Community Bank System, Inc. (NYSE:CBU) has reported a record-breaking revenue for the first quarter of 2024, underpinned by robust growth across its commercial, mortgage, and consumer installment portfolios. The financial institution is looking to expand its presence with the opening of 14 new branches in strategically chosen locations over the next five quarters.
Moreover, the company's wealth business and Employee Benefit Services have shown significant revenue increases, contributing to the strong quarter. Despite a flat performance in the insurance services, Community Bank System remains optimistic about future growth opportunities in all sectors, including potential acquisitions in the insurance and banking sectors.
Key Takeaways
- Community Bank System announced record revenue in Q1 2024, driven by growth in key portfolios.
- Plans to open 14 new branches in various regions, including Buffalo and Rochester.
- Employee Benefit Services grew by 7.9% and acquired creative plan designs.
- The wealth business reported a record revenue quarter with substantial gains.
- The company repurchased 750,000 shares; OpEx run rate to stay around mid-single digits.
- Loan-to-deposit ratio at 74% and Tier 1 leverage ratio at 9.01%, above regulatory standards.
- Net charge-offs increased slightly, while non-performing loans declined from the previous quarter.
- Strong loan pipeline, especially in commercial and industrial loans, is expected to boost net interest income.
- Growth anticipated across wealth, employee benefits, insurance, and banking sectors.
- Positive outlook for credit trends, with strong loss coverage and potential for yield increases through security portfolio management.
Company Outlook
- Expansion into new markets with the opening of 14 branches.
- Continued growth expected in commercial and industrial loan sectors.
- Anticipation of increased net interest income throughout 2024.
- Prospects for organic and inorganic growth in the insurance and employee benefits businesses.
Bearish Highlights
- Insurance services business performance remained flat.
- Regulatory scrutiny and uncertainty affecting bank mergers and acquisitions.
- Challenges in whole bank M&A due to increased regulatory scrutiny and uncertain timing affecting pricing.
Bullish Highlights
- Record revenue in wealth and Employee Benefit Services businesses.
- Strong growth in commercial, mortgage, and consumer installment portfolios.
- Positive credit trend outlook with potential for increased yields.
Misses
- Some securities in the portfolio below market value, despite a positive restructuring in the past.
Q&A Highlights
- Company is adding new customers and lives to the employee benefits platform.
- Acquired credit plan designs expected to contribute to H2 revenue.
- Interest expressed in pursuing acquisitions in the banking sector.
- Company has strong loss coverage and may release securities to increase yields.
- Community Bank System differentiates itself with a strong track record of execution amid M&A scrutiny.
Community Bank System's assertive strategy for growth, coupled with its strong performance in the first quarter, sets a positive tone for the company's trajectory in 2024. With a clear plan for expansion and a focus on diversifying its services, the company remains a significant player in the regional banking landscape.
InvestingPro Insights
Community Bank System, Inc. (CBU) has demonstrated a solid financial performance with a reported market capitalization of $2.35 billion. The company's commitment to shareholder value is evident through a high shareholder yield and a remarkable track record of raising its dividend for 26 consecutive years, showcasing its financial stability and reliability for investors. This is further underscored by the company's ability to maintain dividend payments for 41 consecutive years, signaling consistent returns to shareholders.
InvestingPro Data metrics indicate a Price/Earnings (P/E) ratio of 18.08, which adjusts to a more attractive 13.37 when considering the last twelve months as of Q1 2024. This suggests that the company's earnings are strong relative to its share price.
Moreover, the company's revenue growth is notable, with a 10.43% increase over the last twelve months and an impressive quarterly growth rate of 41.68% in Q1 2024. This revenue growth aligns with the company's reported record-breaking revenue for the quarter and reflects the successful expansion of its portfolios.
InvestingPro Tips further reveal that while some analysts have revised their earnings expectations downwards for the upcoming period, the consensus remains that Community Bank System will be profitable this year, a prediction supported by the company's profitability over the last twelve months. Still, it is important to note the company's weak gross profit margins, which could be an area of focus for potential improvement.
For readers interested in a deeper dive into the financial health and future prospects of Community Bank System, there are additional InvestingPro Tips available. By visiting https://www.investing.com/pro/CBU, readers can access comprehensive analyses, including more on the company's financial metrics and industry comparisons.
And for those looking to subscribe to InvestingPro for a more detailed investment strategy, use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. There are 6 more InvestingPro Tips waiting to guide your investment decisions on Community Bank System.
Full transcript - Community Bank System Inc (CBU) Q1 2024:
Operator: Good day, and welcome to the Community Bank System First Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Dimitar Karaivanov, President and Chief Executive Officer of Community Bank Systems. Please go ahead.
Dimitar Karaivanov: Thank you, Nick, and good morning, everyone, and thank you for joining the Community Bank Systems Q1 2024 earnings call. This quarter was a good illustration of the benefit of our diversified financial model. Our market-sensitive recurring fee income businesses showcased their strength and fully offset margin pressure in our banking business, leading to another quarter of revenue -- of record revenue for the Company. We normalized the expense growth rate while continuing to invest in all of our businesses. Our below-average risk profile remains firmly rooted in the low credit risk intensity and exceptional liquidity of our balance sheet. During the quarter, we also modestly increased our qualitative assessment of future uncertainty and proactively added to our reserves. In our banking business, growth continued in our commercial, mortgage and consumer installment portfolios. Strong loan growth of $179 million was more than fully funded through deposit growth of $424 million. Market share gain opportunities remain attractive across our footprint as many competitors are limited by their liquidity profiles. Pipelines remain excellent with particular strength in C&I compared to prior quarters. We also formally announced our branch expansion plans with 14 locations expected to open in the next five quarters. Two in Buffalo, three in Rochester, Syracuse, two in the Capital Region, two in the Lehigh Valley, one in Springfield, Massachusetts and our first location in New Hampshire. In our Employee Benefit Services business, we are now benefiting from both new client counts and market appreciation. Revenue growth was 7.9%, and we also closed on the acquisition of creative plan designs during the quarter. Looking forward, the organic momentum remains strong and market values remain supportive. Our insurance services business was relatively flat in terms of revenue performance due to the timing of certain commercial premiums and lower contingency revenue. However, both the organic and inorganic growth opportunities remain attractive for 2024. Our wealth business had a record revenue quarter with double-digit gains in revenue and increased inflows. Our wealth team is energized and focused on increasing penetration levels while also launching a number of new service offerings on a nationwide basis. Overall, I'm encouraged by our operational execution this quarter as evidenced by the improvement in pretax pre-provision net revenues over the prior two quarters. In terms of capital deployment, we closed on both a number of smaller acquisitions in our fee income businesses and also repurchased 750,000 shares at what we deem to be very attractive levels, given the intrinsic earnings power of our company. I will now pass it on to Joe for more details.
Joseph Sutaris: Thank you, Dimitar, and good morning, everyone. The Company recorded $0.76 of GAAP diluted earnings per share in the first quarter. This compares to $0.11 in the first quarter of 2023 and $0.63 in the linked fourth quarter of 2023. As a reminder, during the first quarter of 2023, the Company recorded a $52.3 million pretax realized loss on the sale of certain available-for-sale investment securities in connection with the Company's balance sheet repositioning strategy which negatively impacted GAAP diluted earnings per share by $0.75 in that quarter. Operating diluted earnings per share, which excludes certain non-operating revenues and expenses as delineated in this morning's press release were $0.82 in the first quarter and linked fourth quarter as compared to $0.92 in the first quarter of the prior year. The $0.10 decrease in operating diluted earnings per share from the prior year's first quarter was driven by a decrease in net interest income and increases in the provision for credit losses, operating expenses and income taxes, offset in part by an increase in operating non-interest revenues. On a linked quarter basis, a decrease in operating expenses and an increase in non-interest revenues were offset by a decrease in net interest income, a higher provision for credit losses and an increase in income taxes. Operating pretax, pre-provision net revenue per share, as defined in the press release, was $1.18 for the first quarter. This was up $0.05 per share over the linked fourth quarter, but $0.04 per share below the prior year's first quarter. During the first quarter, the Company recorded total revenues of $177.3 million. This established a new quarterly record for the Company and highlights our diversified business model. Higher levels of operating non-interest revenues in our banking employee benefit services and wealth management services businesses overcame declines in net interest income and insurance services revenues in both the linked quarter and the prior quarter -- over the linked quarter and the prior quarter. The Company recorded net interest income of $107 million in the first quarter as compared to $109.2 million in the linked fourth quarter. Despite solid loan growth in the quarter and an improvement in yield on interest-earning assets, pressure on funding costs did not abate. During the quarter, the Company continued to experience a migration of customer deposit balances from lower rate checking and saving accounts to a higher rate money market and time deposits increasing the cost of deposits 16 basis points in the quarter from 98 basis points in the linked fourth quarter to 1.14% in the first quarter. When combined with higher borrowing costs, the Company's total cost of funds increased 23 basis points from 1.08% in the linked fourth quarter to 1.31% in the first quarter. This outpaced a 13 basis point increase in interest-earning asset yields, resulting in a 9 basis point decrease in the Company's fully tax equivalent net interest margin from 3.07% in the fourth quarter of 2023 to 2.9% in the first quarter of 2024. Comparatively, the Company reported net interest income of $111 million in the first quarter of 2023. We believe the first quarter net interest income result of $107 million represents a bottom for the Company in 2024, and the outlook remains positive for net interest income expansion on a full year basis. As mentioned previously, operating non-interest revenues were up in three of our four businesses on both an annual quarter and linked-quarter basis. Banking-related non-interest revenues were up $1.8 million or 11.1% over the same quarter of the prior year driven by increases in debit interchange and ATM fees and loan placement and advisory revenues, while Employee Benefit Services and Wealth Management services revenues were up $2.3 million or 7.9% and $1 million or 11.7%, respectively, over the same period, driven by favorable investment market conditions and employee benefit plan participant growth. Insurance Services revenues were down approximately $400,000 or 3.6% due to timing differences on certain commercial policy renewals and insurance carrier related contingency revenues. On a linked-quarter basis, banking-related non-interest revenues were up slightly, while employee benefit services revenues and wealth management services revenues increased $1.7 million or 5.6% and $1.3 million or 16.5%, respectively. Insurance Services revenues were down approximately $500,000 or 4.2%. During the first quarter, the Company recorded $118.1 million in non-interest expenses. This represents a $4 million or a 3.5% increase from the prior year's first quarter and an $11 million or 8.5% decrease from the linked fourth quarter results. Total operating non-interest expenses, which exclude certain non-operating expenses as detailed in the Company's press release, were $114.4 million in the quarter as compared to $110.3 million in the prior year's first quarter and $116.4 million in the linked fourth quarter. As mentioned on last quarter's earnings call, although the Company will continue to make front-foot investments in its leadership team, talent across all lines of business, data systems and risk management. Operating expense growth is expected to moderate in 2024. The first quarter results were consistent expectations. The Company recorded a $6.1 million provision for credit losses during the first quarter of 2024. This compares to $3.5 million in the prior year's first quarter and $4.1 million in the linked fourth quarter. Although the Company's credit metrics remained strong during the first quarter, the Company billed loss reserves reflective of an increase in our qualitative assessment of future uncertainty. The Company's allowance for credit losses stood at $70.1 million or 71 basis points of total loans outstanding at the end of the first quarter, up $3.4 million or 2 basis points in the quarter and up $6.9 million or 1 basis point over the prior year's first quarter. The effective tax rate for the first quarter of 2024 was 22.9%, up from 16.9% in the first quarter of 2023. Excluding the impact of tax expense and benefits related to stock-based compensation activity and income tax credit amortization, the effective tax rate for the first quarter of 2024 was 22%, up from 21.4% in the first quarter of 2023. Ending loans increased $178.9 million or 1.8% during the first quarter. This marks the 11th consecutive quarter of loan growth and is reflective of the Company's continued investment in its organic loan growth capabilities. Although outstanding balances in the consumer mortgage and consumer direct segments increased in the first quarter despite seasonal headwinds, the primary driver of loan growth in the quarter was the $135.8 million or 3.3% increase in the Company's business lending portfolio. The Company's ending total deposits increased $423.9 million or 3.3% during the first quarter of 2024, driven by seasonal inflows of municipal deposits. Ending deposits also increased $241.4 million or 1.8% from one year prior. Although funding costs continued to increase in the first quarter, as previously noted, non-interest-bearing and low rate checking and savings accounts continue to represent almost two-thirds of total deposits, and the Company's cycle-to-date deposit beta of 20% continues to be one of the best in the banking industry and reflects the strength of the Company's core deposit base. The Company's liquidity position remains strong, readily available sources of liquidity, including cash and cash equivalents, funding availability at the Federal Reserve Bank discount window, unused borrowing capacity at the Federal Home Loan Bank of New York and unpledged investment securities totaled $4.6 billion at the end of the first quarter. These sources of immediately available liquidity represent over 200% of the Company's estimated uninsured deposits, net of collateralized and intercompany deposits. The Company's loan-to-deposit ratio at the end of the first quarter was 74%, providing future opportunity to migrate lower-yielding investment security balances into higher-yielding loans. At the end of the first quarter, all the companies and the bank's regulatory capital ratio significantly exceeded pulp capitalized standards. More specifically, the Company's Tier 1 leverage ratio was 9.01%, and which substantially exceeded the regulatory well-capitalized standard of 5%. During the first quarter, the Company repurchased 750,000 shares of its common stock at an average price of approximately $46 per share. The Company recorded net charge-offs of $2.8 million or 12 basis points of average loans annualized during the first quarter. This is up slightly from 10 basis points in the linked fourth quarter and 7 basis points in the same quarter of the prior year with increases primarily attributed to consumer indirect loan portfolio. At March 31, 2024, non-performing loans totaled $49.4 million or 50 basis points of total loans outstanding. This represents a decline from $54.6 million or 56 basis points of total loans at the end of the linked fourth quarter. Non-performing loans were $33.8 million or 38 basis points of total loans one year prior. Loans 30 to 89 days to linked were also down on a linked quarter basis from $48.4 million or 50 basis points of total loans at the end of 2023 to $42.1 million or 43 basis points of total loans at the end of the first quarter. Overall, the Company's asset quality remained strong in the quarter. We believe the Company's diversified revenue profile, strong liquidity, regulatory capital reserves, stable core deposit base and historically strong asset quality provide a fundamentally solid foundation for future opportunities and growth. Looking forward, we are very encouraged by the revenue outlook in all four of our businesses we will continue to lean into growth and prudently deploy capital and align with the interest of our shareholders. That concludes my prepared comments. Thank you. I'll now turn it over to Nick to open the line for questions.
Operator: [Operator Instructions] Our first question comes from Manuel Navas with DA Davidson. Please go ahead.
Unidentified Analyst: This is Sharanjit on for Manuel. So OpEx this quarter was much better than expected. What are some of your expectations for the OpEx run rate going forward?
Joseph Sutaris: Yes. We believe our run rate for OpEx will kind of be contained, I'll call the historic levels of about mid-single digits, call it, 3% to maybe 3% to 6%. We invested pretty heavily in a lot of our infrastructure and talent and technology last year, which kind of increased the OpEx run rate, but they were kind of -- most of them are front-footed investments. I mean, obviously, there were some wage pressures as well. But we expected that to sort of come down, if you will, in 2024. And I think the first quarter is, I think, a pretty good data point for us from the standpoint of what the expectations are going forward.
Unidentified Analyst: Great. And do you have any updated thoughts on the pace of the buybacks, given strong loan growth?
Joseph Sutaris: Yes. We would expect that the pace will slow a bit. I wouldn't expect to just an additional 750,000 shares going forward. We just had an opportunity at these levels. So, we took advantage of that, if you will. Generally, our philosophy over the years has been to generally buy back the -- I'll call it the equity plan issuance during the year and potentially a little more in this case with the current price points.
Operator: Our next question comes from Steve Moss with B. Riley FBR. Please go ahead.
Steve Moss: Just -- sorry to hop on late here, but I do want to maybe start on the loan pipeline. You guys showed good commercial loan growth this quarter. Just curious as to where -- what you're seeing for economic activity and the opportunity there?
Dimitar Karaivanov: Steve, it's Dimitar. Our pipeline is strong. Our pipeline is actually stronger than it was at the end of last year and probably stronger than it's been in the past couple of quarters. So, I will say the difference in our pipeline on the commercial side, and I really should preface it that it's the commercial pipeline I'm talking about is that we have successfully change the mix there quite dramatically, which we've been working on over the past few quarters from commercial real estate into C&I. And over -- well over half of our pipeline today is in C&I. That takes a little bit longer to close, so we may not see the same pace of growth even with a higher pipeline. But it's there, it's just going to transpire a little bit later, I think, and hear some of those things to close. So, the activity is strong, as I mentioned, it's the same thing on the mortgage side. Our pipeline today is higher than it was a year ago. As we've talked to our consumer installment business, we take a little bit more of a price versus growth equation in that one. So, with that said, I mean, our competitors, a lot of them remain constrained. Be it liquidity, be it capital, be it optimizing risk-weighted assets. So, there's a lot of market share opportunity for us and our markets as well continue to remain resilient and with more than the average historical economic activity. If you look at Central New York, some of the data that -- some of the local organizations have gathered in terms of economic development. Central New York has 10x the amount of economic development today in the pipeline than it did five years ago. That, by the way, does not include any of the semiconductor corridor investments. So, a lot going on in our markets in a positive way, and we're really well positioned to continue to take market share.
Steve Moss: Okay. That -- that's really helpful. Appreciate the color there, Dimitar. Just curious as to what's the add-on rate for new loans these days for you guys?
Dimitar Karaivanov: Yes, we're right back in the mid-7s, which is where we've been in the past couple of quarters. So really, pricing has remained pretty firm here in terms of our new originations.
Steve Moss: Okay. Appreciate that. And then in terms of just the margin here, I realize your deposit beta remains -- and your funding costs are being really low relative to Fed funds. Curious, how you're thinking about the margin here, if we stay in a higher for longer environment? Do you continue to see funding creep? And is there -- I know the securities reprice a little longer dated. So -- just curious, we're going to see some more margin pressure in the next couple of quarters?
Joseph Sutaris: Yes. So, Steve, this is Joe. I will address that. So -- our expectation, and I made it -- I said it in my prepared comments, is that we expected the first quarter NII outcome, net interest income outcome to kind of be the bottom for us. That's still our expectations even in a higher for longer scenario. We do expect the NII to step up in the remaining quarters of 2024 and hopefully outpace the full year result from 2023. Obviously, there's a lot of variables that could change between now and the end of the year. But just some things to think about is that in the trailing 12-month period, we had about $1.3 billion of principal payments and prepayments on the loan portfolio and originated about $2.2 billion for a net growth of about $900 million over a trailing 12-month period. So, there's a turnover component, if you will, on the earning asset side, as these 5, 20 or so loans that are on the books now, the current book yield, as they're rolling off, they're being replaced by 7.5% new paper. So, I think that provides us a significant potential lift on the earning asset side. On the liability side, I said it in the prepared comments, but we do expect kind of some of the pressures on funding to abate. With that said, if rates continue to move up on the long end, those pressures will probably still be present. But right now, our expectations are that the cost of deposits are not going to grow in the quarters going forward at the same rate they had been in the trailing quarters. So that sort of set an NII expansion. The net interest margin, we booked $298 million on a tax equivalent basis in the quarter. The expectation is the margin may creep up a couple of basis points to flat, but the expectation is that we'll be able to expand net interest income on a go-forward basis. Obviously, deposit balances will make a difference and kind of how -- what the outcome is there and their ability to support continued loan growth because if we move from a little over 1% deposit base to a 5% borrowing, that could be expensive. So, that's one the caveats as we have to kind of look and manage the deposit balances. There's obviously migration -- continued migration into higher cost deposits that will impact the overall cost. And obviously, the swap of the yield curve matters as well. So, there are some, I'll call it, some components that could affect the outcome, but our expectation is that NII will expand moving forward.
Steve Moss: Appreciate that. And then, in terms of the insurance business here and maybe just both insurance and employee benefits. I realized -- I think I heard there was time issues for the insurance revenues this quarter. Just -- I assume it's still a hard market and just any update you can give on revenue growth there. And it's been a strong market for stocks and bonds and or more stocks and bonds, but nice pickup on employee benefits, just kind of thoughts there as long.
Dimitar Karaivanov: Sure. Mr. Steve. I'll start with the insurance business. We continue to believe that both the organic expansion in terms of new clients and higher rates is going to be positive this year. And in addition, we do have a very good pipeline in terms of inorganic add-ons as well. So, as you think about the revenue growth in that business, we've grown at double digits over the past three years. We still think that kind of high single digit is probably achievable for this year. As the business is getting bigger, that double-digit number is continuing to increase as well. But the opportunities are strong. And we did have some what we consider to be just timing cutoffs and mismatches this quarter, which kind of muted a little bit of the revenue performance. But the full year expectation for the business is still very positive. On the employee benefit side, we've been talking for years about adding a lot of new customers and a lot of new lives on the platform. That's been the case. It's just been muted for those couple of years because the asset values were too low. And you're now seeing both those new units, if you will, and the asset values come together and we had a great quarter, and our expectation is that, that's going to continue. We did acquire credit plan designs and we did not have much revenue in this quarter from that acquisition as well. So, there is some back end, second half of the year loaded revenue from the acquisition activities as well.
Operator: The next question comes from Christopher O'Connell with KBW. Please go ahead.
Christopher O’Connell: Just wanted to follow up on the fee discussion. I realize that markets are strong but wealth management, the uptick was pretty strong there as well as the BPaaS group there. Is that a good sustainable run rate on a go-forward basis?
Dimitar Karaivanov: Yes. I think, Chris, I mean, our wealth business is very much the same story as our employee benefits business. Folks have been really busy in adding more clients over the past couple of years. And again, that growth has been a little bit muted. So, if market value stays where they are, yes, that will be a very close-run rate for us for the rest of the year in that business. So, look, we've got four businesses. We always talk about our four businesses, that's how we run the Company. If you think about our company is we've got four engines [indiscernible] [00:28:02], which is a couple of engines more than most. And right now, our wealth business and our employee benefit services business are ramping up, our insurance business, as we mentioned, around a little bit lower, but we expect it to ramp up over the rest of the year. And our banking engine is a little bit sputtering on the interest income side, but the gas tank is full. And as we mentioned, if we do get some slowdown really in the mixing of the deposit base, that's going to start contributing quite meaningfully. So, we feel pretty good about the organic and market value driven and inorganic growth across all of those four businesses for the year.
Christopher O’Connell: Great. And I apologize if I missed it, but did you guys say, how much the creative plan designs acquisition adds in terms of revenues?
Dimitar Karaivanov: It's going to be somewhere between $3 million and $4 million per year.
Christopher O’Connell: Great. And you mentioned a couple of times, I think, in the prepared remarks, the inorganic acquisition opportunities. Can you just talk about where you're seeing the greatest opportunities on the fees this side? And then a little bit about what you're seeing and how the market progressed in terms of the traditional bank M&A side?
Dimitar Karaivanov: Sure. So, we're pretty active in terms of what we would consider to be kind of roll-up acquisitions, and those have been predominantly in our insurance business over the past couple of years, I think we're down about 11% in the past three years. So, as you can imagine, there's a three to four to five kind of books of businesses that we're tucking in, and that's across various geographies for us where we're present. So that pipeline remains just as strong as it was last year, and I fully expect that we'll be doing another three or four or five tuck-ins in the insurance business. Our employee benefits business, we've done I think, three tuck-ins so far this year. They vary in size with creative plan designs being the larger one. The other ones are kind of $0.5 million, $1 million here and there. So, they add up over time, and that's part of our business model is to continue to deploy capital in those very attractive segments. In our Wealth business, we -- I would thought acquire practices every once in a while. So, every year, we'll probably have an opportunity to do one or two of those. Again, they're more like equity hires, if you will, somebody just moving on to our platform, and we paid them for a book of business. So, that's kind of -- in those three businesses. On the bank side, as we mentioned in the prior call, we remain very interested in pursuing acquisitions. We have a bit of a different lens today than we did four or five years ago. That doesn't mean that we're not really interested in bank transactions. There has been a little bit more of a pickup in the way of discussions, I would call it. but we all know the hurdles, right, in terms of rates and marks and values. And so, a lot of things need to come together for those to happen, but we remain engaged on that side of the business as well.
Christopher O’Connell: Great. That's helpful. And then, can you talk a little bit about what you're seeing on the credit side, all the trends looks very solid this quarter in terms of NPAs and delinquencies. But you mentioned that the reserve -- you brought up a little bit on the business lending and consumer and direct portfolios. Is there anything that you're seeing there that's different or where credit costs may pick up in those segments over time?
Dimitar Karaivanov: Yes. Good question, Chris. So, on the credit, look, our outlook has not really changed much. And we believe that with an unemployment rate of under 4% and a tremendous amount of government spending and nominal GDP growth of 5%. The outlook for credit is positive across the board. Having said that, if you just think about the distribution of probabilities, if you will, this quarter, the end of this quarter versus last quarter, if we were to remain in a bit of a higher for longer scenario, eventually, the higher cost of credit has to feed through and find its way into the real economy. So, we looked at our model, which actually suggested a little bit of a lower quantitative outcome compared to prior quarters. And I don't think that, that's a big surprise. You've seen a lot of banks actually release reserves this quarter. We just didn't think that it was appropriate for us given the outlook and -- our loss coverage remains very, very strong. I mean we've got -- if you take our 12 basis points of losses this quarter, we've got six years' worth of losses in the ACL. So that remains very strong. We just felt that given the qualitative outlook for maybe higher for longer, maybe a little bit more pressure over time at some point in the portfolios. It will just put onto that a little bit.
Operator: Our next question comes from Matthew Breese with Stephens Inc. Please go ahead.
Matthew Breese: Joe, you had mentioned a little bit that you're starting to see the increase in deposit costs starting to slow over time. And I was curious, if you look at the composition of deposits, if that is matching up with stability, particularly in the lower cost categories as well. And along those lines, if you had any sort of projections as to where we might see DDAs kind of settle out later this year?
Joseph Sutaris: Yes. I'm not sure, Matt, that I can give you precisely where the time deposit mix will be at the end of the year. I would say that the migration that we saw in Q1, the expectation is that would slow just a little bit throughout the year. We think that more -- most of the rate-sensitive deposits, if you will, have found their way to generally to higher cost funds. I would have said the same thing last quarter. But the expectation is that, that migration will slow a bit, but probably will continue is maybe not at the same pace that it has, it has been kind of moving through. So, with that said, will there be additional increases in the overall cost potentially throughout the year. But we also think that the rate of increase on the deposit side will slow a bit. The one thing that's also worth noting, Matt, is that for us, in particular, we have seasonal inflows of municipal deposits, and that occurred in the first quarter. And so, there was some migration, if you will, from a consumer checking account into a municipal account for tax collection at a higher rate. And so, a little bit of our cost escalation on the deposit side was due to the rotation into those higher cost municipal accounts. So, some of that will slow a bit, if you will, as well. So that's why kind of the expectation of not, I will call it the same rate of increase on deposit costs as we've kind of had the last couple of quarters.
Matthew Breese: Got it. Okay. And then the other part, I think this is from a prior call, but there's not much in the way of securities kind of maturing or cash flow coming back to you this year. The yield is well below market rates. And I was curious if you in a degree of way of considered securities restructuring to kind of get that book up to market rates.
Dimitar Karaivanov: I think, Matt, so you're right. Obviously, we as most of our folks have a securities portfolio that's below market. And -- there are pieces though of the securities portfolio that are much closer to market. And in this first quarter, we identified a decent amount of those securities and kind of the rates ran away from us in the second half of the quarter. But if there is a bit of a rate pullback -- we have a not insignificant amount of potential liquidity in the portfolio that we could release at values pretty close to par. So, I think that's how we're looking at it. In terms of something similar to what we did last year. For us, it does come back to net present value of those cash flows. So last year, when we did our restructuring, I think the 10-year was below 4%. We pulled forward three years' worth of cash flows, and we're getting those back now with the higher-for-longer scenario for probably 18 months instead of the two years that we estimated initially. So very positive NPV transaction. If we have another opportunity to do so, we're going to look into it. But my guess is until we get kind of that for handle -- and again, as a reminder, our portfolio is 85% treasury. So, it is very certain in terms of outcome, but it is tied to that treasury curve.
Matthew Breese: Got it. Okay. And then last one for me is just inventory on whole bank M&A, it feels like deals are more under the microscope from a regulatory perspective than ever. Certain deals that you're expecting a fairly routine are taking longer or having gotten done. And I was curious if that's played into your thinking or how that might be a competitive advantage given all the deals over the years.
Joseph Sutaris: Yes. I think, Matt, it does. We feel like we've got a very good track record of execution. So, to your point, it does enable us to make a case and differentiate ourselves in discussions. I think what this does, though, if you're just kind of sitting there and thinking about capital deployment is, you've got now uncertainty on timing. And in our experience, deals and acquisitions don't get better over time as they sit in uncertainty. So, the question is how do you price that uncertainty in the transaction? And that's also a hard discussion to have with a seller, right, because it's kind of no one's fault. But clearly, that asset is going to be worth less to us in 18 months than it is in nine months and than it is in six months. So that's something that's kind of percolating in the back of some of those discussions. It's hopefully that as we get more transactions kind of through the pipeline as an industry, there will be a little bit more of a playbook. Right now, the playbook is also a little bit uncertain because every agency came out with kind of new proposed rules, and they're proposed, but sometimes that means a little bit more than just proposed. So, we have to evaluate all of that as we think about capital deployment.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Karaivanov for any closing remarks.
Dimitar Karaivanov: Thank you, Nick, and thank you, everybody, who participated and listen to our call. We really appreciate your support and interest in our company, and we look forward to speaking to you after the second quarter. Thank you.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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