Q1 2022 Community Bank System Inc Earnings Call
Good morning, and welcome to the community Bank system first quarter 2022 earnings Conference call.
All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad.
Please note today's event is being recorded.
And also please note that this presentation contains forward looking statements within the provisions of the private Securities Litigation Reform Act of 1995 that are based on current expectations estimates and projections about the company markets and economic environment in which the company operates such statements involve risks and uncertainties that could cause actual.
All 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 marching risky president and Chief Executive Officer, and Joseph the terrorists Executive Vice President and Chief Financial Officer.
They will be joined by Dimitar curve and Al <unk> Executive Vice President of financial services and corporate development for the question and answer session session gentlemen at this time you may begin.
Thank you Chad.
Everyone and thank you for joining our first quarter conference call and hope everyone is well.
Earnings for the quarter were very solid across the board margin continues to be a lessening headwind.
And loan growth expenses deposit fees and the continuing strength of our financial services business as a tailwind.
Loan performance continues to be really good.
We had annualized growth of 4%.
Quarter that is seasonally negative for us and which continues a favorable trend in the second half of 'twenty one.
Commercial and consumer mortgage led the way on the strength of solid execution by our teams and the pipeline remains very strong.
Our commercial pipeline right now is over 50% higher than it's ever been.
Joe will comment further on margin, but we were also encouraged by the 40 basis point increase in originated loan yields this quarter over last.
We expect that it would take until the end of the year for originated loan yields to exceed the portfolio yields but the current trends suggest that will happen sooner.
Also our deposit cost ticked down to eight basis points this quarter and since our deposit base is 75% checking and savings we do expect our low beta funding costs will be contributory to margin expansion going forward.
The recent strength of our financial services business has continued in the quarter with revenues up 13% and pretax earnings up 8% over 2021, our benefits wealth and insurance businesses are all performing extremely well right now and given their organic growth momentum and new business pipelines, we expect that trend to continue.
Yeah.
As we announced last week, we have received regulatory approval for the pending Elmira savings Bank transaction, a $650 million asset bank with 12 offices across the southern tier and finger Lakes region, New York State. It's a very nice franchise with a very good mortgage business that we expect will be 15 <unk> per share accretive on a full year basis.
Excluding acquisition expenses, so a very productive low risk transaction that we expect to close early next month.
Looking ahead, we expect our current operating momentum to continue particularly as it relates to our commercial banking business over the past quarter. We've added many experienced and talented bankers to our leadership and frontline's, including in New England Upstate New York in the Lehigh Valley in Pennsylvania, We also expect the seasonally strong.
Consumer mortgage and indirect lending businesses to accelerate subject to inventory availability in those businesses.
Lastly, I would like to give a shout out to the entire community bank team for being recognized by Newsweek as the sixth most trusted bank in the nation and their annual feature of America's most trusted companies Trust is our product and we could not be more proud of this recognition of our team's efforts Joe.
Thank you Mark and good morning, everyone as Mark noted the first quarter results were solid with fully diluted GAAP earnings per share of 86.
The GAAP earnings results were <unk> 11 per share or 11, 3% below the first quarter 2021, GAAP earnings and <unk> per share or seven 5% higher than the linked fourth quarter results fully diluted operating earnings per share, which excludes acquisition related expenses and other non operating revenues and expenses for <unk> 87 for the quarter <unk> 10 per share.
At 10, 3% below the prior year's first quarter, and <unk> <unk> per share or seven 4% higher than the linked fourth quarter results. The 10 cent decrease in operating earnings per share as compared to the first quarter of 2021 was driven by increases in the provision for credit losses operating expenses income taxes, and the fully diluted shares outstanding offset in part by increases in net.
Interest income and noninterest revenues, a $5 $2 million decrease in P. P. P related revenues between the periods and a $6 $6 million increase in the provision for credit losses or responsible for seven four a 17% decrease in fully diluted operating earnings per share net of tax over comparable periods. The company recorded 0.9.
And a provision for credit losses in the first quarter of 2022 as compared to $5 $7 million net benefit in the provision for credit losses in the first quarter of 2021 is the U S economy emerge from the depths of the pandemic. The company P. C. P related interest income totaled $1 $7 million in the first quarter of 2022 as compared to $6.
Million PPP related interest income in the first quarter of 2021 the six.
Or seven 4% increase in operating earnings per share over the linked fourth quarter results were largely driven by a decrease in the provision for credit losses, higher noninterest revenues and lower operating expenses adjust.
Adjusted pretax pre provision net revenue per share, which excludes the provision for credit losses acquisition related expenses and other non operating revenues and expenses and income taxes were $1 12 in the first quarter of 2022 as compared to $1 nine in both the prior year's first quarter and the linked fourth quarter.
The company reported total revenues of $165 million in the first quarter of 2020 to a new quarterly record for the company and an $8 1 million or five 3% increase over the prior year's first quarter. The increase in total revenues between the periods was driven by a zero point $9 million, a 1% increase in net interest income and a $7 2 million.
Or 12, 2% increase in noninterest revenues noninterest revenues accounted for 41% of the company's total revenues during the first quarter of 2022 comparatively total revenues were up 0.9 million, 0.5% over fourth quarter 2021 results due to a $1.8 million or two 7% increase in net.
Non interest revenues, partially offset by zero point $9 million, 0.9% decrease in net interest income driven by a $1 $9 million decline in P. P. P related interest income.
The company reported net interest income of $94 $9 million in the first quarter of 2022. This compares to $94 million of net interest income recorded in the first quarter of 2021, although the company's earning asset yields decreased 34 basis points over the prior year's first quarter due to lower market interest rates on new loan originations and investment securities and the previously.
You mentioned decrease in PPE related interest income net interest income increased by zero point $9 million or 1%. This result was driven by lower funding costs, a significant increase in the average earning assets and 11 basis point increase in investment yields, including cash equivalents as accompanying meaningfully shifted the composition of earning assets away from low yield.
Cash or a host of higher yield investment securities between the periods.
Comparatively the company reported net interest income of $95 $7 million during the fourth quarter of 2021 zero point $9 million million dollars higher than the first quarter 2022 results the company's tax equivalent net interest margin was 273% in the first quarter 2022, as compared to $3 or 3% of prior years first quarter.
274% in the linked fourth quarter.
Employee benefit services revenues for the first quarter of 2022 were $29 6 million up $3 1 million or 11, 5% in comparison to the first quarter of 2021 improvement in revenues was driven by increases in employee benefits trust and custodial fees as well as incremental revenues from the acquisition of Fringe benefits design in Minnesota, Inc. During the third quarter of two.
'twenty one.
Wealth management revenues for the first quarter 2022 were $8 $6 million up from $8 $2 million in the first quarter of 2021 increase in wealth management revenues was primarily driven by increases in investment management Trust service revenues.
The company reported insurance service revenues of $10 $4 million in the first quarter of 2022, which represents a $2 3 million or 27, 7% increase over the prior year's first quarter driven by organic expansion as well as the second quarter 2021 acquisition of a Florida based personal lines insurance agency in the third quarter 2021 Act.
There's never a Boston based specialty lines insurance practice.
Banking noninterest revenues increased $1 $4 million or 9% from $15 6 million in the first quarter 2000 $21 million to $17 million in the first quarter of 2022. This was driven by a $1 $9 million 13, 1% increase in deposit service and other banking fees offset in part by zero point $5 million.
The decrease in mortgage banking revenue.
Comparatively the company.
Company's financial services business revenues increased $1 $3 million or two 7% over the linked fourth quarter results, while banking related noninterest expenses were up zero.
Zero point $4 million or two 8%.
During the first quarter of 2022, the company reported a provision for credit losses of zero point $9 billion. This compares to a $5 $7 million net benefit recorded provision for credit loss in the first quarter 2021.
The company recorded net loan charge offs of zero point $5 million in annualized.
Three basis points of average loans outstanding during the first quarter 2022, as compared to net loan charge offs of zero point $4 million in annualized two basis points of average loans outstanding in the first quarter of 2021.
Although economic forecast remained generally consistent with the prior quarter Companys allowance for credit losses increased <unk> $3 million from the end of the fourth quarter of 2021 due in part to a $90 seven.
$7 million increase in non PPP loans outstanding.
Comparatively in the first quarter of 2021, economic forecasts had improved significantly resulting in a release of reserves in that quarter.
Although asset quality remained strong the company will continue to closely monitor the effects of it in an inflationary environment will have on both the company's consumer and business borrowers the company reported $99 $8 million in total operating expenses in the first quarter of 2022 compared to $93 2 million total operating expenses in the prior year's first quarter to $6 $6 million seven.
Percent increase in operating expenses was primarily driven by a $4 million, 7% increase in salaries and employee benefits and a $2 million or 23, 1% increase in other expenses the increase in salaries and employee benefits expense was driven by increases in merit and incentive related and play wages higher payroll taxes and higher employee benefit related expenses offset in part by.
A decrease in full time equivalent staff between periods. Other expenses were up due to a general increase in the level of business activities, including increases in business development and marketing expenses insurance professional fees and travel related expenses in comparison, the company reported $109 million in total operating expenses in the fourth quarter of 2021.
The effective tax rate for the first quarter of 2022 was 21, 4% up from 18, 6% in the first quarter of 2021. The company recorded a significantly higher level of income tax benefit related to stock based compensation activity in the first quarter 2021, as compared to the first quarter of 2022, which drove down the effective tax rate.
Exclusive of stock based compensation benefits the company's effective effective tax rate was 22, 3% in the first quarter 'twenty two as compared to 21, 4% in the first quarter of 2021 primarily attributable to an increase in certain state income taxes.
The company's total assets increased to $15 $63 billion at March 31, 2022. This represented a one point or $1 billion or six 9% increase from one year prior and a $73 2 million, 0.5% increase from the end of the linked fourth quarter of <unk>.
<unk> increased the company's total assets during the prior 12 months periods, primarily due to large inflows of government stimulus related deposit funding.
Average deposit balances increased $1, five 2 billion or 13, 1% between the first quarter of 2021 in the first quarter of 2022, Likewise average, earning assets increased $154 billion of 12, 2% over the same period. This included a 2.25 billion or 61, 4% increase in the average book value of the invest.
<unk> securities due to the company's security purchase activities and a $34 million, 0.4% increase in average loans outstanding partially offset by a $735 $8 million or 44, 1% decrease in average cash flow months on a linked quarter basis average, earning assets increased $275 2 million or 2% due to the continued.
Net inflows of deposits.
Ending loans at March 31, 2022 of $743 billion were $48 $6 million for zero percent, 0.7% higher than fourth quarter of 2021, and $53 9 million answers euro 4.7% higher than one year prior the.
The increase in ending loans year over year was driven by increases in consumer mortgage consumer indirect consumer direct and home equity loans offset in part by a decrease in business lending due primarily to forgiveness of PPP loans.
Exclusive of PPP loans, ending loans increased $410 3 million or five 9% over the prior 12 month period, and $90 $7 million or one 2% over the prior quarter.
Although the company's low yields cash equivalents remains significantly higher than pre pandemic levels totaling $846 million at March 31, 2022, the company deployed a significant portion of this excess.
Excess liquidity during the first quarter by purchasing 1.2 dollars $6 billion of investment Securities.
The Companys regulatory capital ratios remained strong in the fourth quarter company's tier one leverage ratio was 9.09% at March 31, 2022, which is nearly two times the well capitalized regulatory standard of 5% during the company the recorded or the company excuse me during the quarter the company reported $271 4 million.
And after tax other comprehensive loss driven by decline in the market by the company's available for sale investment Securities portfolio. The company has an abundance of liquidity the combination of <unk>.
Company's cash cash equivalents barring available for Federal Reserve Federal Reserve Bank borrowing capacity at the federal home loan bank and the Unpledged available for sale investment Securities portfolio provided the company with $641 billion of immediately available source of liquidity at the end of the first quarter.
At March 31, 2022 of the company's allowance for credit losses totaled $51 million or 0.68% of total loans outstanding which compares to $49 9 million, 0.68% at the end of the fourth quarter of 2021, and $55 $1 million of 0.7% 70.
And 5% a year prior the small increase in the allowance for credit losses. During the first quarter is reflective of non PPP related loan growth in certain qualitative factors and.
At March 31, 2022, nonperforming loans were $36 million or 0.49% of total loans outstanding. This compares to $45 $5 million of 0.6% six 2% of total loans outstanding at the end of the fourth quarter of 2021, and $75 5 million or one point or 2% of total loans outstanding.
One year earlier, the decrease in nonperforming loans as compared to the prior year's first quarter and fourth quarter is primarily due to the reclassification of certain pandemic impacted hotel loans from non accrual status back to accruing status.
Loans 30 to 89 days delinquent were 0.35% of total loans outstanding at March 31, 2022 down slightly from 0.38% at the end of the fourth quarter 2021, but up from 0.27% one year earlier, we believe the company's asset quality remained strong but acknowledged that they historically low levels of net charge offs experienced over the prior 12 months.
We're supported by extraordinary federal and state government financial system provided to businesses and consumers throughout the pandemic looking forward. We are encouraged by the momentum in our business. The company generates solid organic loan growth over the previous three quarters. The financial services business, that's been growing and performing very well asset quality remained strong and our loan pipeline is.
Robust in 'twenty to 'twenty, two we will remain focused on new loan generation managing the company's balance sheet in a rapidly changing interest rate environment, while continuing to pursue accretive low risk and strategically valuable mergers and acquisition opportunities and lastly to Echo Mark's comments, we look forward to partnering with Elmira savings Bank and sincerely appreciate the efforts of our colleagues.
Myra savings bank to make the transition as seamless as possible for its customers IRA has been serving its communities for 150 years and will enhance our presence in the five counties in New York Southern tier and finger lakes regions. Thank you I will now turn it back over to Chad to open the line for questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two at.
At this time, we will pause momentarily to assemble our roster.
Yeah.
And the first question will come from Alex toward all with Piper Sandler. Please go ahead.
Hey, good morning, guys.
Good morning, Alex.
First off.
I think you guys are just modestly asset sensitive at the end of the year I'm just wondering with the securities purchases that you did during the quarter. If you could give us an update on how the how the balance sheet positioned for Oh. These pending rate hikes that we're now expecting out through the end of 'twenty three.
Yeah, well, Alex I think you're on point there. We are we deployed a fair amount of our investment securities in the first quarter and for that matter going back to the fourth quarter of last year.
Which we were largely on the sidelines for most of 2021 as you know rates were extremely low so.
So I think we've successfully deployed those those securities.
Our outlook for core net interest income ex X P. P. P. A is up significantly so by way of it.
Example, the last the trailing 12 months.
Core net interest income was $361 million, we expect that.
The next four quarters will be significantly higher in fact, I believe to the tune of a high single digits approaching a 10% improvement over the trailing 12 months.
We have about $800 million in.
Overnight.
Cash equivalents that could be deployed in a higher rate environment. We also have some securities maturity. So you know.
Securities and cash equivalents of about a 1 billion won to potentially deploy or reinvest.
Reinvest throughout the year, we do have about $1 billion, seven or solve and variable rate loans of which about 800 million is reprice within the next 12 months. So if rates continue to increase and to stay high we will have those opportunities to.
Redeploy some maturing prints.
Principal payments into higher yielding loans as Mark mentioned, you know our new loan generation rates were up about 40 basis points. This quarter over last quarter. So we are putting loans on it at a higher rate certainly than we did in the fourth quarter, we expect that in the second and third quarter to effectively approach are.
Our current book yields.
And then.
So confident and then we have maturing loans.
Last quarter, we had about $400 million of principal repayments on loans and so they're coming off of it.
The current rates and we will have an opportunity opportunity to redeploy those.
At higher rates, if rates stay where they are I guess the last piece, Alex just to mention is that.
The last cycle of tightening.
Our deposit beta was one of the best in the industry and I think we're going to continue to.
You know certainly have one of the better core deposit franchises, one lower deposit betas in the industry.
So I think we're I think we're fairly well positioned.
And then based on all the stuff you say I totally agree I'm just curious in the disclosures that you put out for the gap analysis does that assume a higher deposit beta than you kind of historically have shown or what would cause that to be what would cause you to.
That's kind of a screen more neutral relative to asset sensitive given all of the things you just went through.
Yeah, No that's fair question, Alex, but the challenge with their disclosures.
Climate around the disclosure, which is basically to take your.
Expected run rate look out look out 12 months, what's changed is the run rate from the end of the fourth quarter.
Was much much lower we've deployed a lot of our securities that run rate is higher.
So you know the baseline expectation is up significantly over the projection that we put out in the fourth quarter.
So when you put the Q disclosure all it's suggesting is if you have a change in rates from that point forward.
What might happen to your net interest income.
That is minimize the date, but we've already stepped up considerably in the last quarter in terms of the core NII.
So no we don't assume we still assume a less than a 10 a deposit.
Based on our experience.
It's just that what's happened is we've already stepped up the NII up.
Projections between the last disclosure in the first quarter disclosure meaningfully.
Okay. Thanks.
And then I.
I'm just curious.
Obviously, the regulatory capital levels are very healthy, but the TCE dropping below 7% and presumably maybe a little bit more.
A decline with the ESP deal coming on in the middle of a quarter. Yeah. How important is that TCE to ta ratio to you guys either internally or if the regulators and is it GNU does that level of capital change. The way you guys think about things like M&A or at least the consideration that you might use for M&A things like that.
Okay.
Alex It's mark I'll jump in on that one.
We don't we don't.
Pay very much attention honestly internally to TCE ratios and TCE in TCE multiple and all those kinds of things that I think.
One of the reasons is because when you run an ongoing business and the notion of a <unk>.
TCE ratio.
R T.
Yeah.
Tangible common per share and those kinds of metrics is there's an assumption inherent in those that youre intangibles have zero value.
And you can't run an ongoing business around the assumption that you have no value to your intangibles.
So you know the regulators pay no attention whatsoever.
Which I understand.
We don't really pay a lot attention until we disclose it because other people are interested in it but in terms of how we think about how we manage the company it's never really been around.
TCE.
Particularly as it relates to the non banking businesses.
I'd use our benefits business as an example, there's.
There is probably.
$800 million of unrecognized goodwill on the books associated with our benefits business.
So likewise for the insurance and.
Wealth businesses. So you.
I understand the math of it all but in terms of how it has any real life implications on how you think about the business or manage the business.
You know it doesn't we don't really think about it I mean, the other the other thing I would add in is the.
The delta in the in the change in <unk>. This.
This quarter was mostly attributable to change in the value of investment portfolio. What do you think about it we have.
What's around $30 billion of financial instruments on our balance sheet.
15 on the asset side 15 or close on the liability side.
The concept of of tangible equity ratio.
Assumes.
Our mark to market of fair value adjustment.
Only one of those financial instruments. So now we I haven't done the math, but I would guess that the value.
Core deposit intangible value of our core deposit base.
Just went up by a whole lot more than whatever the securities book declined by.
So I mean, you also have the loans, which are financial instruments, they would get mark to market. They would go down in a period of rising rates. Your deposit base goes up so I mean, we look more at ease the economic value of equity, which is essentially a fair valuing of all of your instruments and that's done in the context of interest rate risk management.
Liability management, so the TCE ratio or TCE tangible book value and all those kinds of things that we don't we don't think about it.
It's irrelevant to the actual economics and actual value. So we don't really spend a lot of time.
About it.
The.
The <unk>.
Regulatory capital ratios that we look at frankly, the most important are the tier one leverage ratio from a regulatory perspective that we think about that we look at that we pay attention to.
If you look at the.
The risk based capital ratios are what three acts or something to minimum I don't even know what the numbers are so but if you look at it we have.
One $6 billion of assets on our balance sheet.
Hearing no capital charge whatsoever. So I mean, we think we're in pretty good stead from a capital standpoint.
Whatever happens to the tangible ratio and tangible capital we don't really.
Pay much mine too.
Got it I appreciate that that commentary and just a final question for me I think you said that the.
Accretion from the Almirah deal is still scheduled to be about 15 cents, which I think is what it was when you guys announced it but correct me if I'm wrong, there are fairly mortgage having institution does that.
It is the change in the mortgage market and rate environment incorporated in that are in that EPS accretion guidance.
Yes, Alex we when we model, we kind of modeled for the unlikely.
Continuation of high mortgage volumes, we didn't think that it was going to continue in 'twenty and 2021 levels. So we had already kind of model some of that into our expectations that there'd be a drop off in.
In our origination so we've already had that.
<unk> built into the 15th when we announced it.
Fantastic Thanks for taking my questions.
And the next question will be from Russell Gunther from D. A Davidson. Please go ahead.
Hey, good morning, guys.
Good morning.
Wanted to touch on the growth outlook and commentary so feel really good result, very constructive view you guys just laid out both in terms of the commercial and consumer.
Well I think you guys historically I tend to be in that sort of low to mid single digit range pretty consistently for organic growth.
I mean based on you know your guys constructive view if the stars align could there be an upward bias to that range just curious as to how you're thinking about growth over the <unk>.
Remainder of the year.
Yeah, I would think if you look Ross.
Russell I mean, the answer to your question I think is yes relative to our historical.
<unk>.
Growth trajectories in our markets.
As I said in my comments, we've invested in some.
Leadership resources, some frontline resources.
In both our <unk>.
Commercial and our mortgage business in markets, where we think we have a lot more opportunity and can do a better job executing than we have historically, so I think we're already.
Making progress.
On the commercial side as I commented on the pipeline.
Substantially up from where it historically is particularly this time of year. So if I look at where they are.
The pipeline and the committed that fund it is right now it is hard not to conclude that the.
The next couple of quarters are going to be above trend.
For commercial.
Mortgage we'll we will see we're entering the I'll call it busy season in our markets, but inventories the challenge.
Interest rates are.
Are impacting affordability, so that could have an impact that we can't foresee.
But.
We we regardless of the environment, we almost never not grow our mortgage.
Business in the second and third quarter. So we would we would expect absent something we can't predict that we will we will also have good growth in the second and third quarters now with that said last year, our commercial mortgage business I think grew 6%, which is an outlier for us, it's historically, 3% give or take a point.
6% was not we didn't do things a lot different other than we worked hard to execute but I.
That was a function of the market.
More than anything so.
I think in the aggregate.
Loan growth in the next couple of quarters I would expect looking out will be above historical trend.
That's really helpful color. Thank you.
Just a quick follow up on that in terms of the talent leadership you guys have added is that initiative now largely complete.
When you look for good folks all the time, but in terms of a targeted ramp is there anything significant left to do there.
I think there's a there's some areas where we're going to add some more resources and I made reference to some of them. We just hired from one of the larger banks really talented.
Individual actually used to work for us years ago.
Brought him back on board he has already hit the ground running he's only been on board for a couple of weeks, we've asked him to build out a team over time.
Talented people.
That's a really strong market and so we started we started there.
And I think theres other markets.
Within or adjacent to our current footprint that we would continue to look to add resources, where we're not going to we're not going to lift the team out of another bank and pay a fortune and drop it in.
We don't we've never really done things like that it's really just focusing more on finding really talented people and experienced people, who we think can move the needle for us.
In markets, where we think we have opportunity because they're either newer markets us like the Lehigh valley or they're markets, where we have underperformed historically I mean I'll use Western New York as an example, we've kind of in the bedroom the Rochester Buffalo market for a long time, havent really done as much renewed.
Focus on that and a significant part of our current pipeline and opportunity is in Western New York.
So the capital district continues to be very strong in the new England market right now is really strong.
So it's a Pennsylvania is really strong notwithstanding kind of startup effort Lehigh Valley, but northeast, Pennsylvania is really strong. So it's very good right now and the momentum is really good that's been a function of.
Leadership resources front.
Frontline resources, we've done some things to try to.
Improve our process, we haven't changed our lending and credit policies, but we have changed some of the processes will continue to do some of that so it's just it's just a refocus on that business and how we think we can do better in existing markets and markets that are somewhat newer to us.
Okay, great. Thank you Mark and then just last one for me is in terms of average earning asset mix. So yes.
Given the momentum on the loan growth side of things in recent.
Growth in the Securities portfolio, how are you thinking about the investment portfolio going forward in terms of overall mix of earning assets.
So Russell right now of the Securities portfolio is about 40% of our earning assets just the skinny investment Securities. We also as I mentioned that about $800 million of call. It dry powder, we are potentially going to invest some some smaller portion of that we also want to leave a little aside for.
Potentially further rate improvement and also.
Just in case, we see some runoff in our in the deposit book.
Needless funds that gave us a tailwind for last couple of years or effectively gone.
So we just wanted to make sure that we have some some cash reserves in case, we experience a little bit of.
Backup on the on the deposit side, So I would think that you know.
Modest continued investment of that those cash equivalents.
Now to the tune of a couple of hundred million dollars, but effectively.
We expect to keep some of that liquid for either run off or.
Future opportunities for deployment if rates continue to go up.
Okay perfect. That's very helpful. Thank you guys. That's it for me.
Thanks Robert.
The next question is from Matthew Breese from Stephens, Inc. Please go ahead.
Good morning.
I was hoping we could touch on on the auto business, particularly on the growth outlook, but also the credit front as well I just was curious if you're seeing any signs of deterioration on the you know the underlying consumers' ability to pay at this point.
Yes fair question.
I cannot give you an expectation on the outlook that business has always been really volatile. It you know the demand changes quickly.
Got inventory issues supposedly the chips are common when are they going to come is it going to be too late for the season or are they going to come in time and.
What is the change in interest rate environment due to demand. So I think there's too many there's too many variables. There I would expect that there'll be some growth in that business. There's almost always growth in that business in Q2 and Q3. So I would expect that would continue.
Continue.
But is it going to be.
You know, sometimes that portfolios grown 10 double digits and sometimes it shrinks.
Never shrinks double digit, but it will shrink.
Single digits.
So it's very difficult to predict I would expect just given the current run rate and trajectory and trend and the seasonality given the second or.
Third quarter as well I would expect that business will grow a little bit. So I think the balance sheet will get bigger.
So far we have seen no change in asset quality in.
Indicators in that portfolio, frankly, or any other portfolio. The ASIC probably has actually gotten better if you look at.
Some of the metrics.
Delinquencies of nonperformance of the charge offs are all are all really strong right now, but that's that I think that in the consumer businesses can turn a little quicker than on the commercial banking side of the business. So but right now it's a very good there's no indicators that that will turn I will say.
Part of the reason why if you look at the historical kind of loss.
Experience in that portfolio were running less than that right now because of what's happened with used.
Used car prices. So we do have.
We did we do we do have those who weren't able to pay and we have to repossess. The cars sold at auction and those prices are so high theres almost no losses right now so.
So I think.
What I would say is the.
The expected future losses would not come from any higher level of folks who can't make their payments, which I think has always been reasonably consistent in terms of repo activity.
But I do think that at some juncture when the market cools off there will be a quick turn in the value of used car prices and we won't be able to get as much at auction. So there will be.
An increase at some juncture and I don't know when that might be he can't predict but there will be.
An increase in loss rates at some juncture just because of that.
The used used car values.
Interesting, okay, I appreciate that I'm going to jump around him my question's, a little bit because of that last point.
How do you think about M&A.
Does does what you see on the upcoming rate cycle or credit cycle change the characteristics of what you might look for in a bank acquisition and partner.
Interesting question.
I would say generally no, but there could be circumstances, where if you had a bank that was extremely well positioned for the current potential trajectory of the rate environment.
That would.
Affect our perception of valuation if it was otherwise something that we considered for strategic.
Strategic reasons to be a high value opportunity for our shareholders. So we would we would I guess factored into the valuation.
It's typically not been a significant driver of.
Our strategy around M&A is kind of the balance sheet I mean, I will say we don't.
We don't.
Given our loan to deposit ratio, we don't it'd be helpful to do something.
M&A from an M&A perspective that was they had higher loan to deposit ratio than we did and I think that's kind of what we've done which I mean, most banks do we have a higher loan to deposit ratio than we do and then we can be disciplined about the pricing.
Yes.
<unk> size the.
If there's if there's issues around the deposit base and the acquired institution, but I mean, I would say generally its not something that we we think about actively we certainly look at what's their balance sheet or is it a high quality.
Is it additive to us strategically, but in terms of trying to predict even which way interest rates will go on what the impact will be that's a little.
Challenging to do I mean, it's not.
Inconceivable that.
We have some.
GDP.
The challenges.
That is even though there are pockets right now as a group they are much more dovish than they have been historically and I can.
And consumables that we revert back to a much lower or declining interest rate environment. That's conceivable. So I think it's just difficult to predict I don't think we would we would look to their balance sheet in terms of their interest rate sensitivity to understand that.
But theres probably other factors that are certainly more consequential to our consideration.
And then the balance sheet.
Great sensitivity.
Understood. Okay, and then how have conversations gone on the M&A front I know the tape has been volatile, but just curious if theres been more or less discussions and you know you guys have have been known to do more than one one deal in a year.
Yeah, I think it's surprising I would say that the our level of activity in terms of our active interest in specific partners has not changed.
What what I have seen change is the.
The volume let's call it.
Inbound calls from.
Either banks or their bankers.
In terms of deal opportunities.
So that's been a little bit surprising.
But I think it's.
It is.
It was up and down.
Sometimes it's more active than other times, it's it appears to be maybe a little bit less active right now than it historically has done about it.
Our active dialog with parties so strategic.
Interest and value to us.
Continues the pace.
Got it okay I appreciate it thank you for taking.
Pat.
Thank you.
And once again, if you have a question please press star one.
The next question will come from Chris O'connell with <unk>. Please go ahead.
Hey, good morning, guys.
Yes.
Alright startup.
Securities yields coming on.
I know you guys, mostly purchase pretty heavily weighted to the front end of the quarter this past quarter.
What's the duration of the securities that you guys are putting on now and as far as origination yields on what youre going to be putting on.
In the next quarter, so what are those security yields.
Yeah.
So the most recent purchases as you noted had been on the shorter end of the curve three to.
Four or five years and earlier in the quarter.
Oh definitely shorter than the overall duration.
I think we would based on the slope of the curve now and we would expect to stay to the short end of the curve you know somewhere between two three years.
With the incremental opportunities that we have.
It just makes sense given our overall mix of assets and liabilities to stay on that you know on the shorter end of the curve Chris.
The other thing we've done I think we've we've picked up some munis alright, this quarter and I think we may look at some more munis muni spreads have gotten much more favorable but recently so that's.
Our market, we're looking at right now I think we've added we did something this quarter I remember how much it was.
But I think the mute the muni markets looking much more attractive at least right now.
Okay got it.
And appreciate the color on the loan origination yields what are the loan origination yields coming on at today versus the 4% or so portfolio.
So on a blended basis, we were like just close to about a 375 and are in.
In the first quarter.
With rates moving up we would expect that that blended weighted average rate of new originations will go up a bit more.
And this quarter, our overall book yield on the around the loan portfolio was about 4%. So I think we're gonna start to approach.
New loan origination yields that are effectively replacements for loans that are running off I think we're getting there are fairly quickly.
As rates have increased here in the last 30 40 days or so.
Got it.
And then as.
As far as the expense outlook goes.
I mean this quarter pretty good in terms of expense control.
And I know you guys did some hiring this quarter and so maybe it's a little bit back loaded but.
I think prior guidance was.
A little bit above the typical 3% gross growth rate organic.
Closer to 4% to 5% you're still thinking.
Thinking about that as a good growth rate for the year from an organic basis or given the start to the year.
That kind of come in closer to the.
Legacy you know, 3% or so of growth rate.
Chris I believe we're still going to trend a bit higher you know theres just a lot of.
Push from an inflation perspective on on wages and costs across the board.
So I would expect that we're going to probably trend higher in 2022 than we have historically.
That's something you know kind of mid single digits.
Kind of the.
The inflationary pressures are affecting every company, including us were not immune to those so I think we're going to see that we are investing in some very talented people, which I think will certainly pay off from you on the other side of the equation from a revenue generation standpoint, but.
So I still think that that mid single digit expectation is fair we did have.
Some some lower than expected expenses, particularly in some of our benefits plans I would expect those to normalize you know in the quarters going forward. So I think that you know, Florida call it 4% to 6% is probably.
Fair expectation for <unk> for the quarters moving ahead.
Other thing just to add by way of kind of.
Overall.
Commentary.
On the expense base.
We're down about over 100 ftes over last year.
So as we kind of continue to invest in digital and rationalize the analog.
I would expect that as much as yes, we are bringing on some.
Some very talented people.
In certain specified markets enrolls.
We were also overall.
<unk>.
Reducing ftes in other places in the business as we invest more in our digital capabilities. So I think that will continue as well so just to add some overall color to the understanding around the expense base.
Great that's good color and makes sense.
And.
On the wealth side of the business I know you guys, usually have a strong seasonal quarter for the first quarter.
But it seems.
It was strong this quarter given the market moves.
Anything driving that any teams picked up or anything like that that was that was unusual or that caused.
Okay.
Solid growth this quarter.
Hi, Chris its a limiter.
Nothing on the inorganic side, it's just been solid execution organically, we have a lot of momentum right now across all of our nonbanking businesses.
So we've got the right capabilities, we've got the right people.
Done some things on the margin to kind of improve some of our market presence and go to market strategy. So all of that is coming into play.
So keep in mind, our portfolios that we manage on the wealth side are probably a little bit more conservative than the market outcomes you see.
So I think we've held up reasonably well there as you noted you were ahead of last year and ahead of Q4 actually said that that was good to see.
The only thing I would just add in.
Dimitar youre closer to this lever from from what I I see it it seems like our in our benefits and wealth and insurance businesses that they've gotten to the point in terms of scale, where every business to compete in surface search segment of different markets and we've always competed in a certain segment in the benefits business and now we're competing in a different set.
Right.
The same thing with the wealth, maybe even more or at least equally as opportunistic in the wealth side that we have the people in the <unk>.
Platform capabilities that we can compete at a different level.
In terms of where we did historically.
I would say that's it.
Identical in the insurance business, we just have the ability now to compete and win at a different level and I think that's I think that's going to continue to make.
Make to make a business.
Make a difference it feels like those markets have opened.
Up to us in other.
Places that we historically had a more difficult time competing in.
Yeah.
Got it that makes sense.
And then lastly.
Given the comments around capital.
Our regulatory Tc and everything.
One what.
What was the average price of the repurchases this quarter and how are you guys thinking about utilization of the buyback plan going forward.
Yeah, So I'm not sure off the top of my head, Chris I can give the average price, but you know it was around around 70.
As the average our average price the way we've looked at share repurchases is really just to kind of clean up the.
Dilution from various equity plans and like we've always liked to keep some.
A lot of dry powder.
For future M&A opportunities and investment opportunities.
Holding company and so we and so we haven't done a lot of stock repurchase I think that's going to we're going to continue along that path, but we're just trying to effectively.
Clean up some some potential dilution that occurs because of just.
Just drift on the equity plans and that's really our plan going forward.
Understood. Thanks for taking my questions.
Thank you.
And the next question is a follow up question from Alex toward all with Piper Sandler. Please go ahead.
Hey, guys just a couple of follow ups. Just so we can get the modeling I hope I get the modeling a little bit more accurate in terms of the.
The benefits.
I guess the decline in benefit costs that you alluded to in the first quarter. Joe do you have how much that was and what that was related to.
Yeah. So we are we.
Health insurance costs spiked a bit in the at the end of last year.
Somewhat COVID-19 some call it deferred.
Elective procedures and the like of our population of people that take out our medical plan.
And then just you know inflation push if you will on health care costs.
And so we saw increases in the last couple of quarters that we're running.
20% kind of over and above the trailing 12 months.
Were meaningful.
Probably pushing eight $900000 a quarter and over our over our run rate, we kind of settled back into that.
An amount that looks more like you know I'll call. It more standard medical cost inflation of like 8% to 6% or six 8% I'm, sorry, I'm on a quarterly basis.
I don't know if thats going to hold.
But it but it helps certainly in the first quarter as things kind of backed up a bit and you know obviously theres not.
Covid related cases, and all of the.
Things that brings to that.
On the table, so I would expect that.
Hopefully, we'll keep those costs down below where they were at the end of the third or in the third and fourth quarter of last year.
But they'll continue to probably go up on a longer term basis.
High single digits.
Okay is that is it.
Self insurance and people are just kind of hitting their deductible as you get later in the year and so the cost go up a little bit.
Yeah, and yeah, and there's underlying.
Underlying reasons for just number of.
Claims going up as well.
The latter part of the year, which as you know a lot of people just deferred seeing their doctor and.
During COVID-19 and we saw some of that snap back and.
You know in the third and fourth quarter last year people were utilizing their health.
Health care benefits, just a bit more.
Okay and then on the.
Back on the insurance side.
It was a pretty decent pick up from the fourth quarter I know you've got some M&A that contributed some seasonality, but where would you expect that to.
If you kind of were looking at the seasonality of trying to strip that out what would you think that that line. The wealth management inclusive of insurance would run over the next couple of quarters or maybe kind of for the full year.
Alex This is <unk>, you're right our first quarter was record quarter in both revenue wise and margin wise for the business.
Just get the benefit of some of the acquisitions. We did last year I would say there is also a bad set of rates going up across the board. So the market is targeting for that that's good news.
I think we've become a little bit more efficient in how the service the market.
We don't necessarily.
It's hard to it will be hard to take that run rate and extrapolate. It there there is seasonality in the second half of the year is a little bit slower for us in that business.
So if.
If you're referring to pure the insurance business, we think will be up kind of single digits over last year mid to high single digits, but hard to extrapolate from the first quarter again, it's very seasonal.
Great. So if you were kind of a starting point for the second quarter it would be.
Look more towards the.
Fourth quarter than the first quarter.
Turning to together.
I think Thats fair.
Great Alright, thanks for taking my follow ups.
Okay.
Thanks, Alex Thank you.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Mr. Kaminski for any closing remarks.
Thank you Chad. Thank you all for joining us today, and we will talk to you again in July .
Thank you. Thank you Sir the conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Okay.
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Hum.
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