CVB Financial Corp (CVBF) 2016 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the second-quarter 2016 CVB Financial Corporation and its subsidiary Citizens Business Bank earnings conference call. My name is Mike and I am your operator for today.

(Operator Instructions)

Please also note this event is being recorded. I would know like to turn the presentation over to your host for today's call, Miss Christina Carrabino. Miss Carrabino, you may proceed, ma'am.

Thank you, Mike, and good morning, everyone. Thank you for joining us today to review our financial results for the second quarter of 2016.

Joining me this morning are Chris Myers, President and Chief Executive Officer, and Allen Nicholson, 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, these visit our website at www.cvbank.com and click on the 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 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, 2015, and in particular, the information set forth in item 1-A, risk factors therein.

Now, I would 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 net earnings of $25.5 million for the second quarter compared with $23.4 million for the first quarter of 2016 and $26.8 million for the year-ago quarter. Earnings for the second quarter of 2016 were positively impacted by the recapture of $2.6 million of non-accrued interest and fees related to the repayment of three TDR loans.

Second-quarter earnings were negatively impacted by approximately $400,000 of expenditures related to the acquisition of County Commerce Bank. Earnings per share were $0.23 for the second quarter compared with $0.22 for the first quarter and $0.25 for the year-ago quarter. Through the first six months of 2016, we earned $48.9 million compared with $42.6 million for the first six months of 2015. Diluted earnings per share were $0.45 for the six-month period ended June 30, 2016 compared with $0.40 for the same period in 2015.

The second quarter represented our 157th consecutive quarter of profitability and 107th consecutive quarter of paying a cash dividend to our shareholders. Our tax equivalent net interest margin was 3.57% for the second quarter compared with 3.52% for the first quarter and 3.65% for the year-ago quarter.

When the impact of the recaptured non-accrued interest on the three TDR loans is excluded, the tax equivalent net interest margin was 3.45% for the quarter. Total loans were $4.24 billion at the end of the second quarter. Loan origination remained strong and was ahead of last year's pace. Loans grew by $65 million or 1.6% from the end of the first quarter.

Total loans and leases net of differed fees and discounts of $4.24 billion at June 30, 2016 increased by $64.5 million, or 1.55%, from March 31, 2016. The quarter-over-quarter increase was principally due to increases of approximately $61.2 million in commercial real estate loans, $7.6 million in commercial and industrial loans, $4.5 million in single-family residential mortgage loans, $4.4 million in construction loans, and $3 million in consumer loans. Dairy and livestock and agribusiness loans decreased by $13.6 million for the quarter.

From the year-over-year perspective, net loans increased $454 million, or 12%. Organic loan growth accounted for $295 million of the growth, or 8%, while County Commerce Bank loans accounted for $159 million of loan growth, or about 4%.

The low interest rate environment continue to put pressure on both loan retention and loan yields. Price competition remained challenging and intensified during the second quarter due to the decline in interest rates. Excluding the impact of the non-accrued interest recaptured on the three paid-off TDR loans and the discount accretion from purchase credit impaired loans, loan yields were 4.53% in the second quarter compared to 4.49% in the first quarter and 4.75% for the second quarter of 2015.

The allowance for loan and lease losses was $60.9 million, or 1.44%, of total loans at June 30, 2016, up from $59.3 million or 1.42% of total loans at March 31, 2016. Net recoveries on loans for the second quarter were $1.6 million. In terms of loan quality, nonperforming assets defined as nonaccrual loans plus OREO were $23.5 million for the second quarter of 2016, down from $24.7 million for the prior quarter.

At June 30, 2016, we had loans delinquent 30 to 89 days of only $478,000. Classified loans for the second quarter were $96.8 million, a $13.2 million increase from the prior quarter. We will have more detailed information on classified loans available on our second-quarter form 10-Q.

Now, I would like to discuss deposits. For the second quarter of 2016, our non-interest-bearing deposits totaled $3.67 billion compared with $3.35 billion for the prior quarter and $3.25 billion for the year-ago quarter. This represents a $314 million increase, or 9%, quarter-over-quarter and a $416 million increase, or 13%, year-over-year. The ending balance at June 30, 2016 included a $210 million deposit from one customer that is expected to be fully withdrawn during the third quarter.

Average non-interest-bearing deposits were $3.44 billion for the second quarter of 2016 compared with $3.28 billion for the prior quarter, an increase of 4.8%. Non-interest-bearing deposits represented 55.7% of our total deposits at quarter-end or 54.2% if the $210 million customer deposit is excluded. Our total cost of deposits and customer repurchase agreements for the second quarter was 11 basis points, unchanged from the prior quarter.

At June 30, 2016, our total deposits and customer repurchase agreements were $7.18 billion compared with $6.66 billion for the same period a year ago and $6.84 billion at March 31, 2016. Average total deposits and customer repurchase agreements were $6.91 billion for the second quarter of 2016 compared with $6.7 billion for the prior quarter and $6.46 billion for the year-ago quarter.

Our objective remains to maintain a low-cost, stable source of funding for our loans and securities and to focus on managing down any significant concentrations within our deposit base.

Let's talk about interest income. Interest income for the second quarter of 2016 totaled $68 million compared with $64.5 million for both the first quarter of 2016 and the second quarter of 2015. The $3.5 million increase over both the first quarter and the year-ago quarter includes $2.6 million of non-accrued interest income recaptured from the payoffs of the three TDR loans during the second quarter. Non-interest income was $9.3 million for the second quarter of 2016 compared with $8.7 million for the prior quarter.

Now expenses. Non-interest expense for the second quarter was $34.4 million, unchanged from the prior order. Non-interest expense was 1.73% of average assets for the second quarter compared with 1.79% for the first quarter. The second quarter represents the first full quarter of ongoing incremental expenses associated with the offices and staff acquired from County Commerce Bank.

Non-recurring expense related to the acquisition was $355,000 during the second quarter, or for the second quarter, compared to $850,000 for the first quarter.

Now I'd like to call over to Allen Nicholson, our new CFO, to discuss our effective tax rate, investment portfolio and overall capital position. Allen?

Thanks, Chris. Good morning, everyone.

Our effective tax was 37.45% for the second quarter, bringing our full-year effective tax rate to 37%. In comparison, our year-to-date effective tax rate was 35.5% for the same period a year ago. Our effective tax rate varies depending upon tax advantaged income as well as available tax credits. The increase in the effective tax rate was impacted by the decline in tax exempt municipal bond interest income.

Looking at our investment portfolio, during the second quarter of 2016, our average interest running balances at other financial institutions and at the Federal Reserve totaled $390 million. This represents an approximate increase of $253 million over the prior quarter. At quarter-end, these balances totaled $683 million.

At June 30, 2016, our combined available-for-sale and held-to-maturity investment securities totaled $2.97 billion, down $135 million or 4% from the first quarter of 2016. Although our objective is to continue to shift our liquidity into loan growth, this quarter-over-quarter decrease was a result of limited opportunities to invest in securities that meet our investment parameters. Investment securities represented 35.8% of our total assets at quarter-end, our lowest percentage level since September 30, 2012.

At quarter-end, investment securities available for sale totaled $2.25 billion, including a pretax unrealized gain of $66.6 million. In addition, we had held-to-maturity investment securities totaling $724 million.

We continued to be selective in investing in securities in the current interest rate environment, carefully weighing market rates and overall interest rate risk. During the second quarter, we purchased $17.7 million in municipal bonds with an average tax equivalent yield of approximately 3.5%. In the current environment, we're finding it challenging to purchase municipal bonds that meet our investment criteria.

During the quarter, we purchased MBS and CMO securities totaling $93.7 million, with an average expected yield of about 1.6% and an average expected duration of less than four years. We also purchased one SPH security for $16 million with average expected yield of 2.18% and an average expected duration of five years.

Prepayments fees in our mortgage-backed investment portfolio have increased in recent months. Based on the current interest rate environment, we are presently projecting approximately $40 million to $60 million in monthly cash flow from our portfolio, including calls on municipal bonds.

Now turning to our capital position. For the six months ended the June 30, 2016, shareholders equity increased by $68.1 million from December 31, 2015, to $991.5 million at June 30, 2016. The increase was due to $48.9 million in net earnings, $21.6 million for the issuance of common stock for the acquisition of County Commerce Bank, a $20.2 million net increase in unrealized gain on available-for-sale securities and approximately $3.3 million of various stock-based compensation items. This was offset by $25.9 million in cash dividends.

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

Thanks, Allen. One point of clarification, Allen, the $93.7 million of MBS and CMOs, the yield on that was 1.96%. Is that correct?

Expected yield is 1.96%.

Yes. Okay. I thought you might have said 1.6%, but 1.96% on that is the right number. Thanks for clarifying that.

All right. Let's talk about economic conditions. In terms of California drought, we continue to see little effect on the repayment of our loans. The level of statewide drought has decreased modestly over the past year, but long-term issues still remain. It is California. The state continues to closely monitor water usage and we once again will be hoping for a wet winter.

Turning to the California economy according to various economic reports. As the first half of 2016 drew to a close, the California economy maintained a steady course and is on track for the fifth consecutive year of economic expansion, job creation and lower unemployment. California's labor market continued to improve during the second quarter.

California's employment development division reported the unemployment rate was 5.2% in May 2016, the lowest in nine years, compared with 5.3% in April and 6.4% back in May 2015. The state outpaced the nation in terms of job gains with a 2.8% yearly increase in May compared to the nation's 1.7% rate. Nearly every major industry added jobs in first half of this year, while business activity increased and wages advanced modestly.

The California housing market continued to move forward, low mortgage rates have helped to fuel the increase in sales, although lending standards are still tight, which is good. The supply of existing homes remains lean and new home construction continues to proceed at a modest pace. Through the balance of this year, California's economy is fully expected to outpace the nation both in output growth and job growth.

In terms of the dairy industry, the short-term outlook still appears somewhat challenging as milk rises have dropped and remain low. However, the longer-term outlook appears better as the majority of industry analysts predict a steady rise in global dairy trade for the next decade due to population growth and rising income in developing nations.

In closing, as we move into the second half of 2016, we remain focused on growing loans in loan types and geographies where we have expertise. Our recent accumulation of large overnight cash balances has our organization focused on earning asset growth. With the existing interest rate environment, we need to be mindful of maintaining high-quality assets as we believe risk return management and business focus will be critical components to achieving future success for our Company.

And that concludes today's presentation. Allen and I are happy to take any questions that you might have. Thank you.

(Operator Instructions)

Brian Zabora, Hovde Group.

Thanks. Good morning.

Good morning, Brian.

First question maybe on M&A. You mentioned in the release, you talked about augmenting growth with small strategic transactions potentially. With this lower interest rate environment, are you seeing better opportunities or more opportunities and is the size, when you think about small, is it maybe in the $250 million to $500 million in asset size that you've been recently?

Yes, we are having continuous conversations along the way and I think that, to answer your question, I think that is, when I say small, I really am referring to the under $1 billion in assets and over a couple hundred million in assets. So call it $200 million in assets to $1 billion in assets. I think that the pressure on net interest margins and spreads is a big thing in the community banking business.

I think as we look forward, I think you are going to see the smaller banks who have been able to harvest income off releasing loan loss reserves and maybe selling securities and taking gains of those. Those things are going to go away here the next year or two. So profit margins are going to be pressured. There's going to be pressured for us. They're going to be pressured for everyone.

So I do think that's going to push more and more M&A into the discussion point. The question is, is the price expectations between buyer and seller and those are continuous negotiations that go on. But we're optimistic that we will continue to be able to build both organically and hopefully do a few deals here in the next couple years.

That's great. And then another question on just the level of pay-downs you had in the loan book. Could you give us a maybe sense of magnitude of what you saw this quarter in pay-downs and is that going to -- do you see that kind of trickling into third quarter with, again, the lower rates?

I think the pay-downs, this has become less part of our business the last couple years and when you look at our prepayment penalties in 20 -- a good way to track how big pay-downs are for us in the quarter, we don't announce what the actual pay-downs are, but because it is a choppy thing to announce.

Some of them are properties sold, some of them are refinance, some of them we refinance ourselves. But prepayment penalties in 2015 for our organization were about $4.9 million for the year and I think we're about $1.9 million or close to $2 million for the first six months of the year. So still a very elevated level from what we've been historically for this Company.

I think one of the prepayments that I wanted to mention was the three TDR loans that were paid off were about $17 million. Now, that's a good thing. We got paid off in those, we took a gain of $2.6 million in interest income and other income and that was a good trade for us.

If you take that $17 million out, if you really look, we really grew our loans by pretty much 2% for the quarter, which is our objective. So I feel like, despite prepayment pressure, our loan volumes in our teams are doing a really good job and I think that 2% per quarter is a good expectation for us, it is a good goal for us, and I think if prepayment pressures subsided a little bit, we could do even better than that.

So I'm optimistic as far as loan productivity going forward. Our new teams have kicked in at the bank. All of our teams now are marginally profitable, which means on the margin they're making money, which is good, so we don't have any cost and that's San Diego, that's Santa Barbara, that's Ventura, that's LA, new teams, that's our Newport Beach, we brought a new team into there.

So I'm really excited about the fact that these guys have hit the ground running and our existing teams are doing a good job going out and hustling after quality assets. Overall, our sales teams, I'm very proud of the job that they've done here.

If you look at where we were a year ago, our loan totals were about $3.8 billion and now we are about $4.25 billion. So we are up $450 million year-over-year. That's 12%. 4% of that is due to the County Commerce Bank acquisition and 8% of that is due to our organic growth.

So I think we are doing what we set out to do and we're going to continue to try to bring on more teams and expand our market share and so far so good. I don't like the interest rate environment, although I'm glad at least the 10-year treasury is closer to 1.60% then when 1.35% like it was two weeks ago. I think that's good news, as that 10-year treasury goes up, that's good news for CVB.

Great, thank you for taking my questions.

Aaron Deer, Sandler O'Neill.

Good morning, everyone.

Good morning, Aaron.

Allen, congratulations on the new gig and welcome to CVBF.

Thanks, Aaron.

I'm going to start, if I may, on the, I guess Chris, you mentioned in your opening comments the loan yields ex the recapture in the discount accretion of it. I just want to make sure I got those numbers right. I think you put it at 4.53% versus 4.49% in the prior quarter?

Yes.

So is it reasonable to assume that you have been putting on new loans at a rate higher than the portfolio average?

A lot of stuff goes into that because you have to look at prepayment fees are in there, you look at different interest income to go with that, but no. As far as, I guess the best way to look at this is our average loan yield is right around what is that 4.6% on the books right now?

4.5%.

4.5% right? And I would say the average loan that we are putting on the books is probably 4% or in the low 4%s. So there's probably a 40 to 50 basis point differential in between the new loans that we are putting on now and the average loan yield on the books.

The same thing on the securities side. Our security yield is around 2.45% and securities that we're buying right now, if we can buy them, are averaging 2% or a little bit over 2% in total. So there is a headwind there of a 40 basis points across the board.

Where what we feel like we're in a great position is we have great funding and we are able to use that funding to grow loans and if we can replace 2.4% securities with 4% loans, or a little over 4% loan yield, of the new loans we're putting on that, that's actually going to help our margin going forward. The pace of that is the question and we are accumulating so much cash right now. I mean, we've got over $600 million in cash at the end of the quarter.

Now, $210 million of that we feel is short-term. It's going to go out with that one large depositor. But notwithstanding that, to be sitting here at $450 million plus in cash at the end of the quarter, we want to deploy that cash at something other than 50 basis points, which is what we're getting from the Federal Reserve.

So that's our challenge and that's why we are hiring these new teams and that's why we're hustling out there. But we haven't bought any loans yet and maybe that is a consideration for the future, potentially. But we prefer to build it out organically. We've just seen a much higher success rate in building our loans organically than in purchasing loans, like when we purchased mortgage pools 10 years ago. We just find that it is a lot purer for us and more relationship oriented to be building our own loans.

Sure. Well, and you sound pretty positive on the pipeline and what your new producers are bringing on. How about in terms of additional hiring opportunities given the success that you've had in building out some of these new teams?

I really think that we've got -- we are in a great position, because I think our bank can compete on a price basis with anyone for quality assets. We have done a lot of new hiring. We continue to. We're talking to a lot of people. I think you will see us continue to expand on kind of that de novo hiring new teams, hiring new bankers.

It is very important because in the banking industry in general, we have a maturing workforce and it is important to bring in that new talent and whether they're millennials or whatever that talent is, we need to keep that rolling so that we can grow organically and I say this all the time. I think your organization needs to be able to grow organically or you don't have true meaning in the marketplace and that's our goal and we are growing organically.

If we can augment that with some acquisitions and who knows maybe we get lucky and a larger acquisition comes our way sometime, some way. But in the meantime, it is just we are blocking and tackling here and executing every day and I feel very positive about our teams and the management here and especially the management changes.

I'm going to talk a little bit about, I think Allen Nicholson has hit the ground running here as our CFO. Our Chief Credit Officer just started three days ago, so obviously, too new to rate, but at the same time, we are excited to have him on board and I've got my team up and running and we are executing, so some exciting things going on here.

That's great. Thanks, Chris. I will get back in the queue.

(Operator Instructions)

Matthew Clark, Piper Jaffray.

Good morning, guys.

Good morning, how are you?

Good. Good. In the securities portfolio, just looking at that change in yields, just curious how much of that came from an increase in premium amortization and how much of that was just more cash and how much of that was just reinvesting at lower rates?

That sounds like a CFO question to me.

Well, I can tell you that, from an acceleration perspective, I think it was very modest. We did have $66 million in calls in the muni portfolio. And certainly we are replacing that at 10 to 15 basis points lower and we frankly just can't replace all of it. We cannot find enough municipal bonds that meet our criteria in the marketplace.

In the mortgage-back arena, we had about, probably between agency and mortgage-backs, we probably had close to $200 million in principle comeback. A little bit elevated from where we had been, but once again, the yields we are repurchasing are probably 10 to 12 basis points lower than the portfolio.

Okay. And then, Chris, you mentioned that pricing competition intensified during the quarter. Can you talk to -- does your comment about new money going on the books around 4%, does that incorporate that incremental competition? And --

Yes. Go ahead, I'm sorry.

I was also going to ask about the risk of repayment activity.

Yes, I think as that 10-year treasury comes down, our commercial real estate loans are the primary area where we were finding more price competition. It is not in the C&I side and any kind of fixed-rate loan that we are going out for 5 or 7 or 10 years on, that's where the real we've seen some pricing differential. That's starting to come back up a little bit here because rates are slowly returning back to hopefully the high 1%s in the 10-year treasury rate area.

So I don't think it's any huge headwind at this point, but it is something that we are positioned to compete for that. But when we are lending money out at 4% or a little over 4% or sometimes less than 4%, we have to be very mindful of our risk return. And so we're really pushing for quality, quality, quality along the way here. But I think that gain, so to speak, plays into who we are.

I mean, if you look at our bank at 157 quarters of profitability and 107 quarters of paying the cash dividend and making money through all the different recessions even though we are headquartered in the Inland Empire, et cetera, et cetera, as we hear from people, but this is what we do.

We are good at -- our objective is to build long-term relationships with the top quartile, top 25% of small- to medium-sized businesses and the business owners. So this kind of plays into our hands and I think with our cost to funds being 11 basis points, 12 basis points, that's been running that way for quite some time now, we are well-positioned to compete with even the big banks on pricing when we want to and when we feel the risk return is appropriate.

But we have to look carefully at each one of those decisions. What we don't want to do is start piling on average loans and providing them with A pricing. We just, we are not going to dilute the, we're going to do everything we can not to dilute the quality of our asset mix, because we want to make sure we are well-positioned when the next recession comes to power right through it.

Got it. And then just one quick one. In other non-interest income, excluding the branch sale gain, the $2.7 million or so, net of that, anything that's up in the quarter? Just curious if there's anything unusual in there, if that's a good run rate?

Well, what we are starting to do more of is interest rate swaps. And so we've seen an increase of a couple hundred thousand, I think, in the first six months of the year in interest rate swaps and really when, the time that we want to do interest rate swaps are when there's a flat yield curve, because what happens is if we are going to put a loan out at 4% fixed, where we can get 3% variable, we will take that 3% variable on a commercial real estate loan, because that differential between the fixed and the variable just isn't enough to make it worth our while.

But when that differential widens to say 2% and you have a 5% versus a 3% variable yield or 2.5% versus 4.5% or whatever the number is, then it is more compelling for us to put on more fixed-rate loans because, just because we have a bigger yield and it is worth us taking a little bit more interest rate risk.

Right now, with the flattening of yield curve and the 10-year treasury rate coming down, that's pushing more of a pipeline into our swaps. To a customer, they're still getting a fixed rate. They're indifferent to some extent between whether they get a swap rate or fixed rate on our books. They're getting the same thing either way. It is just what we're doing behind the scenes whether we want to do that on a LIBOR-based swap, or do we want to just fix that in and take the interest rate risk ourselves.

So that's one area. The other area on fee income was our trust income was up quarter-over-quarter. And our investment services income was up quarter-over-quarter. In fact, year-to-date we're up by about $380,000 or about, I'll call that about 8% year-over-year-ish. 8.74% is what the number is. I got handed a piece of paper.

Thank you.

So I think those are two drivers.

Jackie Camero, KBW.

Hello, good morning.

Hello, Jackie.

Chris, I wondered if you could provide us with an update on how you are thinking about the Santa Barbara/Ventura market, what growth is looking like there and just an update on future prospects that you are seeing.

Well, I will say, first of all, I think we have some really good people in that marketplace from Santa Barbara to Ventura to Oxnard and the County Commerce people are first class associates and I think they combined very well with our Company, so we are very excited about that marketplace. We have five locations in that marketplace stretching from Westlake Village in the South through Camarillo, Ventura, Oxnard, and then Santa Barbara in the North.

Our plan is really, with our larger balance sheet, our larger lending capacity and County Commerce being a smaller bank, we are hoping to uplift a lot of those relationships into bigger relationships for us and then cross-sell into other products and services with that customer base. In turn, I think that's a good market for us.

It is a strong wealth management market as well and we are trying to deploy some resources there on the wealth management investment services side too up in that Santa Barbara area, so I'm very optimistic. I think it is going be higher growth area for us going forward than probably the main core of the bank.

Okay. Have you have seen, has there been any attrition from the acquisition?

There's natural attrition, which obviously we are doing, there's duplication of jobs and so forth. We need to pick their associate or our associate. So yes, those were naturally built in there. But I think our team is, we've got a good team in the marketplace and nothing of consequence or concern to us. There's a couple people here and there that have left, but nothing of consequence that we think is going to slow us down.

Okay. So is it fair to say that attrition has been fairly minimal and that, over the next several quarters, we can see that particular geography continue to contribute to growth on an increasing basis?

I would say I certainly am counting on that and planning on that, but we will have to see.

Okay. Great. Thank you.

Thanks, Jackie.

Aaron Deer, Sandler O'Neill.

Hello, Chris, just a quick follow-up on one of your comments. It sounded like you might have some willingness to do loan purchases in the absence, maybe not hitting the organic road targets or acquisitions that you would prefer. If you were to do something along those lines, what kind of product might you be looking at?

Then as a follow-on to that question, have you also thought at all about other forms of maybe capital actions in terms of maybe share repurchases or special dividends or another way to manage down your capital?

Yes, those are great questions and we're looking at all of those stuff and those are Executive Management discussions we're having right now and Board discussions as we accumulate more and more cash and project that we are going to accumulate more cash, we've got to figure out how we are going to deploy that cash in a way that is safe. I can say this: we have made no decision at this time to purchase any loans. That could change a week from now. We could decide to do that.

Our focus is going to be, if we decide to purchase loans, we are going to focus on high, high-quality loans. Because we look at any purchase of any loan that we would do or loan portfolio that we would do as really a substitute for our investment securities portfolio to try to take that excess cash we have and get a better yield than 50 basis points overnight and we'll get a better yield than what we could buy securities on.

Which, right now, any mortgage-backs or CMOs, we're probably buying at less than 2% and maybe significantly less than 2%, so that would be our intent if we did that. In general, we prefer not to buy loans because it is not relationship oriented and so that would be something we would have to look at. But again, quality is paramount to us in that.

So if we did look at different types, I think we are under-weighted in housing and multi-family. We might look in that area. And certainly, we always love a commercial industrial and we might look in that area too. So I'd say, between those three types, single-family residential, multi-family and commercial industrial, I think that would be the highest likelihood if we did anything there.

In terms of the capital side, we are looking at ways to deploy our capital, and again, the priority remains the same. M&A is first. I think making sure we maintain our cash dividend and payout a healthy cash dividend, right now, we are paying about 50%, which we think is a healthy level and a good level and a competitive level. We could look at buying back stock depending on our stock price going forward. Those are options too because we are, we've harvested -- I mean, we have a lot of capital and certainly, we feel very comfortable operating this Company with capital levels that are in the 8% to 9% range.

Okay. Terrific. Thanks for the additional color.

Matthew Clark, Piper Jaffray.

Just some house-cleaning stuff. Tax rate has been pumping up here the last couple of quarters. Just curious what we should use going forward.

Matthew, our year-to-date effective tax rate of 37% is our best estimate for the year. And as we noted, it is obviously dependent on overall growth in earnings and our ability to find tax advantaged income like municipal bonds. So, it could obviously vary, but that is our current projection.

Okay and then just wanted an update on the pipeline of recoveries. Obviously, you had some nice recoveries this quarter. Just curious how much we might be able to see going forward.

Yes, I think we still have some, we believe, recoveries that will be realized in the remainder of 2016 and even some realized in 2017 as well. But we're through a lot of that. I would say we are maybe 2/3 of the way somehow, just as a guesstimate. We will see some more recoveries going on, I believe, in the third and fourth quarter of this year and into 2017 as well.

The pace of those is just hard to predict as we are working hard to resolve things, but we are also, one of the things that we've been able to do through this cycle is hang on to some of these problem loans, because our balance sheet has been strong enough and our capital position has been strong enough and work out a better long-term resolution than what we would've gotten from selling those loans or disposing of those loans a couple years ago.

So on some of these things, we are hanging on for every last dollar and you are seeing some of that. You saw some of that in the second quarter and I think you will see some of that in the third and fourth quarter and into 2017, but this is coming -- we are in the, call it, the middle of the third quarter if you use a football game analogy, in terms of our recoveries I think and by the end of 2017, I think we will have pretty much the vast majority of it cleared out.

Okay and then on your reserve coverage on loans that ticked up here for the first time in a while. Just curious if this is trough levels, that we might bump up a little bit from here?

I think when you look at the percentage of their reserve, it ticked up a little bit. But we basically, we recovered $1.6 million for the quarter and just didn't release anything. And so that $1.6 million for the quarter just went into our loan loss reserve and supporting the loan growth that we had during the quarter.

Got it, thanks.

(Operator Instructions)

At this time, there appear to be no further questions. I will go ahead and hand the conference back over to Mr. Chris Myers. Sir?

Thank you very much. Everyone, we appreciate your interest and look forward to speaking with you again on our third-quarter 2016 earnings conference call in October. In the meantime, feel free to contact me or Allen Nicholson, our new CFO. Have a great day and thank you for listening. Take care.

We thank you, sir, and also 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. Again, we thank you all for attending. Take care and have a great day.