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Community Bank System Inc (NYSE:CBU)
Q2 2019 Earnings Call
Jul 22, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Community Bank System Second Quarter 2019 Earnings Conference Call. Please note 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.

Mark E. Tryniski -- President and Chief Executive Officer

Thank you, April. Good morning, everyone, and thank you all for joining our call today. We're very satisfied with Q3 [Phonetic] results, which were as obviously expected. Operating earnings were flat with last year, excluding the Durbin impact of $0.05 to $0.06. The margin is 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 the Kinderhook Bank Corp transaction announced in the first quarter closed on July 12th, adding $650 million of assets and 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 and capital accretion continue to be strong, which positions us very well for the remainder of 2019 and into the future. Joe?

Joseph E. Sutaris -- Executive Vice President & Chief Financial Officer.

Thank you, Mark, and good morning, everyone. As Mark noted, we are pleased with the Company's second quarter 2019 earnings results. The Company recorded 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, and $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 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 or 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 30th, 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 years 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 -- with 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 of 2019 equivalent 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 30th 2019.

Shareholders equity increased $152.6 million or 9.2% between the end of the second quarter of 2018 and the end of the 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 1.54% at the end of the quarter, over 2 times the well capitalized regulatory standard. Tangible equity to net tangible assets end of the quarter solid 10.56%.

Our asset quality remains strong. At the end of the second quarter of 2019, non-performing loans comprising 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 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 low ratings portend stable asset quality.

I will now redirect my commentary to second quarter earnings results. Although GAAP earnings per share match 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 sale of 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 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 earning assets increased 15 basis points, while funding costs increased 9 basis points. The company's net interest margin for 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-equivalent yield on the loan portfolio increased 15 basis points from 4.58% for 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 exceeds 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 earned on investment secured and cash equivalents, 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 payment 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 remained well below peer and industry averages for the second quarter of 2019 at 22 basis points, reflective of the Company's very solid base of core deposits. Checking and savings account balances represent 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 a factor 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 acquisition 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 decrease -- 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 reflected in an improvement in the Company's asset quality metrics 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 of 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 into 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. Kinderhook's total assets at the time of acquisition were approximately $650 million with total loans of 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 3.70s to closer to 3.70%, with the inclusion of the Kinderhook portfolios. If the Federal Open Market to make a 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 sold 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 opportunity for potential future mergers and acquisitions. Thank you. Now I will turn it back over to April to open up the line for questions.

Questions and Answers:

Operator

[Operator Instructions] And we'll take our first question from Austin Nicholas with Stephens. Please go ahead.

Austin Nicholas -- Stephens Inc. -- Analyst

Hey, guys. Good morning.

Mark E. Tryniski -- President and Chief Executive Officer

Good morning, Austin.

Austin Nicholas -- Stephens Inc. -- Analyst

Maybe just on the the charge-off, yet 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?

Joseph E. Sutaris -- Executive Vice President & Chief Financial Officer.

Yes, we typically have some units that we took in a 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.

Austin Nicholas -- Stephens Inc. -- Analyst

Okay, that's helpful. And then maybe just on the expenses. Can you maybe -- you may have mentioned this in your prepared remarks, but could you maybe refresh my memory on what drove maybe the increase in the other expense line item and then kind of just to how to think about that line item kind of going forward?

Joseph E. Sutaris -- Executive Vice President & Chief Financial Officer.

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. 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 3 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, we do have a little bit of wage pressure, so that -- that's rolled up the salaries a bit. And we also had a higher employee benefit costs 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 in 2019.

Austin Nicholas -- Stephens Inc. -- Analyst

Understood. Okay. And then maybe just on the margin, I appreciate your comments there. But maybe 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?

Joseph E. Sutaris -- Executive Vice President & Chief Financial Officer.

Yeah, and Austin, you said rate hike?

Austin Nicholas -- Stephens Inc. -- Analyst

Excuse me, rate cut.

Joseph E. Sutaris -- Executive Vice President & Chief Financial Officer.

Okay. Just to make sure we're on the same page there.

Austin Nicholas -- Stephens Inc. -- Analyst

Yeah.

Joseph E. Sutaris -- Executive Vice President & Chief Financial Officer.

We have about a $1 billion in variable rate loans, so a annualized impact $1 billion at 25 basis point reduction doesn't affect us -- affect us favorably, there is some minus room on the liabilities side for potential funding costs decreases in the future. But as you know we -- our beta in rates up was for full cycle was about 5%. So there's not a lot of room on the deposits 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?

Austin Nicholas -- Stephens Inc. -- Analyst

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 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?

Joseph E. Sutaris -- Executive Vice President & Chief Financial Officer.

Yes, absolutely. So we started to identify that we had significant maturities and capital 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, I'll call it, potentially reduce some of the reinvestment risk associated with, you know, with that much in cash flows in that period of time and so we'd 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 the end of the two-year to five-year range. We had an opportunity to pull some of those securities out, temporarily put them in cash equivalents that actually, you know, about a 25 basis point pick up in yield.

And then --we then have opportunities to redeploy it on kind of on a little bit longer term basis, and I would expect that in the coming months that we will deploy-- redeploy most of the cash that was sitting in cash equivalents at the end of the quarter. And in terms of yield expectations, I mean, the yield expectations are comparable to probably what we're seeing in terms of current cash equivalents except for with extended maturities of that.

Austin Nicholas -- Stephens Inc. -- Analyst

Got it, OK. 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.

Joseph E. Sutaris -- Executive Vice President & Chief Financial Officer.

Correct.

Austin Nicholas -- Stephens Inc. -- Analyst

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?

Joseph E. Sutaris -- Executive Vice President & Chief Financial Officer.

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 semi-annual periods. With the Kinderhook transaction, we will pass back over the $10 billion mark even for the inflation adjusted $10 billion mark. And the dividend rate is typically the or it is the equivalent of the 10-year Treasury rate at the time it's declared.

Austin Nicholas -- Stephens Inc. -- Analyst

Understood. OK, thank you so much. That's all I have.

Joseph E. Sutaris -- Executive Vice President & Chief Financial Officer.

Thank you, Austin.

Operator

We'll take our next question from Russell Gunther with D.A. Davidson. Please go ahead.

Russell Gunther -- D.A. Davidson -- Analyst

Hey, Good morning, guys.

Mark E. Tryniski -- President and Chief Executive Officer

Good morning, Russell.

Joseph E. Sutaris -- Executive Vice President & Chief Financial Officer.

Good morning, Russell.

Russell Gunther -- D.A. Davidson -- Analyst

I 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? I would be particularly interested in the employee benefits business and insurance as well.

Joseph E. Sutaris -- Executive Vice President & Chief Financial Officer.

The -- we've been kind of achieving single-digit -- mid-single digit growth rates 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 -- around that business. So would expect that to continue kind of along its recent -- recent trend lines.

Mark E. Tryniski -- President and Chief Executive Officer

One of the challenges on the employee benefit services business is, it's got to be pretty substantial, the run rate on that will probably yield $100 million of revenue every year and the markets are very good. So we'll take all we can get to that. But it makes it a little bit harder growing mid-single digits is a pretty good -- is a pretty good lift, but there are some kind of businesses within the broader employee benefit services 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 OK. 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 -- as they have done in the past.

Russell Gunther -- D.A. Davidson -- Analyst

That's great color. I appreciate it, guys. Just the last question for me. With the Kinderhook now closed, I know you're gonna 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?

Mark E. Tryniski -- President and Chief Executive Officer

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 -- volatile market conditions. So for us, M&A is an ongoing element of our strategy as everyone understands, and our markets, they are only growing. If you can get 3%, 4% organic growth a year, that's pretty good. That's not enough if you want to deliver double-digit returns to shareholders. So, you know, disciplined, high-value M&A has long been an important element of our of shareholder return strategy. So we would 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, you know, anything between $0.5 billion and $2 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 contiguous to our existing market [Indecipherable]. So those are kind of the parameters for the most part that we look toward in terms of our evaluation. I think Joe had mentioned this earlier relative to our market multiples, which gives us a significant opportunity. But, you know, we, as always, are very disciplined about what we do and who we partner with, and we'll continue to to use that discipline to identify those high-value acquisition opportunities that we know can be solidly accretive on a sustainable basis for shareholders.

Russell Gunther -- D.A. Davidson -- Analyst

Very good. Thanks for all the detail, guys. Appreciate it.

Mark E. Tryniski -- President and Chief Executive Officer

Thank you.

Operator

And we'll take our next question from Erik Zwick with Boenning & Scattergood. Please go ahead.

Erik Zwick -- Boenning & Scattergood -- Analyst

Good morning, guys.

Mark E. Tryniski -- President and Chief Executive Officer

Good morning, Erik.

Joseph E. Sutaris -- Executive Vice President & Chief Financial Officer.

Good morning, Erik.

Erik Zwick -- Boenning & Scattergood -- Analyst

Maybe just first with regard to the Kinderhook transaction closing, I'm curious whether you have any current advertising campaigns running or anything planned for the Capital District? And if so, would those just be kind of standard branding efforts or do you have any kind of loan or deposit specials currently running or planned for the markets?

Mark E. Tryniski -- President and Chief Executive Officer

Well, we have [Indecipherable] kind of a new market, it's not a completely new market. We started in the Albany market in the beginning of 2018 with a 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.

Erik Zwick -- Boenning & Scattergood -- Analyst

And then I know it's still relatively early, but our customer and deposit retention kind of tracking consistent with your expectations at this point?

Mark E. Tryniski -- President and Chief Executive Officer

It's been a week, so far, so good.

Erik Zwick -- Boenning & Scattergood -- Analyst

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.

Mark E. Tryniski -- President and Chief Executive Officer

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.

Joseph E. Sutaris -- Executive Vice President & Chief Financial Officer.

As I recall, from looking at the June balance sheet, the loans were down just a hair and deposits were up a little bit.

Mark E. Tryniski -- President and Chief Executive Officer

Yes.

Joseph E. Sutaris -- Executive Vice President & Chief Financial Officer.

As of June.

Erik Zwick -- Boenning & Scattergood -- Analyst

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 of your expectation for the effective tax rate?

Joseph E. Sutaris -- Executive Vice President & Chief Financial Officer.

Yes. So the effective tax rate range is about 21.3% up to about 22% for the quarters looking forward. If 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% is the range.

Erik Zwick -- Boenning & Scattergood -- Analyst

Thanks, and then just one last one for me, just wanted to make sure, I understood the expectations for the net interest margin going forward. Sounded like you expected it to kind of decrease from the mid 3.70s to closer to 3.70. And did that include the expectation for a Fed Funds rate cut? Or with the kind of decrease from that cut be in addition to that range that you professed?

Joseph E. Sutaris -- Executive Vice President & Chief Financial Officer.

Well, I think we kind a provided (Technical Difficulty) 3.70 mark inclusive of Kinderhook and also expecting a 25 basis point decrease. But, we want to give ourselves some room on each side of that estimate around 3.70 just because things, we don't know until we know at the end of next quarter.

Erik Zwick -- Boenning & Scattergood -- Analyst

Makes sense. Thank you so much. That's it for me.

Mark E. Tryniski -- President and Chief Executive Officer

Thanks Erik.

Operator

And we'll go on to our next question from Brody Preston with Piper Jaffray. Please go ahead.

Brody Preston -- Piper Jaffray -- Analyst

Good morning, everyone. How are you?

Mark E. Tryniski -- President and Chief Executive Officer

Good morning, Brody.

Joseph E. Sutaris -- Executive Vice President & Chief Financial Officer.

Good morning, Brody.

Brody Preston -- Piper Jaffray -- Analyst

I guess I just wanted to touch on Kinderhook, now with the Kinderhook in the fold, I Just want to get a sense for, you know, the long 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 Kindlerhook?

Mark E. Tryniski -- President and Chief Executive Officer

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 nonbanking 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, you know, 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 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 itself. 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.

Brody Preston -- Piper Jaffray -- Analyst

Okay, great. That's good color. And then on the Treasury sale and the cash redeployment, you know, taking 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, what I guess what markets you're looking in terms of duration and if there's any opportunity to redeploy into different asset classes to maybe pick up a little more yield?

Joseph E. Sutaris -- Executive Vice President & Chief Financial Officer.

Okay, Yes, I mean, we are looking at -- additional or I should say reinvestment of those -- of those proceeds. You know, we've got a couple of different actions on the table relative to where we wind up from a weighted average life basis. We have typically invested some of our or a significant portion of our securities in longer term treasuries. We viewed -- you know, we're looking at other assets as well that potentially put the average lives in a range of four years to seven years, maybe a little bit longer, If the opportunity presents itself.

Mark E. Tryniski -- President and Chief Executive Officer

One of the -- I think we had -- we feel like we had an exceptional opportunity we kind of have been talking about stretching out as the maturity -- 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, you know, 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 yields in those securities basically generate capital. I mean, I know, the Street investors don't give you credit for gains, which they shouldn't. But still, it was a -- it was a capital generation event and we're pretty confident that we're going to have the opportunity to reinvest in slightly longer maturities. The yield curve has only inverted a few times in the last 20 years. 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 to reload on some of that liquidity at a better yield. And we're looking at securities -- treasuries, but also potentially some mortgage backs as well maybe a mix of those, depending on where 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 than what those securities were yielding before we sold them. In fact, you know, because of the yield curve inversion, the short-term yield is actually higher than what the book yield on those securities were. But we think we're going to be able to reload at a rate even higher than that between now and the end of the year. So let's just say because of the inversion of the yield curve in that particular tranche of securities just gave us an opportunity 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 -- the whole trade, but the plan is to -- is to redeploy that liquidity at some point between now and the end of the year when the market provides that opportunity.

Brody Preston -- Piper Jaffray -- Analyst

Okay, OK, great. And then I want to maybe get an update on CECL and any of your thoughts around the potential impacts from CECL to some of -- some consumer lending, just given the the longer duration nature of consumer loans relative to some commercial loans.

Joseph E. Sutaris -- Executive Vice President & Chief Financial Officer.

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.

Brody Preston -- Piper Jaffray -- Analyst

Okay. And then last one for me is, 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 the last interest rate cycle, particularly with regard to deposits, you guys have certainly outperformed relative to last cycle. You know, the cycle-to-date, the deposit beta is 5% versus 28% last time and the cost of funds is dramatically lower, which obviously is due to a lower level of absolute level of interest rates. But you guys have had a big mix shift in deposits that have occurred since last time -- since last time, which I'm assuming is a big driver of the current success you've had. So I guess, I wanted to better understand two things. In your view, what's been a a driver of CBU's success from a deposit gathering perspective over the last decade that;s allowed you guys to sort of mix shift into DDA and away from time deposits?

And secondly, given the deposit mix is so different this time around, what would be your expectations around deposit costs moving forward in a one to two rate cut scenario? Thank you.

Mark E. Tryniski -- President and Chief Executive Officer

Sure. I think, it's the realities that you want low cost deposits and not higher cost deposits. And certainly nowadays 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 growing over time, we used to be somewhere in the half range and now it's 70%. So I think that's pretty consistent with our retail banking strategy overall, and I think that's been the reason for this -- the success in this last cycle.

I think you can -- it's difficult to distinguish yourself on the credit side in terms of economic value, earnings performance, shareholder value. I mean, we're all doing the same stuff in the market, Same rates, same for the most part, you know, credit structure, some take different risks in different ways, but, you know, on the assets side, it's not a lot you can do it really, you know, to distinguish yourself, Longer term in terms of Main Street banking and creating shareholder value. That's not so on the funding side. I mean, you can work at having a a really strong foundation of core funding that will serve your interests well over time. So, that's essentially been the model for us for the past 15 years. It's worked out pretty well, clearly it's created a balance sheet though that's asset sensitive. And, rates up is better for us than rates down. But I think even in a period of rates down, we do better on average than the industry as a whole because of our funding mix. So you know, it's a kind of a -- it's kind of a win-win . When rates go up, we do really well. When rates go down, we don't do quite as, you know, quite as badly as others. So, it gives us a lot of flexibility and I think it's consistent with our business model. 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 stand-alone business that we expect to perform well.

Brody Preston -- Piper Jaffray -- Analyst

Great. Thank you very much, everyone.

Mark E. Tryniski -- President and Chief Executive Officer

Thank you.

Joseph E. Sutaris -- Executive Vice President & Chief Financial Officer.

Thank you, Brody.

Operator

We'll take our next question from Collyn Gilbert with KBW. Please go ahead.

Collyn B. Gilbert -- Keefe Bruyette & Woods Inc -- Analyst

Thanks, Good morning, guys.

Mark E. Tryniski -- President and Chief Executive Officer

Good morning.

Joseph E. Sutaris -- Executive Vice President & Chief Financial Officer.

Good morning.

Collyn B. Gilbert -- Keefe Bruyette & Woods Inc -- Analyst

Good morning. I just want to clarify a couple of points on the NIM. So number one is in your guide for maintaining around 3.70% NIM, how much do you all anticipate to derive from accretable yield? I know Kinderhook's not a huge obviously deal, but just --

Mark E. Tryniski -- President and Chief Executive Officer

Right. Yes, so the run rate this quarter was $1.03 [Phonetic] million and it was very similar to last quarter. I would expect that portion of the existing acquired accretion to just sort of drift down a couple of hundred thousand on that on a prospective basis and you're right Kinderhook is relatively small, you know, 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.

Collyn B. Gilbert -- Keefe Bruyette & Woods Inc -- Analyst

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?

Mark E. Tryniski -- President and Chief Executive Officer

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.

Collyn B. Gilbert -- Keefe Bruyette & Woods Inc -- Analyst

Okay. That's helpful. And then that somewhat ties into my next question in terms of the expensive type of the business development efforts that you've said, anything specific there? Is that related to hires? Is that related to systems? Or maybe just talk a little bit more about those investments and what you can get from them?

Joseph E. Sutaris -- Executive Vice President & Chief Financial Officer.

Yes. So we had -- we had ended just as by way of example and my apologies if this [Indecipherable], but we had, you know, some television commercials, for example, that were a little bit older, we refreshed them, which you have to basically incur that expense as you produce and air those slots, you know those those types of items that drove it, not individuals in the business development area, which is more of a marketing expense.

Mark E. Tryniski -- President and Chief Executive Officer

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.

Collyn B. Gilbert -- Keefe Bruyette & Woods Inc -- Analyst

Okay, I think I was also just maybe trying to drill into the other expense line too that was -- looks like maybe just under $3 million increase year-over-year and then about $2 million higher than the first quarter, that I was just trying to get a little bit of a better sense of what that was?

Joseph E. Sutaris -- Executive Vice President & Chief Financial Officer.

Yes, well, Collyn, I think I was just trying to indicate a kind of an earlier question that we had really a, I'll call, a 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 I'll call it more of a normalized quarter this quarter. But when you look at an annual quarter comparative basis, they do look a little bit high, but that is largely because the second quarter of '18 was a very good quarter from an expense run rate perspective.

But, you know, just some other kind of some various little administrative expenses that just resulted in a net increase on an annual quarter comparison basis. That was a little bit above our historical run rates.

Collyn B. Gilbert -- Keefe Bruyette & Woods Inc -- Analyst

Okay. Very good. That's all had. Thanks guys.

Mark E. Tryniski -- President and Chief Executive Officer

Thanks, Collyn.

Joseph E. Sutaris -- Executive Vice President & Chief Financial Officer.

Thank you.

Operator

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 remarks.

Mark E. Tryniski -- President and Chief Executive Officer

Great. Thank you, April. Thanks, everyone, for joining the call and we will talk to you again next quarter.

Joseph E. Sutaris -- Executive Vice President & Chief Financial Officer.

Thank you.

Operator

[Operator Closing Remarks]

Duration: 52 minutes

Call participants:

Mark E. Tryniski -- President and Chief Executive Officer

Joseph E. Sutaris -- Executive Vice President & Chief Financial Officer.

Austin Nicholas -- Stephens Inc. -- Analyst

Russell Gunther -- D.A. Davidson -- Analyst

Erik Zwick -- Boenning & Scattergood -- Analyst

Brody Preston -- Piper Jaffray -- Analyst

Collyn B. Gilbert -- Keefe Bruyette & Woods Inc -- Analyst

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