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Community Bank System Inc (NYSE:CBU)
Q3 2019 Earnings Call
Oct 21, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Community Bank System Third 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.

Mark E. Tryniski -- President and Chief Executive Officer

Thank you, Angel. Good morning, everyone, and thank you all for joining our third quarter call this morning. We had a busy and very productive quarter with strong earnings, solid organic growth, the closing of the Kinderhook transaction in July and the announcement this morning of our acquisition of Steuben Trust Corporation.

Operating earnings were up 4% over last year's quarter and 5% over the second quarter. Organic loan growth was strong for both the commercial and mortgage businesses, and organic deposit growth in non-public funds was also very good. We closed the Kinderhook transaction in July, as I commented on last quarter's call, and that integration in the subsequent operational performance could not be going better. We've a strong leadership team there on both the commercial and retail side and like the opportunities we see in the Albany market going forward. As we announced this morning, we're thrilled to be partnering with Steuben Trust Corporation, a $570 million asset bank in Western New York. This is a high-value, lower-risk transaction of a solid performing in-market institution. We have considerable close proximity branch overlap and so also have consolidation opportunities that we have not incorporated into our model. We expect to close in the second quarter of 2020 and expect full-year accretion, excluding cost base to approximate $0.08 to $0.09 per share.

Overall, it was a solid quarter and we're having a strong year, particularly in light of the fact that the full year 2019 Durbin hit was a $7 million headwind compared to 2018. Our performance momentum is very good heading into Q4, and looking forward, both the Kinderhook and Steuben transactions should be nicely additive to 2020. Joe?

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

Thank you, Mark, and good morning, everyone. As Mark noted, the third quarter was a very active and productive quarter for the Company. We closed on the Kinderhook transaction early in the quarter, increased our dividend $0.03 per share, redeemed $22.7 million of trust preferred securities navigated to interest rate cuts by Fed, entered into a definitive agreement to acquire Steuben Trust Corporation and produce the year-over-year improvement in quarterly operating earnings of $0.03 per share.

Before I review the third quarter earnings results in more detail, I'd like to touch on the other activities. At July 12th, we closed on the acquisition of Kinderhook Bank Corp. As a reminder, we acquired Kinderhook in an all-cash transaction for $93.4 million. In connection with the transaction, we acquired $479.9 million in loans and $560.1 million in total deposits. These amounts were in line with our expectations when we announced the transaction in the first quarter. We are confident that we will meet or modestly exceed our 30% cost savings targets and expect the Kinderhook transaction will reduce GAAP earnings per share of $0.08 on a full-year basis.

We remain excited about our opportunities in the Kinderhook markets and the capital region generally. During the third quarter, the Company raised its quarterly dividend from $0.38 per share to $0.41 per share. The $0.03 increase represents approximately 8% increase in the quarterly dividend rate and increased the Company's streak of raising its dividend to 27 consecutive years. We are proud of this achievement and believe the Company's business model, earnings results and strong capital resources not only support this increase but also allow us to maintain significant flexibility for future growth opportunities.

During the third quarter, we redeemed $22.7 million of trust preferred securities with a weighted average rate of 4.43%; $20.6 million of these TruPs were acquired in connection with the Company's 2017 acquisition of Merchants Bancshares, Inc. and $2.1 million were acquired with the Kinderhook transaction.

Now I'd like to briefly comment on the operating and deal metrics regarding Steuben. As noted in this morning's press release, Steuben Trust is a 15-branch franchise, operating in a six-county region in Western New York. Community Bank currently serves four of these counties within Steuben's current footprint and the other two are contiguous to our markets. The demographics are consistent with much of our current New York state footprint, but also increase our presence in the Greater Buffalo and Rochester, New York markets. At the end of the second quarter, Steuben had total assets of $577 million including total loans of $347 million and $484 million in total deposits. Steuben's loan portfolio was largely a commercial book with $166 million or 48% of its loan portfolio in commercial real estate and $62 million or 18% in commercial and industrial agricultural and farm loans. Steuben also has approximately $98 million or 28% of its total loan portfolio in one-to-four family residential real estate malls, including approximately $60 million in home equity loans. Consumer and other loans make up the balance of the loan portfolio of approximately $20 million or 6% of the total loan portfolio. Steuben's trailing 12-month return on average assets was 1.25%. Net interest margin over the same period was 3.68%.

As noted in our press release, shareholders of Steuben Trust Company -- Corporation will receive for each share of common stock they own a combination of $12.60 in cash and 0.8054 shares of Community Bank System, Inc. for a total consideration valued at approximately $63 per share. The purchase multiples for the pending merger are 15.2 times in the last 12 months' earnings and 1.67 times in tangible book value. The operating expense cost savings are estimated at 30%. The transaction is expected to be $0.08 to $0.09 GAAP accretive on the first full-year basis and $0.09 to $0.10 on a cash EPS basis. The transaction is also expected to be tangible book value accretive. The pro forma consolidated balance sheet is estimated to increase Community Bank's total assets to over $12 billion.

Before I provide additional color on the quarterly earnings, I will provide some commentary on the balance sheet. We closed the third quarter of 2019 with total assets of $11.6 billion. This is up $851.9 million or 7.9% from the end of the second quarter of 2019 due to both the Kinderhook transaction and organic balance sheet growth. Total assets were up $990 million or 9.3% from the end of 2018 and $937.7 million or 7.9% from one-year earlier. Average earning assets for the third quarter of 2019 of $9.81 billion were up $379.1 million or 4% when compared to the linked second quarter and up $473.5 million or 5.1% when compared to the third quarter of 2018. Average loan balances in the third quarter of 2019 were up $441 million or 7% when compared to the linked second quarter of 2019 and up $445.9 million or 7.1% when compared to the third quarter of 2018. Ending loan balances were also up on the linked quarter comparative basis, $569.1 million or 9.1%, $471.7 million attributable to loans acquired to the Kinderhook transaction and an additional $97.4 million attributable to organic growth in the Company's loan portfolios. Exclusive of the loans acquired in the Kinderhook transaction, outstanding balances in all the Company's loan portfolio segments increased during the quarter. More specifically, the business lending portfolio increased $56.4 million or 2.4% during the quarter while consumer mortgage balances were up $29.4 million or 1.3%, and the consumer indirect and direct portfolios were up $10.8 million or 0.9%. Loan balances outstanding in the home equity portfolio also increased slightly in the quarter.

Average total deposits were up $506.6 million or 6% from the same quarter last year and up $423.5 million or 5% on a linked quarter basis. Total deposits at the end of the third quarter were $9.17 billion, up $704.5 million or 8.3% from the year prior and up $680.1 million or 8% on a linked quarter basis. Although $571.9 million of growth in the linked quarter is attributable to the Kinderhook transaction, the remaining increase of $108.2 million is attributable to organic growth in deposit balances. 68% of the Company's total deposit balances at the end of the quarter were comprised of checking and savings accounts. At September 30th, the Company's investment portfolio stood at $2.48 billion. This is up $79.5 million or 3.3% from the end of the linked second quarter. During the third quarter, the Company increased its holdings of municipal securities, agency securities, mortgage-backed securities and other investments.

At the end of the third quarter, the Company's cash equivalents stood at $781.7 million. The tax equivalent net yield on investment securities and cash equivalents during the third quarter was 2.52%. This compares to 2.54% one year prior and 2.58% in the linked second quarter exclusive of the Federal Reserve Bank dividend. The effective duration of the investment securities portfolio was 2.5 years at September 30, 2019. Shareholders' equity was up $172.1 million or 10.3% from one year prior due primarily to an $86.9 million increase in retained earnings and a $64.6 million increase in accumulated other comprehensive income, which included a $74.2 million increase in the after-tax market value adjustment on the Company's available for sale of investment portfolio. The Company's Tier 1 leverage ratio was 10.76% at the end of the third quarter, over 2 times the well-capitalized regulatory standard. Tangible equity to net tangible assets ended the quarter at solid 9.68%; this is down from 10.56% at the end of the second quarter due largely to the impact of the Kinderhook transaction, but up 55 basis points from 9.13% one year prior.

The Company recorded GAAP net income of $39.2 million and fully diluted earnings per share of $0.75 during the third quarter of 2019. This compares to net income of $43.1 million and $0.83 in GAAP earnings per share for the third quarter of 2018. During the third quarter of 2019, the Company incurred $0.09 of acquisition-related expenses net of tax effect due to the Kinderhook transaction; by comparison, during the third quarter 2018, the Company acquired a $0.02 of incremental earnings per share associated with the acquisition-related recovery. Operating diluted earnings per share, which exclude acquisition expenses, realized gains on the sale of investment securities, unrealized losses on equity securities and loss on debt extinguishment, were $0.84 in the third quarter of 2019. This compares to operating diluted earnings per share of $0.81 in the third quarter of 2018. The $0.03 or 3.7% increase in operating diluted earnings per share between comparable periods was driven by an increase in net interest income, an increase in non-interest revenues and a decrease in the provision for loan losses, but was offset in part by higher operating expenses and increase in fully diluted shares outstanding.

Total revenues for the third quarter of $148.4 million were up $6.4 million or 4.5% over the third quarter of 2018. This included a $5.1 million or 5.9% increase in net interest income and a $1.3 million or 2.3% increase in non-interest revenues. The increase in net interest income was driven by an increase in earning assets largely due to the Kinderhook acquisition and a 2 basis point increase in the net interest margin from 3.71% in the third quarter of 2018 to 3.73% in the third quarter 2019. The increase in non-interest revenues were driven by an increase in all three of the Company's non-banking fee businesses, employee benefit services, wealth management insurance. Exclusive of $4.9 million of realized gains on the sale of securities recorded during the second quarter, total revenues increased $4.2 million or 2.9% on a linked quarter basis; $3 million attributable to an increase in net interest income and $1.2 million attributable to an increase in non-interest revenues. The Company's net interest margin was down 7 basis points as compared to the linked second quarter, which included a $0.9 million Federal Reserve semi-annual dividend payment or the equivalent of 4 basis points of net interest margin. All other factors including the addition of the Kinderhook earning assets and liabilities, organic loan growth during the quarter, changes in the Company's funding mix and a two 25 basis point decrease in the prime lending rate between the periods resulted in a 3 basis point decrease in net interest margin on a linked quarter basis.

The Company's total cost of funds -- excuse me, total cost of deposits remains well below peer and industry averages for the third quarter at 26 basis points, reflective of the Company's very solid base of core deposits. Non-interest revenues in our financial services businesses including employee benefit services, insurance services and wealth management services, were up $1.5 million or 4% between comparable annual quarters. Banking non-interest revenues were up $0.2 million or 1.1% over the prior year and $0.7 million or 4.2% on a linked quarter basis. Non-interest revenues contributed 38.6% of the Company's total operating revenues during the third quarter, similar to the first two quarters of 2019 and full year 2018 results. Total operating expenses excluding $6.1 million of acquisition-related expenses were up $4.8 million or 5.6% on an annual quarter comparative basis. This increase included a $5 million or 9.8% increase in salaries and employee benefits, and a $0.3 million or less than 1% increase -- net increase in all other expenses, partially offset by a $0.5 million decrease in the amortization of intangible assets.

On a linked quarter basis, total operating expenses excluding acquisition-related expenses, were up $0.9 million or 1%. During the third quarter, the FDIC awarded the Company a $0.7 million assessment credit for its proportional share of excess deposit insurance fund reserves. In addition, the Company's marketing and business development expenses decreased $0.5 million on the linked-quarter basis.

We recorded $1.8 million in the provision for loan losses during the third quarter of 2019. This compares to $2.2 million recorded in the provision for loan losses in the third quarter of 2018 and $0.4 million decrease between comparable periods.

The effective income tax rate for the third quarter of 2019 was 21.1%, up from 21% in the third quarter of 2018. The company recorded greater amounts of income tax benefits related to stock-based compensation activity in the third quarter of 2018 as compared to the third quarter of 2019. Exclusive of stock-based compensation and tax benefits, the Company's effective tax rate was 21.5% in the third quarter of 2019.

Our asset quality remained strong at the end of the third quarter of 2019. Non-performing loans comprised of both legacy and acquired loans, totaled $28.7 million or 0.42% of total loans. The reported net charge-offs of $1.6 million or 10 basis points annualized on the loan portfolio during the third quarter of 2019. This compares to net charge-offs of $1.7 million or 11 basis points during the third quarter of 2018. At the end of the quarter, the Company's total OREO properties were less than $2 million and the internal loan risk ratings portend stable asset quality.

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 current market valuation also provides an excellent currency for potential future mergers and acquisitions. We look forward to moving forward with this Steuben team on integration efforts over the coming months, as well as increasing our service capacity in our Western New York markets.

Thank you. I will now turn it back to Angel to open the line for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question will come from the line of Alex Twerdahl of Sandler O'Neill. Please go ahead.

Alex Twerdahl -- Sandler O'Neill -- Analyst

Hey, good morning, guys.

Mark E. Tryniski -- President and Chief Executive Officer

Good morning, Alex.

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

Good morning, Alex.

Alex Twerdahl -- Sandler O'Neill -- Analyst

Yes. First off, congrats on landing another acquisition. Just curious how long does it take you guys to do the due diligence process on a bank the size of Steuben kind of from start to deal announcement?

Mark E. Tryniski -- President and Chief Executive Officer

I would say, Alex, it depends on the institution and how readily they can gather materials up. In this case, they were very efficient and so the due diligence period was fairly nominal, but they can certainly extend for greater periods of time depending on the capacity of the counterparty to provide information.

Alex Twerdahl -- Sandler O'Neill -- Analyst

Okay. Just trying to figure out the cadence of these deals is going to be in the future years. Talking about sort of specific organic trends, had some loan growth for the first time or some better loan growth, I should say, the best in a number of quarters, this quarter. I know this helped a little bit by seasonality in the municipal business, but it was growth more a function of the lack of pay-offs that you've been seeing in past quarters; I think the pipeline kind of translate into some better growth this quarter than what we've been seeing or is it a contribution Kinderhook or is there something else that we should be thinking about up there?

Mark E. Tryniski -- President and Chief Executive Officer

Yeah. I think, Alex, in the third quarter, we had pretty good performance from Vermont. We had good performance in the Capital District, Albany. And also the Southern region of New York was very good. So Syracuse, Rochester, Western New York, Finger Lakes was also very good. If you look at it year-over-year, PA has been very good, and likewise, kind of the southern and western parts of New York and the Capital District again [Phonetic] has been very good year-over-year. So it really depends and it can kind of change quarter to quarter.

With respect to early pay-offs, I think we did get fewer this quarter, which was good. I think just the number and the size was a little bit less this quarter, which was good. So I think we -- if you look over the last several years, we have substantially improved our organic generation capabilities and some of that is a function of -- as we've gotten a little bit larger, we've got greater expertise in certain elements of credit. We've the capacity by virtue of our credit discipline and our ability to kind of understand larger credits to do, slightly larger credits and manage effectively larger relationships and syndication kind of deals with others. So I think all of those things have been played into that, but we clearly have improved our organic loan generation ability over the last couple of years.

Alex Twerdahl -- Sandler O'Neill -- Analyst

Okay. And the pipeline going into the fourth quarter and early 2020, is still healthy?

Mark E. Tryniski -- President and Chief Executive Officer

It's still really good, yeah. So we would expect to see continued decent performance going into fourth quarter.

Alex Twerdahl -- Sandler O'Neill -- Analyst

And then just switching gears, just to touch on the margin here, even with the acquisitions and the Fed dividend etc., bounced around a little bit, but over the last couple of years, your margins in pretty steady kind of 3.65% to 3.80%. With the face of now two Fed cuts and another one potentially next week and maybe another one this year, is -- I mean, do you have enough tools, you know, because -- on the way up, obviously, deposits were a huge benefit and the way down, they are not going to be as much of a benefit. Are there enough tools with the short-term nature of these securities portfolio and kind of stuff comes due in the reinvestment rates etc. to keep the margin within that range over the foreseeable future?

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

Yeah. So, Alex, I think we've kind of given general expectations around 3.70%. Last quarter, we came in a little higher. This quarter, loan yields held up fairly well in the quarter. I think were down on a net basis 1 -- down 1 basis points net quarter-over-quarter and that was against the headwinds of the decreases that the FOMC put through. Just to kind of give you some color, we have about $1 billion in loans that are subject to repricing; they are linked to prime or to a lesser extent LIBOR. So when we get a decrease from the FOMC in prime rate that's the impact. The other side of that equation is, we have $9 billion in deposits and so we have the ability in some instances to contain those costs and potentially reduce some of the higher costs deposits in that mix.

If you recall, prior to the this cycle that started in late 2015, and for that matter a portion of that cycle, our cost of funds was 10 basis points, we're sitting at 26 today, so I think there's still some opportunity to decrease some of our costs. We also paid off the TruPs this quarter. So that's going to help a little bit, so I think there's a couple of tools left. The other thing I would notice that we do have a substantial residential mortgage portfolio, and even though we do have some borrowers who are putting the money relative to secondary market rates, the non-conforming nature of our portfolio tends to slow prepayment activity relative to the rest of the market. So that portfolio holds up pretty well even when market rates come down. And we did book this quarter, as we booked new loans, we booked those at about kind of par with our existing book yields. So as a new loans they went on, they went on pretty much close to our -- very close to our book yields this quarter. If you recall in prior quarters, it was a little bit higher, but all in, we've kind of maintained new loan yields at levels very similar to our book yields.

Alex Twerdahl -- Sandler O'Neill -- Analyst

Okay, that's very helpful. Just to kind of hone in on the deposit piece of it, the 26 basis points, obviously, not a ton of room to go down. Following up on your thoughts and maybe they will go down, I mean, do you think they will go down in the fourth after two -- potentially, three cuts this year or is there still going to be a little bit of a lag and maybe some cost actually moving higher into the end of the year?

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

Good question, Alex. My expectation is that they would be similar in the fourth quarter as compared to the third, but if rates stay down on the short end, and for that matter kind of in the mid-part of the range, I would expect that over time they will start to drift down in 2020.

Alex Twerdahl -- Sandler O'Neill -- Analyst

Great. Thanks for taking my questions.

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

Thank you, Alex.

Mark E. Tryniski -- President and Chief Executive Officer

Thanks, Alex.

Operator

[Operator Instructions] And we will now take our next question from Russell Gunther of Davidson. Please go ahead.

Russell Gunther -- Davidson -- Analyst

Hey, good morning, guys.

Mark E. Tryniski -- President and Chief Executive Officer

Good morning, Russell.

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

Good morning, Russell.

Russell Gunther -- Davidson -- Analyst

I wanted to follow-up on the expense outlook here, which I believe you said that you would expect the cost saves from Kinderhook to meet potentially exceed. Just curious if you could give us a sense for what sort of in the run rate already from those related cost saves and how that should trend going forward?

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

Yes. Russell, we realize the majority are located, I'll say, the run rate cost saves in the third quarter. They're generally baked in at this point. We potentially have some other modest cost savings in the fourth quarter, but it's a little too early to kind of call it on a full year basis. So we're kind of holding our general guidance around 30% and $0.08 a share in earnings per share accretion, but and in fact we've realized our operating expense savings on Kinderhook. And on an all-in basis, we actually came in this quarter, I think even slightly above our or better than our expectations around all-in operating expenses.

Obviously, the FDIC insurance premium refund or credit actually helped us a little bit. We also consciously drove down some other operating expenses. We also had a little lesser net results in some of our property-related writedowns and those types of expenses during the quarter. So our less than $90 million, some $91.5 million including the FDIC expenses, this is sort of ahead of our expectations. I think $93 million is a more general sense of the fourth quarter and beyond that we start to I get to inflationary trends.

Russell Gunther -- Davidson -- Analyst

Got it. Okay, very helpful. And then on the revenue side of things, just an update, if you could, in terms of the outlook within your employee benefit services?

Mark E. Tryniski -- President and Chief Executive Officer

Well, I would say, we expect it to continue to grow as it has for 15 years. I think one of the challenges just is as that business gets bigger growing at the same rate gets more difficult, but we got pretty solid and steady growth in that business now that the run rate and revenue is almost $100 million. And so I think that business will continue to grow. It might grow at a slightly smaller percentage basis. I'm not sure it's going to grow at a smaller dollar volume basis, which is helpful to get a certain amount of fixed cost there, that's not inconsiderable. So you can expand the margin and the margin on that business is actually much higher than it was 10 years ago; 10 years ago, it was pretty good.

So I think also we have some other new revenue line opportunities in that business that we will continue to explore. So -- and some of them are have reasonably significant potential growth. So there is capabilities we have in that business that we think we can continue to evolve and develop and input into the market that will be helpful. So I think those businesses will continue to grow, Russell, I think, probably at a smaller percentage pace, but I would expect that necessarily to smaller dollar base.

Russell Gunther -- Davidson -- Analyst

Got it. I appreciate that, Mark. Very helpful. I guess just as a follow-up. The potential new revenue lines within that vertical, is that something that would necessitate acquisitions -- related acquisitions or can be done kind of organically?

Mark E. Tryniski -- President and Chief Executive Officer

I think it could. I think we would probably not look at paying a lot for something -- that space right now -- the private equity firms are playing in that space in a very meaningful way and have essentially bid up prices in that space to a point where it makes a lot less sense for a strategic buyer than it does a financial buyer. But we have tremendous operational capacity in that business and we have the ability to develop solutions based on our existing platforms to leverage additional service capacity into the market. So it could be, I mean, we've looked at, I'll call them, smaller acquisitions that already kind of have a developed platform that we can leverage better. We've also had conversations about existing opportunities that we can build out our current platform to serve -- some of these opportunities are fairly significant, I would say. So I think we have some pretty good runway still left in that business going forward.

Russell Gunther -- Davidson -- Analyst

I appreciate your thoughts there, Mark. Thank you for that. Last one for me guys. You disclosed the impact of CECL as it relates to the, mark in this deal. Just curious, any preliminary thoughts you could share or just an update on timing for when we might get a look at the full disclosure as impacts the pro forma balance sheet?

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

Russell, good question. We are working on additional disclosures for this quarter's Q. So we're going to expand our disclosure when our model is built. We're going to run it through on a parallel basis for a couple of quarters now. We had our validation completed and we'll be making some additional disclosures in the Q, as I said.

Russell Gunther -- Davidson -- Analyst

Very good. Thank you guys for taking my questions.

Mark E. Tryniski -- President and Chief Executive Officer

Thanks, Russell.

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

Thank you.

Operator

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

Collyn Gilbert -- KBW -- Analyst

Thanks. Good morning, gentlemen.

Mark E. Tryniski -- President and Chief Executive Officer

Good morning, Collyn.

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

Good morning, Collyn.

Collyn Gilbert -- KBW -- Analyst

Just a few housekeeping questions. I'm sorry, I missed it. What did you say, Joe, the impact was of the FDIC savings this quarter?

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

About $700,000 to the good [Phonetic].

Collyn Gilbert -- KBW -- Analyst

Okay. And will that -- would you start -- have you absorbed all your credits as it relates to that, so that then costs will be start to be incurred in the fourth quarter again or how will that play through?

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

Yeah. There is additional credits potentially available depending on how the fund performs. So, if the fund performs above it's target benchmark for reserves, we would expect that sort of the impact to occur for another two quarters and we would likely exhaust the credit after a couple of more quarters.

Collyn Gilbert -- KBW -- Analyst

Okay. Okay. All right. That's helpful. And then, just on the deposit growth side, I know you had indicated overall with the impact was from Kinderhook, but you guys saw some really good non-interest-bearing deposit growth this quarter. So just trying to understand the movement within some of those segments.

Mark E. Tryniski -- President and Chief Executive Officer

Yeah. I think it was small. You get -- you typically get variations in the public funding and we have give or take a $1 billion or so in public funds and that can change quarter-to-quarter by a couple hundred million dollars or so. So we like to look at kind of public funding separately from the non-public. We continue, over the course in the past, you had very good growth in kind of the core checking, savings, money market, non-public funds. It never moves dramatically, but it's kind of a tough or slow in continual cadence of low single-digit growth in that core deposit base. As Joe said, about 68% of our deposits right now are in checking and savings accounts that have actually very long lives in our markets. So nothing tremendous, Collyn. It's -- I don't think I'm sure we wants us growing our deposits 10%, because we're not in those markets and that means we paid up to acquire them. So we tried to do it the old fashion way in our markets, but we just have continued cadence of growth in the core deposit part of the deposit base, which obviously is very good.

Collyn Gilbert -- KBW -- Analyst

Okay. That's helpful. And then just another housekeeping item. It looks like you guys have folded in the mortgage banking line into deposit service charges. We're just curious, is there break-out there and if you know why that is, is it just because you're going to deemphasize that line going forward?

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

Good question. I think just in totality, we thought it was just easy to put those two line items together because we don't have a substantial mortgage banking business in the sense that we don't sell a significant part of our portfolio to the secondary market. It's just not a line of business that we've actively have been and originating and selling mortgage as we portfolio, the lion share of our mortgages over the years.

Collyn Gilbert -- KBW -- Analyst

Okay. So not a big variance we should assume in this quarter's line versus what you've done historically? It's just folded in -- ?

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

Yes. It is down a little bit on the mortgage banking side, but not all that significant to the total revenues of the Company for sure.

Collyn Gilbert -- KBW -- Analyst

Okay. Okay. And then just two sort of a little bit more big picture questions. Just as it relates to the margin, as we look out into 2020 and assume we sort of stay in this low rate environment, what -- is there a point where you feel like the margin can kind of bottom or how do you sort of see it broadly playing out as we look into 2020 with assuming that the last Fed cut comes in the first quarter of 2020, sorry.

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

Yeah. I mean, if we have two more Fed cuts, it will likely negatively impact the margin in 2020. As I think it was pointed out earlier in the call, even in the post-crisis era, we tend to keep our margin kind of in that 3.60% range -- low-3.60s to mid-3.60s. Our expectations would be that we would probably maintain it in the 3.60%s level, at least through most of 2020. Obviously, if the yield curve stays flat to inverted and low for a very long period of time that will become more difficult to sustain in the years beyond 2020.

Collyn Gilbert -- KBW -- Analyst

Okay. Okay. That's helpful. And then just on the M&A front, with Steuben and further opportunities, do you see more deals or the supply of potential deals increasing that similar to a profile that Steuben has or how do you sort of see M&A playing out for you guys?

Mark E. Tryniski -- President and Chief Executive Officer

Yeah. I think, we will have -- I think there is a pretty long runway of opportunities for us into the future. And we try to be very disciplined about the partners that we participate with. Steuben is a good example. It's -- it might not be as big as other things we can do, but if you look at, I mean, it's a very high performing institution for its size. I mean, the ROA is of over 1.20% [Phonetic], the efficiency ratio of 60%, the asset quality is clean. They have a nice trust department. So it's in our footprint. We have some branch overlap. It's just -- it's a very good profile of the kind of partner that we are interested in.

So I think there is a number of those across our footprint. I would just kind of repeat historically our acquisition strategy has been to be disciplined and do high value, lower risk kind of things where the risk return profile is asymmetric, and Steuben as did Kinderhook, clearly fit that profile. If you look at, we are now in New York, Pennsylvania, Vermont, Massachusetts and that's a fairly big geographic footprint for us to continue to identify and work with others on opportunities and also we would look to trying to contiguous markets as well. So, you can go very far north and east of where we are, we can move a little bit south and West. And so we've had conversations with institutions in adjacent markets that are south and west of us as well and I suspect that will continue. It's important for us -- the organic execution is important for us. I think historically we rely too much on M&A for the earnings growth that we were getting. We needed to improve on that. I think we have improved on that and will continue to see the benefits of that greater capacity around organic execution going forward, but I also think that the M&A opportunities these kind of high-value, lower-risk opportunities, if you look at our history over the last 10 or 15 years, a lot of the balance sheet growth has come from -- it has come from M&A and I think we've been able to be disciplined about it in and extract the value for shareholders out of the execution on those out of those transactions. So as I've always said, it's not about being big, this has got nothing to do with scale, are rather be smaller than bigger, but regulated -- [Indecipherable] regulated capital. If you want to get operating performance improvement, you have to get a little bit bigger over time, but if you look at our return metrics have also improved over time.

So I think that will be the strategy going forward. I think we continue to have lots of opportunities. It doesn't matter whether it's a somewhat larger institution or smaller institution. It has to be something that kind of fits our profile of what we won't do it. So we don't need to take those risks. I think we trade at above average multiple in the market for a reason. And I don't think we're going to do something that's undisciplined or chase growth for the sake of growth to put our shareholders at risk in anyway. So we will continue to be disciplined and we will continue I suspect to find high-value acquisition opportunities going forward.

Collyn Gilbert -- KBW -- Analyst

Okay, that's great. That was all I had. Thanks guys.

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

Thanks, Collyn.

Mark E. Tryniski -- President and Chief Executive Officer

Thanks, Collyn.

Operator

Our next question comes from the line of Erik Zwick of Boenning & Scattergood. Please go ahead, sir.

Erik Zwick -- Boenning & Scattergood -- Analyst

Good morning, guys.

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

Good morning, Erik.

Mark E. Tryniski -- President and Chief Executive Officer

Good morning, Erik.

Erik Zwick -- Boenning & Scattergood -- Analyst

Couple of questions on the Steuben transaction. First, was this a competitive bid situation or a negotiated transaction?

Mark E. Tryniski -- President and Chief Executive Officer

I'm not going to comment at this juncture, Erik. We just announced. So I will -- I guess it's probably more to be disclosed going forward.

Erik Zwick -- Boenning & Scattergood -- Analyst

Understood. That's fine. And then, just want to make sure I heard the comments clear, with the 30% targeted cost savings, that does not currently incorporate any targeted branch closures that you may revisit that at a later time. Did I hear that correctly?

Mark E. Tryniski -- President and Chief Executive Officer

That's right.

Erik Zwick -- Boenning & Scattergood -- Analyst

Okay. And then just looking at there, net interest margin, it looks like it's been pretty stable over the past year or so. Given the outlook for potentially a couple more Fed cuts and for the yield curve to stay flat, would you expect any major changes to their margin between now and the targeted deal closing? And I guess the heart of my question, just kind of zero in on the pro forma impact to that pro forma margin of the company?

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

Yeah. Erik, I think it would be -- it's going to be similar to the same headwinds that we're facing in the industry spacing. In other words, my expectations would not be that the margin will head north and go up, but potentially would drift down a little bit with the FOMC cuts, but nothing really out of alignment with the industry in general.

Erik Zwick -- Boenning & Scattergood -- Analyst

Okay. And then maybe just kind of one detailed follow-up on that. It looks like they've got about 20% of their deposits in jumbo time and just given your strong loan to deposit ratios, opportunity to let some of those run off and help you withstand the headwinds that we've just discussed?

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

Yeah. I mean, there are some jumbo CDs that are priced at market and I think as those come up for renewal, we'll have to evaluate the overall relationship and profitability with each of those situations. But historically, we have not paid through the market for deposit funding. I would expect that we're going to maintain our discipline around that going forward. So expectations are that jumbo book is probably not going to grow and may drift down a little bit over future quarters.

Erik Zwick -- Boenning & Scattergood -- Analyst

Great. Thanks for taking my questions.

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

Thanks, Erik.

Operator

Gentlemen, there are no further questions at this time. I'd like to hand it back over to you for closing, please.

Mark E. Tryniski -- President and Chief Executive Officer

Very good. Thank you all again for joining our call and we will talk to you again in January. Thank you.

Operator

[Operator Closing Remarks]

Duration: 47 minutes

Call participants:

Mark E. Tryniski -- President and Chief Executive Officer

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

Alex Twerdahl -- Sandler O'Neill -- Analyst

Russell Gunther -- Davidson -- Analyst

Collyn Gilbert -- KBW -- Analyst

Erik Zwick -- Boenning & Scattergood -- Analyst

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