Q2 2024 Community Financial System Inc Earnings Call
Operator: Good day, and welcome to the Community Financial System second quarter 2024 earnings conference call. 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 Financial Systems. Please go ahead.
Speaker Change: Good day, and welcome to the Community Financial System's second quarter 2024 Earnings Conference Call. 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 Financial Systems. Please go ahead.
Dimitar A. Karaivanov: Good morning, everyone, and welcome to our second quarter 2024 earnings call. I would like to first note that during the quarter, we changed our holding company name to Community Financial System. It is a better reflection of the uniquely diversified nature of our financial services company and also a better reflection of how we run the business, how we interact internally, and how we go to market. We are truly unique in the industry.
Dimitar A. Karaivanov: Thank you, Asha. Good morning, everyone, and welcome to our second quarter 2024 earnings call.
Speaker Change: I would like to first note that during the quarter we changed our holding company name to Community Financial System as a better reflection of the uniquely diversified nature of our financial services company and also a better reflection of how we run the business, how we interact internally, and how we go to market.
Dimitar A. Karaivanov: We have the highest percentage of non-banking revenues amongst KRX peers and an overall fee revenue percentage of 40% versus KRX peers of 18%. We are now also providing enhanced disclosures in our quarterly filings and investor presentations in line with how we operate our business segment. Now turning to the quarter.
Speaker Change: We are truly unique among the industry. We have the highest percentage of non-banking revenues amongst KRX peers and an overall fee revenue percentage of 40% versus KRX peers of 18%.
Speaker Change: We are now also providing enhanced disclosures in our quarterly filings and investor presentations in line with how we operate our business segments.
Dimitar A. Karaivanov: This was a productive quarter for us. Our company recorded a new quarterly record for revenues, while expenses remained well controlled, leading to 91 cents of revenue and 95 cents of operating earnings per share. In our banking business, both NII and fee income expanded from the first quarter. NII growth was driven by both the strength of our core funding and our strong lending growth. Loans grew by $140 million, or 1.4%, which is inclusive of a $25 million seasonal decline in municipal loans.
Speaker Change: Now turning to the quarter, this was a productive quarter for us. Our company recorded a new quarterly record for revenues while expenses remained well controlled leading to $0.91 of gap and $0.95 of operating earnings per share.
Speaker Change: In our banking business, both NII and fee income expanded from the first quarter.
Speaker Change: NII growth was driven by both the strength of our core funding and our strong lending growth.
Speaker Change: Loans grew by $140 million, or 1.4%, which is inclusive of $25 million seasonal decline in municipal loans.
Dimitar A. Karaivanov: Deposits decreased by $214 million, which included $278 million seasonal decline in municipal deposits and 63 million increased consumer and business deposits. Credit remains the foundational strength of our banking business, with five basis points of charge-offs for the quarter.
Speaker Change: Deposits decreased by $214 million, which included $278 million seasonal decline in municipal deposits and $63 million increase in consumer and business deposits.
Speaker Change: Credit remains a foundational strength of our banking business, with five basis points of charge-offs for the quarter.
Dimitar A. Karaivanov: In our Employee Benefit Services business, we achieved a new quarterly record of $32.1 million in revenue, up 12% over last year. We continue to add participants and assets to the platform and are also benefiting from strong asset values in both our record keeping and fund administration parts of BFAP. Our insurance services business also achieved a new quarterly record of $13.3 million in revenue, up 12% over last year. As expected, we are now in positive territory for the year with growth of 4.4%.
Speaker Change: In our Employee Benefit Services business, we achieved a new quarterly record of $32.1 million in revenue, up 12% over last year.
Speaker Change: We continue to add participants and assets to the platform and are also benefiting from strong asset values in both our record-keeping and fund administration parts of BFAS.
Speaker Change: Our insurance services business also achieved a new quarterly record of 13.3 million in revenue, up 12% over last year. As expected, we are now in positive territory for the year, with growth of 4.4%.
Dimitar A. Karaivanov: We continue to remain focused on both organic and inorganic growth and, during the quarter, executed on two roll-up acquisitions. Our Wealth Management Services business remains strong, with revenues of $8.7 million, up 10.6% over the comparable period last year. Adstander Management and Administration reached a new high, and client activity remains robust. During the quarter, we also had a couple of small tactical opportunities to create liquidity in our securities portfolio and also repurchased another 250,000 shares at what we believe were very attractive prices. This year so far, we have repurchased a million shares at well below intrinsic value.
Speaker Change: We continue to remain focused on both organic and inorganic growth, and during the quarter executed on two roll-up acquisitions.
Speaker Change: Our Wealth Management Services business remains strong with revenues of $8.7 million, up 10.6% over the comparable period last year. As standard management and administration reach the new high, client activity remains robust.
Speaker Change: During the quarter, we also had a couple of small tactical opportunities to create liquidity in our securities portfolio and also repurchased another 250,000 shares at what we believe were very attractive prices.
Speaker Change: This year so far we have repurchased a million shares at well below intrinsic value. We continue to be on the lookout for similar tactical openings.
Dimitar A. Karaivanov: We continue to be on the lookout for similar tactical openings. As we look ahead, we remain optimistic about the opportunities we have across our markets and businesses. Of note, the New York Smart Eye Corridor Tech Hub, which spans Buffalo, Rochester, and Syracuse, was recently selected as one of only 12 National Tech Hub winners. As a frame of reference, our Buffalo and Rochester regions have combined footings of $4 billion in deposits and $3 billion in loans, and our Syracuse region has $3 billion in deposits and $2 billion in loans.
Speaker Change: As we look ahead, we remain optimistic about the opportunities we have across our markets and businesses.
Speaker Change: Of note, the New York Smart Eye Corridor Tech Hub, which spans Buffalo, Rochester, and Syracuse, was recently selected as one of only 12 National Tech Hub winners.
Speaker Change: As a frame of reference, our Buffalo and Rochester regions have combined footings of $4 billion in deposits and $3 billion in loans, and our Syracuse region has $3 billion in deposits and $2 billion in loans.
Dimitar A. Karaivanov: Our wealth, insurance, and benefits businesses also have deep presence in those markets, positions us very well for the economic activity we're seeing today and expecting in the future. In addition, recent headlines and developments with some of our national and regional banking competitors continue to create opportunities for market share gain. Lastly, as mentioned on our first quarter call, Many activity and dialogue is picking up, and I expect that we will have opportunities to deploy capital at a favorable risk and reward balance. With that, I will pass it on to Joe for more details on our financial performance. Thank you, Dimitar.
Speaker Change: Our wealth, insurance, and benefits businesses also have deep presence in those markets, which positions us very well for the economic activity we're seeing today and expecting in the future.
Speaker Change: In addition, recent headlines and developments with some of our national and regional banking competitors continue to create opportunities for market share gains.
Speaker Change: Lastly, as mentioned on our first quarter call, M&A activity and dialogue is picking up and I expect that we will have opportunities to deploy capital at a favorable risk and reward balance. With that, I will pass it on to Joe for more details on our financial performance.
Joe: Thank you, Dimitar. Good morning, everyone. The second quarter was a very solid one for the company. Gap earnings per share of $0.91 were up $0.15 or 19.7% over the linked first quarter results, driven by increases in net interest income, strong credit performance, and record quarterly revenues in both our employee benefit services and insurance services businesses. These results were also $0.02 higher than the prior year's second quarter result of $0.89 per share. Operating diluted earnings per share, which excludes certain non-operating revenues and expenses, as detailed in this morning's press release, were $0.95 in the second quarter, as compared to $0.82 in the linked first quarter and $0.96 in the second quarter of the prior year.
Joe: Thank you, Dimitar. Good morning, everyone.
Joe: The second quarter was a very solid one for the company. Gap earnings per share of 91 cents were up 15 cents or 19.7% over linked first quarter results driven by increases in net interest income, strong credit performance, and record quarterly revenues in both our employee benefit services and insurance services businesses.
Joe: These results were also $0.02 higher than the prior year's second quarter result of $0.89 per share.
Joe: Operating diluted earnings per share, which excludes certain non-operating revenues and expenses, as detailed in this morning's press release, were $0.95 in the second quarter, as compared to $0.82 in the length first quarter and $0.96 in the second quarter of the prior year.
Joe: The $0.13 or 15.9% increase over the link first quarter was driven by increases in non-interest income and operating non-interest revenues, a lower provision for credit losses, and a decrease in fully diluted shares outstanding, offset in part by increases in operating non-interest expenses and income tax. The one cent decrease from the prior second quarter is driven by increases in the provision for credit losses, operating non-interest expenses, and income taxes, offset in part by higher operating revenues and a decrease in fully diluted shares outstanding. Operating pre-tax, pre-provision net revenue per share, as delineated in the press release, was $1.29 for the second quarter.
Joe: The $0.13 or 15.9% increase over the late first quarter was driven by increases in non-interest income and operating non-interest revenues, a lower provision for credit losses, and a decrease in fully diluted shares outstanding offset in part by increases in operating non-interest expenses and income taxes.
Joe: The one cent decrease from the prior second quarter is driven by increases in the provision for credit losses, operating non-interest expenses, and income taxes offset in part by higher operating revenues and a decrease in fully diluted shares outstanding.
Speaker Change: Operating pre-tax, pre-provision net revenue per share as delineated in the press release was $1.29 for the second quarter. This was up 11 cents or 9.3 percent per share, excuse me, 11 cents per share or 9.3 percent over the length of the first quarter.
Joe: This was up 11 cents or 9.3 percent per share, excuse me, 11 cents per share or 9.3 percent over the length of the first quarter and $0.05 per share or 4% over the prior second quarter. During the second quarter, the company recorded total operating revenues of $183.2 million. This was up $7.9 million, or 4.5% from one year prior, and up $5.9 million, or 3.3% from the length of the first quarter. This also established a new quarterly record for the company and marked the fourth consecutive quarter of increases in total operating revenues.
Speaker Change: and $0.05 per share or 4% over the prior second quarter.
Speaker Change: During the second quarter, the company recorded total operating revenues of $183.2 million. This was up $7.9 million, or 4.5 percent from one year prior, and up $5.9 million.
Speaker Change: or 3.3 percent from the linked first quarter. This also established a new quarterly record for the company and marked the fourth consecutive quarter of increases in total operating revenues.
Joe: The company recorded net interest income of $109.4 million in the second quarter as compared to $107 million in the length of the first quarter. An improvement in the yield on interest earning assets supported by loan growth and subsiding pressure on funding costs helped drive improvement in both net interest income and net interest margin in the quarter.
Speaker Change: The company recorded a net interest income of $109.4 million in the second quarter as compared to $107 million in the length first quarter.
Speaker Change: and Improvement in the Yield on Interest-Earning Assets Supported by Loan Growth and Subsiding Pressure on Funding Costs.
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. This comparison increases the cost of the positive 16 basis points in the first quarter of 2024 and 22 basis points in the fourth quarter of 2023. The company's total cost of funds was 1.37% in the second quarter, up six basis points in the quarter, while the yield on interest-earning assets increased 11 basis points to 4.35% in the second quarter.
Speaker Change: help drive improvement in both net interest income and net interest margin in the quarter.
Speaker Change: 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, but at a declining pace, increasing the cost of deposits nine basis points in the quarter to 1.23 percent.
Speaker Change: This compares to increases in the cost of the positive 16 basis points in the first quarter of 2024 and 22 basis points in the fourth quarter of 2023.
Speaker Change: The company's total cost of funds was 1.37% in the second quarter, up 6 basis points in the quarter, while the yield on interest earning assets increased 11 basis points to 4.35% in the second quarter.
Joe: The company's fully taxed equivalent net interest margin increased from 2.98% in the linked first quarter to 3.04% in the second quarter. On a comparable basis, the company recorded net interest income of $109.3 million in the second quarter of 2023. Operating non-interest revenues were up in all four businesses compared to the prior year's second quarter and represented 40.1% of total operating revenues in the quarter. Banking-related operating non-interest revenues were up $1.9 million or 10.6% over the same quarter of the prior year, driven largely by an increase in mortgage banking revenues.
Speaker Change: The company's fully tax-equivalent net interest margin increased from 2.98% in the first quarter to 3.04% in the second quarter.
Speaker Change: Comparatively, the company recorded net interest income of $109.3 million in the second quarter of 2023. The outlook remains positive for net interest income expansion on a full-year basis.
Speaker Change: Operating non-interest revenues were up in all four businesses compared to the prior year's second quarter and represented 40.1% of total operating revenues in the quarter. Banking related operating non-interest revenues were up 1.9 million dollars or 10.6% over the same quarter of the prior year, driven largely by an increase in mortgage banking revenues.
Joe: Employee benefit services revenues were up $3.5 million, or 12.4% over the prior second quarter, reflective of an increase in total participants under administration and growth in asset-based fees. Insurance revenues were up $1.4 million, or 12.2%, reflective of both acquired and organic growth.
Speaker Change: Employee Benefit Services revenues were up $3.5 million or 12.4% over the prior second quarter, reflective of an increase in total participants under administration and growth in asset-based fees.
Speaker Change: Insurance revenues were up $1.4 million or 12.2% reflective of both acquired and organic growth. And wealth management services were up $0.8 million or 10.6% reflective of more favorable market conditions over the same period.
Joe: And wealth management services were up $0.8 million or 10.6%, reflective of more favorable market conditions over the same period. On a link order basis, banking-related non-interest revenues were up $1.4 million, or 7.6%, while employee benefit services and insurance service revenues increased $0.4 million, or 1.3%, and $2.2 million, or 19.8%, respectively. However, Wealth Management Services revenues were down approximately 500,000 or 5.6% due to seasonal factors.
Speaker Change: On a link quarter basis, banking-related non-interest revenues are up $1.4 million, or 7.6%, while employee benefit services and insurance service revenues increased $0.4 million, or 1.3%, and $2.2 million, or 19.8%, respectively.
Speaker Change: Wealth Management Services revenues were down approximately 500,000 or 5.6% due to seasonal factors.
Joe: During the second quarter, the company reported $119 million in non-interest expenses. This represents a $6 million, or 5.3% increase from the prior year's second quarter, and $0.9 million, or 0.8% increase from the long first quarter results. Total operating non-interest expenses, which exclude certain non-operating expenses, as detailed in the press release this morning, were $115 million in the quarter, as compared to $108.3 million in the prior year's second quarter and $114.4 million in the long first quarter.
Speaker Change: During the second quarter, the company recorded $119 million in non-insurance expenses.
Speaker Change: This represents a $6 million or 5.3% increase from the prior second quarter and a $0.9 million or 0.8% increase from the length first quarter results. Total operating non-interest expenses, which exclude certain non-operating expenses, as detailed in the press release this morning.
Speaker Change: were $115 million in the quarter as compared to $108.3 million in the prior year's second quarter and $114.4 million in the length first quarter.
Joe: On a year-to-date basis, total operating non-interest expenses are up $10.7 million, or 4.9%, consistent with the mid-single-digit growth rate noted in the prior two earnings calls. Reflective of an increase in Loan Outstanding and Stable Economic Forecast, the company recorded $2.7 million. In the provision for credit losses during the second quarter of 2024, this compares to $0.8 million in the prior second quarter and $6.1 million in the length first quarter. The company recorded net charge-offs of $1.3 million for five basis points of average loans annualized during the second quarter, and overall credit performance remained strong.
Speaker Change: On a year-to-date basis, total operating non-interest expenses are up $10.7 million, or 4.9%, consistent with the mid-single-digit growth rate noted in the prior two earnings calls.
Speaker Change: Reflective of an increase in loans outstanding and stable economic forecast, the company recorded $2.7 million.
Speaker Change: and the provision for credit losses during the second quarter of 2024. This compares to $0.8 million in the prior second quarter and $6.1 million in the length first quarter.
Speaker Change: The company recorded net charge-offs of $1.3 million for five basis points of average loans annualized during the second quarter, and overall credit performance remained strong.
Joe: The effective tax rate for the second quarter of 2024 was 22.8%, up from 21.4% in the second quarter of 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 second quarter of 2024 was 22.3%, up from 21.4% in the second quarter of 2023.
Speaker Change: The effective tax rate for the second quarter of 2024 was 22.8%, up from 21.4% in the second quarter of 2023.
Speaker Change: 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 second quarter of 2024 was 22.3%, up from 21.4% in the second quarter of 2023.
Joe: Ending loans increased by $140.4 million, or 1.4%, during the second quarter. This marks the 12th consecutive quarter of loan growth and is reflective of the company's continued investment in its organic loan growth capabilities. This included growth in both the company's business lending and consumer lending portfolios. On a year-to-date basis, ending loans are up $319.3 million, or 3.3%. The company's ending total deposits decreased $214.1 million, or 1.6 percent, during the second quarter of 2024, driven by seasonal outflows of municipal deposits.
Speaker Change: Ending loans increased $140.4 million or 1.4% during the second quarter. This marks the 12th consecutive quarter of loan growth and is reflective of the company's continued investment in its organic loan growth capabilities.
Speaker Change: This included growth in both the company's business lending and consumer lending portfolios. On a year-to-date basis, ending loans are up $319.3 million, or 3.3%.
Speaker Change: The company's ending total deposits decreased $214.1 million or 1.6% during the second quarter of 2024, driven by seasonal outflows of municipal deposits. Conversely, ending deposits increased $266.1 million or 2.1% from one year prior.
Joe: Conversely, ending deposits increased $266.1 million, or 2.1 percent, from one year prior. Although funding costs increased in the second quarter, as previously noted, non-interest bearing and lower rate checking and savings accounts continue to represent almost two-thirds of total deposits, and the company's cycle-to-date deposit rate of 22% continues to be one of the best in the banking industry and reflects the stability 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 $4.44 billion at the end of the second quarter.
Speaker Change: Although funding costs increased in the second quarter as previously noted, non-interest bearing and lower rate checking and savings account continue to represent almost two-thirds of total deposits, and the company's cycle-to-date deposit beta of 22% continues to be one of the best in the banking industry and reflects the stability the company's core deposit face.
Speaker Change: The company's liquidity position remains strong, readily available source of liquidity including cash and cash equivalents, funding availability at the Federal Reserve Bank's discount window.
Speaker Change: unused barring capacity at the Federal Home Loan Bank of New York and unpledged investment securities totaled $4.44 billion at the end of the second quarter. These sources of immediately available liquidity represent over 200% of the company's estimated uninsured deposits, net of collateralized and intercompany deposits.
Joe: These sources of immediately available 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 second quarter was 76.3%, providing future opportunity to migrate lower-yielding investment securities into higher-yielding loans. At the end of the second quarter, all the companies and the bank's regulatory capital ratio significantly exceeded well
Speaker Change: The company's loan-to-deposit ratio at the end of the second quarter was 76.3%, providing future opportunity to migrate lower-yielding investment securities into higher-yielding loans.
Speaker Change: At the end of the second quarter, all the companies and the bank's regulatory capital ratio significantly exceeded well-capitalized standards. More specifically, the company's Tier 1 leverage ratio was 9.07%, substantially exceeded the regulatory well-capitalized standard of 5%.
Joe: More specifically, the company's Tier 1 leverage ratio was 9.07%, substantially exceeding the regulatory well-capitalized standard of 5%. As Dimitar mentioned, during the second quarter, the company repurchased 250,000 shares of its common stock at an average price of approximately $45 per share. The company recorded a net charge loss of $1.3 million for five basis points of average loans annualized during the second quarter.
Speaker Change: As Dimitar mentioned, during the second quarter, the company repurchased 250,000 shares of its common stock at an average price of approximately $45 per share.
Dimitar: The company recorded net charge loss of $1.3 million for five basis points of average loans annualized during the second quarter. This is up slightly from three basis points in the same quarter of the prior year, but down from 12 basis points.
Joe: This is up slightly from three basis points in the same quarter of the prior year but down from 12 basis points in the length first quarter. The company's allowance for credit losses was $71.4 million of 71 basis points of total loans outstanding at the end of the second quarter, up from $63.3 million of 69 basis points one year prior. Comparatively, the allowance for credit losses to total loans outstanding was also 71 basis points at the end of the first quarter. The allowance for credit losses at the end of the second quarter represented over nine times the company's trailing 12-month net charge off.
Dimitar: and the length first quarter.
Dimitar: The company's allowance for credit losses was $71.4 million of 71 basis points of total loans outstanding at the end of the second quarter, up from $63.3 million for 69 basis points one year prior.
Dimitar: Comparatively, the allowance for credit losses to total loans outstanding is also 71 basis points at the end of the linked first quarter. The allowance for credit losses at the end of the second quarter represent over nine times the company's trailing 12-month net charge-offs.
Joe: On June 30, 2024, non-performing loans totaled $50.5 million, or 50 basis points of total loans outstanding. This represents a slight increase from $49.5 million at the end of the linked first quarter. Non-performing loans were $33.3 million, or 36 basis points one year prior.
Dimitar: June 30th, 2024.
Dimitar: Non-performing loans totaled $50.5 million or 50 basis points of total loans outstanding. This represents a slight increase from $49.5 million at the end of the linked first quarter. Non-performing loans were $33.3 million or 36 basis points one year prior.
Joe: Loans 30 to 89 days of the link were also up on a linked quarter basis from $42.1 million, or 43 basis points of total loans at the end of the first quarter to $45.1 million, or 45 basis points of total loans at the end of the second quarter. Overall, the company's asset quality remains stable and strong during the quarter. On July 17th, the company announced a 1 cent or 2.2 percent increase in the quarterly dividend to 46 cents per share.
Dimitar: Loans 30 to 89 days delinquent were also up on a linked quarter basis from 42.1 million dollars or 43 basis points of total loans at the end of the first quarter to 45.1 million dollars or 45 basis points of total loans at the end of the second quarter.
Dimitar: Overall, the company's asset quality remains stable and strong in the quarter.
Dimitar: On July 17th, the company announced a 1 cent or 2.2 percent increase in the quarterly dividend to 46 cents per share. This marked the 32nd consecutive year of dividend increases for the company, which serves as a testament to the performance of the company's long-standing and durable business model.
Joe: This marked the 32nd consecutive year of dividend increases for the company, which serves as a testament to the performance of the company's longstanding and durable business model. We believe the company's diversified revenue profile, strong liquidity, regulatory capital reserves, stable core deposit base, and historically strong asset quality provide a solid foundation for future opportunities and growth. Looking forward, we are encouraged by the revenue outlook for all four of our businesses and prospects for continued organic growth.
Speaker Change: We believe the company's diversified revenue profile, strong liquidity, regulatory capital reserves, stable core deposit base, and historically strong asset quality provide a solid foundation for future opportunities and growth. Looking forward, we are encouraged by the revenue outlook in all four of our businesses.
Joe: We will continue to play offense, lean into growth, and deploy capital in the best manner possible for our shareholders. Lastly, on Friday, September 6, from 9 a.m. to 12 noon, we will be hosting an Investor Day at the New York Stock Exchange. This event will provide an opportunity for investors to engage directly with the company's management, gain insights into strategic initiatives, and explore the company's future growth prospects. Links to register for CBU Investor Day were included in this morning's earnings press release.
Speaker Change: and Prospects for Continued Organic Growth. We will continue to play offense, lean into growth, and deploy capital in the best manner possible for our shareholders.
Speaker Change: Lastly, on Friday, September 6th, from 9 a.m. to 12 noon, we will be hosting an Investor Day at the New York Stock Exchange. This event will provide an opportunity for investors to engage directly with the company's management, gain insights into strategic initiatives, and explore the company's future growth prospects.
Speaker Change: Links to register for the CBU Investor Day were included within this morning's earnings press release. That concludes my prepared comments. Thank you. Now I'll turn it back to Ashia to open the line for questions.
Ashia: That concludes my prepared comments. Thank you. Now I'll turn it back to Ashia to open the line for questions.
Operator: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble a rooster. The first question comes from Matthew Breese with Stevens Inc. Please go ahead
Ashiya: Thank you.
Ashiya: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our rooster.
Ashiya: The first question comes from Matthew Breese with Stevens Inc. Please go ahead.
Matthew M. Breese: I was hoping to, you know, touch on the
Ashiya: Hey, good morning. Good morning, Matt. Morning, Matt.
Matthew M. Breese: You know, touch on the topic of NIM first and maybe to get there, I was hoping you could provide, you know, what is the balance sheet exposure to pure floating rate loans today and, you know, adjustable and fixed rate loans on the opposite side, and I'd love to delve into a little bit of the difference in what those portfolios are yielding today.
Speaker Change: I was hoping to, you know, touch on the topic of the NIM first and maybe to get there.
Matthew M. Breese: I was hoping you could provide, you know, what is the balance sheet exposure to pure floating-rate loans today and, you know, adjustable and fixed-rate loans on the opposite side, and I'd love to delve into a little bit of the difference in what those portfolios are yielding today.
Joe: It's a good question, Matt. We actually look at that internally, periodically as well, just to kind of understand the dynamics of, you know, the potentially changing yield curve and, you know, maybe changes to the short end of the curve. In summary, we have just under a billion dollars of floating rate loans, which are, you know, generally tied to an index like prime or SOFR or something that's short term. We have, in the next 12 months, we have adjustable rate loans.
Matthew M. Breese: It's a good question, Matt. We actually look at that internally, periodically as well, just to kind of understand the dynamics of the potentially changing yield curve and maybe changes to the short end of the curve. In summary, we have just under a billion dollars of...
Speaker Change: Floating Rate Loans, which are generally tied to an index like Prime or SOFR or something that's short-term.
Joe: So these are the loans that, for example, you know, might have a 7-year term and reprice at year 3 or year 5, those types of loans. We have about $250 million of those adjustable rate loans. And then we also have expectations for maturing cash flows on the fixed rate portfolios of about $1.5 billion. So all in between floating rate loans, adjustable rate loans, and fixed rate loans, including anticipated prepayments, we think we've got about $2.8 billion of loans maturing, and they're coming off at a rate around six, if you will, on a blended basis. You know, obviously, the floating rate loans are a little bit higher, around eight, but ultimately, that's kind of what we're looking at from an adjustable Ray Portfolio and floating rates.
Speaker Change: We have, in the next 12 months, we have adjustable rate loans, so these are the loans that, for example, you know, might have a seven-year term and reprice a year.
Speaker Change: 3 or Year 5, those types of loans. We have about $250 million of those adjustable rate loans.
Speaker Change: And then we also have expectations for maturing cash flows on the fixed rate portfolios of about $1.5 billion.
Speaker Change: So, all in between floating rate loans, adjustable rate loans, and fixed rate loans, including anticipated prepayments, we think we've got about $2.8 billion of debt.
Speaker Change: of loans maturing. And they're coming off at a rate around six, if you will, on a blended basis. You know, obviously, the floating rate loans are a little bit higher, around eight. But ultimately, that's kind of what we're looking at from an adjustable and
Speaker Change: Rate Portfolio and Floating Rates.
Matthew M. Breese: and then so that implies kind of the pure fixed-rate stuff probably yielding kind of fives or low fives and being put on maybe 175 to 250 bips higher. Is that a fair assumption that the roll-on for the fixed rate is quite a bit higher?
Speaker Change: and then so is that implies kind of the pure fixed-rate stuff
Speaker Change: It's probably yielding kind of fives or low fives and being put on maybe 175 to 250 bps higher. Is that a fair assumption, that the roll-on for the fixed rate is quite a bit higher?
Joe: Yeah, I think you nailed it, Matt. It's about, you know, on a blended basis on the fixed-rate stuff, about five. And last quarter, new loans were going on, you know, kind of in the mid to low sevens. So, yeah, there's a fair amount of repricing opportunity just on replacement of maturing cash flows on the fixed rate.
Speaker Change: Yeah, I think you nailed it, Matt. It's about, you know, on a blended basis on the fixed-rate stuff, about five. And last quarter, new loans were going on, you know, it kind of in the mid to low sevens.
Speaker Change: So, yeah, there's a fair amount of repricing opportunity just on, you know, replacement of maturing cash flows on the fixed rate portfolio.
Matthew M. Breese: Right, and so here's where I'm going. Right?
Matthew M. Breese: I know you all don't typically provide NIM guidance, but historically, CBU is an organization that's run with a name that's in the 350s, upwards of 4%. As this all kind of normalizes and resets, is there a pathway back to that kind of MIM? Assuming no major changes in the yield curve, obviously, we might get a couple of cuts, but you get my point. Is there a natural upside to the NIM long duration over time as the fixed rate book reprices?
Speaker Change: Right, and so here's where I'm going with this.
Speaker Change: I know you all don't typically provide NIM guidance, but...
Speaker Change: Historically, CBU is an organization that's run with a NIM that's in the 350s, upwards of 4%.
Speaker Change: As this all kind of normalizes and resets, is there a pathway back to that kind of MIM?
Speaker Change: Assuming no, you know, major changes in the yield curve, obviously we're making a couple of cuts, but you get my point, is there a natural upside to the NIM long duration over time as the fixed rate book reprices?
Joe: Matt, so the way I would think about it is, in the next... call it 24 months. There's a lot of upside from the loans on the balance sheet that are churning, right? So as we've approached the point to which deposits and the cost of funding are stabilizing. You know, right now, we're just gathering more steam on the asset side than the downside on the liability side. So you're going to start seeing that initially in the next 24 months or so.
Speaker Change: Matt, so the way I would think about it is, in the next...
Speaker Change: [inaudible]
Speaker Change: Thank you for your time.
Joe: Then we've got, then our securities maturity starts kicking in, and then you're going to have some very big pickups as well, in addition to the long side. So could we... Could we go back to those ranges, I think, over that time frame, which is probably more like three years, which might be longer than some people on the call care about? Yes, I think it's possible that we could start getting into that range again.
Matt: And then you're going to have some very big pickups as well, in addition to the long side.
Speaker Change: Could we go back to those ranges, I think, over that time frame, which is probably more like three years, which might be longer than some people on the call care about? Yes. I think it's possible that we start getting into that range again.
Matthew M. Breese: Great, I appreciate that. I also just wanted to touch on the expense outlook and kind of expectations for the rest of the year and whether or not, I know you guys have been very tight on expenses given the shape of the yield curve and everything, whether there are any major changes from what we saw this quarter through the balance of the year.
Speaker Change: Great, I appreciate that.
Speaker Change: I also just wanted to touch on the expense outlook and kind of expectations for the rest of the year and whether or not, I know you guys have been very tight on expenses given the shape of the yield curve and everything, whether there's any major changes from what we saw this quarter through the balance of the year.
Joe: The expectations are not really changing from the standpoint of where operating expenses are going to kind of wash out at the end of the year. I think on the last earnings call, the quarter prior, so I guess it was the first and fourth quarter of last year's earnings call, we kind of.. provided some ranges of our, you know, I'll call it our normal historical run rate of somewhere between 3 and, say, 6 percent on operating expenses, and I still think that that's, you know, the full year expectations.
Matt: Matt, the expectations are not really changing from the standpoint of where operating expenses are gonna kind of wash out at the end of the year. I think on the last earnings call, the quarter prior, so I guess it was the first and fourth quarter of last year earnings call, we kind of...
Speaker Change: provided some ranges of kind of our, you know, I'll call it our normal historical run rate of somewhere between three and say six percent on operating expenses and I still think that that's
Matthew M. Breese: Admittedly, in 2023, we had some unexpected activity on OPEX. We also leaned into growth to position ourselves, you know, for 24 and beyond. But I think that year was more uncharacteristic of us in terms of the overall OPEX growth. So, kind of, mid-single digits is still where our mindset is with respect to operating expenses, that can come into the mix later on.
Speaker Change: You know, the full year expectations. Admittedly, in 2023, we had some unexpected activity on OPEX. We also leaned into growth to position ourselves, you know, for 2024 and beyond.
Joe: Okay. And then just last one for me.
Speaker Change: But I think that year was more...
Speaker Change: uncharacteristic of us in terms of the overall OpEx growth, so.
Speaker Change: [inaudible]
Matthew M. Breese: I was hoping you could touch on loan pipelines and expected growth for the balance of the year. Growth this quarter was pretty widespread, and you've done a better job as of late versus your history. So just an update there.
Speaker Change: Understood. Okay and then just just last one for me I was hoping you could touch on you know loan pipelines and expected growth for the balance of the year growth this quarter was pretty widespread and you've done a better better job as of late versus historical so just an update there
Joe: Yeah, I think Matt, as we think about the banking business, the pipelines today are just as strong as they were at the end of last quarter.
Speaker Change: Yeah, I think, Matt, so as we think about the banking business, the pipelines today are just as strong as they were at the end of last quarter. It is broad spread across regions and products. So I...
Joe: It is broadly spread across regions and products. I think we're going to continue the momentum we have on the bank side, and each one of our other businesses also has pretty strong tailwinds, so I think the performance for the second half of the year shouldn't be that much different than what we're experiencing today.
Speaker Change: I think we're going to continue the momentum we have on the bank side and each one of our other businesses also have pretty strong tailwinds, so I think the performance for the second half of the year shouldn't be that much different than what we're experiencing today.
Matthew M. Breese: Perfect. That's all I had. Thank you for taking my questions. I appreciate it.
Speaker Change: Perfect. That's all I had. Thank you for taking my questions. Appreciate it.
Operator: The next question comes from Manuel Navas, with D.A. Davidson. Please go ahead.
Speaker Change: The next question comes from Manuel Navas with D.A. Davidson. Please go ahead.
Sharon G.: Hi, good morning. This is Sharon G. on behalf of Manuel Navas. Thank you for taking my question. For my first question, could you talk a little bit about an update on the fee income outlook and about the pipelines or trends in fee lines like mortgage banking, insurance, and employee benefit services?
Speaker Change: Hi, good morning. This is Sharon G., on for Manuel Navas. Thank you for taking my question.
Sharon G.: For my first question, could you talk a little bit about an update on the fee income outlook and about the pipelines or trends in fee lines like mortgage banking, insurance, and employee benefit services?
Joe: Sure morning. So as you think about our four businesses, we have two of them that are very much market-based and market values driven as well. So that's the employee benefit services business and our wealth management services business. So in both of those, as markets remain, hopefully strong, our performance should remain consistent and, frankly, improve.
Speaker Change: Sure, morning. So as you think about our four businesses, we have two of them that are very much market-based and market values driven as well. So that's the employee benefit services business and our wealth management services business.
Speaker Change: So in both of those, as markets remain hopefully strong, our performance should remain consistent.
Joe: There's potentially upside from the fixed income market potentially returning to a better outcome than it has been. So the current values and performance you're seeing are really driven by the equity market predominantly. So even if the equity market kind of softens up a little bit, you know, the fixed income market should hopefully offset some of that. So we remain pretty bullish on those businesses. Our insurance business had another double-digit, year-over-year growth this quarter.
Speaker Change: and, frankly, improving.
Speaker Change: There's potentially upside from
Speaker Change: The fixed income market potentially returning to...
Speaker Change: better outcome than it has been.
Speaker Change: So the current values and performance you're seeing are really driven by the equity market predominantly.
Speaker Change: Thank you for your time.
Speaker Change: We remain pretty bullish on those businesses. Our insurance business had another double digits.
Joe: We're making up the ground, as we kind of alluded to that in the first quarter call as well. So I expect that Q3 and Q4 will also remain strong year-over-year in that business, and on a full-year basis, we'll be closer to those kind of high single digits and maybe low double-digit growth on the insurance side. As it relates to banking fees, we did have a strong quarter in mortgage banking, which I think would be a little bit harder to replicate for the next couple of quarters. With that said, there are more opportunities that we're seeing in the secondary market, but this quarter we had a couple of things, frankly, that went our way that may not be repeated.
Speaker Change: year-over-year growth this quarter, you know, we're making up the ground as we
Speaker Change: kind of alluded to that in the first quarter call as well.
Speaker Change: So, I expect that Q3 and Q4 will also remain strong year-over-year in that business. And on a full-year basis, we'll be closer to those kind of high single digits and maybe low double-digit growth on the insurance side. As it relates to the banking fees...
Speaker Change: We didn't have a strong quarter in mortgage banking, which I think would be a little bit harder to replicate for the next couple of quarters. With that said, there are more opportunities that we're seeing in the secondary market, but this quarter we had a couple of things, frankly, that went our way that may not be repeatable.
Sharon G.: Thank you. And for my next question, could you talk a little bit about, like, deposit costs, where they could peak, if they're stabilizing right now, and any updated thoughts on the impact on them if rates were cut in September?
Speaker Change: Thank you. And for my next question, can you talk a little bit about, like, we talked about deposit costs, where they could peak, if they're stabilizing right now, and any updated thoughts on the impact to them if rates were cut in September ?
Joe: Yes. So I think, you know, right now our cost of deposits, our beta is 22% on a cycle-to-date basis. You know, our kind of internal expectations have been, and we've actually talked about it on the earnings calls, maybe, you know, somewhere between 20 and 25%. I don't think that that will change. You know, I still think that's a fair estimate in terms of the migration from lower-cost deposits to higher-cost deposits on deposits, but certainly at a much slower pace than we certainly experienced through 2023 and through the first quarter of 2021. 24.
Speaker Change: Yes, um...
Speaker Change: So I think, you know, right now our cost of deposits, our beta is 22% on a cycle-to-date basis. You know, our kind of internal expectations have been, and we've actually talked about it on the earnings calls, maybe, you know, somewhere between 20 and 25%. I don't think that that...
Speaker Change: You know, I still think that's a fair estimate in terms of the, you know, migration from lower cost deposits to higher cost deposits that has slowed a bit. But it's not over. So, you know, I think it's fair to expect a little bit of a continuation of higher costs.
Joe: You know, with respect to a Fed cut, yes, that would be, and I think on the previous question Matt asked about floating rate loans, that would have a negative impact on the yield on floating rate loans. On the other hand, we have close to $10 billion in interest-bearing deposits, and effectively, you can make up some of that difference on the floating rate loans, you know, loss of interest income on floating rate loans with a decrease in some interest-bearing deposit costs pretty quickly.
Speaker Change: You know, with respect to a Fed cut, yes, that would be, and I think on the previous question Matt had asked about floating rate loans, that would have a negative impact on the yield on floating rate loans.
Speaker Change: On the other hand, we have close to $10 billion in interest-bearing deposits.
Speaker Change: Effectively, you can make up some of that difference on the floating rate loans, loss of interest income on floating rate loans.
Joe: So, you know, hopefully those two can kind of match themselves if we get a short-term rate increase or a decrease in the short-term rate. The other thing I would just kind of, you know, I guess caution or advise on is that, you know, the path to higher NIM and the path to higher net interest income is not necessarily linear quarter over quarter. Typically, in the third quarter, as we've already experienced right at the end of the second, we have a little lower deposit base because of some seasonal aspects of municipal deposits.
Speaker Change: with a decrease in some interest-bearing deposit costs pretty quickly. So, you know, hopefully those two can kind of match themselves off if we get a short-term or a decrease in the short-term rates.
Speaker Change: The other thing I would just kind of, I guess, caution or advise on is that the path to higher NIM and the path to higher net interest income is not necessarily linear quarter over quarter.
Speaker Change: Typically, in the third quarter, as we've already experienced right at the end of the second, we have a little lower deposit base because of some seasonal aspects on municipal deposits. And as those deposits
Joe: And as those deposits have run out, they've had to be replaced with overnight borrowings at, you know, five and a half percent. So that in itself does create more pressure on overall funding costs. But, you know, our longer-term expectations are for, you know, improvements in NII and NIM, given what we know today about the current rate environment. But I just would caution that it's not necessarily a linear movement quarter over quarter. You know, it could be a third quarter that is somewhat sideways in terms of the outcome and then hopefully, kind of a resumption of growth in net interest income and margin in Q4 and into 2020.
Speaker Change: have run out. They've had to be replaced with overnight borrowings at, you know, five and a half percent. So that in itself does create, you know, more pressure on overall funding costs.
Speaker Change: But, you know, our longer-term expectations are for, you know, for improvements in NII and NIM, you know, given what we know today about the current rate environment, but I just would caution that it's not necessarily a linear...
Speaker Change: movement quarter over quarter, you know, it could be a third quarter could be somewhat sideways in terms of the outcome and then hopefully kind of a resumption of growth in net interest income and margin in Q4 and into 2025.
Sharon G.: Thank you. That's all for me.
Speaker Change: Thank you. That's all for me.
Operator: Once again, if you have a question, please press star then 1. The next question comes from Chris O'Connell with KBW. Please go ahead.
Speaker Change: Once again, if you have a question, please press star, then 1.
Speaker Change: The next question comes from Chris O'Connell with KBW. Please go ahead.
Chris O'connell: Good morning, Chris. Good morning, Chris.
Chris O'connell: Hey, good morning.
Chris: Morning, Chris. Morning, Chris.
Chris O'connell: I think in the press releases noted that there was an insurance acquisition completed at the beginning of April. I'm not going to call it as being covered on last quarter's call, but I was just hoping you could walk through what the impact was to revenues this quarter and just the annual impact to revenue and expenses from that transaction.
Speaker Change: I think in the press releases noted that there is an insurance acquisition completed at the beginning of April .
Chris O'connell: I don't recall it being covered on last quarter's call, but I was just hoping you could walk through, you know, what the impact was to revenues this quarter and just the annual impact to revenues expenses from that transaction.
Joe: Yeah, Chris, that was a small tuck-in acquisition. You know, in the grand scheme of things, it's pretty small, you know, in the quarter, maybe a hundred, couple hundred thousand dollars in revenues, expectations even on a full year basis for that particular acquisition, maybe half a million. So that was a pretty nominal, you know, add, but that's actually, you know, kind of the way we operate that business. It's very fragmented, and there are a lot of small, smaller agencies and roll-up opportunities for us kind of in the, you know, independent agent space. And so, you know, each one that we add, whether it be half a million or a million dollars in revenue, is pretty additive to the overall revenue picture for that business.
Speaker Change: Yeah, Chris, that was a small tuck-in acquisition. You know, in the grand scheme of things, it's pretty small, you know, in the quarter.
Speaker Change: You know, maybe a hundred, couple hundred thousand dollars of revenues, expectations even on a full year basis for that particular acquisition, maybe half a million.
Speaker Change: So that was a pretty nominal ad, but that's actually kind of the way we operate that business. It's very fragmented and there's a lot of smaller agencies and roll-up opportunities for us kind of in the independent agent space.
Speaker Change: Each one that we add, whether it be half a million or a million of revenue is pretty additive to the overall revenue picture for that business.
Chris O'connell: Great. That's helpful. And, you know, circling back to the margin discussion, could you share maybe what the... blended CD costs are right now, what the current offering costs are, and just how much it has to reprice in the back half of the year?
Speaker Change: Could you share maybe what the...
Speaker Change: blended CD costs are right now, you know, what the current offering costs are and just how much, you know, has to reprice in the back half of the year.
Joe: Yeah, just give me a moment here, Chris. I think Chris, while Joe is getting those exact numbers, I'll just comment that during the quarter, we kind of crossed over, if you will, on the city side, where the new production or replacement rate is now lower than the rate at which the back book is. So in other words,
Speaker Change: Just give me a moment here, Chris. I think Chris, while Joe is getting those exact numbers, I'll just comment that during the quarter,
Speaker Change: We kind of crossed over, if you will, on the city side, where the new production or replacement rate is now lower than the rate at which the back book is. So in other words...
Joe: It's a net positive as we replace those cities that we built over the past few quarters from a margin perspective, and we have actually lowered our rates twice during the quarter. And we're now kind of in the high threes and low fours, depending on the tenure of the.
Speaker Change: It's a net positive as we replace those cities that we built over the past few quarters from a margin perspective. And we have actually lowered our rates twice during the quarter.
Speaker Change: And we're now kind of in the high threes and low fours depending on the tenure of the CD.
Joe: And in the quarter, you know, all in all, just under about $375 to $380 was kind of our time to deposit costs for the quarter.
Speaker Change: And in the quarter, you know, all in just under about $3.75 to $3.80 was kind of our time to deposit costs for the quarter.
Chris O'connell: Great, that's helpful. [inaudible] Thanks. And then, you know, as you talked about, I think, in the prepared comments that the M&A dialogue is picking up, you know, how do you guys balance, you know, the usage of the buyback here, you know, with the potential for M&A opportunities in the future? Maybe just talk about the thought process around, you know, continued use of the buyback, especially, you know, after the recent rally we've had, and then also
Speaker Change: Great. That's helpful.
Speaker Change: Great. And then, you know, you talked about, I think, in the prepared comments that the M&A dialogue is picking up.
Speaker Change: You know, how do you guys balance, you know, the usage of the buyback here, you know, with the potential for M&A opportunities in the future? Maybe just talk about, you know,
Speaker Change: thought process around, you know, continued use of the buyback, especially, you know, after the recent rally we've had, and then also, you know, what type of M&A targets and opportunities you might be looking at in the future.
Joe: Yeah, so Chris, I think on the bank side, basically, year to date, we've bought back a million shares as a company. And as we looked at capital deployment, we basically couldn't find a better bank to buy than our own. So we bought back a million shares at $45. For whatever reason, we have a similar opportunity. We'll probably take a hard look at it again. Hopefully, not.
Speaker Change: Yeah, so Chris, I think on the bank side basically year to date we've bought back a million shares as a company and as we looked at capital deployment we basically couldn't find a better bank to buy than our own. So we we bought back a million shares at 45 bucks and
Speaker Change: [inaudible]
Joe: The M&A dialogue is stronger because I think a number of sellers have also realized that valuations for buyers like us were extremely appealing. At one point, we were yielding over 4%, which I think has happened only once in the past 15 years. Sellers also want more stock, the ones that at least we've been discussing with, because they understand the... (inaudible) So I think we'll continue to balance that. We always look at risk and reward.
Speaker Change: The M&A dialogue is stronger because I think a number of sellers have also realized that valuations of buyers like us...
Speaker Change: We're extremely appealing. I mean, at one point, we were yielding over 4%, which I think has happened only once in the past 15 years. So...
Speaker Change: Sellers also want more stock, the ones that at least we've been discussing with because they understand the
Speaker Change: [inaudible]
Speaker Change: $60 versus $45 from the perspective of
Speaker Change: of buying our company versus some of the other opportunities which may not have appreciated quite as much in the past few weeks. So I think we will continue to balance that. We always look at risk and reward. So in other words, the
Joe: So in other words, the... The upside to a transaction needs to be significantly better than the downside to it. So the things that we like, on the bank side in particular, remain, you know, strong balance sheets. [inaudible] Say around here, we're in the business of capital deployment, not in the business of share issuance, so we generally have a preference for cash M&A if we can do that.
Speaker Change: The upside to a transaction needs to be significantly better than the downside to it. So the things that we like on the bank side in particular remain, you know, strong balance sheets.
Speaker Change: [inaudible]
Speaker Change: So those are the kinds of things that we're focused on.
Speaker Change: [inaudible]
Speaker Change: Say, around here we're in the business of capital deployment, not in the business of share issuance, so we generally have a preference for cash M&A if we can do that.
Chris O'connell: And, you know, you guys are a little bit bigger now. And, you know, in the past, you've been, you know, willing to do deals under a billion in assets, despite your size and growth. I mean, do you guys have an organic growth outlook kind of accelerating from, you know, historical levels? I mean, do you still see value in doing deals, you know, in the $500 million to 700 million range? Are you guys willing to go that low? Or are you guys looking, you know, for a little bit more meaningful impact going forward compared to historically? Yeah.
Speaker Change: Great.
Speaker Change: And, you know, you guys...
Speaker Change: you know, are a little bit bigger now and, you know, in the past, you know, you've been willing to do deals, you know,
Speaker Change: under a billion in assets, you know, despite your size and growing. I mean, do you guys, with the organic growth outlook,
Speaker Change: kind of accelerating from, you know, historical levels. I mean, do you still see, you know, value in doing deals, you know, in the $500 million, $700 million range? Are you guys willing to go that low? Or are you guys looking, you know,
Speaker Change: for a little bit more meaningful impact, you know, going forward compared to historically.
Joe: Yeah, I think Chris on the bank side, that goes back to risk and reward. And I think the more you look at it, the more, at least we believe, that that risk and reward also tends to be less favorable the larger you go in transactions. And typically, the larger you go, the less liquidity that company is going to have as well, you know, the more concentrations they might have as well.
Speaker Change: Yeah, I think Chris on the bank side, that...
Chris: It goes back to the risk and reward, and I think the more you look at it, the more at least we believe that.
Speaker Change: That risk and reward also tends to...
Chris: Flip less favorable the larger you go in transactions and typically the larger you go the less liquidity that company is going to have as well You know the more concentrations they might have as well
Joe: So, you know, whether we will do something quite as small as $500 million, I think that really is dependent on what exactly it is. But certainly, things between $500 and a billion still remain of interest to us, especially if they check the boxes with low risk, right market, and strong liquidity profile. You know, we could take a couple of hundred million dollars of their liquidity and put it to use in our growth strategy. So, that's always additive as we look at banking.
Chris: You know, whether we will do something as...
Chris: Quite as small as 500 million. I think that really is dependent on what exactly it is
Chris: But certainly things between 500 and a billion still remain of interest to us, especially if they check the boxes with low risk.
Chris: Thank you for your time.
Chris: Great.
Speaker Change: And then, I mean, credits held up really well, you know, the trends this quarter, you know.
Chris O'connell: And then, I mean, credits held up really well, you know, the trends this quarter, you know. Tepid, Flat, Quarter Over Quarter, and MPAs, MPLs, and you guys haven't seen much of a cycle to date yet. Are there any areas that you guys are seeing any pressure at all in either the consumer or the commercial side or that you're keeping a closer eye on from here?
Speaker Change: Tepid, flat, quarter over quarter on MPAs, MPLs, and you guys haven't seen much cycle to date yet. Is there any areas that you guys are seeing any pressure at all in either the consumer or the commercial side or that you're keeping a closer eye on from here?
Joe: To be quite frank with you, the answer to that is not a lot that we're seeing. But we're certainly keeping a very close eye on it.
Speaker Change: To be quite frank with you, the answer to that is not a lot that we're seeing. We're certainly keeping a very close eye to it. As we've talked before, our markets have a bit of a unique dynamic right now because of the demand, especially on the housing side.
Joe: As we've talked before, our markets have a bit of a unique dynamic right now because of the demand, especially on the housing side, and just the lack of supply. All of the economic activity that's happening here in upstate New York and, frankly, northeastern Pennsylvania and to a degree in Vermont is driving a lot of housing demand. And we haven't built homes in those markets in many, many years, um... so some of the things that, frankly..., keep us a little bit more focused on that side of the equation are things like the fact that Syracuse, for example, had the highest increase in rent increase prices in the country last year.
Speaker Change: and just the lack of supply. You know, all the economic activity that's happening here in upstate New York and frankly in northeastern PA and to a degree in Vermont.
Speaker Change: is driving a lot of housing demand, and we haven't built homes in those markets in many, many years. So, you know, some of the things that, frankly...
Speaker Change: Keep us a little bit more focused on on that side of the equation is things like the fact that Syracuse for example had the highest increase in rent increase prices in the country
Joe: So that's not typical for a market like Syracuse and kind of puts us a little bit on the lookout for what it might mean in terms of sustainability going forward. So we keep a close eye on that.
Speaker Change: last year.
Speaker Change: That's not typical for a market like Syracuse and kind of puts us a little bit on the lookout for what might that mean in terms of sustainability going forward.
Chris O'connell: On the commercial side, again, a lot of those businesses are benefiting from the same dynamics in terms of economic activity. I believe year-to-date we're actually seeing negative charge-offs on the commercial side. I think last year we had three base points of charge-offs. Are we going to see some migration here and there? Yes, we will, but nothing that really worries us at this point that's out of the historical norm. Frankly, we continue to be quite a bit better than historical norms across all of our portfolios.
Speaker Change: So, we keep a close eye on that. On the commercial side, again, a lot of those businesses are benefiting from the same dynamics in terms of economic activity, and I believe, year-to-date, we're actually negative charge-offs on the commercial side. You know, I think last year we had three base points of charge-offs.
Speaker Change: [inaudible]
Chris O'connell: understood. Really helpful. Thanks for taking my questions.
Speaker Change: Understood. Really helpful. Thanks for taking my questions.
Operator: The next question comes from Steve Moss with Raymond James. Please go ahead.
Speaker Change: The next question comes from Steve Moss with Raymond James. Please go ahead.
Stephen M. Moss: Good morning, Steve. Dimitar, just following up on the M&A side, or the M&A discussions here, just curious like how much of a, you know, potential, you know, just as I think about the banks you're potentially talking to, they're going to likely have, you know, meaningfully more NII than fee income. Just curious, you know, how much are you willing to take in terms of potential reduction to the fee income revenue? as you're looking at these. Yeah.
Stephen M. Moss: Good morning.
Stephen M. Moss: Good morning, Steve.
Speaker Change: Dimitar, just following up on the M&A side, or the M&A discussions here, just curious like how much of a, you know, potential...
Stephen M. Moss: You know, just as I think about the banks you're potentially talking to, they're going to likely have, you know, meaningfully more NII than fee income. Just curious, you know, how much are you willing to take in terms of potential reduction to the fee income revenue mix?
Dimitar A. Karaivanov: Yeah, so Steve, there's a couple of things that go into that equation. So if you look at our company, our... non-banking businesses or financial services businesses grow faster than a banking business just by default, right? So we've historically averaged high single-digit growth rates outside of the banking business and kind of, mid-single-digit crawl trade from the banking business, which included M&A, by the way, along the way. So that, by itself, actually moves the fee income ratio of what is about 40% today. If you just play out the organic growth, you're kind of looking at about two points of movement every five years.
Speaker Change: as you're looking at these deals.
Dimitar: Yeah, so Steve, there's a couple of things that go into that equation.
Speaker Change: If you look at our company, our non-banking businesses, our financial services businesses grow faster than the banking business, just by default, right? So we've historically averaged high single-digit growth rate outside of the banking business and kind of...
Speaker Change: [inaudible]
Speaker Change: So that, by itself,
Speaker Change: actually moves the fee-income ratio, you know, of what is about 40% today. If you just play out the organic growth, you're kind of looking at about two points of movement every five years. So...
Dimitar A. Karaivanov: Those businesses run faster than the bank. As we look at banks, clearly, there's not another company like us that has those kinds of metrics. So everyone that we do is going to be diluted from that perspective. But again, we run fast from the thinking side organically anyways. So that helps offset a chunk of that. And then secondly,
Speaker Change: Those businesses run faster than the bank.
Speaker Change: As we look at banks, clearly there is not another company like us that has those kinds of metrics.
Speaker Change: So, everyone that we do is going to be diluted from that perspective. But again, we run faster on the thinking side organically anyways, so that helps offset a chunk of that. And then secondly...
Dimitar A. Karaivanov: We're typically pretty good at bringing our fee income capabilities into the acquired franchises as well, not just on the non-banking side but also on the banking side. We tend to have more products and capabilities than they do. So over time, while that's kind of a longer timeframe usually to affect those, over time, that kind of evens out in many ways. So we're mindful of it, but it's not a barrier in terms of looking at bank transactions.
Speaker Change: We're typically pretty good at bringing our fee-income capabilities into the acquired franchises as well. Not just on the non-banking side, but also on the banking side, we tend to have more products and capabilities than they do. So over time, well, that's kind of a longer...
Speaker Change: [inaudible]
Dimitar A. Karaivanov: Again, size also does help, and it just so happens that we also find better risk-reward in the smaller deals than the larger deals to begin with, see income ratio over time. Even though we've done quite a bit more bank M&A than financial services M&A over the past 10 or so years, our fee-income ratios actually increased meaningfully in that period.
Speaker Change: It's not a barrier in terms of looking at bank transactions. Again, size also does help. And it just so happens that we also find better risk-reward in the smaller deals than the larger deals to begin with. So if you look at our...
Speaker Change: Thank you.
Stephen M. Moss: Okay. And then in terms of just, you know... The transaction opportunity here, I'm curious if it is a $500 million to a billion-dollar type transaction, are you willing to do two acquisitions simultaneously or, you know, would you look to do one and then, you know, potentially do a second one after you complete the first?
Speaker Change: okay and and then in terms of just you know
Speaker Change: The transaction opportunity here, you know, curious if it is a $500 million to a billion dollar type transaction.
Speaker Change: Are you willing to do two acquisitions simultaneous or will you look to do one and then potentially do a second one after you complete the first?
Dimitar A. Karaivanov: Steve, my comment was more general than about a specific transaction, but I would say that most of the discussions we're having are in the under $2 billion range, and a couple of them are under the $1 billion range.
Speaker Change: Steve, my comment was more general than a specific transaction, but I would say that most of the discussions we're having are in the under $2 billion range and a couple of them under the $1 billion range.
Stephen M. Moss: I appreciate that caller there, Dimitar. All my other questions have been asked and answered, so thank you very much.
Stephen M. Moss: Okay, great. I appreciate that call there, Dimitar. All my other questions have been asked and answered, so thank you very much.
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. Please go ahead. Thank you, Asher.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to Mr. Karaivanov for any closing remarks. Please go ahead.
Dimitar A. Karaivanov: Thank you, Asha, and thank you everyone for joining the call and for your interest in our company. We will speak again with you in October.
Karaivanov: Thank you, Asha, and thank you everyone for joining the call and the interest in our company, and we will speak again with you in October .
Operator: This conference is now concluded. Thank you for attending today's presentation. You may now disconnect. BF-WATCH TV 2021
Speaker Change: This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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