CVB Financial Corp. (CVBF) Q2 2013 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Second Quarter 2013 CVB Financial Corp. and its subsidiary, Citizens Business Bank, Earnings Conference Call. My name is Gary and I'm 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.

Thank you, Gary, and good morning, everyone. Thank you for joining us today to review our financial results for the second quarter of 2013. 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. 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 $24.5 million for the second quarter of 2013 compared with $21.6 million for the first quarter of 2013 and $23.6 million for the second quarter of 2012. The $24.5 million in net income represents the highest quarterly earnings in our bank's history. Our second quarter earnings were positively impacted by the sale of one OREO property, which resulted in a $2.5 million pretax gain on sale and a $6.2 million recapture of loan loss provision, which lowered our overall loan loss allowance to 2.70% of non-covered loans. Earnings per share were $0.23 for the second quarter compared with $0.21 for the first quarter and $0.23 for the year-ago quarter. Through the first 6 months of 2013, we earned $46.1 million compared with $45.9 million for the 6 months of 2012. Earnings per share were $0.44 for the 6 months period ending June 30, 2013, compared with $0.44 for the same period in 2012. The first quarter represented -- the second quarter represented our 145th consecutive quarter of profitability and 95th consecutive quarter of paying a cash dividend to our shareholders. Based on our strong capital position and the stability of our earnings, we increased our second quarter's cash dividend from $0.085 per share to $0.10 per share. Excluding the impact of the yield adjustment on covered loans, our tax-exempt net interest margin was 3.46% for the second quarter compared with 3.54% for the first quarter and down from 3.77% 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 fees within our current loan portfolio. We also continue to see competitive pressure on rates in all classes of loans, particularly commercial real estate secured loans. The competitive pressure has forced us to lower rates on some loans in order to retain the business. At June 30, 2013, we had $3.34 billion in total loans net of deferred fees and discounts compared with $3.37 billion at March 31, 2013. Overall, non-covered loans decreased by $19.7 million and covered loans decreased by $4.9 million quarter-over-quarter. Our dairy and livestock loan portfolio decreased by $28.2 million from the prior quarter. This decline was a combination of us exiting troubled relationships and lost business due to competitive pressure -- competitive pricing pressure and/or structure. On the positive side, residential loans increased by $18.1 million and commercial real estate loans increased by $12.5 million. The market remains very competitive for new loan originations but the recent rise in long-term interest rates may moderate future refinanced pressure. In terms of loan quality, nonperforming assets, defined as noncovered, nonaccrual loans plus OREO, decreased in the second quarter to $59.9 million compared with $68.5 million for the prior quarter. Improved credit quality and improving economic factors resulted in a $6.2 million recapture of loan loss provision reflected in the operating results for the second quarter of 2013. For the previous 8 consecutive quarters, we have had 0 provision for loan losses. The allowance for loan and lease losses was $85.5 million or 2.70% of total noncovered loans at June 30, 2013, compared with $92.2 million or 2.89% of outstanding loans at March 31, 2013. Net charge-offs for the second quarter were $561,000 compared with net charge-offs of to $223,000 for the first quarter of 2013. At second quarter end, we have loans delinquent 30 to 89 days of $1.6 million or 0.05% of total noncovered loans. Classified loans for the second quarter were $304.4 million compared with $319.5 million for the prior quarter. We will have more detailed information on classified loans available in our second 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 June 30, 2013, we had $191.4 million in total covered loans with a carrying value of $173.8 million compared with $199.6 million with a carrying value of $178.7 million at March 31, 2013. As of second quarter end, our remaining purchase discount was $17.5 million. As a reminder, our loss-sharing agreement with the FDIC expires in October 2014. Now I'd like to discuss deposits. For the second quarter of 2013, our noninterest-bearing deposits increased to $2.52 billion compared with $2.37 billion for the prior quarter and $2.25 billion from the same quarter a year ago. This represents a $266.6 million or 11.8% increase year-over-year, completely organic. Noninterest-bearing deposits now represent a record 52.1% of our total deposits. Our total cost of deposit and customer repurchase agreements for the second quarter was 12 basis points compared with 12 basis points for the prior quarter. At June 30, 2013, our total deposits and customer repurchase agreements were $5.32 billion compared with $5.17 billion for the same quarter a year ago and $5.19 billion at March 31, 2013. Our ongoing objective is to maintain a low-cost stable source of funding for our loans and securities. Noninterest income. Noninterest income was $7.7 million for the second quarter of 2013, compared with $6.7 million for the first quarter of 2013. Noninterest income was positively impacted by a $2.5 million net pretax gain on the sale of one OREO property -- OREO property, excuse me. For the first quarter of 2013, we recognized a $2.1 million net pretax gain on the sale of investment securities. Also contributing to the quarter-over-quarter increase in noninterest income was a $3.4 million net decrease in the FDIC loss-sharing asset compared with a $4 million net decrease for the first quarter of 2013. Interest income and fees on loans for the second quarter totaled $45 million compared with $46 million for the first quarter of 2013. The $45 million for the second quarter included $3.5 million of discount accretion from principal reductions and payoffs, as well as the improved credit loss experienced on covered loans. This compares to a -- to $4.4 million of discount accretion for the prior quarter. So if the discount accretion was eliminated, interest income and fees on loans for the second quarter decline by $135,000 or about 0.3% from the first quarter of 2013, pretty flat. Now expenses. We continue to closely monitor and manage our expenses. Noninterest expense for the second quarter was $28.2 million compared with $30.8 million for the first quarter. The $2.6 million quarter-over-quarter decrease was partially due to a $1.2 million decrease in OREO costs, legal expenses and loan-related expenses. In addition, salaries and employee benefits, office equipment, maintenance and supplies decreased by $400,000 quarter-over-quarter. Now I'd like to 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 33% for the 6 months ended June 30, 2013, compared with 29.2% for the first quarter. The increase was due to higher taxable income related to current earnings trends. Overall, our estimated annual effective tax rate may fluctuate based upon the ratio of taxable income to total income considering tax-advantaged municipal bond income and nondeductible expenses. Now to our investment portfolio. During the second quarter of 2013, we purchased an average of approximately $136.9 million in overnight funds from the Federal Reserve and received a yield of approximately 25 basis points on collected balances. We also maintain $70 million in short-term CDs with other financial institutions, yielding approximately 70 basis points. At June 30, 2013, investment securities totaled $2.43 billion, up $40.8 million from the first quarter of 2013. Investment securities represented approximately 38% of our total assets. At June 30, 2013, we had an unrealized gain of $6.9 million in our total investment portfolio, down from $60.8 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 $828,000. We have been strategically reinvesting our cash flow runoff from our investment portfolio, carefully weighing current rates and overall interest rate risks. During the second quarter, we purchased $233.6 million in mortgage-backed securities, with an average yield of 1.99%. 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 $40 million to $45 million in cash inflow monthly from our securities portfolio. We also purchased $443,000 in municipal securities during the second quarter with an average tax equivalent yield of 4.31%. 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 June 30, 2013 capital ratios will be released soon concurrently with our second quarter Form 10-Q. Shareholders' equity decreased by $16.1 million to $752.1 million for the second quarter compared with the first quarter. The decline was due to a decrease of $31.2 million in unrealized gain on available-for-sale investment securities and a $10.5 million in cash dividends, offset by $24.5 million in net earnings and $1.3 million of various stock-based compensation items. I will now turn the call back to Chris for some closing remarks.

Thanks, Rich. Now let's talk about economic conditions. The dairy industry has been struggling through a period of industry downturn, which began in late 2008, early 2009 as a result of lower milk prices and higher feed costs. Milk prices have increased, but high feed costs continue to put pressure on profit margins. According to the California Department of Food and Agriculture, the CDFA, feed cost in California represented 66.9% of total milk production costs at the end of the first quarter of 2013 compared with 66% of total milk production cost for the fourth quarter of 2012. In looking forward, we are seeing signs that feed cost may be moderating. The future cost of feed is dependent upon many factors, which includes weather, both domestically and globally. Turning to the California economy. Recent evidence shows that California's economic recovery continues to pick up steam and is helping to drive the U.S. economic recovery. According to the state's employment development division, the California unemployment rate fell to 8.6% in May 2013 compared with 9% in April and 10.7% back in May 2012. Construction, aided by a rebounding housing market, has led the job gain so far this year. Tourism remains a driving force as well, with more than 62,000 new leisure and hospitality jobs added over the past year. According to various reports by local economists, real estate is perhaps the brightest star in California's economic landscape. The residential real estate market, including both home ownership and rentals, continue to be a growth driver. Median home prices continue to increase at a double-digit pace due to rising demand in inventory levels that remain below 3 months of supply. According to economists, the strength in housing market trend is expected to continue over the next 2 years before cooling to be more in line with historical averages. Most major indicators point to an ongoing recovery for California in 2013 and beyond. It is undeniable that the state has made the turn toward the good. We remain optimistic. On the mergers and acquisitions side, we continue to look at opportunities within, and/or adjacent to, our current footprint. We are optimistic that, as margin and regulatory pressures mount, more M&A opportunities will come our way. We hope. As we head into the final 6 months of 2013, we remain focused on quality loan growth and expanding our loan growth initiatives; increasing core deposits and driving operating efficiency. We believe our organization can grow organically and our job is to prove that to our investors. That concludes today's presentation. Now Rich and I will be happy to take any questions that you might have.

[Operator Instructions] Our first question comes from Aaron Deer of Sandler O'Neill + Partners. Aaron James Deer - Sandler O'Neill + Partners, L.P., Research Division: Chris, to start, it looked like you're getting some good loan traction in your resi mortgage portfolio. I'm guessing that that's part of your jumbo product initiative that you launched previously. I'm just curious, what kind of trends you're seeing in the other portfolios? If you're starting to see some building in the pipelines there? And what your outlook is for seeing some new growth?

Yes. You know what? I have to tell you, in the last, call it, maybe 45 days, we've become very, very optimistic. Our pipeline is strong. I think this move in interest rates, which -- we're looking at the 10-year Treasury, which is 90 basis points higher than it was 45 days ago or 50 days ago. That's a big thing for us. Because what was happening along the way is we were really having -- we were having some gut-wrenching decisions about keeping loans or letting them go out of the bank. And when a lot of the major banks would come in and price a 10-year fixed rate loan, particularly commercial real estate, but fixed for 10 years and they're pricing these things at the high 3s or 4%, it's gut-wrenching for us to really think that we're doing the right thing lending money on a 10-year fixed-rate basis at that price, particularly when it's amortized, usually, over 20 or 25 years. But this increase over the last 45 days is now putting that rate at 80 or 90 basis points higher, so the decision now is do we want a 10-year fixed rate loans in the high 4s or something like that out of commercial real estate. So we feel much more comfortable playing in that game. And so what you're seeing here in the last several quarters is us making those decisions on a case-by-case basis, and letting some runoff go because we just couldn't simply digest lending money at those rates. And now, we feel much more comfortable with that and our pipeline is building and I feel -- I have to tell you that I feel really optimistic, much more so than I did 45 days ago because of interest rates. Now obviously, we want to grow organically. We did grow organically, if you take out the dairy and livestock loans for the second quarter. And when we talk about dairy and livestock loans, let's also think about what's happened in that industry over the last 5 years. It's been -- it's really been a battle in terms of that business. It's been up and down, but more down than up. And we're very committed to the dairy business. But at one point between our dairy land loans and our commercial C&I dairy loans, we had about $550 million out the door 4 or 5 years ago. Today, we have $400 million in total outstandings. So that's $150 million in rundown. Some of that was potentially some lost business, but a lot of that was we had to exit some dairy relationships that we didn't think would get through the cycle. And for the first time in our company history, in 2010, we had dairy losses. But we've managed through that pretty well. And we're still under $6 million in total charge-offs to the dairy industry in our history. And that goes back to 1993. So I feel good about the pipeline. Obviously, it's month-by-month, day-by-day execution. But right now, I feel like the wind has shifted and I feel like the wind has started to push us at our back. Aaron James Deer - Sandler O'Neill + Partners, L.P., Research Division: That's great. Sounds very encouraging. And then just a couple of quick questions for Rich. When I was going through the press release, you had the comments in there about the enterprise-owned tax credits benefit in the first quarter. And that got me thinking, is there any ongoing benefit that you guys have in that, that we could see go away in 2014?

Well, Aaron, you may have read that California recently passed, and Governor Brown signed into law, AB 93, which reworks that whole enterprise zone and hiring credit pool of tax credits that have been given out. So it will have some impact to us because net interest deduction is being eliminated 12/31 of '13. And the hiring credits used to have 13 or 14 different categories that employees could be qualified under. And now, it's been narrowed down to 3 categories. And so we're still digesting AB 93 because it was just signed into law about a week ago and we haven't made any future calculations exactly how it may affect us, but it will have some effect on an ongoing basis. Aaron James Deer - Sandler O'Neill + Partners, L.P., Research Division: Can you put some size on what the total benefit is on a quarterly basis, so we at least know kind of what the worst-case scenario might be?

We haven't provided any future forecast information on that because it's just really new and we really haven't gone through the calculation to understand exactly what impact it might have. Aaron James Deer - Sandler O'Neill + Partners, L.P., Research Division: Okay. And then lastly, the -- I know the securities purchased over the past couple of quarters had something like a 4-year duration. I'm wondering, what's the duration on the overall portfolio at this point?

I think we're running close to between 3.5% and 4%. I don't have the exact number on me...

Not percent, he means years.

I mean, years, excuse me, excuse me.

3.5, 4 years? Is that right?

Yes, yes.

And one thing, Aaron, on the securities portfolio, you saw that we'd purchased around, what was it? Like $233 million in the quarter of mortgage-backed securities. I think something like that, right?

Correct, correct.

Well, if you look at those purchases, it really is weighted to the vast majority of it we purchased in June, and in fact, in late June.

Correct.

And because we didn't purchase much at all in April and May because you can -- I guess the easiest way to look at this is just look at the 10-year Treasury rate. You saw in March, the 10-year Treasury rate was in the high 1s, like 1.90% or something like that. It dipped down to like 1.66% or 1.70% in April and May, and then it rebounded back in June. So we weren't buying much at all in April and May. And really, our buying was in June, late June, as the 10-year Treasury started driving up and we felt like we could at least get some yield for our mortgage-backs because we started accumulating a lot of cash in April and May, and then we're able to put some of that cash to work and buy us some securities in June.

[Operator Instructions] Our next question comes from Keith Miller of Sidoti. Hugh M. Miller - Sidoti & Company, LLC: I just had a question about the shift in the yield curve and during the end of the quarter, you guys mentioned how rates were going up in step with the 10-year. But did you notice any differential in the degree to which competition was in some of those lending products? Did that start to abate at all with kind of the improvement in yields?

Hugh, absolutely. And that's why I'm feeling much more optimistic is that the -- it's really about a -- it's kind of the LIBOR futures curve. You can also look at the 10-year Treasury weight, and what does that. The big banks really depend on those future curves a lot in their pricing. And the bottom line is, is that the pricing pressure has really -- the game is now fair. I feel like -- whereas before, I felt like it was almost unfair, some of the pricing that was coming in on the competitive side from mostly the big banks. So absolutely. We feel like -- that's what I'm saying, I feel like we're -- our loan pipeline, we're -- is not only more robust but we're getting, on average, 75 basis points more on the same loan that we were making 60 days ago. Hugh M. Miller - Sidoti & Company, LLC: Got you. Yes, that, I understand. Okay. And then just as a follow-up. Can you just talk about the percentage of loans that you have right now that have floors in place? And how we should be thinking about that in terms of the potential weight from a benefit on the NIM from the steepening of the yield curve?

Yes. If you would've asked that question a few years ago, I would have said we have a lot of floors that we have embedded in our dairy loans and so forth. But most of the floors -- I mean, we still have floors in loans, but it's not a major impact for us. As rates rise, I just don't -- I mean, as rates rise or fall or whatever, those floors are not going to be that impactful for us. It just -- it isn't that much anymore. A lot of those floors, we've gone away from floors, we've just gone to pure variable rates.

Our next question comes from Robert Greene of Sterne Agee & Leach Inc. Robert Greene - Sterne Agee & Leach Inc., Research Division: I just had a -- just some thoughts on the securities purchases. Obviously, the absolute level of purchases kind of accelerated in the quarter, as did the, I guess, the new money yields. I was wondering, first, if you could just kind of give some commentary on what the, I guess, the reinvestment rates are coming into the third quarter now. And then, I guess, your thoughts on potentially keeping your powder dry if -- in the event that rates kind of tick up further from here.

I'll have Rick answer part of it. But I can tell you that as loan demand, and as our loan pipeline builds, we'll -- obviously, we would prefer to use our $45 million to $50 million-ish in cash flow that comes off the securities portfolio every month and deploy that into loans which are higher-yielding than our securities. But as far as what we're looking at purchasing right now, and if -- Rich, as far as an equivalent purchase to what we did in the second quarter, we were -- our purchase in the second quarter on mortgage-back securities, I think, were 1.99%. Is that what it was on average?

That is correct, that's correct.

So how are we looking at it right now a few weeks later from that, just in general?

I think as you've seen, Robert, the rates continue to bounce up and down with the market. But along with the yield that we're looking at, we're also looking at a number of other aspects when we buy a 15-year mortgage-backed, it's just kind of where we're concentrated on the securities book. But we're looking at state of origination. A lot of states have a higher prepayment speeds than others. We're looking at servicers, a lot of servicers. They redo their books, they refinance a lot of the borrowers out. So the prepayment speeds accelerate. And we're also looking at the components of the individual securities, the loan -- the average loan balances and securities, et cetera. It's easier to look at all those aspects when we're trying to evaluate whether to buy a bond at a yield that we're looking at. And then we're also looking at, as we described in the earlier discussion today, municipal securities. On a tax equivalent basis, they're running around 4.25%, 4.35% range on a tax-equivalent basis. But we have some very strict criteria. We're not just stretching for just to buy municipal securities. We're really looking for quality-type instruments and they're very difficult to find that meet the criteria that we're looking for. Robert Greene - Sterne Agee & Leach Inc., Research Division: Okay. I guess, part of my question was related to the big swing in AOCI in the quarter. If I'm looking at my numbers correctly, tangible book value was actually down very slightly because of the swing in the unrealized gain. And so I was just wondering, given that kind of swing there, would that cause you to maybe think about slowing down your securities purchases? Or is it just kind of full steam ahead?

Well, I think, as Chris indicated, we'd rather put the money out in loans. And he's also indicated that our loan pipeline is growing. So hopefully, that's going to allow us to let some of this $45 million cash flow from the portfolio to filter over into the loan portfolio that the yield, hopefully, a couple percent more in the loan portfolio than they would in the investment portfolio. But sitting on a lot of cash at 25 basis points is hard to swallow, too. So we're really looking at duration when we're buying securities, too. And we're really trying to forecast a pipeline of loans, et cetera, that we have out there with our sales division and our loan division. So we're really trying to make loans, first of all, but deploy our excess cash into securities where needed. And you know what? I think some of the loan initiatives is -- are kicking in. Our mortgage initiative. I mean, we had $18 million in quarter-over-quarter growth. And actually, if you look at that, it's a little bit higher than that because we have runoff from our mortgage pools that we purchased. In fact, it would've been -- I think if you take the mortgage pools out of there, the runoff on that was $4 million. So it was actually a $22 million organic growth in residential loans. Not that that's a huge difference. But we've got -- we feel like we have more oars in the water. We're moving our C&I lending, our asset-based lending. We've got good pipelines there. We did have some large payoffs in the second quarter of individual loans that got extremely price-competitive. One was a substandard loan that was paid off. And so, as you see, as you look at our nonperforming assets and our classified loans, they went down quarter-over-quarter. So I guess, we're getting more and more refined, it feels like. And we're hoping we can continue that trend and then take our excess cash. And I'd love to get to the point where we're growing loans by $50 million a month. We're not there yet, but we're working hard to get there and maintain the credit quality.

Our next question comes from Julianna Balicka of KBW. Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division: I have a couple of questions to follow up on some of the conversation so far. One, on the loan growth, you mentioned the large payoffs just now. And looking at your CRE loan growth, net loan growth of $12.5 million on your legacy portfolio, it sounds like the loan growth kind of truly started to come out and accelerate at the end of the quarter. So if you had, had a full quarter worth of improved rate and competitive environment, what -- I mean, how much would the growth have been? I mean, are we talking about 1 week worth of growth here at $12.5 million a month? I mean, you know what I mean?

Yes, I know. It's tough to say. There's no question throughout the quarter, we had good momentum. And we did have -- I mean, between -- literally, between 4 loans, we had $50 million in payoffs in the quarter. And that's very unusual for us. And when I mentioned the interest rates of the 4% and the high 3s percent rate on longer-term fixed rate stock, that pressure is -- we feel like it's now off our back because rates are higher. So we're -- we do feel like our pipeline is kicking in. It's the best pipeline we've had in quite some time and we're hoping that the consistency of that pipeline continues month-over-month and we get these loans booked. So we feel good about it. But it's -- obviously, it's still a -- it's every day, it's putting on your bootstraps and getting to work and then making sure we're executing. Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division: And then for the city slickers of us on this conference call, could you give us a little bit of -- how should we think about ag loans going forward next quarter and into fourth quarter? You said you have some intentional runoff this quarter, but what should the portfolio do on an on-going [ph] basis?

You know what? I think we're -- the dairy business, it feels like the dairies are going to make some money maybe in the second quarter and third quarter, and hopefully, into the fourth quarter. So that's a good thing. That will moderate some of the runoff pressure. Dairies need to make some money because they've had some choppiness along the way. And right now, milk prices are at a decent level and feed prices appear to be moderating. So some of these things, we've been able to work through. So I think that the more we work through the dairy -- the core dairies that we want to keep and the dairies that we're okay with them running off, and I think we worked through a lot of that already, the better off we're going to be to the point where we can actually start growing dairy loans and our agribusiness loans. And when we do have -- we're also focused on the agribusiness side because the farming business has been pretty strong over the last several years. And a lot of that is getting tied to dairy, too. Because some of our strategy in looking at dairy is saying, how much of the feed is each individual dairy growing of what they're actually consuming? So if you have a dairy that's having to buy all their feed, they're at somewhat of a competitive disadvantage to the competition in the volatility of commodity prices. But if the dairy is growing 50% or more of its feed, then you've got a dairy that's able to control some of those feed costs and stabilize profits. And those are the dairies that we're really trying to pursue from a marketing and a sales perspective. Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division: And so there isn't like a seasonal outflow that we should be looking for next quarter?

No. There's no -- the only seasonality in the dairy business is at the end of the year. Otherwise there -- at the end of the year, they borrow more money typically and then they pay it very quickly back in the early part of the first quarter. So it's really from the fourth quarter to the first quarter numbers where you're going to see -- fourth quarter numbers should be up from the third quarter, and then first quarter numbers should be down from the fourth quarter. But right now, we're in the nonseasonal part of that. So there should be -- it should be real growth or not real growth, quarter-over-quarter from the second to the third quarter, whatever that is. Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division: Got it. And then on the second topic, if I may follow-up, on the reserve release or -- you went from 2.9% to 2.7% reserve coverage. Now I know loan growth is improving, but all things being equal, if your loan growth weren't coming back, like where would your reserves have been going? And how far would you be needing to release reserves before you can pause?

It's just hard for us to -- when we look at our reserve, there's a pretty complicated methodology that goes along with that, and there's a whole bunch of factors that come in. And so what we do is we calculate all those factors. A lot of those factors are based on past losses and trends. Some are based on economic factors. But we have a whole reserve methodology that we've refined over the years that is obviously reviewed by our regulators and everybody along the way and our accountants, as well. And so, that methodology came out and showed to us that, you know what, our reserve was -- we needed to release some of that reserve in the second quarter. So on a quarter-by-quarter basis, we'll continue to do that. And as our nonperforming assets go down and our classified loans go down, yes, there could be more reserve release. If our classified loans go up and economic factors don't continue to improve, then maybe there will be no reserve release. So we just have to take that on a quarter-by-quarter basis and really are staying focused on the pure and trying to purify our methodology as much as we can.

Our next question comes from Doug Johnson of Evercore.

My question is on -- you mentioned prepayment speeds impacting refinancings in your loan portfolio. My question is, did that have any impact in terms of prepayment assumptions or premium amortization in your mortgage-backed securities book this quarter? It looks like yields were down quite a bit.

Doug, we look at our prepayment speeds on a monthly basis and we use a number of different avenues to provide us with prepayment speeds and estimated prepayment speeds, CPRs, et cetera, that we try to estimate the best we can. As you've seen with Chairman Bernanke's comments, there was some prepayment speeds that accelerated early in the year and kind of slowed down now somewhat, given that the interest rates have increased. But we monitor that on a very regular basis and make the appropriate adjustments every single month, as a part of our closing process of the general ledger.

So was that an incremental drag in 2Q versus 1Q?

I would say that there was some adjustments that were made in the second quarter because of the prepayment speeds, definitely.

I just want to say, but as rates are coming up here, wouldn't we expect prepayment speeds to slow, Rich?

As I indicated, they have been slowing recently in the last few weeks.

Yes, yes, it was just the last -- really, the last -- since early June, right?

Yes.

Right, right. So that could be -- potentially be a benefit, going forward?

Potentially.

Okay. And then just kind of rolling up all the commentary in the margin and the loan growth, et cetera, do you think we're at a point where the margin and maybe overall spread revenue has -- could stabilize or even increase going forward?

Well, it's tough to project what that margin is going to do. But I'll say this, is that is when we're looking at our loan pipeline right now from where we were 60 days ago, the average yield we're making these loans at is higher than the average yields were making 60 days. So if that trend can continue, we can keep doing that. And our cost of funds stay where they are. I mean, our cost of funds were flat quarter-over-quarter or actually a little bit down. But 12 basis points cost of deposits, 29 basis points cost of funds, there's not a lot of wiggle room in that. I think we've lowered our cost of funds and our cost of deposits kind of to where we we're going to be, maybe we can tweak a little bit here and there. But it really -- it comes down to our ability to grow loans, redeploy our securities into loans as the cash flow comes off, and that's going to help our yield. And that ultimately will lead us to the promised land of a better margin. But we've got to prove that game out for everyone, right? And we're working hard to do that.

Right, great. And I guess, just a final question related to the cost of funding, just any different thoughts, I guess, in that final FHLB? Are we still -- have the same thought process that kind of wait-and-see if the prepayment penalty is too high?

Yes. You know what? And just like a ballpark, we talk about this all the time between Rich, our CFO, and Francene, our Controller. We talk about that prepayment penalty. And I -- probably every obnoxiously to them, I ask, okay, what's the quote now? What's the quote now? But right now, it's about $22.5 million in prepayment penalties to pay that $200 million off. So it's just -- it's -- we're still, at least at this juncture, we had decided not to do anything there, but we talk about it quite frequently. And there could be a possibility that we might look at a piece of that in the future instead of doing the whole $200 million, do we do $50 million. But one of the problems there is there's still 3 years and 4 months left on that, I think, right? It matures in November 28, 2016. I have that date printed in the back of my brain. And the rate is 4.52% so it's pretty egregious. But if rates were to jump up a couple of years from now, we'd feel pretty stupid paying that large of a prepayment penalty. Now having said that, I just hate to have that extra cost of funds embedded in our cost of funds, I guess, or at least the cost of that in our cost of funds. Because I'd love to be sitting here funding everything off our deposits at 12 basis points.

Our next question comes from Gary Tenner of D.A. Davidson. Gary P. Tenner - D.A. Davidson & Co., Research Division: I have a couple of questions. First, on M&A. You briefly mentioned in your prepared comments but I just love to kind of hear with what is going on in the market, out in your neck of woods. And as part of that, as you guys talk a little more positively about the potential benefits of higher market rates and an improved loan pipeline, do you have a sense that possible sellers are maybe getting a little more optimistic and would like to see their way through it a little more so?

It's interesting because 2 quarters ago, I thought M&A was really starting to pick up and we were looking at a couple of opportunities and so forth. And then it seemed to die down a little bit. And now, we're starting to see some other deals that may be coming around the bend here, or hearing of deals that may be coming round the bend. And fortunately, I think we're in a good position because we trade at a good multiple over our tangible book. We have a lot of capital to deploy for an acquisition. And I think for the most part, people like our stock because we pay a healthy dividend. So we are -- I think we're one of a handful of banks that are looked at as a favorable acquirer. Plus, I think, in some respects, we're looked at as more of a friendly acquirer as we're not -- I think we've tried to culturalize banks over the years that we purchased into our cultural and tried to make 1 and 1, 3, as opposed to crashing and burn in the expenses even though we will be disciplined on expenses. So I guess, I'm a little schizophrenic in my answer here. But I think that there are going to be some more opportunities along the way, we have to stay disciplined in our pricing and -- but what's the differentiator between some of the other potential acquirers in our marketplace, the banks that are similar to our size, is we're very confident we can grow organically and build this bank by bringing in new teams of people, by growing our same-store sales, and all the things, the initiatives that we've had. I think some of those banks are not so confident they can grow organically, so they have to do an acquisition. So we're going to balance the 2 of those things and try to drive the top line income growth of this bank. So our challenge over the next 12 months is to reverse this declining top line income that we've been experiencing over the past couple of years and get that thing going in the right direction, because that's going to be what's going to drop money to the bottom line and help our stock price. Gary P. Tenner - D.A. Davidson & Co., Research Division: Okay. And then secondly, can you just remind us what percentage of your loans are linked to prime or short-term LIBOR?

You know what? It's -- I don't know if I have an exact figure of this. But we really look at anything from the variable to a 1-year LIBOR, adjusting 1 year or less. I think it's about 50-50. We're about 50% of that, as a ballpark.

[Operator Instructions] Our next question comes from Joe Stieven of Stieven Capital.

Actually, my question was on M&A and Gary just got it right in front of me.

Our next question comes from Julianna Balicka from KBW. Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division: I have a follow-up, please, on the tax question that Aaron asked earlier. To ask in another way, for -- in terms of your tax expense this quarter and last quarter, how much tax expense would you have had if you hadn't had your tax credits and other items that reduce your tax expense? Dollar amounts.

I'm going to say here on the tax provision, last quarter, we had about $1.4 million of tax credits that were -- that reduced our overall tax expense, primarily from the easy credits and hiring credits and the net interest deduction.

You know what, Julianna? I think if you saw the first quarter, I think our tax rate, effective tax rate was 29%. really, in a normal -- there's no such thing as pure normalization, but we've been kind of running around 33% on a balance basis on quarter-over-quarter here, 33%, 34%. And so that 29% in the first quarter was really because of those tax breaks. So it had a 4% to 5% effect in that given quarter. Now going forward and so forth, we just don't know what, if any, impact will have on that. Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division: So the $1.4 million is the only part that's like the variable that may or may not recur?

Correct, and that was a little bit of a recapture from prior periods, too, because it was a little bit of -- it was a little lumpier in that quarter than it should be going forward. That's for sure. Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division: And then this quarter, was there any -- is there a dollar amount we can put around the benefits that you've gained from your strategy?

I would -- this quarter, our estimate is, I would say, is about $200,000 in reduction of tax expense.

Due to the tax credits, Rich?

Yes, yes. $200,000. I seem -- okay, I learned something. Okay. So much lower.

[Operator Instructions] At this time, there are no more questions. So I would now like to turn the call back over to Mr. Myers.

Well, thank you. Thank you, all, very much for joining us on our call today. We appreciate your interest and look forward to speaking with you again on our third quarter 2013 earnings conference call in October. In the meantime, please feel free to contact me or Rich Thomas and have a great day. Thank you.