Q1 2024 Community Bank System Inc Earnings Call

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Operator: Good day, and welcome to the Community Bank System First Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on a touch-tone phone. To withdraw your question, please press star, then 2. Please note, this event is being recorded. I would now like to turn the conference over to Dimitar Karaivanov, President and Chief Executive Officer of Community Bank System. Please go ahead.

Good day and welcome to the community Bank system first quarter 'twenty 'twenty four earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero.

After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on a touchtone phone to withdraw your question. Please press Star then two.

Please note this event is being recorded.

I would now like to turn the conference over to your Dimeter carve enough President and Chief Executive Officer of community Bank system. Please go ahead.

Dimitar A. Karaivanov: Thank you, Nick, and good morning, everyone, and thank you for joining the Community Bank System Q1 2024 earnings call. This quarter was a good illustration of the benefit of our diversified financial model. Our market-sensitive recurring fee income businesses showcase their strength and fully offset margin pressure in our banking business, leading to another quarter of record revenue for the company. We normalized the expense growth rate while continuing to invest in all of our businesses. Our below-average risk profile remains firmly rooted in the low credit risk intensity and exceptional liquidity of our balance sheet.

Dimitar A. Karaivanov: Thank you Nick and good morning, everyone and thanks for joining the community Bank system Q1, 2024 earnings call.

Dimitar A. Karaivanov: This quarter was a good illustration of the benefit of our diversified financial model our.

Dimitar A. Karaivanov: Our market sensitive recurring fee income businesses showcase their strength and fully offset margin pressure in our banking business, leading to another quarter of revenue a record revenue for the company.

We normalize the expense growth rate, while continuing to invest in all of our businesses.

Dimitar A. Karaivanov: Our below average risk profile remains firmly rooted in the low credit risk intensity and exceptional liquidity of our balance sheet.

Dimitar A. Karaivanov: During the quarter, we also modestly increased our qualitative assessment of future uncertainty and proactively added to our reserves. In our banking business, growth continued in our commercial, mortgage, and consumer installment portfolios. Strong loan growth of $179 million was more than fully funded through deposit growth of $424 million. Market share gain opportunities remain attractive across our footprint as many competitors are limited by their liquidity profiles. Pipelines remain excellent, with particular strength in C&I compared to prior quarters.

Dimitar A. Karaivanov: During the quarter, we also modestly increased our qualitative assessment of future uncertainty and proactively added to our reserves.

Dimitar A. Karaivanov: In our banking business growth continued generic commercial mortgage and consumer installment portfolio.

Dimitar A. Karaivanov: Strong loan growth of $179 million was more than fully funded through deposit growth of $424 million.

Dimitar A. Karaivanov: Market share gain opportunities remain attractive across our footprint as many competitors are limited by their liquidity profiles.

Dimitar A. Karaivanov: Plans remain excellent with particular strength in CNI compared to prior quarters.

Dimitar A. Karaivanov: We also formally announced our branch expansion plans with 14 locations expected to open in the next five quarters. Two in Buffalo, three in Rochester, three in Syracuse, two in the capital region, two in the Lehigh Valley, one in Springfield, Massachusetts, and our first location in New Hampshire, in our Employee Benefit Services business.

Dimitar A. Karaivanov: We also formally announced our branch expansion plans with 14 locations expected to open in the next five quarters too.

Dimitar A. Karaivanov: Two in Buffalo and.

Dimitar A. Karaivanov: In Rochester Syracuse.

Dimitar A. Karaivanov: Syracuse doing the capital region between the Lehigh Valley, one in Springfield, Massachusetts, and now our first location in New Hampshire.

Dimitar A. Karaivanov: In our employee benefit services business.

Dimitar A. Karaivanov: We are now benefiting from both new client counts and market appreciation. Revenue growth was 7.9%, and we also closed on the acquisition of creative plan designs during the quarter. Looking forward, the organic momentum remains strong, and market values remain supportive. Our insurance services business was relatively flat in terms of revenue performance due to the timing of certain commercial premiums and lower contingency revenue.

Dimitar A. Karaivanov: We are now benefiting from both new client accounts and market appreciation.

Dimitar A. Karaivanov: Revenue growth was seven 9% and we also closed on the acquisition of creative plan designs during the quarter.

Dimitar A. Karaivanov: Looking forward the organic momentum remained strong and market values remain supportive.

Dimitar A. Karaivanov: Our insurance services business was relatively flat in terms of revenue performance.

The timing of certain commercial premiums and lower contingency revenue.

Dimitar A. Karaivanov: However, both the organic and inorganic growth opportunities remain attractive for 2024. Our wealth business had a record revenue quarter with a double-digit gain in revenue and increased inflows. Our wealth team is energized and focused on increasing penetration levels while also launching a number of new service offerings on a nationwide basis. Overall, I'm encouraged by our operational execution this quarter, as evidenced by the improvement in pre-tax preprovisioned net revenues over the prior two quarters.

Dimitar A. Karaivanov: However, both the organic and inorganic growth opportunities remain attractive for 2024.

Dimitar A. Karaivanov: Our wealth business had a record revenue quarter with double digit gains in revenue and increased inflows.

Dimitar A. Karaivanov: Our wealth team is energized and focused on increasing penetration levels. While also launching a number of new service offerings on a nationwide basis.

Dimitar A. Karaivanov: Overall I'm encouraged by our operational execution this quarter as evidenced by the improvement in pretax pre provision net revenues over the prior two quarters.

Dimitar A. Karaivanov: In terms of capital deployment, we closed on both a number of smaller acquisitions in our fee-income businesses and also repurchased 750,000 shares at what we deem to be very attractive levels given the intrinsic earnings power of our company. I will now pass this on to Joe for more details. Thank you.

In terms of capital deployment, we closed on bolt a number of smaller acquisitions in our fee income businesses and also repurchased 750000 shares at what we deem to be very attractive levels, given the intrinsic earnings power of our company.

Dimitar A. Karaivanov: I will now pass it onto Joe for more details.

Joe: Thank you, Dimitar, and good morning, everyone. The company recorded 76 cents of GAAP diluted earnings per share in the first quarter. This compares to 11 cents in the first quarter of 2023 and 63 cents in the linked fourth quarter of 2023. As a reminder, during the first quarter of 2023, the company recorded a $52.3 million pre-tax realized loss on the sales of certain available for sale investment securities in connection with the company's balance sheet repositioning strategy, which negatively impacted GAAP diluted earnings per share by 75 cents in that quarter.

Joe: Thank you Demeton good morning, everyone.

Joe: The company reported 76 cents of GAAP diluted earnings per share in the first quarter. This compares to 11 cents in the first quarter of 2023 and <unk> 63 in the linked fourth quarter of 2023 as a reminder, during the first quarter of 2023, the company recorded a $52 $3 million pretax realized loss on the <unk>.

Joe: Sales of certain available for sale investment securities in connection with the company's balance sheet repositioning strategy, which negatively impacted GAAP diluted earnings per share by 75% in that quarter operating diluted earnings per share, which excludes certain non operating revenues and expenses as delineated in this morning's press release were 82 cents in the first quarter and linked fourth quarter.

Joe: Operating diluted earnings per share, which excludes certain non-operating revenues and expenses as delineated in this morning's press release, were 82 cents in the first quarter and linked fourth quarter, as compared to 92 cents in the first quarter of the prior year.

Joe: As compared to 92 cents in the first quarter of the prior year. The 10 cent decrease in operating diluted earnings per share from the prior year's first quarter was driven by a decrease in net interest income and increases in the provision for credit losses operating expenses and income taxes offset in part by an increase in operating noninterest revenues on a linked quarter basis.

Joe: The 10 cent decrease in operating diluted earnings per share from the prior year's first quarter was driven by a decrease in net interest income and increases in the provision of credit losses, operating expenses, and income taxes, offset in part by an increase in operating non-interest revenues. On a linked quarter basis, a decrease in operating expenses and an increase in non-interest revenues were offset by a decrease in net interest income, a higher provision for credit losses, and an increase in income taxes. Operating pre-tax pre-provision net revenue per share, as defined in the press release, was $1.18 for the first quarter.

Joe: A decrease in operating expenses and an increase in noninterest revenues were offset by a decrease in net interest income a higher provision for credit losses, and an increase in income taxes.

Joe: Operating pre tax pre provision net revenue per share is defined in the press release was $1 18 for the first quarter. This was up five cents per share over the linked fourth quarter, but <unk> per share below the prior year's first quarter. During the first quarter. The company reported total revenues of $177 $3 million. This established a new quarterly record for the company.

Joe: This was up five cents per share over the linked fourth quarter but four cents per share below the prior year's first quarter. During the first quarter, the company recorded total revenues of $177.3 million. This established a new quarterly record for the company and highlights our diversified business model.

Joe: And highlights our diversified business model higher levels of operating noninterest revenues in our banking employee benefit services and wealth management services businesses overcame declines in net interest income and insurance service services revenues in both the linked quarter in the prior quarter over the linked quarter of the prior quarter The company recorded.

Joe: Higher levels of operating non-interest revenues in our banking, employee benefit services, and wealth management services businesses overcame declines in net interest income and insurance services revenues in both the linked quarter and the prior quarter. The company recorded net interest income of $107 million in the first quarter, as compared to $109.2 million in the linked fourth quarter. Despite solid loan growth in the quarter and an improvement in the yield on interest-earning assets, pressure on funding costs did not abate.

Joe: Net interest income of $107 million in the first quarter as compared to $109 $2 million in the linked fourth quarter. Despite solid loan growth in the quarter an improvement of the yield on interest earning assets pressure on funding cost did not abate during the quarter. The company continued to experience a migration of customer deposit balances from lower rate checking and savings accounts to higher rate on a mark.

Joe: During the quarter, the company continued to experience a migration of customer deposit balances from lower rate checking and savings accounts to higher rate money market and time deposits, increasing the cost of deposits 16 basis points in the quarter from 98 basis points in the linked fourth quarter to 1.14% in the first quarter. When combined with higher borrowing costs, the company's total cost of funds increased 23 basis points from 1.08% in the linked fourth quarter to 1.31% in the first quarter.

Joe: And time deposits, increasing the cost of deposits 16 basis points in the quarter from 98 basis points in late fourth quarter to $1, one 4% in the first quarter when combined with higher borrowing costs. The company's total cost of funds increased 23 basis points from 1.18% in the linked fourth quarter to 131% in the first quarter.

Joe: This outpaced a 13 basis point increase in interest-earning asset yields, resulting in a nine basis point decrease in the company's fully taxed equivalent net interest margin from 3.07% in the fourth quarter of 2023 to 2.9% in the first quarter of 2024. Comparatively, the company reported net interest income of $111 million in the first quarter of 2023. We believe the first quarter net interest income result of $107 million represents the bottom for the company in 2024, and the outlook remains positive for net interest income expansion on a full year basis.

Joe: This outpaced a 13 basis point increase in interest, earning asset yields resulting in a nine basis point decrease in the company's fully tax equivalent net interest margin from three point over 7% in the fourth quarter of 2023 to two 9% in the first quarter of 2024 comparatively the company reported net interest income of $111 million in.

Joe: First quarter of 2023.

Joe: We believe the first quarter net interest income result of $107 million represents a bottom for the company in 2024 and the outlook remains positive for net interest income expansion on a full year basis.

Joe: As mentioned previously, operating non-interest revenues were up in three of our four businesses on both an annual quarter and a linked quarter basis. Banking-related non-interest revenues were up $1.8 million, or 11.1%, over the same quarter of the prior year, driven by increases in debit interchange and ATM fees and loan placement and advisory revenues, while employee benefits services and wealth management services revenues were up $2.3 million, or 7.9%, and $1 million, or 11.7%, respectively, over the same period, driven by favorable investment market conditions and employee benefit plan participant growth.

Joe: As mentioned previously operating noninterest revenues were up in three of our four businesses on both an annual quarter and linked quarter basis banking related noninterest revenues were up $1 $8 million or 11, 1% over the same quarter of the prior year driven by increases in debit interchange and ATM fees and loan placement in advisory revenues while employee.

Joe: Benefits services and wealth management services revenues were up $2 $3 million or 779% and $1 million or 11, 7% respectively. Over the same period, driven by favorable investment market conditions and employee benefit plan participant growth insurance services revenues were down approximately 400000.

Joe: Insurance services revenues were down approximately $400,000, or 3.6%, due to timing differences on certain commercial policy renewals and insurance carrier-related contingency revenues. On a linked quarter basis, banking-related non-insurance revenues were up slightly, while employee benefit services revenues and wealth management services revenues increased $1.7 million, or 5.6%, and $1.3 million, or 16.5%, respectively. Insurance services revenues were down approximately $500,000, or 4.2%.

Joe: A three 6% due to timing differences on certain commercial policy renewals and insurance carrier related contingency revenues.

Joe: Linked quarter basis banking related noninterest revenues were up slightly while employee benefit services revenues in wealth management services revenues increased $1 7 million or five 6% and $1 $3 million or 16, 5%, respectively and insurance services revenues were down approximately $500000 or four 2%.

Joe: During the first quarter the company reported $118 $1 million in noninterest noninterest expenses. This represents a $4 million or three 5% increase from the prior year's first quarter and $11 million of our eight 5% decrease from the linked fourth quarter results.

Joe: During the first quarter, the company reported $118.1 million in non-interest expenses. This represents a $4 million, or 3.5 percent, increase from the prior year's first quarter and an $11 million, or 8.5 percent, decrease from the linked fourth quarter results. Total operating non-interest expenses, which exclude certain non-operating expenses, as detailed in the company's press release, were $114.4 million in the quarter as compared to $110.3 million in the prior year's first quarter and $116.4 million in the length fourth quarter.

Joe: Operating noninterest expenses, which exclude certain non operating expenses as detailed in the Companys press release were.

Joe: Or $114 $4 million in the quarter as compared to $110 $3 million in the prior year's first quarter and $116 $4 million in the linked fourth quarter as mentioned on last quarter's earnings call. Although the company will continue to make front footed investments and its leadership team talent across all lines of business data systems and risk management.

Joe: Operating expense growth is expected to moderate in 2020 for the first quarter results were consistent with these expectations.

Joe: As mentioned in last quarter's earnings call, although the company will continue to make front-footed investments in its leadership team, talent across all lines of business, data systems, and risk management, operating expense growth is expected to moderate in 2024. The first quarter results were consistent with these expectations.

Joe: The company reported a $6 $1 million provision for credit losses. During the first quarter of 2024. This compares to $3 $5 million in the prior year's first quarter and $4 $1 million in the linked fourth quarter, although the company's credit metrics remained strong during the first quarter. The company built loss reserves reflective of an increase in our qualitative assessment of future uncertainty.

Joe: The company recorded a $6.1 million provision for credit losses during the first quarter of 2024. This compares to $3.5 million in the prior year's first quarter and $4.1 million in the linked fourth quarter. Although the company's credit metrics remained strong during the first quarter, the company billed loss reserves reflective of an increase in our qualitative assessment of future uncertainty. The company's allowance for credit losses stood at $70.1 million, or 71 basis points of total loans outstanding at the end of the first quarter, up $3.4 million, or two basis points in the quarter, and up $6.9 million, or one basis point over the prior year's first quarter. The effective tax rate for the first quarter of 2024 was 22.9%, up from 16.9% in the first quarter of 2023.

Joe: The company's allowance for credit losses stood at $71 million of 71 basis points of total loans outstanding at the end of the first quarter up $3 $4 million or two basis points in the quarter and.

Joe: Up $6 $9 million or one basis point over the prior year's first quarter. The effective tax rate for the first quarter 2024 was 22, 9% up from 16, 9% in the first quarter 2023, excluding the impact of tax expense and benefits related to stock based compensation activity and income tax credit amortization, the effective tax rate for the firm.

Joe: Quarter of 2024 was 22% up from 21, 4% in the first quarter of 2023.

Joe: Ending loans increased $178 $9 million or one 8% during the first quarter. This marks the 11th consecutive quarter of loan growth and is reflective of the Companys continued investment in its organic loan growth capabilities, although outstanding balances in the consumer mortgage and consumer indirect segments increased in the first quarter. Despite seasonal headwinds the primary driver of loan.

Joe: Excluding the impact of tax expense and benefits related to stock-based compensation activity and income tax credit amortization, the effective tax rate for the first quarter of 2024 was 22%, up from 21.4% in the first quarter of 2023. Ending loans increased $178.9 million, or 1.8%, during the first quarter. This marks the 11th consecutive quarter of loan growth and is reflective of the company's continued investment in its organic loan growth capabilities. Although outstanding balances in the consumer mortgage and consumer indirect segments increased in the first quarter despite seasonal headwinds, the primary driver of loan growth in the quarter was the $135.8 million, or 3.3%, increase in the company's business lending portfolio. The company's ending total deposits increased $423.9 million, or 3.3%, during the first quarter of 2024, driven by seasonal inflows of municipal deposits. Ending deposits also increased $241.4 million, or 1.8%, from one year prior.

Joe: Both in the quarter was the $135 8 million or three 3% increase in the company's business lending portfolio.

Joe: The company's ending total deposits increased $423 9 million or three 3% during the first quarter of 2024, driven by seasonal inflows of municipal deposits ending deposits also increased $241 $4 million or one 8% from one year prior.

Joe: Although funding costs continue to increase in the first quarter as previously noted noninterest bearing.

Joe: And low rate checking and savings accounts continue to represent almost two thirds of total deposits and accompany cycle to date deposit beta of 20% continues to be one of the best in the banking industry and reflects the strength of the company's core deposit base. The company's liquidity position remains strong readily available sources of liquidity, including cash and cash equivalents.

Joe: Funding availability at the federal reserve bank's discount window unused borrowing capacity at the federal home loan Bank of New York and Unpledged investment Securities totaled $4 $6 billion at the end of the first quarter. These sources of immediately available liquidity represent over 200% of the customer comes.

Joe: <unk> estimated uninsured deposits net of collateralized and intercompany deposits company's loan to deposit ratio at the end of the first quarter was 74% providing future opportunity to migrate lower yielding investment security balances into higher yielding loans at the end of the first quarter all the companies of the bank regulatory capital ratios significantly exceeded well capitalized stand.

Joe: Although funding costs continued to increase in the first quarter, as previously noted, non-interest-bearing and low-rate checking and savings accounts continued to represent almost two-thirds of total deposits, and the company's cycle-to-date deposit beta of 20% continued to be one of the best in the banking industry and reflected the strength of the company's core deposit base. 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 of New York, and unpledged investment securities totaled $4.6 billion at the end of the first quarter.

Joe: More specifically the company's tier one leverage ratio was nine 1%.

Joe: Which substantially exceeded the regulatory well capitalized standard 5% during the first quarter. The company repurchased 750000 shares of its common stock at an average price of approximately $46 per share.

The company recorded net charge offs of $2 $8 million of 12 basis points of average loans annualized during the first quarter. This is up slightly from 10 basis points in the linked fourth quarter and seven basis points in the same quarter. Prior year with increase is primarily attributed to consumer indirect loan the indirect loan portfolio at March 31, 2020 for nonperforming loans.

Joe: $49 4 million or 50 basis points of total loans outstanding. This represents a decline from $54 6 million or 56 basis points of total loans at the end of the linked fourth quarter nonperforming loans were $33 8 million or 38 basis points of total loans one year. Prior loans 30 to 89 days delinquent were also down on a linked quarter basis.

Joe: These sources of immediately available liquidity represent over 200% of the company's estimated uninsured deposits and that of collateralized and intercompany deposits. The company's loan-to-deposit ratio at the end of the first quarter was 74%, providing future opportunity to migrate lower-yielding investment security balances into higher-yielding loans. At the end of the first quarter, all the companies in the bank's regulatory capital ratio significantly exceeded the regulatory well-capitalized standard of 5%. During the first quarter, the company repurchased 750,000 shares of its CommSoc at an average price of approximately $46 per share.

Joe: From $48 4 million or 50 basis points of total loans at the end of 2023 to 42 1 million or 43 basis points of total loans at the end of the first quarter overall, the company's asset quality remained strong in the quarter.

Joe: We believe the company's diversified revenue profile strong liquidity regulatory capital reserves stable core deposit base and historically strong asset quality provide a fundamentally solid foundation for future opportunities and growth looking forward. We are very encouraged by the revenue outlook in all four of our businesses, we will continue to lean into growth and prudent.

Joe: The company recorded a net charge loss of $2.8 million with 12 basis points of average loans annualized during the first quarter. This is up slightly from 10 basis points in the length of the fourth quarter and 7 basis points in the same quarter of the prior year with increases primarily attributed to consumer indirect loans, the indirect loan portfolio. At March 31, 2024, non-performing loans totaled $49.4 million, or 50 basis points of total loans outstanding.

Joe: Deploy capital in line with the interest of our shareholders that concludes my prepared comments. Thank you I'll now turn it over to Nick to open the line for questions.

Nick: We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

Nick: If you are using a speakerphone please pick up your handset before pressing the keys.

Nick: To withdraw your question. Please press Star then two.

Nick: At this time, we will pause momentarily to assemble our roster.

Manual: Our first question comes from manual in the boss with D. A Davidson. Please go ahead.

Joe: This represents a decline from 54.6 million or 56 basis points of total loans at the end of the fourth quarter. Non-performing loans were $33.8 million or 38 basis points of total loans one year prior. Loans $30 to $89 days to link were also down on a link quarter basis from $48.4 million or 50 basis points of total loans at the end of 2023 to $42.1 million or 43 basis points of total loans at the end of the first quarter.

Manual: Hi, This is Sharon Z on for Emmanuel. Thank you for Mosquito My question.

Sharon Z: Good morning.

Speaker Change: Good morning.

Sharon Z: Opex this quarter was much better than expected what are you assuming your expectations for the Opex run rate going forward.

Sharon Z: Yes.

Sharon Z: We.

Sharon Z: We believe were run run rate for Opex will kind of be contain alcohol on historic levels of about mid.

Sharon Z: Mid single digits call it three to maybe 3% to 6%.

Joe: Overall, the company's asset quality remained strong in the quarter. We believe the company's diversified revenue profile, strong liquidity, regulatory capital reserves, stable core deposit base, and historically strong asset quality provide a fundamentally solid foundation for future opportunities and growth. Looking forward, we are very encouraged by the revenue outlook for all four of our businesses. We will continue to lean into growth and prudently deploy capital in alignment with the interests of our shareholders.

Sharon Z: We invested pretty heavily in a lot of our infrastructure and talent and technology last year, which kind of increase the opex run rate, but they were kind of most of them are front footed investments I mean, obviously there were some wage pressures as well.

Sharon Z: While we expected that to sort of.

Sharon Z: Come down if you will in 2024 and I think the first quarter as you know I think a pretty good data point for us from the standpoint of what the expectations are going forward.

Nick: That concludes my prepared comments. Thank you all, and I'll turn it over to Nick to open the line for questions. We will now begin the question and answer session.

Great. Thank you and do you have any updated thoughts on the pace of the buybacks given the strong loan growth.

Operator: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Manuel Navas with D.A. Davidson. Please go ahead.

Speaker Change: Yeah, we would expect that the pace will.

Speaker Change: Slow a bit I wouldn't expect too.

Speaker Change: Purchased an additional 750000 shares.

Speaker Change: Going forward, we just had an opportunity at these levels.

So we took advantage of that if you will gen.

Speaker Change: Generally our philosophy over the years has been to.

Sharon G.: Hi, this is Sharon G. on behalf of Manuel. Thank you so much for taking my question. Good morning. So, OPEX this quarter was much better than expected. What are some of your expectations for the OPEX run rate going forward?

Speaker Change: Generally.

Speaker Change: Buyback.

Speaker Change: I'll call it the equity plan.

Speaker Change: Issuance.

Speaker Change: And during the year and potentially a little more in this case with the with the current price points.

Joe: Yes, we believe our run rate for OpEx will kind of be containing, I'll call them historic levels of about mid-single digits, call it three to maybe three to six percent. We invested pretty heavily in a lot of our infrastructure, talent, and technology last year, which kind of increased the OpEx run rate, but they were kind of mostly front foot investments. I mean, obviously, there were some wage pressures as well, but we expected that to sort of come down, if you will, in 2024, and I think the first quarter is, you know, I think a pretty good data point for us from the standpoint of, you know, what the expectations are going forward.

Speaker Change: Okay.

Speaker Change: Thank you.

Speaker Change: For now thank you again for taking my question.

Speaker Change: Our next question comes from Steve Moss with B Riley FBR. Please go ahead.

Stephen M. Moss: Hey, good morning, guys.

Stephen M. Moss: Just.

Stephen M. Moss: I'm, sorry, I hopped on late here, but I do want to.

Stephen M. Moss: Maybe start on the loan pipeline you guys showed good commercial loan growth this quarter.

Stephen M. Moss: I'm just curious as to you know.

Stephen M. Moss: What youre seeing for economic activity and the opportunity there.

Speaker Change: Good morning, David Scimitar.

David Scimitar: Our pipeline is strong our pipeline is actually stronger than it was at the end of last year and probably stronger than its been the past couple of quarters. So I will say the difference in our pipeline on the commercial side and I really should should pre face it that it's the commercial pipeline Im talking about is that we have successfully.

Joe: Great, thank you. And do you have any updated thoughts on the pace of the buybacks given the strong loan growth?

Joe: Yeah, we would expect that the pace will slow a bit; I wouldn't expect to, you know, purchase an additional 750,000 shares. You know, going forward, we just had an opportunity at these levels. So, you know, we took advantage of that, if you will. Generally, our philosophy over the years has been to, you know, generally, buy back the equity plan issuance during the year and potentially a little more in this case with the current price point.

David Scimitar: Change the mix there quite dramatically, which we've been working on over the past few quarters from commercial real estate into CNI and.

David Scimitar: Over over well over half of our pipeline today is in C&I.

David Scimitar: That takes a little bit longer to close so you may not see the same pace of growth, even with a lower with a higher pipeline.

David Scimitar: But it's they're just going to transpire, a little bit later, I think in India or some of those things to close so the activity is strong as I mentioned, it's the same thing on the mortgage side our pipeline today is higher than it was a year ago.

Sharon G.: Thank you. I think that's it for now. Thank you again for taking my questions.

David Scimitar: As we have stopped our core consumer installment business, we take a little bit more of a price versus growth equation and thats one so.

Operator: Our next question comes from Steve Moss with B. Reilly, F.B.R. Please go ahead.

Stephen M. Moss: Hey, good morning, guys. I'm sorry I jumped on late here, but I do want to maybe start on the loan pipeline. You guys showed good commercial loan growth this quarter. Just curious as to what you're seeing for economic activity and the opportunity there.

David Scimitar: With that said I mean the.

David Scimitar: Our competitors a lot of them remain constrained.

David Scimitar: Liquidity be it capital be it optimizing the risk weighted assets. So there is there is a lot of.

Lot of market share opportunity for us in our markets as well continued to remain resilient and with more than the average historical economic activity.

Dimitar A. Karaivanov: Morning, Steve. It's Dimitar. Our pipeline is strong. Our pipeline is actually stronger than it was at the end of last year and probably stronger than it's been in the past couple of quarters. I will say the difference in our pipeline on the commercial side, and I really should preface it by saying it's the commercial pipeline I'm talking about, is that we have successfully changed the mix there quite dramatically, which we've been working on over the past few quarters from commercial real estate into CNI, and well over half of our pipeline today is in CNI.

David Scimitar: If you look at Central New York some of the data that.

David Scimitar: Some of the local organizations have gathered in terms of economic development Central New York has.

David Scimitar: <unk> the amount of economic development today in the pipeline than it did five years ago dead.

David Scimitar: By the way does not include any of the semiconductor corridor investments so.

David Scimitar: A lot going on in our markets in a positive way and we're really well positioned to continue to take market share.

Dimitar A. Karaivanov: That takes a little bit longer to close, so you may not see the same pace of growth even with a higher pipeline, but it's there. It's just going to transpire a little bit later, I think, and bring some of those things to close.

David Scimitar: Okay.

That's very helpful. I appreciate the color there.

Speaker Change: Just curious as to what's the add on rate for new loans. These days for you guys.

Yes.

Dimitar A. Karaivanov: So the activity is strong, as I mentioned. It's the same thing on the mortgage side. Our pipeline today is higher than it was a year ago. As we've talked about with our consumer installment business, we take a little bit more of a price versus growth equation in that one. With that said, I mean, our competitors, a lot of them remain constrained, you know, be it liquidity, be it capital, be it optimizing risk-weighted assets.

<unk> in the mid Sevens, which is where we've been in the past couple of quarters. So really pricing has remained.

Speaker Change: Pretty firm here in terms of our new originations.

Speaker Change: Okay I appreciate that and then in terms of just the margin here.

Speaker Change: I realize your deposit beta remains.

Speaker Change: Then your funding costs, I mean, really really low relative to fed PON.

Speaker Change: Curious, how you think about the <unk>.

Speaker Change: Margin here, if we stay in a higher for longer environment.

Speaker Change: You continue to see funding Creat.

Speaker Change: And is there I.

Dimitar A. Karaivanov: So there's a lot of market share opportunity for us, and our markets, as well, continue to remain resilient and with more than average historical economic activity. For example, if you look at Central New York, some of the data that some of the local organizations have gathered in terms of economic development, Central New York has 10x the amount of economic development in the pipeline than it did five years ago. That, by the way, does not include any of the semiconductor corridor investments. So there is a lot going on in our markets in a positive way, and we're really well-positioned to continue to take market share.

Speaker Change: I know the securities.

Speaker Change: Price a little longer dated so.

Speaker Change: Curious, we're going to see from a more margin pressure next couple of quarters.

Yeah. So Steve this is Joe good morning, I will address that so our expectation and I made it said it in my prepared comments is that we expected the first quarter NII outcome net interest income outcome to kind of be the bottom for us.

Joe: That's still our expectations, even in a higher for longer.

Joe: Scenario.

Speaker Change: We do expect the NII to.

Dimitar A. Karaivanov: Okay, that's really helpful. Appreciate the color there, Dimitar. Just curious as to what the add-on rate is for new loans these days for you guys?

Speaker Change: Step up.

Speaker Change: In the remaining quarters of 2024, and you know hopefully outpace the full year result from from 2023, obviously theres a lot of variables that could change between between now and the end of the year, but just some things to think about is that in.

Dimitar A. Karaivanov: Yeah, we're right smack in the mid-7s, which is where we've been in the past couple of quarters, so really, pricing has remained pretty firm here in terms of our new originations.

Stephen M. Moss: Okay, appreciate that. And then in terms of just the margin here, you know, I realized, you know, your deposit data remain, and your funding costs are really low relative to Fed funds. I'm curious how you think about the margin here if we stay in a higher for longer environment, you know, do you continue to see funding creep, and you know, is there, and I know the security is repriced a little longer dated, so just curious, we're going to see some more margin pressure in the next couple quarters.

Speaker Change: Trailing 12 month period.

Speaker Change: We had about $1 $3 billion of <unk>.

Speaker Change: Principal payments and prepayments on the loan portfolio and originated about $2 2 billion for net growth of about $900 million over a trailing 12 month period. So that there is a there is a turnover component. If you will on the earning asset side as these 520 years or so.

Joe: Yeah, so, so Steve, this is Joe. Good morning.

Joe: I will address that. So, you know, our expectation, and I, you know, I made it or said it in my prepared comments is that, you know, we expected the first quarter NII outcome, net interest income outcome, to kind of be the bottom for us. You know, that's still our expectation; even in a higher for longer scenario, we do expect the NII to step up in the remaining quarters of 2024 and hopefully outpace the full year result from 2023.

Speaker Change: Loans that are on the books now the current book yield as they are rolling off they're being replaced by seven 5%.

Speaker Change: Paper, So I think that provides us a significant potential lift on the earning asset side on the liability side.

Speaker Change: You know.

Speaker Change: I've said it in the prepared comments, but we do expect to kind of some of the pressures on funding to abate with that said if rates continue to.

Speaker Change: To move up on the long end those pressures will probably.

Speaker Change: Still be present.

Speaker Change: But right now our expectations are that the cost of deposits are not going to grow in.

Joe: Obviously, there are a lot of variables that could change between now and the end of the year. But just some things to think about are that in the trailing 12-month period, we had about $1.3 billion of principal payments and prepayments on the loan portfolio and originated about $2.2 billion for net growth of about $900 million over a trailing 12-month period. So there's a turnover component, if you will, on the earning assets side, as these 520 or so loans that are on the books now, the current book yield, as they're rolling off, they're being replaced by 7.5% new paper.

Speaker Change: Quarters going forward at the same rate they had been in the trailing trailing quarters, so that sort of <unk>.

Speaker Change: <unk> and NII expansion.

Speaker Change: <unk>.

Speaker Change: The net interest margin.

We booked 298 on a tax equivalent basis in the quarter.

Speaker Change: Patient is the margin may creep up a couple of basis points to flat, but the expectation is that we'll be able to expand net interest income.

Speaker Change: On a go forward basis.

Speaker Change: Obviously.

Speaker Change: Deposit balances.

Speaker Change: Well, we will make a difference and kind of how what the outcome is there and their ability to support continued loan growth because if we move from a.

Joe: So I think that provides us with a significant potential lift on the earning assets side. On the liability side, I said it in the prepared comments, but we do expect some of the pressures on funding to abate. With that said, if rates continue to move up on the long end, those pressures will probably still be present, but right now, our expectations are that the costs of deposits are not going to grow in the quarters going forward at the same rate they have been in the trailing quarters.

Speaker Change: A little over 1% deposit base to a 5% borrowing.

Speaker Change: That could be expensive. So that's one of the caveats as we have to.

Speaker Change: Kind of look and manage the deposit balances Theres, obviously migration continued migration into higher cost deposits that.

Speaker Change: Well.

Joe: So that sort of hints at NII expansion. You know, the net interest margin we booked 298 on a tax equivalent basis in the quarter. The expectation is the margin may creep up a couple of basis points to flat, but the obviously deposit balances will make a difference and kind of how, you know, what the outcome is there and their ability to support continued loan growth because if we move from a, you know, a little over a 1% deposit base to a 5% borrowing base, that could be expensive.

Speaker Change: Impact impact the overall cost and obviously the slope of the yield curve matters as well. So there are some.

Speaker Change: Call. It some components that could affect the outcome, but our expectation is that NII will expand.

Speaker Change: Moving forward.

Speaker Change: Okay.

Speaker Change: I appreciate that and then in terms of the insurance business here.

Speaker Change: And maybe just both insurance and employee benefits I realized I think I heard there was.

Speaker Change: Timing issues for the insurance revenues this quarter.

Speaker Change: I assume it's still a hard market and just any update you can give on revenue growth there and it's been a strong market for you now.

For stocks and bonds.

Joe: So that's one of the caveats is that we have to, you know, kind of look at and manage the deposit balances. There's obviously migration, continued migration into higher-cost deposits that, you know, will impact the overall cost, and obviously, the slope of the yield curve matters as well. So there are some, you know, I'll call them some components that could affect the outcome, but our expectation is that NII will expand.

Speaker Change: Or more stocks and bonds, but nice pick up of unemployed benefits just kind of thoughts there as well.

Speaker Change: Sure Steve ill start with the insurance business.

Speaker Change: We continue to believe that both the organic expansion in terms of new clients and higher rates.

Speaker Change: It's going to be positive this year.

Speaker Change: In addition, we do have.

Speaker Change: A very good pipeline in terms of inorganic add ons as well. So as you think about the revenue growth in that business, we've grown at double digits over the past three years.

Stephen M. Moss: I appreciate that. And then in terms of the insurance business here, and maybe just in both insurance and employee benefits, I realized I think I heard there were time issues for the insurance revenues this quarter. Just, you know, I assume it's still a hard market, and any update you can give on revenue growth there, and it's been a strong market for stocks and bonds, or more stocks and bonds, but, you know, nice pickup on employee benefits, just kind of thoughts there as well.

Speaker Change: We still think Thats kind of high single digits is probably achievable for this year.

Speaker Change: As the business is getting bigger that double digit numbers continue to increase as well, but the opportunities are strong and we did have some.

Speaker Change: What we consider to be just timing cutoffs, and mismatches this quarter, which kind of muted.

Speaker Change: A little bit of the revenue performance, but the full year expectation for the business is still very positive.

Dimitar A. Karaivanov: Sure. Steve, I'll start with the insurance business. We continue to believe that both the organic expansion in terms of new clients and higher rates is going to be positive this year, and, in addition, we do have a very good pipeline in terms of inorganic add-ons as well. So as you think about the revenue growth in that business, you know, we've grown at double digits over the past three years. We still think that kind of high single-digit growth is probably achievable for this year, you know, as the business is getting bigger, that double-digit number is continuing to increase as well.

Speaker Change: On the employee benefit side.

Speaker Change: We've been talking for years about.

Speaker Change: Adding a lot of new customers and a lot of new lives on the platform.

Speaker Change: That's been the case, it's just been muted for those couple of years, because the asset values were too low.

Speaker Change: And you are now seeing both those new units, if you will and the asset values come together.

Dimitar A. Karaivanov: But the opportunities are strong, and we did have some what we consider to be just timing cutoffs and mismatches this quarter, which kind of muted a little bit of the revenue performance. But the full-year expectation for the business is still very positive. On the employee benefit side, we've been talking for years about, you know, adding a lot of new customers and a lot of new lives on the platform. And that has been the case.

Speaker Change: And we had a great quarter and our expectation is that thats going to continue we did acquire creative plan designs and we did not have much revenue in this quarter from that acquisition as well. So there is some.

Speaker Change: Backend second half of the year loaded revenue from from the <unk> acquisition activities as well.

Dimitar A. Karaivanov: It's just been muted for those couple of years because the asset values were too low. And you're now seeing both those new units, if you will, and the asset values come together. And we had a great quarter, and our expectation is that that's going to continue. We did acquire Creative Plan Designs, and we did not have much revenue from that acquisition this quarter either. So there's some back-end second half of the year revenue from the acquisition activities as well.

Speaker Change: Great I appreciate all the color there.

Speaker Change: Yes.

Speaker Change: The next question comes from Christopher O'connell with K BW. Please go ahead.

Hey, good morning.

Christopher O'Connell: Just wanted to follow up on the fee discussion.

Christopher O'Connell: I realize that the markets are strong.

Christopher O'Connell: But well wealth management, the uptick was pretty strong there as well as the be path.

Christopher O'Connell: Group there.

Stephen M. Moss: Great. I appreciate all the color there, Dimitar. Thank you.

Christopher O'Connell: Is that is that a good sustainable run rate on a go forward basis.

Operator: The next question comes from Christopher O'Connell with KBW. Please go ahead.

Speaker Change: Yes, I think Chris I mean, our royalty business is very much the same story as our employee benefits business and.

Christopher O'Connell: I just wanted to follow up on the fee discussion. I realize that, you know, markets are strong, but, you know, wealth management, the uptick was pretty strong there as well as, you know, the BPAS, you know, group there. Is that a good sustainable run rate on a go-forward basis?

Speaker Change: Folks have been really busy on adding more clients over over the past couple of years and again that growth has been a little bit more.

Speaker Change: So.

Speaker Change: If markets stay where they are yes that would be a very close run rate for us for the rest of the year in that business. So look we've got four businesses, we always dumped.

Dimitar A. Karaivanov: Yeah, I think, Chris. I mean, our wealth business is very much the same story as our employee benefits business. Folks have been really busy adding more clients over the past couple of years. And again, that growth has been a little bit muted.

Speaker Change: Talk about our four businesses, that's how we run the company if you think about our our company.

Speaker Change: We've got four in just our bolt, which is a couple of engine more than than most and right now our wealth business and our employee benefit services business are revving up.

Dimitar A. Karaivanov: So if market values stay where they are, yes, that would be a very close run rate for us for the rest of the year in that business. So look, we've got four businesses. You know, we always talk about our four businesses. That's how we run the company. If you think about our company, we've got four engines in our boat, which is a couple of engines more than most. And right now, our wealth business and our employee benefits services business are revving up.

Speaker Change: Our insurance business as we mentioned around a little bit lower but we expect it to ramp up over to the rest of the year and our banking engine is a little bit sputtering on the interest income side.

Speaker Change: But the gas tank is full and as we mentioned if we do get some slowdown really in the mixing of the deposit base.

Speaker Change: That's going to start contributing quite meaningfully so.

Dimitar A. Karaivanov: Our insurance business, as we mentioned, ran a little bit lower, but we expect it to rev up over the rest of the year. And our banking engine is a little bit sputtering on the interest income side. But the gas tank is full, and as we mentioned, if we do get some slowdown in the mixing of the deposit base, that's going to start contributing quite meaningfully. So we feel pretty good about the organic and market value-driven and inorganic growth across all of those four businesses for the year.

Speaker Change: We feel pretty good about the.

Speaker Change: Organic and market value, driven and inorganic growth and across all of those four businesses for the year.

Great and I apologize if I missed it but.

Speaker Change: Did you guys say, how much the accretive plan designs acquisition add in terms of revenues.

Speaker Change: It's going to be somewhere between three and $4 million for the year.

Speaker Change: Great.

Speaker Change: And you mentioned a couple of times I think.

Christopher O'Connell: Great. And I apologize if I missed it, but did you guys say how much the creative plan designs acquisition adds in terms of revenues?

Speaker Change: In our prepared remarks.

Speaker Change: Inorganic.

Speaker Change: Organic.

Speaker Change: Acquisition opportunities.

Dimitar A. Karaivanov: It's going to be somewhere between three and four million dollars per year.

Speaker Change: Can you just talk about where youre seeing the greatest opportunities.

Dimitar A. Karaivanov: And you mentioned a couple of times, I think, in the prepared remarks, you know, the inorganic, you know, inorganic acquisition opportunities. Can you just talk about where you're seeing the greatest opportunities on the fee business side? And then a little bit about what you're seeing and how the market's progressed in terms of the traditional bank side?

Speaker Change: The business side and then.

Speaker Change: A little bit about <unk>.

Speaker Change: What youre seeing and how the market has progressed.

In terms of the traditional bank M&A side.

Speaker Change: Sure.

Speaker Change: We're pretty active in terms of what we would.

Speaker Change: Consider it to be kind of roll up acquisitions.

Speaker Change: Symptom freedom.

Dimitar A. Karaivanov: Sure. So we're pretty active in terms of what we would consider to be kind of roll-up acquisitions, and those have been predominantly in our insurance business over the past couple of years. You know, I think we've done about 11 in the past three years. So, you know, as you can imagine, there are three to four to five kind of books of businesses that we're tucking in, and that's across various geographies for us where we're present.

Speaker Change: Predominantly in our insurance business over the past couple of years.

Speaker Change: I think we've done about 11.

Speaker Change: In the past three years, so as you can imagine there is a.

Speaker Change: Three to four to five kind of books of businesses, we're tucking in.

Speaker Change: And that's across various geographies for us where we're present.

Dimitar A. Karaivanov: So that pipeline remains just as strong as it was last year, and I fully expect that we'll be doing another three or four or five, you know, tuck-ins in the insurance business. In the employee benefits business, we've done, I think, three tuck-ins so far this year. They vary in size, with creative plan designs being the larger one.

Speaker Change: That pipeline remains just as strong as it was last year.

Speaker Change: I would expect that we will be doing another three or four or five tuck ins in the insurance business, our employee benefits business we've done.

Speaker Change: I think three tuck ins so far this year they.

Speaker Change: They vary in size with creative plan designs being the larger one.

Speaker Change: The other one is there you know kind of a half a million Bucks a million bucks here and there so.

Dimitar A. Karaivanov: The other ones are, you know, kind of a half a million bucks, you know, a million bucks here and there. So they add up over time, and that's part of our business model to continue to deploy capital in those very attractive segments. In our wealth business, you know, we acquire practices every once in a while. So every year, we probably have an opportunity to do one or two of those.

Speaker Change: They add up over time, and that's part of our business model is to continue to deploy capital in those very attractive segments and our wealth business.

Speaker Change: I would call it.

Speaker Change: Acquire practices every once in a while.

Speaker Change: So every year, we probably have an opportunity to do one or two of those.

Dimitar A. Karaivanov: Again, they're more like acqui-hires, if you will. You know, somebody just moved onto our platform, and we paid them for a book of business. So that's kind of in those three businesses. On the bank side, as we mentioned in the prior call, we remain very interested in pursuing acquisitions. You know, we have a bit of a different outlook today than we did four or five years ago. That doesn't mean that we're not really interested in bank transactions.

Speaker Change: Again, they're more like a.

Speaker Change: <unk> hires if you will.

Speaker Change: Somebody just moving onto our platform and we paid them for our book of business.

Speaker Change: That's kind of in those three businesses on the bank side.

Speaker Change: As we mentioned in the prior protocol, we remain very interested in pursuing acquisitions, we have a bit of a different lines today than we did four or five years ago.

Speaker Change: Does it mean that we're not really interested in bank transactions.

Dimitar A. Karaivanov: There's been a little bit more of a pick-up in the way of discussions, I would call it that, but we all know the hurdles, right, in terms of rates and marks and values, and so a lot of things need to come together for those to happen, but we remain engaged on that side of the business as well.

Speaker Change: There has been a little bit more of a pick up in the way of discussions I would call it.

Speaker Change: But we all know that hurdle rate in terms of rates and marks and values.

Speaker Change: So a lot of things need to come together for those to happen, but we remain engaged on that side of the business as well.

Christopher O'Connell: Great, that's helpful. And then can you talk a little bit about, you know, what you're seeing on the credit side, all the trends look very solid this quarter in terms of, you know, MPAs and delinquencies. But, you know, you mentioned that the reserve, you brought up a little bit on the business funding and consumer and direct portfolios. Is there anything that you're seeing there that's different or, you know, where credit costs may pick up in those segments over time?

Speaker Change: Great Thats helpful.

Speaker Change: And then can you talk a little bit about what.

Speaker Change: Youre seeing on the credit side all of the trends it looks very solid this quarter in terms of Npls and delinquencies.

Speaker Change: But.

Speaker Change: You mentioned that.

Speaker Change: The reserve.

Speaker Change: Got up a little bit on the business lending and consumer indirect portfolios is there anything that youre seeing there.

That's different or.

Speaker Change: Credit costs may pick up in those segments over time.

Dimitar A. Karaivanov: Yeah, good question, Chris. So, on credit, look, our outlook has not really changed much, and we believe that with an unemployment rate of under four percent, a tremendous amount of government spending, and nominal GDP growth of 5%, the outlook for credit is positive across the board.

Speaker Change: Yes. Good question, Chris So one on the credit look our outlook has not really changed much and we believe that with unemployment trade of under 4%.

Speaker Change: A tremendous amount of government spending and nominal GDP growth of 5% the outlook for credit is positive across the board.

Dimitar A. Karaivanov: Having said that, if you just think about the distribution of probabilities, if you will, this quarter, at the end of this quarter versus last quarter, if we're to remain in a bit of a higher-for-longer scenario, eventually, the higher cost of credit has to feed through and find its way into the real economy. So we looked at our model, which actually suggested a little bit of a lower quantitative outcome compared to prior quarters, and I don't think that that's a big surprise.

Speaker Change: Having said that if you just think about the distribution of probabilities if you will.

Speaker Change: This quarter at the end of this quarter versus last quarter. If we were to remain in a bit of a higher for longer scenario eventually to higher cost of credit has to feed through.

And find its way into the real economy. So.

Speaker Change: We looked at our model, which actually suggest that.

Speaker Change: A little bit of a lower quanta.

Speaker Change: Quantitative outcome compared to prior quarters, and I don't think that Thats, a big surprise, you've seen a lot of banks.

Dimitar A. Karaivanov: You've seen a lot of banks actually release reserves this quarter. We just didn't think that it was appropriate for us, given the outlook, and our loss coverage remains very, very strong. I mean, if you take our 12 basis points of losses this quarter, we've got six years' worth of losses in the ACL. So that remains very strong. We just felt that, given the qualitative outlook for maybe higher-for-longer and maybe a little bit more pressure over time at some point in the portfolios, it would just prove to add a little bit.

Actually release reserves this quarter.

Speaker Change: He just didn't think that it was it was appropriate for us given the outlook and our loss coverage remains very very strong I mean, we've got it.

Speaker Change: If you take our 12 basis points of losses this quarter.

Speaker Change: Got six years worth of losses, and NDA scale. So.

Speaker Change: That debt remains very strong we just felt that given the qualitative outlook for maybe higher for longer and maybe a little bit more pressure over time at some point.

Speaker Change: In the portfolios. So we just put on to that a little bit.

Christopher O'Connell: Great. Thanks, Dimitar. I appreciate the color.

Speaker Change: Great. Thanks, Tim I appreciate the color.

Operator: Again, if you have a question, please press star, then 1. Our next question comes from Matthew Breese with Stevens Incorporated. Please go ahead.

Speaker Change: Again, if you have a question. Please press Star then one.

Our next question comes from Matthew Breese with Stephens incorporated please go ahead.

Matthew M. Breese: Hey, good morning, everybody. Joe, you had mentioned a little bit that you're starting to see, you know, this is that the increase in deposit costs is starting to slow over time. And I was curious, if you look at the composition of deposits, if that is matching up with stability, particularly in the lower cost categories, as well, and along those lines, if you had any sort of projections as to where we might see DDAs kind of settle out later this year.

Matthew M. Breese: Hey, good morning, everybody.

Matthew M. Breese: Good morning, Joe you had mentioned a little bit that you're starting to see.

Matthew M. Breese: The increase in deposit cost starting to slow over time.

Matthew M. Breese: And I was curious if you look at the composition of deposits that is matching up with stability, particularly in the lower cost categories as well.

Matthew M. Breese: Along those lines have you had any sort of projections as to where we might see DDA to kind of settle out later this year.

Joe: Yeah, I'm not sure, Matt, that I can, you know, give you precisely where the time deposit mix will be at the end of the year. I would say that the migration that we saw in Q1, the expectation is that it would slow just a little bit throughout the year. We think that more, you know, most of the rate-sensitive deposits, if you will, have found their way to, generally, higher cost funds. You know, I would have said the same thing last quarter.

Speaker Change: Yes, Im not sure Matt that I can give you precisely where time that time deposit mix will be at the end of the year.

Speaker Change: I'd say that the migration that we that we saw.

Speaker Change: In Q1, the expectation is that would slow just a little bit throughout the year, we think that more most of the rate sensitive deposits. If you will have found their way to generally to higher cost funds I would have said the same thing last quarter.

Joe: But, you know, the expectation is that, you know, migration will slow a bit but probably will continue, just maybe not at the same pace that it has been kind of moving through. So, with that said, will there be additional increases in the overall cost potentially throughout the year? But we also think that the rate of increase on the deposit side will, you know, slow a bit.

Speaker Change: But the expectation is that that.

Speaker Change: That migration will slow a bit but probably will continue just maybe not at the same pace that it has.

Speaker Change: It has been.

Speaker Change: Kind of moving through so with that said.

Speaker Change: Will there be additional increases in the overall cost potentially.

Speaker Change: Throughout the year.

Speaker Change: But we also think that the rate of increase on the deposit side will will slow a bit but the one thing. That's also worth noting that in is that fair.

Joe: The one thing that's also worth noting, Matt, is that, for us in particular, we have seasonal inflows of municipal deposits, and that occurred in the first quarter. And so there was some migration, if you will, from a consumer checking account into a municipal account for tax collection at a higher rate. And so a little bit of our, you know, cost escalation on the deposit side was due to the rotation into those higher-cost municipal accounts.

Speaker Change: For us in particular, we have seasonal inflows of municipal deposits and that had occurred in the first quarter and so there was some migration if you will from a consumer.

Checking account into a into a municipal account for tax collection at a higher rate and so a little bit of our.

Speaker Change: Cost escalation on the deposit side was due to the rotation into those higher cost municipal accounts. So some of that will.

Joe: So, you know, some of that will, you know, slow down a bit, if you will, as well. So that's why kind of the expectation of not, I would call it, the same rate of increase on deposit costs as we kind of had in the last couple of quarters.

Slow a bit if you will as well so that's why I kind of the expectation of.

Speaker Change: Not.

Speaker Change: I'll call. It the same rate of increase on deposit cost as we've kind of had the last couple of quarters.

Speaker Change: Got it okay.

Matthew M. Breese: And then the other part is, I think this is from a prior call, but there's not much in the way of securities kind of maturing or cash flow coming back to you this year, and the yield is well below market rates. And I was curious if you've, you know, in a greater way considered, you know, securities restructuring to kind of get that book up to market rates.

Speaker Change: And then the other the other part I think thats from prior call, but there is not much in the way of securities kind of maturing of our cash flow coming back to this year. The yield is well below market rates and I was curious.

Speaker Change: And in an integrated way, it's configured securities restructuring to kind of get that book up to market rates.

I think Matt.

Speaker Change: So.

Matt: Right. So obviously, we as most other folks have a securities portfolio thats below market.

Matt: And.

Matt: There are pieces, though.

Matt: The securities portfolio that are much closer to market and.

Matt: And this first quarter.

Matt: <unk> identified.

Joe: I think Matt, you're right, obviously we as most of our folks have a securities portfolio that's below market. There are pieces, though, of the securities portfolio that are much closer to market.

A decent amount of those securities.

Matt: Kind of the rates ran away from us in the second half of the quarter, but if there is a bit of a rate pullback we have a not insignificant amount of potential liquidity in the portfolio that we could re lease at <unk>.

Matt: <unk> pretty close to par so I think that's how we're looking at it in terms of something.

Joe: And in this first quarter, we identified that the value is pretty close to par. So I think that's how we're looking at it. In terms of something similar to what we did last year, for us, it does come back to the net present value of those cash flows. So last year, you know, when we did our restructuring, I think the 10-year was below four. We pulled forward three years' worth of cash flows, and we're getting those back now with the higher for longer scenario for... [inaudible] forehand. Again, as a reminder, our portfolio is 85% treasuries, so it is very certain in terms of outcome, but it is tied to that treasury.

Matt: Similar to what we did last year.

Matt: For us it does come back to net present value of those cash flows so last year.

Matt: When we did our restructuring I think the tenure was below four we pulled forward three years worth of cash flows and we're getting those back now with the higher for longer scenario for <unk>.

Matt: Probably 18 months instead of the two years that we estimated initially so very positive NPV transaction. If we have another opportunity to do so we're going to look into it.

Matt: But my guess is until we get kind of that.

Matt: Four handle.

Matt: And again as a reminder, our portfolio is 85% treasuries. So it is.

Matt: Very certain in terms of outcome, but it is tied to that treasury.

Matthew M. Breese: Got it. Okay. And then the last one for me is, you know, Dimitar on Whole Bank M&A.

Matt: Curve.

Speaker Change: Got it Okay, and then last one from me is.

Speaker Change: Inventory.

Speaker Change: On whole bank M&A.

Dimitar A. Karaivanov: It feels like deals are more under the microscope, from a regulatory perspective, than ever. Certain deals that you expect to be fairly routine, you know, are taking longer or haven't gotten done. And I was curious if that's played into your thinking or how that might be a competitive advantage given all the deals over the years.

Speaker Change: Like deals are more under the microscope regulatory perspective than ever.

Speaker Change: Certain deals that you expect to be fairly routine.

Speaker Change: They are taking longer or Havent got done I was curious if that played into your thinking or how that might be a competitive advantage given all the deals over the years.

Dimitar A. Karaivanov: Yeah, I think, Matt. It does. You know, we feel like we've got a very good track record of execution. So to your point that it does, it does enable us to make a case and differentiate ourselves in discussions. I think what this does, though, if you're just kind of sitting there and thinking about capital deployment is you now have uncertainty on timing. And in our experience, deals and, you know, acquisitions don't get better over time as they sit in uncertainty. So the question is, how do you price that uncertainty in the transaction? And that's also a hard discussion to have with a seller, right? Because it's kind of no one's fault.

Speaker Change: Yes, I think Matt it does.

Speaker Change: We feel like we've got a very good track record of execution. So to your point that it does it does enable us to make the case and differentiate ourselves in discussions I think what this does though if youre just kind of sitting there and thinking about capital deployment is.

Speaker Change: <unk> got now uncertainty on timing and in our experience deals.

Speaker Change: Acquisitions don't get better over time as they sit and uncertainty. So the question is how do you price that.

Speaker Change: Uncertainty in the transaction and that's also hard discussion to have would accelerate because it's kind of no one's fault.

Dimitar A. Karaivanov: But clearly, that asset is going to be worth less to us, you know, in 18 months than it is in nine months, and then it is in six months. So that's something that's kind of percolating in the back of some of those discussions. It's hoped that as we get more transactions kind of through the pipeline as an industry, there will be a little bit more of a playbook. Right now, the playbook is also a little bit uncertain because every agency came out with kind of new proposed rules, and they're proposed, but sometimes that means a little bit more than just proposed. So we have to evaluate all of that as we think about capital deployment.

Speaker Change: But clearly.

Speaker Change: Asset is going to be worth less to us.

In 18 months than it is in the nine months and then it is in six months so.

Speaker Change: Thats something thats kind of percolating in the back of some of those discussions.

Speaker Change: It's.

Speaker Change: Hopefully that as we get more transactions kind of through the pipeline as an industry there will be a little bit more of a playbook right now. The playbook is also a little bit uncertain. Because every agency came out with kind of new proposed rules.

Speaker Change: They are proposed but sometimes that means a little bit more than just proposed.

Speaker Change: So we have to evaluate all of that as we think about capital deployment.

Speaker Change: Okay.

Matthew M. Breese: Great. That's all I had. I'll leave it there. Thank you.

Speaker Change: Great. That's all I had I'll leave it there. Thank you.

Dimitar A. Karaivanov: This concludes our question and answer session. I would like to turn the conference back over to Mr. Karaivanov for any closing remarks. Thank you, Nick.

Mr. Carbonara: This concludes our question and answer session I would like to turn the conference back over to Mr. Carbonara for any closing remarks.

Dimitar A. Karaivanov: Thank you, Nick, and thank you everybody who participated and listened to our call. We really appreciate your support and interest in our company, and we look forward to speaking to you after the second quarter.

Carbonara: Thank you Nick.

Carbonara: Thank you everybody, who participated and listened to our call. We really appreciate your support and interest in our company and we look forward to speaking to you after our second quarter. Thank you.

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

Speaker Change: The conference has now concluded.

Speaker Change: You for attending today's presentation you may now disconnect.

Speaker Change: [music].