CVB Financial's (CVBF) CEO Christopher Myers on Q2 2016 Results - Earnings Call Transcript

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CVB Financial Corporation (NASDAQ:CVBF) Q2 2016 Earnings Conference Call July 1, 2016 10:30 AM ET

Executives

Christina Carrabino - Investor Relations

Christopher D. Myers - President and Chief Executive Officer

E. Allen Nicholson - Executive Vice President and Chief Financial Officer

Analysts

Brian Zabora - Hovde Group, LLC,

Aaron Deer - Sandler O'Neill and Partners

Matthew Clark - Piper Jaffray & Co

Jackie Camaro - Keefe, Bruyette & Woods, Inc.

Operator

Good morning, ladies and gentlemen and welcome to the Second Quarter 2016 CVB Financial Corporation and its subsidiary, Citizens Business Bank, Earnings Conference Call. My name is Mike and I'm your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer period. 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, you may proceed ma'am.

Christina Carrabino

Thank you, Mike and good morning everyone. Thank you for joining us today to review our financial results for the second quarter of 2016. Joining me this morning are Chris Myers, President and Chief Executive Officer and Allen Nicholson, Executive Vice President and Chief Financial Officer. Our comments today will refer to the financial information that was included in the earnings announcement released yesterday. To obtain a copy, 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 the call over to Chris Myers.

Christopher D. Myers

Thank you, Christina. Good morning everyone and thank you for joining us again this quarter. Yesterday, we reported net earnings of $25.5 million for the second quarter compared with $23.4 million for the first quarter of 2016 and $26.8 million for the year ago quarter. Earnings for the second quarter of 2016 were positively impacted by the recapture of $2.6 million of non-accrued interest and fees related to the repayment of three TDR loans.

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

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

When the impact of the recaptured non-accrued interest on the three TDR loans as excluded the tax equivalent net interest income margin was 3.45% for the quarter. Total loans were $4.2 billion at the end of the second quarter. Loan origination remains strong and was ahead of last year's pace, loans grew by $65 million or 1.6% from the end of the first quarter.

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

From the year-over-year perspective net loans increased $454 million or 12%. Organic loan growth accounted for $295 million of the growth or 8%, while County Commerce Bank loans accounted for $159 million of loan growth or about 4%. The low interest rate environment continue to put pressure on both loan retention and loan yields.

Price competition remains challenging and intensified during the second quarter due to the decline in interest rates. Excluding the impact of a non-accrued interest on the three paid-off TDR loans and the discount accretion from Purchase Credit Impaired loans, loan yields were 4.53% in the second quarter compared to 4.49% in the first quarter and 4.75% in the second quarter of 2015.

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

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

Now I would like to discuss deposits. For the second quarter of 2016, our non-interest bearing deposits totaled $3.67 billion compared with $3.35 billion for the prior quarter and $3.25 billion for the year ago quarter. This represents a $314 million increase or 9% quarter-over-quarter and a $460 million increase or 13% year-over-year. The ending balance at June 30, 2016, included a $210 million deposits from one customer that is expected to be fully withdrawn during the third quarter.

Average non-interest bearing deposits were $3.44 billion for the second quarter of 2016 compared with $3.28 billion for the prior quarter an increase of 4.8%. Non-interest bearing deposits represented 55.7% of our total deposits at quarter end or 54.2% if the $210 million customer deposit is excluded.

Our total cost of deposits and customer repurchase agreements for the second quarter was 11 basis points, unchanged from the prior quarter. At June 30, 2016, our total deposits and customer repurchase agreements were $7.18 billion compared with $6.66 billion for the same period a year ago and $6.84 billion at March 31, 2016.

Average total deposits and customer repurchase agreements were $6.91 billion for the second quarter of 2016 compared with $6.70 billion for the prior quarter and $6.46 billion for the year ago quarter. Our objective remains to maintain a low cost stable source of funding for our loans and securities and to focus on managing down any significant concentrations within our deposit base.

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

Now, expenses. Non-interest expense in the second quarter was $34.4 million unchanged from the prior quarter. Non-interest expense was 1.73% of average assets for the second quarter compared with 1.79% for the first quarter. The second quarter represents the first full quarter of ongoing incremental expenses associated with the offices and staff acquired from County Commerce Bank. Non-recurring expense related to the acquisition was $355,000 for the second quarter compared to the $850,000 for the first quarter.

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

E. Allen Nicholson

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

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

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

At quarter end, investment securities available-for-sale totaled $2.25 billion including a pre-tax unrealized gain of $66.6 million. In addition, we had held-to-maturity investment securities totaling $724 million. We continue to be selective in investing in securities in the current interest rate environment carefully weighing market rated and overall interest rate risks.

During the second quarter, we purchased 17.7 million in municipal bonds with an average tax equivalent yield of approximately 3.5%. In the current environment, we are finding it challenging to purchase municipal bonds that meet our investment criteria.

During the quarter, we purchased MBS and CMO Securities totaling $93.7 million with an average expected yield of about 1.6% and an average expected duration of less than four years. We also purchased one SBA Securities for $60 with an average expected yield of 2.18% and an average expected duration of five years.

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

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

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

Christopher D. Myers

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

E. Allen Nicholson

Expected yield is 1.96%.

Christopher D. Myers

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

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

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

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

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

In terms of the dairy industry, the short-term outlook still appears somewhat challenging as no prices have dropped and remain low. However, the longer-term outlook appears better as the majority of industry and analysts predict a steady rise in global dairy trade for the next decade due to population growth and rising income in developing nations.

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

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

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer Session [Operator Instructions] The first question we have comes from Brian Zabora of Hovde Group. Please go ahead.

Brian Zabora

Thanks good morning.

Christopher D. Myers

Good morning Brian.

Brian Zabora

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

Christopher D. Myers

Yes. We are having continuous conversations along the way and to answer your question I think that is when I say small I really am referring to the under $1 billion in assets and over a couple of $100 million in assets. So, $200 million in assets to a $1 billion in assets. I think the pressure on net interest margins and spreads is a big thing in the Community Banking business and I think as we look forward I think you are going to see smaller banks who have been able to harvest income off, releasing loan loss reserves and maybe selling securities and taking gains of those. Those things are going to go away here in the next year or two.

And so profit margins are going to be pressured, they are going to be pressured for us, they are going to be pressured for everyone. So I do think that's going to push more and more M&A into the discussion point. The question is the price expectations between buyer and seller and then those are continuous negotiations that go on, but we are optimistic that we will continue to be able to build both organically and hopefully do a few deals here in the next couple of years.

Brian Zabora

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

Christopher D. Myers

This has become as part of our business in the last couple of year and a good way to track how big pay downs are for us in the quarter, we don’t announce what the actual pay downs are, but because it's a choppy thing to announce. Some of them are properties sold, some of our refinance, some of them we refinance ourselves, but prepayment penalties in 2015 for organization were about $4.9 million for the year and I think we are about $1.9 million or close to $2 million for the first six months of the year. So still at very elevated level from what we have been historically for this company.

I think one of the prepayments that I wanted to mention was the three TDR loans that were paid-off were about $17 million. Now that's a good thing, we got paid-off in those, we took a gain of $2.6 million in interest income and other income and that was a good trade for us. But if you think that $17 million out, we really grew our loans by pretty much 2% for the quarter, which is our objective.

So I feel like despite repayment pressure our loan volume and our teams are doing a really good job and I think that 2% per quarter is a good expectation for us, it's a good goal for us and I think if prepayment pressures subsided a little bit, we can do even better than that. So I’m optimistic as far as loan productivity going forward, our new teams have kicked in at the bank.

All of our teams now are marginally profitable, which means on the margin they are making money, which is good. So we don't have any costs and that’s San Diego, at Santa Barbara, that's Ventura, that’s L.A. new teams, that’s our New Port Beach, we brought in new team into there. So I’m really excited about the fact that these guys have hit the ground running and our existing teams are doing a good job of going out and hustling after quality assets.

So, overall our sales teams, I'm very proud of the job that they have done here. If you look at where we were a year ago, our loan totals were about $3.8 billion and now we are about $4.25 billion. So we are up $450 million year-over-year that's 12%, 4% of that is due to County Commerce Bank acquisition and 8% of that is due to our organic growth.

So I think we are doing what we set out to do and we are going to continue to try to bring on more teams and expand our market share and so far so good. I don't like the interest rate environment, although I’m glad at least the 10-year treasury is closer to 160 than 135 like it was a few weeks ago. So I think that's good news, if that 10-year treasury goes up that's good news for CVB.

Brian Zabora

Great. Well thank you for taking my questions.

Operator

And next we have Aaron Deer, Sandler O'Neill.

Aaron Deer

Hey good morning, everyone.

Christopher D. Myers

Morning Aaron.

Aaron Deer

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

E. Allen Nicholson

Thanks Aaron.

Aaron Deer

I’m going to start if I may, I guess Chris you mentioned in your opening comments the loan yields X the recapture and the discount - I just want to make sure I got those numbers right, I think you put it at 453 versus 449 in the prior quarter?

Christopher D. Myers

Yes.

Aaron Deer

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

Christopher D. Myers

A lot of stuff goes into that, because you have to look at prepayment fees are in there, you look at different interest income to go there, but no, as far as I guess the best way to look at this is, our average loan yield is right around what is that 450 right. And I would say the average loan that we are putting on the books is probably 4% or in the low fours. So there is probably a 40 to 50 basis point differential in between the new loans that we are putting on now and the average loan yield on the book.

And the same thing on the security side, our securities yield is around 245 and securities that we are buying right now, if we can buy them are averaging 2% or a little bit over 2% in total. So, there is a headwind there of a 40 basis points across the board. But what we feel like we are in a great position as we have great funding and we are able to use that funding to grow loan and if we can replace 2.4% securities with 4% loans or a little over 4% loan yield of the new launch we are putting on that's actually going to help our margin going forward.

The pace of that is the question and we are accumulating so much cash right now, we have got over $600 million cash at the end of the quarter. Now $210 million of that we feel is short-term, it’s going to go out with that one large depositor, but notwithstanding that to be sitting here at 450 million plus in cash at the end of the quarter, we want to deploy that cash at something other than 50 basis points, which is what we are getting from the Federal Reserve.

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

Aaron Deer

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

Christopher D. Myers

Yes, I really think that we are in a great position, because I think our bank can compete on a price basis with anyone of quality assets. We have done a lot of new hiring, we continue to do, we are talking to a lot of people. I think you will see us continue to expand on the kind of that de novo hiring, new teams hiring, hiring new bankers. It's very important, because in the banking industry and general we have a maturing workforce and it's important to bring in that new talent and whether they are millennials or whatever that talent is, we need to keep that rolling, so that we can grow organically.

And I say this all the time, I think your organization needs to be able to grow organically or you don’t have a true meaning in the marketplace and that's our goal and we are growing organically. And we can augment that with some acquisitions and who knows may be we get lucky and a larger acquisition comes our way sometime, someway. But in the mean time, it's just we are blocking and tackling here and executing everyday and I feel very positive about our teams and the management here and especially the management changes.

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

Aaron Deer

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

Operator

[Operator Instructions] Next we have Matthew Clark with Piper Jaffray. Please go ahead.

Matthew Clark

Hey good morning guys.

Christopher D. Myers

Good morning. How are you?

Matthew Clark

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

Christopher D. Myers

It sounds like a CFO question to me.

E. Allen Nicholson

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

In the mortgage-backed arena, we had about probably between agency and mortgage-backed we probably had close to $200 million and our principle come back a little bit elevated from where we had been, but once again are the yields zone where we are purchasing are probably 10 to 12 basis points lower than the portfolio.

Matthew Clark

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

Christopher D. Myers

Yes, I admit it. Go ahead I’m sorry.

Matthew Clark

And I was just going to also ask about kind of the risk of repayment activity?

Christopher D. Myers

Yes. I think as that 10-year treasury comes down our commercial real estate loans are the primary area where we were finding more price competition. It's on the CNI side and any kind of fixed rate loan that we are going out for five or seven or 10-years on that's where we have seen some pricing differential.

That's starting to come back up a little bit here, because rates are slowly returning back to hopefully the high ones in the 10-year treasury rate area. So I don't think it's any huge headwind at this point, but it is something that we are positioned to compete for that, but when we are lending money out at 4% or a little over 4% or sometimes less than 4%, we have to be very mindful of our risk return.

And so we are really pushing for quality, quality, quality along the way here. But I think that gains so to speak plays into who we are. I mean if you look at our bank and a 157 quarters of profitability and a 107 quarters of paying the cash dividend and making money through all the different recessions even though we are headquartered in the Inland Empire et cetera, et cetera as we hear from people.

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

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

Matthew Clark

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

Christopher D. Myers

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

But when that differential widens to say 2% and you have a 5% versus a 3% variable yield or 2.5% versus 4.5% or whatever the number is then its more compelling for us to put on more fixed rate loans, just because we have a bigger yield and it's worth us taking a little bit more interest rate risk. Right now with the flattening of the yield curve and the 10-year treasury rate coming down that's pushing more of a pipeline into our swaps. To the customer, they are still getting a fixed rate, they are in different to some extent between whether they get a swap rate or a fixed rate on our books, they are getting the same thing either way.

It's just what we are doing behind the scenes whether we want to do that on a LIBOR base swap or do we want to just fix that in and take the interest rate risk ourselves. So that's one area. The other on fee income is our trust income was up quarter-over-quarter and our investment services income was up quarter-over-quarter. In fact, year-to-date we are up about $380,000 or about I would call that about 8% year-over-year 8.74% is what the number is, I just got handed a piece of paper.

Matthew Clark

Thank you.

Christopher D. Myers

So I think those are our two drivers.

Operator

The next we have Jackie Camaro of KBW.

Jackie Camaro

Hi good morning.

Christopher D. Myers

Hi Jackie.

Jackie Camaro

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

Christopher D. Myers

Well I would say first of all I think we have some really good people in that marketplace from Santa Barbara to Ventura to Oxnard, the County Commerce people are first class associates and I think they combine very well with our company. So we are very excited about that marketplace. We have five locations in that marketplace stretching from West Lake village in the south through Camarillo, Ventura, Oxnard and then Santa Barbara in the North.

Our plan is really with our larger balance sheet, our larger lending capacity and County Commerce being a smaller bank, we are hoping to uplift a lot of those relationships into bigger relationships for us and then cross sell into other products and services with that customer base. In turn, I think that's a good market for us it's a strong wealth management market as well and were trying to deploy some resources there on the wealth management investment services side too up in that Santa Barbara area. So, I'm very optimistic, I think it's going to be a higher growth area for us going forwards then probably the main core of the bank.

Jackie Camaro

Okay. And has there been any attrition from the acquisition?

Christopher D. Myers

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

Jackie Camaro

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

Christopher D. Myers

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

Jackie Camaro

Okay, great. Well, thank you.

Christopher D. Myers

Thanks Jackie.

Operator

Next we have the follow-up from Aaron Deer of Sandler O'Neill.

Aaron Deer

Hey Chris. Just a quick follow-up on one of your comments it sounded like you might have some willing us to do loan purchases in the absence, maybe not hitting the organic growth targets or acquisitions that you would prefer. If you were to do something along those lines what kind of product might you be looking at and then as a follow on to that question have you also thought at all about other forms of maybe capital actions in terms of may be share repurchase or special dividends or other way to kind of manage down your capital?

Christopher D. Myers

Yes, those are great questions and we are looking at all of those stuffs and those are executive management discussions we are having right now and board discussions as we accumulate more and more cash and project that we are going to accumulate more cash. We got to figure out how we are going to deploy that cash in a way that's safe. I can say this, we have made no decision at this time to purchase any loans that could change a week from now, we could decide to that.

But our focus is going to be if we decide to purchase loans we are going to focus on high, high quality loans, because we look at any purchase of any loan that we would do or loan portfolio that we would do is really a substitute for our investment securities portfolio to try to take that excess cash we have and get a better yield and 50 basis points overnight. And we will get a better yield than what we could buy securities on, which right now any mortgage-backed or CMOs will probably buy in at less than 2% and may be significantly less than 2%.

So that would be our intent if we did that. In general, we prefer not to buy loans, because it's not relationship oriented and so that would be something we have to look at, but, again quality is paramount to us on that. So, if we did look at different types I think we are underweighted in housing and multifamily we might look in that area and certainly we always like the commercial, industrial and we might look in that area too. So, I would say between those three types, single family residential, multifamily and commercial, industrial I think that would be the highest likelihood if we did anything there.

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

Aaron Deer

Okay, perfect. Thanks for the additional color.

Operator

Next we have a follow-up from Matthew Clark, Piper Jaffray.

Matthew Clark

Hey just some house cleaning stuff. Tax rate has been bumping up here in the last couple of quarters, just curious what we should use going forward?

E. Allen Nicholson

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

Matthew Clark

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

Christopher D. Myers

I think we still have some we believe recoveries that will be realized in the remainder of 2016 and even some realized in 2017 as well. But we are through a lot of that. I would say we are may be two-thirds of the way somehow, this was guesstimate. We will see some more recoveries I believe in the third quarter and fourth quarter of this year and into 2017 as well.

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

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

Matthew Clark

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

Christopher D. Myers

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

Matthew Clark

Got it. Thanks.

Operator

[Operator Instructions] Well, at this time, there appears to be no further questions. I will go ahead and hand the conference back over to Mr. Chris Myers. Sir.

Christopher D. Myers

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

Operator

And we thank you sir and also to the rest of the management team for your time also today. The conference call has now concluded. At this time, you may discount your lines. Again, we thank you all for attending, take care and have a great day.

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