Q2 2022 Community Bank System Inc Earnings Call
Okay.
Well, so nobody buying systems second quarter 2014 through earnings conference call.
Please note that this presentation contains forward looking statements within the provisions of the private Securities Litigation Reform Act with 1995.
That are based on current expectations estimates and projections about the industry markets and economic environment in which the company operates.
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 on Form 10-K filed with the securities message Krishna.
Today's presenters are barge lipski, President and Chief Executive Officer, Joseph Sitars, Executive Vice President and Chief Financial Officer, gentlemen, you may begin.
Thank you Rocco good morning, everyone Hope all is well and thank you for joining our second quarter conference call.
Operating earnings for the quarter were very strong and similar to last year on a reported basis, but excluding PPP and reserve release from 'twenty. One results this year's quarters up 13% over last year.
Last quarter I referred to margin as a lessening headwind, but in Q2 it turned into a tailwind as originated loan yields increased substantially and total cost of funds. We're unmoved at nine basis points, resulting in a 60 basis point expansion in net interest margin for the quarter.
As pleased as we are with margin results. The highlight of the quarter and my view was the performance of our credit businesses, which continue to be historically strong for us organic loan growth for the quarter was four 2% and year over year. It was over 10% given.
Given the investments in talent, we have made in our commercial and mortgage businesses.
Current pipelines, we expect growth to continue.
The recent strength of our benefits wealth and insurance businesses moderated in the quarter with revenue growth slowing to 7% largely due to financial market related impacts and margin actually declined slightly.
Pipeline activity, particularly in the benefits business remains very strong and the insurance market continues to harden, which will be supportive of forward revenue and margin growth in that business.
I won't say a lot about the Ohio savings bank transaction other than we closed in May.
Went extremely well and we continue to expect 15 cents per share of accretion on a full year basis ex acquisition expenses.
We also announced recently and increasing our dividend, which marks the 13th consecutive year of dividend increases.
Looking ahead, we fully expect our current operating momentum to continue particularly as it relates to credit generation, we continue to add experienced and talented bankers and the commercial pipeline is at an all time high we expect margin expansion will continue and credit quality to remain strong so as we sit here today I like our prospects.
For the second half of 'twenty to 'twenty two.
Yeah.
Thank you Mark and good morning, everyone as Mark noted the second quarter earnings results were solid fully diluted GAAP earnings per share were <unk> 70, <unk>, while operating earnings per share, which exclude acquisition related charges were 85 cents in the quarter. These compare.
These compared to fully diluted GAAP and operating earnings per share of <unk> 88 cents in the second quarter of 2021, a 2.8 million gallon decrease in P. P. P related revenues between the periods and a $6 $4 million increase in the provision for credit losses, excluding acquisition related provision were responsible for a 13% decrease in fully diluted operating.
Earnings per share net of tax over comparable periods. The company recorded a $2 $1 million provision for credit losses in the second quarter of 2022, excluding acquisition related provision. This compares to a $4 $3 million net benefit recorded the provision for credit losses in the second quarter of 2021 as the U S economy emerge from the depths of the pandemic.
Diluted GAAP earnings per share were <unk> 86 cents in the first quarter of 2022 and operating earnings per share were <unk> 87, excluding a penny per share of acquisition expenses. The two cent or two 3% decrease in operating earnings per share from the linked first quarter results.
Largely driven by higher operating expenses, a higher provision for credit losses, and lower noninterest revenues offset in part by a decrease in net interest income and a decrease in income taxes adjusted pre tax pre provision net revenue per share, which excludes the provision for credit losses acquisition related expenses other non operating revenues and expenses and income taxes.
It was $1 13 in the second quarter of 2022, seven or six 6% higher than the prior year's second quarter, and a penny per share higher than the linked first quarter.
The company reported total revenues of $167 $2 million in the second quarter of 2020 to a new quarterly record for the company and a $15 7 million or 10, 3% increase over the prior year second quarter. The increase in total revenues between the periods was driven by an $11 billion, 12% increase in net interest income and a $4 6 million.
Seven 8% increase in noninterest revenues.
Noninterest revenues accounted for 38% of the company's total revenues during the second quarter of 2022 comparatively total revenues were up $6 7 million or four 2% over first quarter 2022 results due to an $8 $3 million or eight 7% increase in net interest income, partially offset by $1 6 million.
Our two 4% decrease in noninterest revenues the key.
Company reported net interest income of $103 $1 million in the second quarter of 2022 as compared to $92 $1 million in the second quarter of 2021 between comparable periods. The company average interest, earning assets increased $1 $1 billion or eight 2% and a tax equivalent net interest margin was up 10 basis.
<unk> from 279% in the second quarter of 2021 to $2 eight 9% in the second quarter of 2020 to the margin expansion was primarily driven by shifting the composition of earning assets lower yielding cash equivalents to higher yielding investment securities and loans, including significant organic loan growth between the periods the tax equivalent.
Average yield on interest, earning assets in the second quarter of 2022 was $2 97%.
Eight basis points higher than the tax equivalent average yield on interest, earning assets of $2 eight 9% in the second quarter of 2021, Despite a decrease in PPP related interest income.
While the cost of interest bearing liabilities decreased from 15 basis points to 13 basis points comparatively the company reported net interest income of $94 $9 million during the first quarter of 2020 to $8 $3 million less in the second quarter 2022 results, while the tax equivalent net interest margin was 273% comp.
<unk> total cost of funds was nine basis points in the second quarter consistent with the linked first quarter and was one basis point lower than the second quarter of prior year.
Employee benefit services revenues for the second quarter 2022 were $28 9 million up $1 4 million or five 3% in comparison to the second quarter of 2021. The improvement in revenues was driven by increased employee benefits trust the custodial fees as well as incremental revenues from the acquisition of British benefits design in Minnesota during the third quarter of two.
'twenty one.
Wealth management revenues for the second quarter of 2022, breakpoint $1 million down slightly from $8 $2 million in the second quarter of 2021, the company reported insurance services revenues of $9 $8 million in the second quarter of 2022, which represents a $1 6 million or 19, 1% increase over the prior year second.
Quarter, driven by both organic expansion the acquisition of several insurance insurance practices in books of business between the periods Bank.
Banking noninterest revenues increased $1 $7 million or 11% from $15 5 million in the second quarter.
The second quarter of 2021 to $17 $2 million in the second quarter of 2022 dose due primarily to an increase in deposit service and other banking fees.
Apparently financial services revenues decreased $1 8 million from the linked.
First quarter due to lower asset based fiduciary revenues in the employee benefits and services and wealth management businesses. During the second quarter of 2022, the company reported a provision for credit losses of 6 million $3 9 million of which was due to the acquisition of Empire.
This compares to $4 $3 million net benefit recorded in the provision for credit losses in the second quarter of 2021.
Companys allowance for credit losses increased $5 $4 million from the end of the first quarter of 2022% to 55 $5 million, but remained consistent with the prior quarter at 68 basis points of total loans outstanding.
The company reported net loan charge offs of <unk> $4 million or an annualized two basis points of average loans outstanding during the second quarter of 2022 as compared to net loan recoveries of zero point $6 million of our three.
We're an annualized three basis points of average loans outstanding for the second quarter of 2021 on a year to date basis. The company has recorded net loan charge offs of <unk> $9 million or an annualized two basis points of average loans outstanding.
The company reported $110 4 million and total operating expenses in the second quarter of 2022 or $106 $1 million in core operating expenses exclusive of acquisition related expenses. This compares to $93 $5 million of total and core operating expenses in the prior year's second quarter the $12 five.
13, 4% increase in core operating expenses was attributable to a $7 5 million, a 13% increase in salaries and employee benefits, a $3 4 million or 36, 5% increase in other expenses as well as increases in data processing data processing and communication expenses occupancy and equipment expenses.
Intangible asset amortization totaling $1 $6 million.
The increase in salaries and benefits expense was driven by increases in merit incentive related employee wages acquisition related staffing increases higher payroll taxes and higher employee benefit related expenses.
The other non compensation expenses were up due to the general increase in the level of business activities, including cost incurred to pursue several new business opportunities and the company's non banking businesses and incremental expenses associated with the operating expanded franchise due to several non bank acquisitions between the periods and the second quarter acquisition of Elmira savings Bank.
Comparatively the company reported $99 8 million of total operating expenses in the first quarter of 2020 to $10 6 million or 10, 6% increase in total operating expenses on a linked quarter basis is largely attributed to a 4 million dollar increase in acquisition related expenses, a $3 8 million six 1% increase in salaries and employee.
<unk> and a $2 $3 million increase in other expenses the effective tax rate for the second quarter of 2022 was 21, 6% down from 23, 1% in the second quarter of 2021, and the second quarter of 2021, the company's effective tax rate was driven by an increase of certain state income taxes that were enacted during the period.
During the second quarter. The company report completed its acquisition of Elmira savings Bank in connection with the acquisition of the company at eight branch locations like bar total deposits of approximately $522 million in total loans of approximately $437 million, including $20 8 million and non PCB marks.
The company also booked $8 million of core deposit intangible assets. The company's total assets were $15 $4 9 billion at June 32022, representing a $686 5 million or four 6% increase from one year prior and $138 1 million or 0.9% decrease from.
The prior quarter and the.
The increase in the Companys total assets during the prior 12 month period was primarily due to net inflows of deposits between the periods and EMR acquisition average deposit balances increased $1 3 billion or eight 4% between the second quarter of 2021 in the second quarter of 2022.
<unk> average, earning assets were up.
From $13 $37 billion in the second quarter of 2021% to $14 $47 billion in the second quarter of 2022, representing a one $1 billion eight.
Great.
This included a $2 three $2 billion 58, 6% increase in average book value of investment Securities and a $383 9 million or five 2% increase in average loans outstanding partially offset by a one $6 billion 77, 2% decrease in average cash equivalents on a linked quarter basis at.
Average, earning assets increased $235 $3 million or one 7% due primarily to the mirror acquisition. Despite the <unk> acquisition during the second quarter 2022 total assets decreased from the prior quarter end.
Due primarily to the net outflows of municipal deposits totaling $368 $4 million.
Due in part to seasonal factors and a $262 million decrease in the market value adjustment on the available for sale investment securities portfolio due to an increase in market interest rates.
Ending loans at June 32022 of $814 billion, or $722 4 million or nine 7% higher than the first quarter of 2022, and $905 million or 12, 4% higher than one year prior.
The increase in ending loans year over year was driven by increases in all categories of loans, including consumer mortgage consumer indirect business lending home equity and consumer direct loans due to the <unk> acquisition and net organic growth. Despite a $259 $9 million decrease in PPP loans.
The increase in loans outstanding on a linked quarter basis was driven by the <unk>.
Myra acquisition and solid organic growth across all five baseball portfolios on a full year basis, ending loans increased $905 million of 12, 4% excluding loans acquired in connection with the <unk> acquisition, and PPP loans, ending loans increased $723 4 million or 10, 4% year over year.
The Companys regulatory capital ratios remained strong in the second quarter. The company's tier one leverage ratio was 865% at June 32022, which substantially exceeds the well capitalized regulatory standard 5% during the quarter. The company reported $196 7 million and after tax other comprehensive loss driven by the decline in the market.
The company's available for sale investment Securities portfolio Company has an abundance of liquidity the combination of the Companys cash and cash equivalents barga build at Federal Reserve Bank borrowing capacity at the federal home loan Bank and Unpledged available for sale investment Securities portfolio provides the company with over five $8 billion in immediately available sources of liquidity at the end of the second quarter.
<unk>.
Asset quality remains strong in the second quarter at June 32022, nonperforming loans were $37 $1 million of 0.4% or 6% of total loans outstanding. This compares to $36 million or 0.49% of total loans outstanding at the end of the first quarter of 2022 and 72.
$2 million or zero point, 97% of total loans outstanding one year earlier, the decrease in nonperforming loans as compared to the prior year second quarter, 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 for 0.29% of total loans outstanding at June <unk>.
<unk> 2022 down slightly from 0.35% at the end of the first quarter of 2022, but up from 0.25% one year earlier looking forward. We are encouraged by the momentum in our business the company generate strong organic loan growth over the prior four quarters. The net interest margin expanded meaningfully in the quarter asset.
Quality remains strong and the loan pipeline is robust. In addition, the pipeline of new business opportunities in financial services businesses remained strong.
In 2022, we remain focused on new loan generation managing the company's funding strategies in a rapidly changing interest rate environment, while continuing to pursue.
Accretive low risk and strategically valid in the merger and acquisition opportunities and lastly, we sincerely appreciate the efforts of the bank staff and the former Elmira savings banks that were seamlessly integrating the two companies. Thank you now I'll turn it back over to Rocco to open the line for questions.
Thank you we will now begin the question and answer session.
Ask a question you May press Star then one on you touched on so.
Using a speakerphone please pick up your handset before pressing the keys.
Your question. Please press Star then two.
Today's first question comes from Alex <unk> with Piper Sandler. Please go ahead.
Hey, good morning, guys.
Rocco just so youre aware the feet on our end is is a bit garbled.
Thank you I will make some adjustments here Mr. Eduardo the floor is yours.
Thank you can you guys hear me okay.
Okay.
Can you hear me okay.
Hello. This is the operator, we can hear you yeah. We can hear you loud and clear are you able to hear Mr toward off yet.
Yes, why don't I can't.
A bad line here.
Okay.
I can hear you can you hear me since we could try to call in terms of the other.
Paul Department.
I don't know if its on our minds.
Pardon the interruption everyone is working we are having some difficulties there and were going on and we're going to have another line. Thank you and go through that.
Okay.
Thank you for holding everyone. It looks like we have lost the speaker line, we will have them dahlberg handled well get back underway here shortly please standby.
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And everyone. We thank you for holding we have reconnected the speaker location.
With regard to all of you you can begin your questions. Thank you.
Great. Good morning, Mark and Joe can you hear me now.
Yes, we can good morning, good morning.
Perfect Good morning.
I wanted to first ask about liquidity your cash position seems to have normalized back to sort of pre pandemic levels and I was just hoping you could help us think through sort of the.
Deposit flows.
Expectations for deposits over the next quarter given the municipal.
Potential inflows in the third quarter as.
As well as if you have any bullet securities that could mature in the third quarter to provide sources of liquidity in the near term.
Yes, Alex good question.
So we look back to the pre pandemic periods regarding deposit outflows and this pattern is pretty consistent with what those periods.
<unk> basically have tax collection in the fall and early in the winter time.
Those funds tend to flow out in the second quarter kind of blow out to some extent in the third but then they come back late in the third quarter with tax collection.
So we are expecting.
Some growth in the third quarter I can't speak specifically as to the amounts other than because its tax election season, but typically.
We get back to about.
Even.
Tax collection season, So we had a we had an outflow of $368 million. So we're hopeful.
Most of that comes back.
Although we did we do believe that there was some spend down of.
<unk>.
That municipalities accumulated during the pandemic.
Kind of in the back end of the 2000 22022 full year and also some capital projects I think.
Got funded as well so, but we do expect a couple of hundred million dollars back in the third quarter and then Theres also some collections in the beginning of next year with respect to securities.
We do have over the balance of the summer another call it 140 $150 million.
Cash flows and then the next lumpy cash flow is kind of in the may timeframe, but the meantime, we have tax collection to support it with that said, it's not uncommon for us to.
To go into kind of a temporary borrowing position.
In the past and given the size of our balance sheet couple hundred million dollars in borrowings I don't think is all that concerning.
Yes.
Alex I think the if you look at what happened in our deposits.
Organic deposit growth rate pre COVID-19.
Low to mid single digits.
Double digit.
In some cases corridor, 20% one after another.
Thats pretty much moderated and we're back to more of a.
Pre COVID-19 organic run rate.
The municipal as you know they go up they.
They go down I think in the quarter.
The non municipal deposits were down a little bit, but not very much.
Business deposits were actually up so the business deposits continue to be pretty strong so.
I think we're back to.
To more of a pre COVID-19 environment in terms of as you look at the national savings rate.
And the like.
We're back to more normalized.
The environment in <unk>.
Yes.
Okay, and then I guess.
Yeah.
Sort of a million dollar question. The industry is what's going to happen with deposit betas and you guys have obviously done an amazing job through past tightening cycles I'm just curious.
Just given all that's changed in the world if you're starting to see any pressure on your deposit base or if you think you'll be able to maintain those betas are consistent with historical experience.
It's been it's been very limited in terms of the pressure.
If you look at our deposit base, 76% of our deposit base and is checking and savings accounts and those are not going to move much if at all.
No.
I think our setup here.
Rising rate environment is quite good in terms of deposit beta also in terms of margin expansion, which we saw obviously this quarter as did everyone else.
I think on the first quarter's call, we said that we expected.
Originated loan rates would exceed the portfolio rate.
Third quarter or maybe fourth.
Really happened this quarter not by a lot, but by a little bit so.
There is a good tailwind I think on the.
The margin right now heading into the second half of the year because the loan yields even on what's on the pipeline right now.
A bright spot.
Rate change environment gives us either recession or some other.
Event.
What we have in the pipeline is starting to widen which is pretty substantial.
Higher rates and so I think the the.
Margin outlook is pretty good for the remainder of the year.
And I'm just curious as you think about M&A. Obviously, you guys have a lot of experience with M&A with the move in rates and the impact that that will have on.
Many banks.
A loan Mark and the interest rate Mark and a lot of banks portfolios is that kind of put a damper on your appetite for M&A in the near term.
No I mean, it never as rates go up rates go down we try to be.
Blend around what we do from an M&A perspective some are.
Yes, some opportunities are more tactical in terms of.
Earnings accretion.
Shareholder benefit others are more strategic in terms of the longer term.
That's a lot of opportunities in certain markets. So.
The loan marks.
Credit marks.
The core deposit intangible March none of that really makes a difference at all.
All of those adjustments are noncash anyway, and we really look at.
The company from a more of a cash flow perspective in terms of the cash flow impact and less.
And of the <unk>.
GAAP earnings impact, which is an important but it's not necessarily in our view aligned with economic value.
<unk>.
I would say no. There is the change in the interest rate violin will have no impact.
Whatsoever on our M&A strategy Alex.
Great. Thanks for taking my questions.
Thank you al.
Thank you and our next question today comes from Eric <unk> with her.
The group. Please go ahead.
Good morning, guys.
Good morning, Eric.
Oh first wanted to start on you.
Kind of looking at the outlook for commercial loan growth I think you mentioned several times in the prepared remarks that the <unk>.
<unk> remained strong our commercial pipeline I think you've been at an all time high so maybe it kind of a two part question first I'm wondering if you could just provide a little color in terms of the geographies and industries that are contributing to the growth and strength in the commercial pipeline and then secondly, just wondering about your expectations for pull through.
In the second half of the year and your ability to close these loans just given that there is maybe some heightened in a heightened economic uncertainty.
Certainty today relative to six months ago.
Sure.
First I would I would just.
Say that we made some.
Strategic investments in.
People.
And some of our markets.
<unk>.
Yes, not to be too historical but.
We've always the majority of our business is that and kind of is more non metropolitan smaller rural type markets, where we have high market share over the last let's call. It 10 years.
In some of those larger markets that we are in <unk>.
<unk> gotten in.
More meaningful way in the last let's say 10 years like.
Syracuse.
Buffalo.
Markets in North East, Pennsylvania.
We don't have a lot of market share, yes, we haven't I mean, if you look at Syracuse. Our headquarters are here, we obviously banking business here, but we do know.
It's going to get.
Better.
The talent, but.
We have a lot of market share opportunity.
And even in the capital district in Syracuse Rochester Buffalo.
Early Tim we just brought in at the beginning of the year somewhat.
Talented too to.
To continue to grow our business in that market, which is doing.
So.
We have made investments in people we've had some transition in leadership.
And the results are starting to show themselves. So we just think we have a lot of market share opportunity and you look at these somewhat larger.
Markets that we're in as I as I mentioned and our market share is under 10% and so there is a fair bit of opportunity in these markets to growth we've made the investments in.
People and leadership to try to accomplish that and the results are as I said the results are showing in terms of the.
Marcus.
If you look at percentage basis the largest.
Growth market, we've had a percentage basis.
Paul.
But they're all doing.
Quite well.
We've got a lot of a lot going on in new England.
The greater Central New York, Syracuse, Central New York market has been really strong.
<unk>.
We continue to grow in.
In northeast, Pennsylvania, So its really honestly it is everywhere and some are growing a little faster than others.
But it's pretty much across the footprint.
In terms of the kind of business I would say right now it's mostly CRE.
But the C&I business is also growing.
It's just it's interesting.
There's a lot of.
There's a lot of a lot of projects and a lot of investment going on right now maybe it's just our markets. They tend to kind of lagged the national markets and this is.
Yes.
The result of that but there is a there's a lot of opportunity right now and were.
We're going to have.
I think a very good.
Solid remainder of.
The year, particularly given the pipeline as I said I think.
Last quarter. It was $1 billion this quarter, it's a 1 billion wanted it's up 10%.
A quarter or so.
That momentum to continue given kind of the investments we've made in that.
<unk> newest leadership team, we have which has really been in place since the beginning of the year and so I think we will do a better job of getting better opportunities in our core markets.
Yes, well our market share a little bit over time, I think one of the strategies.
Just kind of maybe ask the question a bit but I think it's important to us.
I understand now if you look at our balance sheet, we have $6 billion of securities.
$8 billion alone.
And that is that.
You have an optimized balance sheet, so we needed to make the investments in trying to overtime improve our balance sheet.
I mean, we have a very solid balance sheet liquidity incredible actually too much liquidity.
But I think the the.
The risk reward opportunity we've been too.
Through prudent in terms of.
Our balance sheet asset quality and liquidity. So this strategy is really to just kind of let our.
Investment portfolio.
It is if you will and reinvest maturities into the loan book.
To create greater.
Pandemic returns more consistent with kind of the.
The risk return.
Risk reward profile, we're looking at I think we've just historically too conservative.
Sheet, and we need to move the needle a little bit on that which I think we are in the process of doing I think to your last question.
Eric was around weather.
Whether or not we think we pull that through.
Pretty confident we can win.
Be surprise, if we Didnt also see very strong balance sheet growth, particularly in commercial in the third quarter and hopefully the fourth quarter as well. So I think we'll get pretty good pull through on that.
I bet pipeline, particularly.
Just on some of the things that I know what is going on in there and the things that I see so I think we will.
Hoping that the execution is good and we get good pull through in both Q3 and Q4.
In that pipeline.
Great I really appreciate the detailed answers there.
And then I think in the prepared comments Mark you mentioned that the mortgage market is firming youre seeing some firming there I think that the residential mortgage market and curious if you could add a little color there, whether its volume or application activity or spreads and just your thoughts today on.
Selling those any originations into the secondary market versus versus holding today and I know from an income statement perspective, it's a relatively small contribution to your revenue, but just curious on your thoughts on that market today.
So determining insurance business in the mortgage business.
I thought I heard you say mortgage market is firming, but I could have misheard that.
It was insurance reinsurance market is hardening, so that will be helpful to that market I would say as it relates to the mortgage business thats actually softening a bit.
Not inconsistent with what we're seeing elsewhere across the country.
But we have brought on board.
Some newer.
Sales in origination leaderships in frontline folks in our mortgage business and so I think our pipeline is not.
Okay.
That number maybe you could just around where it was last year give or take but we also are pushing them through much quicker because we made some investments in <unk>.
People and process and technology in that business. So our time, our date to close a lot less of a push it through quicker. So the pipelines around the same as last year might be down a little bit.
There is almost the refi market has almost gone I think the purchase money part of our originations our almost 90%. So it's basically a purchase money market right now, which makes sense because rates are up a fair bit Jen already refinanced, it's probably too late so.
We expect that business to continue to grow as well given also given our markets. If you look even when the national market is boom and bust, we just we're still draw on it.
Three 4% a year in the mortgage business I expect we'll continue to do that I would hope to do a little better only because of the some of the kind of investments we made in that business, but.
It will continue to be okay for us to continue to grow we like the assets, we're not going to sell them.
The average mortgage.
10 years or less.
So 10 year paper with the.
Our historical loss rate on mortgages was 86 basis points or something like that.
At a yield of over four pushing five is a.
As a fabulous asset so we'll continue to put those on the.
On the on the books.
Got it yes insurance market firming in residential mortgage market softening makes that makes sense. Thanks for the correction there and I appreciate you taking my questions today.
Thank you Eric.
And our next question today comes from Chris O'connell, Okay. VW. Please go ahead.
Mark.
Morning, gentlemen.
So wanted to start you made some comments about the origination yields.
Exceeding the portfolio yield a bit faster than anticipated last quarter.
Can you, maybe quantify where those insurance or were those origination yields are coming on relative to the portfolio yet.
Thank you.
Okay, Yes.
Chris I think we made a comment last quarter, just saying that we saw the origination yields creeping up at that point, our book yields were about 4% on the loan portfolio.
And we thought that potentially the new origination yields.
Hit 4%, maybe late in the second quarter third quarter for the quarter, we actually originated at about.
About a four and a quarter on a blended basis across all the portfolio. So we were booking new loans at call it 25 basis points higher than the.
The book yield and that obviously continues to go up.
Some of the originations in the second quarter, we're basically in the pipeline during the first quarter before significant rate movements. So.
We continue to.
Do you expect that.
The new origination yields will well exceed the book yields, but they were about a quarter point above in the quarter.
Okay great.
Thank you.
And then.
As far as.
Capital goes I know you guys primarily focus.
Regulatory capital.
That's a little bit of buyback this quarter one.
Usually that's your kind of tightening up the share count.
From compensation related issuance.
Is there any expected buyback going forward in general how are you guys feeling about capital ratios.
The plan going forward, given the disparity between <unk> and the regulatory capital.
Yes, Chris with respect to.
Share repurchase activity.
Our plan really hasn't.
Tensions really havent changed which is intending to just kind of clean up the.
Equity plan dilution that occurs throughout the year.
No I don't anticipate any significant changes there we always prefer to keep a little.
Powder dry for M&A activity, So we're still.
Hopeful that we can deploy.
Some of our capital.
And for that matter some of the cash we have at the holding company and future M&A transactions.
Transactions so.
So really no anticipated changes in our strategy there with respect to stock repurchase.
Okay.
And then.
I was hoping to get.
An update on <unk>.
Where do you think operating expenses will be going or core operating expenses will be going in the back half of the year now that Oh.
Euro deal is closed.
And just how the cost saves youre going to flow through over the next quarter or two.
Sure.
So Chris just as a matter of kind of a backdrop. If we look at the third quarter of <unk> 21 in the fourth quarter of 2001 in the first quarter of 'twenty, two and take kind of a simple average of the operating expenses for the company in those three quarters, just about $100 million the expectation for a quarterly run rate on the Elmira is about.
$3 million.
Thats the expectation based on what we have announced now with that said.
We also signaled that we thought I'll call. It the core expenses were going to increase it a little more rapid.
Or a little higher level than they have in the past just because of various inflationary pressures or for that matter.
This activity has kind of come back to kind of normal activity level. So we're kind of on the back end of that.
<unk> people are traveling again theyre going out meeting customers. There's just more general activities. So our expectation was that kind of.
I'll call it that 3% to 5% organic or core growth rate in expenses is what the expectation is on a going forward basis with that said in the second quarter, we booked a little over $106 million of operating expenses.
My calculation estimates that there's probably $1 million or two of kind of nonrecurring items in there that doesn't mean, we won't have another nonrecurring explained expense item.
Next quarter I mean, they are operating expenses, but it just items that.
That cost us a lot of money on the backend of the Elmira transaction a couple of other items.
In professional fees and marketing and kind of other write downs and things of that nature that are nonrecurring.
So I hope that provides some color for you on operating expenses going forward.
Yeah absolutely.
It is helpful.
And then you talked a little bit about the benefits administration business and.
Some great opportunities that youre seeing there and just kind of good business activity.
Wondering if you could provide any additional color on kind of what youre seeing in the outlook for that business.
Yes sure.
I think there is a couple of segments we operate in.
I would call them verticals, I guess their business lines and our benefits business that are all related but at the same.
Two of those.
Okay Administration recordkeeping business and the collective investment trust business, both have pretty solid pipelines right now and opportunities and I would say a lot of that arises from.
The idea that one we have a very very good mousetrap and both of those businesses.
And we've gotten to the kind of scale and capability and expertise.
And reputation to execute in those businesses and those are both national businesses by the way there completely.
They operate have offices all over the U S.
But we now have.
I guess.
We're playing a bigger market because of not just the growth, but the quality of the mouse trap the quality of the people the expertise in those two particular rounds itself and we're getting a lot more opportunity some of which is playing at the next level off in terms of park.
<unk> with some of the National lets got international very large financial players who are outsourcing some of their recordkeeping and administration and collective trust work too.
Two our shops.
It's not just all retail I guess, you would call it some institutional some of it is us.
Being able to partner with much larger firms too.
To outsource what Theyre doing for example in the VEBA business, we've partnered with Voya.
As an example.
Example.
And the collective business.
Partnering with some large insurance companies and others to outsource some of some of their.
Operations, which they find because of their scale. They don't do very well or very efficiently. So it's a couple of things it's kind of typical retail institutional organic stuff and it's also the opportunity to partner with larger players.
And have a seat at the table.
In terms of their platforms.
Okay, great appreciate the color there and.
And then too.
Two final small ones if I could just one.
Where do you think accretion kind of normalizes here.
Postpone mirror and then.
Whats a good tax rate going forward.
Yeah, So I think.
The expectation around tax I'll take tax rate first.
Now probably the current level is a reasonable expectation going forward plus or minus half a point on either side of that generally speaking.
Excluding any kind of distinct tax events, so I think thats.
Yesterday regarding accretion I mentioned in my comments that.
We booked about $20 million in.
Non PCB loan Mark.
The.
Average life of debt at that book was largely to residential mortgage so little longer average life, so that that market with the plus the current or the existing marks prior to the <unk> acquisition, maybe totaled about 20 $25 million over call. It at 10 or 15 year average life. So that's the expectation I think on the creative.
To that Mark in and core deposit intangible.
$8 million, we typically.
Amortize at an accelerated basis over call it eight years or so.
Each side of the.
Accretion and amortization.
That has helped create hopefully.
Yes definitely.
Thanks, I'll step out.
Okay.
And our next question today comes from Matthew Breese with Stephens, Inc. Please go ahead.
Good morning.
Morning, Matt.
Just going back to loan growth.
Myra obviously this was a.
Better than usual type organic growth quarter for you I'm just curious given your commentary whether or not you think that's sustainable in the back half of the year and then longer term given your comments around just overall investments in penetrating some of the.
Economically larger.
Areas across your footprint does the low single digit growth rate go to a mid single digit growth rate per se just curious there.
Yes, I'll answer the second part of the question first which is yes I believe it does.
You always hesitate to go out on the limb in terms of predicting things that would appear to be favorable and were not prone to do that but.
I do think that the.
We've improved our business our organic.
Our ability to grow organically is different than what it was last year and the year before.
So I think the answer is yes, I would be going forward somewhat disappointed if we didn't.
Improve our growth rates on our historical levels, just given the investments we've made in people and talent.
And the like and some of these larger markets, where we don't have significant market share we have tremendous opportunity, particularly against some of the larger banks.
Right now a lot of the things that we.
Certainly.
Given our balance sheet.
And our capacity and now our expertise have the ability to compete with the larger banks in a way that we didn't always have and we have that out so.
A lot of the a lot of the opportunities we're getting frankly are from larger banks.
Who are.
They are different they are bigger regulatory concerns are different.
All different and so the ability to kind of execute as a commercial bank, but have the capacity to deliver the products and services.
The expertise of the larger banks is what's really going to continue to drive that so I think you said it well I think we would hope that our organic growth goes from generally low single digits to mid single digit I think right now and for the.
Under of the year.
When you look at that as I said in the last 12 months.
Commercial growth was 10% I think the mortgage growth was 9%.
I think that will continue.
Through the remainder of the year.
We typically get a falloff in the fourth quarter in the mortgage lending just because of seasonality, but I think given the pipelines in both of those businesses. The investments we've made in the.
Opportunity we have.
Some of those larger markets I think we will continue to execute.
In terms of organic loan growth at a higher level than we have in the past I think.
That will continue I think if you look at.
Loan growth in the first quarter.
For commercial I think was about four 5% annualize that you get a big number.
I think that.
It will also be very good.
Salt.
Third and fourth quarter so.
Whether what happens.
2023, 2024, who can predict that I'm, just saying I think we've made the investments in people and expertise capabilities that will allow us to grow into the future at a higher rate given the markets and the environment. We're in than we have historically and I expect that will continue.
Understood Okay.
And then.
Joe.
Throughout all the prepared comments it feels like yes, we're going to see higher interest expense youre going to see higher interest income the margin is going to expand just given the volatility in rates right. Now I was hoping you could give us some idea of what we might see margin expansion. If we get to 75 basis point hike in July and then I think you can.
I assume there is more behind that.
I guess said another way do you expect to kind of 16 basis points NIM expansion. We saw this quarter, where if you back out pp and accretion closer to 20 bps.
Is that what we should expect for next quarter as well that kind of type of NIM expansion.
Yes.
Fair question Matt.
Yes.
Book 16 basis point 60 basis point increase every quarter. It is a challenge I see it's possible certainly for the next quarter.
In the third quarter not sure about the fourth quarter because the other side of that too is that the long end of the curve is kind of I'll say plateaued at around three right. So you don't necessarily get lift quarter over quarter.
In the new volume rate right, it's potentially you don't particularly on mortgages or anything thats kind of on the longer end of the curve.
Third quarter looks a lot like the second quarter.
That matter of fourth quarter looks like the third quarter. So.
It may not be possible to increase by call. It 60 basis points every quarter with that said.
The loan.
Our pipeline and the expectations around loan growth or certainly a significant tailwind.
It pushes along in terms of in terms of margin expansion.
So obviously, if we get which it looks like the fed is going to increase the short end of term that certainly will help.
Some of the variable rate.
Loans in the portfolio.
And helped by the stuff that is priced off of the shorter end of the curve like like the prime rate. So I think there is I think there is the expectation that we're going to continue to see increases and I'm sure we can.
Lacking 16 basis points every quarter, but we are certainly.
Optimistic about.
And the expansion of the margin certainly for the next quarter or two okay.
And then I did want to go back to tangible common equity I heard you loud and clear last quarter on your thoughts around <unk> and its impact, but with the TCE ratio in the kind of the low 5% range curious if theres any sort of <unk>.
Self imposed or externally imposed pressure to get that number higher and just your overall thoughts there.
No Theres no particular.
Cellphone boat imposed a minimum or limit we do focus on the regulatory capital I think for good reason.
Regulators do not.
Counting the changes in the value on the RFS.
Portfolio, which is the primary driver of.
The decrease in intangible common equity for us So no I still I still think we're kind of focused on maintaining our strong regulatory capital ratios.
So we haven't been pose any sort of house limits on on TCE.
Okay.
Last one for me just the last CPI reading fuel cost across the country I think we're up 99% year over year and I don't recall, how the majority of homes across your markets are heated natural gas or oil, but your winters tend to be longer and a little bit harsher than others. So I'm curious your thoughts on the ability to withstand high.
Heating costs for your consumers and as you get into the colder winter months.
Do you have any sort of thoughts around potential for increased delinquencies or MPA is on the back of that.
Matt.
With that issue in particular, yes, we think the consumer is feeling the stress of higher <unk>.
Prices at the pump general inflationary pressures.
To your point.
There's still a lot of customers hitting home heating oil, which.
We'll see where that comes out, but it's likely to be more expensive putting pressure on the consumer.
So with respect to our reserves, we have not released reserves around the consumer portfolios kind of anticipation expectations that.
The consumer will begin to feel stress with that said that the loss rates in those portfolios have been well below historical norms for us for all the reasons I think we stated on the prior.
Earnings calls so is it possible that we go back to more normal levels.
Pre COVID-19 levels of delinquency and losses, the answer's, yes, but we've also.
Did not release reserves in those portfolios for for that potentially happens. So yes, there will be some stress on the consumer we have seen gas prices come down a little bit here.
Certainly not to the levels I'm sure all the consumers would like.
All of us on the call but.
But we do expect to see some more.
Incremental stress on consumers, particularly as we head into the winter months.
Got it okay.
That's all I had thanks for taking my questions.
Thank you thank you Matt.
And our next question comes from Russell Gunther of D. A Davidson. Please go ahead.
Hey, good morning, it's Manuel novice on for Russell.
Good morning, Danielle.
Okay.
One of my questions have been answered I just wanted to confirm that when you talk about.
And they're released this pipeline in financial services business is remaining strong.
Is that where is that where you're kind of getting that that is the higher level with a 441 K record keeping business and trust business.
Are there any other fee pipeline one.
In that comment.
Yes, no I mean, I think that that kind of covers that it's both it's kind of the.
Organic kind of typical sales to end user customers, whether they be retail or institutional.
It's mostly institutional but also some of it is the opportunity to partner with the.
International.
Financial company, so it's a little of both Meanwhile.
On the other the pipeline side, we don't really track kind of the pipeline in wealth management to the same degree and I think of all of the business is amongst the most challenged export is going to be wealth management. They are the most challenged this quarter.
The majority of their revenues are directly tied to the market which is down.
90% or something give or take so I think.
They will be affected.
Absent any changes in market conditions, they will be affected more in the third quarter than those other two the benefits business because of the organic pipeline also less of their assets are tied to directly to the market.
Actually it's less than half I think are tied directly to the market.
And then on the insurance business I said, the market and insurance is hardening and Youre seeing some cases kind of double digit increases in premiums, which will be helpful to us.
Into the second half of the year, so that's kind of a little bit more.
Detail on the businesses there in the pipelines.
Perfect. Thank you very much.
Thank you.
It appears we have a follow up from Chris O'connell with BW. Please go ahead.
Yes.
One follow up on the outlook for indirect auto.
Hi.
Looking into the back half of the year.
To be extremely strong this past quarter.
Organic basis, and I know you guys had kind of telegraphed that in the prior quarter, but if that strength.
And to the back half of the year, and how you're kind of seeing out there.
Yes.
It's interesting.
You hear all about Theres no inventory and there is no chips and people can't get new cars.
And I look at our auto business and we were up 10% this quarter.
And.
Over last year that business is up I think 17%.
But that business is very volatile right. I mean, you can go up 15% in one year to go down 15% for next year. So it's a different kind of business and then mortgage and commercial but.
Its strong right now a lot of what we do is used because we like the risk reward profile to use auto business a lot better.
Yields are higher and the residual risk is lower.
Usually terms are.
<unk>.
Duration is less so we kind of like that business better but.
That business turns on and off quick and right now I think the chip supply is cleared up and everybody.
Major manufacturing they.
They are making cars as fast as they can and ship them and so cars that come back there is kind of that.
Built up demand that has been unsatisfied with the last two years and right now.
That business is very busy I wouldn't expect it to run at the same rate maybe the third quarter will be good also.
Some juncture that business is going to go back to something different and as I said some years you can grow double digits in some years you shrink double digits.
So.
It's really.
Its pretty unpredictable.
Yes.
But right now it's very strong.
Great appreciate the color there. Thank you.
Thank you thank you Chris.
This concludes our question and answer session I would like to turn the call back over to Mr. Smith for any closing remarks.
Great. Thank you Rocco. Thank you everyone for joining sorry, we had some tough to call. It technical difficulties we had two.
To address but I appreciate your patience and we will talk to you again at the end of the third quarter.
Good rest of the summer thank you.
Thank you Sir This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.