CVB Financial Corp (CVBF) 2017 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Second Quarter 2017 CVB Financial Corporation and its subsidiary, Citizens Business Bank, Earnings Conference Call. My name is Mike, and I'll be your operator for today. (Operator Instructions) Please also note this event is being recorded.

I would now like to turn the presentation over to your host for today's call, Ms. Christina Carrabino. Ms. Carrabino, the floor is yours, ma'am.

Thank you, Mike, and good morning, everyone. Thank you for joining us today to review our financial results for the second quarter of 2017. 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, 2016, and in particular, the information set forth in Item 1A, Risk Factors, therein.

Now I will turn the call over to Chris Myers.

Thank you, Christina. Good morning, everyone, and thank you for joining us again this quarter. Yesterday, we reported net earnings of $28.4 million for the second quarter compared with $28.5 million for the first quarter of 2017 and $25.5 million for the year-ago quarter. Earnings per share were $0.26 for the second quarter, the same as the first quarter, and $0.23 for the year-ago quarter. The second quarter's earnings were impacted by a $1 million loan loss provision recapture. The quarter also included $2 million in net loan loss recoveries. Comparatively, the first quarter of 2017 included loan loss provision recapture of $4.5 million and $2.2 million in net recoveries. The second quarter represented our 161st consecutive quarter of profitability and 111th consecutive quarter of paying a cash dividend to our shareholders. Last month, we were additionally pleased to announce a $0.02 increase in our second quarter dividend to $0.14 per share.

Through the first 6 months of 2017, we earned $56.9 million compared with $48.9 million for the first 6 months of 2016. Diluted earnings per share were $0.52 for the 6-months period ended June 30, 2017, compared with $0.45 for the same period in 2016. Our year-to-date earnings were the highest in CVBF history for the first 6 months of any calendar year. Our tax equivalent net interest margin was 3.63% for the second quarter compared with 3.51% for the first quarter and 3.57% for the year-ago quarter. The higher net interest margin was a result of a 13 basis point increase in loan yields over the prior quarter, primarily due to rising short-term interest rates.

Total loans increased by $72.2 million to $4.69 billion for the second quarter of 2017. Commercial real estate loans increased by $40.5 million, and SBA loans increased by $16.5 million for the second quarter. Commercial loans increased by $8.4 million, while all other loans increased by $6.8 million in aggregate. Average loans grew by $264.4 million over the prior quarter, as the first quarter did not fully reflect the loans acquired from Valley Business Bank. In comparison to the second quarter of 2016, average loans grew by $453.2 million or 10.8%.

Loan yields were 4.63% for the second quarter of 2017 compared with 4.50% for the first quarter of 2017 and 4.81% for the year-ago quarter. When interest recaptured on nonaccrual loans is excluded, the second quarter loan yields were 4.60% compared with 4.50% in the prior quarter and 4.53% in the year-ago quarter.

At June 30, 2017, the allowance for loan and lease losses was $60.2 million or 1.28% of total loans, compared with $59.2 million or 1.28% of total loans at March 31, 2017.

Net recoveries on loans for the second quarter were $2 million. When the loan loss allowance is combined with the remaining fair market value loan discounts from our acquisitions, the allowance for loan and lease loss ratio was 1.51% as of June 30, 2017.

At quarter end, nonperforming assets, defined as nonaccrual loans plus other real estate owned, were $16.7 million or 0.20% of total assets, compared with $14.9 million or 0.17% of total assets for the prior quarter and $23.5 million or 0.28% of total assets at June 30, 2016.

At June 30, 2017, we have loans delinquent 30 to 89 days, up only 608 -- $619,000 or 0.01% of total loans. Classified loans for the second quarter was $93.4 million, a $10.7 million decrease from the prior quarter. We will have more detailed information on classified loans available in our second quarter Form 10-Q.

Now I'd like to discuss deposits. For the second quarter of 2017, our noninterest-bearing deposits totaled $3.93 billion compared with $4 billion for the prior quarter and $3.67 billion for the year-ago quarter. The ending balance at March 31, 2017, included a single $140 million deposit from one customer that deposited shortly before quarter end and was withdrawn shortly after, inflating our numbers for the first quarter. Excluding the impact of this temporary deposit, noninterest-bearing deposits grew by approximately $70 million over the prior quarter.

Average noninterest-bearing deposits were $3.89 billion for the second quarter of 2017 compared with $3.70 billion for the prior quarter. Average noninterest-bearing deposits represented 58% of our total deposits for both quarters. Our cost of interest-bearing deposits and customer repurchase agreements for the second quarter was 11 basis points, the same as the prior quarter.

At June 30, 2017, our total deposits and customer repurchase agreements were $7.24 billion compared with $7.41 billion at March 31, 2017, and $7.18 billion for the same period a year ago. Average total deposits and customer repurchase agreements were $7.25 billion for the second quarter of 2017, up $265 million from the prior quarter. Compared with the first quarter of 2017, total average deposits increased by $314 million, while customer repurchase agreements declined by $49 million. Our overall cost of funds for the second quarter of 2017 was 12 basis points, which is consistent with our cost of funds for both the prior quarter and the second quarter of 2016.

Interest income. Interest income for the second quarter of 2017 totaled $72.6 million compared with $67.4 million for the first quarter and $68 million for the same period a year ago. Excluding interest recaptured on nonaccrual loans, interest income for the second quarter of 2017 increased by $4.9 million or 7.2% over the prior quarter and $6.9 million or 10.5% over the same quarter last year. The tax equivalent yield on earning assets grew by 12 basis points over the prior quarter and 6 basis points over the year-ago quarter. The yield on loans increased by 13 basis points over the first quarter or 10 basis points when interest recapture is excluded. Average loans have grown as a percentage of average interest earning assets from 55% in the second quarter of 2016 to 57% in the first quarter of 2017 to 59% in the second quarter of 2017. Although modest, we are hoping to continue this trend.

Noninterest income was $10.8 million for the second quarter of 2017 compared with $8.7 million for the prior quarter and $9.3 million for the second quarter of 2016.

During the quarter, we received a death benefit from a bank-owned life insurance policy that resulted in additional income of $775,000. A gain on sale of securities for $402,000 was realized in the quarter from selling the one remaining corporate bond in our investment portfolio. And we also had recoveries in the period from loans charged off by American Security Bank prior to our acquisition that totaled $443,000. So that's about a, call it, $1.5 million, $1.6 million in total, between those 3 things.

Now expenses. Noninterest expense for the second quarter was $36.9 million compared with $34.1 million for the first quarter of 2017 and $34.4 million for the year-ago quarter. The increase was primarily due to expenses related to the acquisition of Valley Business Bank. Acquisition expense resulting from the systems conversion and reduction in staffing during the quarter was approximately $1.3 million, up from $676,000 for the prior quarter. In addition, occupancy and equipment expense grew by $870,000 over the first quarter due to expenses related to 4 additional branch locations acquired from Valley Business Bank and the build-out and occupation of our new operations and technology building. Over the next 2 quarters, occupancy expense will be impacted by the consolidation of 3 branches in the Central Valley resulting from the integration of Valley Business Bank. Professional services, including legal expenses, grew by $586,000 over the first quarter. Higher legal expenses of $267,000 as well as the timing of certain professional expenses contributed to this increase. Noninterest expense totaled 1.76% of average assets for the second quarter compared with 1.70% for the first quarter and 1.73% for the second quarter of 2016.

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 36.75% year-to-date and 37.49% for the second quarter. This compares with 37% for the first 6 months of last year. During the first quarter of this year, we had discrete tax benefits related to stock compensation activity accounted for under the newly adopted accounting standards update number 2016-09. Our effective tax rate can vary depending upon the amount of tax-advantaged income, tax credits and discrete items, such as stock compensation.

Looking to our investment portfolio. During the second quarter of 2017, our average interest-earning balances at other financial institutions and the Federal Reserve totaled $110 million. During the second quarter, these balances represented approximately 1.4% of our average earning assets, which compares to 1.5% for the prior quarter and 5.2% for the second quarter of 2016. At June 30, 2017, our combined, available-for-sale and held-to-maturity investment securities totaled $3.14 billion, a $17.5 million decrease from the first quarter. Investment securities represented 39.6% of our average earning assets during the second quarter and 37.3% of our total assets at quarter end. At quarter end, investment securities available for sale totaled $2.27 billion, which included a pretax unrealized gain of $18.2 million. In addition, we had held-to-maturity investment securities totaling $870 million. The tax equivalent yield on the total securities portfolio was 2.48% for the second quarter, which was a 2 basis point increase from the prior quarter.

During the second quarter, we purchased $137.5 million of securities with a tax equivalent yield of 2.60%. Our purchases of available-for-sale securities were comprised primarily of mortgage-backed securities totaling $119 million with an average expected yield of 2.40% based on an expected average life of approximately 4.9 years. Held-to-maturity securities purchases for the quarter included $18.5 million of high-quality, bank-qualified municipal bonds with an average tax equivalent yield of 3.87%. Our average tax equivalent yield on purchases during the second quarter was 8 basis points higher than the first quarter average, as municipal bonds were 13% of purchases in the second quarter compared with 7% in the first quarter. During the second quarter, we sold 1 security with an approximate market value of $5 million, realizing a net gain on sale of $402,000.

Now turning to our capital position. For the first 6 months -- for the 6 months ended June 30, 2017, shareholders' equity increased by $69.9 million from December 31, 2016, to $1.1 billion at June 30, 2017. The increase was due to $56.9 million in net earnings, $37.6 million of the issuance of common stock through the acquisition of Valley Commerce Bancorp and $4 million of various stock-based compensation and other items. This was offset by $28.6 million in cash dividends.

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

Thank you, Allen. Now let's talk about economic conditions. Turning to the California economy. According to various economic reports, California's economy continue to roll forward in the first half of 2017. California's unemployment rate fell to its lowest in 10 years at 4.7% in May 2017 compared with 4.8% in April and 5.5% in May 2016. The state's labor market continues to add jobs at a steady pace and is expected to continue to outpace the nation as a whole. Wages are expected to rise over the foreseeable future, driving household spending. The California housing market outlook in 2017 is improving. Single-family home construction has accelerated in the last few quarters. If sustained, it will not only lead to more construction employment but also help to promote additional spending on household items.

In terms of the dairy industry, milk price futures have fluctuated during the past few months while feed costs have stabilized. Overall, the outlook for milk prices for 2017 remains better than 2016. Feed prices are expected to remain relatively low.

In closing, as we move into the second half of 2017, we remain focused on streamlining our business lines as much as possible. Loan growth remains important, but so is our efficiency and return on investments.

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

(Operator Instructions) The first question we have comes from Jackie Bohlen of KBW.

I wanted to kick it off talking about loan yields, just given the nice benefit that you had in the quarter. First off, was there any impact in accretable yield versus prior quarters? I know that's been a low contributor in the past. I'm just wondering, given the recent acquisition, if there was any increase in that or if everything stayed low.

Jackie, this is Allen. Quarter-over-quarter, it was roughly about 1 basis point impact.

Okay. So is that the loan yields or the NIM?

I'm talking about the loan yields, yes.

Okay. So roughly 3 basis points this quarter, give or take?

About 1, actually, quarter-over-quarter.

1 basis point on the loan yields. 3 basis -- impact on the NIM yield.

I think, Jackie, you were talking about accretable yield versus NAIP recapture, right?

Yes, yes, because I had 2 basis points of impact last quarter from accretion on acquired loans. So would that...

Yes, there's only -- in terms of comparison Q1 to Q2, it was only about 1 basis point.

Okay, okay. And then so, I guess, where are you seeing current production versus the portfolio yield? And is it something where we could see an increase again in June just based on what we saw in the second quarter's number after the March increase?

Jackie, I'm a little confused by the question. Are you talking about what's our loan demand and kind of the pricing of loans that we're seeing in comparison to our portfolio?

Yes, sorry, I'm not that articulate this morning. I'm looking at where the portfolio yield is versus where you're booking new generation. And given that we had another rate increase in June, which wouldn't be much captured in these numbers, kind of how could we see the magnitude of increase again next quarter?

Yes. I think, in terms of loan yields, it's kind of a funny dynamic right now because, remember, the prime rate is 4.25%. And so if we have a lot of loans out there, let's just say for argument's sake, prime plus 0.5%, that's a 4.75% yield on those loans. Whereas, we might be booking a commercial real estate loan that has a 5-year, fixed rate or 25-year amortization with a 5-year fixed rate at 4%. So it's kind of funny, you get a 5-year fixed rate at 4%, but our average variable rate yield is like 4.75%. So I think the answer is, our yields are coming in about where they are for the second quarter in terms of our new loan productivity given that balance. As we get longer 7-year fixed rate and 10-year fixed rate, obviously we get higher than the 4% along the way. So I don't think we have any negative headwind there. I think, if anything, we have a slight tailwind in terms of yields, but we'll have to see if rates moderate for the rest of the year and so forth. And in terms of loan production, our pipeline is good, it's not great. We're tracking about just a little bit behind what we produced last year. We have a big sales rally this afternoon, and I've got all my team coming in there, and we're going to say, "Listen, we got to beat last year and do all those kinds of things." But so far, in the first 6 months, we're tracking a little bit behind in production, in new loan production than we did last year, despite averaging -- I mean despite hiring a few new teams. So I'm hoping that will kick in a little bit more in the second half of the year and will catch what we did last year and hopefully surpass it.

And is there anything that you credit to that lower -- just the pipeline not being quite where you might have expected it?

Yes, I think a lot of this -- remember, we are -- we don't buy any loans. Everything we do is supposed to be within what we specialize in. So we don't try to get -- we really haven't started these new lending initiatives and going to different areas that we -- we're not experienced in. So we're blocking and tackling every day in executing. So there is not strong loan demand out there, there's moderate loan demand right now in the economy, and I think we're getting our share of it. And we're trying to get a little bit more than our share of it. But again, very focused on quality, especially in this kind of economy. I think a lot of times, banks make bad decisions during good times. And we're in good times right now. We're trying not to make the decisions that we're going to regret. One of the things that I think is phenomenal, and Allen and I were talking about this just a few minutes ago, we report net recoveries to you guys and you see our net charge-offs, depending what that is. But our total charge-offs -- I have to knock on wood when I say that, our total charge-offs, forget about recoveries, this is charge-offs, for the 6 months of the year, is $1,558 on bad loans. I mean, I'm just -- so when I hear that, I go, "That's unbelievable. That's amazing." But it's not going to get any better, right? So it's -- we're very cautious about that. These are good times in terms of credit quality. But prices have gone up a lot. When we look at doing our real estate financing, a lot of our loans now are being -- the loan to values are being reduced because we've got -- the cash flows are -- what we do is we look at -- we'll lend you up to 65% or 70% against a commercial real estate property, but it has to have a debt coverage ratio of, say, 1.25. Well, a lot of times when we get to that debt point coverage ratio of 1.25, we can only lend them 55% or 60% loan-to-value because the cap rates on these properties have come down so much. Does that make sense?

Yes, yes, yes.

We're making sure we stay disciplined on that stuff. And sometimes, to be candid with you, we'll lose deals here and there because other banks are more aggressive in terms of that -- they might lend just against the loan-to-value and not be as disciplined as we are in terms of making sure the cash flows make sense. But notwithstanding that, I mean, we grew by 1.56% organically, which is an annualized rate of 6.24%. And I stated to you guys quarter-after-quarter for the last 4, 5, 6 quarters that my goal is to grow 2% a quarter or 8% a year organically. So we're not quite making that, but we're close.

The next question we have will come from Matthew Clark of Piper Jaffray.

Just on -- curious on deposit cost unchanged this quarter. Obviously, pretty impressive. Just wanted to get your thoughts on how you think your deposit costs might inch up from here given the latest increase? And maybe talk about competition in and around your footprint.

Yes. Deposit competition is heating up. We're feeling that. I think you can see our deposits growth has moderated over the last couple of quarters and -- if you take out the VBB acquisition. And that's a product of us really staying -- trying to stay disciplined and focused on our core-core deposits. The deposits that price with a Fed funds change intend to be more -- call that elastic with the changes. We're not crazy about those deposits. And we have let some deposits go that we think are non-relationship-based deposits for that very reason. Functionally, we feel we're in a great position to do that. We're 69%, 68%, whatever it is, loan-to-deposit ratio. If you include our repos, we're 63% or 64%. And so we can be picky and choosy about our deposits. But notwithstanding that, funding is the most important thing we do, and we're very focused on keeping our noninterest-bearing deposits at that 58% level, if possible. And so we have let some pricier deposits go off. And that's why you're seeing our deposit rates haven’t gone up. But is there pressure there? Yes, there is. Is it accelerating? I believe it is accelerating. I just don't know what's going to happen with -- I think with a couple of more rate increases, it's going to get interesting.

Great. And then just on -- I know credit, obviously, solid, benign. But just curious if you guys have done a deep dive on your retail commercial real estate portfolio and if you could maybe size it up and just talk about what's in there, and what you're seeing.

Yes. We just did, in fact, yesterday, our Chief Credit Officer and our Deputy Chief Credit Officer just did a comprehensive presentation to the board. We had our board meeting yesterday. And on retail -- our retail exposure, and I'll speak to it. We have about $550 million in retail loans in the bank, of which -- these are rough numbers, $500 million is investor and about $50 million is owner-occupied. The average loan size of that portfolio is around $1.5 million. So it's very granular. We have 5 -- I believe 5 relationships, might be 6, that are $10 million or more in credit on a retail deal. And of those relationships, I knew every one of those clients. And so we feel very good about our larger retail that we've done in terms of -- and some of those -- it might not just be one $10 million loan. It might be 5 loans that totaled $10 million to that, too -- to that 1 borrower. So the granularity of the portfolio is very good, which we feel very good about. We don't have a lot of big boxes in there, we just went through the whole thing. I mean we have some larger tenants like a Walgreens or a Vons or an Albertsons and so forth and some shopping centers, but with that kind of granularity in the portfolio, we feel pretty good about it.

Okay, great. Just last one for me. Just on your reserve coverage, adjusted reserves at 1.51%. Just want to get an update on your -- what your comfort level is and where that might find the bottom?

Well, there's this very complicated formula that they put together with the [ALLL] methodology, and we just hired a new, kind of mathematical quant person to help us prepare for when we're going to go over $10 billion. And he's building out his team to calculate all these different factors that go into this. So I think, at the end of the day, I mean, I'd like to keep our reserves as high as we possibly can. And -- but when you have $1,558 in charge-offs for the first 6 months of the year, that does put pressure -- downward pressure on our reserves. The 1.51% is right -- 1.51% includes our accretion and so forth. It's 1.28% on the whole portfolio. Boy, I'd love to see it stay right about there, but I just can't control that. But we'll do what we can to make sure we're looking at every possibility and every metric that is relevant to our loan loss potential over the next period of time. I don't know what else I can say about that. I think that -- I think we're very cognizant of that. One of the things that's kind of funny in this whole thing is we're spending a lot of money figuring out what the right loan loss reserve is, as all banks are. And here we have $1 billion in capital, and our loan loss reserve is $60 million. And we're probably spending millions of dollars to determine whether that $60 million should be $62 million or $58 million or whatever it's going to be when we have $1 billion in capital. The whole thing is crazy. I think it's overregulated and all that stuff. I just think they should set some different -- I'm going to go -- I guess I shouldn't go off on a tangent here, but – they should just set some floors on this stuff and look at different species of loans and then -- and tie loan loss reserves to different species of loans, like construction loans would have a higher reserve, and commercial real estate would maybe have a lower reserve and C&I would have a lower reserve and et cetera, et cetera. But I don't get to pick and choose that, so we just go and do our methodology. And I feel like it's -- we're doing the very best we can to make it as accurate as possible and I -- and my personal preference is to keep it as robust as possible. Sorry for that little answer.

Next we have Aaron Deer of Sandler O'Neill + Partners.

Chris, obviously, you guys have been doing some repositioning of some of your real estate for your technology and operations group. I know that's weighing on expenses a bit. When that's completed and then when you also tie in the cost saves coming from the Valley deal, where do you see your total noninterest expenses shaking out toward the end of the year?

Yes. I think we'll be in a very, what I would say, is a very normal position by the fourth quarter. There may be some trickling in there. Like, we announced the sale of our Westlake office -- our Woodlake office, sorry, Woodlake, not our Westlake. We do have a Westlake office. Not -- we're not selling our Westlake office, our Woodlake office, which is in the Central Valley. And that will happen in the fourth quarter. But the consolidations of those 3 offices will all happen in the third quarter, so that will be vetted through there. We'll feel the full expense reduction of that in the fourth quarter. In terms of our building, we are still getting more efficiencies out of our new building. The building we bought, we have 10,000 extra square feet that we're going to be leasing out. That will take us 3 to 6 months or so to lease that out, but that will produce ultimately, around $200,000 a year in income for us when we do lease that out. The sale of our old building, which is the former loan operations and so -- and center is actually in escrow right now. It -- nothing is for sure until it closes, but that's scheduled to close in August. So a lot of these things are filtering through. I would hope that we are -- we're back to that 1.70% ratio that we've talked about earlier and making sure that we're below a 45% efficiency ratio for the fourth quarter.

Okay, that's helpful. And then, Allen...

In terms of dollars, I don't really have a dollar for you, but I do think that we're $2.5 million in expenses heavy in this quarter due to those nonrecurring type of things. So...

Sure. Okay. And Allen, it seems that we've seen a little bit of shift toward loans and out of investment securities, and it's a little better earning asset mix maybe contributed to some of this margin expansion. If you kind of look out prospectively, the rate environment and the types of yields that you're getting on various assets, what -- how do you see that earning asset mix positioning over the next few quarters?

Well, that's one of our -- really, our critical few things in the bank that we want to get done. Because right now, the average security were -- give me a little slack -- 10 basis points here and there. The average security we're putting in the bank right now is 2.5%, and the average loan we're putting on in the bank right now is roughly 4.5%. So that 2% divide there between those 2 things is substantial, and we want to take advantage of that. But securities have 0 risks. Loans have some risk. And so we've got to be careful about the type of loans that we put on, and that's why it's been slower than the world would like. I think -- one of the things we've looked at is buying loans and say, should we buy loans and use this great deposit and kind of reverse out the securities? But if we were to buy loans and buy the higher-quality loans we would want, we think that our yield on those loans would probably come in somewhere in the 3.75-ish range, Allen, is that kind of what we've looked at?

Yes, (inaudible).

Yes, net, net, net. Because you have to pay a premium for them, they have higher costs. So we would give out that extra 75 basis points that we organically can create. And I think we'd rather just keep marching forward and doing what we're doing, and even if it's -- even if our loan to earning asset mix goes from 55% to 57% to 59%, if we can keep doing that to 60% and 62% and 64%, I think that's going to show -- continue to show nice earnings gains for us in a very predictable fashion.

And the next question we have will come from Brian Zabora of Hovde Group.

I wanted to start on dairy. You usually get that seasonal benefit in the back half of the year. Do you have any early expectations of what that growth could be?

Yes. I've talked to the head of our dairy and livestock industries group, and -- who's been doing this for us since 1993, by the way, so 24 years, and has done a great job building that group. And he feels that we'll start seeing some of the lending build in the latter portion of the third quarter. But certainly, we'll see most of the build in the fourth quarter, in the latter portion of the fourth quarter. Not huge average loan impacts for us, but we do feel like it should be a fairly substantial year in that regard, kind of like we've had in the last couple of years, somewhere between $80 million and $100 million of build-out. And it's probably starting at the beginning of September, realistically and accelerating each month after that.

Great. And then your SBA growth has been pretty good. How big does this portfolio get? And just kind of your thoughts around expanding that or if you just have any thoughts around SBA?

Well, the SBA portfolio, we're doing -- we're doing SBA 504s for the most part, which are no different than what we've been doing all along. We do a few 7As here and there. The Valley Business Bank folks over there were doing SBA 504s, and that came -- they brought some over into our portfolio, so part of that gain is from Valley Business Bank SBA, but we've also put on some good SBA loans lately, too. So kind of reversing a trend of kind of slowly falling backwards on SBA 504. So we're optimistic about it. I think the -- it's getting a little bit revitalized with the addition of Valley Business Bank. I'm got to give them credit for getting the bank a little bit more focused on those 504s. So I'm hoping that trend will continue, but I don't have a lot of transparency on that right now. It's still only about $120 million or something like that.

Sure. Understood. And then just lastly, could you just update on how much of your loans repriced with a move in prime or Fed funds or 30-day LIBOR?

Brian, it's approximately 25% to 30%, probably closer to 25%.

(Operator Instructions) Next, we have Tim Coffey of FIG Partners.

Chris, you've already provided a lot of good color on the call, so most of my questions have been answered but I did have a question on the cash dividend. What are your thoughts about regular -- more regular increases in that divided going forward given the capital that you have right now?

Yes. We've had a lot of conversations about our capital and our -- my response is really, very -- really unchanged from what it's been for the last couple of years and that is our first priority is to make sure that we pay a competitive dividend to our shareholders and that's why we increased the dividend by $0.02 in the second quarter. And when you look at where we're paying that out, it's coming out at about a 50% payout. Our second priority is to use our excess capital for acquisitions, and I think with our new operations center and Valley Business Bank getting integrated here, we're starting to get on the prowl again a little bit. So we're looking forward to trying to see if we can find another good deal along the way. But again, I think we will be focusing on quality and deals that are both strategic and financial. After that, stock buyback is a possibility although less -- it's probably unlikely when we're trading at 2.6x tangible book. And then finally, would we do a special dividend. We've talked about it, but we really feel that we want to keep our powder dry for acquisitions as if -- a great opportunity of the bank -- a larger bank saying over $1 billion in assets came along, we would really like to use our capital to do that and not have to raise capital to do that, which is a lot more expensive. So that's our priorities for now. Doesn't mean that change – it stays that way forever, but we are still optimistic about our ability to do M&A going forward.

Okay. And sticking with the M&A part, how are those conversations going?

Yes, I think it's -- the first 6 months of the year, we were really have been just executing our deal, and with our new operations and technology Center kind of retooling ourself, resetting ourself. I mean that building that we bought, I think we could -- this bank could grow to $15 billion or $20 billion in assets, and we'd have plenty of room in that building. So I feel like we've taken care of ourselves for at least the next 5 years, I would imagine, barring some large, large acquisition. We are getting more on the offense right now in terms of having discussions with other banks and are very interested in -- and what's happened -- it's a little different, is I think that we know the banks that we want to talk to for the most part. And so it's not as much as, somebody coming to us and saying, “hey, we've got this bank that's selling." If we get the name, we'll say, okay, we’ll know pretty quickly whether we are interested in that or not. There's very few that we'd say, "We don't know and we have to go do some research on."

Okay, and those banks that you do know well, in your mind, have any of those situations changed that would make a potential acquisition position near term more likely or is it more status quo?

I don't - I really don't have any color on that at all. I mean we're just out there starting to have conversations and we'll see how those conversations transpire. We are -- we certainly -- we like to talk about our story, talk about how we're a business bank, we're very sensitive to the client, we give high levels of service. Our stock has traded strongly for a long time. We paid -- our currency is strong, and we pay a good dividend. So those are all compelling things for an acquiree to want to see, and we hope that resonates going forward.

(Operator Instructions) Well, at this time, it appears that we have no further questions. We'll go ahead and conclude today's question-and-answer session. I would now like to turn the conference call back over to Mr. Chris Myers for any closing remarks. Sir?

Well, thank you very much. And to everyone in the call, we appreciate your interest and look forward to speaking with you again on our third quarter 2017 earnings conference call in October. In the meantime, feel free to reach out and call me or Allen. Have a great day, and thanks for listening. Bye-bye.

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