Community Bank System Inc
NYSE:CBU
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Community Bank System Inc
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Welcome to the Community Bank System, Second Quarter 2019 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.
Today's call presenters are Mark Tryniski, President and Chief Executive Officer; and Joseph Sutaris, Executive Vice President and Chief Financial Officer.
Gentlemen, you may begin.
Thank you, April. Good morning everyone, and thank you all for joining our call today. We’re very satisfied with the Q3 results which were largely expected. Operations earnings were flat with last year excluding the Durbin impact of $0.05 to $0.06. The margin’s hanging in, loans and non-municipal deposits were up a little, asset quality is really good, and our non-banking businesses continue to grow and perform extremely well. All-in-all, it was a reasonably stable and solid quarter.
We’re very pleased that Kinderhook Bank Corp. transaction announced in the first quarter closed on July 12, adding $650 million of assets in 11 branches across the greater Albany New York market. The closing systems integration and operating transition went extremely well. According to our team, it was our best ever. So we’re off to a very good start in this market and excited about the growth opportunities that lie ahead.
As previously disclosed, we expect this transaction to be $0.08 per share accretive on a full year basis. Looking ahead, our operating momentum capital accretion continued to be strong, which positions us very well for the remainder of 2019 and into the future. Joe?
Thank you, Mark and good morning everyone. As Mark noted, we are pleased with the company’s second quarter 2019 earnings results. The company reported GAAP net income of $45 million and earnings per share of $0.86 during the second quarter of 2019. This compares to net income of $44.6 million and $0.86 in GAAP earnings per share for the second quarter of 2018.
On a comparative basis, the second quarter of 2019 earnings were favorably impacted by $4.9 million of realized gains on the sale of investment securities and unfavorably impacted by a $1.1 million increase in acquisition expenses due to the Kinderhook acquisition and a $3.5 million estimated reduction in non-interest revenues due to Durbin-related debit interchange price restrictions imposed on the company between the periods.
I'll now make a few comments about our balance sheet before providing additional details on our quarterly earnings results. We closed the quarter of 2019 with total assets of $10.75 billion. This is down $171.1 million or 1.6% from the end of the first quarter of 2019, due to the seasonal net outflow of municipal deposits.
Total assets were up $138.1 million or 1.3% from the end of 2018, or $112.3 million or 1.1% from one year earlier. Average earning assets for the second quarter of 2019 of $9.43 billion were up $53.5 million or 0.6% when compared to the linked first quarter, but down $27.8 million or 0.3% when compared to the second quarter of 2018.
Average loan balances in the second quarter of 2019 were up $21 million or 0.3% when compared to the linked first quarter of 2019 and up $44 million to 0.7% when compared to the second quarter of 2018.
On a linked quarter comparative basis, average balances in the business lending portfolio, the consumer mortgage, consumer indirect, and consumer direct portfolios were up. These increases were offset in part by a decrease in the home equity portfolio.
Total ending loans were up $18 million or 0.3% on a linked quarter basis in spite of a $39.9 million decrease in municipal loans as seasonally expected.
Average total deposits increased $92.3 million or 1.1% on a linked quarter basis, but ending deposits decreased $131.5 million or 1.5% due to the net outflow of municipal deposits as seasonally anticipated and consistent with prior year’s annual cycles.
At June 30, the book value of the company's investment portfolio stood at $2.37 billion. This is down $593 million from the end of the first quarter. During the second quarter, the company sold $590.2 million of Treasury Securities with remaining maturities of two to five years at a weighted average market yield of 2.09% and reported net realized gains of $4.9 million.
These securities were temporarily reinvested in overnight federal funds at approximately 2.35% yield, and management is in the process of evaluating market opportunities for reinvesting these proceeds in securities with a longer weighted average lives.
Accordingly, at the end of the second quarter, the company's cash equivalents stood at $707.1 million. The second quarter 2019 tax yield on the investment portfolio including cash equivalents was 2.69%. Exclusive of cash equivalents, the effective duration of the investment securities portfolio was 2.7 years at June 30, 2019.
Shareholders' equity increased $152.6 million or 9.2% between the end of the second quarter of 2018 and at the end of second quarter of 2019, due largely to an increase in retained earnings.
Our capital ratios also remained strong in the second quarter. The company's Tier 1 leverage ratio was 11.54% at the end of the quarter, over 2X the well capitalized regulatory standard.
Tangible equity to net tangible assets at end of the quarter was a solid 10.56%. Our asset quality remained strong at the end of the second quarter of 2019. Non-performing loans comprised of legacy and acquired loans, totaled $24.5 million or 0.39% of total loans.
This is the same as the ratio reported at the end of the linked first quarter of 2019 and 8 basis points lower than the ratio reported at the end of the second quarter of 2018.
Our reserves for loan losses represented 0.78% of total loans outstanding and 0.93% of legacy loans outstanding at the end of the quarter.
We recorded net charge offs of $1.2 million or 8 basis points annualized on the loan portfolio during the second quarter of 2019. This compares to net charge-offs of $0.9 million or 6 basis points annualized during the second quarter of 2018.
At the end of the second quarter, the company's total OREO properties were less than $2 million, and the internal risk loan ratings portend stable asset quality.
I will now redirect my commentary to second quarter earnings results. Although GAAP earnings per share matched the second quarter of 2018 at $0.86, operating earnings per share, which excludes acquisition-related expenses net of tax effect and net realized gains on the sales investments net of tax effect were down $0.06 to $0.80.
This decrease in operating earnings was driven by Durbin related debit interchange price restrictions estimated at $0.05 to $0.06 for the second quarter and a higher effective tax rate.
Total revenues for the second quarter of $149 million were up $5.6 million or 3.9% over the second quarter of 2018. This included a $1.5 million or 1.7% increase in net interest income and a $4.1 million or 7.3% increase in non-interest revenues despite the decrease in banking revenues due to Durbin.
On a linked quarter basis, total revenues increased $6.5 million or 4.5% driven by the recognition of $4.9 million of net realized gains on the investment securities portfolio and a $1.4 million or 1.7% increase in net interest income.
We recorded $88.3 million in net interest income in the second quarter of 2019 as compared to $86.8 million in the second -- million dollars in the second quarter of 2018. Between comparable quarters, the company's net interest margin increased 7 basis points from 3.73% in the second quarter of 2018 to 3.80% in the second quarter of 2019.
The company's yield on average earnings assets increased 15 basis points while funding costs increased 9 basis points. The company's net interest margin from the linked first quarter was also 3.80%.
On a comparable annual quarter basis, net interest income recorded on loans was up $2.9 million and the tax implement yield on the loan portfolio increased 15 basis points from 4.58% from the second quarter of 2018 to 4.73% in the second quarter of 2019.
During the second quarter, the weighted average net yield on new loans exceeded the net yield on the total loan portfolio by approximately 20 basis points. This compares approximately 50 basis points during the first quarter of 2019.
Investment income, including revenues are down investment secured and cash commitments but exclusive of net realized gains of 4.9 million was up 0.4 million over the second quarter of 2018. The company received $0.9 million semi-annual dividend payments from the Federal Reserve Bank in the second quarter of 2019 as compared to the semi-annual dividend paying of $0.4 million during the second quarter of 2018.
The net gains on the sale of investments were realized late in the second quarter when the treasury yield curve inverted. The company's total cost of funds increased 9 basis points between comparable annual quarters from 19 basis points in the second quarter of 2018 to 28 basis points in the second quarter of 2019.
The total cost of deposits remain well below period peer and industry averages for the second quarter of 2019 and 22 basis points reflective of the company's very solid basis for deposits.
Checking and savings account balances represents 69.1% of our total deposits at June 30th 2019. This is up from 67.4% one year prior. Non-interest revenues in our financial services businesses including Employee Benefit Services, insurance services and wealth management services were up $2.2 million or 6.1% between comparable annual quarters, but were offset by a $3.1 million or 15.3% net decrease in banking related non-interest revenues due to the Durbin Amendment becoming effective for the company in the third quarter of 2018.
Despite Durbin, non-interest revenues exclusive of the investment securities gains realized during the quarter contributed 38.8% of the company's total operating revenues, similar to the first quarter of 2019 and full year 2018 results.
Total operating expenses excluding acquisitions expenses were up $3.9 million or 4.6% on an annual quarter comparative basis. The increase in operating expenses between comparable quarters was due to increases in compensation expense including higher employee benefit costs and increase in business development and other administrative expenses.
We reported $1.4 million in the provision for loan losses during the second quarter of 2019. This compares to $2.4 million reported in the provision for loan losses in the second quarter of 2018, a $1 million decrease between comparable periods.
The decrease in the provision for loan losses was reflective of the improvement in the company's asset quality matters between the periods. The effective tax rate for the second quarter of 2019 was 20.2% up from 18.7% in the second quarter of 2018. The company recorded greater amounts of income tax benefits related to stock based compensation activity in the second quarter of 2018 as compared to the second quarter 2019.
Exclusive of stock based compensation tax benefits, the company's effective tax rate was 21.3% in the second quarter of 2019. We look forward to fully integrating the former Kinderhook bank in the community bank in the months ahead. We also expect to fully realize the projected annualized non-interest expense savings of 30% and achieve earnings per share accretion of $0.07 to $0.08 in the first full year following the acquisition.
Kinderhooks total assets at the time of acquisition were approximately $650 million with total approximately $480 million and total deposits of $570 million in line with our expectations.
Looking ahead, we do not anticipate any significant deviations from recent trends around the company's asset quality. Core net interest margin is anticipated to decrease to the mid 370s to about 373 with the inclusion of the Kinderhook portfolios.
If the Federal Open Market Committee lowers the Federal Funds target rate by 25 basis points in the third quarter it will unfavorably impact loan yields, including total variable rate loans of approximately $1 billion.
We also anticipate redeploying significant portions of our overnight federal funds sole position into longer term securities in the months ahead.
Operating expenses are expected to reset after the full integration of Kinderhook at a quarterly run rate of approximately $93 million to $94 million and an increase in line with general inflationary trends.
In summary, we believe the company remains very well positioned for the future. The company's strong asset quality, capital reserves liquidity core funding base and strong non-banking business revenues provide a solid foundation for continued growth and dividend capacity.
The company's market valuation also provides an excellent currency for potential future mergers and acquisitions. Thank you. Now, I will turn it back over to April to open the line for questions.
Thank you. [Operator Instructions]. And we’ll take our first question from Austin Nicholas with Stephens. Please go ahead
Hey guys good morning.
Good morning, Austin.
Maybe just on the charge off, you had a good quarter obviously of credit quality. Any recoveries in there that were driving that down a little bit from kind of that where it's trended over the last couple of quarters?
Yes, we typically have some units that we took into possession in the fourth and first quarter, sometimes go to auction in the second quarter and we do record occasionally some recoveries if the market pricing is there for those units. And so, we did recover on some -- some units in the second quarter.
Okay, that's helpful. And then maybe just on the expenses. Can you, maybe you may have mentioned this in your prepared remarks, but can you maybe refresh my memory on what drove maybe the increase in the other expense line item and then kind of just how to think about that line item kind of going forward?
Sure. During the -- well let me go back to the second quarter of 2018. The second quarter of 2018 was, I guess, a very low expense quarter for us. We had a couple of items that kind of went our way in the second quarter of 2018 that didn't necessarily go the same way in the second quarter of 2019.
But we did increase some of our business development and marketing expenses on an annual quarter comparison basis. We did some refresh on rebranding and that drove a little bit of the expenses in the quarter. We also had some, I’d call, normal related expenses to property type pre foreclosure expenses in the quarter, which we actually had some recoveries back in the second quarter of 2018. So, just more a reflection of some of the favorable variances in the second quarter of 2018.
We also had -- on the salaries and compensation line item, we also had some increases. You know we do have a little bit of wage pressure, so that drove up the salaries a bit, and we also had a higher employee benefit cost in the quarter including some increased costs on our medical-related type benefits. We had an extraordinary year in 2018 on some of our health related costs. And we're sort of back to the normal run rate 2019.
Understood. Okay. And then maybe just on the margin I appreciate your comments there, but maybe just just more specifically how we should think about I guess the impact to the margin from a potential rate hike coming up here in the next couple of days. And then, I guess beyond that, any commentary you have on how we should think about your excess kind of cash position? Should that continue to grow a little bit or are you actively seeking to kind of deploy that cash?
Yes. And Austin, you said rate hike?
Excuse me, Rate cut.
Yes, okay. I just want to make sure we're on the same page there. Yes. Yes, we have about $1 billion in variable rate loans. So, an annualized impact of $1 billion and 25 basis point reduction doesn't affect us favorably. You know, there is some modest room on the liability side for potential funding cost decreases in the future, but as you know we – our beta in rates up for full cycle was about 5%. So, there's not a lot of room on the deposit side to pick up some expense savings. So, the expectation if we do get a 25-basis-point cut is I'll say modestly down from the interest income perspective, and I'm sorry Austin, can you repeat your second question?
Sure, it was related to your excess cash position that you've been building over the last couple of quarters or as you've sold off some securities and maybe just any commentary on how you're thinking about redeploying that and what would trigger you to be more aggressive or less aggressive?
Yes, absolutely. So, we started to identify that we had significant maturities and cash flow expectations from our investment securities portfolio basically from the second half of 2020 through 2023. In fact, we were looking at potentially $2.5 billion of cash flows and maturities.
And so we wanted to, call it potentially reduce some of the reinvestment risk associated with that much in cash flows in that period in time, and so we had kind of indicated in prior calls that we might reinvest or pre invest some of that cash flow. We had an inversion in the yield curve. We happen to see that in kind of the two- to five-year range. We had an opportunity to pull some of those securities out, temporarily put them in cash equivalents at actually you know about a 25 basis point pickup in yield.
And then, we then have opportunities to redeploy it kind of on a little bit longer-term basis, and I would expect that in the coming months that we will redeploy, excuse me most of the cash that was sitting in cash equivalents at the end of the quarter.
And in terms of yield expectations, I mean you know the yield expectations are comparable to probably what we're seeing in terms of current cash equivalents except for we’ll extend the maturities of that.
Got it. Okay, that’s helpful. So more or less, they're not expecting a big yield picked up, just kind of matching your current yield with longer durations.
Correct.
Okay. And then maybe just one last one on the Fed dividend. I know that is expected to decline kind of as you're getting into the large bank larger bank territory. Can you just maybe give us some commentary on where we should think about that number going that was kind of that $900,000 number this quarter?
So we have qualified for the current semi-annual dividend as a bank less than $10 billion because of the inflationary component that the Fed allows. The dividend payment rate was 6% for the semiannual periods. With the Kinderhook transaction, we will pass back over the $10 billion mark even for the inflation. Inflation adjusted $10 billion dollar mark. And the dividend rate is typically the core; it is the equivalent of the 10 year treasury rate at the time it's declared.
Understood. Okay. Thank you so much. That's all I have.
Thank you, Austin.
And we'll take our next question from Russell Gunther with D.A. Davidson. Please go ahead.
Hey good morning guys.
Good morning, Russell.
Wonder if we could start please on some of your niche fee businesses, if you guys could provide us an update in terms of how that revenue growth is tracking into the back half of the year. It would be particularly interested in the employee benefits business and insurance as well.
We've been kind of achieving single digit, mid-single digit growth rates in that in that business. I would expect that that would continue in the back half of the year as compared to the second half of 2018. We've continued to just see a general growth in the number of participants and the related revenues around that business. So I would expect that to continue kind of long it's recent trend lines.
One of the challenges on the employee benefits services business is, it's got to be pretty substantial. The run rate on that will probably be $100 million in revenue this year. And the margins are very good. So we'll take all due to that, but it makes it a little bit harder growing mid-single digits as a business is a pretty good is a pretty good. But there are some kind of businesses within the broader employee benefit services that are that are growing a little bit faster than the mid-single digits.
Wealth management and wealth management insurance, the insurance is doing very well. Good growth year-over-year in the insurance business. Pretty good growth in wealth management too. They're all doing okay. None of them are really at double-digit pace right now, but they're all in between kind of 4 and 9, 5 and 8 kind of range in all those businesses. Margins are actually going up, which is good. So revenues are growing faster than expenses. So I think we expect those businesses could continue to be pretty substantial contributors going forward as they have they have been in the past.
That's great color. I appreciate it guys. Just the last question from me. With the Kinderhook now closed, I know you're going to be focused on integrating that, but any updated thoughts in terms of future M&A on the depository side. Just how active you remain, and what's of interest to you at this point in the cycle?
Sure. I think we're always interested. I think the cycle is maybe a bit less relevant to us than it is to some others who maybe operate outside our markets in more volatile market conditions. So for us, M&A is an ongoing element of our strategy and as everyone understands, our markets are only growing. You know you can get 3%, 4% organic growth in the year that's pretty good. That's not enough if you want to deliver double digit returns to shareholders so you know discipline, high value M&A has long been a an important element of our -- of our shareholder return strategy.
So we will continue to look for opportunities on an ongoing basis that continues at the current time. I expect that will continue into the future. We're unlikely to do anything significant in terms of size. I think for us, I think between half a billion and two billion is really kind of where we want to be, it's got to be, high value opportunity in terms of ultimate shareholder benefit. It's got to be something that's either within or continuous to our existing market fluff trend. So those are kind in parameters for the most part that we look towards in terms of our valuation.
I think Joe had mentioned this earlier relative to our market multiples, which gives us a significant opportunity. But you know we -- we as always are very disciplined about what we do and who we partner with and we'll continue to use that discipline to identify those high value acquisition opportunities that we know can be solidly accretive on a sustainable basis for shareholders
Very good. Thanks for all the detail, guys. Appreciate it.
Thank you.
And we'll take our next question from Erik Zwick with Boenning & Scattergood. Please go ahead.
Good morning, guys.
Good morning, Erik.
Good morning, Erik.
Maybe just first with regard to the Kinderhook transaction closing, I'm curious whether you have any our current advertising campaigns running or anything planned for the Capital District? And if so, would those just be the kind of standard branding efforts or do you have a loan or deposit specials currently running or planned for the market?
Well, we have [Indiscernible] kind of a new market. It's not a completely new market. We started in the Albany market in the beginning of 2018 with the commercial banking office that has done extremely well. So we were already doing a fair bit of marketing and branding and advertising, some of those kinds of things in that market. I suspect that will pick up a little bit between now and the end of the year as we continue the integration and transition -- transition process, which I think is fairly standard operating procedure.
And then I know its still relatively early, but our customer deposit retention kind of tracking consistent with your expectations at this point?
It's been a week, so far so good.
Got you. A week since closing, I guess, you know, some of you are happy ever since the deal was announced. And then certainly, certain customers, I'm sure, are aware of that. So but it sounds like everything's on track.
Yes. And Erik, prior to the -- prior to the conversion day, Kinderhook had done a pretty good job of holding in the customers, with regard to their announcements, obviously, that there was going to be a merger in early July. And, the balances would indicate that those customers are, for the most part, healthy. Well, that's right out through the conversion two weeks ago.
As I recall from looking at their June balance sheet, loans were down just a hair and deposits were up a little bit as of June.
That's good. I appreciate the detail there. And then on the tax rate as I just kind of think about modeling for the second half of the year, can you remind us your expectations for the effective tax rate?
Yes. So the effective rate range is about 21.3% to up to about 22 % for the quarters looking forward. In some of our municipal or reinvestment winds up in the municipal securities portfolio that could drip down a couple of basis points, but generally 21% to 22% range.
Thanks. And just one last one from me, just wanted to make sure I understood the expectations for the net interest margin going forward. Sounded like you expected to kind of decrease from the mid 370s to closer to 370, and did not include the expectation for a Fed Funds rate cut? Or with the kind of decrease from that cut be an addition to that range that you professed?
Well, we kind of provide around 370s because knowing 25 basis point we cut, although our prime-based loans were repriced, it's not a significant impact on kind of a quarterly run rate basis. So we kind of estimated that kind of 370 mark inclusive of Kinderhook and also expecting a 25 basis point decrease. But we want to give ourselves some room on each side that estimate around 370 just because things -- we don't know until we know at the end of the next quarter.
Make sense. Thank you so much. That's it from me.
Thanks Erik.
And we'll go on to our next question from Brody Preston with Piper Jaffray. Please go ahead.
Good morning everyone. How are you?
Good morning Brody.
Good morning, Brody.
I guess I just want to touch on Kinderhook. Now with the Kinderhook in the fold, just wanted to get a sense for the loan growth outlook moving forward and better understand if there are any industries or any other areas of opportunity that you think you could take advantage of with the addition of Kinderhook?
Sure. I think I'd start with it. It's a somewhat larger market than our average markets, just in terms of demographic, the population. It's a good market if you look at it relative to the other upstate New York cities, it's fairly vibrant. There's still a fair bit of development and growth in different ways happening in that market. And we've been able to capitalize on that since the beginning of last year when we put in place a commercial banking office there. I think the opportunities are broad in the sense that there is a fair bit of commercial real estate opportunities. There's C&I opportunities. There are mortgage opportunities there.
So I think it's a broad-based set of opportunities that we expect to be able to capitalize on. We've also, you know, we haven't been there that long in that market, a year-and-a-half now. Certainly, the addition of Kinderhook will be an advantage. We've been able to do, I would say, an above average job of leveraging some of our non-banking businesses into those markets as well. So, I think that's been good. We've established a wealth management office there also recently, which is also off to a very good start. Our benefits business has done a fair bit of work in Capital District for some of the larger companies and businesses in the Capital District.
So -- and I think the other thing is that if you look at our legal lending limit, there's almost nothing we can't really participate in the, you know, in that market. So I think -- we think that there's a lot of breadth of opportunities, I mean, across the spectrum of commercial and consumer opportunities. There's also from kind of the bottom to the top of the market, vertically there's a lot of opportunities there for us to penetrate that market as well. As I said, we're -- we've met with a great deal of success in 18 months that we've been in that market and we think, the Kinderhook market is going to just extend our opportunities that much more from the market. So in terms of growth opportunities, it's hard to put a number on it. Our existing organic markets grow at two, three, four points a year. I would expect to do a little bit better than that in the Capital District.
Okay, great. That's good color. And then on the treasury sale and the cash redevelopment, I think some of your comments from earlier, it sounds like the yield on the redeployment won't necessarily be too much higher than what you're currently earning on cash equivalents. So I guess I wanted to better understand what the duration -- I guess what market you're looking at in terms of duration? And if there's any opportunity to redeploy in two different asset classes to maybe pick up a little more yield?
Yes. I mean, we are looking at additional or I should say reinvestment of those proceeds. We've got a couple of different actions on the table relative to where we wind up from a weighted average lives basis. We have typically invested some of our significant portion of our securities in longer term treasuries. We viewed – we're looking at other assets as well that they had potentially put the average lives in a range of four to seven years maybe little bit longer if the opportunity presents itself.
One of the -- I think we had – we feel like we had an exceptional opportunity. We kind of been talking about stretching out as the maturities -- the weighted average life of the portfolio came down, we've talked about trying to stretch it back out a little bit just to diversify some of the lumpy cash flows over the next handful of years as we were kind of having those conversations and look at the market, the yield curve inverted and pretty significantly and it just created this opportunity for that particular tranche of securities for us to sell it, reinvested actually at a higher book yield than those securities basically generate capital. I mean, I know the Street investors don't give you credit for gains which they should, but still it was a capital generation of that and we're pretty confident that we're going to have the opportunity to reinvest in slightly long maturities.
The yield curves has only inverted few times the last one year. This was a good opportunity for this particular tranche of securities. It won't stay inverted forever, at least, it never has, if history is any indicator, and so we're pretty confident we'll have an opportunity reload on some of that liquidity at a better yield. And we're looking at securities, but on treasuries, but also potentially some mortgage backs as well as maybe a mix of those, depending on where are the spreads are there as well. So we're pretty confident that we'll have the opportunity to redeploy at some juncture here certainly before the end of the year at a much more attractive yield and what those securities were yielding before we sold them. In fact, now because of the yield curve inversion, the short term yield is actually higher than what the book yield of those securities were, but we think we're going able to reload at a rate even higher than that between now and the end of the year.
So just because of the inversion of the yield curve in that particular of tranche of securities has gave us an opportunities to do something that we felt was a kind of one time capital creation opportunity. So that was kind of the thinking behind the whole trade. But the plan is to redeploy that liquidity at some point between now and the end of the year when the market provides that opportunity.
Okay, great. And then, I wanted to maybe get an update on CECL and any of your thought around the potential impact from CECL to some consumer lending just given the longer duration nature of consumer loans relative to some commercial loans?
Sure, Brody. Well, first of all, we're not in a position yet to put any sort of range out around CECL. But I can assure you we're working very diligently on running our CECL models and looking to have those models validated. We do have some consumer portfolios, as you mentioned, home equity and residential mortgage portfolios with longer average lives. With that said, the charge-off levels in those two portfolios looking back have been very low. So, the expectation around future charge-offs based on, you know, at least the economic outlook today would not probably require that we significantly change those expectations on from a historical loss perspective. So, on balance, I think we're pretty well positioned for CECL, part of that is just the historical charge-off levels have been low for us.
Okay. And then last one from me. It's a little bit more of a two-part question. When I look back at CBU's performance from a funding perspective in this interest rate cycle relative to last interest rate cycle particularly with regard to deposits, and you guys have certainly outperformed relative to last cycle. The cycle deposit beta is 5% verse 28% last type and the cost of funds is dramatically lower which is obviously due to a lower level of -- absolute level of interest rate. But you guys have had a mix shift in deposits that have occurred since last time, which I'm assuming is a big driver of the current success you've had.
So I guess I want to better understand two things. In your view what's been a driver of CBU success from a deposit gathering perspective over the last decade that's allowed you guys just sort of mix shift into DDA and away from time deposit? And secondly, given the deposit mix is so different this time around what would be your expectations around deposit cost moving forward in a one to two rate cut scenario? Thank you.
Sure. I think it's the realities that you want low cost deposits and not higher cost deposits. And I mean, I certainly now there's two strategies here. You can run very lean and efficient branch network and gather deposits based on rate, but you save on the operating expense side. I mean, our strategy has always been because we're in a lot of smaller markets is to gather those core checking and savings accounts. We've been doing that obviously very well for 15 years. And so if you look back historically you can see our mix of checking and savings accounts just grown overtime, it used to be somewhere in the half range and now its 70%. So, I think that pretty consistent with our retail banking strategy. Overall, I think that's been the reason for this success in this last cycle.
I think you can – its difficult to distinguish yourself on the credit side in terms of economic values, earnings performance, shareholder value, I mean, we're all doing the same stuff in the market, same rates, same for the most part credit structure, some take different risks and different lanes, but on the asset side there's not a lot you can do really to distinguish yourself longer term in terms of Main Street banking and creating shareholder value. That's not true on the funding side. I mean you can work at having a really strong foundation of core funding that will serve your interest well over time.
So, that's essentially been the model for us for the pass 15 years. It's worked out pretty well. Clearly its created a balance sheet of that's asset sensitive. And rates up is better for us than rates down, but it'd appears that rates down we do better on the average than the industrial as whole because of our funding mix. So it’s a kind of a win-win. When rates go up we do really well. When rates go down we don't do quite as – it's quite as badly as other. So, it gives us a lot of flexibility and I think it's consistent with our business models. We work hard at it. We run our retail banking business like it’s a business. We measure profitability. We measure earnings performance. We measure returns. We measure growth, all those kinds of things. So we don't run it as a funding mechanism for our asset gathering businesses. We run it as a standalone business that we expect to perform well.
Great. Thank you very much everyone.
Thank you.
We'll take our next question from Collyn Gilbert with KBW. Please go ahead.
Thanks, good morning guys.
Good morning, Collyn.
Good morning. I just want to clarify couple of points on the NIM. So number one is in your guide for maintaining around that 3.70 NIM, how much do you all anticipate to derive from equitable yield? I know Kinderhook is not a huge obviously deal, but just…?
Yes. So the run rate this quarter was $1.03 million [ph] and it was very similar to last quarter. I would expect that portion of the existing acquired accretion to just sort of drift down to a couple hundred thousand on a prospective basis. And you're right, Kinderhook is relatively small. We don't have a number per se for the adjustment, but I would not anticipate that being more than a hundred or couple of hundred thousand on a quarterly basis.
Okay. And then -- got it. Okay. And then just on prepay -- so I know last quarter you guys saw elevated prepays, it looks like you had one again in this quarter. Can you just talk about -- I know those are obviously are hard to predict, but just sort of what you're seeing within the pattern of your borrowers and maybe if you have a sense at all on how that could flow during the back half of the year?
Sure, I know it doesn't look like our commercial lending was up very much this quarter. We actually had a really good origination quarter. The pipelines are bigger than they were last year. We were having a very, very good quarter. We did have some pay-downs in June. Actually, a couple of them came in like the very end of June. We had -- I think Joe made reference to the $40 million of municipal loans which pay down every June 30th and then they reload. So that was $40 million of that, we've also had about $36 million of. credits that were over a million piece, anything over a million, they totaled about $36 million in the quarter that paid down early. That was a little more than the first quarter, so we had a little kind of better experience the first quarter, we had two significant credits about $25 million that paid down literally the last week in June, plus the $40 million in municipals which we reload.
So, if you take it all in, and look, I understand that things prepay, that's the business we're in, you lend money and sometimes people pay it back early, but from an origination stand point, we had a really -- really strong second quarter. And again, the pipeline is pretty good in commercial. The mortgage pipeline is also off -- the mortgage is a bit more predictable, let's say, than the commercial business. We had some growth in mortgage, I expect we'll have some growth next quarter, that portfolio pretty much grows over time generally at a kind of a lower single-digit rate and I would expect that to continue into the third quarter. The fourth quarter is usually more difficult just from a seasonal standpoint. But I think the pipelines are actually in better shape than they were last year at this time and we have a really good origination quarter this quarter compared to last year..
Okay. That’s helpful. And then that somewhat ties into my next question in terms of the expenses type of the business development efforts that you've said. Anything specific there or is that related to hires? Is that related to systems? Or maybe just talk a little bit of more about those investments and what you expect to get from that?
Yes. So we had -- and just as fine way of example, and my apologizes if this is long into the weeds, but we had some television commercial for example that were little bit older. We refresh them, we -- which you have to basically incur that expense as you produce and air those fabs [ph], those types of items that drove it, not individuals in the business development area, it just more about marketing expense.
Nothing significant, Collyn, other than what Joe just said, we made some commercials in the fourth quarter, they were expensive, you have to expense those off when you start running them, which we did in the first quarter or so, the first couple of quarters, you're expensing off the cost of those TV commercials, which for the last year-and-a-half we do that, but maybe once a year at the most I'm and not even sure. So -- but other than that, there was no significant marketing rebranding. I would say, maybe marketing is running a little bit higher -- the best run rate than it has, in the past, it was nothing, I don't think significant beyond just the accounting for those TV commercials that we remade..
Okay. I think, I was also just maybe try to drill into the other expense line. Looks like maybe just under $3 million increased year-over-year and then about $2 million higher than the first quarter. So I was trying to get a little bit of better sense of what that was?
Well, Collyn I think I'm trying to indicate kind of an earlier question that we had really, I call it, very good expense quarter in the second quarter of 2018. We just had a couple of items that effectively were -- went our way. We had reductions in certain expenses. And we basically had more of a call it a more of a normalized quarter this quarter, but when you look at annual quarter comparative basis, they do look a little bit high. But that's largely because the second quarter of 2018 was a very good quarter from an expense run rate perspective, but just some other kind of some of various little administrative expenses that just resulted in a net increase on an annual quarter comparative basis that was a little bit above our historical run rate.
Okay. Very good. That's all I had. Thanks guys.
Thanks Collyn.
Thank you.
There are no further questions in the queue. At this time I would like to turn the conference back over to today's presenters for closing and additional remark.
Great. Thank you, Avril. Thanks everyone for joining the call. And we will talk to you again next quarter. Thank you.
Ladies and gentlemen this does conclude today's presentation. We thank you for your participation. You may now disconnect.