Q2 2019 Earnings Call
[music] welcome to the community Bank systems second quarter 2019 earnings Conference call.
Please note. This presentation contains forward looking statements within the provisions of the private Securities Litigation Reform Act of 1995 that are based on current expectations estimates and projections about the industry markets and economic environment.
The company operates.
Such statements involve risks and uncertainties that could cause actual results to differ materially from the results discussed in these statements.
These risks are detailed in the company's annual report.
And Form 10-K filed with the Securities and Exchange Commission.
Today's call represent presenters are Mark Tryniski, President and Chief Executive Officer, and Joseph Joseph The terrorists Executive Vice President and Chief Financial Officer Gentleman, you may begin.
Thank you April good morning, everyone and thank you all for joining our call today.
We're very satisfied with our Q3 results which were expected.
Operating earnings were flat with last year, excluding the durbin impact of five to six cents.
The market is hanging in there.
Loans non municipal deposits were up a little.
Well he is really good and our non banking businesses continued to grow in performance strictly well all in all things are reasonably stable and solid core.
We're very pleased with the Kinderhawk Bancorp transaction announced in the first quarter close on July 12, getting to $650 million of assets and 11 branches across the greater New York market.
The closing systems integration operating transition went extremely well.
According to our team it was our best ever.
So we're off to a very good start in this market and excited about the growth opportunities that lie ahead.
As previously disclosed we expect this transaction to be eight cents per share accretive on a full year basis.
Looking ahead, our operating momentum and capital accretion continued to be strong, which positions us very well for the remainder of 2019 and into the future.
Thank you Mark and good morning, everyone.
As Mark noted we are pleased with the company's second quarter 2019 earnings results.
The company reported GAAP net income of $45 million and earnings per share of 86 cents during the second quarter of 2019.
This compares to net income of $44.6 million.86, and GAAP earnings per share for the second quarter of 2018.
On a comparative basis for the second quarter of 2019 earnings were favorably impacted by $4.9 million of realized gains.
Sales of investment Securities and unfavorably impacted by a $1.1 million increase in acquisition expenses due to the Kinderhawk acquisition and a $3.5 million estimated reduction in noninterest revenues due to durbin related debit interchange price restrictions imposed on the company between the periods.
I'll make a few comments about our balance sheet before providing additional details on our quarterly earnings results. We closed the quarter of 2019 when tall assets of $10.75 billion. This is down $171.1 million or 1.6% from the end of the first quarter of 2019.
Due to the seasonal net household municipal deposits.
Total assets.
$138.1 billion or 1.3% from the end of 2018 on a $112.3 million or 1.1% from one year earlier.
Average, earning assets for the second quarter of 2019 of $9.43 billion were up $53.5 million or 0.6% when compared to the first quarter, but down $27.8 million, 0.3% when compared to the second quarter of 2018.
Average loan balances in the second quarter of 2019 dropped $21 million or 0.3% when compared to the linked first quarter 2019, and up $44 million of 0.7% when compared to the second quarter of 2018.
On a linked quarter comparative basis average balances in the business lending portfolio, the consumer mortgage consumer indirect and consumer direct portfolios were among these increases were offset in part by a decrease in the home equity portfolio.
Total ending loans were up $18 million or 0.3% on a linked quarter basis in spite of a $39.9 million decrease in municipal loans as seasonally expected.
Average total deposits increased $92.3 million or 1.1% on a linked quarter basis, but any deposits decreased $131.5 million or 1.5%.
Due to the net outflow municipal deposits as seasonally anticipated and consistent with prior years annual cycles.
At June Thirtyth, the book value of the Companys investment portfolio stood at $2.37 billion. This is down $593 million from the end of the first quarter. During the second quarter. The company sold $590.2 million of Treasury Securities with remaining maturities of two to five years.
At a weighted average market yield of 2.09% and recorded net realized gains of $4.9 million. These securities were temporarily reinvested in overnight federal funds at approximately 2.35% yield.
Management is in the process of evaluating market opportunities for reinvesting these proceeds in securities with a longer with longer weighted average lives.
Accordingly at the end of the second quarter, the company's cash equivalents stood at $707.1 million. The second quarter 2019 tax equivalent yield on the investment portfolio, including cash equivalents was 2.69%.
Exclusive of cash equivalents, the effective duration of the investment Securities portfolio was 2.7 years at June 32019.
Shareholders equity increased to $152.6 million or 9.2% between the end of the second quarter of 2018 in the in the second quarter of 2019 due largely to an increase in retained earnings.
Our capital ratios also remained strong in the second quarter. The Companys tier one leverage ratio was 1.54% at the end of the quarter over two times, the well capitalized regulatory standard tangible equity to net tangible assets ended the quarter of solid 10.56%.
Our asset quality remains strong at the end of the second quarter of 2019 nonperforming loans comprised of both legacy and acquired loans totaled $24.5 million or 0.39% of total loans.
This is the same as the ratio reported at the end of the linked first quarter of 2019, and eight basis points lower than the ratio reported at the end of the second quarter of 2018.
Our reserves for loan losses represented 70, 0.78% of total loans outstanding and 0.93% of legacy loans outstanding at the end of the quarter.
We reported net charge offs of $1.2 million or eight basis points annualized on the mall portfolio during the second quarter of 2019.
This compares to net charge offs of zero point $9 million were six basis points annualized during the second quarter of 2018.
At the end of the second quarter, the company's total Oreo properties were less than $2 million and internal risks low.
Ratings for 10 stable asset quality.
I will now redirect my commentary to the second quarter earnings results, Although GAAP earnings.
Per share matched the second quarter of 2018 at 86 cents operating earnings per share, which excludes acquisition related expenses net of tax effect and net realized gains on the sale of investments net of tax effect were down six cents to 80 cents. This decrease in operating earnings was driven by Durbin related debit interchange price restrictions estimated five to six cents for the second quarter and a higher effective tax rate.
Total revenues for the second quarter of $149 million were up $5.6 billion were 3.9% over the second quarter of 2018.
This included a $1.5 million or 1.7% increase in net interest income and a $4.1 billion or 7.3% increase in non interest revenues. Despite the decrease in banking group revenues due to Durban.
On a linked quarter basis, total revenues increased $6.5 million or 4.5%.
Driven by the recognition of $4.9 million of net realized gains on investment securities portfolio, and a $1.4 billion or 1.7% increase in net interest income.
We recorded $88.3 million in net interest income in the second quarter of 2019 as compared to $86.8 million in the second billion dollars in the second quarter of 2018.
Between comparable quarters, the company's net interest margin increased seven basis points from 3.73% in the second quarter of 2018% to 3.80% in the second quarter of 2019.
The company's yield on average earnings assets increased 15 basis points, while funding costs.
Increased nine basis points, the company's net interest margin for the length.
First quarter was also 3.80%.
On a comparable annual quarter basis net interest income recorded on loans was up $2.9 million in the tax equivalent yield on the loan portfolio increased 15 basis points from 4.58% for the second quarter of 2018% to 4.73% in the second quarter of 2019.
During the second quarter, the weighted average net yield on new loans exceeds the net yield on the total loan portfolio by approximately 20 basis points. This compares to approximately 50 basis points during the first quarter of 2019.
Investment income, including revenues earned on investment securities in cash equivalents, but exclusive of net realized gains of 4.9 million was up 0.4 million over the second quarter of 2018. The company received zero point $9 million semiannual dividend payment from the Federal Reserve bank them in the second quarter of 2019 as compared to the semi annual dividend payments zero point $4 billion during the second quarter of 2018.
The net gains on the sale of investments are realized late in the second quarter when the treasury yield curve converted.
The company's total cost of funds increased nine basis points between comparable annual quarters from 19 basis points in the second quarter of 2018 to 28 basis points for the second quarter of 2019.
The total cost of deposits remain well below peer to peer and industry averages for the second quarter of 2019, and 22 basis points reflective of the company's very solid base of core deposits checking and savings account balances represented 69.1% of our total deposits at June 32019. This is up from 67.4% one year prior.
Noninterest revenues in our financial services businesses, including employee benefit services insurance services and wealth management services were up $2.2 million was 6.1% between comparable annual quarters.
But were offset by a $3.1 million or 15.3% net decrease in banking related noninterest revenues due to the Durbin amendment, becoming effective for the company in the third quarter of 2018, Despite Durbin noninterest revenues exclusive of the investment securities gains realized during the quarter contributed 38.8% of the company's total operating revenues similar to the first quarter of 2019 in full year 2018 results.
Total operating expenses, excluding acquisitions acquisition expenses were up $3.9 million or 4.6% on an annual report comparative basis. The increase in operating expenses between comparable quarters was due to increases in compensation expense, including higher employee benefit costs, an increase in business development and other administrative expenses.
We recorded $1.4 billion in the provision for loan losses during the second quarter of 2019. This compares to $2.4 billion reported the provision for loan losses in the second quarter of 2018.
By $1 million decrease between comparable periods.
The decrease in the provision for loan losses was reflective of an improvement in the company's asset quality metrics between the periods.
The effective tax rate for the second quarter of 2019 was 20.2% up from 18.7% in the second quarter of 2018.
The company recorded greater amounts of income tax benefits related to stock based compensation activity in the second quarter of 2018 as compared to the second quarter 2019 exclusive of stock based compensation tax benefits. The company's effective tax rate was 21.3% in the second quarter of 2019.
We look forward to fully integrating the former tinder bake into community bank in the months ahead. We also expect to fully realize the projected annualized non interest expense savings of 30% and achieved earnings per share accretion of seven eight cents in the first full year following the acquisition.
Tenterhooks total assets at the time of accent acquisition were approximately $650 million with total was approximately $480 million and total deposits of $570 million in line with our expectations.
Looking ahead, we do not anticipate any significant deviations from recent trends around the company's asset quality core net interest margin is anticipated to decrease the mid three seven just to file threeseventy with the inclusion of the Kinderhook portfolios.
Yes, the center opened Mark to maybe lowers the federal funds target rate by 25 basis points in the third quarter, we will unfavorably impact loan deals, including total variable rate loans of approximately $1 billion.
We also anticipate redeploying significant portions of our overnight federal funds sold position into longer term securities in the months ahead.
Operating expenses are expected to reset after the full integration of tender offer at a quarterly run rate of approximately $93 million to $94 million and an increase in line with general inflationary trends.
In summary, we believe the company remains very well positioned for the future the company's strong asset quality capital reserves liquidity for funding base and strong non banking business revenues provide a solid foundation for continued growth and dividend capacity. The complex market valuation also provides an excellent currency for potential future mergers and acquisitions.
Thank you now I will turn it back over to April to open the line for questions.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speakerphone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again that is star. One if you would like to ask a question and we'll take our first question from Austin Nichols with Stephens. Please go ahead.
Hey, guys good morning.
Good morning offs.
Maybe just on the charge off you had a good quarter, obviously of a credit quality any recoveries in there that were driving that down a little bit.
From kind of that where it's trended over the last couple of quarters.
Yes, we typically have some.
Units that.
We took into possession in the.
Fourth and first quarter, sometimes go to.
Auction in the second quarter, and we do record occasionally some recoveries at the at the market pricing is there for those units and so we did recover on some on some units in the second quarter.
Okay.
Okay Thats helpful. And then maybe just on the expenses.
Can you maybe you may have mentioned this in your prepared remarks, but can you maybe.
Refresh my memory on what drove maybe the increase in the other expense line item and then kind of just how to think about that that line item kind of going forward.
Forward.
Sure good morning.
The the let me go back to the second quarter of 2018.
The second quarter of 2018.
Was I guess, a very low expense quarter for us we had a couple of items that kind of went our way in the second quarter of 2018.
That didnt nesser necessarily go the same way in the second quarter of 2019, but we did increase some of our business development and marketing expenses on an annual quarter comparison basis, we did some refresh on on rebranding and that drove a little bit of the the expenses.
In the quarter.
We also had some.
A follow normal related expenses to property type pre foreclosure expenses in the quarter, which we actually had some recoveries back in the second quarter of 2018, So just more of a reflection of some of the.
Favorable variances in the second quarter of 2018.
We also had on the salaries and compensation line item. We also had some.
Some increases.
We do have a little bit of.
Wage pressure, so that drove up the salaries of death, and we also had higher.
Employee benefit costs in the quarter, including some increased costs on our.
Medical.
Related type benefits, we had an extraordinary year 2018, and some of our.
Health related.
Costs, and we're sort of back to normal run rate 2019.
Understood.
Okay, and then maybe just just on the margin I appreciate your comments there.
But maybe just just more specifically, how we should think about I guess the impact to the margin from.
Potential rate hike.
Coming up here in the next couple of days and then.
I guess beyond that.
Any any commentary you have on how we should think about your your excess cash position should that continue to grow a little bit.
Or you guys are you actively seeking to kind of deploy that cash.
Yes in Austin, you said rate hike.
Excuse me right.
Yes, Okay. All right just want make sure. We're on the same page there yeah. Yeah, we we have about $1 billion in variable rate loans.
So a annualized intact.
$1 billion at a 25 basis point reduction doesn't.
FX effect as favorably.
There is.
Some modest room on the liability side.
For potential funding cost decreases in the future, but as you know we are beta in rates up was.
For full cycle was about 5%.
So there's not a lot of room on the on the deposit side too too.
Pick up some some expense.
Savings.
So the expectation if we do get a 25 basis point cut is I'll say modestly.
Down from from the interest income perspective.
Im sorry could you repeat your second question.
Sure. It was related to your your excess cash position that youve been building over the last couple of quarters as we've sold off some some securities and maybe just any commentary on how youre thinking about.
Redeploying that and what would what would trigger you to be more aggressive or less aggressive.
Yes, absolutely so.
We started to identify that we had significant.
Maturities and cash flow expectations from our investment securities portfolio basically from.
The second half of 2020 through 2023 in fact, we were.
Looking at potentially two and a half a billion dollars of cash flows and maturities and so we wanted to.
I'll call a potentially reduce some of the reinvestment risk associated with.
With that much in cash flows in that in that period of time, and so we had kind of.
Indicated in prior calls that we might reinvest or pre invest.
Some of that cash flow, we hadn't version in the yield curve.
We happen to see that in the kind of the two to five year range, we had an opportunity to.
Paul some of those securities out.
Temporarily put them in in cash equivalents and actually about 25 basis point pickup in yield.
And then.
We then have opportunities to redeploy it kind of on a little bit longer term basis, and I would expect that in the coming months that we will redeploy redeploy excuse me most of the cash.
That was sitting in cash equivalents.
At the end of the quarter and in terms of yield expectations I mean, the yield expectations are.
Comparable to probably what we're seeing in terms of current cash equivalents, except for will extend the maturities that.
Got it okay that that's helpful. So more or less that not not expecting a big yield picked up just kind of matching your current yield with longer duration.
Correct.
Okay, and then maybe just one last one on the fed dividend.
No that is expected to decline kind of as you're getting into the large bank larger bank territory can you just maybe give us some commentary on where we where we should think about that number going that was kind of that $900000 number this quarter.
So we had qualified.
For the current semiannual dividend as a bank less than $10 billion because of the inflationary.
Component of the fed allows the dividend payment rate was 6% for the semi annual.
Period.
With the Kinderhawk transaction, we will.
Pass back over the $10 billion, Mark even for the inflation inflation adjusted $10 billion, Mark and the dividend rate is typically the or it is the equivalent of the 10 year treasury rate at the time is declared.
Understood. Okay. Thank you so much that's all I have.
Thank you Austin.
And we'll take our next question.
From Russell Gunther with D.A. Davidson. Please go ahead.
Hey, good morning, guys.
Good morning Russell.
Wonder if we could start please on some of your niche fee businesses. If you guys could provide us an update in terms of how that revenue growth is tracking into the back half of the year.
It would be particularly interested in the employee benefits business and insurance as well.
The.
We've been kind of achieving.
Single digit.
Mid single digit growth rates in that in that business.
I would expect that that will continue in the back half of the year as compared to the second half of 2018.
We continue to see a general.
Growth in the number of participants and.
And the related revenues around around that business.
So I would expect that to continue kind of long its recent recent trend lines.
Yes, one of the challenges on the employee benefits services businesses.
It's got to be pretty substantial.
The run rate on that we will probably do a $100 million of revenue this year.
In the margins are very good so we'll take all we get to that but it makes it a little bit harder grow at mid single digits.
It's a pretty good is a pretty good lift but there are some kind of businesses within the broader employee benefit services that are that are growing a little bit faster than the mid single digits.
Wealth managements.
Wealth management insurance the insurance.
Is doing very well good growth year over year in the insurance business.
Pretty good growth in wealth management to they're all doing okay. None of them are really at double digit pace right now, but they're all in between kind of four and nine.
Five and eight kind of range it all those businesses.
Margins are actually going up which is good.
So revenues are growing faster than expenses.
So I think we expect those businesses continue to be pretty substantial contributors going forward as they have.
As they have done in the past.
That's great color I appreciate it guys.
Just last question from me.
With the Kinderhook now closed I know you're going to be focused on integrating that but any updated thoughts in terms of future M&A on the depository side.
Just how active you remain and what what's of interest to you at this point in the cycle.
Sure.
I think we're always interested.
I think the cycle is maybe a bit less relevant to us than it is to do some others, who maybe operate.
Outside our markets in more volatile.
Total market conditions, so for us and M&A is it is an ongoing element of our strategy and as everyone understands in our markets through only grown.
Can get three or 4% organic growth the year Thats pretty good thats not enough. If you want to deliver double digit returns to shareholders. So.
Disciplined high value M&A has long been a an important element of our of our shareholder return strategy. So we will continue to look for.
For opportunities on an ongoing basis that continues.
At the current time I expect that will continue into the future we're unlikely to do anything.
Significant in terms of.
Of size I think for us anything.
Between half a billion and 2 billion is really kind of where we want to be it's got to be high value.
Opportunity in terms of ultimate shareholder benefit.
It's got to be something that's either.
Within or contiguous to our existing market fluff trend.
So.
Those are kind of parameters.
For the most part that.
As we look towards in terms of our evaluation.
I think Joe had mentioned this earlier relative to our.
Our market multiples, which gives us a.
Significant.
Opportunity.
But.
We as always are very disciplined about what we do and who we partner with that.
We'll continue to use that discipline to identify those high value acquisition opportunities that we know can be solidly accretive on a sustainable basis for shareholders.
Very good thanks for all the detail guys appreciate it.
Thank you.
And we'll take our next question from Erik Zwick with.
Boenning.
Scattergood. Please go ahead.
Good morning, guys.
Good morning, Eric Good morning, Eric.
Maybe just first with regard to the Kinderhook transaction closing I'm curious, whether you have any current advertising campaigns running or anything planned for the capital district, and if so would those be kind of standard branding efforts or do you have any kind of loan or deposit specials.
Currently running our plan for the market.
Well we have.
Yes, under a kind of a new markets not a completely new market. We started in the Albany market in the beginning in 2018 with the commercial banking office has done extremely well. So we were already doing a fair bit of.
Marketing and branding and advertising some of those kinds of things in that.
That market I suspect that will pick up a little bit between now and the end of the year as we continue the.
Integration and transition transition process.
Which I think is fairly standard operating procedure.
And then I know, it's still relatively early but our customer deposit retention.
Kind of tracking consistent with your expectations at this point.
It's been a week so far so good.
Gotcha.
The only thing I guess, several about happy or since the deal was announced and then certainly.
Certain customers I'm sure are aware of that so but it sounds like everything is on track.
Yes, Eric prior to the.
Prior to the conversion date.
Andrew.
He's done a pretty good job of holding in the customers.
With regard to their announcements, obviously that there was going to be a merger on.
In early July and the balances would.
Indicate that those customers for the most part of.
Health and wellness right up through the conversion two weeks ago as I recall from looking at their June balance sheet loans were down just a hair and deposits were up a little bit yes.
That's good I appreciate the detail there and then on the tax rate is I, just kind of think about.
Modeling for the second half of the year can you remind us about your expectation for the effective tax rate.
Yes, so the effective tax rate range.
Is about 21.3 to up.
Up to about 22% for the.
Quarters looking forward.
If some of our.
Your next couple or reinvestment winds up in the municipal securities portfolio that that can drive down based a couple of basis points, but generally 21 to 22.
So range.
Thanks, and then just one last one for me just wanted to make sure I understood the expectations for the net interest margin going for it sounded like you expect it to cut it decreased from the mid 37 days to closer to 370 and did that include the expectation for fed funds rate cut or with the.
Kind of decrease from that can be in addition to that range that you professor.
Well I think we kind of provided around three seventys, because only 25 basis point rate cut.
Although our prime based loans what reprice.
It's not a.
Significant.
Impact on kind of on a quarterly.
Run rate basis.
So we kind of estimated that kind of 370, mark inclusive of Kinderhawk in also expecting a 25 basis point decrease, but we want to give ourselves some room on each side of that.
Estimate around 370.
Just because things.
Yes, we don't know until we know at the end of next quarter.
Makes sense. Thank you so much that's it for me.
Thanks, Eric.
And we'll go on to our next question from Brody Preston with Piper Jaffray. Please go ahead.
Good morning, everyone. How are you.
Good morning, Brody good morning, Brian .
I guess I just wanted to touch on Kinderhook now with the kinda back in the fold just wanted to get a sense for.
The loan growth outlook, moving forward and better understand if there were any any industries or any other areas of opportunity that you think you could take advantage of.
It would be a dip with the addition of Kinderhook.
Sure I think I'd start with is.
Somewhat larger market than our average markets.
Just in terms of demographic population.
It's a it's a good market. If you look at me relative to the other upstate New York city's it's it's fairly vibrant.
Theres still a fair bit of.
Development and growth in different ways happening in that market and we've been able to capitalize on.
On on.
On that since the beginning of last year, when we put in place a commercial banking office. There I think the the opportunities are are broad in the sense that there's a fair bit of commercial real estate opportunities Theres see an i. opportunities.
There are mortgage opportunities there.
It's so I think it's a broad based set of opportunities that we expect to be able to to capitalize on we've also no. We haven't been there that long in that market.
A year and a half now certainly the addition, kinderhawk will be an advantage we have been able to do I would say an above average job of leveraging some of our non banking businesses into those markets as well.
So I think thats been.
Thanks Ben.
Good we've we've established a wealth management office. There also recently, which is also off to a very good start.
Our benefits business has done a fair bit of work in the capital district for some of the.
You don't larger.
Companies and businesses in the capital district so.
I think the other thing is that if you look at our legal lending limit.
There's there's almost nothing we can't really participate in in the in that market. So I think we think that theres a lot of breadth of opportunities I mean across the spectrum.
Commercial and and.
Consumer opportunities.
Theres also from kind of the bottom to the top of the market.
Vertically there is theres a lot of opportunities there for us to penetrate that market as well as I said were we met with a great deal of successful 18 months that we've been in that market. We think the kinderhook market is going to just extend our opportunities that much more of that market. So in terms of growth opportunities. It's hard to put a number on it our existing organic market growth.
234 points, a year I would expect to do a little bit better than that.
In the in the capital District.
Okay, Okay great.
Thats good color and then on the on the Treasury sale and the cash redeployment.
I think some of your comments from earlier it sounds like the yield on the redeployment won't necessarily be too much higher than what you are currently earning on cash equivalents. So I guess I wanted to better understand.
What the duration I guess what markets you're looking at in terms of duration and if theres any opportunity to redeploy into different asset classes to maybe pick up a little more yield.
Okay.
Yes, I mean, we are looking at.
No additional or I should say reinvestment of those of those proceeds.
We've got a couple of different options on the table relative to where we wind up.
From a.
Weighted average life basis.
We have we have typically invested some of our significant portion versus journeys and longer term treasuries.
We view, we're looking at other assets as well.
That potentially put the average lives.
And a range of.
Four to seven years, maybe a little bit longer if the opportunity presents itself.
One of the.
I think we have we feel like we have a.
An exceptional opportunity we've been talking about stretching out as the.
The maturity the weighted average life of the portfolio came down you talked about trying to stretch it back out a little bit just to diversify some of the lumpy cash flows over the next handful years as we were kind of having those conversations and look at the market the yield curve inverted and pretty significantly and it just created this opportunity for that particular tranche securities for us to sell it reinvested actually at a higher book yields in those securities basically generate capital I mean, I know the street investors don't give you credit for the gains which they should.
But still it was a cat it was a capital generation event, and we're pretty confident that we're going to have the opportunity to reinvest.
Slightly longer maturities.
So the yield curves only inverted a few times last 20 years. This was a good opportunity for this particular tranche of securities.
It won't stay inverted forever at least it never has.
History is any indicator. So we're pretty confident we'll have an opportunity to reload on some of that liquidity at a debt yield and we're looking at securities, but all our treasuries, but also potentially some mortgage backs as well maybe a mix of those depending on.
Where where the spreads are there as well. So we're we're we're pretty confident that we will have the opportunity to redeploy at some juncture here certainly before the end of the year at a much more attractive.
Yield and what those securities were.
Yielding before we sold them in fact, you know because of the yield curve version in the short term yield was actually higher than what the book yield of those securities were.
But we think we're going to be able to reload at a rate even higher than that between now and the end of the year. So just because of the end versus the yield curve in that particular tranche secured as gave us an opportunity to do something that we felt was a kind of one time capital creation opportunity.
So that was kind of the.
The thinking behind the whole the whole trade, but the plan is to.
Is to redeploy that liquidity at some point between now and the end of the year when the market provides that opportunity.
Okay, Okay, great and then.
Well.
Maybe get an update on Cecil and any of your thoughts around the potential impacts from c. so to sum up.
Some consumer lending just given the longer duration nature of of consumer loans relative to some commercial loans.
Sure Brody.
Well first of all we are we're not in a position yet to put any sort of range out around Cecil, but I can assure you we're working very diligently on on running our seasonal models and.
Looking to have those models validated.
We do have some consumer portfolios as you mentioned home equity and residential mortgage portfolios with long longer average lives with that said the charge off levels and those two portfolios looking back and in very low.
So the it's the expectation around around future charge offs based on at least the economic outlook today.
We're not probably require that we.
Significantly change those expectations on from a historical loss perspective.
So on balance I think we're.
We're pretty well positioned for.
Foresee salt part of that is just the historical charge off levels have been low for us.
Okay, and then last one for me.
It's a little bit more of a two part question.
When I look back at sea views performance from a funding perspective in this interest rate cycle relative to the last interest rate cycle, particularly with regard to deposits. You guys are certainly outperformed relative to last cycle the cycle to date deposit betas, 5%.
First 28% last time in the cost of funds is dramatically lower which obviously is due to a lower level of absolute level of interest rates, but you guys have had a big mix shift in deposits that have occurred since last time since last time, which I'm assuming is a big driver of the the current success you've had.
So I guess I wanted to better understand two things.
In your view, what's what's been a driver of CVU success from a deposit gathering perspective over the last decade. That's allowed you guys to sort of mix shift into VVA and away from.
Time time deposits and secondly, given the deposit mix is so different this time around what would be your expectations around deposit cost moving forward.
One to two rate cut scenario. Thank you.
Sure.
I think it's the.
The reality that.
You well low cost deposits in that higher cost deposits and.
Certainly now is there is there's two strategies here you could run very lean and efficient branch network and.
Gather deposits based on rate, but you're you use you save on the operating expense side I mean, our strategy has always been because we're in a lot of smaller markets is to gather those core checking and savings accounts, we've been doing that obviously very well for 15 years. So if you look back historically you can see our mix of checking and savings accounts just grown over time, you should be somewhere in the half range and now it's 70% so.
I think thats pretty consistent with.
With our retail banking strategy overall, I think thats been.
And the reason for this.
Successes this last cycle.
I think.
You can it's difficult to distinguish yourself on the credit side.
In terms of economic value earnings performance shareholder value I mean, we're all doing the same stuff in the market same rates say for the most part.
Credit structure.
Yes, some take different risks in different ways, but.
On the on the asset side is not a lot you can do to really.
To distinguish yourself longer term in terms of of.
Main street banking in creating shareholder value that's not true on the funding side. I mean, you can you can work at having a a really strong foundation of core funding.
That will serve your interest as well over time. So that's that's essentially been the model for us.
For the past.
15 years.
It's worked out pretty well.
Clearly has created a balance sheet, so that asset sensitive and.
Raped up is better for us than rates down, but I think you did a period rates down we do better on average than the industry as a whole because of our funding mix. So.
It's a kind of a it's kind of a win win when rates go up we do really well when rates go down we don't do quite is.
It's quite as badly.
His others so.
It gives us a lot of a lot of flexibility and I think it's consistent with our business model. We work hard at it we run our retail banking business like as a business. We measure profitability. We measure earnings performance. We measure returns we measured growth all those kinds of things. So we we don't run it as a funding mechanism for our asset gathering businesses, we run it as a standalone business that we expect to perform well.
Great. Thank you very much everyone.
Thank you.
We'll take our next question from Collyn Gilbert with KBW. Please go ahead.
Thanks, Good morning, guys.
Good morning.
Good morning, just to clarify a couple of points on the NIM.
So number one is in your guide for maintaining around that three can be NIM, how much do you all anticipate to derive from accretable yield.
And then kind of a it's not a huge obviously.
Deal, but just some.
So yes, so the run rate this quarter was 1 million three and it was very similar to last quarter.
I Wouldnt expect that portion of the existing acquired.
Accretion to just sort of drift down couple of hundred thousand on that.
Prospective basis, and you're right Kinderhawk is relatively small we don't have.
The number per se for the for the adjustment, but I would not anticipate that being more.
And I've been 100 or couple of hundred thousand on a quarterly basis.
Okay, Okay and then.
Got it Okay, and then just on Prepays. So I know last quarter you guys saw elevated pre pays it looks like you had one again this quarter can you just talk about I know those are obviously are hard to predict but just sort of what you're seeing within the pattern of your borrowers.
And maybe if you have a sense at all on how that could flow during the back half of the year.
Sure.
I know it Doesnt look like our commercial lending was up very much this quarter, we actually had a really good origination quarter.
The pipelines are bigger than they were last year.
We were having a very very good quarter.
We did have some pay downs in in June actually a couple of them came at the very end of June .
We had I think Joe made reference to the $40 million of municipal loans, which pay down every June thirtyth nine they reload so that was $40 million of it we also had.
About $36 million of other credits.
There were over 1 million apiece anything over $1 million that totaled about 36 million in the quarter that pay down hurdles that was a little more than the first quarter, we had a little kind of better experience the first quarter.
We had we had two significant credits about $25 million to pay down literally last week in June plus the $40 million in municipals, which will reload so.
If you take it all in.
Look I understand that things prepared thats. The business were end you lend money and sometimes people pay it back early but from an origination standpoint, we had a really really strong second quarter and again the pipeline is pretty good on commercial the mortgage pipeline is also up.
The mortgage is a bit more predictable, let's say.
Than that of the commercial business, but we had some growth in mortgage I expect we'll have some growth next quarter.
That that portfolio pretty much grows over time generally at a kind of a lower single digit rate and I would expect that to continue into the third quarter. The fourth quarter is usually more difficult just from a seasonal standpoint.
But I think that the pipelines are actually in better shape than they were last year at this time and we had a really good origination quarter.
This quarter compared to last year.
Okay. That's helpful and then that kind of ties into my next question in terms of.
The expenses tied to the business development efforts that you said anything specific there or is that related to higher or is that related to.
Systems, or maybe just talk a little bit more about those investments in what you can get from.
Yes, so we have.
We had and just by way of example, and my apologies if this along into the weeds, but we had some television commercials for example that were.
A little bit older we refreshed we.
Which you have to basically.
Incur that expense as you as you produce in air those those fabs.
Those those types of items that drove that not.
Yes that individuals in the in the business development area just more of a.
Marketing expense.
Nothing significant.
Other than what Joe just said, we may see commercials in the fourth quarter. They were expensive. Yes, you have to expense those off when you start running them, which we did in the first quarter. So the first couple of quarters. This year, especially off the cost of those TV commercials, which will last.
I don't know, how we do that but.
Maybe one for you at the most and not even sure so but other than that it wasn't there was no significant.
Marketing rebranding I would say, maybe marketing is running a little bit higher.
A bit.
Run rate than it than it has in the past it there's nothing.
I don't think significant beyond just the accounting for those TV commercials that we we read rebate.
Okay. I think I was also just maybe druck trying to drill into that the other expense line to that.
Looks like maybe just under 3 million increase year over year, and then about 2 million higher than the first quarter and so I was just trying to get a little bit better better sense of what.
That was.
Yes, well call. It I think I am just trying to.
Indicate that kind of an earlier question that we had really a.
I'll call a very good.
Expense quarter in the second quarter of 2018.
We just had a couple of items that effectively were.
When our way, we had reductions in certain expenses and.
We basically had more of a call it on more of a normalized quarter this quarter, but when you look at an annual quarter comparative basis, They do look a little bit high.
But thats largely because the second quarter of 18.
It was a very good quarter from an expense run rate.
Perspective, but just some other kind of.
Yes, some of various little administrative expenses to just resulted in a net.
Increase on an annual quarter comparison basis that was a little bit above our historical.
Right.
Okay. Okay very good Thats, all I had thanks guys.
Thanks Kyle.
Thank you.
There are no further questions in the queue at this time I would like to turn the conference back over to today's presenters for closing and additional remarks.
Great. Thank you April thanks to everyone for joining the call and we will talk to you again next quarter. Thank you.
Ladies and gentlemen, this does conclude todays presentation. We thank you for your participation you may now disconnect.