CVB Financial Corp. (CVBF) Q1 2017 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen and welcome to the first quarter 2017 CVB Financial Corporation and its subsidiary, Citizens Business Bank, earnings conference call. My name is Daniel and I am your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions]. Please note that this call 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 Daniel and good morning everyone. Thank you for joining us today to review our financial results for the first 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 $28.5 million for the first quarter, compared to $27.1 million for the fourth quarter of 2016 and $23.4 million for the year ago quarter. Earnings per share were $0.26 for the first quarter compared to $0.25 for the fourth quarter and $0.22 for the year ago quarter. The first quarter represented our 160th consecutive quarter of profitability and the 110th consecutive quarter of paying a cash dividend to our shareholders. On March 10, we announced the completion of our acquisition of Valley Commerce Bancorp and its subsidiary Valley Business Bank. Our financials for the first quarter of 2017 included 21 days of VBB's operations. At close, Citizens Business Bank acquired $309.7 million of loans, assumed $172.5 million of noninterest-bearing deposits and $189.3 million of interest-bearing deposits. The first quarter's earnings were impacted by a $4.5 million loan loss provision recapture, which included $2.2 million in recoveries during the quarter. The fourth quarter of 2016 also included loan loss provision recapture of $4.4 million. Our tax equivalent net interest margin was 3.51% for the first quarter compared with 3.47% for the fourth quarter and 3.52% for the year ago quarter. The modest increase was a result of both loan growth from the acquisition of Valley Business Bank and an increase in our investment portfolio yield. Total loans were $4.62 billion for the first quarter of 2017, compared to $4.40 billion for the prior quarter. The $220.4 million increase over the prior quarter included $309.7 million of loans acquired from Valley Business Bank. Our dairy and livestock and agribusiness loan portfolio declined by $109.2 million, primarily due to seasonal paydowns which occur in the first quarter of the calendar year. For the first quarter, excluding the impact of loans acquired from Valley Business Bank and loans associated with our dairy and livestock portfolio, commercial real estate loans increased by $50.3 million, while construction loans decreased by $21.5 million. All other loans declined by $8.9 million in aggregate. Loan yields were 4.50% for the first quarter of 2017, compared to 4.53% for both the fourth quarter and the first quarter of 2016. When interest recaptured on nonaccrual loans and discount accretion on purchase credit impaired loans are excluded, rising interest rates contribute to a four basis point increase in overall loan yields over the fourth quarter. The allowance for loan and lease losses was $59.2 million or 1.28% of total loans at March 31, 2017, compared with $61.5 million or 1.40% of total loans at December 31, 2016. Net recoveries on loans for the first quarter were $2.2 million. It is important to note that 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 increases to 1.54% as of March 31, 2017. In terms of loan quality, nonperforming assets defined as nonaccrual loans plus other real estate owned were $14.9 million at the end of the first quarter, compared to $11.7 million for the prior quarter. Total nonperforming assets included $6.4 million in nonperforming loans from the acquisition of Valley Business Bank. At March 31, 2017, we had loans delinquent 30 to 89 days of $1.4 million, or 0.03% of total loans. Classified loans for the first quarter were $104.2 million, a $4.1 million decrease from the prior quarter. We will have more detail information on classified loans available in our first quarter Form 10-Q. Now, I would like to discuss deposits. For the first quarter of 2017, our noninterest-bearing deposits totaled $4 billion compared with $3.67 billion for the prior quarter and $3.35 billion for the year ago quarter. The ending balance at March 31, 2017 included $172.5 million of noninterest-bearing deposits acquired from Valley Business Bank and a single $140 million deposit from one customer that deposited shortly before quarter-end and was withdrawn shortly after quarter-end inflating our numbers. Average noninterest-bearing deposits were $3.70 billion for the first quarter of 2017, compared to $3.72 billion for the prior quarter. Average noninterest-bearing deposits represented 58% of our total deposits for the quarter. Our cost of interest-bearing deposits and customer repurchase agreements for the first quarter was 11 basis points, compared to 10 basis points for the prior quarter. At March 31, 2017, our total deposits and customer repurchase agreements were $7.4 billion compared to $6.9 billion at December 31, 2016 and $6.84 billion for the same period a year ago. Total deposits acquired from Valley Business Bank were $368.1 million. Average total deposits and customer repurchase agreements were $7 billion for the first quarter of 2017, up $32 million from the prior quarter. Compared to the first quarter 2016, total average deposits increased by $367.5 million, while customer repurchase agreements declined by $82.7 million. We continued our focus on maintaining a low cost stable source of funding for our loans and securities. Our overall cost of funds for the first quarter of 2017 was 12 basis points, which compares to 11 basis points for the prior quarter and 12 basis points for the first quarter of 2016. Interest income. Interest income for the first quarter of 2017 totaled $67.4 million compared with $67.4 million for the prior quarter and $64.5 million for the same period a year ago. Excluding interest recaptured on nonaccrual loans and discount accretion on purchase credit impaired loans, interest income for the quarter of 2017 increased by $880,000 over the prior quarter. The tax equivalent yield on earning assets grew by five basis points over the prior quarter as the tax equivalent yield on investment securities increased by 15 basis points and average loans grew from 56% to 57% of average interest earning assets. Interest income grew by $2.9 million, or 4.6%, from the same quarter last year as average interest earning assets were higher by approximately $343 million. Excluding interest recaptured on nonaccrual loans and discount accretion on purchase credit impaired loans, interest income grew by about $3.5 million, or 5.5% year-over-year. Noninterest income was $8.7 million for the first quarter of 2017, compared with $8.4 million for the prior quarter and $8.7 million for the first quarter of 2016. Now expenses. Noninterest expense for the first quarter was $34.1 million compared with $34.9 million for the prior quarter and $34.4 million for the same quarter last year. The fourth quarter of 2016 included $4.1 million in expenses associated with a legal settlement in a write-down of a building held for sale. The current quarter included $676,000 in acquisition expenses. Salary and benefit expense increased by approximately $1.9 million or 9.9%, compared to the fourth quarter of 2016. In comparison to the fourth quarter, salary and benefit expense increased by approximately $1 million related to payroll taxes, which is typical during the first quarter of each year. Salary and benefit expense increased by approximately $200,000 related to our acquisition of Valley Business Bank. Annual increases in group health insurance also increased our salary and benefit expenses by approximately $400,000 for the first quarter. Notwithstanding the increases, noninterest expense totaled 1.70% of average assets for the first quarter compared with 1.72% for the fourth quarter and 1.79% for the first quarter of 2016. Now I would 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% for the first quarter compared with 37.5% for the prior quarter and 37.5% for 2016 as a whole. The decline in our effective tax rate was driven by new accounting items related to stock-based compensation and the impact from annual vesting of stock awards and option exercises. Our effective tax rate also varies depending upon tax advantaged income as well as available tax credits. Looking to our investment portfolio. During the first quarter of 2017, our average interest earning balances at other financial institutions and at the Federal Reserve totaled $118 million. We decreased these balances by $72 million on average from the prior quarter as we transitioned these balances into loan growth during the quarter. During the first quarter, these balances represented approximately 1.5% of our average earning assets, which compares to 2.5% in the prior quarter. At March 31, 2017, our combined available-for-sale and held-to-maturity investment securities totaled $3.16 billion, a $25.4 million decrease from the fourth quarter of 2016. Investment securities represented 36.9% of our total assets at quarter-end and were 41% of our average earning assets during the first quarter, which was identical to the prior quarter. At quarter-end, investment securities available-for-sale totaled $2.27 billion including a pretax unrealized gain of $15.8 million. In addition, we had held-to-maturity investment securities totaling $885 million. The tax equivalent yield on the total securities portfolio was 2.46% for the first quarter, which is a 15 basis point increase from the prior quarter. The type and amount of security investments we make each quarter are based on our available liquidity as well as market rates and the overall pricing duration risk. During the first quarter we purchased $120 million of securities with a tax-equivalent yield of 2.51%. Our purchases of available-for-sale securities were comprised of mortgage backed securities totaling $112 million with an average expected yield of 2.42% based on an expected average life of approximately 4.5 years. Held-to-maturity security purchases for the first quarter included $8 million of high-quality bank qualified municipal bond with an average tax-equivalent yield of 3.86%. Our average tax-equivalent yield on purchases during the quarter were 33 basis points higher than the prior quarter average as market rates were generally higher for most of the first quarter. Prepayment speeds in our investment portfolio have continued to slow in recent months as market rates increased. The decline in prepayment speeds resulted in lower premium amortization for our mortgage backed securities and collateralized mortgage obligations resulting in a nine basis point increase in the portfolio's yield for the quarter. Based on current interest rate environment, we currently project approximately $130 million to $150 million in quarterly cash outflows. Now turning to our capital position. Shareholders' equity increased $55.5 million to $1.05 billion for the first quarter. The quarter-over-quarter increase was due to $28.5 million in net earnings, $37.6 million from the issuance of common stock for the acquisition of Valley Commerce Bancorp and $2.1 million of various stock-based compensation items. This was offset by $13 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. In terms of the California drought, winter brought a great deal of rain and snow contributing to a significant decrease in drought conditions throughout the state. In most parts of the state, particularly in Northern California, the drought has been declared as over. Consequently, we saw little effect on the drought on the repayment of our customer's loans. Turning to the California economy. According to various economic reports, California's economy generally tracked the national economy throughout 2016. California's unemployment rate fell to its lowest in 10 years at 5.0% in February 2017, compared with 5.2% in January and 5.6% back in February 2016. With February's job gains, California has gained a total of 2.5 million jobs since the economic expansion began in February 2010. The California housing market outlook in 2017 is mixed. With growing incomes, economists predict renters will be a better position to become homeowners. However, the supply of existing homes remains lean and interest rates are expected to rise. All-in-all, California should experience continued growth in economic activity and jobs drought 2017 with the largest contributions to employment coming from the healthcare, leisure and hospitality and professional services industry. In terms of the dairy industry, feed cost continued to decrease and milk price futures continue to trend upward. With recent price increases for all major dairy products and expected strength in short-term demand, the all milk price forecast for 2017 is predicted to increase. We remain cautiously optimistic. In closing, we are pleased to complete the acquisition of Valley Business Bank and welcome their customers, associates and shareholders. We remain focused on our growth initiatives and will continue to look for other exciting acquisition opportunities to help us increase our market share and expand our geographic footprint. And that concludes today's presentation. Allen and I will be happy to take any questions that you might have.

[Operator Instructions]. Our first question comes from Matthew Clark with Piper Jaffray. Please go ahead.

Good morning.

Good morning Matthew.

Just first a quick one. I am just curious how much the accretion contributed to the margin this quarter?

There is very, very little in accretion. As we noted, year-over-year, the decline was about $600,000, linked-quarter, I think the decline was less than $200,000. Obviously, the acquisition was very late in the quarter and accretion from prior acquisition is becoming really a rounding error.

Okay. And then just on the margin outlook from here. You have obviously had a nice uptick in your core loan yields. Reinvestment rates and securities portfolio up nicely on new purchases. Deposit cost really unchanged. I am just curious, what does new production look like? Yields on new production? And then how should we think about that the latest March hike as we look out for your core margin?

Sure. On the margin, I think what was interesting this quarter was this margin was a pure margin for us. There wasn't really, like the fourth quarter we had some interest income increase and our prepayment penalties have been running about $700,000 a quarter for the last few quarters. So it seems like a very ordinary quarter in terms of our interest income. So I think our net interest margin at that 3.51% is kind of where we are right now. It's come up some because of the short term interest rate increases on our variable rate products and some of that takes a little while to kick in for us because we have a lot of stuff that's tied to either one-month LIBOR or in some cases even when one year LIBOR where we have some of our commercial real estate loans that are tied to one year LIBOR. So we anticipate some more tailwinds on the margin side there. Now I felt better a month ago when the 10-year treasury rate was 2.65%. It fell down in 2.20%, now it's back in the 2.30%. So that 10-year treasury rate will affect our loan pricing as we go on our commercial real estate loans, not that we are directly tied to it, but it's indicative of how we price our product. So I think we shall see what that 10-year treasury rates do going forward. But I think, yes, our core margin is up from where it was six months ago, no question about it.

And what would you say the weighted average rate is on new productions in the quarter?

Yes. Hard to say. I think our portfolio right now is around 4.50%, I think our total yield and I would say that the loans we are putting on the books right now are right around that area on average in the fixed rate category. And then the floating rate category, not far from it because you have got a 4% prime now. So I would say, right in there. I think it's kind of a wash right now.

Okay. Great. I will step out. Thanks.

Our next question comes from Aaron Deer with Sandler O'Neill & Partners. Please go ahead.

Hi. Good morning everyone.

Good morning.

If I could, just a follow-up on the margin commentary. Notwithstanding the core items and the different moving parts there, but just looking at what will be the benefit from Valley Commerce, I guess they had a slightly higher yield in general plus the little bit of accretion is going to come from that. If you can isolate the benefit from that addition, what is that going to add to the margin here in the second quarter? Somewhere around five basis points or so? Does that seem like a reasonable expectation?

What I would tell you, Aaron, is I think their loan portfolio was about 4.9 on average. So a little bit higher than what our portfolio is. So you will get the benefit of that. And as we mentioned, about roughly $300 million of loans that came on in the last 20 days. So I think you can simply do the math from there.

Okay. And then Chris, what have you seen quarter-to-date in terms of any additional paydowns on the dairy? And are you comfortable with what's been your guidance in recent quarters with kind of a target in 2% per quarter, 8% annual in terms of the core organic loan growth?

We look at our organic loan growth this quarter at basically 0.05%. So our goal is to do 2%. But the first quarter is always our toughest quarter, not only because we have the run-off. When I say that 0.05%, I am taking out the dairy and I am also taking out Valley Business Bank loans. 0.05% was our core portfolio. So our goal is to grow our core portfolio 2% an d that would include, yes it include dairy going forward but we have got to take out the seasonality of dairy. That remains unchanged. I think our pipeline is good. It remains good. Prepayment penalties should be less of a factor going forward. But tell me what the 10-year treasury rate does. 10-year treasury rate goes to 2.50%, our prepayment pressure should subside more. It goes down to 2% then our prepayment pressure will accelerate a little bit more. So that ha is something to do with that too. So I think that's kind of where we are right now. We feel pretty comfortable. I do think we are going to see if we see a couple more rate increases, I think we are going to see some more interest rate pressure on our deposit rates which we have seen a little bit of already, not a lot. But I think that as those short term interest rates on deposits or short term interest rates go up, pressure on deposits rates will come around the bend and that's why we have been so focused on our business noninterest-bearing deposits. We feel comfortable that 58% of those deposits are noninterest-bearing and a lot of that is a function of, they need to keep those deposits in there to support all the services that we provide them. And so that makes me feel good because they are less interest rate sensitive to a money market or CD type of product.

Okay. That's helpful. Just to clarify. Has there been any additional paydowns in the dairy books since quarter-end? Or has that stabilized?

None seasonal. But this is, I don't like to report after quarter stuff. This is our first quarter production. But no, the dairy portfolio is kind of running the same thing it has run for the last few years and it is what it is. We have got a good team there and they are doing a good job. We are seeing improvement in the dairy portfolio in terms of credit quality. But as dairies make more money, they tend to pay it down a little faster. Dairies do two things when they make money. They pay your debt down or the buy more cows. And they have been paying our debt down. We were a little surprised to see it was $109 million at first quarter. We anticipated that would be about $80 million or 85 million. So it was $20 million, $25 million higher. But that's part of the fact that the dairies, most of our dairies made money in the fourth quarter. And we believe they made money in the first quarter too and they are using that excess profit to pay us down.

Okay. That's helpful.. I appreciate it. Thanks for taking my questions.

The next question comes from Jackie Bohlen with KBW. Please go ahead.

Hi Chris. Good morning.

Good morning.

Well, following up a bit on your deposit commentary, have you seen any movement at all from the March increase, in terms of rates?

Well, I mentioned that $140 million deposit. We had a large investment firm that banks with us and they brought in some money on March 29 and took it out on April 3 which skewed our end of the quarter noninterest-bearing deposits and total deposits by $140 million. But other than that, it's kind of business as usual. Actually deposits tend to resurge in the second quarter. The first quarter is our low point in deposits historically and then we tend to come on in the second quarter and we are seeing the same thing.

Okay. And any rate --

$140 million.

Yes. No, I understood about that one. And then any rate movement from March? Or are you still thinking more like what you said about, we need a few more before you start to see the pressure?

I mean, a little bit here, a little bit there but nothing material. There is just, sometimes we have to make decisions where we have competitors. I really think that deposits, if rates go up, deposits are going to be a game of the haves and have-nots. And the have-nots are going to pay up for deposits because they are going to get more desperate as they along. And the haves are going to say, I am going to hang on to my pricing as much as I can to the extent I don't lose the core of my deposits. And I think we are in the have category.

And the services that your depositor could get, are a lot of the balances in their account? I know they need to maintain a certain level of deposits in order to have those services. How do you think about the excess deposits within that account? Do they look at that at all? Or do they just think, we have our deposits with you, we get these services, we are not concerned about the balances as much?

They do. But they look at it less when interest rates are low and they will look at it more as interest rates rise. But remember this, I think every day we are selling more and more of IT-type products, whether that's cybersecurity protection or other remote deposit cash or more sophisticated online banking AC. I mean there is all kinds of products and services that customers weren't using as much 10 years ago that they are using today. Those are built into those deposits, if you will. So they have their choice. They can either pay those in fees or they can pay those by keeping higher deposit levels with us and then not have to pay fees. And if you really look at our noninterest income and break it down and look at our service charge noninterest income, our service charge noninterest income has been very flat over the last year's. In fact, it's declined a little bit over the last year's. But that's the product of companies not wanting to pay fees and keeping more money in our noninterest-bearing deposits so they don't have to pay fees. So it's been a little bit of bad news in terms of fee income side but it's been very good news in terms of our funding side. So the excess balances from our noninterest-bearing business accounts go in one or two places. They either go into a money market account or they go into our repurchase agreements suite. Or the third option is, is if somebody is really chasing rate, they may take them and go to some other bank and get 1% or something like that. So we don't like to see that and that sometimes we will pay up a little bit more on our money market rate or our repo rate to retain that business, if need be.

Okay. That's helpful. Thank you. I will step back now.

[Operator Instructions]. Our next question comes from Brian Zabora with Hovde Group. Please go ahead.

Yes. Good morning.

Good morning.

A question on the recovery there. Was that multiple loans that you had as far as the recovery? And I know it's hard to predict, provide an outlook, but any sense on the pace of recovery that we should expect or could see more in the rest of the year?

Yes. The loan recovery was one of the few loans. But I do feel this way, one of the things that we did during the crisis that some banks did and some banks didn't was, for the vast majority of our loans other than our large relationship for many years gone by and a few other small things we hung on to our loans and so we hung on to all through the cycle and some of these loans are doing a lot better as real estate prices are better, occupancy levels are up on properties, commercial real estate. So these loans are now maturing X number of years later and what happens is when they mature a lot of them are REIT markdowns. And so they will go refinance them with someone else and pay us off and then work best for getting these recoveries on. So I think that will continue through 2017, but after 2017 it gets very thin after that. And I think we have been very fortunate. We have had a longer run than most of the competition on this because of the fact that we hung on those loans through thick and thin and we were able to do that because we were making money every quarter and we had pretty good capital ratios through the crisis. So I think that longer-term strategy, I think is paying off right now in terms of these recoveries and our only problem is that these recoveries, we are having to unwind out of our loan loss reserve because our loss history is fading into the distance, right. We have very little loss history after 2012 and we are going on five, six years to show any real loss history numbers and this will be our fourth year in a row, I think 2017 will be our fourth year in a row where I think we will have a net recovery for the year in terms of charge-off recoveries for a long time.

The results have been pretty impressive. So could be expect that a negative provision maybe matching those recoveries for the rest of the year? Is that a possibility?

Yes. It is. It just depends on our organic loan growth. And if we can grow loans 2% a quarter, we are going to have to, you know 8% on $4.6 billion or let's say, 6% for the rest of year on $4.6 billion is $275 million. So you put 1% to 1.5% reserve and that's $3 million to $3.5 million right there in terms of reserves that we will need to have assuming we meet that growth target. So that could get swallowed up with recoveries or we will have to add some to the provision. My guess and this is just a guess, is that we will either have net net zero provision for the rest of the year or a slight recovery, just based on the fact that I think our recoveries are still strong enough that they will outpace our reserves on our hopefully 2% quarterly growth.

That's very helpful.

I think I said that right.

That makes sense. And then construction balances were down. Did you have some of loans where the construction was completed and moving to CRE? Or were the increase in the balances of CRE really not related to the construction portfolio?

The answer is yes, some of those did move into CRE and that was related to construction. A couple of them paid off. There is going to be some ebbing and flowing on our construction loan portfolio. Our pipeline is actually pretty good right now. So I think you will see those numbers should go back up considerably in the second quarter. But it's a good thing to get these construction loans going through the pipeline and getting finished. What we don't like to do is have construction loans that hang in the pipeline a long time because the real risk of a construction loan is getting the property started and then getting it finished and then moving on to either next financer or to a buyer or permanent financing and then see the property stabilized. So we try to keep as short as we can and so it's a good thing with some of these payoffs. But I think it's more of a timing thing than anything else. I think you will see our construction loans of resurge in the second quarter here to some extent.

Great. And then just lastly, even with the paydown from the depositor that came in and came out probably quickly, it looks like you still have a good amount of liquidity on the balance sheet. I think interest bearing cash was about, net of that, still over $100 million. Just kind of your thoughts around deploying that? Is the preference loan growth? Or could you also add to the securities book forward?

I think in the order you just said. Loan growth, number one. Securities, number two. We still are looking at buying securities in this marketplace right now but the things we are buying right now are probably 25 to 30 basis points lower than what we were buying a month ago. And Allen's nodding at me. I am just making sure I am saying that correctly. So I do think that it's still attractive to us at this rate. It's just not as attractive to us. So we do want to just keep our cash deployed, especially when we see that we have $130 million to $150 million in cash that's running off at a quarterly basis. So if we had to borrow overnight fed funds, we could quickly cure that through just our securities runoff and paydowns within a few months period time. So we want to try to keep that cash balance somewhere around zero to $100 million is kind of our goal. Every once in a while, we have to borrow a little bit here that's not such a bad thing either.

Understood. Great. Well, thanks for taking my questions.

[Operator Instructions]. We now have a follow-up question from Matthew Clark. Please go ahead.

Great. Just on the cost saves from the acquisition, just curious when you think you might have those fully phased in if there is any change there?

Yes, a good question. I think our actually cost of the acquisition will go up in the second quarter from the first quarter because we convert their operating system over in the DNMA and so we keep most of their employees that we are going to not keep. We keep through May or through the middle of May-ish. And so those costs, the separation cost will come through in the second quarter there. And we are announcing anyways that we are consolidating two offices. Those offices will be, we are consolidating our Visalia office into their Visalia office. Our offices are actually less than 1,000 feet away from each other. So that one's an easy one. And their Visalia office is bigger and more robust than ours and that was their corporate headquarters, so it makes sense. And then we are consolidating their Fresno office, Valley Business Bank's Fresno office into our Fresno office. And both of those things should occur in August, I think both of them will happen August, may be August, September. So those will still be cost that we incur in the third quarter as well. So I think the vast majority of cost will still be played out for the acquisition in the second and third quarter and by the time we get to the fourth quarter, we should be pretty pure. Did you get that?

Correct. Okay. And then just on the adjusted reserve ratio of 1.54%, just curious where do you think that could go? I guess what's your comfort level based on your mix and the outlook assuming things remain fairly stable?

Well, as Chris pointed out, our allowance is built off of a lot of factors. Most those factors have been continually improving, both our loss history and a lot of the economic factors as well as our internal asset quality factors. So there is probably some level of pressure on seeing that allowance level decline. We also continually recalibrate on an annual basis some of those factors and look at some factors that have been looked at before. So we don't know at this point, but I think the trends are such that we could possibly see those continue to decline.

And this is, obviously as we become closer to $10 billion, our methodology and fees from everything kick in here in the next couple of years. We are actually looking forward to that from the sense of, we are trying to find ways that we can hang on to our reserve at the kinds of levels right now. But there is quite a bit of science involved in this. And so we have to, KPMG and the regulators and everybody, all look at this stuff too. So a lot of eyes watching it. But my preference would be certainly to keep as robust a reserve as we can within the guidelines that are presented to us.

Okay. And then just one last one on the tax rate. A little higher this quarter, if you adjust for the tax benefit. Curious where you think that might shake out for the balance of the year?

Well, the effective tax rate for the quarter is what we forecasted to be for the full year right now at 36%. The one factor that will create volatility, of course, is the change and how we account for stock-based compensation. However, we can't predict option exercises for the rest of the year but because we generally grant our options and our restricted stock on an annual basis, we would expect the biggest impact to actually be in the first quarter.

And let's not forget about the proposed tax cut that we could get, right. So that's not factoring into any of that stuff.

15%, yes.

Here there was news today on that.

We will take it.

We all are holding our breath, right.

Exactly. All right. Thank you.

Any more questions?

[Operator Instructions]. At this time, it appears that we have no further questions. So I would like to turn the call back to Mr. Myers.

Thank you. Everyone on the call and listening in here today, we appreciate your interest and look forward to speaking with you again on our second quarter 2017 earnings conference call in July. In the meantime, feel free to contact me or Allen, if you have any direct questions. Have a great day and thank you for your interest. Good bye.

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