CVB Financial Corp. (CVBF) Q3 2015 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Third Quarter 2015 CVB Financial Corporation and its subsidiary, Citizens Business Bank Earnings Conference Call. My name is Mike and I'm your operator for today. At this time, all participants are in a listen-only mode. [Operator Instructions]. Please also note this event is being recorded. I would now like to turn the conference call over to your host for today, Ms. Christina Carrabino. Ms. Carrabino, the floor is yours ma'am.

Thank you, Mike and good morning everyone. Thank you for joining us today to review our financial results for the third quarter of 2015. Joining me this morning are 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 Investor's tab. Before we get started, let me remind you that today's conference call will include some forward-looking statements. These forward-looking statements relate to, among other things, current plans, expectations, events and industry trends that may affect the company's future operating results and financial position. Such statements involve risks and uncertainties, and future activities and results may differ materially from these expectations. The speakers on this call claim the protection of the Safe Harbor provisions contained in the Private Securities Litigation Reform Act of 1995. For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from our forward-looking statements, please see the company's annual report on Form 10-K for the year ended December 31, 2014, 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 $27.9 million for the third quarter of 2015, our second highest quarter of earnings on record. This compares to $26.8 million for the second quarter of 2015 and $24.3 million for the third quarter of 2014. On October 14 we announced that we entered into a merger agreement with County Commerce Bank pursuant to which County Commerce Bank will merge into Citizens Business Bank. We're excited about this acquisition as County Commerce Bank is a strong community bank with four branch location in the Greater Ventura County area with approximately 250 million in assets. This should be an excellent strategic and geographic fit for our bank. Why? Number one, this had four new locations and expands our footprint up to 101 Freeway corridor into the Central Coast region, enabling us to easily spread northward into Santa Barbara and eventually beyond. Number two, this is an affluent market place good for cross selling our products and services especially Citizens Trust. Number three, we believe this market has strong community banking, Agri business and business banking opportunities. And finally four, we believe this bank has excellent credit quality. In addition, I would like to also add that is this was the best running bank in terms of performing due diligence from an acquisition perspective that we have seen in my tenure of CEO. It is also important to note that we operate on the same data processing system Fighter [ph] so integration should be easier. The County Commerce Bank acquisition is expected to close in the first quarter of 2016. This acquisition should not preclude us in any way from pursuing other potential acquisitions. Earnings per share which were $0.26 for the third quarter compared to $0.25 for the second quarter and $0.23 for the year ago quarter. Through the first nine months of 2015 we're in $70.5 million compared with $78.4 million for the first nine months of 2014. As you may recall during the first quarter of 2015 we repaid a $200 million fix rate advance from the Federal Home Loan bank, resulting a $13.9 million termination expense on a free tax basis. The third quarter represented our 154th consecutive quarter of profitability and a 104th consecutive quarter of paying a cash dividend to our shareholders. Our tax equivalent net interest margin was 3.72% for the third quarter compared with 3.65% for the second quarter of 2015 and 3.61% for the year ago quarter. Total loans grew by $38 million or 1% for the third quarter to $3.82 billion. Our new loan productivity for the first three quarter of 2015 was significantly stronger than the same period in 2014. However net loan growth has been slowed by higher loan prepayments. Loan prepayment penalties totaled over $4.3 million for 2015 year-to-date, compared to $2.1 million for 2014 year-to-date, over double. Notwithstanding the prepayment pressure, total loans still grew by $38 million or 1% for the third quarter to $3.82 billion. During the third quarter, dairy and livestock loan portfolio increased by $26.1 million, construction loans increased by $10.7 million, in-single family residential mortgage loan increased by $7.2 million. In terms of loan quality, non-performing assets defined non-accrual loans plus OREO were $30.6 million for the third quarter of 2015, an increase of $592,000 from the prior quarter. Non-performing commercial real estate loans increased $1.7 million during the third quarter offset by a decrease of $622,000 million in non-performing single family residential mortgage loans and $832,000 in OREO. The allowance for loan and lease losses was $59.1 million or 1.55% of total loans at September 30, 2015 compared with $59.6 million or 1.57% of total loans at June 30, 2015. The reduction in allowance was due to the release of $2.5 million in reserves driven by net loan loss recoveries of $2.1 million for the third quarter. At September 30, 2015 we had loans delinquent 30 to 89 days of only $318,000 or 0.01% of total loans. Classified loans for the third quarter totaled $85.6 million. This was a $32.7 million decrease from the prior quarter. These decrease was primarily due to upgrading $23 million of classified commercial real estate loans. We will have more detailed information on classified loans available in our third quarter Form 10-Q. Now I’d like to discuss deposits. For the third quarter 2015 our non-interest bearing deposits increased to $3.3 billion compared with $3.25 billion for the prior quarter and $3.04 billion for the same quarter a year ago. This represents a $267.9 million increase or 8.82% year-over-year, and a 1.67% increase quarter-over-quarter. Average non-interest bearing deposits were $3.23 billion for the third quarter 2015, compared with $3.12 billion for the prior quarter and $2.92 billion for the same quarter a year ago. Non-interest bearing deposits now represent 55.46% of our total deposits, this is an all-time high. Our total cost of deposits and customer repurchase agreements was 10 basis points for the third quarter unchanged from the prior quarter. At September 30, 2015 our total deposits and customer repurchase agreements were $6.57 billion compared with $6.29 billion for the same period a year ago, and $6.66 billion at June 30, 2015. Averaged total deposits and customer repurchase agreements were $6.59 billion for the third quarter of 2015 compared with $6.46 billion for the prior quarter and $6.21 billion for the year ago quarter. Our ongoing objective remains to maintain a low cost stable source of funding for our loans and securities. Interest income, interest income for the third quarter of 2015 totaled $67.7 million compared with $64.5 million for the second quarter of 2015. Non-interest income was $8.4 million for the third quarter of 2015, compared with $8.3 million for the second quarter of 2015. Now expenses, we continue to closely monitor and manage our expenses. Non-interest expense for the third quarter was $32.7 million compared with $31.5 million for the second quarter. The increase was principally due to the expenses related to the expansion of our offices and teams in the Los Angeles, Ventura and Santa Barbara County. Non-interest expense was 1.71% of average assets for the third quarter, compared with 1.69% of average assets for the second quarter. Now I’d like to turn the call over to Rich Thomas our CFO to discuss our effective tax rate, investment portfolio and overall capital position. Rich?

Thanks, Chris. Good morning, everyone. Our effective tax rate was 36.75% for the third quarter and 36% year-to-date. Our effective tax rate varies depending upon tax-advantage income as well as available tax credits. Now to our investment portfolio during the third quarter of 2015, we sold an average of approximately $261 million in overnight funds to the Federal Reserve and received a yield of approximately 25 basis points on collected balances. We also maintained an average of $33.9 million in short-term CDs with other financial institutions yielding approximately 73 basis points. At September 30, 2015 our combined available-for-sale and held-to-maturity investment securities totaled $3.18 billion up $26.8 million from the second quarter of 2015. Investment securities represented 41.7% of our total assets at quarter end. During the third quarter of 2015 we transferred $886 million of securities from our available-for-sale securities portfolio to our held-to-maturity securities portfolio. As we wanted to protect our shareholders equity in anticipation that interest rates may rise. These securities were transferred at fair value at the date of transfer. The unrealized holding gain and losses at the date of transfer will continue to be reported in accumulated other comprehensive income, but shall be amortized over the remaining life of the security as a yield adjustment. At September 30, 2015 held-to-maturity investment securities totaled consisted of $332.1 million of municipal bonds, $297.2 million of government agencies and government sponsored enterprises and $240.3 million of mortgage-backed securities and collateralized mortgage obligations. After-tax unrealized gain on these securities was $3.7 million at September 30, 2015. At quarter end, investment securities available-for-sale were $2.31 billion and we had a pretax unrealized gain of $53.2 million. Virtually all of our mortgage-backed securities are issued by Freddie Mac or Fannie Mae which have the implied guaranty of the U.S. government. We continue to monitor the interest rate environment carefully weighing current rates and overall interest rate risk. During the third quarter, we purchased $170 million in mortgage-backed securities with an average yield of 2.17% and an average duration of approximately 4 years. Despite the continued low interest rate environment prepayment speeds in our investment portfolio appear to have somewhat stabilized and based upon current interest rates we anticipate receiving approximately $35 million in monthly cash flow from our portfolio. However if rates remain low, we may see faster prepayments speeds which could increase our estimated monthly cash flows. Now turning to our capital position, for the nine months ended September 30, 2015 stockholders' equity increased by $42.6 million to $920.7 million. The increase was due to $70.5 million in net earnings, $6.9 million of various stock based compensation items and a $3.5 million increase in unrealized gain on investment securities. This was offset by $38.3 million in cash dividends. I will now turn the call back to Chris for some closing remarks.

Thanks Rich. Now let's talk about economic conditions. In terms of the dairy industry milk future prices appear to have stabilized as milk production slowed down to better match consumption. According to the U.S. Department of Agriculture, dairy exports continue to decrease reflecting weak global demand, particularly for powdered milk and competition from foreign countries. According to the California Department of Food and Agriculture, feed cost in California represented 59.9% of total milk production cost for the second quarter of 2015 compared to 61.1% for the first quarter of 2015 and 65.4% for the second quarter 2014. In terms of the California drought the impact in 2015 still appears to be not as severe as originally anticipated. Notwithstanding we continue to watch the drought situation closely and as of yet have seen little effect on the repayment of our loan. The winter weather forecast in California is predicting a severe El Niño effect potentially causing wet conditions throughout the state, we shall see. Turning to other items related to the California economy. According to various economic reports, California's employment development division reported the unemployment rate was 5.9% in September 2015 dropping below 6% for the first time since November 2007. This compares to 6.1% in August 2015 and 7.3% back in September 2014. Over the past year California has outpaced the U.S. economy. California has been a fifth fastest growing state in the nation and the single largest source of new U.S. jobs. The state's current economic expansion is broad -- I am sorry, is broad based in terms of both geographies and industries and the quality of jobs has been improving. Through the first six months of 2015, sales of existing single family home climbed nearly 10%, while the medium price of a home in California has risen more than 82%, since hitting rock bottom in early 2009. New construction activity is occurring across the state and business within consumers are still driving growth and spending. The England Empire where our bank is headquartered is a bright spot in California's economic recovery. Employment in the region continues to expand, driving increasing demand in the residential real estate market. In closing, we are pleased with our third quarter financial results; we remain focused on our growth initiatives and will continue to peruse strategic acquisition to help us increase our market share in California geographic presents. I would like to take a moment to congratulate our entire team, Citizen Business Bank was recognized as the most trust worthy mid-cap bank in the U.S. by Forbs magazine. In addition Bank Director Magazine awarded us a top five ranking for the second consecutive year in overall bank performance among bank was $5 billion to $50 billion in assets. And with that I conclude today's presentation. Now Rich and I will be happy to take any questions that you might have.

Thank you, sir. [Operator Instructions]. The first question we have comes from Aaron Deer of Sandler O'Neill and Partners. Please go ahead.

First, congratulation on the deal on Ventura, it seem like it’s a really nice fit for you guys. I had a question on the expense lines in the quarter, it looks like the comp was up quite a bit, I’m just trying to get a little bit more color on that. I know you have been building out Ventura in particular, but L.A. and Santa Barbara and some of the other markets, I was wondering if you could talk about how many -- say relationship officers you’ve hired of late, maybe what your FT count is today versus year ago and then what kind of time line do you expect for this newer folks to be ramping production and how we might see that transact to loan balances over the coming quarters?

Yes, basically there is four new teams in the bank if you include San Diego, three new teams this year and those teams are in L.A. they’re in Ventura County and Santa Barbara. In fact we’re going to -- we’ll officially announce our opening next month in Santa Barbara, we have already hired three people there, we have six people that we’ve hired in Ventura County and then we have another six people down in San Diego and four people in downtown Los Angeles, so if total all that up, it’s around 20 people that we have hired here to build out this different centers. Of those four none of them have reached profitability yet. The closest is the L.A. office and they’ve been ramping up their loans, they are doing well. Ventura I think is doing tremendous in terms of the prospects and the customers and so forth. It’s just -- they have a fantastic pipeline, I would expect that they will breakeven within the first year, which will be first quarter or early second quarter next year, would be my best guess. Santa Barbara is just opening I don’t have a feel for that and San Diego is making good progress, has been a little slower than what we like, but we have some excellent people down there and I would anticipate that in the first half of 2016 we’ll reach profitability in that office as well. So once those offices are profitable, that will help us in terms of an offsetting some of these expenses.

Okay and how about in terms of the -- how that translates to your expectation for long growth over the coming year?

Yes, we had a good quarter in loans and we’ve had actually this year, I think -- it’s hard to -- well it's not that hard to predict. Unless something changes we should have our best loan year in 2015 since prerecession. So clearly couple $100 million greater than last year in commitment and so forth is what our run rate is right now. So we feel good about that. The problem is our prepayment pressure has increased in fact if you looking at our loan prepayment penalties so far this year we’re $4.3 billion -- $4.3 million, excuse me. And last year this time earlier $2.1 million, so it's more than double and this 10 year treasury that sits out at 2.05% or whatever it is continues to put pressure on mostly commercial real estate loans and that’s why you see the quarter over quarter, we didn’t grow commercial real estate loans even though we had pretty good loan production in that area. We grew dairy, we grew single family residential and we grew constructions loans, but actually our CRE portfolio went down slightly and that was because of the prepayments.

Yes, that was actually -- my other question was on the prepays and it sounds as though that it -- has it continued to be that kind of pace post quarter as well?

I think it's still going to be higher than a normal quarter for the fourth quarter, but it's still little early to tell on that. Some of these are not necessarily refinanced loans, some of these loans we do keep and let’s say of the loans on a ballpark, one third of the loans that get prepaid we do keep it, we refinance. I would say probably another one third are financed by someone else and we choose not to compete for that. And then the -- or we just lose it. And the other third I would say, the property gets sold and there's really nothing we can do. What we're also scratching our heads on a little bit is if we can get to our borrowers somehow and talk to them and say, listen we’ll give you a discount on your prepayment penalty, if you refer us successfully into who’s ever buying your property and we keep that loan. So, we're thinking about how we do that and how we incent that, so that we can keep these loans which will help us a little bit, but it's -- with real estate prices recovering as much as it has, some of these people want to take money off the table and they're selling properties.

Next we have Julianna Balicka of KBW.

Congratulations on your new acquisition. And I have a couple of questions and I'll step back. Maybe one as a follow up to the conversation that Arron began in the prepays. You have 4.3 million year-to-date, but in the quarter it's actually down in the quarter to 1.1 million. So, from -- it looks like a spike in Q2, should we be reading anything into that or is that just quarter-to-quarter volatility and nothing indicative of any sort of improvement here?

The last three quarters have all been over $1 million, which is a big run rate for us. I think there is a -- with the thought process although -- we have this buildup and everybody thinks interest rates are going to go up, so borrowers start thinking about how they’re positioning there loans and they want to fix into longer term rates, and I think that causes faster prepayment speeds. But it's been dud so far, rates have done nothing. Actually, they have gone down. So, it's interesting to think whether this trend will continue or it’ll soften. Sooner or later if everything gets refinanced, it will slow down. We have been surprised, we've been caught a little bit by surprise by the prepayment speeds that we had. I mean we're way over twice what we've budgeted in prepayment penalties for this year and so we’re reacting to it and trying to make sure that we’re all over retaining our loans as much as we're trying to bring in loans, and we had a good loan quarter. We had a good loan production quarter, but we had our big -- we had a 1.9 million in prepayments penalties in the third quarter, that's the highest we’ve ever had.

Okay. And then in terms of couple of questions on -- effort wise [ph] your trending closer to 10 billion with the acquisition that’s pending and then hopefully another, and so could you talk about whether or not, what kind of infrastructure building you have to put in or how you’re thinking about crossing the $10 billion mark and getting ready for [indiscernible] or is too early?

Well, it's not too early to be thinking about it. In fact we just had our strategic planning session with our senior leadership team in late August, and one of the -- we spend half a day talking about preparing for 10 billion and what we're going to do, and each of our roles, and what were the bigger factors. We also had our regulators come in here from all three regulatory -- excuse me, regulatory bodies came in here and talked to us about 10 billion and what to expect, et cetera. So, we feel like we've got a feel for what needs to be done, but we’re -- it's not imminent, I can tell you that and unless something changes here radically through a large acquisition, but we’re pushing for it and we're not going to -- I know a lot of banks out there who will say, well if you're going go over 10 billion, you might as well go to 14 billion or something like that. We're not going to change the way we run our business because of the $10 billion threshold. We encourage some more cost growing over that, so be it There is no short term orientation here to think about suppressing growth or anything like that, standard at $10 billion. We're building this bank for the long run, brick-by-brick-by-brick and if we go over $10 billion, than that’s normal course of business, we'll deal with it.

Okay. And so I guess that implies as you get closer, you will layer and it’s needless to say at [indiscernible] that we shouldn't be thinking about big upticks in expense run rate?

No, I think we're definitely going to see some upticks, there is no question about it, but I think we're not a retail bank, we're not a consumer bank. So I think the impact to us is going to be substantially less than it could be for some other institutions. We don't have a cost estimate that we're really putting out there yet to what we think the impact would be. I think we do -- I think just in a ballpark, I think it's going to be in the low seven-figures for us on annual basis, in terms of incremental costs.

Got it. And then on -- I'll step back, I’ve got one more question. In terms of loan growth, in terms of C&I, the last call, you were talking about being expecting a pickup in C&I in the second half of the year and it doesn’t seem to have shown up in the third quarter. So could you talk a little bit more about C&I commercial originations specifically?

Yes its -- I do expect it to continue to pick up, I mean we were -- a year ago our commercial industrial loans totaled $396 million and this excludes our daily of course, which are really C&I loans too, but we had $396 million and today they’re $422 million. So if you look at that, we've grown, what's that, roughly $25 million, it's about 7% year-over-year. I would hope that when we're setting here a year from now, that’s more like 10% or 12%. And the new teams are going to drive most of that that incremental growth are. Particularly the team in Venture County and the team in L.A. and Santa Barbara as well. They’re all C&I teams and I think we're going to make some good traction there and I'm optimistic about San Diego as well. So it's been -- you bring on a new team, they just don’t map over business the first month they are there, and we've got a great pipeline and it’s starting to come over. We had a real huge win in the third quarter and so we'll see -- which is great and that will help us in the fourth quarter numbers. And then on the C&I side just one more comment is the usage is still very, very soft. I mean I wish our customers would borrow more money, but I think they’re still cautious in expanding their businesses for a variety of reason.

Thank you sir. Next we have Matthew Clark of Piper Jaffray.

Can you remind us with the prepay penalty was in 2Q please?

In the second quarter what our total was?

Yes.

About 1.1 million and we're about of 1.9 million in the third quarter.

Okay thank you.

That would be first quarter by the way.

Got you. Okay and then in terms of the yields on new production this quarter, on average can you -- obviously you know what that was relative to that portfolio, I think the core loan portfolio is somewhere around four -- probably around 470 I guess, if you exclude the interest recovery and the prepayment penalty income.

Yes I'd say in general the loans that we're putting on the books right now, ink-in-mass [ph] are probably 40 basis points to 50 basis points lower on average than what is our average yield in our books. Rich does that sound right to you?

Yes.

And the securities, when we're buying securities because we were in and out of the market depending on what rates are going, right now we're pretty much out of the market and buying mortgage bank securities because rates are too low. So when we’re buying those securities, they’re probably 30 basis points to 40 basis points lower than our average yield on our securities portfolio of what we're buying. So eventually time goes on, that’s going to affect our net interest margin. Now it hasn’t affected or net interest margin that much because of really two things. One is higher prepayment penalties and number two is credit recoveries, and credit recoveries not only go into our loan loss reserves some of the time, but we get back due interest recovery that goes into the P&L, in fact I think we’ve put in our press release that we had one borrower where we recovered $2.8 million in interest recovery from a loan that was put on the book half a dozen years ago or something like that. But the good news is, I think we're going to see more of that. I think we're going to see more of these recoveries. You saw our classified loans go down by $38 million -- I think about $35 million, somewhere around there for the quarter, and our credit is improving and we didn’t do a lot of selling of loans during the crisis. So the fact that we’ve held on to these loans and are working through them is paying off for us, and it’s paying off for us in terms of credit recoveries and its paying off for us in terms of interest recoveries and we expect that to continue through the remainder of this year and into 2016 and even from a pipeline standpoint somewhat into 2017 as well.

Got you. And then just on the margin and thinking about the excess liquidity you put to work in the third quarter, the ongoing pressure obviously on asset yields and really -- should we really be thinking about that core margin around 351, if you exclude that interest recovery and assume modest pressure from there, is that fair?

I think there is a core margin there and that’s in the ballpark of where it is and then we're going to see -- and then we'll see that how much prepayment penalties effected that and then recoveries affect that too. I think our net interest margin could potentially balance around from quarter-to-quarter because of these recoveries, I mean there are more recoveries coming down in the next year or two that could be the same size of this $2.8 million we saw here in a given quarter. But it's not going to be something that we can really predict as we work through this loan. So we do know that it’s coming, I think to some extent because we understand the value of this real estate prices and we understand what our loan amounts are and we understand what the maturity of those loans and that maturity we're going to have great opportunities to recover all our interest income and so far of some of this loans and we're tracking this stuff very closely. So I feel like headwind in terms of this low interest rate environment, tailwind in terms of recoveries and I’d actually like to see the prepayment penalties moderate a little bit because that mean we're keeping some of these loans so we get more loan growth and then that will help the net interest margin too, because if we could take $1 billion of securities and move those into our loan yields and that’s another 2% pick up for us and that’s $20 million in pretax income or $0.13 of --.

I was just going to get to that as well, assuming rates are lower for longer, do you think you might be more willing to compete on rate to help step up loan growth and maybe keep that's one-third, that you let go previously, and then just finally, as it relates to loan growth, just any update there, if you could quantify the production in the quarter in the pipeline?

Yes, as far as -- we are competing on rates. There is no question about it, we're competing on rates for quality loans. What we're trying to do is just make sure that if we're going to lend money out at 4% or whatever the range is and that's got some term to it that we’re looking at, not necessarily the loan amount itself, but how much true risk we have in that loan amount and we're looking at it from a risk return standpoint, I mean there are some loans, we can have a $5 million loan and you're taking -- in real terms, you’re taking very little risk or maybe $0.5 million or $1 million risk, if the market did what it did in 2009. But there are other loans you lend $5 million and this can occur on the C&I side where you need to be careful or you might be risking the full $5 million. So that risk returning decision, you have to really think through. As far as quantifying our loan production, we haven't given that guidance, we haven't given that information in terms of how much we're producing quarter over quarter, but I did mention that we're tracking about $200 million ahead of where we were last year on a commitment basis and promise that some of that’s not turning into out standings because it’s either construction loans or its C&I loans or its equity lines of credit secured by commercial real estate where borrowers were used to do opportunistic buying in the marketplace, using their equity in commercial real estate properties that they own and we sometime -- we give them a line of credit behind that, they might have a free and clear [ph] property, we give them a couple of million dollar line of credit, they don't use it unless they see an opportunity to buy them.

[Operator Instructions] Next we have Timothy Coffey of FIG Partners. Please go ahead.

Chris, could you give us any color on the classified loans that were upgraded in the quarter?

I think, that two-thirds of them were commercial real estate loans and what's happening is some of the upgrades to these loans can lag. And the reason they lag is typically we will reappraise loans that are substandard loans in the bank portfolio, annually. And some of these appraisal information, appraisals tend to be based off information for the preceding six months and so some of that time is lag and so I think, this classified loan improvement is really just a function of appraisals and almost lagging evaluation. Again we only reappraise these once a year. So, it's -- a year ago, we were -- I think our classified loans were about $160 million and today they’re $85.6 million, so that's tremendous improvement, but I think it's really a function of -- the vast majority of it is really a function of commercial real estate appraisals and valuations, the values going up and these are recognized by appraisers as such, and then to a smaller extend maybe a little bit of the dairy side there too.

Okay. The upgraded loans in the quarter, were they -- was it one relationship, a handful of relationships?

It was several relationships.

Okay. And then you’ve had some changes in the team members down in the San Diego production unit, is that going to have any meaningful impact on the current growth prospect?

Well, I don't think so, in fact I think we did have the person who leads that group left the bank recently, but the core producers are there and we're looking at recruiting a new team in there and hopefully we can do that pretty quickly. So I don't think that will have a material effect on our ability to continue to grow and so forth, we got some really good people down there and they have good pipeline.

Okay and then my final question is, given the potential dislocations of City Nationals clients, would you consider deviating from your strategy and accepting deposits that might not have an immediate loan relationship, just to take the client?

Everything on the deposit side, we're trying to be really thoughtful about what deposits relationships we're building. We don't -- today, we don't want any deposits that we don't think are going to be sticky and they're going to be sustainable going forward. So, if somebody came in with $5 million and wanted to place it for six months with us, that's really not very attractive to us, even if they did it at next to nothing, because what we're trying to do is continue to build this bank steadily along the way and the stability of that funding enables us to make good business decisions on the asset side. So -- and the other part of that is we're seeing some of the big bank, real big banks turned away large deposit relationships, and they're coming to us and so forth and looking for -- I’m talking about $50 million to $100 million relationships and deposits and they're coming to us and I'm sure other mid-sized banks and say, we’d like to talk to you about a relationship and we're scratching our heads and saying, this isn’t something that's going to stick here and if you at our deposit growth, it's really -- most of its focused on the non-interest bearing side, because of that discipline that we’ve been able to put in. Now as loan growth, if we were able to achieve organic loan growth of 15% or something like that a year on an annualized basis, I might loosen that up a little bit, but right now there is no reason too, because we have $250 million-ish going over night to the Federal Reserve getting 25 basis points right now.

Okay well thanks raising my questions.

Thanks. Rich did that number sound right about? 250 million?

Yeah.

Next we have Julianna Balicka, KBW.

Hi one more follow up, actually I have are couple of follow ups, one just really quickly please on the pending acquisition, it did not specify a cost saving, should we be thinking about 20% or what should we be thinking about?

No, I just think inherently it will be higher than that. I think it will be closer to 30%, but again there is four branches that we’re acquiring and we’re not planning on closing any of those four branches, this is about growth, it's about expansion, it's about layering in our balance sheet, and our capabilities in all the products and services that we have, that are more robust and their products and services to what we think is a very good list of clients there. So this is about trying to drive greater income in that area and combining that with our teams that are already up there and the team we just hired in Santa Barbara and the six person team we have in Oxnard, Ventura County. We are going to have a lot of traction in that market and I think we are going to be a forth [ph].

Very good, and then in terms of reserve coverage and reserve levels it’s been pretty steady. Now as we think about fourth quarter annual audit, do you see yourself coming under pressure to release reserves at the fourth quarter? So should we be thinking about or in I guess after 4Q, so should we be thinking about maybe in 1Q, a big reserve release or is this level okay here?

Obviously we have to look at this and analyses this as we go and then the methodology gets tweaked along the way. I’ve been a little bit surprised that we’ve had the releases we have, but most the releases we’ve done have really been based on our net recoveries. And so if you look at our net recoveries year-to-date, I think we’re close to $4 million and this year we’ve released I think $4.5 million. So those two numbers almost -- they’re not aligned align, but they’re close and I am hoping that we grow into this reserve, and remember the fourth quarter should be a strong loan growth quarter for us not only because have a good pipeline, but also we have the seasonal dairy loans that will kick in in this fourth quarter and we feel like that’s going be similar to what happened last year in terms of magnitude.

Got it, thank you.

[Operator Instruction] Well at this time there no further questions. I’d like to hand the conference back over to Mr. Myers for any closing remarks. Sir?

Thank you all very much for joining us on our call today and we appreciate your interest and look forward to speaking with you again in our fourth quarter and year end 2015 earnings call in January. In the meantime feel free to contact me or Rich Thomas and have a great day. Thank you very much.

And we thank you sir and to the rest of the management team for your time also today. The conference call is now concluded. At this time you may disconnect your lines everyone. Thank you take care and have a great day.