay where they are and pressure on profit margins and all of the things going along with the regulatory world and Dodd-Frank and compliance and all of those same [ph] things, it's going to put a lot of pressure on earnings in smaller banks. It's going to put a lot of pressure on earnings on all banks. But the larger you are and the more teeth you have into your clients, the better you're going to be able to endure it. So we're thinking that's going to put more pressure and create more opportunities for us. And we did see more activity in the first quarter in terms of looking at different deals, no question.

Our next question comes from Julianna Balicka of KBW. Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division: I have a couple of questions, kind of continuing on the conversation about the loan growth. On the single-family residential product, are you portfolio-ing that? Are you thinking about having any gains on sales there or anything like that?

Right now, we're portfolio-ing all of it. It really is, Julianna, kind of a precursor to what we hope to be doing more formally in a year or 2 from now. And that is have a full-pledged private banking operation here at the bank. So we're getting this mortgage product set up. It's more focused towards jumbo loans than it is your more conventional loans. I think our average loan size of what we've booked in this program is running somewhere around $900,000 in -- per loan. And so it's all going on our books. Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. Very good. That makes sense. And then in terms of loan yields, 2 quick questions in there. One, a housekeeping question. What was the prepay fees within your loan interest income this quarter? And two, within the decline in loan yields, where are your new loans coming in at? Or how should we think about the run rate there because it looks like everything else seems to be doing pretty well in terms of margin?

Yes. I'll give you a whole bunch of numbers here. In 2011, we had $1.8 million in prepayment fees -- loan prepayment fees. In 2012, we had about double that, $3.7 million. And we had about $954,000 in prepayment penalties in the first quarter. So we're running pretty close to where we -- what we did last year on a quarter-by-quarter basis. We're actually up a little bit. The first quarter of 2012 was $869,000 and we did $954,000 in this quarter. Now that's a good sign and it's a bad sign. The good sign is it's good to get those prepayment penalties because they drop to our bottom line. The bad sign is we're still having to refinance these loans and reprice these loans along the way. I'm hoping this is going to slow down in a couple of quarters because I would like to -- as much as we like those prepayment penalties, it means that we're either losing a loan or we had to reprice a loan. And typically what we're seeing on the repricing side is -- I don't want to give away any of our pricing strategy but we're seeing about a 1.5% differential between the loan that was on our books and what we're repricing it to in the future. I'd say that's kind of the average difference. And most of our prepayment penalties have about a -- approximately about a 3% of the notional amount of the loan prepayment penalty embedded in there.

And our next question will come from Doug Johnson from Evercore Partners.

Just a quick question on the sale of the securities with accelerated prepayments. Just wondering when that took place in the quarter and kind of what was the yield pickup from the securities sold versus securities reinvested?

I believe we did -- Francene, was that -- when we did do that? It was -- okay. Mid-February is when most of the securities were sold. Some late January. I don't know if I have the number on the difference in the yield between what we purchased and what was the previous yield on those securities. Do you have that number, Francene? We can get back to you on that. I don't know if I've got that handy here amongst our deal. But the logic there is we have some good advisors that we're able to rely on and we constantly are looking in our portfolio and seeing what we can do to prune that portfolio. And the concern is, is that if we anticipate there's going to be accelerated prepayment fees, we might want to harvest some of these gains. And there were 13 different investment securities that we had -- we sold. Not all of those securities were in the money. Most of them were but not all of them were in the money. Some of them we sold as a loss. In fact, I think, it was 3 out of the 13 we sold at a loss and the rest of them we sold at a gain and then balanced out that $2.1 million pretax gain overall.

Got it. Just so with that benefit and the loan yield pressure you talked about, should we think about the margin compression going forward as kind of similar, in that kind of 5 to 6 basis point range on the core margin going forward?

It's really tough to project that and a lot of it is going to have to do with where are -- we have about $50 million that's running off per quarter in our investment security portfolio. And how we redeploy that $50 million per month -- I'm sorry, I said $50 million per quarter, I meant $50 million per month, about $150 million per quarter. How we redeploy that, whether it's redeployed in the loans or securities, et cetera, et cetera, will have a lot to do with that number. And also prepayment penalties will have to do -- have something to do with that number, too, because that gets embedded in our interest income there, too. So I don't know if you can, like, project out 5 basis points a quarter going forward. I do think there's pressure on that but we're working hard to try to keep our margin in that 3, mid-3.5 range. And some of that's within our control and some of that's beyond our control as we're out there trying to redeploy all this cash flow that's coming our way.

Got it. Just quickly moving to expenses. I noticed professional services jumped a little bit and that has been declining pretty nicely throughout the last year. So it was $1.6 million this quarter. Should we expect that to kind of come down back to that $1 million range? Or was there kind of something unusual in there? Or how should we think about that?

Yes, no. Very good question. And there's lumpiness in our professional services and that has to do with, primarily, with our securities lawsuit. And the securities lawsuit, at different times, we were spending more money on attorneys than others and we just -- let me give you a quick update on where that is because -- this may take a minute but I think it's probably good for all of our shareholders to hear this. So the shareholder lawsuit, we really can't comment on the substance of the 2 -- the 2 cases, the shareholder lawsuit and the derivative lawsuit but I'll give you kind of where we are procedurally. As you may recall, the judge in the federal class action dismissed the plaintiffs' initial complaint in January of 2012, holding that it did not meet the pleading thresholds under the Private Securities Litigation Reform Act. The plaintiffs then filed an amended complaint in February 2012, this has been going on for a while, and we filed our motion to dismiss in March of 2012. The judge then held a hearing on the amended complaint in June 2012 and issued an order dismissing the amended complaint this past August. So that's 2 dismissals. However, the judge did give the plaintiffs leave to make a third attempt to plead a case against CVB Financial and so the plaintiffs filed a second amended complaint, which is really the third go around, in September 2012. The following month, in October 2012, we filed our third consecutive motion to dismiss the latest version of what is basically the same set of claims. The hearing on our motion to dismiss took place in February 2013. So we had to prepare for that. That's what the legal expenses are. Sorry for the long answer. And we're awaiting the issuance of the court's decision. And as long as this action is allowed to continue, we intend to continually -- vigorously contest the plaintiffs' claims, which we believe are entirely without merit. Now when you look at this, you'd say, well, that's an expense for us but the vast majority of the securities lawsuit is reimbursed to us through insurance. And so you're going to see some lumpiness month over month or quarter-over-quarter. We may have a higher quarter and then a lower quarter because we're getting reimbursed. So we spend our money in, say, February and so forth and pay our bills in February and March. We may not get that vast majority of reimbursement until April or May or something like that from the insurance company. We're going to see some lumpiness but overall, we feel good about professional services. We feel like we've got it, knock on wood here, of course, but we feel like we've got it pretty contained and I think you're going to see some good numbers in 2013. I think that's -- I'm not concerned about that accelerating on us at this time overall for the year.

Got it, great. And just one last question on the tax rate. What should we -- how should we think about the tax rate going forward? I know you had the credit this quarter.

Yes, and -- we did. We had enterprise -- some enterprise zone credits, which lowered our tax rate for the quarter. And in general, without any noise in there, we're probably looking at an effective tax rate of somewhere 33, 34 percentage maybe 35%. I think that's probably a little high, if anything. But somewhere in that area is kind of our normalized tax rate. Now remember that -- a lot of that depends on how much -- in munis we have vis-à-vis our other income. And if we grow our other income, our tax rate is going to go up. And if we grow our muni income, then our tax rate is going to go down. So it's a little bit of a balancing act there. We're trying to find more munis. I think we bought about $9-plus million.

$8.2 million.

$8.2 million. I've been corrected. $8.2 million in the first quarter of munis. And that's about an offset to the runoff we're having. Maybe we had a little increase in munis for the quarter. But we're trying to find those munis but we're very particular about what we're buying and we also have to look at the yield we're getting on those munis.

[Operator Instructions] Our next question will come from Robert Greene. Robert Greene - Sterne Agee & Leach Inc., Research Division: Quick question on credit quality. Obviously, there are some puts and takes here but total MPAs were, call it relatively flat, although there were a couple of moving parts. The loss content overall, very low. And once again, you guys didn't put up a provision in the quarter. So I'm just wondering kind of going forward, sort of how to think about core improvement in problem assets and kind of your comfort around where your absolute reserve levels are?

Yes, I think we're still not -- we're still seeing some loans go into nonperforming. So it's not like it was back in the early 2000s and so forth where you really saw nothing go in quarter-over-quarter. There's still a little bit of noise out there. We are moving some things through the process pretty quickly and we sold some OREO properties this quarter, which is good. We've been managing this stuff very closely. So I feel pretty good about our trends. We were down slightly quarter-over-quarter in terms of nonperforming asset and nonperforming loans, as well. The -- what we're also seeing as real estate prices improve, we feel like -- we feel that there -- we have hope that we may be able to see future OREO gains from where we've marked some of these loans on properties that in OREO. But I don't have any more color for you in that. I just feel like prices are coming up a little bit and firming up, and that should help where we marked these things down 2 years ago, 3 years ago, and have continued to assess them. Because we do reappraise those properties, typically, that are nonperforming or in OREO anywhere from 6 months to 1 year, we're getting new appraisals on them. Robert Greene - Sterne Agee & Leach Inc., Research Division: Okay. And I guess a follow-up to that would be just regarding the reserve. It's kind of been in the high-280s range for most of 2012 and obviously the first quarter here. Just trying to think about how you guys look at the reserve level, if there's like a specific target or if you plan on taking that down at all?

Well, ideally, what we'd like to see is a little bit of improvement in the economy and then we grow the loans and then we still don't have to reserve as those loans grow because the economy is improving. That would be the great -- the best scenario and not have to release reserves. But right now, we feel our reserves are fully adequate. And I do think that there could be future pressure on us in terms of where our reserves levels are if the economy continues to improve and we don't grow loans because we have a, historically -- in terms of 2.8% or 2.9% or whatever, that's a high level historically. And when you have 4 quarters where you have a net recovery, in aggregate over those 4 quarters, that's going to be a factor here sooner or later. Robert Greene - Sterne Agee & Leach Inc., Research Division: Understood. And then...

We feel pretty good about the reserve, I guess, is the one sentence answer. Robert Greene - Sterne Agee & Leach Inc., Research Division: Right. I guess basically keep it flat and then let it come down via the higher balance sheet.

Yes, absolutely, and an improved economy would have to go along with it because there's a lot of metrics that go into that reserve. I mean, we're looking at all kinds of factors that go in there. And one of the things that you'll see is that, what's probably keeping that reserve a little -- keeping us feeling that reserve in that 2.8%, 2.9% level is the dairy business -- we have increased our reserves over the last several quarters in the dairy business because of the high feed costs basically. And I think our dairy reserves are -- if you look at all-in both in direct reserves and our undispersed reserves, or unfunded reserves, if you will, we're close to, I think, $24 million, $25 million just on the dairy piece in terms of reserves on a portfolio that is $400 million-ish if you include both real estate and dairy. So that's a pretty high number. Robert Greene - Sterne Agee & Leach Inc., Research Division: Terrific. Just one more follow-up on some of your M&A commentary. As you've talked about sort of the pipelines being better going forward 2013, that's kind of been a theme that we've seen throughout earnings so far. And I'm wondering with maybe an improving economic outlook, loan pipelines are better, bank valuations are higher. I know there's been sort of an evolving discussion between buyers and sellers. But now that the outlook is, perhaps, a little bit brighter, has that changed the tone, the tenor of your discussions? Have the goalposts moved at all?

No. I think it's too early to assess that. I mean, I think, we're all talking about our pipelines feeling better. But I don't think we're all feeling our pipelines are better for month after month after month. This is just -- we're -- I mean, for our point, it's really the last 45 days. So I'm not willing to declare the war is over here. It's still a grind out there and I'm hoping that it's not some type of release from depressed loan demand in January and February. I'm hoping it's something that's going to be sustainable. But I don't know if we fully see that. The other thing is, I think, when we look at some of the earnings that are out there, especially of these -- some of these banks, a lot of their earnings improvement 2012 came from credit improvement. And so when I look at the financials and I project forward what they're going to earn with some of these smaller banks that we've taken a look at so far, I look at their earnings as being very flattish to maybe even down. And the way that they're harvesting some of these earnings are through security gains, too. So once you strip out the onetime nature of what's going on there, I don't -- vis-à-vis the credit improvement and/or security gains, when you peel back the onion, I don't see their profits. Most of them, they're not improving. And so they're kind of -- it's an offset of maybe they're growing a little bit and they -- but it's offset by the fact that their loan yields are coming down and/or security yields. Robert Greene - Sterne Agee & Leach Inc., Research Division: Okay. So I guess that in the sense that there might be a little bit more light at the end of the tunnel here, it's not really changing sort of the thought process of potential sellers?

Yes, I don't think so. I think there's still a lot of pressure on banks to consider a strategic alternative, especially if you're under $1 billion in assets, particularly if you're under $0.5 billion in assets.

Our next question will be a follow-up question from Julianna Balicka. Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division: I have a couple of follow-ups real quick, please. On the deposit growth, which was down this quarter, is that seasonal or what are your thoughts about the deposit growth trajectory?

Yes, there is some seasonality, to it. The first quarter is always a softer quarter for us. But I also think it was compounded a little bit by a lot of the estate planning and tax planning that went on at the end of the year in December. We saw a big rise in our deposits in November and December of 2012 and that moderated back in January, February and it's climbing back right now. So we were down in noninterest-bearing deposits and I believe slightly down in total deposits but I think that was more a function of we had really strong growth at the end of the year, which I think some of that was artificial growth, too, all the stuff that's going on with the whole -- the budget and everything that was going on around there and people's insecurity about that. Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. That makes sense. And then, in terms of the securities gains on -- the gain this quarter, obviously, makes a lot of sense. In terms of thinking forward, as you start seeing gains -- or not start seeing, as you have gains in your portfolio, how are you thinking about exercising some of that? Should we expect a little bit more of that activity this year?

I don't think we're going into the year saying, "We're going to replan on harvesting gains from our securities portfolio on an ongoing basis." But I think, situationally, we have to take a look at things. And as our advisors bring us ideas and say, "Listen, you ought to be looking at the prepayment fees on these different securities as, number one, you're -- these are going to prepay faster and it's causing -- it's damaging your ongoing loan yield." And we have to make a choice, do we want to hang with it? Or do we want to go ahead and harvest some of those gains and move forward? So it's a balancing act and we could do this again but it's going to be very situational and it's not part of our budget, put it that way. Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. That makes sense. And then a final follow-up I have is on the capital with the TCE of 11.44. I mean, I know you're working hard to kind of revamp loan growth but that takes time. So is there a point where you might revisit the idea of buybacks as growth kind of takes time to accelerate and you continue to build capital?

Yes, one of the things we've been able to do is repurchase some of our trust preferred and I think that, if you saw our announcement, we -- in the last really, I guess, 100 days, we've repurchased a total of $41.2 million in trust preferred. So that's kind of a way we've been able to -- we did that for 2 reasons: one is to reduce our ongoing debt load or expense load for that, and then also to deleverage our balance sheet. Even though that's considered equity now, in the future, it won't be considered equity. But the whole trust preferred repayment thing, we're really out of gas on that. We're down to about $25.7 million or something like that in trust preferred left and the last piece that we have in there is priced at 3 months LIBOR plus 1.38%, which right now is somewhere around 1.70%. That's pretty cheap money on a trust preferred side. The stuff we repaid was 3 months LIBOR plus 2.85%, which is running somewhere around 3.10% or 3.15%. So big difference in the cost of those 2. So I don't know that we'll repay the remaining, or at least in the foreseeable future repay the remaining trust preferred, the remaining $25.8 million or $26 million or whatever it is in trust preferred. As far as repurchasing stock, we'll look at that situationally. And part of that is going to look at the opportunity of what's out there to purchase vis-à-vis where we're trading. And ideally, we'd love to be able to buy a bank that's trading at a lower level, a lower multiple than our multiple and make it accretive acquisition and then hopefully take their clients and expand the relationships and make it a double win by doing that. So that's the strategy right now. We're really repurchasing our stock and -- or doing some type of special dividend is on a back burner.

Our next question will come from Gary Tenner. Gary P. Tenner - D.A. Davidson & Co., Research Division: Chris, you had talked about the California economy a little bit in general. I wonder if you could comment on the Inland Empire market, warehouse absorption activity there relative to what you're seeing on the more coastal markets.

Yes, I think -- let's talk about commercial real estate first and then we can talk a little bit about residential real estate. And this is not all science. This is -- some of this is feel and talking with our clients but it's also some -- embedded in looking at a few local economists that give us information. But in general, the industrial market has improved. It hasn't improved as dramatically as the residential real estate market in Southern California but it has improved and vacancy rates are down. The Inland Empire has improved as well, particularly the larger facilities. When you get over to 100,000 square feet plus, the vacancy rate really goes down quite a bit. So there's -- and that's just because of the large distribution companies that have warehouses here in the Inland Empire and then there's still a demand for that. A lot of that maybe Internet-based companies, where they're shipping things out from a central warehouse here, located in the Inland Empire. In general, prices have firmed up more in the infrastructure mature areas and that typically is closer to the coast. So your coastal comment is a good one. And the further east you get in California, the more the vacancy rate seems to increase, although I will say the Inland Empire is -- particularly the western portion of the Inland Empire is behaving much like L.A. County. And so that's a good thing. Also remember, in terms of our loans, we have almost 2x as many loans in L.A. County than we do in the Inland Empire. So we've tried to be careful about where we're lending in the Inland Empire geographically and by product type, too. Office is softer in the Inland Empire than it is in L.A. County, in Orange County, no question about it. And same thing with retail. Now on the residential side, residential is very -- when you get close to the coast, boy, the prices have really firmed up and you're getting multiple offers on properties in the nicer, more affluent areas. I think in the -- earlier in the conference call here, I mentioned that, I think, year-over-year we're 23% up. The median home price in California is up 23% year-over-year and 19% in Southern California. Remember, that statistic is a little bit misleading because it really has -- a lot has to do with the stronger part of the market is -- or the higher end of the market is improving, I think. Not the high, high end but the medium-high end is improving in a big way. And that tends to be closer to the coast. And a lot of that is a function of these low interest rates and affordability.

Our next question will come from Aaron Deer. Aaron James Deer - Sandler O'Neill + Partners, L.P., Research Division: I think most of my questions have been used. I just want to follow up once on the expense side. Excluding the tax item that you had this quarter and I guess the negative provision in the fourth quarter, your run rate on the expense side has kind of been running right around $29 million on a core quarterly basis. Is that -- is it -- are you going to continue to kind of target that level? Or are there any sort of investments that you have planned for this year that could send that higher?

Yes, good question. And we're overall projecting pretty flat expenses for the year and obviously, that's a moving target as things -- as situations come up and we look at opportunities. And I think we'll try to orient it more of our expense spend on offense and trying to build out infrastructure and do some things there. But at the same time, we're seeing -- we're having to spend more dollars on technology than ever before. And so that is an expense need of ours and technology in all facets from our products that we use to service our clients to also fraud prevention and so forth. But conversely, we're also looking at reducing our brick-and-mortar expense. So you've seen us close some offices or I guess consolidate some offices over the last year and we'll probably continue to do that situationally. It's not something we're going to have -- you're not going to pick up the paper and read that we've closed 10 offices next month. But at the same time, we are situationally looking at brick and mortar and where we can be more efficient. And the fact is, is that more and more of our clients are simply just not coming into the branch anymore, especially the higher-end clients.

[Operator Instructions] At this time, there are no more questions. So I would like to turn the call back to -- I apologize, there is a question that has just come into the queue. Our next question will come from Tim Coffey.

You were -- a little earlier, you were talking about having [indiscernible] redeeming some trust preferred securities and I'm wondering are there other ways that you have to deleverage the balance sheet? I remember a couple of quarters ago, you took a prepayment related to a loan and there was some discussion about doing that again. Is that off the table or are you still examining the possibility of redeeming that similar-type loan?

The real 800-pound gorilla out there is we have $200 million in Federal Home Loan Bank debt at 4.52% that matures in November 2016. So we've got basically 3 years and 7 months left on that. That 4.52% is gut-wrenching for us, right? It's -- just in quick math, that's $9 million a year that's costing us as opposed to funding it from our deposits, which is 12 basis points right now. So big, huge difference there. The problem with that is we checked our prepayment penalty a month or so ago, and it was like $28 million. So when we look at that and the remaining duration of over 3.5 years left on that, there's just too much risk right now for us to consider, hey, we're going to take a $28 million hit to pick up $8.5 million, $9 million a year and feel comfortable that rates are going to stay exactly where they are for the next 3.5 years. If that had a shorter duration to it, 2 years, like our other piece did, like with -- I think that had about a 2.5-year remaining duration when we paid that off in last August, September of last year, that $250 million and took a $20 million prepay, we'd probably feel more inclined to do it. But with 3.5 years plus left on there, there's just too much risk in us prepaying that, that if a year or 2 from now rates jump up we feel like we would have made a bad decision.

[Operator Instructions] As there are no additional questions, I would like to turn the call back over to Mr. Myers.

Well, thank you, everyone, for joining us on our call today. We really appreciate your interest and look forward to speaking with you again on our second quarter 2013 earnings conference call in July. In the meantime, please feel free to contact me or Rich Thomas. And everyone have a great day. Take care.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.