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spk06: Welcome to the Community Bank System Second Quarter 2023 Earnings Conference Call. Please note that this presentation contains forward-looking statements within the provisions of the Private Security Litigation Reform Act of 1995 that are based on current expectations, estimates, and projections about the industry, markets, and economic environment in which the company operates. Such statements involve risks and uncertainties that could cause actual results to differ materially from the results discussed in these statements. These risks are detailed in the company's annual report and Form 10-K filed with the Securities and Exchange Commission. Please note also that this call is being recorded today. Today's call presenters are Mark Trenisky, President and Chief Executive Officer and Joseph Sitaris, Executive Vice President and Chief Financial Officer. They will be joined by Dimitar Karivanov, Executive Vice President and Chief Operating Officer, for the question and answer session. Gentlemen, you may begin.
spk01: Thank you, Alan. Good morning, everyone, and thank you all for joining our second quarter conference call. I'm not going to say much about our quarterly performance other than it was very good. Joe and Dimitar will comment in more detail. But I did want to acknowledge the announcement we made early last month regarding my retirement from the company effective this December 31st. But I will remain on the board through 2024 to support the transition. Most importantly, we're thrilled that Dimitar Karivanov will be appointed President and Chief Executive Officer of Community Bank System and Community Bank effective January 1st of 2024. Succession is something we've been working on for many years, as it's one of the most important responsibilities of a CEO and a board of directors. I've known Dimitar for at least 15 years, starting in his prior life as a financial advisor to the company. Two years ago, he joined the company as Executive Vice President of Financial Services and Corporate Development, assuming responsibility for our benefits, insurance, and wealth businesses. He made an immediate impact on those businesses, and in 2022 was appointed Chief Operating Officer, assuming further responsibility for the banking business. Our board went through a deliberative and very thorough succession process beginning in early 2022 and culminating in last month's announcement. Dimitar is one of the most astute financial and strategic thinkers I have ever worked with, and more importantly, fully embodies our core values of integrity, teamwork, excellence, and humility. We have right now the best leadership team across the company we have ever had. Combined with earnings and balance sheet strength, revenue diversity, tremendous funding, and growth capabilities, I fully expect the next 15 years will be even better than the last 15. Dimitar?
spk03: Thank you, Mark. It has been more than a privilege to work alongside Mark and the team, and I'm grateful for the trust and confidence that the board has granted me. I've been involved with this company for 15 years, and I feel very strongly that we have the best team we have ever had, and our ability to service clients, win in the marketplace, and provide growth opportunities for our colleagues and communities has never been better. The future of our company is bright, and I'm fortunate to be part of it. All of this is evident in our results for the second quarter. The strength of our diversified business model delivered another quarter of above-average returns, regardless of the noisy environment. Operating revenues remain close to all-time highs. We grew the number of clients and accounts across the company, and our risk metrics remain very strong, allowing us to deliver this performance with below average risk. Looking forward, we're encouraged by the momentum across all of our businesses. The banking pipelines are healthy, and our funding base is secure. The improvement in market values bodes well for our benefits and wealth businesses, And in our insurance business, we're benefiting from organic growth, increased premiums, and inorganic activities. Joe will now provide you with more details on the financials. Joe?
spk04: Thank you, Dimitar, and good morning, everyone. The company's earnings results were solid in the second quarter. Fully diluted gap earnings per share were 89 cents in the quarter, which were up 16 cents over the prior year's second quarter, and 78 cents better than the linked first quarter results. Fully diluted operating earnings per share as defined in the company's earnings press release, were $0.91 in the quarter, up $0.06 per share from the prior year's second quarter, and $0.05 per share higher than the linked first quarter results. The $0.06 per share increase in operating earnings per share on a year-over-year basis was driven by an increase in operating revenues and a lower provision for credit losses offset in part by higher operating expenses and an increase in income taxes. The $0.05 per share increase in operating earnings per share on a linked quarter basis was driven by a decrease in the provision for credit losses and lower operating expenses offset in part by a decrease in operating revenues. Second quarter 2023 adjusted pre-tax, pre-provision net revenue per share, a non-GAAP measures to find the company's earnings press release of $1.17 was up $0.04 per share as compared to the second quarter of 2022 and up a penny per share as compared to the linked first quarter results. The company's total revenues were up $8 million or 4.8% over the prior year's second quarter. This was driven by increases in both net interest income and non-interest revenue between the periods. Net interest income was up $6.1 million or 6% driven by 29 basis points of margin expansion between the periods. Non-interest revenues were up $1.9 million or 2.9% due largely to an increase in insurance service revenues. Comparatively, operating revenues which exclude Excludes realized and unrealized losses on investment securities and gain on debt extinguishment were $1.3 million or 0.7% lower than the linked first quarter results. The company recorded net interest income of $109.3 million in the second quarter of 2023. This was down $1.7 million or 1.6% on a linked quarter basis driven by increases in the company's funding costs. The company's total cost of funds in the second quarter of 2023 was 67 basis points as compared to 44 basis points in the linked first quarter. The 23 basis point increase in funding costs in the quarter outpaced the 19 basis point increase in earning asset yields, resulting in a two basis point decrease in the company's net interest margin from 3.20% in the first quarter to 3.18% in the second quarter. For context, the nationwide median cost of funds for banks in the second quarter was approximately 2%. and the median net interest margin contraction was approximately 15 basis points. The year-over-year increase in non-interest revenues was driven by a $2.1 million or 21.3% increase in insurance services revenues and a slight increase in banking-related non-interest revenues, which was offset by slightly lower employee benefit services and wealth management services revenues. The increase in insurance services revenues was driven by harder insurance markets as well as organic and acquired customer growth. Despite organic customer growth in the employee benefit services and wealth management businesses, revenues were down due to asset-based valuation factors. On a linked quarter basis, non-interest revenues, excluding realized and unrealized losses on investment securities and gain on debt extinguishment, increased $0.5 million or 0.7%. Reflective of an increase in loans outstanding in the stable economic forecast, the company recorded a provision for credit losses of $0.8 million during the second quarter. Comparatively, the company recorded a $3.5 million provision for credit losses in the late first quarter of 2023 and $6 million during the second quarter of 2022, which included $3.9 million of acquisition-related provision for credit losses in connection with the Elmira Savings Bank acquisition. The company recorded $113 million in total operating expenses in the second quarter of 2023 compared to $110.4 million in total operating expenses in the prior year's second quarter. Excluding $1 million of acquisition-related contingent earn-out expenses in the second quarter of 2023 and $4.4 million of acquisition-related expenses in the prior year of second quarter, core operating expenses increased $6 million or 5.6% year-over-year. The increase in core operating expenses was driven by higher salaries and employee benefits, data processing, communication costs, business development and marketing, and other expenses. In comparison, the company reported $114 million of core operating expenses in the linked first quarter of 2023. The effective tax rate for the second quarter of 2023 was 21.4%, down slightly from 21.6% in the second quarter of 2022. The company's total assets were $15.1 billion at June 30, 2023, representing a $379.8 million, a 2.5% decrease from one year prior. and $147.9 million or 1% decrease from the end of the first quarter of 2023. The book value of average interest earning assets decreased $264 million or 1.9% during the second quarter, driven by a 453.5 million decrease in the average book value of investment securities, partially offset by $188.8 million increase in average loan balances. Ending loans increased $188.4 million or 2.1% during the quarter, and $1.03 billion, or 12.6% over the prior year. The increase in loans outstanding in the second quarter was driven by an $85.8 million, or 2.3% increase in the business lending portfolio, and $102.7 million, or 2% increase in the company's consumer loan portfolios. The increase in ending loans year over year was driven by organic loan growth in the company's business lending portfolio, totaling $501.7 million, or 15.1%. and growth in all four consumer loan portfolios totaling $524.4 million or 10.9%. The company's ending total deposits were down $238.9 million or 1.8% from the end of the first quarter. This was comprised of a $144.2 million or 1.6% decrease in interest-bearing deposits and a $94.7 million or 2.4% decrease in non-interest-bearing deposits. On a customer segment basis, municipal deposits decreased $146.6 million during the quarter, which tended to seasonally decline in the second quarter, while business and consumer deposits decreased less than 1% or $92.3 million in the quarter. On a year-to-date basis, ending total deposits were down $140.5 million or 1.1%. The company's deposit base is well diversified across customer segments, comprised of approximately 63% consumer balances, 26% business balances, and 11% municipal balances, and broadly dispersed with average consumer deposit account balance of $12,000 and average business deposit relationship of approximately $60,000. The company's cycle to date deposit data is 10%, reflective of a high proportion of checking and savings accounts, which represents 72% of total deposits and the composition stability of the customer base. The weighted average age of the company's non-maturity deposit accounts is approximately 15 years, and the company does not currently carry any broker or wholesale deposits on its balance sheet. The cycle-to-date interest-bearing deposits beta is 14%, and the total funding beta is 12%. 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, unused borrowing capacity at the Federal Home Loan Bank, and unplugged investment securities totaled $4.27 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 left collateralized, and intercompany deposits. The company's loan to deposit ratio at the end of the first quarter was 71.2%, providing future opportunity to migrate lower yielding investment security balances into higher yielding loans. At June 30, 2023, all the companies in the bank's regulatory capitals ratio significantly exceeded well-capitalized standards. More specifically, the company's Tier 1 leverage ratio was 9.35% at the end of the second quarter, which substantially exceeded the regulatory well-capitalized standard of 5%. The company's net tangible equity and net tangible assets ratio, a non-GAAP measure to define the company's first quarter or second quarter earnings press release, was 5.34% at the The end of the second quarter is compared to 5.41% at the end of the first quarter and 5.40% one year prior. During the second quarter, the company repurchased 200,000 shares of its common stock at an average price of approximately $48 per share, pursuant to its board-approved 2023 stock repurchase program. At June 30, 2023, the company's allowance for credit losses totaled $63.3 million, or 69 basis points of total loans outstanding, This compares to 63.2 million or 70 basis points of total loans outstanding at the end of the first quarter and $55.5 million or 68 basis points of total loans outstanding at June 30th, 2022. During the second quarter of 2023, the company reported net charge-offs of $0.7 million or three basis points of average loans annualized. This compares to two basis points of annualized net charge-offs in the same quarter last year and seven basis points in Q1. At June 30, 2023, non-performing loans totaled $33.3 million or 36 basis points of total loans outstanding. This was down from 38 basis points at the end of the first quarter and 46 basis points one year prior. Loans 30 to 89 days delinquent were 47 basis points of total loans outstanding at June 30, 2023, up from 35 basis points at the end of the first quarter and up from 29 basis points one year prior. Overall, the company's asset quality remains strong and stable in the quarter. We believe the company's strong liquidity profile, capital reserves, stable core deposit base, historically strong asset quality, and revenue profile provide a solid foundation for future opportunities and growth. Looking forward, we are encouraged by the momentum in our banking business and prospects for continued organic loan growth. Although we believe escalating funding costs will abate over time, we believe higher funding costs will remain a challenge for the third quarter despite the quality and strength of the company's core deposit base. In addition, new business opportunities in the company's financial services businesses remain strong. Thank you. I will now turn it back to Alan to open the line for questions.
spk06: 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're using a speakerphone, please pick up your handset before pressing the keys. 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 Nick Cucciaralli of the Hove Group. Go ahead.
spk02: Good morning, everyone. How are you today? Good morning, Nick. Good morning, Nick. At the halfway point of the year, pretty solid loan growth. Are you starting to see others in your markets pulling back given liquidity concerns? And can you help us think about a full year growth rate?
spk03: Sure. Nick, you're spot on. We've benefited from a couple of things. One is our own capabilities, but the second is the competitive environment. And the reality is a lot of banks, predominantly smaller ones, have run out of liquidity. They don't have enough funding that they can extend to clients. So a number of folks are focused on only existing clients. A number of folks are just not lending. So we are seeing an opportunity to leverage our strength of the balance sheet to service our clients and to extend new relationships for relationships in all of our markets. So in terms of growth rate, I think we have been communicating kind of mid to high single digits range that still stays probably a little bit closer to the higher end of that than the midpoint of the single digits. Just the momentum is strong and the pipeline actually increased quarter over quarter as we sit here today, I mean, all of our businesses.
spk02: That's great, Culler. And as it relates to expenses, I believe your previous guidance was for 5% to 9% growth for the full year 2023. Is that consistent with your thinking at this stage?
spk04: Yeah, I don't think any, this is Joe, Nick. I don't think anything has changed with our, around our expectations for operating expenses. I think we kind of acknowledged that, you know, Q1 was up a bit, but we expected that to level off throughout the remaining three quarters. I think we're still on path generally to have a flattish outcome, if you will, for the remaining two quarters. And so on a full year run rate basis, still kind of that 5% to 9%, I think, is a reasonable expectation.
spk02: Okay, great. And then lastly for me, I know it's price dependent, but the repurchase has been pretty consistent the past two quarters, and you recently increased the dividend for the 31st year in a row. Can you give us your thoughts on capital return and M&A and how you balance that with your organic initiatives at this stage?
spk03: Nick, it's Dimitar again. We look at all of those things. The dividend is part of our core value proposition and investment thesis, which is above average returns with below average risk. So we try to manage volatility across our businesses and control as much as we can the outcomes as it relates to revenue and earnings, which then allows us to pay that growing dividend. So it's a really important part of what we aim to achieve for our shareholders. I think in share repurchases, we've communicated that our goal is to at least offset the equity dilution from our annual grants. So I think right now we're kind of well on our way as it relates to that this year. The stock, we believe, continues to be attractive, you know, as we personally look at it and from a company's perspective. So we probably have a little bit more to do there at these levels on the share repurchase side. And then on capital allocation in terms of M&A, we remain very opportunistic across all of our businesses. We deploy capital in the bank every day as we grow the balance sheet. So that's part of what we do in the bank. And then we're actively looking at M&A across all of our businesses. We do some small roll-ups in our insurance business, our benefits business. We lift some practices and folks on our wealth side So that will remain a main priority for us because we do generate a lot of capital and we need to put it to work for our investors.
spk10: I appreciate the caller. Thank you for taking my questions.
spk06: Our next question comes from Steve Moss of Raymond James. Go ahead.
spk10: Good morning. Good morning. Maybe just on the margin here.
spk08: Good morning. Maybe just on the margin here. Just curious – Joe, you mentioned that, you know, deposit costs, it sounds like deposit costs are a little bit of a headwind. Curious as to where you're thinking deposit costs are headed over the next two quarters or so.
spk04: Yeah, so it's a very fair question, Steve. I mean, the, you know, our experience is that even if the Fed pauses, that there will be a continuation of, you know, higher deposit rates, just as, you know, we continue to see migration from low or non-interest-bearing deposits into higher-rate certificates. And so we do continue to expect increases. I'm not sure I have an exact call with respect to how much deposit can increase over the third quarter, but they were trending higher in the second quarter, and we expect some of that to continue into the first quarter. But with that said, if the Fed does pause over time, that pressure abates a bit. And, you know, I'll call it the pace at which money's moved from low interest bearing to non-interest bearing slows a bit. And, you know, I'll call it the repricing of the non-maturity deposits perhaps slows a bit as well. So we think those pressures will abate over time, you know, but in the third and potentially into the fourth quarter, we do see that to continue to be a headwind. So, you know, with respect to our margin, you know, and NII expectations, we're kind of thinking more of a you know, kind of flat to sideways outcome for at least the next quarter or two. And then, you know, hopefully we can see some expansion in 2024 as some of those funding pressures, you know, just abate a bit.
spk08: Okay. And then in terms of just curious on loan pricing here, you know, what were origination yields for the quarter and, you know, where do you guys see that shaking out here going forward?
spk04: Yeah, so on a blended basis, we booked new loans at about just under 7% for the quarter. So we're seeing pretty good rate improvement, if you will, on the book over time because the book yield is, I think, just sub 5. So we're picking up about 200 basis points on the repricing activity plus volume has been increasing. And if we do have kind of a mid-single digit kind of growth outcome, that's going to help over time. So we also have approximately $2 billion, about 25% of our loan portfolio that are repricable, of which roughly a billion will reprice in the next 12 months or so. Some of those are kind of the, they might be 10-year terms with a five-year repricing, reset, and some of that occurs in, you know, years out. But we have about, you know, a billion repricing in the next 12 months or so.
spk08: Okay. That's helpful. And then maybe just on the employee benefits services business, you know, splattish year over year, but you guys have talked in the past about the pipeline of new business coming in, and I apologize if I missed it. Just curious as to, you know, the underlying organic trends you're seeing there.
spk03: Yeah, the Morning, Steve. The underlying trends remain very strong. As Joe said, some of that's been masked by the market. But I think as we're sitting here in July, I wouldn't be surprised if we have a record month in that business for us. And if the asset values stay where they are, which are still lower than the market peaks, we're already doing better than we were back in Q4 of 21. So There are some things in that business that are also, I would call them sometimes more consulting-based, so that impacted our revenues a little bit here in the first six months compared to the last year. But we're down a little bit compared to 2022. Again, right now we're in as good of a position as we've been. My expectation is we're going to more than make it up by the end of 2023 should market values stay where they are.
spk10: Great, appreciate all the color. Nice quarter, guys. Thank you. Thank you.
spk06: The next question comes from Alex Twerdell of Piper Sandler. Go ahead.
spk00: Hey, good morning, guys.
spk06: Good morning, Alex.
spk00: First off, just in terms of sort of balance sheet management, can you just remind us what you have coming due in terms of securities and, you know, whether that will be sufficient or if that's the mechanism that you plan to use to fund the loan growth. I think you kind of alluded to another $300 million to $400 million of loan growth later this year based on your growth targets. I'm just wondering if the securities cash flows will be sufficient and sort of the outlook for funding.
spk04: Yeah, so in the third quarter, Alex, this quarter, we have about another $100 million of maturity. That's going to certainly help for the funding, at least for the balance of 2023. And then as we get into 2024, we do have a little bit of a slower cash flow coming off the securities portfolio, less than about $100 million in 2024. But we do have some plans basically to continue to grow. And with the higher loan yields, we can continue to bridge to cash flows a little further out just through probably some wholesale borrowings. Given where rates are, it's still fairly attractive to do that.
spk00: Can you say the number from the third quarter just broke up a little bit? I'm not sure if that was just my line or everyone's line.
spk04: Yeah. So the third quarter is about $150 million, Alex, in maturities.
spk00: And anything in the fourth quarter?
spk04: It's fairly nominal in the fourth quarter. I don't have a precise number, but it's fairly nominal. Most of it's in the third quarter.
spk00: And with the expectation in terms of other deposit flows that the $147 million of municipal deposits that went out in the second quarter, that usually builds into the end of October. Is that correct?
spk04: That's correct, Alex. For us, it's somewhat seasonal, the second quarter being the low point for municipal deposits. And then in New York State in particular, tax collection occurs in the third quarter and in the first quarter. So we tend to see a little bit of a rebound, if you will, in municipal deposits. And for that matter also, on the municipal repurchase agreements, particularly in our Vermont market, our New England market, they bounce back a little bit in the third quarter as well. So we do have some expectations that municipal funding is going to roll back in the door, if you will, in the third quarter.
spk00: Okay. Do you happen to have the... just the sort of exit net interest margin from the quarter and exit cost of funds?
spk04: Yeah, it was relatively flat. You know, I'll say May to June from an NII perspective. So cost of funds, We kind of exited the quarter at about 90 basis points, if anybody serves here.
spk10: I'm sorry, I'm off. About 80 basis points totaled past the funds exiting at the end of the quarter.
spk03: And Alex, the margin in June was consistent with the second quarter number.
spk00: Okay, yeah, it's pretty flat across the court. I wasn't sure if there's anything funky in there from the deleveraging transaction you guys did back in the first quarter that would make the numbers not seem as straightforward as they look. And then just the final question I had is on fees. I know last quarter you guys mentioned some adjustments to NSF fees, and I think you guided to like a $6 million to $8 million hit across the year on NSF, and then it just doesn't look like we saw that show up in the deposit service charges um fees uh this quarter looks like that i mean that second quarter looked stronger than the second quarter a year ago and much stronger than the first quarter so i'm just curious if there's something else in there that we should be thinking about or if there's any change to that um that full year guidance for for the uh the hit to deposit service charges from that uh we also had a little higher um
spk04: debit interchange outcome for the second quarter. So that sort of, you know, offset some of the reduction for the NSF changes.
spk00: Okay. So the full year guide of the $6 million to $8 million hit is still intact?
spk04: Yeah, I think that's still fair, Alex.
spk00: Perfect. Thank you for taking my questions.
spk06: Our next question comes from Manuel Navas of DA Davidson. Go ahead.
spk09: Hey, good morning. A lot of my questions have been answered, but I just was wondering about the loan outlook with thinking about the mix. Consumer was pretty strong and just trying to see what are the trends there.
spk03: Yeah, so morning, Manuel. If you're right, the consumer, we did reasonably well this quarter. The pipelines remain very robust on the mortgage side. We hinted at it last quarter as well, but we've gained even more momentum on the mortgage side. So I think we're going to have a pretty robust quarter here in Q3 and going into Q4. That's usually when we book the most on the mortgage side anyways, but the pipelines are actually stronger than they were a year ago. And as you can imagine, it's 85% purchase money. So all of that is additive to the balance sheet. So it's going to result in a bit of a higher number than usual in terms of net growth. As it relates to the auto business or car business, that also is in pretty good shape. You know, we've benefited from some of the same things that we talked a little bit earlier on the call, which is competitors exiting certain uh, markets, uh, wholesale basis. And when you do that, um, you know, you kind of create an opening in the segment that we play in. Cause as you know, we don't play everywhere, but we in the segment that we play in are part of the market. Um, so that's created some opportunities for us. Um, so that business remains in good shape. It is hard to predict, as we've said before, um, we're trying to, uh, manage, uh, risk and return there on an active basis, you know, through rate and, you know, the segments we focus on. So expect that to be in line with the second quarter, frankly, as we sit here today.
spk09: What new yields are you getting on auto loans on your paper?
spk03: On a net basis, we're in the high sixes and kind of 7% range on a net basis to us.
spk10: That's great. I appreciate the update. Thank you.
spk06: As a reminder, if you have a question, please press star, then 1. Our next question comes from Matthew Brees of Stevens. Go ahead.
spk07: Good morning. Morning, Matt. I think the credit metrics largely speak for themselves. With that in mind, I'd be curious your thoughts around the provisioning outlook and then on the overall reserve level. It's fairly flat year over year. Just curious if the bias is to remain flat or even down, just considering the credit performance.
spk04: Yeah, Matt, this is Joe. The expectations right now are flat. I mean, we have not seen, fortunately, any sort of turns in credit. In fact, when you look at kind of our Risk ratings on a year-over-year basis, we've seen some improvement, which is good. Net charge-offs are still fairly low. I think things are normalizing a little bit in the indirect business, but our indirect net charge-offs tend to average about 30 basis points over a long period of time. So we're really not seeing any sort of headwinds knock on wood on the credit front right now, and so given that, our expectations are you know, kind of about the same until we see some changes.
spk07: Okay. And then, look, I think your stance on tangible common equity as a capital ratio and impacts from AOCI are pretty well known at this point, but I would be curious, one, as it stands today, what the duration of the securities portfolio is, and then two, Just given continued impacts, should we expect you to remain patient in terms of ultimate recapture, or are you considering additional kind of balance sheet restructuring opportunities out there to maybe to lessen things here, the impact?
spk03: Hey, Matt. It's Dimitar. We're not going to surprise you here. There's no change in how we look at our business. And we also have to desegregate the bank from the aggregate business. And keep in mind, the balance sheet only shows one of our four businesses. So we've got a tremendous amount of value if you want to talk about value and economic value to our shareholders that is not captured on the balance sheet. So if you were to Think about that, you know, frankly, and apply back to the balance sheet that the numbers are very strong and those businesses provide tremendous amount of capital every year to the rest of the company. So we're focused on regulatory ratios. We don't believe because a third of our revenue, more than a third of our revenue is coming from non-balance sheet activities. We don't believe that the balance sheet itself fully reflects, you know, the economic value of the company. Our regulatory ratios remain very strong. They continue to increase. The transaction we did earlier this year was really focused on allowing us to, one, it was economically net value positive for our shareholders because we got our money back a year sooner than we would have gotten it otherwise. Secondly, it allowed us the flexibility to now service more clients when other people were pulling back. We don't feel like we need to do anything similar here for the next couple of quarters at the very least. So, capital is accruing at a very robust pace. We have not been able to deploy it through M&A, so it just keeps accruing to our company.
spk10: Great. I appreciate that.
spk07: One last one before I sign off. First, Dimitar, congrats on the promotion. Mark, congratulations on retirement. I think the stock and the bank balance sheet speaks for itself in terms of legacy. Dimitar, as you kind of commence your CEO role here in the not too distant future, where do you think you and Mark differ in terms of strategy or bank management, fee income, business management. I'd be curious if there's any sort of notable differences in terms of philosophy, both around the day-to-day organic businesses and how you run them, and then inorganic in terms of how you think about M&A and acquisitions.
spk03: Matt, that's a fair question. There is a reason why I feel like I've been part of this company for a long time, because all of us here tend to think very similarly and evaluate things in a similar light. So you're not going to see much in the way of change for us. Our shareholder thesis remains what it's always been, which is we need to provide that consistency of results and cash flows back to our shareholders. What that means is having a diversified business model, which includes all of our businesses, and we need to invest as much as we can in all of them. We need to stay vigilant for other opportunities to add to those verticals, be tangential to them or a new vertical potentially. Again, in the spirit of having a diversified company that functions regardless of the rate environment or the market environment or the insurance market, So I think we're going to have an increased focus on that diversification, an increased focus on managing the low volatility and risk across our businesses. So it's really an evolution. I think one of the differences that we have today than we did historically, and that's kudos to Mark and the team, we're much better at organic growth. So we're going to continue to lean into that. We're going to continue to look at new markets and new opportunities to expand organically. We allocate capital in multiple ways. One of it is through the P&L, investments in people and new businesses through the P&L, which we're doing daily. And then as we have opportunities to deploy that excess capital that we generate into transactions, we're going to continue looking at that as we've communicated through the more strategically focused and tactically focused because of the lesser need to generate earnings growth for M&A.
spk07: Appreciate all that very much. Thank you for taking my questions. Thank you.
spk06: Our next question comes from Chris O'Connell of KBW. Go ahead.
spk05: Good morning. And yeah, congratulations to you, Mark, on your retirement and Dimitar on the promotion. I was hoping to circle back to some of the margin discussion. I mean, it sounds like you guys have been doing a really good job of keeping the margin kind of held up where it is here this past quarter and year to date, as well as it seems like the spot margin into June. I mean, given that there's still some funding pressure coming in the back half of the year, I mean, do you expect the margin to remain under pressure into the back half of the year, or do you think you can, you know, keep it held up, you know, more or less, you know, around the current levels?
spk04: Yeah, I think, Chris, our best, you know, expectation at this point is kind of, you know, I'll say flat to, you know, call it sideways for a couple quarters, which I think is potentially going to outperform the rest of the market just because of the strength and resilience of our funding base. If those pressures do abate, which the Fed pauses and they do abate, the expectation would be that the rate at which funding costs increase in 2024 will slow significantly. In the meantime, we are still turning over the loan portfolio at a pretty healthy cliff with basically a 200 basis point pickup on the turnover. So the hope and expectation is that NII – net interest income will, you know, hopefully improve as we look into 2024 and beyond. You know, but obviously, you know, rates don't go one direction and it's, you know, sometimes there's fluctuations, but, you know, based on where we are today, the expectation is that we would go effectively, you know, sideways, maybe down a few basis points on the NIM, maybe, you know, a couple basis points in the next couple of quarters, but generally sideways.
spk05: Do you think that there's more risk of compression in the fourth quarter versus the third quarter, given the lack of securities roll-off?
spk04: We typically have some funding roll-in, as I mentioned, in the third and fourth quarters from a municipal side, and that should hopefully allow for a reduction in some of the more expensive overnight borrowings. So potentially... Again, we're still kind of signaling flat, but I don't see further erosion in Q4 versus Q3.
spk05: Got it. And what's the average or blended cost of the municipal deposit book versus the rest of the portfolio?
spk10: That's a fair question, Chris.
spk04: But to be perfectly frank, I need to look it up, but it's... Let's see. I'm not sure I have the breakout in front of me, Chris, but it certainly is much more, it's slightly more than that of the IPC deposits and certainly less than overnight borrowings.
spk05: Just on the M&A outlook, I mean, I know you guys are actively looking at the fee businesses and for potential ads there. On the traditional bank M&A side, are you seeing opportunities? Are you, you know, actively or, you know, seriously pursuing opportunities at this time, just given kind of the overall slowdown in the traditional bank M&A environment? And, you know, have you seen any pickup in those type of opportunities from, you know, the call it like early March? in kind of the disruption that happened in March and April.
spk03: Chris, I think on the bank side, there is a little bit of a slight uptick, I would call it, in the sense of sellers being more willing to engage in discussions. I think the challenges there remain similar to what they've been for the past couple of quarters, which is You've got a lot of unknowns as to what the balance sheet looks like, what the margin looks like. You know, I think the cycle is showcasing that some balance sheets can change quite drastically in the matter of a couple of quarters. And when earnings are going down for some folks, you know, 25%, 30% in a short period of time, that's pretty hard to price in terms of what is the value of that earnings stream to us. given that we're focused on consistency first and foremost in our results. So I think that's one challenge. I think the second challenge is for a lot of folks, there's not a lot of capital left once you mark the balance sheet. So we have to essentially pay for the deal twice. So some of those challenges are pretty hard to stomach, especially depending on the size of the opportunity. As Joe pointed out to a number of us very wisely, it's also hard to figure out in today's environment when you announce a transaction on a bank deal, what does that do to the deposit base, given that it's sounding the starting signal for all the competitors and high-rate customers to start looking around yet again. So I think that's kind of hard to put your arms around. And then the last piece is the uncertainty as to the timing of closure of transactions these days. Clearly there's a higher hurdle in terms of unknowns that come with a transaction from all the regulatory bodies. So that creates another challenge in terms of you don't know when you're going to close a transaction. And that puts pressure on retaining clients, retaining people, having to pay a lot more for customers. So that's another unknown that's really kind of creating that unfavorable risk and reward right now. With that said, you know, we continue to look... On the flip side, we know now some franchises that their balance sheets are holding up better than expected and better than others. So that's something that we're going to remember for a long time. And when the opportunity comes, we will be active and hopefully in a better environment.
spk10: Great. Thanks for your time. Appreciate you taking my questions.
spk06: This concludes our question and answer session. I would like to turn the conference back over to Mr. Trenisky for any closing remarks.
spk01: Thank you all for joining again our conference call, and I guess I will see you one last time here in October, and hope you all have a great rest of the summer. Thank you.
spk06: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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