Q3 2022 Community Bank System Inc Earnings Call
Yeah.
Welcome to the community Bank system third quarter 2022 earnings conference call.
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 industry markets and.
The economic environment in which the company operates.
Such statements involve risk and uncertainties that could cause actual results to differ materially from the results discussed in the statements.
This risks are detailed in the company's annual report.
And the Form 10-K filed with the Securities and Exchange Commission.
Today's calls call presenters are Mark <unk>, President and Chief Executive Officer, and Joseph So terrorists executive Vice Vice President and Chief Financial Officer.
They will be joined by Dimeter.
Correct, but NAS.
Executive Vice President of financial services, and corporate development for the question and answer session.
Gentlemen.
You may begin please go ahead.
Thank you Marlene.
Morning, everyone football as well and thank you all for joining our third quarter conference call.
As you can see from the release. This was one of the best operating quarters, we've ever reported.
I believe it is the best quarter, we've ever reported absent last year's post Covid reserve releases and PPE revenues in Q1.
Earnings for the quarter were driven by improvement across the board, including solid loan growth a growing margin higher noninterest revenues in our banking and insurance segments and improved efficiency ratio and solid credit quality.
Loan growth was across all of our portfolios and that momentum continues 5% growth in the quarter follows 4% growth in Q2. So continues to be a performance highlight delivered by our credit generation teams.
Larger loan loss provision was driven almost entirely by loan growth and deteriorating qualitative factors of the seasonal model.
<unk> costs remained contain an average balances were flat for the quarter with public fund outflows of about 300 million offset by growth in consumer and business balances of 300 million.
Overall, GAAP EPS is up 8% over last year and P. P in hours up 20% both numbers would be even greater ex PPP revenues in last year's quarter.
So we could not be more pleased with this quarter's results and believe we are well positioned heading into Q4 as well in terms of our pipelines and margin expectations.
Looking forward, we expect our current operating momentum to continue obviously this is an unpredictable and volatile environment, but given our stable core funding base the higher rate environment will continue to be additive to our results.
Joe.
Thank you Mark and good morning, everyone as Mark noted the third quarter earnings results were solid with fully diluted GAAP and operating earnings per share of <unk> 90.
These results are up seven or eight 4% over the third quarter 2021 results of <unk> 83 per share.
The improvement in operating results was largely driven by a significant improvement in the company's net interest income and increase in noninterest revenues and a decrease in weighted average shares outstanding between the periods offset in part by increases in operating expenses, the provision for credit losses and income taxes.
Adjusted pretax pre provision net revenue or adjusted P. PNR per share, which excludes the provision for credit losses acquisition related expenses other non operating revenues and expenses and income taxes was $1 25 in the third quarter up 21 cents or 22% over the prior year's third quarter adjusted P. P.
<unk> per share was also up 12 cents or 10, 6% over the linked second quarter result of $1 13.
The company recorded total revenues of $175 $6 million in the third quarter of 2022. This was up $18 $7 million or 11, 9% over the prior year's third quarter and establish a new quarterly record for the company.
Net interest income the primary driver of the company's revenue growth was up 17, 8% or 19, 2% over the prior year's third quarter due to market interest rate related tailwind strong loan growth in.
In investment securities purchases between the periods the company's average interest, earning assets increased $1.08 billion or 8%, while the tax equivalent net interest margin increased 29 basis points from 274% in the third quarter of 2021% to 3.03% in the third quarter of 2022.
Net interest income was also up $7.2 million or 7% over linked second quarter results, while the tax equivalent net interest margin expanded 14 basis points.
Although interest expense was up $2 $4 million over the prior year's third quarter. The company's average cost of funds was up just six basis points from 10 basis points in the third quarter of 2021 to 16 basis points in the third quarter of 2022, the company's average cost of deposits remained low at 11 basis points for the quarter.
Noninterest revenues increased <unk> $9 million over the prior year's third quarter led by a $1 6 million dollar or nine 7% increase in banking related revenues and a $1 3 million or seven 6% increase in wealth management insurance services revenues banking noninterest revenues increased from $16 9 million in the third quarter 'twenty.
One to $18 5 million in the third quarter.
2022, driven by an increase in deposit service and other banking fees the increase in wealth management and insurance services revenues was driven primarily by organic and acquired growth in the insurance services business offset in part by a decrease in wealth management services revenues due to a challenging investing challenging investment market conditions employee benefit service.
<unk> revenues were down $2 million or six 8% as compared to the prior year's third quarter due to a decrease in asset based employee benefit trust and custodial fees.
Although asset quality remains very strong the company recorded $5 $1 million in the provision for credit losses in the third quarter reflective of strong loan growth and a weaker economic forecast. This compares to a 0.9 million dollar net benefit recorded in the provision for credit losses in the third quarter of 2021 comparatively during the second quarter of 2022 of the company.
Reported a provision for credit losses of $6 million $3 9 million of which was due to the acquisition about Mira savings bank during the quarter.
The company recorded a $108 $2 million in total operating expenses in the third quarter of 2022 compared to $104 million of total operating expenses in the prior year's third quarter, the $7 $7 million or seven 7% increase in operating expenses was driven by a $3 $3 million or five 3% increase in salaries and employee.
If it's a $2 $2 million 19, 8% increase in other expenses and a $1.2 million nine 4% increase.
In data processing and communication expenses on a combined basis, all other expenses increased $1 million between the comparable.
In comparison, the company recorded a $110 $4 million of total operating expenses in the second quarter of 2022.
$2 $2 million or 2% sequential decrease in quarterly operating expenses was largely attributable to a $4 million decrease in acquisition related expenses, partially offset by increases in salaries and employee benefits.
Processing and communication expenses and other expenses the effective tax rate for the third quarter of 2022 is 22%.
The company's average, earning assets increased $1.08 billion or 8% over the prior year from 13, five $3 billion in the third quarter of 2000 $21 billion to $14.61 billion in the third quarter of 2022. This included a 2.07 billion dollar of 49, 4% increase in the average book.
Value of investment Securities and a $1.06 billion or 14, 6% increase in average loans outstanding partially offset by a 2.05 billion dollar decrease in average cash equivalents average deposit balances which includes.
Includes $522 $3 million of deposits acquired in Jamar acquisition increased $839 million or six 6% over the same period.
Linked quarter basis average, earning assets increased $145 million or 1%.
Ending loans increased $398 $9 million or four 9% during the third quarter and $1.26 billion or 17, 3% over the prior 12 month period exclusive of $437 million of loans acquired in connection with the second quarter acquisition about Mira ending loans outstanding have increased 800.
$24 million or 11, 3% over the prior 12 month period, despite $156 2 million dollar decrease in PPP loans during the third quarter. The company originated over $750 million of new loans at a weighted average rate of just under 5% comparatively the book yield on the company's loan portfolio was.
4.22% during the third quarter.
Asset quality remains strong in the third quarter at September 30th 2022 nonperforming loans were $32 $5 million or 0.38% of total loans outstanding. This compares to $37.1 million or 0.46% of total loans outstanding at the end of the linked second quarter of 2022 and $67 8 million.
Zero point, 93% of total loans outstanding one year earlier, a decrease in nonperforming loans as compared to the prior year's third quarter was 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 0.33% of total loans outstanding at September 30th 2022 up slightly from 0.29% at the end of the second quarter of 2022, but down slightly from 0.35% one year earlier.
The company's regulatory capital ratios remained strong in the third quarter, the company's tier one leverage ratio of 878% was up 13 basis points in the quarter. This significantly exceed the well capitalized regulatory standard of 5%. The company has an abundance of liquidity the combination of the companies.
Cash and cash equivalents borrowing capacity at the Federal Reserve bank borrowing availability at the federal home loan Bank and Unpledged available for sale investment Securities portfolio provides a company with over $5 $2 billion of immediately available sources of liquidity at the end of the third quarter. The company's loan to deposit ratio at the end of the third quarter was 63, 4% providing future off.
Particularly to migrate lower yield investment security balances into higher yield loans.
<unk> forward, we are encouraged by the momentum in our business the company generate strong organic loan growth over the prior five quarters. The net interest margin expanded meaningfully in the quarter asset quality remains strong and our loan pipeline is robust. In addition, the pipeline of new business opportunities in the financial services business has remained strong in Q4 and 'twenty 'twenty three we.
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 is strategically valuable merger and acquisition opportunities. Thank you I will now turn it back to them or at least to open the line for questions.
Yes.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
You're using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Okay.
Our first question is coming from Alex Wherewithal from Piper Sandler.
Alex Please go ahead.
Hey, good morning, guys.
Good morning, Alex Good morning.
First off I appreciate your comments on a robust loan pipeline going into the fourth quarter, obviously, it strung together a couple of quarters, a very nice loan growth I'm. Just curious if you can spend a little bit more time, just elaborating on what we should expect to see in terms of the funding of that loan growth or potential loan growth in the fourth quarter, just given sort of the ebbs and flows of the municipal.
That's as well as any other cash flows.
That we should expect to see from the securities portfolio over the next couple of quarters.
Hey, Alex This is Joe I'll I'll take that question yeah. It is quite possible that we are we wind up in a borrowing position at the end of the year on an overnight borrowing position given the robust loan growth in the pipeline where that said we do have.
About $600 million of securities maturities in and payments next year in 'twenty 'twenty, three which are if you kind of do the math on that.
That can support about a 7% growth rate on our existing loan portfolio and.
So although we'll have you know moments throughout the year will be in a borrowing position. We also think that those are securities cash flows will support a lot of that growth next year.
With regard to you know loan demand. It is it is still robust I think the market is expecting that are you know the higher rate environment will squeeze out some of that demand last year, which are you know given our securities portfolio cash flows. We think we can support a lot of that growth just by transferring effectively from an investment security here.
Asset into alone at earning asset.
Got it so over the next in the fourth quarter and early next year, we don't expect much in the way of securities cash.
Cash flows if I remember correctly. The next baseball. It comes matures in May of next year in the meantime can you just remind us the ebbs and flows of the of the municipal deposits I know that you see some inflows I think into the end of October and then outflows after that am I correct in that thinking and maybe just help us quantify you know how to think about that.
Yeah, Alex like we do have a at least with New York State, which is the primary driver of our municipal flows. There is a tax collection season that occurs effectively at.
At the end of the third quarter, and we tend to be somewhat level. If you will in terms of our municipal deposits in the fourth quarter, although that can vary a bit from year to year and.
And then there's another a large tax collection cycle on property taxes and in New York State in the month of January .
So typically we will see a little bit of an increase in AR.
And you know tax collection of municipal deposit flows are in in the first quarter.
Okay, and then can you give us some color on what you're seeing is in terms of deposit pricing pressures in your market I know historically, you've done an extremely good job keeping those betas about as low as possible I'm just wondering if you're thinking.
Through this cycle any differently about the the complexion of the deposit mix.
Good morning, Alex It's Dimitar we're.
We're not seeing much in the way of deposit pressures in our markets are at this point in time with that in mind I would say that it's more likely that those will accelerate from where they are today as everybody is experiencing pretty robust loan demand, but right now no one's really.
Move in any meaningful way in our markets.
Got it thanks for taking my questions.
Youre welcome Thanks, Alex.
And our next question comes from Eric Zwick from Hockey Group. Please go ahead.
Thank you good morning, everyone.
Good morning, Eric Good morning.
I'm wondering if I could just start on the net interest margin and what your thoughts are you've talked a little bit about deposit beta and then deposit pricing pressure maybe starting to.
Creep into some expectation that you might start to see that towards the end of the year into next just given you know the fact that we likely have some more fed funds rate increases coming out here at the end of the year and maybe into next year as well just curious about your thoughts for the direction and if you could quantify any expectations for where you think the margin goes in <unk> and maybe the early part of next.
Yeah.
Yeah.
Sure. Eric This is Joe I'll take that question. So I mean, we've had two consecutive quarters of pretty robust margin expansion. It was 16 basis points in Q2, and it was 14 and Q3, we don't anticipate that margin will continue to expand at that rate in part really ties back to Alex's question.
Regarding you know just just borrowings will be likely be borrowing a little bit in the in the fourth quarter, and obviously that set up a little higher rate significantly higher rate than our deposit base. So we're not expecting a continued expansion and you know certainly at the last couple of quarters in terms of margin expansion, but the loan pipeline and the momentum we have you know showed.
Help a bit to support the you know the current the current margins. So we could see we could see a tick up a couple of basis points in the quarter with that said, we do expect some expansion of NII net interest income because of that because of the deposit growth and the momentum we have but probably.
And likely not at quite the rate that we've been growing at least in the last quarter, but we do expect continued expansion of NII on a longer term basis.
We still think that our.
Expectations around mid single digit kind of growth in loans as a as a more of a you know a.
Our standard process as opposed to one or 2% than in prior years will support margin expansion over time, but you know and in on a short term basis. We don't expect the continued levels of of expansion.
That's helpful and maybe one quick follow up question on this line of questioning it.
Loans can grow kind of mid single digit, but you've got opportunities to take some of the cash flows from the investment securities portfolio in 2023 to one that now how would how should we think about average earning asset grew.
Growth over the next few quarters.
Yeah, I think that's a that's a fair question.
Wouldn't expect it to certainly increase that the levels that we saw during the pandemic.
We just don't have those types of flows to you know from the deposit side to continue to support.
Growth in the overall base, but you know the long side of the equation as we get a higher run rate. So I would expect that you know overall, earning assets could probably grow in the low to mid single digits. Just based on you know the loan pipeline and expectations around growth as we move ahead, but certainly not the double digit.
At levels, we saw during the pandemic.
Yeah.
Thanks for the extra clarity there and just moving on to credit obviously.
The metrics that you have in your portfolio continue to get better in terms of nonperforming loans Oreo early delinquencies are the provision this quarter reflected as you mentioned both organic loan growth and then just the deterioration in that I think national outlook is what it is at any partially just curious what you're seeing you know with your own eyes.
And in here with your own years, there in your own markets in terms of you know communities and businesses are.
You are seeing any signs of pressure or weakness, there or more just kind of caution and in businesses and consumers preparing for what may be a recession coming in the next few quarters.
Hey, Eric its Dimitar, we're not seeing really and I think that gives us concern on the credit side, we're watching it a little bit more obviously with rates going up.
I think that's all secured some of the demand and maybe some of the more marginal bar worse as well. So right now if you look at our metrics across every single portfolio, there below or at the historical averages.
Delinquencies are very very low.
We would expect them to creep up a little bit then you saw some of that into provisioning this quarter kind of looking ahead, but.
Certainly it does not feel like in a sort of a credit events in our markets.
I appreciate the color that's all my questions right now thank you.
Thank you Eric.
And our next question is coming from Chris O'connell from K B W. Chris. Please go ahead.
Good morning.
Just wanted to start off on the on the fee businesses, which held up well this quarter, especially you know wealth and insurance.
And you mentioned you had a good pipeline there. So maybe if you could walk us through kind of what you're thinking for organic growth rates going forward, assuming a you know the broader financial markets remain more or less flat.
Good morning, Chris our estimates are so if you just kind of step back and look at our fee businesses.
<unk> is that they continue to exhibit.
This year is just tremendous.
We're up on a year to date basis.
Across our fee income platforms and we are you.
Quarter over quarter, we were also up that's what.
If you look at our benefits wealth and insurance businesses together, you know about 50% of that is market dependent and related.
So with the market kind of being down 20% fixed income and equities.
Just kind of gives you a sense of those organic opportunities that we've been referencing.
On our call so we've.
We're up double digits in terms of units if you want to think about it that way and those businesses more to give any more clients.
You know excellent kind of organic performance and some of that has been taken down by the market essentially again, we're still.
On a year over year basis, we have a pretty good shot this year it being close to flat.
And those businesses so as you.
We kind of look at that as a very constructive outcome, especially given that most of our peers will be down to income right not everything can be is created equal.
So we're pretty pleased with that and the momentum in each one of those businesses again, it's double digit organic growth. So.
So we're very pleased with it but what youre going to see that in actual numbers again half of that is tied to the market. So.
We got the units, we got the organic side and the market will do what the market does.
Got it that's helpful. Thank you.
And circling back to some of the margin discussions who a little bit surprised I guess, you know not more bullish on the near term margin outlook.
Maybe if you could provide what the spot rates are you know on the deposits today.
That'd be helpful and Ah is is all of the near term you know for Q, you know less expansion due to the to the borrowings are coming on the books in the fourth quarter.
Or do you expect.
Our deposit beta is to accelerate from here.
Yeah, Hi, Chris This is Joe I'll, just take that so you know were cycled to date, our cost of funding cost of deposits is not up very much at all in fact, I think our cost of funding beta is about a two which you know probably will not continue with that levels are as we had it.
Or into the cycle I'm, you know, we will likely have to catch up in terms of some.
Some funding costs as we get further into the cycle, which is which is which is pretty typical you know we also have pretty strong loan demand we need to fund. It. So you know we're going to continue.
Continue to evaluate our deposit base and look for opportunities in our markets to grow that and that will be at a rate that's higher than certainly our current cost of deposits of 11 basis points. So we're going to continue to expect to see higher funding betas as we head into into the fourth quarter.
And to your question about the fourth quarter, specifically, yes.
You know some of the US you know shorter term borrowing costs will dampen the our ability to increase the net interest margin to the fourth quarter, but then as we head into next year. We do we'll continue to see some of those securities cash flow start to effectively transfer over to the loan to the law.
One portfolio, but yeah I think in the short term, it's really a it's really the funding side of that equation that will be a challenge you know we we did book new loan volume this past quarter at a rate very close on a blended basis of 5% now keep in mind some of that some of those originations.
The actual rate, which was set with the borrower you know prior to a lot of the increase.
Increase in rates. So we expect the AR that you know the new volume rate to be up a little bit in in Q4 on new loans.
But the challenge on the short term basis will just be higher you know.
Higher costs around around borrowings are at least a foot.
For the fourth quarter, maybe into the first quarter.
Great that's helpful and then.
Oh, I'm, sorry, Christmas, but NII will continue we expect to expand in Q4.
Yep.
You mentioned you know the uptick in origination yields are you know you know post the end of the quarter and maybe you could just provide an update on our you know where the origination yields for the various buckets are coming on it.
They're they're varied, but actually they're you know they're fairly tight.
Relative to.
To last quarter, so I'm just pulling it up here.
So.
Actually I take that back I don't have those right in front of me Chris on each of the individual portfolios.
Unless I missed it there.
Yes.
Or.
Total portfolio, yeah, he's looking for individual portfolio. So that's it.
Yes, so the on the mortgages.
I'm sorry.
The originated yield in the fourth.
Third quarter was.
About.
38 basis points higher than the portfolio yield.
Business lending was about.
Over 100.
The mostly auto lending business right. The indirect business was about 80 basis points higher.
Actually home equity was a blowout that was a couple of hundred basis points I think.
And the direct consumer lending, which we don't do a lot of but was up about a 65 basis points. So it's it's up across the board quite a bit actually we.
That to continue.
Into the fourth quarter that day.
Divergence between the portfolio yield and the.
Yield on new assets coming on.
Okay.
Great.
And then lastly, I'm just with the OCI impact on D. C. I know you guys. You know primarily focus on a regular regulatory capital ratios, but you know maybe just an update on how you guys are thinking about that and any updated conversations are in general and how the regulators feel about that.
And you know you mentioned you know still pursuing accretive M&A transactions Ah, maybe just kind of outline what you guys are seeing in the market they're in.
You know what what type of transactions are you'd be interested in pursuing that.
So with respect to the question on OCI and our intangible capital you know that's not a that's not a metric that we spend a lot of time focusing on here and our place I mean, if you think about the the Aoc I.
Changes in the last couple of quarters, it's largely on Treasury securities almost all on Treasury Securities and we don't really.
Feel the need to have you know incremental capital to support a basically an adjustment in the market value on on Treasury Securities.
We know.
You know when those cash flows are coming in and there are certain.
So we don't think there is additional capital that we do focus on regulatory capital.
And we also you know and that's what our regulators focus on as well as regulatory capital for it for that reason.
So that's really our primary focus you know Chris we also have a very long duration stable core deposit funding base that obviously you know we don't have the ability to write that too you know twitch to its true value, but you know certainly that supports our you know.
Our overall valuation as that portfolio as well and it's actually quite frankly, the reason we've been able to go longer on some some of our asset durations, because we have a very long.
Portfolio of liabilities and you know at 75% of our total deposits and checking and savings accounts.
That are not not particularly rate sensitive.
I think on the tomorrow on the M&A question as we said last quarter, we are still interested in pursuing high value acquisition opportunities I bet.
The market environment seems to be okay for having those conversations and those opportunities. So we're pretty pleased that those continue.
I do think the one thing that's maybe changed a little bit for us is our ability now to grow organically.
On the bank side.
Maybe changed our M&A strategy, a little bit, but I think if you think about our growth opportunities. It's a three legged stool we have the.
Bank organic non bank organic and M&A and I think the M&A Lake in the nonbank organic lake have always been really good.
<unk>.
Below par growth that we've delivered generally.
Over the years.
On the bank organic side, we've made up with let's call them tactical M&A.
M&A opportunities. So I think with the ability to now have that third leg more solid and the ability to grow organically on the bank side.
Appropriately.
It allows us now to focus principally on more strategic M&A opportunities. So that's kind of a discussion we've been having.
Having internally so maybe a slight change to the strategy, but nothing changing near term in terms of.
Our interest or ability or even I would say the level of dialogue, which is reasonably productive.
Great I appreciate the color and thanks for taking my questions.
Thank you.
At this time I would like to remind you if you'd like to pose a question. Please press Star then one.
Our next question comes from Matthew Breese from Stephens, Inc.
Please go ahead good morning, everybody.
I first just wanted to confirm on on the loan growth outlook. It feels like mid single digits is it pretty good bogey low single digit earning asset growth with you know the difference there being expected securities runoff is that is that an accurate statement.
Yes, we think that's accurate math.
Okay, and then within the the loan pipeline you know where are the greatest strengths and where do you expect to grow or or should we expect loan growth to be pretty diverse like we saw this quarter.
Uh huh.
Good morning, Matt.
The pipeline is strong across all all of our businesses. So we expect to grow in commercial that's been obviously.
Meaningful area of growth for us the pipeline there remains very strong.
Same in mortgage.
Notwithstanding what you are hearing about kind of the national.
Situation all of our markets remain resilience with.
Refi volume is down but as you know we put those on our balance sheet, So refis and net zero for us. So purchase applications are actually trending up this year for us.
We've also been hard at work at three organizing our go to market model there a little bit. So I expect that mortgage will continue to grow for us on the balance sheet side.
Indirect has been very strong this year.
It is a more cyclical business and you've kind of its hard to predict but right now certainly the application volume remains robust notwithstanding rate increases.
On the direct side, we've actually grown this year and continue to grow.
Into the fourth quarter. So we.
We feel pretty good about that as well.
And it's the first year in a while just with actually growing home equities. In addition to everything else. So.
We are we feel good across the board.
Is it going to be as strong as the third quarter.
Maybe not.
Still a mid single digit growth rates as is.
As achievable for us for next year.
And then from an underwriting perspective can you talk a little bit about the health of the underlying borrowers just given the more tenuous backdrop or is what we're seeing a reflection of the no no boom bust markets that you're typically you typically in combined with a bit more horsepower.
On the lending front and our exposure to some of the metropolitan areas.
And have you had to change underwriting at all or become more selective in this environment.
So Matt our underwriting has not changed.
At all.
What's changed is just our ability to be on the street and getting getting opportunities in the door.
Across our business lines.
So if you.
Just kind of also look at our markets. They remain housing constrained inventory is low.
It's actually down on a year over year basis versus auto markets in the country, where it's very.
Meaningfully.
So there's just not a lot of housing to go around so.
So.
<unk>.
Again before we're writing mortgages into sevens today, just like everybody else and our purchase applications are strong the.
The commercial borrowers as well.
We are looking at their financials.
Constant basis.
Where we've gone into the larger markets with gone with the best in class developers and clients.
As we.
We like to say around here.
Biggest clients' needs to be our best clients. So we are we're very focused on that.
So now our credit metrics do you look at our indirect business.
Our FICO is they are actually up year over year.
As you know, we're right kind of prime and Super Prime type of paper in the used market.
So.
Nothing's changed in terms of our underwriting is just our ability to actually be more presence in the markets.
Great and then.
Two other ones. The first quick one is just on tax rate and expected tax rate going forward I have 23% model, but it's been a bit below that year to date.
Yeah, Matt I think the you know the last couple of quarters is indicative of our expectations, which is in and around 22, you know plus or minus call. It a half a percent depending on activity and.
And in particular, a particular quarter barring of course any changes in state tax rates or anything along those lines I would expect that the last couple of quarters is indicative of the future.
Tax rate of about 22.
Okay. Thank you and then.
Last one is just mark when you discussed you know the more strategic M&A.
Could you give us some idea of what the key differences in your view for strategic M&A versus some of the past deals that you've that you've done you know what do you look for in a strategic deal.
Sure.
We look for new.
New markets.
Generally our adjacent.
Contiguous extensions.
That we think are strategic because they don't have a presence there we have a lot of opportunity in those markets.
They might represent some of those kind of slightly.
Larger markets.
That that we that we've gone into in the last handful of years.
Albany, Buffalo markets like that they're a little bit bigger there is still not what you would consider metropolitan but.
Bigger than our kind of.
Historical legacy markets. So I think that's number one.
Talent is always something thats important to us that we assess as a component of our evaluation of.
Transactional opportunities.
Maybe particular businesses.
That are great interest to us for some reason.
Some banks have outsized really high quality trust businesses, which is very additive and other wealth management resources somebody of insurance.
Sometimes its talent, sometimes it's the market.
So it's really can be a variety of things I would suggest that.
The tactical type transactions have historically been kind of the smaller in market plug and play.
These are transactions where.
There.
They are smaller so the accretion percentage, let's call it the economic value.
Is greater Theres lower execution risk because they are in market.
So those I would consider to be historically more tactical and with the ability to have that kind of a third leg of the growth stool.
Those will become less let's call it necessary or important in terms of our M&A strategy will focus more on those.
Kind of.
Market extensions talent acquisition business line product acquisition, those kinds of things, which we consider to be more strategic and less tactical.
Great I appreciate all the color that's all I had thank you.
Thank you Matt.
We have Alex <unk> from Piper Sandler with a follow up question. Alex go ahead.
Thank you just just on that last point with respect to the strategic M&A. You know historically your range is kind of been half a billion to sort of 2 billion and sort of target asset size, there's something strategic that they include something a little bit bigger than that range.
Probably not at this juncture it would have to be something.
Significant special for us to think about.
Something beyond 2 billion at this point, we think there's a lot of.
Really good.
Strategic opportunities that are.
Less than $2 billion.
So I would say at this juncture, Alex though I would.
Let's say 2 billion is probably the.
The top side of.
Where we'd be thinking currently.
Got it and then just on expenses I don't think we touched on it yet, but just in terms of cost saves and sort of expected expenses expense run rate is this sort of 100 and $708 million the right starting point and as you look into next year, how do you see expense trajectory.
Yeah, Hi, Alex It's Joe again, I'll I'll take that question so.
You know our history was was growing at.
Call. It low single digits, maybe you know call. It 3% is kind of a run rate around opex.
We've invested a few additional resources and new loan generation and new business development. So that in itself has the cost structure associated with that but as I think we're all keenly aware.
There's inflationary pressures on wages and other pressures on you know even vendors and the like from the standpoint of higher costs.
So our expectations is that our <unk>.
Right from this point forward will be kind of mid single digits potentially a tad higher if.
Inflation persists, but right now kind of mid single digits is our expectation.
And the 108 ish million is the right starting point for that mid single digits.
That's that seems reasonable we typically have.
Some seasonal patterns around expenses the snow will fly here at some point there is just higher costs associated with our Q4, and then Q1 into next year. We typically you have our merit increases in the beginning of the year and then it then things level out, but I think the long term trajectory of mid single digits is a it's a fair expectation.
Course barring any.
Additional M&A at.
At this point.
Got it and then just to clarify on your NII growth comments I think you said the fourth quarter, you expect NII growth or expansion I'm. Just wondering as we head into 2023 is your kind of outlook and sort of see obviously you have the exchange of low cost or low yielding securities for higher yielding loans.
But you know given that weighed against a higher funding costs do you feel confident that NII can expand across 2023 as well.
Yeah, we still expect that to continue to expand and in 2023, just the rate of change in rate of increase is unlikely to be replicated in 2023.
Okay.
Thank you for now.
We have worked clarity of writing loans well ahead of the wholesale funding cost right. So every marginal dollar is additive.
From a balance sheet growth perspective to NII.
Right.
Thank you for taking my follow ups.
Youre welcome.
And now we have a question from Manuel Nava from D. A Davidson Manuel Please go ahead.
Hey, good morning Carlos.
Good morning, the noninterest noninterest bearing deposit growth is that all tied to public public funds or is that also seen.
Seen some nice growth from that you.
New commercial customers.
Sorry man what can you do I think I think I think Emmanuel.
In the in the quarter, we actually had public funds outflows so the growth in noninterest.
So the end of period non interest bearing deposit growth.
It was driven by could you kind of give extra color on that.
Yes, its consumer and business.
Okay great.
Is that.
So, it's it's reaching about 32% right now maybe.
Any thoughts on how that could be held in across this type of.
Rapidly increasing deposit beta environment.
I'm not sure what the 32% to referring to Emmanuel.
Okay.
Yeah, roughly 32% noninterest bearing deposits.
Oh, no actually yes so.
I think if you look at our deposit account balances the.
Checking and savings accounts are.
About 70%.
Give or take.
Of the of the total suite, so, 70% checking and savings and about 30% as money market and Cds.
I think historically look through different interest rate cycles, we've had that.
The beta performance through the cycle has been really good.
Yeah.
B B.
Duration of those core deposits. They go back into core deposit studies on our existing core deposit base in connection with an acquisition.
I think the last one we did was 14 years.
Or so so there's a lot of duration.
And stickiness to those deposits I think we're going to be in a different environment going forward.
And we will have some other banks have already been challenged in terms of the deposit base of the funding cost I think that we will.
Not be immune from that influence over time, I think right now it's pretty good I think as <unk> said were not seeing a lot of.
A lot of risk currently.
I think that will that will come but I like where we're sitting in terms of our deposit mix and our historical.
Hold those in and hold the rates and hold the data.
Much lower we won't have the same kind of pressure.
Because we're going to have to.
Fred just kind of.
Over the next few years, taking our.
Investment book down by maybe a couple of billion dollars still have tons of liquidity, but have a much more optimized balance sheet. So.
So we have some kind of forward funding thats going to ebb and flow.
Quarter to quarter based on deposit in overnight borrowing needs.
But I think there's a there's a longer term strategy here.
Sound around repositioning our balance sheet over time to optimize the earnings potential. If you think if you look at a couple of billion dollars in securities at.
4%.
That delta on earnings as a dollar a share so I think our opportunity.
<unk>.
Is a dollar a share over the next few years.
Wow.
Without impairing liquidity without taking risk out of it actually necessarily blowing up our balance sheet.
Through kind of leverage so.
I think the.
The remix of the balance sheet will be will be helpful. Obviously, the funding cost has always been really important to us I think that's something we've been pretty good over the years in terms of.
Building, a really stable sound.
Our low cost core deposit funding base that's really.
Sticks with us through the ups and downs of markets, including rates up in rates down and recessions and credit crises in the hole.
The whole gamut of things that you know that the economy kind of.
Goes through over different cycles over time so.
I like where we're at pretty well, but I think on a shorter term basis.
Deposit rates are probably going to have to go up at some juncture and we may experience some.
More challenging deposit retention environments.
Forward, but we haven't seen it at this juncture.
Maybe just to clarify its tenants are when you when we talk about checking or savings 75, we think about it that way because our savings accounts I would call them nominal interest bearing.
They're so they don't show up in your in the 30 something percent that you look at from noninterest bearing perspective, but the rate on those is a few basis points.
We don't that doesn't.
Doesn't scale up with.
Paid is the way out of problems there.
I think you historically have a very strong deposit base and you have more non interest bearing deposits as a percent of deposits than you've ever had.
That's what I'm trying to highlight.
Yeah that seems pretty good.
We like it.
[laughter].
Alright, that's it for our questions for me. Thank you.
Thanks Danielle.
Okay.
And this concludes our question and answer session I would like to turn the conference back over to Mr. <unk> for any closing remarks. Thank you.
Thank you Maher least thank you to everyone for joining us today on our third quarter call and we will talk to you again in January thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.