CVB Financial Corp (CVBF) 2016 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the fourth-quarter and year-end 2016 CVB Financial Corp. and its subsidiary Citizens Business Bank earnings conference call. My name is Andrea and I am your operator for today. (Operator Instructions) Please note that this event is being recorded.

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

Thank you, Andrea, and good morning, everyone. Thank you for joining us today to review our financial results for the fourth quarter and year end 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, please visit our website at www.cbbank.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 1A risk factors therein.

Now I will turn 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 $27.1 million for the fourth quarter compared to $25.4 million for the third quarter of 2016 and $28.6 million for the year-ago quarter. Earnings per share were $0.25 for the fourth quarter compared to $0.23 for the third quarter and $0.27 for the year-ago quarter.

Net earnings were $101.4 million for the year ended 2016 compared to $99.1 million for 2015. Diluted earnings per share were $0.94 for 2016 compared with $0.93 for 2015.

The fourth quarter represented our 159th consecutive quarter of profitability and 109th consecutive quarter of paying a cash dividend to our shareholders. The fourth quarter included several sizable items that impacted earnings. We had approximately $4.9 million in recoveries during the order, which resulted in a $4.4 million loan loss recapture.

In addition, we recaptured $450,000 related to our reserve for unfunded loan commitments. We also incurred an approximate $2.5 million charge to write down an asset classified as held for sale to its estimated market value.

As we noted on last quarter's call, the Bank purchased a new operations building to house central operations, information technology, and other bank departments. In analyzing our options, we determined the best course of action is to sell the building. Based on various appraisals, the prior book value of our existing operations center was determined to be approximately $2.5 million higher than the current estimated market value.

As disclosed in prior SEC filings, we have been defending the Bank against a wage and hour lawsuit. After much consternation, we decided to settle this lawsuit through mediation rather than face the ongoing costs of litigation and the uncertainty of outcome. We accrued $1.5 million to the fourth quarter to settle this lawsuit.

Our tax equivalent net interest margin was 3.47% for the fourth quarter compared with 3.30% for the third quarter and 3.52% for the year-ago quarter. Prepayment penalties for the fourth quarter were $739,000 compared to $766,000 for the prior quarter. During the fourth quarter, we recovered $716,000 in interest related to nonaccrual loans, which resulted in a 3-basis-point increase of our net interest margin.

Total loans grew by $100 million or 2.3% for the fourth quarter to $4.4 billion. During the fourth quarter, dairy and livestock and agribusiness loans increased by $100 million, commercial real estate loans increased by $16 million, and single-family residential loans increased by $9 million. Commercial and industrial loans declined by $9 million and all other loans declined by $16 million in aggregate.

The majority of the increase in dairy and livestock loans was seasonal, as most dairy owners choose to defer their milk checks into the first quarter of the following year and/or prepay their feed expenses.

The low interest rate environment and competitive pricing pressures continue to impact both loan retention and loan yields during the fourth quarter. However, loan rate pressures subsided in the latter part of the quarter due to the rise in interest rates.

Excluding recaptured interest on nonaccrual loans, our loan yields were 4.43% for the fourth quarter compared to 4.41% for the third quarter and 4.51% for the fourth quarter of 2015. In looking forward, we are anticipating that loan repricing pressure will be less of a factor in 2017 due to higher overall interest rates.

For 2016, net loans increased $378 million or 9.4% compared to 2015. Organic loan growth accounted for $235 million of the growth or about 6%, while the acquisition of County Commerce Bank accounted for the remaining $143 million of loan growth.

The allowance for loan and lease losses was $61.5 million or 1.40% of total loans at December 31, 2016, compared with $61 million or 1.42% of total loans at September 30, 2016. Net recoveries on loans for the fourth quarter were $4.9 million.

In terms of loan quality, nonperforming assets, defined as nonaccrual loans plus other real estate owned, were $11.7 million at the end of the fourth quarter compared to $13.5 million for the prior quarter. At December 31, 2016, we had loans delinquent 30 to 89 days of only $436,000.

Classified loans for the fourth quarter were $108 million, a $3 million increase from the prior quarter. The increase was due to downgrades in the dairy and livestock portfolio. We will have more detailed information on classified loans available in our year-end Form 10-K.

Now I'd like to discuss deposits. For the fourth quarter of 2016, our noninterest-bearing deposits totaled $3.67 billion compared with $3.66 billion for the prior quarter and $3.25 billion for the year-ago quarter. For the year, this represents a $423 million increase or 13%.

The ending balance at December 31, 2016, included a $110 million deposit from one customer that declined by $37 million from the end of the third quarter. This deposit is expected to continue to decline throughout 2017.

Average noninterest-bearing deposits were $3.72 billion for the fourth quarter of 2016, consistent with the prior quarter. Average noninterest-bearing deposits represented 58.4% of our total deposits for the quarter.

Our total cost of deposits and customer repurchase agreements for the third quarter was 10 basis points, the same as the prior quarter. At December 31, 2016, our total deposits and customer repurchase agreements were $6.91 billion compared with $6.61 billion for the same period a year ago and $6.90 billion at September 30, 2016. Average total deposits and customer purchase agreements were $7 billion for the fourth quarter of 2016, down $146 million from the prior quarter, but $282 million higher than the fourth quarter of 2015.

We continued to focus on maintaining a low-cost stable source of funding for our loans and securities. As part of that focus, we did not renew any time deposits from the state of California that matured during the third or fourth quarter. This was the main driver of the $156 million decline in average time deposits from the third quarter and the $327 million decrease from the fourth quarter of 2015. We consider these state of California deposits as interest-rate sensitive and non-relationship based.

Interest income -- interest income for the fourth quarter of 2016 totaled $67.4 million compared with $65.2 million for the prior quarter and $65.1 million for the same period a year ago. Excluding interest recaptured on nonaccrual loans, interest income for the fourth quarter of 2016 increased by $1.5 million over the prior quarter, as the tax equivalent yield on earning assets grew by 14 basis points.

Interest income grew by $2.3 million from the same quarter last year, as interest-bearing assets were higher by approximately $350 million. Noninterest income was $8.4 million for the fourth quarter of 2016 compared with $9.2 million for the prior quarter. There were no gains on sales of securities in the current quarter compared to $548,000 of gains in the prior quarter.

Now expenses. Noninterest expense for the fourth quarter was $34.9 million compared with $33 million for the prior quarter. The $1.9 million increase was due to one-time charges for a $2.5 million write-down on our operations center, which was classified as an asset held for sale; and $1.5 million related to the wage and hour lawsuit settlement. Noninterest expense was 1.72% of average assets for the fourth quarter compared with 1.59% for the third quarter.

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

Thanks, Chris. Good morning, everyone. Our effective tax rate was 37.5% for the fourth quarter, consistent with our full-year effective tax rate of 37.5%. In comparison, our 2015 effective tax rate was 34.5%. 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 continued decline in tax-exempt municipal bond interest income.

Looking to our investment portfolio, during the fourth quarter of 2016, our average interest-earning balances at other financial institutions and at the Federal Reserve totaled $190 million. We decreased these balances by $373 million on average from the prior quarter, as we transitioned these balances into loan growth and investment purchases during the quarter. At quarter end, these balances totaled $50 million.

During the fourth quarter, these balances represented approximately 2.5% of our average earning assets, which compares to 7.4% in the prior quarter. This decrease in lower-yielding assets, combined with growth in the investment and loan portfolios, contributed to the improvement in net interest margin from the third quarter.

At December 31, 2016, our combined available-for-sale and held-to-maturity investment securities totaled $3.18 billion, increasing by $75.6 million or 2.4% from the third quarter of 2016. Investment securities represented 39.4% of our total assets at quarter end and were 41% of our average earning assets during the fourth quarter compared to 38% in the prior quarter.

At quarter end, investment securities available-for-sale totaled $2.27 billion, including a pre-tax unrealized gain of $14.6 million. In addition, we had held-to-maturity investment securities totaling $912 million. The tax equivalent yield on the total securities portfolio was 2.31% for the fourth quarter, which is down 7 basis points from the prior quarter and 20 basis points from the fourth quarter of 2015.

We evaluate liquidity, market rates, and overall price and duration risks in determining the level and type of security investments we make each quarter. During the fourth quarter, we purchased $319 million of securities with a tax equivalent yield of 2.19%. Our purchases of available-for-sale securities were comprised of mortgage-backed securities totaling $235 million with an average expected yield of 2.07%.

Held-to-maturity security purchases for the quarter included $62 million of collateralized mortgage obligations, or CMOs, with an expected yield of 2.19%. In addition, we added $15.8 million in high-quality bank-qualified municipal band bonds to the held-to-maturity portfolio with an average tax equivalent yield of 3.9%.

There continues to be a limited supply of municipal bonds that meet our investment criteria, but we were able to purchase approximately $1.4 million more than the third quarter. Market rates also improved, resulting in a 59-basis-point increase in the tax equivalent yields on purchases in the fourth quarter related to municipal bonds compared to the prior quarter.

Prepayment speeds in our investment portfolio have slowed in recent months. Based on the current interest rate environment, we currently project approximately $140 million to $150 million in quarterly cash outflows.

Now looking at our capital position. Shareholders' equity increased $67.5 million to $991 million in 2016. The year-over-year increase was due to $101.4 million in net earnings, $21.6 million for the issuance of common stock for the acquisition of County Commerce Bank, and $8.4 million of various stock-based compensation items. This was offset by $51.8 million dollars in cash dividends, $1.4 million in shares repurchased under our common stock repurchase program, and a $10.7 million decline in accumulated other comprehensive income, net of tax, which was to due to the impact of rising rates at year-end on our available-for-sale investment portfolio.

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

Thanks, Allen. Now let's talk about economic conditions. In terms of the California drought, winter has so far brought a great deal of rain and snow, contributing to a significant decrease in California's drought conditions, particularly in Northern California. We continue to see little effect of the drought on the prepayment of our customers' loans.

Turning to the California economy, according to various economic reports. As the last half of 2016 drew to a close, the California economy maintained a steady course. California's unemployment rate fell to 5.3% in November 2016 compared with 5.5% in October and 5.9% back in November 2015.

With November's jobs gains, California has gained a total of 2.4 million jobs since the economic expansion began in February 2010. Virtually every industry in the state continued to add jobs from an annual perspective.

The California housing market continued to move forward. Low mortgage rates have helped to fuel the increase in sales. The supply of existing homes remains lean, and new home construction continues to proceed at a modest pace, although it appears to be accelerating a little bit. All in all, the statewide economy is poised for continued growth over the next several quarters and should outpace most other states in the nation.

In terms of the dairy industry, the forecast for 2017 appears to be an improvement over last year. Milk price futures are trending upward and feed costs are predicted to be favorable to dairy farmers. We are cautiously optimistic.

In closing, we are pleased with 2016 and feel we are well positioned to have a great year in 2017. We were excited to complete our acquisition of County Commerce Bank earlier this year and look forward to the expected closing of the acquisition of Valley Business Bank later this quarter.

We thank our employees for their continued hard work and dedication, our customers for their loyalty, our shareholders for their continued support, and our Board of Directors for their ongoing guidance.

As we move into 2017, we remain externally focused on expanding our geographic footprint, both organically and through acquisitions. We remain internally focused on quality loan growth, fee income expansion, continued strong core deposits, and overall operating efficiency.

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

(Operator Instructions) Jacque Bohlen, KBW.

I wondered if we could first touch off on expenses. I'm just kind of looking at the quarter's run rates, excluding the building costs, the settlement, and the M&A fees. It looked like compensation and occupancy were down a little bit. Were those year-end true-ups or was there any sort of change in either of the run rates?

Yes, there was a little bit of true-up on the salary and wage expense in terms of bonus accrual, but it -- not a hugely significant number, just a few hundred thousand dollars there. On the occupancy side, we've been doing some consolidation, getting more efficiency on the occupancy place and I think that's starting to pay off a little bit.

I do think in looking forward at expenses, though, the next quarter or two I think our expenses could be elevated somewhat because of several things we have going on. First of all, we're moving from our operations technology center into a whole new building. There's new expenses that will come up on that building and we're building that out right now.

A lot of those expenses will be capitalized, but some of those expenses, like moving expenses and other items, will not be capitalized. So I think you're going to see elevated expenses related to our building move in the first quarter that could even leak into the second quarter.

In terms of our acquisition of Valley Business Bank, I think you are going to see elevated expenses there as well. Those are the two areas that I think expenses will be heightened, but as far as the core expense rate of this Company, we're pretty disciplined. And I think we'll continue to show solid numbers there.

Okay. And is a mid-quarter time frame, maybe mid- to late-quarter time frame, appropriate for the Valley closure?

Yes, I think that's it. Our objective is to close it by the end of February. I think we've stated here at the end of the first quarter by the end of February, if you read our actual definitive agreement and so forth, that end of February is our anticipated closing date.

Okay. And just one clarification question from your prepared remarks. The mark on the building -- was that a mark on the new building or was that a mark on the old building?

It's a mark on the old building. And what happens is we've held that building now for about a dozen years, and we've done a lot of improvements to it. We customized the building; it's our operations building. So there was a lot of stuff in that that may not translate to a new buyer.

So we did an evaluation of that, and then at the end of the day, we came up with this $2.5 million shortfall. And we decided that we are going to proceed with attempting to sell the building. So once we did that, we felt it made sense to recognize that. Now, the building probably won't be sold actually until the second or third quarter of 2017, but that remains to be seen.

Okay. Thanks, guys.

Gary Tenner, D.A. Davidson.

Just a question regarding what you've observed over the last couple months in terms of customer activity. Obviously, you had the spike-up in loan growth on the dairy and livestock piece. But X that, the core business -- any changes from your customers on how they are kind of looking at the world and the outlook there?

That's a great question. And right now, let me talk a little bit how interest rates are affecting that and then we can talk a little bit just the general kind of business environment that we're in.

So as I said, during the quarter, as rates increased at the end of the quarter, we started seeing prepayment pressures subside. Now, as you look forward, if prepayment pressure continues to subside in 2017, which would be likely because of higher interest rates -- if interest rates stay up, right? If they come back down, who knows.

But if they stay up, you are going to see a couple things. First of all, you're going to see that our prepayment speeds on -- our payoffs on our existing loans should slow down, so that's going to help loan retention, if you will, and potentially loan growth.

Now conversely, though, the refinance market on commercial real estate will probably slow down, because rates that are 4.5%, 5% out there won't get refinanced, they will stay in place. And so that refinance market is going to be more difficult for us to get new loan volume out of. So we're really focusing our sales teams on operating companies and making sure they are calling on operating companies and new business and expansion and all that.

We do feel there is an optimism that's out there. But it's going to take a while to see that come to fruition. The optimism I think is just in -- we bank a lot of entrepreneurs. And I think that with the recent run-up in the stock market and maybe optimism about taxation and regulation and things like that, I think that entrepreneurs may get more aggressive.

Do I have examples of that yet? Not specifically, but we're starting to see that feel come into the marketplace. So I'm hoping a quarter from now, I'm able to give you a little bit or color on that.

That's helpful. Appreciate it. And then just on the dairy and livestock current end run-up, how much of that has already flowed out here through the first few weeks of January?

About $55 million has already been paid back down from the year-end.

Okay. Thank you.

And we anticipate, ballpark-ish, another $20 million, $25 million probably coming out of there.

Okay. Thanks again.

Matthew Clark, Piper Jaffray.

Just first maybe on the margin, you mentioned that there is less rate pressure out there. And it also looks like the purchases this quarter in the securities portfolio came at a rate slightly above the portfolio.

But just curious, I guess first, what's the rate I guess on new production in the quarter, maybe even in the second half of the quarter on new loans? And then is it fair to assume maybe more modest margin pressure going forward, with still some repricing in the loan book?

I don't know that in the fourth quarter we really felt any higher interest rates on our loans, other than the move in prime. For the most part, there is like a 60-day cycle to close these commercial real estate loans. So when rates drop in the middle of October, most of our borrowers have until the middle of December to get those loans booked or the rates are going to go up on them. So a lot of them were rushing to get them closed, so to speak.

Our loan pipeline is pretty good. It's not exceptional, but it's solid. It's really been consistent over the last several months, so I don't really see a change in that as of yet. I think, as far as the security side, I think we purchased -- Allen, give a little color on our security purchases and your thoughts of going forward on that.

Sure. We actually have seen early in 2017 some of the yields on bonds that are out there for us to purchase come back a little bit from where they were at the end of the fourth quarter. But we did see a lot better opportunities: as I noted, the tax equivalent yield on our bond purchases was 2.19% for the quarter. And that was better as the quarter went along -- well over 2.25% as we got into the latter half.

We do -- probably will still see some continued pressure on the overall yield in that portfolio because runoff is running off at probably 2.50%. And so depending on where rates are, we may or may not be able to replace them exactly at the same levels.

Okay. Great. And then maybe just on credit -- first on your pipeline of recoveries, I know they are difficult to forecast, but I think you attempted to previously. What are your thoughts for the ability to continue to experience net recoveries for the next two quarters?

I think the net recovery run we've had has been pretty good, and we feel like we're definitely in the -- if we use the football game analogy, we're in the fourth quarter of our net recovery run here. We do have some more to come.

I don't anticipate we'll have a net recovery like we did in 2016, where we had $9 million -- almost 9, what was it -- $8.8 million in net recoveries -- $8.8 million in net recoveries for the year. I don't think we'll have as strong a year as that in 2017; that's not foreseeable.

I do think that at least for the first six months of year, we will have net recoveries, barring something unforeseen. So there is some left, but it really runs itself through by the end of 2017 for most intents and purposes. So it is coming to an end.

Okay.

It's been a good ride, though.

Yes, no doubt. And then just on classified loans in the dairy portfolio; another increase here this quarter. Can you just maybe size up what portion of your portfolio is in classified? Maybe it's the related reserve, and how we should think about that trend going forward?

We have had a run-up on the dairy side in terms of classified loans. And we do anticipate, or I guess we're cautiously optimistic that some of those downgrades will be upgraded in 2017 when we get the year-end financial statements and show a solid first quarter.

The milk futures -- milk is now at a price where a lot of dairies can make money again. And feed prices have kind of stayed the same, or moderated, if anything. So I do think it's looking like it's a more advantageous situation for dairies for 2017.

On our reserve for dairies, I think we're roughly over $8.2 million, somewhere in that vicinity on just dairy alone, right?

Yes. That's the one area that was trending negatively in our allowance analysis was really the downgrades in the dairy.

So when you look at -- against the dairy portfolio, if you will, we have about -- just about 2.6% reserves against that portfolio compared to a 1.4% reserve against the rest of the -- on the average the Bank.

Yes, got it. Okay. Thank you.

Aaron Deer, Sandler O'Neill & Partners.

I think most of my key questions have already been asked and answered. Maybe just a little bit more color on the C&I trends in the -- obviously the portfolio was down a bit. Just curious to know if that was just a drop in line usage, and what the expectations are for that particular category in 2017, given the general optimism amongst customers?

I'm hoping that we're going to get better line usage going forward as entrepreneurs act more like entrepreneurs and pursue some of the profit gains that they can take and so forth and so on. The usage is still very low on a lot of these commercial loans -- commercial lines of credit that we have.

I'm looking for the same thing you are: I'm optimistic that we're going to grow commercial loans in 2017, particularly with our orientation on calling on operating companies being accelerated. And so we have our quarterly sales rally is coming up next week and one of the big things at that sales rally was you get to get back to calling -- hopefully they are already doing it -- but calling on operating companies and be less reliant on commercial real estate brokers and those type of people for referrals into businesses.

Listen, this Bank was built off of operating companies and relationship banking and that's what we need to continue to focus on. So I'm optimistic we're going to be able to do that, but really it's a deal-by-deal, roll-up-your-sleeves process to grow that business.

Now, as we acquire more teams, we tend to acquire teams that are more C&I-oriented, so I think that will help as well. And we are in discussions with a couple teams right now that hopefully next quarter I'm able to report on.

Okay. Can you give any sense of where line usage stood at year-end relative to commitments and how that trended during the quarter?

I'd say we're somewhere around 40%-ish, Allen. What's your thought on that -- low 40s%?

I'd say low 40s%. I don't think it changed dramatically quarter over quarter.

Yes. I think we're pretty much the same thing.

Okay. And then Allen, maybe -- I know you already gave some thoughts on broader margin and rate-related issues. But I think as to some rate swaps that show up in your fee income, I think in the other noninterest income line. With rates kind of trending upward here, what is your expectation for the rate swaps and how that affects your noninterest income?

We were -- in 2016, we grew pretty nicely as related to that income, and we were modestly up in the fourth quarter over third quarter. But we're optimistic about 2017. I think our loan pipeline includes a fair number of interest rate swaps, and we think the environment will be generally positive and we're looking forward to having a strong year.

The swap side is when we look at the alternative of doing a fixed rate on our book or an interest rate swap, we want to look at the differential between what the fixed rate on our book will be and what that swap rate will be. And as the short-term rates go up, swaps become more compelling to us.

And so now we can get a yield on a variable loan that's in excess of 3%, whereas a year ago, that variable yield might have been below 3%. So it becomes more compelling to look at swaps to not only help offset too much fixed rate loan exposure, but also we like -- as rates move up, we want the benefit of getting higher yields on our loans.

And keep in mind: these are back-to-back swaps. So we are not really exposing ourselves in anything from a hedging perspective.

Right. Okay, great. Thanks for taking my questions.

Tim Coffey, FIG Partners.

Great, thanks. Chris, as we get to the end of the line on these recoveries and you start looking to provision, what is kind of the optimal level for provisioning on new loans? Is it 50 basis points? 100 basis points? What do you think?

Well, obviously, we have a pretty complex analysis and formula along the way. And it really depends -- and we use -- we look back to our experience over the many years and we have different qualitative and quantitative factors that we use. But at the end of the day, that 1.4% reserve is kind of our balance reserve on the whole portfolio.

Depending on whether we are doing owner-occupied commercial real estate, non-owner-occupied commercial real estate, construction lending, dairy leading, residential real estate, the reserves differ somewhat on each of those categories based on those qualitative and quantitative factors and the look-back of what we've experienced in loans in our history. So as a ballpark, most of the core stuff we're putting on, you're probably looking at a 1.25% reserve on it.

And most of the qualitative factors, which a fair number of them are just industry-market-related type things, things we don't necessarily control, in this environment continue to trend favorably quarter over quarter. So that's part of the equation as well.

But I don't think you're going to see -- I mean, we're going to -- obviously the numbers are what the numbers are, but I really don't anticipate that our reserve is going to go down to 1% on our total portfolio. I really think there's a certain point where you get to that you want to make sure that you have a healthy enough reserve. Because we all know that you need your reserve during the bad times, and during the good times, your reserve gets can depleted. And so we're trying to hold the line on that as much as we can through our methodology and et cetera, et cetera.

Sure. Yes. No, I would've been surprised if you said your reserve was going to drop by half going forward. And then kind of the other item I want to talk about was on taxes. And if there is progress on corporate tax reform and your tax rate does come down, would 100% of that flow to the bottom line or would you anticipate using some of it to make some investments in the business?

Before we get to that question, I want to clarify a little bit more on our allowance. I think at 1.40% that's probably where we are, and we'll see what happens from there. I'm just saying that if you have a performing commercial real estate loan and so forth, it tends to be a little bit lower than that because some of that reserve is also based on classified loans and some of it is based on special mention loans. And it blends into that 1.40%.

So you say a past great loan that we're putting on the books, I'd say a normal reserve for that would be 1.25%. So it doesn't necessarily mean our reserve is going to go down any further than it is right now. So just clarification there, Tim.

Right, no. Understood.

Onto the tax question. Allen, you got a feel for --?

Tim, just to reiterate what your question was, you asked if we saw some tax reform and our effective tax rate went down, therefore net income would grow, what would we do with that? Where would we invest that?

I think we would continue with our existing strategy. We would continue to invest in adding teams around our current geographic footprint. We would continue to look for acquisitions, and we would continue to look for potentially buybacks of stock. And we do have a buyback out there that we can utilize.

All right. Well, thank you very much. Those are my questions.

I think if you saw, we also repurchased a small amount of stock in the fourth quarter. About $1.3 million worth of stock; I think it was 81,000 shares. And that average price of that was around $16.49, I think, just below $16.50 in terms of our stock repurchase.

So we feel good about that. We would've liked to do a lot more, but there was a very narrow window when the stock dropped down to that level. But we are being opportunistic. If the stock does drop, we are prepared to support that and use our nearly 10 million shares now of repurchase capability.

(Operator Instructions) Brian Zabora, Hovde Group.

Thanks. Got a question on expenses. If I look at the efficiency ratio, if I backed out some of those one-time items in the fourth quarter, efficiency ratio was maybe around 41%. I know in the past, you've talked about a 45% kind of target. You said that there might be some increases kind of near term, but could the efficiency ratio longer term be closer to what we saw in the fourth quarter?

I think kind of the current benchmark in the Company, barring unusual items, is to run that efficiency somewhere around 45%, 44%. I do think there are some opportunities. If we can switch out -- more opportunities, I would say, on the income side than on the expense side in terms of -- but those are both part of the formula.

So I would hope to aspire one day, yes, within in a higher interest rate environment to get in the low 40s% on our operating expenses efficiency ratio. To put that as a target for the Company right now I think is ambitious. I think it's about 44%/45% is a good run rate for us. And then you have to add in special items like I talked to on the building and the acquisition expenses that we'll be incurring here in the next two quarters.

That's helpful. Okay, and then just a question on acquisitions. Have you see more interest or more sellers looking -- just talk about activity and if you have more sellers kind of approaching you?

I don't think there's been any great change. I do think that it is going to be interesting seeing what price expectations are for smaller banks now. There's been a couple banks that have sold at some higher multiples. Our multiple is roughly 2.7 times tangible book right now, so that gives us more I guess runway in looking at that as well.

But I don't think we've seen anything notable yet, although we are having discussions here and there along the way, and would like to announce another acquisition in 2017 if everything works great.

Okay. All right. Well, thanks for taking my questions.

Jacque Bohlen, KBW.

Just one quick follow-up question. Do you have the dollar amount of the special FHLB dividend that happened in the quarter?

It was roughly $700,000, I believe.

Great. Thank you. That was all.

(Operator Instructions) There appear to be no further questions at this time, so I will now turn the call back over to Mr. Myers.

Well, we thank you all for your support of CVB Financial and Citizens Business Bank. We appreciate your interest and look forward to speaking with you again on our first-quarter 2017 earnings conference call in April.

In the meantime, feel free to contact me or Allen Nicholson, our CFO. Have a great day and thank you for listening. Hope 2017 is a great year for all of us. Thanks.

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