CVB Financial Corp
NASDAQ:CVBF
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CVB Financial Corp
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Good morning, ladies and gentlemen and welcome to the First Quarter 2019 CVB Financial Corporation and its subsidiary Citizens Business Bank Earnings Conference Call. My name is Steven 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 period. Please note 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, Steven and good morning everyone. Thank you for joining us today to review our financial results for the first quarter of 2019. 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, 2018 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 $51.6 million for the first quarter of 2019, compared with $43.2 million for the fourth quarter of 2018 and $34.9 million for the year-ago quarter. Our first quarter earnings were the highest quarterly earnings in Company history. Earnings per share were $0.37 for the first quarter compared with $0.31 for the fourth quarter and $0.32 for the year-ago quarter. The first quarter’s earnings were impacted by a $4.5 million gain on the sale of a bank-owned building and $3.1 million in acquisition costs related to the integration of Community Bank. The first quarter of 2019 represented our 168th consecutive quarter of profitability and 118th consecutive quarter of paying a cash dividend to our shareholders.
Our tax equivalent net interest margin was 4.39% for the first quarter compared with 4.40% for the fourth quarter of 2018 and 3.68% for the year-ago quarter. Total loans decreased by $158 million or 2% to $7.61 billion at the end of the first quarter of 2019. The decrease in loans included a $76 million decline in dairy & livestock loans. This decline is mostly seasonal as pay-downs are typically high in the first quarter of each calendar year. Excluding dairy and livestock loans, total loans declined by $82 million or about 1.1%. However, average loans decreased by only $3 million quarter-over-quarter. Through the first quarter of 2019, new gross loan production is tracking ahead of 2018 by about 10%. But loan payoffs have been substantially elevated. Some of these payoffs are from other lenders who are willing to extend terms that we are unwilling to match. We anticipate our bank-wide loan growth to be flat for the second quarter as we continue to integrate the new Community Bank loan portfolio. Loan yields were 5.27% for the first quarter of 2019, compared with 5.22% for the fourth quarter of 2018 and 4.67% for the year-ago quarter.
Excluding interest income related to purchase discount accretion, loan yields were 4.84% for the first quarter, which was 11 basis points higher than the fourth quarter of 2018. After excluding interest income related to purchase discount accretion and non-accrual interest paid, our loan yields increased by 38 basis points over the first quarter of 2018. At March 31, 2019, the allowance for loan and lease losses was $65.2 million or 0.86% of total loans compared with $63.6 million or 0.82% of total loans at December 31, 2018. During the first quarter of 2019, we recorded a provision for loan losses of $1.5 million. The provision was primarily due to loan growth of $101 million in non-acquired loans, net of the decline in dairy & livestock loans. Conversely, our portfolio of acquired loans decreased by approximately $184 million for the first quarter. The allowance for loan losses as a percentage of non-acquired loans was 1.35% at March 31, 2019 compared to 1.32% at December 31, 2018.
At quarter end, non-performing assets defined as non-accrual loans plus other real estate owned were $19.3 million or 0.17% of total assets compared with $20.4 million or 0.18% of total assets for the prior quarter and $10.2 million or 0.12% of total assets at March 31, 2018. Total non-performing assets included $13.7 million in non-performing loans originated by Community Bank. At March 31, 2019, we had loans delinquent 30 days to 89 days of $1.2 million. Classified loans for the first quarter were $52 million, an $827,000 increase from the end of 2018. Total classified loans included $20 million of loans acquired from Community Bank, which increased by $862,000 from the prior quarter. We have more detailed information on classified loans available on our first quarter Form 10-Q.
Now I would like to discuss deposits. For the first quarter of 2019, our non-interest bearing deposits totaled $5.10 billion compared with $5.2 billion for the prior quarter and $4.06 billion for the year ago quarter. Non-interest bearing deposits were 59% of total deposits at the end of the first quarter compared with 59% for the prior quarter and 61% for the year-ago quarter. At March 31, 2019, our total deposits and customer repurchase agreements were $9.12 billion compared with $9.27 billion at December 31, 2018 and $7.20 billion for the same period a year ago. Our cost of deposits and customer repurchase agreements for the first quarter was 20 basis points compared with 17 basis points for the prior quarter. Our total cost of funds was 25 basis points, an increase of 6 basis points over the prior quarter. This included the impact of an increase in average overnight borrowings of $105 million.
We continued to achieve our objective of maintaining a low cost stable source of funding for our loans and securities. Although, rising short-term interest rates have created pressure to increase funding cost industry-wide, we continued to take a disciplined approach to deposit pricing. Interest income, interest income for the first quarter of 2019 totaled $115.3 million compared with $117.7 million for the fourth quarter and $72.7 million for the same period a year ago. The decrease in interest income for the fourth quarter of 2018 was the result of two fewer days in the first quarter and a $1.3 million decrease in loan discount accretion. The increase in interest income for the first quarter of 2018 was a result of $2.3 billion in growth in earning assets and increased yield on earning assets of 82 basis points.
The first quarter of 2019 reflected a $4.9 million increase in loan discount accretion and non-accrual interest paid over the first quarter of 2018. The tax equivalent yield on earning assets for the quarter was 4.62% compared with 4.58% for the prior quarter and 3.80% for the year-ago quarter. When loan discount accretion and non-accrual interest paid are excluded, the tax equivalent yield on earning assets for the first quarter increased by 8 basis points compared to the prior quarter and by 63 basis points compared to the first quarter of 2018. Interest expense, interest expense for the first quarter of 2019 totaled $5.7 million, a $1 million increase over the fourth quarter and a $3.6 million increase over the first quarter of 2018. The increase from the prior quarter was primarily due to a 6 basis point increase in our cost of funds. The increase in interest expense in the first quarter of 2018 can be attributed to higher average interest-bearing deposits of $984 million and a 14 basis point increase in funding costs. Non-interest income; non-interest income was $16.3 million for the first quarter of 2019 compared with $10.8 million for the prior quarter and $12.9 million for the year-ago quarter. Non-interest income for the current quarter included a $4.5 million gain on the sale of a building where Citizens Business Bank banking center is located. Bank service charges increased by approximately $500,000 or 11% over the prior quarter and by $1.1 million or 27% compared to the first quarter of 2018.
Now expenses, non-interest expense for the first quarter was $51.6 million compared with $60.8 million for the fourth quarter of 2018 and $35.9 million for the year ago quarter. The first quarter of 2019 included $3.1 million in acquisition expenses compared with $8.5 million for the prior quarter and $803,000 for the first quarter of 2018. Compared to the fourth quarter of 2018, salary and benefit expense declined by $1.6 million and occupancy and equipment expense declined by $1.4 million. The vast majority of the expense decreases were attributed to cost elimination resulting from the merger. Non-interest expense totaled 1.83% of average assets for the first quarter compared with 2.10% for the fourth quarter and 1.77% for the first quarter of 2018. Excluding acquisition expense, non-interest expense was 1.72% of average assets for the first quarter compared with 1.80% for the fourth quarter and 1.73% for the first quarter of 2018.
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 29% for the first quarter. This compares to 28% for the first quarter of 2018. The slight increase from the prior year was due to the greater relative increase in taxable income compared to the increase in tax-advantaged income. Our effective tax rate can vary depending upon the amount of tax-advantaged income, tax credits and discrete items such as stock compensation.
Looking to our investment portfolio, at March 31, 2019, our combined available-for-sale and held to maturity investment securities totaled $2.4 billion, a $72 million decrease from the fourth quarter and a $333 million decrease from March 31, 2018. At quarter end, investment securities available-for-sale totaled $1.7 billion, which included a pre-tax unrealized loss of $4.2 million. The pre-tax unrealized loss declined by approximately $90 million compared to the prior quarter due to lower longer-term interest rates. In addition, we own held to maturity investment securities totaling $733 million. The tax equivalent yield on the total securities portfolio was 2.57% for the first quarter compared with 2.55% for the fourth quarter and 2.41% for the first quarter of 2018.
Now, turning to our capital position shareholders’ equity increased by $39.7 million to $1.89 billion at the end of the first quarter. The increase was primarily due to $51.6 million of net earnings and a $12.8 million increase in other comprehensive income from the tax affected impact of the increase in market value of our available-for-sale securities. Partially offsetting these increases to equity were $25.2 million in cash dividends.
I will now turn the call back to Chris for some closing remarks.
Thanks, Allen. Now, we will talk about economic conditions. Turning to the California economy, according to various economic outlooks, California’s unemployment rate was 4.2% in February 2019, the same as in January 2019 and 4.3% back in February 2018. California’s economy in the first part of 2019 remained on a steady growth track. Like the nation, California’s economy benefited from expansionary physical policy in the form of tax cuts coupled with increases in government spending that pushed the labor market closer to full employment and fueled solid job gains. Tech-related sectors made significant contributions to the state’s economic growth as did a handful of other industries, including healthcare, professional, scientific and technical services, leisure and hospitality and administrative services. There is a continued demand for housing in California.
The supply of existing homes has increased slightly and is expected to remain lean. New home construction continued to increase at a modest pace. Given these recent increases in the state’s supply of homes and assuming rates hold steady for the next few months, the peak season of 2019 could be better than many expect. In terms of the dairy industry, milk prices are expected to be higher in the latter half of 2019 due to the strong economy and an increased demand for non-fat dry milk exports. Milk prices are projected to remain – are projected to still remain slightly under the cost of production for the first half of 2019, while feed prices are expected to decrease modestly.
In closing, we remain focused on integrating the Community Bank acquisition and feel we are right on track. The vast majority of non-recurring expenses should be incurred by the end of the second quarter of 2019 as expected. All brands consolidation should be completed by the end of the second quarter as well. So, we expect that a return to business as usual is just a few months away. Our overall strategy remains unchanged as we continue to grow the bank in a balanced way. Looking forward, we will focus on increasing our same-store sales, opening de novo locations in new geographies, and finding new acquisition opportunities. That concludes today’s presentation and Allen and I will be happy to take any questions that you might have.
Thank you. [Operator Instructions] And our first question comes from Jackie Bohlen with KBW. Please go ahead.
Hi, good morning.
Hi, good morning.
Hi. I want to make sure I understand what you said in the prepared remarks on loan growth. So, the legacy CVB portfolio was plus $100 million and the acquired Community portfolio was minus $184 million, is that correct?
Yes, I am not sure about the $184 million, but the – but I think –
Remember that’s net of dairy.
Net of dairy, okay.
Yes, the $184 million is net of dairy.
Net of dairy, but remember this that some – when we renew a line of credit that’s a Community Bank line of credit that was previously Community Bank line and now we renew a line of credit or we renew a loan, it then comes on our books. So, it’s no longer part of Community Bank books. So what happens, all the discount accretion on that loan goes away when that loan becomes – when it becomes refinanced by us if you will. And then in turn, we have to look at it and say, well we better provide a reserve on this loan. So even though – so that’s why we have a reserve for the quarter. We reserved a $1.5 million because we had $100 million, a little over $100 million in loan growth on the CVB legacy portfolio. That makes sense?
Yes. Because my original interpretation was that that contract outside of seasonal and dairy and all of that and agricultural and everything, so my original interpretation was that you had a lot of run-off in the CB book and good generation in CVB and while that likely still did happen and I know we will get to that, the magnitude wasn’t as great because you did mix in those numbers, some Community Bank moving over to Citizens Bank. Is that right?
Yes, that’s fair. I would say the growth wasn’t as strong as CVB legacy as the $101 million would dictate and the run-off wasn’t as severe on the Community Bank portfolio as the $170 million or whatever it is would dictate. So it’s somewhere in between those things. On the loan side, look we are integrating everything, we are going through everything, we are going through their loan portfolio, we’re looking at renewing credits, the market is very aggressive out there. And when I say that sometimes we are choosing not to play on different credits, yes, I would say three out of four of those credits are more Community Bank credits and Citizens Business Bank credits, but things like other banks not requiring guarantees or perhaps doing an unsecured loan and we want the loan secured are factors that are going into our decision-making. It’s usually not price, although price is getting crazy too. I don’t understand how some of these banks who have 60 basis points or 70 basis points higher cost of funds than we do, are pricing loans where they’re pricing loans. But if it’s a good customer, we are going to play ball on the pricing side because we want to keep the relationship and keep the deposits and all that kind of stuff, but transactional loans, we have seen the pricing come down on these particularly longer-term loans where people are doing things at rates that are 50 basis points to 60 basis points lower than they were three months ago. So we are dealing with that a little bit, but notwithstanding all that, I think the phenomenon of us or the fact that we have – actually overall loans here have declined is because we are absorbing Community Bank and going through that whole process and figuring out exactly what fits and what doesn’t fit. The vast majority of it fits. We’re feeling very good about their credit quality and so forth, but there’s a few and particularly the larger C&I type credits, we’re having discussions on a lot of those, and seeing if whereas, where we might want to guarantee or we might want to be secured by something else and sometimes there’s three or four other banks are there, who just won’t require those same things that we do and I just don’t believe that we are in the earlier stages of the credit cycle and we’re going to underwrite these loans like Citizens Business Bank has always underwritten our loans and sometimes that’s going to result in us having a little run off here as we integrate our two portfolios. So we think that that whole transition, if you will, will be done by the end of the third quarter hopefully done by the end of the second quarter, but I want to hedge my bet a little bit, and that’s why I say that we think loans are to be flat quarter-over-quarter for the second quarter.
Okay. And does this play into past comments that you had on the structure, on some of the CB loans and how it doesn’t necessarily align with the Citizens structure and so that that was what was impacting loan growth in fourth quarter and then that’s what we saw again in the first quarter outside of seasonality?
Yes, I think a little bit, but don’t over blow that because I think the vast majority of Community Bank loans are well underwritten, we think very highly of their credit people and their sales people, they’ve done a really good job. So, this is just this is like tweaking, but remember that the credit underwriting for a $5 million loan will be a little will be potentially a little looser than it would be for $25 million loan. When you get up into the big numbers, the big numbers, we are really, okay, this better be stronger credit, otherwise we don’t want to have this type of concentration, et cetera, et cetera. So, the bar gets risen as the amount of the in terms of credit quality and things like that as the loan amount gets risen. And then sometimes when you get the big banks in there, I won’t name any big bank names, but they will come in and not even require guarantees and we’re looking on going, well, I wouldn’t do the deal with a guarantee, so we are going to lose this deal or potentially lose the deal. So, that’s – but we are thinking about when the next recession hits, I we want our client that shoulder to shoulder with us to work through the problems, not somebody who is looking down the barrel and saying, well, I don’t have a guarantee, I can walk if I want to.
Okay. Okay, that all makes sense. So then, in light of what, occurences in the first quarter and then expectations for maybe flat loan book in 2Q, how are you thinking about expansion in 3Q and 4Q, understanding that some of the trends that impacted the first quarter and will impact second could trickle into third as well?
I think once we get like to the year one-year anniversary, we’re pretty much gone through everything I think for the most part and then it’s just business as usual, and that’s August of 2019. So, I think that’s kind of how we’re planning through this. Our pipeline is good. It’s not great. But remember a lot of the Community Bank sales people are getting acclimated and they’re getting more and more acclimated as we go along. So, I do expect that there our pipeline will continue to pick up over time and we’re 10% of where we ahead of where we were last year in terms of new business pipeline or new business production. So, I would expect that to even grow from there as we get further and further in the year because we have more sales people and our former Community Bank associates are getting more acclimated. And I’m telling you the talent level of their people is good, especially the ones that we’ve kept and I’m very impressed. So, I and the quality of the clients is good too. It’s not this is just every acquisition we do, we Citizens Business Bank [indiscernible]. And so, we go through there and it’s just it has to be what we think is the way to do business and that takes a little bit of time to do that. And I’m not saying we ask for personal guarantees on every loan we have in the bank, of course we don’t, but I think the criteria to get our guarantee released at Citizens Business Bank is probably more stringent than 80% to 90% of the other banks out there.
Okay, that’s wonderful color. Thank you. I will step back now.
Our next question comes from Gary Tenner with D.A. Davidson.
I have a couple of questions. First on the expense side, a nice drop in the core expenses this quarter, and it looks like a bit more as you finish up the branch consolidations. With that, and i.e. the average assets core down around 1.70% and presumably going down a bit further over the next quarter or so. Where do you think that number kind of settles out over a longer-term time horizon?
Yes, on the expense side, we look at two metrics that we think are the key metrics. One is the expense to total assets, right?
Non-interest expense to total average assets.
Non-interest expense to total average assets, thank you, non-interest expense to total average assets, and our goal is to keep that at 1.70% or below. We’re still above that, but I think with our expense reductions in the next couple of quarters, we’re going to get below that again. The other one is our efficiency ratio. And if you asked me eight years ago, I would have said, our goal is to be below 50%. If you ask me now, it’s to be below 40% and have that as the norm, and I think we’re there right now and we can even get there a little bit more. The one caveat I’ll throw out there is that we are now over $10 billion in assets. So, I am having to add more staff and so forth to have the checkers check the checkers and so I do think that’s going to add some expense load to us. My goal is still to run at that 40% efficiency ratio or lower, but I need to make sure that we’re doing everything we can to be a $10 billion and over bank and all the requirements that are now regulatory wise and so forth. So that will be adding people to our staff over the next year. I don’t think that’s going to be a huge amount of money, but it could be low-seven figures.
Okay, thank you. And then on the capital front, you’ve added effectively or nearly 100 basis points to your TCE ratio since closing the Community Bank deal. As you think about capital management going forward, what are your thoughts, buyback and otherwise?
You know, I’m going to let Allen answer part of this too, because he just finished our capital plan for the bank and did a great job on it. So, I told him, he did way too much because we have a ton of capital anyways, why do we need to do this big plan? But he said, no we got to do this for the regulator. So good job Allen and so anyways, right now, we’re ahead of where we thought we would be capitalized and we’re ahead of where we thought we would be income wise. I didn’t think we’d make $50 million towards the third quarter of 2019 and we made it in the first quarter of 2019, and if we bump and that’s why we bumped the dividend in the first quarter. We were going to bump the dividend in the third quarter when we got to that $50 million, but we bumped the dividend from $0.14 to $0.18. So, we’re projecting to make let’s just throw a number out there, don’t you don’t have to build this into your models or anything, but let’s say, we make $200 million-ish for this year, we’re dividend out about $100 million, so we have a $100 million in capital that is flowing on our balance sheet. And so, the question is, what do we do with that? That will support about $1 billion in organic growth that is 10 to 1 kind of leverage-ish ratio. And so, I don’t think we’re going to grow $1 billion organically hopefully this year. Maybe next year, we can try to crank it up for that, but not this year because there is so much going on back and forth. So, we are creating more capital. So, we’ve already bumped the dividend, stock buybacks are definitely an option. We have a 10b5-1 plan in place and but that’s predicated on stock price has something to do with that too and where we’re trading as a multiple over tangible book. But I do think it also positions us I mean, with our multiple and all this capital, it’s we’re going to start looking at the acquisitions again here pretty shortly and I think that makes sense. I do think the acquisition bar of what we would buy is raised. We are only going to look at buying higher quality banks that are of size anyways because I just think we are later in the credit cycle. So, it’s not the time to go buy something and fix it. You got to buy something that’s kind of already fixed and that we can integrate. And Community Bank would like that. Allen, what did I forget, anything?
I think you covered really well. I mean, all of the problem we have, but I think we’re well positioned to either buyback stock if we need to, potentially far in the future increase dividends, or well positioned to use it for acquisitions.
Yes. That’s it.
Thank you.
Our next question comes from Matthew Clark with Piper Jaffray. Please go ahead.
On the deposit trend this quarter, how much of that run-off was deliberate? How much of that was seasonal? And what are your thoughts on kind of deposit growth from here? Is that something we might see bounce back as soon as the second quarter and you’d be able to and some of those borrowings are?
Yes, on the deposit side, the first quarter is seasonally a tough quarter for us and I think that is also probably a little bit exaggerated this quarter because there is more deposit pressure still going on out there. And as you see by our total cost of deposits and our total cost of funds that we have, some pretty good discipline on that side. We are having to increase rates on deposit accounts, particularly interest bearing and play the competitive game along with everybody else, but we do it in a relationship type of way. We don’t pay our top interest rates to depositors that just have a money market account. We’re paying our top rates to people that have operating deposits with us and have a money market account or have a CD or something like that. So, it’s really more relationship-based strategy on the deposit side and that is something that I think that is probably keeping us from growing at a faster rate or maybe shrinking at a less-faster rate. I do think we are going to get back to just like the loan side, we’re going to get back to growing. It maybe another I think the second quarter will be higher than the first quarter in certainly in non-interest-bearing deposits I would hope because of the seasonality, but it’s I think it’s the latter portion of the year you’ll see us probably getting more and more traction there. Again, as we integrate all the Community Bank people, a lot of their – I will say this about their bankers, their bankers are very good lenders and so forth, but they’re not as adapted deposit gathering as our people are, because they haven’t been trained as much. So, we’re in the process of training them and taking some of our specialty banking deposit teams in integrating with their lenders and then getting in front of those clients. So, I do think that one of the things we didn’t talk about the acquisition is all the synergies and the ability to cross sell and get deposits that we don’t have. I think there is tremendous potential there, but I think most of that is going to kick-in in the second half of the year, just like the loan side.
Okay. And then your core loan yield looks like it was up about 12 basis points to 4.90%. If you exclude purchase accounting accretion, how does that compare to the rate on new production this quarter in light of what the curve has done as well?
Yes, I mean, if you asked me that question three months ago, we were all pumped because the loans we are putting on are higher yield than the loans we have on average on the books. Now, that’s kind of come in to about the same thing. Although, we still have I will say this, the I don’t I think our margin is going to hold pretty well for the next quarter or two despite there being deposit pressure and so forth and some of that opportunity eventually also is our ability to transition investment securities into loans, which will help our yield. But there is with the flat yield curve like this and deposits being still under a lot of pressure, I think inherently that is a headwind for us. But I think we have some wild cards that we can play out here a little bit to keep that margin in total for a while. But eventually if we keep this flat yield curve, indefinitely, I got to think our margins can and then we exhaust the ability to transition securities to loans, then I think our margin will have downward pressure, but I don’t think that’s necessarily going to happen in the short run.
Okay. And then just on the reserve, you had a decent step-up in the reserve ratio, part of that was just loan balances being down. But I know you talked to $1.5 million on the $101 million of non-acquired loan growth. But I guess, I know and how should we think about that coverage ratio? I guess going forward, I assume it’s going to continue to grind higher it just looks like a bigger step-up than I would have expected.
Matthew, I am not sure if it will the 1.35% on the non-acquired portfolio didn’t move up modestly and there is.
1.32%, the quarter before.
Correct. The model has a lot of inputs into it. So, it can be a little bit hard to predict and when you’re talking about a basis point here or there. So, I’m not sure if it will really pick up materially through the rest of the quarter, obviously see those coming soon. But I think you’d expect it to be continually somewhere in the range that it was this quarter.
As we as the discount accretion flows through our income statement and those loans go from being Community Bank loans or made by Community Bank are now renewed and so forth by Citizens Business Bank, we have reserve for. So inherently, we will be continuing to put reserves. Even if we had no loan growth, we would still be putting reserves on for the rest of the year and that’s kind of what happened in the first quarter here, right, because we had $100 million in kind of legacy you watch the legacy growth that’s the number that we are really having to reserve against, if you will. Is that fair enough?
Correct. And as that piece grows and if there is transitioning then we are having to put reserves on those transitioning and whatever the growth is obviously beyond that.
And seasonal, you know we’ll see what happens with seasonal. We’re preparing for seasonal we’re doing a lot of work on seasonal. We’re spending money to get to seasonal and I’m really excited about it. Sorry.
Thank you.
[Operator Instructions] And our next question comes from Aaron Deer with Sandler O’Neill. Please go ahead.
Hi good morning everyone.
Morning.
Just had a few follow-up questions for me. The one Chris, you mentioned in terms of kind of margin preservation some wildcards that you have to play. Presumably, one of those is that shift from securities to into loan. So, is there anything else there that where you see an opportunity?
Yes, I think that Community Bank had a lot of loan growth from 2000 and call it 2010 to 2017, and so some of those loans that were put on those books are at lower rates than what they would be today, even with this 40 basis points, 50 basis points, back up. So as those loans mature or get closer to maturity, we’re going to try to proactively retain them maybe a couple years before maturity and then extend them again. And when we do that, we’ll be doing it at higher rates. So, I think there is some opportunity there. And then same for our portfolio to some extent there too. So I do think there is a recycling interest rates was down for so long, for so for years and years, because we had a 25 basis point Fed funds rate, and even at the modest levels that they are today, it’s still a 25-year amortization commercial real estate loan fixed for seven years that we’re doing today even with the backup in interest rates here over the last three months is higher than what we were doing 4, 5 years ago. So as those loans mature or get closer to maturity, we are going to be able to bump them up to today’s market. So, I think that’s a little bit of a tailwind for us. But again, the flat yield curve when you’re when you have a Fed funds rate of 2.5% and you have a 10-year treasury rate of 2.5%, our, these wildcards are only going to last so long, so before margins will come down. But I do think we’ve got a good opportunity over the next, I wouldn’t even say couple of years to fight that off.
I appreciate that additional color. And then on the expense side, obviously, it seems anyway like you are really getting ahead of the game with the cost saves related to the Community Bank. With this additional branch closures and some of the other things finishing up here, what percentage of cost saves or I guess, what are the annualized cost saves from that deal that are still to be realized?
I think as you mentioned and Chris talked about, we have captured a great deal of this already. On the people front, I think there is minimal going forward. And as Chris said, we may be adding a few people here in the non-revenue areas. But we probably will still see a few 100,000 or may be 300,000, 400,000 in the second quarter savings on the occupancy side from the closure of the final offices.
Aaron, couple of those offices in the first quarter were closed later in the first quarter, so they don’t – so they haven’t really kicked in yet.
It’s a full quarter, quarter.
Yes, I think [indiscernible] about that.
Okay. And then Chris, you mentioned as we kind of get up to the year anniversary around August that you expect loan growth to get back to more of a business as usual kind of pace, so is that obviously what the environment looks like then versus now could change. But as you prospectively look out at that, does that do you think that 6% to 8% is kind of the right kind of growth rate organically once we get through this period?
Yes, I would say, 6%. I think the 8% is starting to get off the table a little bit. We have done that for a while. So, I think we can get back to 6% like 1.5% per quarter and hopefully we’ll get that rolling by the third quarter of this year, if not the fourth quarter. That’s the goal. Second quarter is still going to be like I think it’s going to be very flattish, and because we still got a lot of stuff, we are dealing we are transitioning through, but the good news is, I think we are – in the it’s like we’re running a mile race and we’re in the bell lap now and we just got to finish this race strong, and so far we’ve run a good race and we just got to finish it up and that’s what we’re really focused on executing. And so, I think my team has done a brilliant job. And I really, I think our team is coming together with both the Citizens folks and the Community Bank folks to be one culture. So, I’m extremely happy about all that. And I do think that we are positioning ourselves to be able to look at other deals coming forward here as the year progresses. I don’t think it’s I do think that I think that given this flat yield curve, I think price expectations from sellers needs to come down a little bit. There is still a gap there and I think that you’re starting to see some of these deals stall because buyers are like, I am not paying that and sellers are like I want what I could get six months ago and there’s a gap there and that gap while it was narrowing over the last couple of years, it’s now widening back up. So, I think sellers need to look at, if they really want to sell what a realistic price expectation is given the flat yield curve environment and earnings multiples.
Okay that’s great. Thanks for taking my questions.
Our next question is a follow-up from Gary Tenner with D.A. Davidson. Please go ahead.
Thank you. Allen, I was just wondering if you could split out the $7.2 million of discount accretion this quarter between scheduled accretion and accelerated?
It was predominantly what we would have expected, the acceleration, I would estimate to be about 600,000 give or take 100,000 either way.
Okay, thank you.
[Operator Instructions] At this time, there are no more questions. So, I’d like to turn the call back over to Mr. Myers.
Alright. Thank you very much. And I want to thank everybody for joining us again this quarter. As always, we appreciate your interest and look forward to speaking with you again in July for our second quarter 2019 earnings call. Have a great day and thank you again for listening.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.