CVB Financial Corp (CVBF) 2018 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the First Quarter 2018 CVB Financial Corp. and its subsidiary, Citizens Business Bank, Earnings Conference Call. My name is Phil, and I'm your operator for today. (Operator Instructions) Please note, 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, Phil, and good morning, everyone. Thank you for joining us today to review our financial results for the first quarter of 2018. 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, 2017, 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. I have an important announcement to make, and that is Allen Nicholson is celebrating his 51st birthday today. And so I ask that you go extra tough on him in the questions. But anyway, all kidding aside, happy birthday, Allen.

Yesterday, we reported net earnings of $34.9 million for the first quarter compared with $17.9 million for the fourth quarter of 2017 and $28.5 million for the year ago quarter. Our first quarter earnings were the highest quarterly earnings in CVBF history. Earnings per share were $0.32 for the first quarter compared with $0.16 for the fourth quarter and $0.26 for the year ago quarter. Excluding the impact of the deferred tax asset valuation adjustment, earnings per share for the fourth quarter of 2017 were $0.28.

The first quarter's earnings were positively impacted by a $3.5 million net gain on the sale of our last remaining OREO property and the $1 million loan loss provision recapture. First quarter earnings were negatively impacted by $803,000 in acquisition-related expenses and $860,000 in higher payroll taxes as we typically experience higher payroll taxes in the first quarter of each year.

The first quarter represented our 164th consecutive quarter of profitability and 114th consecutive quarter of paying a cash dividend to our shareholders. In February, we announced that we entered into a merger agreement with Community Bank, pursuant to which Community Bank will merge into Citizens Business Bank. We are excited to be joining forces with a successful business bank that has served Southern California businesses and individuals for the past 74 years. The combination of our 2 companies will not only increase our customer market share in the greater Los Angeles and Orange County areas, but also add strong personnel depth to help fuel expansion in the future. The closing of the merger is anticipated to occur in the third quarter of 2018.

Moving back to some numbers. Our cash equivalent net interest margin was 3.68% for the first quarter compared with 3.68% for the fourth quarter and 3.51% for the fourth -- for the first quarter a year ago. Excluding the impact of tax-exempt interest, our nominal net interest margin increased 3.63% in the fourth quarter to 3.66% in the first quarter of 2018, primarily due to the increase in our loan and investment yields. Total loans declined by $35.6 million to $4.79 billion for the first quarter of 2018 or about 0.74%. Our dairy and livestock and agribusiness loan portfolio declined by $71.7 million, primarily due to seasonal paydowns, which historically occur in the first quarter of the calendar year. If you take out the dairy loans -- dairy, livestock and agribusiness loans quarter-over-quarter, our loans were up actually about 0.75% or about a 3% annual run rate, a little below where we -- or significantly below where we want to be, but at least positive growth.

Commercial real estate loans increased by $31.3 million for the first quarter of 2018 while all other categories were relatively flat quarter-over-quarter. Average loans increased by $35.6 million over the prior quarter or about 0.75%.

Loan yields were 4.67% for the first quarter of 2018 compared with 4.66% for the fourth quarter of 2017 and 4.50% for the year ago quarter. At March 31, 2018, the allowance for loan and lease losses were $59.9 million or 1.25% of total loans compared with $59.6 million or 1.23% of total loans at December 31, 2017.

Net recoveries on loans were $1.35 million for the first quarter of 2018 compared with $454,000 for the fourth quarter of 2017 and $2.2 million for the first quarter of 2017. When the loan loss allowances combine with the remaining fair market value loan discounts from our acquisitions, the allowance for loan and lease loss ratio was 1.43% as of March 31, 2018, compared with 1.44% for the prior quarter and 1.54% for the year ago quarter.

At quarter-end, nonperforming assets, defined as nonaccrual loans plus other real estate owned, were $10.2 million or 0.12% of total assets compared with $15.2 million or 0.18% of total assets for the prior quarter and $14.9 million or 0.17% of total assets at March 31, 2017. At March 31, 2018, we have loans delinquent 30 to 89 days of $743,000 or 0.02% of total loans. Classified loans for the first quarter were $43.2 million or 14 -- I'm sorry, $43.2 million, a $14.2 million decrease from the prior quarter. The decrease was primarily due to a $7.4 million decrease in commercial real estate loans and a $6.7 million decrease in dairy and livestock loans. We'll have more detailed information on our classified loans available in our first quarter Form 10-Q.

Now I'd like to discuss deposits. For the first quarter of 2018, our noninterest-bearing deposits totaled $4.06 billion compared with $3.85 billion for the prior quarter and $4 billion for the year ago quarter. Average noninterest-bearing deposits were $3.86 billion for the first quarter of 2018 compared with $3.94 billion for the fourth quarter of 2017 and $3.7 billion for the first quarter of 2017. Average noninterest-bearing deposits represented about 59% of our total deposits for the first quarter.

Our cost of deposits and customer repurchase agreements for the first quarter was 11 basis points compared to 10 basis points for the prior quarter and 11 basis points for the first quarter of 2017. Our total cost of funds was 12 basis points, the same as the first quarter of 2017 and 1 basis point higher than the fourth quarter.

At March 31, 2018, our total deposits and customary purchase agreements were $7.2 billion compared with $7.1 billion at December 31, 2017 and $7.4 billion for the same period a year ago. We continue to achieve our objective of maintaining a low-cost, stable source of funding for our loans and securities.

Interest income. Interest income for the first quarter of 2018 totaled $72.7 million compared with $73.3 million for the fourth quarter and $67.4 million for the same period a year ago. The decrease in interest income for the fourth quarter was a net result of a $1.2 million decline from 2 fewer days of interest in the quarter and a $21 million decline in average earning assets. This was offset by increases in loan and investment yields. The $5.2 million increase in interest income compared to the first quarter of 2017 was the result of $139 million increase in average earning assets and a 17 basis point increase in the yield on earning assets. The tax equivalent yield on earning assets for the quarter was 3.80% compared with 3.79% for the prior quarter and 3.62% for the year ago quarter.

Noninterest income was $12.9 million for the first quarter of 2018 compared with $12.6 million for the prior quarter and $8.7 million for the first quarter of 2017. The $334,000 quarter-over-quarter increase was a net result of a $3.5 million gain on sale of OREO in the first quarter, a $475,000 loan recovery on a loan charged off prior to the acquisition of Valley Business Bank and $436,000 of income from a [debt] benefit on bank-owned life insurance during the quarter.

By comparison, the fourth quarter of 2017 included a $2.9 million gain from the eminent domain condemnation of a banking center and a $906,000 net gain from the sale of a former Valley Business Bank branch.

Now expenses. Noninterest expense for the first quarter was $35.9 million compared with $35.1 million for the fourth quarter of 2017 and $34.1 million for the year ago quarter. The first quarter of 2018 included $803,000 in acquisition expenses compared with $75,000 for the prior quarter and $676,000 for the first quarter of 2017.

Salary and benefit expense increased by approximately $860,000 related to payroll taxes, which is typical for the first quarter of the year. Modest decreases in compensation and employee benefit expenses offset the increase in payroll taxes, resulting in a net increase in total salary and benefit expense of $365,000 or 1.7%. Noninterest expense totaled 1.77% of average assets for the first quarter compared with 1.67% for the fourth quarter and 1.70% for the first quarter of 2017.

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 28% for the first quarter compared with 36% for the first quarter of 2017. The reduction was due to the decrease in federal tax rate from 35% to 21% as a result of the Tax Reform Act. When the $13.2 million revaluation of our net deferred tax assets at the end of last year is excluded, our effective tax rate was 38.3% for the fourth quarter.

Our effective tax rate can vary depending upon the amount of tax-advantaged income, tax credits and discrete items such as stock compensation.

Now looking to our investment portfolio. During the first quarter of 2018, our average interest-earning balances at other financial institutions and the Federal Reserve totaled $139 million. During the first quarter, these balances represented less than 2% of our average earning assets. At March 31, 2018, our combined available-for-sale and held-to-maturity investment securities totaled $2.74 billion, a $171 million decrease from the fourth quarter. We did not reinvest any of the cash flow from principal payments from the investment portfolio during the first quarter. Investment securities represented 37% of our average earning assets during the first quarter, which compares to 38% in the prior quarter.

At quarter-end, investment securities available for sale totaled $1.94 billion, which included a pretax unrealized loss of $28.5 million. In addition, we had held-to-maturity investment securities totaling $798 million. The tax equivalent yield on total security portfolio was 2.41% for the first quarter compared with 2.42% for the fourth quarter and 2.46% for the first quarter of 2017. The reduction in the federal tax rate had impact of lowering the tax-effected yield on securities in comparison to 2017. On a nominal basis, our investment security yields increased modestly, with a 2.34% yield in the first quarter of 2018 compared with a 2.29% in the fourth quarter and 2.32% in the first quarter of 2017.

Now turning to our capital position. Shareholders' equity decreased $2.4 million to $1.07 billion at the end of the first quarter. The quarter-over-quarter decrease was due to $34.9 million in net earnings and $772,000 of various stock-based compensation and other items, offset by a $15.4 million in cash dividends and a $22.7 million decline in other comprehensive income from the tax-effected impact with a decline in market value of available-for-sale securities.

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

Thanks, Allen. Let's talk about economic conditions. Turning to the California economy. According to various economic outlooks, California's unemployment rate was 4.3% in February 2018 compared to 4.4% in January 2018 and 5.1% back in February 2017. California has now gained a total of $2.9 million -- 2.9 million jobs since the economic expansion began in February 2010. Throughout much of this expansion, California has outpaced the nation and many states in terms of economic growth and job gains and improvements in its unemployment rate, all fueled by strengths in many of its key industries. Steady job growth is expected to keep the state's unemployment rate low and to increase wages for nearly all workers. With these gains in both financial and economic well-being, households in California are expected to help drive growth in their local communities.

There is continued demand for housing in California driving up purchase costs. The supply of existing homes has increased slightly but remains lean, and new home construction continues to increase at a modest pace.

In terms of the dairy industry, milk prices fell in the first quarter due to an oversupply, and they are projected to be slightly under the cost of production for the first half of 2018. Feed prices were relatively flat for the first quarter.

In closing, we remain focused on continuing our strategy of growing the bank in a balanced way. We will rely on same-store sales, opening de novo locations in new geographies and acquisitions to build our bank. The merger with Community Bank is very exciting and provides a great opportunity and challenge for our company and its capable people.

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

(Operator Instructions) First question comes from Aaron Deer with Sandler O'Neill.

Chris, I'd like to start just talking a little bit about the loan trends, obviously, the headwind from the seasonal dairy paydown this quarter. Is that mostly done at this point? Or could we see a little bit more of that in the second quarter here?

It's pretty much done. We actually expected a little bit more. But because the dairies are having kind of a tough quarter because of lower milk prices, I think that the borrowings are a little bit -- we expected about $10 million or $15 million more in decline in the dairy. And I think that $10 million, $15 million is a result of the tougher operating environment in the first quarter. So I don't see much more, no.

Okay. And then, absent that, I guess, the growth was a little weaker than you'd hope for, you said. And that -- it seems to be pretty common across the industry here this first quarter of the year. But as you look out to the remainder of the year, what are -- how are your expectations shaping up? And any particular areas that you're looking to focus on as you look to grow that book?

Yes. And let me give you just some perspective, I think. When we look year-over-year from 3/31/17 to 3/31/18, we grew loans 3.87%. That's not where we want to be. We want to be closer to 8%. But it is what it is. That was our organic growth rate. In the first quarter, our real organic growth rate, if you take out dairy and livestock and agribusiness, we look at it as being 0.75%, which is annualized at 3%. First quarter is always a slow loan growth. And also, the first quarter, January-February, deposits are very tough because of a lot of year-end taxes and things like that. So the average deposits in the first quarter were a little bit soft. But at the end of the quarter, they rebounded nicely. So in looking forward on loan growth, our aspiration is that kind of 6% to 8% annual organic growth rate. We are a little distracted with the acquisition. There's no question about it. We've got a lot of work to do. We're interviewing -- we interview all 430 of their employees. So we're treating this like it was a $500 million acquisition. We're doing the same thing because we want to make sure we get the best people with the best result. So loan growth may be impacted for that in the first half of the year. Do I think loan growth will be negative? No, I think it will be positive. It may not be at an 8% annualized run rate. It may stick closer to that 4% we're kind of running right now. I just don't know. Our pipeline is pretty good for April, so that's good. But we are -- a lot of my resources, my regional managers, my head of my sales division, my teams are out making sure that we're making the right decisions in terms of personnel with Community Bank and our own people and keeping the all-star team together and positioning ourselves so that we're postmerger in the second half of the year that we've got everybody on one team, they're all bonded, we've got everything running efficiently. And that's when I expect, I think, we'll really kick in the organic growth rate. Because to be candid with you, the Community Bank people bring a good skill set to us in terms of C&I lending and relationship banking. We're going to combine that with our skill set, and we're going to have offices like our Pasadena office and our North Orange County office and our Newport Beach office and our South Bay office that are very -- that are like almost mini-banks within the bank. I mean, as we consolidate these offices, we'll have offices with $300 million, $400 million, $500 million in loans and deposits. And that's really, really efficient. So I think one of the things I was really -- just to -- sorry, I keep on rambling here. But one of the things that I want -- I have my people focused on and I'm very proud of is for the first 3 months of the year, our return on average assets was 1.71%, our return on average equity was 13.02% and our efficiency ratio was 43.1%. I mean, we're in the middle of an acquisition, a lot of things are going on. But these numbers for our type of beta in terms of risk and what we take in running this company, I think, are phenomenal. And if we can continue on this trend and get Community Bank consolidated, I think we're going to be hitting on all cylinders and we're going to make that $50 million a quarter in profitability that I aspire to by the third quarter or fourth quarter of 2019.

Okay, that's a great update. Chris, one last question related to the deal. Any sort of update in terms of -- it sounds like you're working pretty hard on the integration efforts already. Do you have a planned conversion date or any update in cost saves that you can provide at this point?

I don't have anything on the cost save issue. I mean, we've announced them at 50%, so that's where we are in that. We -- assuming we close the deal in July and August, which we're pushing very hard to do, we've got our applications filed, we've got all that stuff in the pipeline, assuming that happens, our conversion date to convert the operating systems over is in November. So we should be converted before year-end if that happens correctly. And then -- and we'll do the consolidation of the branches, whether it's our branch into their branch or their branch into our branch, from December through March. It may go into April, but it will be primarily in the end of next -- end of this year and the first quarter of 2019.

The next question comes from Matthew Clark with Piper Jaffray.

First one, just on the accretion in the quarter, how much that contributed to the margins?

You're referring to the accretion of our PCI loans?

The purchase accounting accretion that I think has been running about $800,000?

Yes. I think it was about $1 million, just a tad bit over $1 million.

Okay, okay. And then, just if you strip that out and look at your core loan yields, relatively stable in the quarter. If you -- can you speak to why you might not be seeing more of a lift in your core loan yields? Is it the competition? Or is it something else?

Well, some of the -- what happens is we -- part of our seasonality, too, we get year-end borrowings from the dairy side, and that lingers into January, February. The dairies are typically a little lower loan yields right now, although their loan yields are going up because variable rate loan yields are going up. We should see some higher loan yields going forward. I think that the trend is positive for us as variable-rate loan yields are going up and we're also finally seeing some more fixed-rate loan yields go up. The flattening of the curve, though, is not great for us. More flatten of the curve, the more we're going to have a flat loan yield. And so I do anticipate it's going to go up. Tell me what the 10-year Treasury does in lockstep with the Fed funds rate, and I can give you more information on what our loan yields are going to do.

Okay. So you feel -- it sounds like you feel pretty good about the core margin outlook at least in the near term here with that excess deposit growth, too, being able to put that to work at the end of the quarter.

I absolutely do. And because I think there is more deposit pressure on all institutions. But the way we have weathered the last year on the deposit side, I mean, for us to be sitting here with our cost of deposits being 9 basis points, that's the same cost of deposits we had a year ago. Cost of deposits -- I mean, the cost of funds is 12 basis points, same cost of funds we had in the first quarter of 2017. So we're not going to be able to hold the line that perfectly going forward. The fact that we've been able to do it so far, I think, shows that we really have a good relationship banking concept and that we do have a lot of business deposits that are sticky. One of the things that we are doing this year and have included in our incentive program and our presidents club is a bigger emphasis on deposits. And so you're going to see us really start focusing on deposits. And I know that the world out there wants us to focus more on loans. But this funding is so important right now. The war for deposits right now is extremely important. So you have to have the infrastructure, the service, the technology and everything to accommodate all these business clients, and we do. And we're doing a great job competing in that area. So I'm going to have about $1 billion in funding when we close the Community Bank deal that we're going to have to deal with that I don't think is pure, pure funding. I think it's more price-sensitive funding. It's more tied to fed funds rate. It's FHLB borrowings. It's all kinds of stuff. It's about $1 billion. Is that -- Allen, do you agree with that number?

Correct.

So what I want to do is I want to replace that $1 billion of their funding, which I don't -- which I think is very price sensitive and is -- that portion of them is costing well over 1% right now, and turn that into my 11 basis points fed funding. And if I can do that, boy, that's a lot of money to bring to the bottom line for us. So that's something that we really have not put in our modeling for economic synergies. Is that right?

Correct.

We have not modeled that, yet that's something that we're going after and saying, "Hey, you know what, this is what we need to build." So we're having meeting with our specialty banking deposit groups. We're having meetings with actually -- or at least conceptual meetings with Community Bank. They have a big real estate group that does a tremendous job. They have -- they do their nonowner-occupied commercial real estate, they do it in a separate group in Community Bank. And they have about $750 million-plus in that group. I think there's a tremendous amount of opportunity for us to go after deposits in that group. They've begun a program to do that, but I think we can accelerate that program. So I'm focused a lot on this deposit thing because the economic synergies of us really driving good core deposits is going to dictate our success going forward. And also, it helps -- it will help us transition more of our asset mix from a greater percentage of loans vis-à-vis securities. And you've already seen some of that, a slow shift over the last couple of years, but I want to accelerate that shift. And I think that's where the magic is going to be and we're going to -- and get to that $50 million-plus a quarter come third, fourth quarter 2019, maybe more.

Got it. Got it. Great. And then last one for me, just on all the dislocation in your markets. I know you've got obviously a pending acquisition here, decent size. I mean, how will you think about the hiring opportunities above and beyond the pending acquisition? Are you entertaining hiring deposit gatherers or seasoned lenders? Or is that pretty much on hold at this stage?

I would say, for the most part, I mean, I'd like to say we're out there hustling for everybody, the [growth] part is a little bit on hold right now because we've got a lot of talent at Community -- talented people at Community Bank. And we want to make sure we're paying attention to them and talking to them and see how they can add value to our company and so forth, so -- and integrate it into us -- I mean, integrate into our bank. And remember, we have more products and services to sell than they do. So if we can get their employees educated -- they know their clients. We can cross-sell more to their clients. We can get more of their deposit base. I mean, there's a lot of money to be made that I think that can -- that's really fundamentally in the customer base of Community Bank. They've done a good job organically over the years, building really quality clients, and I commend their management team for that. I -- we can do more with them. And I want to make sure that their people that join us and become our team understand how to do more with them. So that's where we're spending -- that's where we're going to spend our time and energy on, more so than recruiting outside. Because I think we've got -- for the short run, for the next year or so, we have a lot of talent to choose between these 2 teams, and that's where the magic is going to be.

(Operator Instructions) The next question comes from Jackie Bohlen with KBW.

Chris, continuing on with that same line of question and the $1 billion in funding that you referenced. Might we see a trickle-down effect in the balance sheet from some of that? Meaning that -- I saw that securities came down a little bit in the quarter. Would you look to let some of that funding run off and then let securities decline a bit?

Potentially, yes, but the reason we're accumulating more cash right now is for 2 reasons. First of all, we've got to pay $177 million at close. So second is that if we start borrowing money, fed funds over that rate is 1 75. So when you're funding at 10 basis points, 11 basis points, I sure as heck don't want to borrow money at 1 75. So -- and then to go invest in a security right now, to go out and do like a 15-year mortgage-backed, we're getting something, 2 80, 2 90 with a 3-year, 4-year -- 4 point...

A little over 2 90.

A little over 2 90. So it's just not -- I mean, I'd rather be booking 4.5%, 5% loans or variable rate loans that are 4.75% and up. So that's where we're focused on. There could be some of that. But that's why I want to get the deposit going, Jackie, so that I can avoid doing that. I don't want to shrink the asset side if we don't have to. I'd like to keep the asset side there, but I need to get the deposits rolling here so I can take out that $1 billion in funding, layer in our $1 billion in funding. And boy, you're going to see some real good numbers if we do that.

Okay, that's helpful. And then, Allen, thinking about the net interest margin and the effect that the new tax rate had on some of the municipal securities, do you have an apples-to-apples NIM from 4Q to 1Q or just the impact that the lower tax rate had on the first quarter's NIM?

If you would look at it on a nominal basis, and this is a -- I think it would be 3 63 to 3 66, so a 3 basis point pickup.

Okay, so that takes out all the tax impact and everything else?

That's -- yes, that's not adjusting for tax equivalency.

Okay. Okay. And then just lastly on -- I noticed that there was a decline in assets under management in the quarter. Was there anything unusual in that? And would you expect any sort of an income impact going forward from it?

We did have some attrition with 1 large account, and we do expect that there will be some income decrease where we -- somewhere in the neighborhood of $150,000 to $200,000 a quarter is where we believe the runoff is on that. And so that was embedded all in the first quarter ago. So there is -- so that -- we did have a large relationship, and that did have an impact on us. And -- but I'll say this, I mean, I know I'm sounding more optimistic than I probably do on most of our calls, but I feel a lot more optimistic. And remember, all these Community Bank clients, they're already starting to refer business to us on the Citizens home loan side and on the wealth management side. I believe we've already closed a wealth management deal, and we're in the process of closing a couple of home loans, too, from Community Bank already. So that synergy is going to be great when we get that rolling. So I do expect a rebound from CitizensTrust. We did lose a large client, and the impact is $150,000 to $200,000 a quarter, but I think all systems are go.

The next question comes from Brian Zabora with Hovde Group.

First, I'll ask a question -- sorry if I missed this, but did you indicate how much paydowns may be impacted loan growth or just what you're seeing on the CRE paydowns?

We expected CRE paydowns to slow, and they really haven't. They remain at the same levels, maybe even modestly increased quarter-over-quarter. We were surprised by that because it's not refinancing based. It's sale based. So we just had some of our customers sell properties, which may be -- I'm hoping was an anomaly for the quarter, and it's not going to continue to go on. But we're not seeing as much refinance pressure, but we are seeing a few more sales than we've seen in the last -- over the last -- even in the last couple of quarters, I think, than we were seeing maybe a year ago. Property sales people cashing in and doing something else with the money.

That's helpful. All right. And then just a question on the expense side. You've done a great job of keeping those expenses as a percent of averaging asset -- or a percent of assets under 1 70, or the 1 60 rate. As you get over $10 billion assets, do you think there's a floor longer term where you can bring that down to or kind of a minimum level that you would have to maintain?

Well, our objective remains at 1 70. And I think even as we get over $10 billion, I think we will have some more economic synergies here along the way. We were at 1 77 for the quarter, but I think you can look at that as a little bit -- that was a little inflated due to payroll taxes, which were elevated by about $800,000 for the quarter. And then there was another $800,000 in acquisition expenses, which I think are nonrecurring but recurring if we keep doing acquisitions. So I think we're running where we want to run. I do think there'll be more pressure on that. But I think we have more income opportunities, too. So remember there's 2 sides to that equation. And the income side, I think, is going to be positive and help us offset that, too.

Great. And then just -- I guess, just lastly, on the nice recovery, again, this quarter -- several quarters. Are we getting to the end? Or do you think there's still a couple -- maybe some more quarters of net recoveries?

I've been saying the end is near for a long time now. And the end is near, and I'm going to be right one of these times. We do have a couple more recoveries coming down the pipeline in 2018. But it's getting few and far between. In fact, our net recoveries in the first quarter were around $1.4-ish million, I think, if you round up, $1.360 million or something like that. I think $1.3 million of that was 1 client in different loans that we recovered. So there's not -- there's just not the multitude of things contributing to that. It's like we've got a couple of things that we still need to resolve. And like that sale on the OREO, realize that property, we've held for 7 years now. And the beauty I think of our company is that we can weather the storm and hang on to these types of things without having to sell them at discounts during adverse times and then come out the back end with a good moneymaker. And that's what we did on this. I mean, to get a $3.5 million OREO gain from where we charge that down, I mean, we're getting -- we didn't get all of our money back on that, but we're really close to getting all of our money back on that, which is pretty darn good for -- this property was in Porterville, which is in Central Valley of California and heavily impacted by the recession of 2008, '09, '10.

The next question comes from Tim Coffey with FIG Partners.

So most of my questions have been answered, but I did want to talk about -- see if I can get you to talk about capital management plans going forward. On the Community Bank call, you had kind of hinted that we could -- a potential for maybe an increased dividend post-deal. And I wondered if you had any additional thoughts there.

Yes. I'm going to answer that a little bit, and Allen can answer that a little bit since it's his birthday. And I'll answer the easy part. The function of increasing the dividend is executing on our strategy and getting to that point where we can start making $50 million a quarter. And my goal in that is to be doing that by the third or fourth quarter of 2019. I think I've stated that several times now. If we do that -- so let's make the argument that third, fourth quarter of 2019 we're making $50 million a quarter, that's $200 million a year. At our present dividend rate of $0.14 per share, we'll have about 140 million shares after the acquisition -- merger with Community Bank. Do the multiplication, there are 140 million shares times $0.14 and 4 quarters, you come out with a little over $80 million. So our dividend payout ratio will then go from where we are right now in the low 50s to around 40% or the very low 40s. So I don't see any reason why we wouldn't be able to keep our dividend payout ratio in the low 50s, especially given the fact that if we're making $200 million a year and we're dividending out $80 million, we have $120 million in capital that's coming into the company every single year. Well, at $12 billion in assets, that's a 10% organic growth rate in loans and what I would call core deposits. Very hard to achieve that. So I think an 8% is more realistic, so we could dividend those extra dollars out and feel very comfortable that we would have no capital attrition. Allen, you got anything to add to that as far as capital planning?

You made it difficult because you answered it completely. But obviously, it's something our board will always look at very closely. And once we get through Community and look at potentially other acquisitions, we'll always have to keep that in mind as well.

The beauty of this, think about, we've been running with too much capital. We have -- our Tier 1 common has been over 11%. We're getting to normalize that and bring that into like 9.25%. Even that I think is a little bit -- probably that's right within our peer group, but it's a little high for what we need to do with our credit quality and the consistency of our performance and I think the risk beta of our loan portfolio, we could run it even lower than that if we wanted to and feel very comfortable with it. So I really think that ROA is extremely important to us and it's probably our most important thing. But ROA with this acquisition -- I mean, ROE with this acquisition is going to become just as important as the ROA going forward.

Right. And to your point, if you're making $50 million a quarter and you don't increase the dividend, you'll start growing capital at rather pretty quick clip.

Yes. And I think -- I mean, let's just pretend that we brought the dividend from $80 million to $100 million a year, right, we're still only at a 50% payout ratio. That's a 25% increase in our dividend, so that's a -- what is that? Close to $0.03 -- that's $0.04 or $0.035 or whatever you want to. We probably wouldn't do any $0.005 dividend increase, but probably be $0.03, $0.04. But I'm not going to bring that to the board until we accomplish that first. So right now that's not something I think that's in direct discussion in board meetings, but it is something we're watching. And if we execute on this deal like we think we're going to execute on this deal and integrate all the great people at Community Bank and all their great clients and do what we're supposed to do there, I think home run.

Okay. So talking about increasing the dividend and the potential timing, are you saying that you'd wait till you're hitting $50 million a quarter or until you have visibility on $50 million a quarter?

We'd wait. I can't speak for the board. But I would say, I would recommend that we wait. But we -- I have 7 other board members that would want to do that, too, because we're a little -- we've always been conservative, we've always been a little bit "show me first," the [Missouri] concept. So I think that would be more likely based on the conversations I've had with the board over the years. But I -- it's something we will be discussing over time, and that could change.

(Operator Instructions) At this time, there are no more questions, so I would like to turn the call back over to Mr. Chris Myers.

Thank you very much. I just want to thank everybody for joining us again this quarter. This concludes today's presentation, and we look forward to speaking with you again in July for our second quarter 2018 earnings call. Have a great day. Take care.

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