CVB Financial Corp (CVBF) 2011 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the third quarter 2011 CVB Financial Corporation and subsidiary Citizens Business Bank earnings conference call.

My name is Keith, and I am your operator for today. At this time all participants are in listen-only mode. Later, we will conduct a question and answer period.

I would now like to turn the presentation over to your host for today's call, Christina Carrabino, you may proceed.

Thank you, Keith, and good morning, everyone. Thank you for joining us today to review our financial results for the third quarter of 2011. Joining me 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 last night. To obtain a copy, please visit our website at www.cvbank.com and click on the CVB investors tab.

Before we get started, let me remind you that today's conference call will include some forward-looking statements. These forward-looking statements relate to, among other things, current plans, expectations, events, and industry trends that may affect the company's future operating results and financial position.

Such statements involve risks and uncertainties, and future activities and results may differ materially from these expectations. The speakers on this call claim the protection of the Safe Harbor provisions contained in the Private Securities Litigation Reform Act of 1995. For 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, 2010 and in particular the information set forth in item 1-A, risk factors therein.

Now, I will turn the call over to Chris Myers.

Thank you, Kristina. Good morning, everyone. And thank you for joining us again this quarter.

Last night, we reported record earnings of $22.4 million for the third quarter of 2011 up 6.4% from $21 million for the second quarter of 2011. And up 24.9% from $17.9 million for the third quarter of 2010.

This is the highest earnings for a fiscal quarter in our company's history coming off the heels of last quarter's record earnings. Earnings per share were $0.21 for the third quarter compared with $0.20 for the second quarter and $0.17 for the year-ago quarter.

Through the first nine months of 2011, we earned $60 million, up 13.1% from the same period in 2010. Earnings per share were $0.57 for the nine month period ended September 30, 2011 compared with $0.50 per share for the same period in 2010.

The third quarter was our 138th consecutive quarter of profitability and 88th consecutive quarter of paying a cash dividend to our shareholders. Our net interest margin has held steady so far. Excluding the impact of the yield adjustment on covered loans, our net interest margin was 3.81% for the third quarter, down from 3.92% for the second quarter and up from 3.73% for the third quarter of 2010.

In the absence of future loan growth and/or an increase in interest rates, it could be a challenge to maintain our net interest margin at this level. Now, let's talk about loans beginning with our noncovered loan portfolio. Classified loans and non-performing assets continued to decline in the third quarter, representing the fourth straight quarter we have experienced a decline.

We reported zero provision for funded loan and lease losses for the third quarter. The allowance for loan and lease losses was $95.5 million or 3.01% of outstanding loans at September 30, 2011 compared with $96.9 million or 3.04% of outstanding loans at June 30, 2011. Net charge-offs for the third quarter were only $1.4 million compared with $4.2 million for the second quarter.

In total, our non-performing assets, defined as noncovered, nonaccrual loans plus other real estate owned totaled $81.2 million at September 30, 2011, a decrease of $7.6 million from $88.8 million at June 30, 2011. At September 30, 2011, we had loans delinquent 30 to 89 days of $2 million or 0.06% of total noncovered loans.

Classified loans decreased for the third quarter to $357.2 million compared with $445.3 million for the prior quarter. Out of the $88 million decrease from the second quarter to the third quarter, $74.2 million can be attributed to our dairy and livestock loans and related loans secured by dairy farmland.

We will have more detailed information on classified loans available in our third quarter 10-Q. We had $3.5 billion in total loans and leases at the end of the third quarter, a decline of $73 million from the end of the second quarter. A total of $65 million out of this $73 million decrease is due to our ongoing success in reducing our exposure to three non-core lending categories.

Number one, mortgage loan pools, residential mortgage loan pools; number two, noncovered construction loans, and number three, problem covered loans. Most of our dairy and livestock clients continue to show profitable operations yet we remain cautiously optimistic as there are uncertainties going forward into 2012. Grain and hay prices continue to remain at historically high levels and overall milk production is reported to be higher than it was a year ago. A weak U.S. dollar usually translates into strong milk product exports and is an important factor in gaging future milk prices.

Right now, milk futures show a potential lower price for milk in the months ahead. We shall see.

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 September 30, 2011, we had $354.6 million in total covered loans resulting from the San Joaquin Bank acquisition.

These loans have a carrying value of $286.1 million. At the acquisition date, the initial purchase discount was $199.8 million. Today our remaining discount is $68.5 million. The discount accretion was $4 million for the third quarter compared with $5.7 million for the prior quarter.

Our quarterly discount accretion has slowed down considerably from where it was in 2010. Now, I would like to discuss deposits. We continue to grow our non-interest bearing deposits. For the third quarter of 2011, our non-interest bearing deposits grew to $1.98 billion compared to $1.7 billion for the same quarter a year ago. This represents a 16.4% increase year-over-year, completely organic.

Non-interest bearing deposits now represent he over 43% of our total deposits. Our total cost of deposits for the third quarter was 17 basis points, compared with 20 basis points for the second quarter. Moving on to non-interest income. Non-interest income was $7.5 million for the third quarter of 2011 compared with $6 million for the second quarter of 2011.

The second quarter was negatively impacted by a $1.7 million write-off of a previously held for sale loan. So in relative terms there was very little change quarter over quarter in non-interest income.

Now, expenses. We continue to closely monitor our expenses.

Non-interest expense for the third quarter of 2011 was $32.9 million, down from $37.2 million for the second quarter of 2011. The $4.3 million quarter over quarter decrease is attributable to the following.

Number one, a $1.65 million reversal of our previous provision for unfunded loan commitments. Number two, a $384,000 reduction in FDIC insurance assessments. And number three, a $1.3 million reduction in professional service expense. That is mainly legal expense.

Now, I will turn the call over to Rich Thomas to discuss our effective tax rate, investment portfolio, and overall capital position. Rich?

Thanks, Chris. Good morning, everyone. Our effective tax rate was 35.4% for the third quarter. Higher than the prior quarter's 32.6%. The increase is due to higher estimated total income levels which impact the overall effective tax rate for the entire fiscal year.

During the third quarter of 2011, we provided an average of approximately $455 million in overnight funds to the federal reserve and received a yield of 25 basis points on collected balances. At September 30, 2011, investment securities totaled $2.2 billion, up $187.9 million from the second quarter of 2011. Investment securities represent approximately 33% of our total assets.

Our available-for-sale investment portfolio continued to perform well. At September 30, 2011, we had an unrealized gain of $68 million, up from $43 million for the prior quarter. We have no preferred stock or trust-preferred securities in our portfolio. 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 have seven private label mortgage-backed securities totaling $5.6 million.

We have been strategically reinvesting our cashflow from our investment portfolio, carefully weighing current rates and overall interest rate risk. During the third quarter, we purchased $279.6 million in mortgage-backed securities with an average yield of 1.99%.

We attempt to maintain a neutral position at the short end of the treasury curve by reinvesting in mortgage-backed securities with an average duration of about three years to avoid material extension risk as interest rates may rise in the future. We also purchased $839,000 in municipal securities with an average tax equivalent yield of 5.66%. Finding bank-qualified municipal securities that meet our investment criteria remains challenging.

Now, turning to our capital position. As part of our 10 million share stock repurchase program authorized by our board of directors in 2008, in the third quarter we elected to repurchase 1.5 million shares of common stock at an average of price of $7.83 per share totaling $11.8 million.

In addition, we paid out approximately $9 million in cash dividends during the third quarter. Despite this, shareholders' equity increased $16.2 million to $699.9 million for the third quarter. We primarily attribute this $16.2 million increase in capital to a $14.1 million increase in unauthorized appreciation in our investment portfolio.

Our capital ratios are all well above regulatory standards and above our peer group average. Our September 30, 2011 capital ratios will be released concurrently with our third quarter form 10-Q. We anticipate the ratios to be at or above June 30, 2011 levels.

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

Thanks, Rich. Now, I would like to take a few minutes to talk about the economy.

In late September, our company hosted the second annual 2011 Claremont McKenna College/UCLA Inland Empire Forecast Conference at Citizens Business Bank Arena located in Ontario, California. I know that was a mouthful.

The presenters included some of the top local economists from the Claremont McKenna graduate school and the UCLA Anderson school and some local real estate experts. Here are some of the interesting statistics and comments about the U.S., California, and Inland Empire economies that were presented by these experts.

First, the U.S. forecasts. The U.S. economy is stalled in GDP growth for 2011 and into the first quarter of 2012; is expected to average a weak 0.9%. Thereafter there'll be enough strength in exports and business investment along with modest increases in consumption to propel the economy forward at a 2.5% to 3% pace starting in about mid 2012.

Job growth will be sluggish, and unemployment with remain at recession levels mired in one long slump and hovering at approximately 9.5% in 2012. Foreclosures are preventing the housing market from recovering, and the lack of recovering in the housing industry is what is hampering the U.S. economy.

Now, let's move to the California forecast. California is directly affected by the stalled U.S. economy as it shares the same consumer expectations and export-related factors as the rest of the nation. The current forecast is for slow growth until the end of 2012, but it is important to note that none of the presenters are predicting a double dip recession for California.

With the California economy in stall mode, the most likely is a scenario will be a slow build over the next 12 months followed by an incipient recovery period. The unemployment rate in California remains stubbornly high and is expected to hover around 12% and fall through 2013 to an average of 11%. Employment growth of 0.7% in 2012 and 2.1% in 2013 will push unemployment down marginally. But unemployment in California is not expected to reach single digits until 2019.

Finally, the Inland Empire program. Real GDP growth a negative 1% in 2011. A negative 3.3% in 2008. A negative 5.5% in 2009. And a negative 0.6% in 2010.

The bad news is that the Inland Empire has experienced negative GDP growth for four consecutive fiscal years. The good news is that it looks like it may turn to positive growth sometime in 2012. Job growth is expected to remain slow but it is expected to resume in 2012.

Since June 10, 2011, the average unemployment rate for the Inland Empire has been 14.7%. Housing recovery expected to begin in 2012, albeit at a modest pace. Although our bank was founded in the Inland Empire and it is currently headquartered in the Inland Empire, our footprint and footings are much broader, as nearly 80% of our loans are outside the Inland Empire.

In regard to our growth strategy, we will continue to focus on multiple forms of growth. These are; number one, driving same store sales in loans, deposits, and fee income. Number two, acquiring teams of bankers from our competitors. And number three, bank acquisitions.

In terms of bank acquisitions, we continue to look at acquiring community-oriented banks that are in or adjacent to our existing footprint along with considering FDIC-assisted opportunities.

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

Thank you. (Operator Instructions). The first question comes from Hugh Miller with Sidoti.

Got down to one question here. You mentioned, Chris, about a reduction in legal expenses for the quarter. And I was wondering if that was kind of signaling a wrapping up of the SEC investigation or any sense there? Or what was kind of causing the reduction in legal costs?

You know, it as combination of things. We did spend a little less money on the SEC litigation than we did in the quarter before but it is also the improvement in overall -- the overall litigation in regards to problem loans.

Okay. Okay. That makes sense. So there is no update you can give us then on the SEC?

No, there is really not. You know, we continue to be fully cooperative and, you know, we are just running our business day-to-day and focused on growing our business. It really, you know, from a personal standpoint I'm not spending much time on the SEC investigation at all and we are driving business going forward. We don't have any announcement regarding the SEC investigation.

The follow-up question just on the NIM you mentioned, barring a lack of loan growth, that you would anticipate seeing pressure on the NIM. Wondering if you could provide us color there. And also given some of the pressure we are seeing on the yield curve, even if you are able to kind of get into a phase of showing some loan growth, would that just kind of ease some of the pressure or would you anticipate, you know, that you would be able to maintain the current NIM?

I think if we can get the loan growth hopefully and it is hard to predict because there is a lot of factors that into into this. We can keep that NIM in the high 3s. We are facing pricing pressure on loans and repricing of our loans in our existing portfolio, no question. We have been able to continue to reduce our deposit costs although that game will end here sooner or later. I think we're 17 basis points for the third quarter in total cost of deposit, soit gets to the point where it will be difficult to get much lower than that, for sure.

Remember, we have nearly $500 million going to the federal reserve overnight and we are getting 25 basis points for that. So even if we can push that out at prime,which is 3.25%, that is a nice pickup of us of 3% margin. So loans are going to be very important for us, loan growth going forward. And I think the good news on that is that a lot of our non-core lending areas, we have already been through the brunt of the reduction in those non-core lending areas, so I'm hoping that we can get to positive loan growth if not in the fourth quarter then the first quarter of 2012.

Thank you.

(Operator Instructions). And our next question comes from Todd Hagerman from Sterne Agee.

Good morning, everybody. Just a follow-up on the margin question, Chris. I'm just curious, the balance sheet was a little bit bigger than what I was expecting this quarter particularly with the securities purchases.

With kind of the excess liquidity that you have, loan demand being relatively weak, so to speak, how should we think about, again, just like spread income, the size of the balance sheet and ongoing securities purchases over the next few quarters? And again kind of balancing out the margin versus spread income?

You know, I think that we are we are fully engaged on growing loans right now and I will say this. Our customers are doing a lot better than what you read in the paper every day.

Most of our clients that I'm talking to and meeting with, their sales are up year-over-year, their profits are up year-over-year. They are not feeling it nearly as bad as you read about the European debt crisis and Greece tanking and most of our business owners are cautiously optimistic and feeling very positive about things. Yet they pick up the paper every day or they hear the news every day and start getting worried. So our pipeline is improving in terms of on the loan side. So we are feeling more positive about it, and that is going to be the critical factor.

That and doing an acquisition are going to be able to really -- to deploy our excess cash, and the fact we are also receiving $30 million to $35 million a month in cash flow from our investment portfolio that we need to reinvest. We would rather reinvest that money back into loans as opposed to securities because then we get a better yield for it. Usually what is running off is if we have to reinvest in securities it's going to be at a lower rate than the existing securities that we have. That is why we have such a strong mark-to-market on the investment portfolio because our interest rates are higher than what the market is today.

I think there are factors that go into this whole thing but we are really cognizant of growing quality loans and my sales force is getting after it in a big way, and we are feeling more confident about it. But it is still -- you know, this economy is okay, it's not great.

So that is helpful. And if I may, just to follow-up. Again, how should I think about just kind of the pace of security purchases over the next couple of quarters?

I mean, we have had some growth the last couple of quarters, nothing meaningful by any means. but again how are you thinking about kind of weighing the securities purchases versus that focus on loan growth, and how should we think about that growth?

Well, we are thinking about it a lot on a day-to-day basis, and we really want to make sure that are we are not going to accrue too much more than $0.5 billion in cash going to the Federal Reserve overnight. In the same sense, we are also not paying up for deposits. We are not looking to grow our deposits unless we can do it in what we call sticky deposits, or deposits that we think are going to be here. two, three, four years down the line when interest rates go up.

So we're not interested in getting a money market account as 70 basis points and trying to figure out how to deploy that into investment securities. So loan growth is a huge factor that's involved in there. So I think you will see us probably strive to replace securities as they run off. But if we can get some loan growth, we would rather re-deploy that securities cash flow runoff into loans as opposed to securities.

Great. Thanks very much.

Thank you. And the next question comes from Tim Coffey from FIG Partners.

You there, Tim?

Mr. Coffey, your line has been activated.

Maybe he is on mute.. Go to the next one.

Okay.

And the next question comes from Aaron Deer from Sandler O'Neill & Partners.

Good morning, guys.

Good morning, Aaron.

Sticking with the theme of loan growth. I'm curious, some of the other banks that I have spoken to that have EGG portfolios have talked about the -- how good it has been for some of the farmers and growers in their markets, and that they are rich with cash and not borrowing a whole lot. It sounds like with your dairy and livestock borrowers, maybe this year isn't quite as good as hoped given the grain pricing and milk pricing.

What is your outlook? I know typically in the fourth quarter they tend to take down some of their borrowings. Are you anticipating a decent run off here in the fourth quarter or is that off the table, where do things stand with that, do you expect?

It's actually been a pretty good year for the dairies. It really has. A lot of my comments were just being cautious about future milk prices given the milk futures market right now and also given the high cost of fees.

I think the dairy industry has greatly improved over where it was certainly in 2009 and 2010. But I would anticipate because the dairies are profitable and have been profitable in 2011 that most of them, that there will be some drawdowns at the end of the year because what they like to do is they like to pre-purchase fees and so forth and then expense that against their profits to reduce their tax liability.

Sure. And then as a follow-up, the share re-purchases in the quarter. Obviously, with the market prices where they were, seems like a pretty opportunistic time to be active with that. Is that how you would characterize, more opportunistic buying or more capital management at this point, and what can we expect going forward on that front?

I really think it is both. We're going to be opportunistic about our stock price, but we are harvesting a lot of capital right now. When you make $21 million or $22 million in a quarter and pay out $9 million in cash dividends, we have $12 million or $13 million in capital that organically is in front of us. And with our capital ratios the way they are in the absence of doing an acquisition, it is like what are we going to do with that money?

So we do have a lot of shares left, I think about $7.9 million authorized to re-purchase. We will look at continuing that program, albeit strategically and cognizant of price and situation, and if we could get an acquisition done, that is part of that capital equation, too.

That's great. Thanks for taking my questions.

Thank you. The next question from Brian Zabora from Stifel Nicolaus.

One question on your M&A. Do you think maybe the timeline has shortened or talked about last quarter about maybe a 12- or 18-month timeline between potential M&A targets as you get a little more realistic or you get a better sense on loan buck. Just wanted to kind of get you sense on what your thought timing was today.

You know, I think there is still a little bit of a gap between seller expectations and buyer expectations, and we are trying to bridge that gap and we feel like our stock is a good currency, so we are willing to use stock and cash in an acquisition. So we're trying to be flexible and so forth, but we are look at buying some of these banks, and we feel where our stock is trading and vis-a-vis some of the price of these other institutions that we should be able to make this accretive out of the gate because we have outperformed most of these banks in terms of our return on equity and return on asset and credit quality. So why should we pay a bigger multiple than what we are trading at right now in the marketplace?

Now having said that, if we get something in market, and we can cut out costs, and we can really do a good expense save on the deal, then that would -- might result in us be willing to pay a little more than we would normally like to pay because we can drop that in pretty well.

Okay. And as a follow-up on loan loss provision, if the pace of improvement continues, is it possible to see a negative provision or would you rather grow into your current loan loss reserve?

It is very formulaically-based, so we look at reserves and we look at all kinds of different factors that go into those reserves. We do have more of an unallocated reserve than we did a year ago. As we get more and more unallocated reserve, we will have to look at that issue. In a perfect world, no, we would rather just organically bleed out our reserve with what hopefully is small charge-offs going forward.

Obviously we have to stick to the formula and what we have done and our methodology, and obviously, that methodology gets tweaked quarter over quarter based on all kinds of factors including global factors like the European debt crisis and things like that. Ultimately, I don't know if I can give you as clear an answer as you would like on that.

We feel good about our reserve right now. Feel it is fully adequate, and right now, we are seeing as we have seen, we saw certainly in the third quarter or the second quarter more outflow in terms of non-performing assets than inflow.

Thanks for taking my questions.

Thank you and the next question comes from Tim Coffey of FIG Partners.

Hi. Can you hear me now?

Yes.

Okay, good. Chris, earlier you talked about the rationale for your -- for letting deposits into the bank and clearly you haven't thrown the doors open to let anybody just bring a deposit into the bank. In addition to the stickiness, what are some of the criteria you are looking for from new depositors?

Well, we are heavily focused on business deposits. And 70% of our non-interest-bearing deposits in the bank, a little over 70%, I believe, are business deposits. And we think those are stickier deposits than individals that will have money in the bank and then when rates go back up, they're going to be more interest rate sensitive. That's a big focus of ours.

We've also developed niches in deposits, which are strong deposit areas. For instance, we have a government services business where we bank different -- we bank, I think, 14 different cities in our territories. We bank multiple municipalities, water districts, all that kind of stuff.

We also have a niche in property management. Title escrow. And not-for-profit. So country clubs, foundations, all those types of areas tend to be what we think are stickier deposits that are going to keep their money in those kind of D.E.A. accounts, demand deposit accounts through economic cycles and different interest rate cycles.

As a follow-up, do we anticipate any of this translating into greater deposit fee income?

It is right now. We are driving more deposit fee income. And let me back up. We are driving more deposit fee income related to our business deposits.

The regulation on the consumer side has caused us to probably have a little bit less deposit fee income on the consumer side, but we are make up for it on the business side and that is why we are even more and more focused on the business side as well. There is a lot of regulation going on in the consumer fee area, and we are really a business bank and our consumer accounts are usually part of a business relationship. Either one of the principles of the business or someone related or an entrepreneur or a professional.

Great. Those are my questions, thank you.

Thanks, Tim.

The next question comes from Ed Timmons from Roth Capital.

Good morning, guys. Just going back to the loan growth questions. It seemed like kind of mixed messages with your guidance on the margin and some of the comments from the economic forum, and then Chris, I think you said you were hoping for growth in the fourth quarter.

I was wondering if you could tell us, when you are out there talking to business owners, what is their appetite for credit? What is preventing them from borrowing right now, and what have they said in terms of reversing the trend and that would get them borrowing again?

It is a good question. I think there is kind of a mixed message here. I think business owners feel that their revenue base is more stable than it was a year ago. And so therefore they feel more confident in the stability of their business.

Yet they are concerned about a whole bunch of different factors looking forward from taxation to healthcare to global crisis on the economic side, et cetera, et cetera. And I think that causes them to hesitate a little bit more from maybe buying a building versus leasing a building. Buying new equipment or just fixing their existing equipment.

So that slows down some of the loan growth side. However, we don't have to have huge economic growth for us to get our market share up in loan growth. Because we're not Bank of America or Wells Fargo or one of these banks that has a dominant market share.

Our market share is still single digits in most of our markets. Therefore, if we can take 1% of loans from the bigger banks, that is a huge number for us. So I really got our guys focused on trying to get to pull loans out of the bigger banks, if you will, whether commercial real estate or C&I loans, et cetera. And publicity-wise, the bigger banks are probably under more siege than the community banks right now in terms of reputation and the Wall Street movement is or whatever they call that. All the crazy things going on.

We feel like there are opportunities out there and we need to be very aggressive in our calling efforts. And try to pull loans. Our target is more the big banks.

Taking the bear outlook, assuming loan growth doesn't return until the end of, call it 2012 with the declining topline, what kind of offsets do you have to really drive earnings growth given than you have been at a zero provision for the last couple quarters?

In the absence of loan growth and the absence of an acquisition, I would say those two things are still things we are very much focused on. In the absence of those two things, deposit costs we -- can reduce them a little bit, but the other opportunities are really more on the cost reduction side in terms of our -- and I do think we have good potential there, particularly in the professional services area.

And we have a lot of initiatives right now that we have that we're looking at all kinds of things. Like our whole telecommunication side of the business and how we can reduce costs there. In terms of our courier service. How we are outsourcing some of that to reduce costs on the courier side. Because that's a big cost for us. Our print management costs.

We are looking at everything in the organization to get as lean and mean as possible. The biggest opportunity is on the legal side, and the biggest part of that really is on the SEC side. So that would help us a lot, but again, we don't have any comment on that.

Right. Okay. Thanks for taking my call.

Thank you. The next question comes from Gary Tenor from D.A. Davidson.

Good morning. First off on the acquired loan portfolio has been still a pretty steady run up there. It hasn't really slowed down.

Any sense if there you expect that to slow down, if there's going to be any amount of this portfolio sticking around, where do you see that going over the next several quarters?

The run off on that has been pretty strong because we really put a lot of forces on that in terms of the covered loans. We are trying to resolve those loans as quickly as possible and we are fully staffed up there with our workout team and special assets guys on the coverage guide. And maybe a year ago we we're as staffed up as we now but we've got a good team on it and we're after it, and so we are getting quicker resolution.

I do think that over the next few quarters, are going to see the runoff on the covered loan side slow down simply because we have already worked through quite a bit of this. We still got some more to go. I'm ballparking this, but we are probably two thirds of the way through the game.

Okay. As a follow-up, the negative provision for unfunded commitments. Was that a function of any sort of economic outlook or was that just the pipeline diminishing? What is the process on that?

A lot of it had to do with the fact that we had improvement in our dairy and livestock loans in terms of credit grades and so a lot of that is still unfunded and so we reserve based on our credit grades on that and just overall improved credit. We are not reserving as much on the unfunded side as we were before.

Great, thank you.

The next question from Joe Steven from Stevens Capital.

Good morning, Chris.

Hi, Joe.

Almost all of my questions have been answered. I joined a little late. First of all, good quarter.

Did you guys at all talk about the SEC investigation?Your numbers continue to get better and better, and it just seems like this never goes away.

We did mention a few comments on it, but nothing that we haven't mentioned before. Sorry about that. We are fully cooperating with the SEC, and that is about all we are saying, sorry.

Again, good quarter, thank you.

Thanks, Joe.

Thank you. The next question comes from Julianna Balicka from KBW.

Good morning.

Hi, Julianna.

Hi, how are you?

Good.

I have -- well, most of my questions have already been asked, but in terms of dividends, I'm not sure if you discussed any dividend increases or any special dividends or any dividend method of returning capital?

We haven't mentioned anything about the dividend. We look at that on a quarterly basis. One the things we look at is what is our payout as a percentage of our total income for the quarter, and whn you look at historically over the last couple years that has been relatively high, running close to 50% or something around that area.

Now, with $9 million in dividends versus $21 million or $22 million, we are getting getting at more of a normalized level of 40% of income that we are earning after taxes, but again that is something that we do actively discuss with the board meetings, but obviously, we announced that the dividend was the same 8.5 cents this year so we don't have any guidance on that going forward.

Very good. Thank you very much.

Thank you. The next question is from Hugh Miller from Sidoti.

Hi, Chris. Just one quick follow-up question. I'm not sure if anyone touched on this at all, about the tax rate in the quarter just coming in little higher than expected. I know that there's a handful of factors that can influence that in any given quarter, but what is your expectation for that on a go-forward basis?

Well, I'm going let Rich answer that one because obviously our tax rate was up, I think, over 35% for the third quarter. A lot of that was make-up. But, Rich, why don't you?

Okay. What we try to do is try to establish a what we believe will be effective tax rate for the year. As you've seen the last couple of quarters, we had record earnings for the company. And so we included in our earnings stream our two components. We have taxable items and we have non-taxable, such as new municipal security interest and those types of things.

That ratio of the non-taxable income, municiple security income, let's say in my example to total taxable income has shrank, which has driven our tax rate for the year we believe will perhaps be at about a 33% level. So we had to basically true up our total tax expense year-to-date to that level.

So we had to take an additional provision in the third quarter to get to that level.

So from a ballpark standpoint, Hugh, we are thinking -- and again this is not a perfect science. We are thinking roughly 33% tax rate for the fourth quarterish.

Thank you very much.

Thank you. (Operator Instructions).

Okay. At this time there are no more questions so I would like to turn the call back to Mr. Myers.

Well, you know, we thank all of you for joining us on our call today and we appreciate your interest and look forward to speaking with you again on our fourth quarter and year-end 2011 earningsconference call.

In the meantime, please feel free to contact me or Rich. Have a great day. Take care.

Thank you. That does conclude today's teleconference. You may disconnect your phone lines. Thank you for participating, and have a nice day.