Q2 2023 Community Bank System Inc Earnings Call
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Welcome to the community Bank system second quarter 2023 earnings Conference call. Please note that this presentation contains forward looking statements within the provisions of the private Security Litigation Reform Act of 1995 that are based on current expectations estimates and projections about the industry markets and <unk>.
Economic environment in which 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. Please note.
Also that this call is being recorded today today's call presenters are Mark <unk>, President and Chief Executive Officer, and Joseph Sitars, Executive Vice President and Chief Financial Officer. They will be joined by Dimitar Craven Executive Vice President President and Chief operating officer for the question and.
The recession gentlemen, you may begin.
Thank you Alan Good morning, everyone and thank you all for joining our second quarter conference call.
I'm not going to say much about our quarterly performance other than it was very good.
Joey Dimitar will comment in more detail.
But I did want to acknowledge the announcement we made early last month regarding my retirement from the company effective December 31.
But I will remain on the board through 2024 to support the transition.
Most importantly, we're thrilled that <unk> will be appointed President and Chief Executive Officer of community Bank system and community Bank effective January one 2024.
Succession is something we've been working on for many years as it is one of the most important responsibilities of the CEO and the board of directors.
I've known Dimitar for at least 15 years, starting in his prior life as a financial advisor to the company.
Two years ago. He joined the company as executive Vice President of financial services, and corporate development, assuming responsibility for our benefits insurance and wealth businesses.
He made an immediate impact on those businesses into 2022 was appointed Chief operating officer, assuming further responsibility for the banking business.
Our board went through a deliberative and very thorough succession process beginning in early 'twenty, two and culminating in last month's announcement.
<unk> is one of the most astute financial and strategic thinkers I've ever worked with and more importantly, fully embodies our core values of integrity team work excellence and humility.
We have right now the best leadership team across the company, we have ever had combined with earnings and balance sheet strength revenue diversity tremendous funding and growth capabilities I fully expect the next 15 years will be even better than the last 15.
Yes.
Thank you Mark.
It has been more than a privilege to work alongside Marc and the team and I'm Grateful for the trust and confidence of the Board has granted me I've been involved with this company for 15 years and I feel very strongly that we have the best team, we have ever had and our ability to service clients win in the marketplace and provide growth opportunities for our colleagues and communities.
Never been better the future of our company is bright and I am fortunate to be part of it.
Hello. This is evidenced in our results for the second quarter the strength of our diversified business model delivered another quarter of above average returns regardless of the noisy environment.
Operating revenues remain close to all time highs.
We grew the number of clients and accounts across the company.
In our risk metrics remained very strong, allowing us to deliver this performance with below average risk.
Looking forward, we're encouraged by the momentum across all of our businesses.
And pipelines are healthy and our funding base is secure.
For months in market values bodes well for our benefits and wealth businesses and in our insurance business were benefiting from organic growth increased premiums and inorganic activities.
Joe and I will provide you with more details on the financials, Joe. Thank you Dimitar and good morning, everyone.
The company's earnings reserve results were solid in the second quarter fully diluted GAAP earnings per share were <unk> 89 cents in the quarter, which were up 16 cents over the prior year's second quarter, and 78% better than the linked first quarter results fully diluted operating earnings per share as defined in the company's earnings press release were 91 cents in the quarter up six.
<unk> per share from the prior year second quarter, and <unk> <unk> per share higher than the linked first quarter results. The <unk> per share increase in operating earnings per share on a year over year basis was driven by an increase in operating revenues and a lower provision for credit losses offset in part by higher operating expenses and an increase in income.
<unk> the <unk> <unk> per share increase in operating earnings per share on a linked quarter basis was driven by a decrease in the provision for credit losses, and lower operating expenses offset in part by a decrease in operating revenues second quarter 2023, adjusted pretax pre provision net revenue per share and non-GAAP measures defined the company's earnings press release of one <unk>.
<unk> was up <unk> <unk> per share as compared to the second quarter of 2022 and up a penny per share as compared to the linked first quarter results. The company's total revenues were up $8 million or four 8% over the prior year second quarter. This was driven by increases in both net interest income and noninterest revenue between.
The period's net interest income was up $6 $1 million or 6% driven by 29 basis points of margin expansion between the periods noninterest revenues were up $1 $9 million or two 9% due largely to an increase in insurance service revenues comparatively operating revenues, which exclude excludes realized and unrealized loss.
<unk> on investment Securities and gain on debt extinguishment were $1 3 million or 0.7% lower than the linked first quarter results. The company recorded net interest income up $109 $3 million in the second quarter of 2023, this was down $1 $7 million or one 6% on a linked quarter basis driven by increases in the company.
Funding costs, the company's total cost of funds in the second quarter of 2023, a 67 basis points as compared to 44 basis points in the linked first quarter.
23 basis point increase in funding costs in the quarter outpaced the 19 basis point increase in earning asset yields resulting in a two basis point decrease in the company's net interest margin from 320% in the first quarter to three 8% in the second quarter for context. The nationwide median cost of funds for banks in the second quarter was approximately 2% and median net.
Margin contraction was approximately 15 basis points.
The year over year increase in noninterest revenues was driven by a $2 1 million or 21, 3% increase in insurance services revenues and a slight increase in banking related noninterest revenues, which was offset by slightly lower employee benefit services and wealth management services revenues. The increase in insurance services revenues was driven by <unk>.
Harder insurance markets as well as organic and acquired customer growth. Despite an organic despite organic customer growth in the employee benefit services and wealth management businesses revenues were down due to asset based valuation factors.
On a linked quarter basis, noninterest revenues, excluding realized and unrealized losses on investment securities and gain on debt extinguishment increased zero point $5 million or 0.7%.
Reflective of an increase in loans outstanding and a stable economic forecast the company recorded a provision for credit losses of zero point $8 million during the second quarter comparatively the company reported a $3 $5 million provision for credit losses in the linked first quarter of 2023.
$6 million during the second quarter of 2022, which included $3 $9 million of acquisition related provision for credit losses in connection with the Elmira savings Bank acquisition.
The company recorded $113 million in total operating expenses in the second quarter of 2023 compared to $110 4 million total operating expenses in the prior year's second quarter, excluding $1 million of acquisition related contingent earn out expenses in the second quarter of 2023, and $4 $4 million of acquisition acquisition related expenses and the.
Here your second quarter core operating expenses increased $6 million or five 6% year over year. The increase in core operating expenses was driven by higher salaries and employee benefits data processing and communication costs business development and marketing and other expenses in comparison, the company reported $114 million of core operating expenses in the linked first quarter of <unk>.
2023.
The effective tax rate for the second quarter of 2023 was 21, 4% down slightly from 21, 6% in the second quarter of 2022.
The Companys total assets were $15 $1 billion at June 32023, representing a $379 $8 million two 5% decrease from one year prior and $147 $9 million a 1% decrease from the end of the first quarter of 2023, the book value of average interest, earning assets decreased $264 million or <unk>.
One 9% during the quarter.
Second quarter, driven by a $453 $5 million decrease in average and the average book value of investment securities, partially offset by $188 $8 million increase in average loan balances ending loans increased $188 4 million or two 1% during the quarter and 1.03 billion or 12, 6% over the pre.
Your year the increase in loans outstanding in the second quarter was driven by an $85 8 million two 3% increase in the business lending portfolio of $102 $7 million or 2% increase in the company's consumer loan portfolios. The increase in ending loans year over year was driven by organic loan growth and company's business lending portfolio totaling five.
$101 7 million or 15, 1% and growth in all four consumer loan portfolios totaling $524 4 million or 10, 9%.
The company's ending total deposits were down $238 $9 million or one 8% from the end of the first quarter. This was comprised of a $144 $2 million or one 6% decrease in interest bearing deposits and a $94 $7 million two 4% decrease in noninterest bearing deposits on a customer segment basis municipal.
Deposits decreased $146 $6 million during the quarter, which tend to seasonally decline in the second quarter, while business of consumer deposits decreased less than 1% or $92 $3 million in the quarter.
On a year to date basis, ending total deposits were down $145 million or one 1%.
The Companys deposit base is well diversified across customer segments comprised of approximately 63% consumer balances, 26% business balances and 11% municipal balances and broadly dispersed with average consumer deposit account balance of $12000 in average business.
This deposit relationship relationship of approximately $60000. The company's cycle to date deposit beta is 10% reflective of a high proportion of checking and savings accounts, which represented 72% of total deposits and the composition stability of the customer base.
The weighted average age of the Companys non maturity deposit accounts was approximately 15 years and the company does not currently carry any brokered or wholesale deposits on its balance sheet. The cycle to date interest bearing deposit beta is 14% and the total funding beta it was 12%.
The company's liquidity position remains strong readily available sources of liquidity, including cash and cash equivalents funding availability at the federal reserve bank's discount window unused borrowing capacity at the federal home loan Bank and Unpledged investment Securities totaled $4 $2 $7 billion at the end of the second quarter. These sources of immediately available.
<unk> liquidity represent over 200% of the company's estimated uninsured deposits net of collateralized and intercompany deposits.
The company's loan to deposit ratio at the end of the first quarter was 71, 2%, providing future opportunity to migrate lower yielding investment securities balances into higher yielding loans.
At June 32023, all the companies in the bank's regulatory capital ratios significantly exceeded well capitalized standards more specifically the company's tier one leverage ratio was 935% at the end of the second quarter, which substantially exceeded the regulatory well capitalized standard a 5% comp.
The company's net tangible equity and net tangible assets ratio a non-GAAP measures defined the Companys first quarter second quarter earnings press release was 534%.
At the end of the second quarter as compared to 541% the end of the first quarter and 540% one year prior.
The second quarter the company repurchased 200000 shares of its common stock at an average price of approximately $48 per share pursuant to its board approved 2023 stock repurchase program.
At June 32023, the company's allowance for credit losses totaled $63 3 million or 69 basis points of total loans outstanding. This compares to $63 2 million or 70 basis points of total loans outstanding at the end of the first quarter and $55 5 million or 68 basis points of total loans outstanding at June 32020.
Two during the second quarter.
During the second quarter of 2023, the company reported net charge offs of zero point $7 million or three basis points of average loans annualized. This compares to two basis points of annualized net charge offs in the same quarter last year and seven basis points in Q1.
At June 32023, nonperforming loans totaled $33.3 million or 36 basis points of total loans outstanding. This was down from 38 basis points at the end of the first quarter and 46 basis points. One year. Prior loans 30 to 89 days delinquent were 47 basis points of total loans outstanding at June 32020 through 2020.
Three up from 35 basis points at the end of the first quarter and up from 29 basis points one year. Prior overall, the company's asset quality remained strong and stable in the quarter.
We believe the company's strong liquidity profile capital reserves stable core deposit base, historically strong asset quality and revenue profile provide a solid foundation for future opportunities and growth looking forward. We are encouraged by the momentum in our banking business and prospects for continued organic loan growth, although we believe escalating fund.
Costs will abate over time, we believe higher funding costs remain a challenge for the third quarter, despite the quality and strength of the company's core deposit base. In addition, new business opportunities and the company's financial services business has remained strong.
I will now turn it back to Alan to open the line for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question comes from Nick <unk> of the whole group go ahead.
Good morning, everyone. How are you today.
Good morning, good morning.
At the halfway point of the year pretty solid loan growth or are you starting to see others in your markets pulling back given liquidity concerns and can you help us think about a full year growth rate.
Sure Nick its limits are.
You are spot on.
Benefited from a couple of things one is our own capabilities, but the second is the competitive environment and the reality is a lot of banks predominantly smaller ones.
Had run out of liquidity they don't have enough.
The funding that they can.
They can extend to clients. So a number of folks are focused on only existing clients. A number of folks are just not lending. So we are seeing an opportunity to leverage our strength of the balance sheet to service, our clients and to extend new relationships.
Full relationships in all of our markets.
So in terms of growth rate I think we we had been communicating kind of mid to high single digits range.
Steel space.
I'll be a little bit closer to the higher end of that then.
At the midpoint.
Of the single digits.
Just the momentum is strong and the pipeline actually increased quarter over quarter.
As we sit here today, I mean, all of our businesses.
That's great color and as it relates to expenses I believe your previous guidance was for 5% to 9% growth for the full year 2023 is that consistent with your thinking at this stage.
Yeah, I don't think any this is Joe Nick I don't think anything has changed with our around our expectations for operating expenses I think we kind of.
Balanced that Q1 was up a bit, but we expected that to level off throughout the remaining three quarters I think we're still on path generally to have a flattish outcome. If you will.
The remaining two quarters and so on a full year run rate basis still kind of that 5% to 9% I think is a reasonable expectation.
Okay, Great and then lastly for me I know, it's price dependent but the repurchase has been pretty consistent the past two quarters and you recently increased the dividend for the 30 <unk> year in a row can you give us your thoughts on capital return and M&A and how you balance that with your organic initiatives at this stage.
So it gets dimitar again.
We look at all of those.
All of those tanks the dividend as part of our core.
Value proposition and investment thesis, which is above average returns with below average risk. So we tried to manage volatility across our businesses and in control as much as we can the outcomes as it relates to revenue and earnings, which then allows us to pay that's growing dividend. So it's a really important part of what we what.
We aim to achieve for our shareholders.
I think share repurchases, we've communicated that our goal is to at least offset the equity dilution from our annual grants.
So I think right now we're kind of on our way well on our way.
As it relates to that this year.
Just talk we believe continues to be attractive.
As we personally.
Look at it.
From a company's perspective, so we probably have a little bit more to do there, but these levels on the share repurchase side and then on capital allocation in terms of M&A, we remain very opportunistic across all of our businesses, we deploy capital in the bank everyday as we grow the balance sheet. So that's part of.
What we do in the bank and then we're actively looking at M&A.
All of our businesses.
We do some small roll ups in our insurance business our benefits business.
We know we left some practices and folks in our wealth side.
So that will remain.
Our main priority for us because we do generate a lot of capital and we need to put it to work for our investors.
I appreciate the color. Thank you for taking my questions.
Our next question comes from Steve Moss of Raymond James Go ahead.
Hi, good morning.
Good morning, just on the margin here.
Hey, good morning, maybe just on the margin here just.
Curious.
Joe you mentioned that deposit costs.
It sounds like deposit costs are a little bit of a headwind curious as to where youre thinking.
Deposit costs are headed over the next two quarters or so.
Yeah.
That's a very fair question, Steve I mean the.
Our experience is that even if the fed pauses that there'll be a continuation of.
Higher deposit rates I'm, just just as we continue to see migration from low or noninterest bearing deposits into higher rate certificates.
And so we do continue to expect increases I'm not sure I have an exact call with respect to how much deposit an increase over the third quarter, but they are they were trending.
Higher in the second quarter, and we expect some of that to continue into the first quarter, but with that said if the fed does pause over time that pressure abate a bit.
And I'll call it the pace at which monies move from low interest bearing and noninterest bearing slows a bit.
And I'll call it the repricing of the non maturity deposits, perhaps slows a bit as well. So we think those pressures will abate over time.
But in the third and potentially into the fourth quarter, we do see that to continue to be to be a headwind so with respect to our margin.
NII expectations were kind of thinking more of a.
Kind of flat to sideways outcome for for at least the next quarter or two and then hopefully we can see some expansion in 2024 as some of those funding pressures.
Just abate a bit.
Okay, and then in terms of just curious on loan pricing here.
But what were our origination yields for the quarter and where do you guys see that shaking out here going forward.
Yeah, so on a blended basis.
We booked new loans at about just under 7% for the quarter.
And so we're seeing pretty good.
Right right improvement if you will on the book over time.
Because the book yield is I think just sub sub five so we're picking up about 200 basis points on the repricing activity plus volume has been increasing and if we do have kind of a mid single digit kind of growth outcome, that's going to help over time so.
We also have approximately $2 billion about 25% of our loan portfolio that are repriced symbol of which roughly $1 billion will reprice in the next next 12 months or so some of those are kind of the.
Yes.
They might be 10 year terms with a five year.
Re pricing reset and some of that occurs in the years out, but we have about.
1 billion repricing in the next 12 months or so.
Okay.
Helpful.
Then maybe just on the employee benefit services business.
Flattish year over year, but you guys had talked in the past about the pipeline of new business coming in and I apologize if I missed it I'm just curious as to the trends the underlying organic trends youre seeing there.
Yes.
Good morning, Steve.
Lying trends remain very strong as Joe said some of the some of that has been masked by the market, but I think as we're sitting here in July .
I wouldn't be surprised if we have a record month.
That business for us.
Asset values stay where they are which are still lower than the market peaks.
We're already doing better than we were back in Q4 of 'twenty one so.
There are some things in that business that are also.
I would call them, sometimes more consulting based so that impacted our revenues a little bit here in the first six months compared to the last year, but were down a little bit compared to 2022.
Again, right now where we're in as good of a position as we then my expectation is we're going to more than make it up by the end of 2023 should market values stay where they are.
Great I appreciate all the color nice quarter guys.
Thank you.
The next question comes from Alex toward all of Piper Sandler.
Head.
Hey, good morning, guys.
Good morning, Alex.
First off.
Just in terms of sort of balance sheet management can you just remind us what you have coming due in terms of securities and whether that will be sufficient or if that's the mechanism that you plan to use to fund the loan growth I think you kind of alluded to another three years to $400 million alone growth. Later this year based on your growth targets and just wondering if the securities cash flows will be sufficient.
And sort of the outlook for.
For funding.
Yeah. So.
In the third quarter, Alex this quarter, we have about another 100.
Dollars of maturity, that's going to certainly help the funding at least for the balance of 2023.
And then as we get into 2024, we do have a little bit of a slower cash flow coming off the securities portfolio.
Less than about $100 million in 2024.
But we do have some some plans are basically to continue to grow in.
The higher loan yields we can continue to.
Bridge to.
<unk> cash flows a little further out just through some probably some wholesale borrowings.
And where rates are it's still fairly attractive to do that.
Can you see the number from the third quarter, just broke up a little bit I'm not sure. If that was just my line of Evercore Your line.
So the third quarter is about $150 million Alex charities.
And anything in the fourth quarter.
It's fairly nominal in the fourth quarter I don't have a precise number but it's fairly nominal most of it is in the third.
And with the expectation in terms of other deposit flows that the 146 $147 million of municipal deposits.
Went out in the second quarter that is remind us that usually builds into the end of October is that correct.
That's correct Alex.
For us it's.
It's somewhat seasonal in the second quarter being the low point for municipal deposits and then in New York State in particular tax collection occurs in the third quarter and in the first quarter.
So we tend to see a little bit of a rebound if you will in municipal deposits and for that matter also.
The municipal repurchase agreements, particularly in our Vermont market, our new England market, they bounced back a little bit in the third quarter as well. So we do have some.
Some expectations that municipal fundings.
Rollback in the door, if you will in the third quarter.
Okay.
The.
Just the sort of exit net interest margin from the quarter and exit cost of funds.
Yes, it was.
It was relatively flat.
I'll say may to June .
NII perspective.
So cost of funds, we kind of exited the quarter at about 90 about 90 basis points of reserves here.
I'm, sorry, I'm off about 80 basis points total cost of funds.
Exiting at the end of the quarter.
Okay, Alex So the margin in June was consistent with the second quarter number.
Yes, it's pretty flat across the board I wasn't sure if there's anything funky in there from the deleveraging transaction you guys did back in the first quarter.
It would make the number is not seen as straightforward as they look.
And then just the final question I had is on fees I know last quarter, you guys mentioned, some adjustments to NSF fees and I think you guided to like a $6 million to $8 million hit across the year on NSF and then it just doesn't look like we saw that show up in the deposit service charges.
Fees this quarter it looks like that I mean that.
Second quarter looks stronger than the second quarter a year ago.
Much stronger than the first quarter. So I'm just curious if there is something else in there that we should be thinking about or if there is any change to that that full year guidance for.
The hit to deposit service charges from that.
We also had a little higher.
Debit interchange outcome for the second quarter, So that's sort of.
Offset some of the reduction for the NSF changes.
Okay. So the full year guide of the $6 million to $8 million hit is still intact.
Yes, I think that's that's.
Still fair Alex.
Perfect. Thank you for taking my questions.
Youre welcome.
Yeah.
Our next question comes from Manuel Novartis of D. A Davidson go ahead.
Hey, good morning, a lot of money.
Questions have been answered, but I just was wondering about the.
On outlook, we are thinking about the mix consumer was pretty strong and just trying to see what are the trends there.
Yep, So morning Manuel.
You're right the consumer we did reasonably well this quarter the pipelines remain very robust.
On the mortgage side, we hinted at last quarter as well.
We've gained even more momentum.
On the mortgage side.
So I think we're going to have a pretty robust quarter here in Q3 and going into Q4, that's usually when we booked the most on the mortgage side anyways, but the pipelines are actually stronger than they were a year ago.
And as you can imagine it's a.
85% purchase money. So all of that is additive to the balance sheet. So it's going to result in a bit of a higher number than usual in terms of net growth.
As it relates to that.
Auto business our card business.
That also is in is in pretty good shape.
We benefited from some of the same things that we talked a little bit.
On the call, which is competitors exiting certain.
Markets on a wholesale basis.
When you do that.
You kind of.
Create an opening in the segments that we play in because as you know we don't play everywhere between the segments that we play in our part of the market.
So thats created some opportunities for us.
So that business remains in good shape. It is hard to predict as we've said before.
We're trying to manage.
Risk and return there on an active basis through rate.
<unk>.
The segments, we focus on so expect that to be in line with second quarter frankly.
As we sit here today.
Okay.
Yields are you getting on auto loans.
Sure.
On a net basis were in the high sixes.
7% range on that basis to us.
That's great I appreciate the update.
As a reminder, if you have a question. Please press Star then one our next question comes from Matthew Breese of Stephens go ahead.
Good morning.
Good morning, Good morning, Matt I think the credit metrics largely speak for themselves with that in mind I'd be curious your thoughts around the provisioning outlook and then.
The overall reserve level, it's fairly flat year over year, just curious if the bias is to remain flat or even down just considering the.
The credit performance.
Yeah, Matt This is Joe.
Our expectations right now are flat I mean, we have not seen.
Fortunately any sort of turns in credit in fact, when you look at kind of our.
Risk ratings on a year over year basis, we've seen some some improvement which is good.
Net charge offs are still fairly low I think things are normalizing a little bit in the indirect business, but our indirect net charge offs tend to average about 30 basis points over a long period of time.
So we're really not seeing any any sort of headwinds knock on wood.
On the credit front right now and so given that our expectations are.
Kind of about the same until until we see some some changes.
Okay.
And then.
Okay.
I think your stance on tangible common equity as a capital ratio and impacts from OCI are pretty well known at this point, but I would be curious.
One as it stands today, what the duration of the securities portfolio is and then too.
Just given continued impacts should we expect you to remain patient in terms of ultimate recapture or are you considering additional kind of balance sheet restructuring opportunities out there to maybe.
To lessen things here the impact.
Yes.
Yeah, Hey methods limits are.
We're not going to surprise you shared there is no change in how we look at our business and.
We also have to disaggregate the bank from the aggregate business and keep.
Keep in mind, the balance sheet only shows one of our four businesses. So we've got a tremendous amount of value. If you want to talk about value and economic value to our shareholders that is not captured on the balance sheet. So if you were to think about that.
Frankly, the blood back to the balance sheet that the numbers are very strong in and those businesses provide a tremendous amount of capital every year two to the rest of the company. So we're focused on regulatory ratios we don't.
Believe because a third of our revenue more than a third of our revenues coming from non balance sheet activities. We don't believe that the balance sheet itself fully reflects the economic value of the company.
Our regulatory ratios remain very strong they continue to increase.
Yeah.
The transaction we did earlier this year was really focused on allowing us to monitor was economically net value positive for our shareholders. Because we got our money back a year sooner than we would have gotten it otherwise and secondly allowed us the flexibility to now service more clients.
People are pulling back so.
We don't we don't feel like we need to do anything similar.
For the next.
A couple of quarters at the very least.
Capital is accruing at a very robust pace, we have not been able to deploy it through M&A. So it just keeps.
Keeps accruing to our company.
Great I appreciate that.
One last one before I sign off first dimitar congrats on the promotion.
Mark Congratulations on retirement, I think the stock and the bank balance sheet speak for it speaks for itself in terms of legacy.
Dimitar.
You kind of.
Commence your CEO role here in the not too distant future.
Where do you think you and mark differ in terms of strategy.
<unk> management fee income business management I'd be curious if theres any sort of notable differences in terms of philosophy, both around the day to day work organic businesses and how you run them and then inorganic in terms of how you think about M&A.
M&A and acquisitions.
Yeah.
Matt That's a fair question.
There is a reason why I feel like I've been part of this company for a long time, because we all of US here tend to think very similarly.
Evaluate things in a similar light so.
Youre not going to see much in the way of.
Change for us our shareholder thesis remains what it has always been which is we need to provide that consistency of results.
Cash flows back to our shareholders.
What that means is having a diversified business model, which includes all of our businesses and we need to invest as much as we can and all of them.
We need to stay vigilant for other opportunities to add.
To those verticals.
Tangential to them or new vertical potentially again in the spirit of having a diversified company that functions, regardless of the rate environment toward a market environment or the insurance market.
So I think we're going to have.
An increased focus on that diversification and increased focus on managing the low volatility and risk across our businesses.
So it's really an evolution I think.
One of the differences that we have today than we did historically and thats kudos to mark and the team.
We're much better with organic growth. So we're going to continue to leaning into that.
We're going to continue to look at new markets and your chances to expand organically.
We allocated capital in multiple ways swab is through the <unk>.
<unk> investments in people.
New businesses through the P&L, which we're doing daily and then as we have opportunities to deploy that excess capital that we generate into transactions. We're going to continue looking at that as we've communicated really more strategically focused and tactically focused.
Because of the lesser needs to generate earnings growth through M&A.
Okay.
Okay.
I appreciate all of that very much. Thank you for taking my questions.
Thank you.
Our next question comes from Chris O'connell of K B W. Go ahead.
Good morning.
Yes, congratulations mark on your retirement.
In terms of the promotion.
I was hoping to circle back to some of the margin discussion I mean, it sounds like.
You guys have been doing a really good job of keeping the margin kind of held up where it is here this past quarter.
Year to date.
As well as seems like the spot margin ended June .
<unk>.
Given that Theres still some funding pressure.
Coming in the back half of the year.
Do you expect the margin to remain under pressure.
The back half of the year or do you think.
Keep it held up you know more or less around the current levels.
Yes, I think Chris our best.
Expectation at this point is kind of I'll say flat too caught sideways for a couple of quarters, which I think is.
Potentially going out perform the rest of the market just because of our the strength and resilience of our of our funding base.
If those pressures to abate, which if the fed pauses and they do abate the expectation would be that the rate at which funding cost increase in 2024 will slow significantly in the meantime, we are still turning over the loan portfolio.
And a pretty pretty healthy cliff with basically a 200 basis point pickup on the turnover so.
Our hope and expectation is that NII.
Net interest income will.
Hopefully improve as we look into 2024.
Beyond <unk>.
Obviously.
Rates don't go one direction.
And sometimes there is fluctuations, but based on where we are today. The expectation is that we would go effectively sideways, maybe down a few basis points on the NIM maybe.
A couple of basis points in the next couple of quarters, but.
Generally sideways.
Got it do you think that there is.
More risk of compression in the fourth quarter versus the third quarter, given the lack of securities roll off.
We typically have some funding roll in as I mentioned.
In the third and fourth quarters from our municipal side and that should.
Hopefully allow for a reduction in some of the more expensive overnight borrowings so potentially.
Again, we're still kind of signaling flat.
But.
I don't see further erosion in Q4 versus Q3.
Got it and what's the average blended cost of like the municipal deposit book versus the rest of the portfolio.
So fair question, Chris but to be perfectly Frank I need to.
Look it up but it's.
See shrink at that I'm not sure I have the breakout in front of me, Chris but it certainly is.
Much more so.
Slightly more than that of the IPC deposits and certainly less than overnight borrowings.
Got it.
And just on the M&A outlook.
I know you guys are.
Actively looking at the fee businesses and.
For potential adds there.
Traditional bank M&A side are you seeing.
Opportunities are you.
Actively or seriously pursuing opportunities at this time, just given kind of the overall slowdown in the traditional bank M&A environment.
Have you seen any pickup in that those type of opportunities from.
They call it like early March.
And kind of the disruption that happened in March and April .
Hey, Chris.
I think on the bank side there is.
A little bit of a slight uptick I would call. It in the sense of sellers being more willing to engage in discussions.
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I think the challenge is there remain similar to what they've been for the past couple of quarters, which is.
You have got.
Lot of unknowns as to what the balance sheet looks like what the margin looks like.
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I think this cycle is showcasing that some balance sheets can can change quite drastically in the matter of a couple of quarters.
And when earnings are going down for some folks in all 25%, 30% in a short period of time, that's pretty hard to price in terms of what is the value of that earnings stream to us given that we're focused on consistency first and foremost in our results.
So I think that's one challenge I think the second challenges.
For a lot of folks.
Theres not a lot of capital left to wash them out of the balance sheet.
No.
We have to essentially pay for the deal twice.
So some of those challenges are pretty hard to stomach.
Especially depending.
Depending on the size of the opportunity.
As.
Joe.
Pointed out.
To a number of us very wisely, it's also hard to figure out.
In today's environment, when you announce a transaction on bank bank deal what does that do to the deposit base given that.
It's like selling the starting signal for four older competitors and high rate customers to start looking around to yet again. So I think that's kind of hard to put your arms around and then the last piece is.
D uncertainty as to the timing of closure of transactions. These days.
Clearly there is a.
A higher hurdle.
In terms of unknowns that come with that transaction.
From all the regulatory bodies.
So that creates.
Another challenge in terms of if you don't know when youre going to close the transaction.
That puts pressure on retaining clients retaining people.
Adding to pay a lot more for for for our customers.
So that's another unknown, that's really kind of creating.
That unfavorable risk and reward right now.
With that said we continue to look.
On the flip side, we know now some franchises that their balance sheets are holding up better than expected and better than others. So that's something that we're going to remember for a long time.
And when the opportunity comes we will be.
Active and hopefully in a better environment.
Great.
Thanks for your time I appreciate you taking my questions.
This concludes our question and answer session I would like to turn the conference back over to Mr. Czarnecki for any closing remarks.
Thank you all for joining again our conference call in.
I guess I will see you one last time here in October and hope you all have a great.
The rest of the summer thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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