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spk00: Good morning and welcome to the Community Bank System first quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. Please note, today's event is being recorded. And also please note that this presentation contains forward-looking statements within the provisions of the Private Security Litigation Reform Act of 1995 that are based on current expectations, estimates, and projections about the company, markets, and economic environment in which the company operates. Such statements involve risks and uncertainties that could cause actual results to differ materially from the results discussed in these statements. These risks are detailed in the company's annual report, in Form 10-K filed with the Securities and Exchange Commission. Today's call presenters are Mark Trenisky, President and Chief Executive Officer, and Joseph Sotiris, Executive Vice President and Chief Financial Officer. They will be joined by Dimitar Kravinov, Executive Vice President of Financial Services and Corporate Development for the question and answer session. Gentlemen, at this time you may begin.
spk02: Thank you, Chad. Good morning, everyone, and thank you for joining our first quarter conference call. Hope everyone is well. I think earnings for the quarter were very solid across the board. Margin continues to be a lessening headwind in loan growth expenses, deposit fees, and the continuing strength of our financial services businesses or tailwinds. Loan performance continues to be really good. We had annualized growth of 4%. In a quarter that is seasonally negative for us, and which continues a favorable trend to the second half of 21. Commercial and consumer mortgages led the way on the strength of solid execution by our teams, and the pipeline remains very strong. In fact, our commercial pipeline right now is over 50% higher than it's ever been. Joe will comment further on margin, but we were also encouraged by the 40 basis point increase in originated loan yields this quarter over last. We expected it would take until the end of the year for originated loan yields to exceed the portfolio yields, but the current trend suggests that will happen sooner. Also, our deposit costs ticked down to eight basis points this quarter, and since our deposit base is 75% checking and savings, we do expect our low beta funding costs will be contributory to margin expansion going forward. The recent strength of our financial services business has continued in the quarter. with revenues up 13% and pre-tax earnings up 8% over 2021. Our benefits, wealth, and insurance businesses are all performing extremely well right now, and given their organic growth momentum and new business pipelines, we expect that trend to continue. As we announced last week, we have received regulatory approval for the pending Elmira Savings Bank transaction, a $650 million asset bank with 12 offices across the Southern Tier and Finger Lakes regions, New York State. It's a very nice franchise with a very good mortgage business that we expect will be 15 cents per share accretive on a full year basis, excluding acquisition expenses. So a very productive, low-risk transaction that we expect to close early next month. Looking ahead, we expect our current operating momentum to continue, particularly as it relates to our commercial banking business. Over the past quarter, we've added many experienced and talented bankers to our leadership and front lines including in New England, upstate New York, and the Lehigh Valley in Pennsylvania. We also expect the seasonally strong consumer mortgage and indirect lending businesses to accelerate, subject to inventory availability in those businesses. Lastly, I would like to give a shout-out to the entire Community Bank team for being recognized by Newsweek as the sixth most trusted bank in the nation in their annual feature of America's Most Trusted Companies. Trust is our product, and we could not be more proud of this recognition of our team's efforts. Joe? Thank you, Mark, and good morning, everyone.
spk03: As Mark noted, the first quarter results were solid with fully diluted GAAP earnings per share of 86 cents. The GAAP earnings results were 11 cents per share, or 11.3% below the first quarter 2021 GAAP earnings, and 6 cents per share, or 7.5% higher than linked fourth quarter results. Fully diluted operating earnings per share, which excludes acquisition-related expenses and other non-operating revenues and expenses, were $0.87 for the quarter, $0.10 per share, or 10.3% below the prior year's first quarter, and $0.06 per share, or 7.4% higher than the linked fourth quarter results. The $0.10 decrease in operating earnings per share as compared to the first quarter of 2021 was driven by increases in the provision for credit losses, operating expenses, income taxes, and the fully diluted share is outstanding. offset in part by increases in net interest income and non-interest revenues. A $5.2 million decrease in PPP-related revenues between the periods and a $6.6 million increase in the provision for credit losses were responsible for a $0.17 decrease in fully diluted operating earnings per share net of tax over comparable periods. The company recorded $0.9 million in the provision for credit losses in the first quarter of 2022 as compared to $5.7 million net benefit in the provision for credit losses in the first quarter of 2021 as the U.S. economy emerged from the depths of the pandemic. The company PPP-related interest income totaled $1.7 million in the first quarter of 2022 as compared to $6.9 million of PPP-related interest income in the first quarter of 2021. The Sixth Sense or a 7.4 percent increase in operating earnings per share over the linked fourth quarter results were largely given by a decrease in the provision for credit losses, higher non-interest revenues, and lower operating expenses. 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 were $1.12 in the first quarter of 2022 as compared to $1.09 in both the prior year's first quarter and the linked fourth quarter. The company recorded total revenues of $160.5 million in the first quarter of 2022, a new quarterly record for the company and an $8.1 million or 5.3% increase over the prior year's first quarter. The increase in total revenues between the periods was driven by a $0.9 million, 1% increase in net interest income and a $7.2 million or 12.2% increase in non-interest revenues. Non-interest revenues accounted for 41% of the company's total revenues during the first quarter of 2022. Comparatively, total revenues were up $0.9 million or 0.5% over fourth quarter 2021 results due to a $1.8 million or 2.7% increase in non-interest revenues, partially offset by a $0.9 million or 0.9% decrease in net interest income driven by a $1.9 million decline in PPP-related interest income. The company recorded net interest income of $94.9 million in the first quarter of 2022. This compares to $94 million of net interest income recorded in the first quarter of 2021. Although the company's earning asset yields decreased 34 basis points over the prior year's first quarter due to lower market interest rates on new loan originations and investment securities, and the previously mentioned decrease in PPP-related interest income, net interest income increased by $0.9 million, or 1%. This result was driven by lower funding costs, a significant increase in the average earning assets, and 11 basis point increase in investment yields, including cash equivalents, as the company meaningfully shifted the composition of earning assets away from low-yield cash equivalents to higher-yield investment securities between the periods. Comparatively, the company recorded net interest income of $95.7 million during the fourth quarter of 2021, $0.9 million higher than the first quarter of 2022 results, The company's tax equivalent net interest margin was 2.73% in the first quarter of 2022 as compared to 3.03% in the prior year's first quarter and 2.74% in the late fourth quarter. Employee benefits services revenues for the first quarter of 2022 were $29.6 million, up $3.1 million, or 11.5% in comparison to the first quarter of 2021. Improvement in revenues was driven by increases in employee benefits, trust, and custodial fees, as well as incremental revenues from the acquisition of fringe benefits designed in Minnesota, Inc. during the third quarter of 2021. Wealth management revenues for the first quarter of 2022 were $8.6 million, up from $8.2 million in the first quarter of 2021. The increase in wealth management revenues was primarily driven by increases in investment management trust service revenues. The company recorded insurance service revenues of $10.4 million in the first quarter of 2022, which represents a $2.3 million or 27.7% increase over the prior year's first quarter, driven by organic expansion as well as the second quarter 2021 acquisition of a Florida-based personal lines insurance agency and the third quarter 2021 acquisition of a Boston-based specialty lines insurance practice. Banking non-interest revenues increased $1.4 million, or 9%, from $15.6 million in the first quarter of 2021 to $17 million in the first quarter of 2022. This was driven by a $1.9 million, 13.1% increase in deposit service and other banking fees, offset in part by a $0.5 million decrease in mortgage banking revenue. Comparatively, the company's financial services business revenues increased $1.3 million, or 2.7% over the linked fourth quarter results, while banking-related non-interest revenues were up $0.4 million, or 2.8%. During the first quarter of 2022, the company recorded a provision for credit losses of $0.9 million. This compares to a $5.7 million net benefit recorded in the provision for credit loss in the first quarter of 2021. The company recorded net loan charge-offs of $0.5 million in the annualized three basis points of average loans outstanding during the first quarter of 2022 as compared to net loan charges of $0.4 million and annualized two basis points of average loans outstanding in the first quarter of 2021. Although economic forecasts remain generally consistent with the prior quarter, companies' allowance for credit losses increased $0.3 million from the end of the fourth quarter of 2021, due in part to a $90.7 million increase in non-PPP loans outstanding. Comparatively, in the first quarter of 2021, economic forecasts had improved significantly, resulting in a release of reserves in that quarter. Although asset quality remains strong, the company will continue to closely monitor the effects an inflationary environment will have on both the company's consumer and business borrowers. The company recorded $99.8 million in total operating expenses in the first quarter of 2022, compared to $93.2 million in total operating expenses in the prior year's first quarter, and The $6.6 million, 7% increase in operating expenses was primarily driven by a $4 million, 7% increase in salaries and employee benefits, and a $2 million, or 23.1% increase in other expenses. The increase in salaries and employee benefits expenses was driven by increases in merit and incentive-related employee wages, higher payroll taxes, and higher employee benefits-related expenses, offset in part by a decrease in full-time equivalent staff between the periods. Other expenses were up due to a general increase in the level of business activities, including increases in business development and marketing expenses, insurance, professional fees, and travel-related expenses. In comparison, the company reported $100.9 million in total operating expenses in the fourth quarter of 2021. The effective tax rate for the first quarter of 2022 was 21.4%, up from 18.6% in the first quarter of 2021. The company recorded a significantly higher level of income tax benefit related to stock-based compensation activity in the first quarter of 2021 as compared to the first quarter of 2022, which drove down the effective tax rate. Exclusive of stock-based compensation benefits, the company's effective tax rate was 22.3% in the first quarter of 2022 as compared to 21.4% in the first quarter of 2021, primarily attributable to an increase in certain state income taxes. The company's total assets increased to $15.63 billion at March 31, 2022. This represented a $1.01 billion or 6.9% increase from one year prior and a $73.2 million or 0.5% increase from the end of the linked fourth quarter. The substantial increase in the company's total assets during the prior 12-month period was primarily due to large inflows of government stimulus-related deposit funding. Average deposit balances increased $1.52 billion, or 13.1%, between the first quarter of 2021 and the first quarter of 2022. Likewise, average earning assets increased $1.54 billion, or 12.2%, over the same period. This included a $2.25 billion, or 61.4%, increase in the average book value of the investment securities due to the company's security purchase activities, and a $30.4 million, 0.4% increase in average loans outstanding, partially offset by a $735.8 million or 44.1% decrease in average cash equivalents. On a linked quarter basis, average earning assets increased $275.2 million or 2% due to the continued net inflows of deposits. Ending loans at March 31st, 2022 of $7.42 billion or $48.6 million or 0.7% higher than fourth quarter of 2021 and $53.9 million or 0.7% higher than one year prior. The increase in ending loans year over year was driven by increases in consumer mortgage, consumer indirect, consumer direct, and home equity loans offset in part by a decrease in business lending due primarily to forgiveness of PPP loans. Exclusive of PPP loans, ending loans increased $410.3 million or 5.9% over the prior 12-month period and $90.7 million or 1.2% over the prior quarter. Although the company's low-yield cash equivalents remain significantly higher than pre-pandemic levels, totaling $840.6 billion at March 31, 2022, the company deployed a significant portion of its excess liquidity during the first quarter by purchasing $1.26 billion of investment securities. The company's regulatory capital ratios remain strong in the fourth quarter. The company's Tier 1 leverage ratio was 9.09% at March 31, 2022, which is nearly two times the well-capitalized regulatory standard of 5%. During the quarter, the company recorded $271.4 million in after-tax other comprehensive loss driven by the client and the market value of the companies available for sale investment securities portfolio. The company has an abundance of liquidity, the combination of Companies' cash, cash equivalents, borrowing availability at the Federal Reserve Bank, borrowing capacity at the Federal Home Loan Bank, and the unpledged available-for-sale investment securities portfolio provided the company with $6.41 billion of immediately available sources of equity at the end of the first quarter. On March 31, 2022, the company's allowance for credit losses totaled $50.1 million, or 0.68% of total loans outstanding. This compares to $49.9 million, or 0.68% at the end of the fourth quarter of 2021, and $55.1 million, or 0.75% a year prior. The small increase in the allowance for credit losses during the first quarter is reflective of non-PPP-related loan growth and certain qualitative factors. On March 31, 2022, non-performing loans or $36 million or 0.49% of total loans outstanding. This compares to $45.5 million or 0.6%, 62% of total loans outstanding at the end of the fourth quarter of 2021 and $75.5 million or 1.02% of total loans outstanding at one year earlier. The decrease in non-performing loans as compared to the prior year's first quarter and fourth quarter is primarily due to the reclassification of certain pandemic impacted hotel loans from non-accrual status back to accruing status. Loans 30 to 89 days delinquent were 0.35% of total loans outstanding at March 31st, 2022, down slightly from 0.38% at the end of the fourth quarter of 2021, but up from 0.27% one year earlier. We believe the company's asset quality remains strong, but acknowledge that the historically low levels of net charge-ups experienced over the prior 12 months were supported by extraordinary federal and state government financial assistance provided to businesses and consumers throughout the pandemic. Looking forward, we are encouraged by the momentum in our business. The company generates solid organic loan growth over the previous three quarters. The financial services businesses have been growing and performing very well. Asset quality remains strong, and the loan pipeline is robust. In 2022, we will remain focused on new loan generation, managing the company's balance sheet, and rapidly changing interest rate environment while continuing to pursue accretive, low-risk, and strategically valuable emergence and acquisition opportunities And lastly, to echo Mark's comments, we look forward to partnering with Elmira Savings Bank and sincerely appreciate the efforts of our colleagues at Elmira Savings Bank to make the transition as seamless as possible for its customers. Elmira has been serving its communities for 150 years and will enhance our presence in the five counties in New York's southern tier and Finger Lakes regions. Thank you. I will now turn it back over to Chad to open the line for questions.
spk00: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speaker phone, 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. And the first question will come from Alex with Piper Sandler. Please go ahead. Hey, good morning, guys.
spk03: Good morning, Alex. Good morning, Alex.
spk07: First off, I think you guys were just modestly asset sensitive at the end of the year. I'm just wondering, with the securities purchases that you did during the quarter, if you could give us an update on how the balance sheet's positioned for all these pending rate hikes that we're now expecting through the end of 23.
spk03: Yeah, well, Alex, I think you're on point there. We deployed a fair amount of our investment securities in the first quarter, and for that matter, going back to the fourth quarter of last year. which, you know, we were largely on the sidelines for most of 2021 as, you know, rates were extremely low. So I think, you know, we've successfully deployed those securities, you know, and our outlook for core net interest income, XPPP, is up significantly. So by way of a Example, the last trailing 12 months, core net interest income was $361 million. We expect that the next four quarters will be significantly higher, in fact, I believe to the tune of high single digits, approaching a 10% improvement over the trailing 12 months. We have about $800 million in overnight income cash equivalents that could be deployed in a higher rate environment. We also have some securities maturities. So, you know, on the securities and cash equivalents, about a billion one to potentially deploy or, you know, reinvest throughout the year. We do have about a billion seven or so in variable rate loans, of which about 800 million is repriced for the next 12 months. So, you know, if rates continue to increase and stay high, we'll have those opportunities to you know, redeploy some maturing principal payments into higher yielding loans. As Mark mentioned, you know, our new loan generation rates were up about 40 basis points this quarter over the last quarter. So, you know, we are putting loans on at a higher rate certainly than we did in the fourth quarter. We expect that in the second, third quarter to effectively approach our, you know, our current book yields. And then, you know, And then we have maturing loans. Last quarter we had about $400 million of principal payments on loans, and so they're coming off at the current rates, and we'll have an opportunity to redeploy those at higher rates if rates stay where they are. I guess the last piece, Alex, just to mention is that the last cycle of tightening Our deposit beta was one of the best in the industry, and I think we're going to continue to, you know, certainly have one of the better core deposit franchises, one of the lower deposit betas in the industry. So I think we're fairly well positioned.
spk07: And based on all the stuff you say, I certainly agree. I'm just curious, in the disclosures that you put out for the gap analysis, does that assume a higher deposit beta than you kind of historically have shown? Or what would cause that to be? What would cause you to kind of screen more neutral relative to asset sensitive, given all the things you just went through?
spk03: Yeah, no, that's a fair question, Alex. But the challenge with that disclosure is the requirement around the disclosure, which is basically to take your, you know, expected run rate lookout 12 months, which changes the run rate from, you know, the end of the fourth quarter period was much, much lower. We've deployed a lot of our securities. The run rate is higher. So the baseline expectation is up significantly over the projection that we put out in the fourth quarter. So, when you put the Q disclosure out, all it's suggesting is if you have a change in rates from that point forward, you know, what might happen to your net interest income. And that is minimized a bit, but we've already stepped it up considerably in the last quarter in terms of the, you know, the core NII. So, no, we don't assume, we still assume a less than a 10 deposit beta based on our experience. It's just that what's happened is we've already stepped up the NII, you know, projection between the last disclosure and the first quarter disclosure, meaningfully.
spk07: Okay, thanks. And then I'm just curious, you know, obviously the regulatory capital levels are very healthy, but TCE dropping below 7% and presumably maybe a little bit more decline with the ESBK deal coming on the middle of the quarter. How important is that TCE to TA ratio to you guys, either internally or to the regulators? And is it going to – does that level of capital change the way you guys think about things like M&A, or at least the consideration that you might use for M&A, things like that?
spk02: Alex, it's Mark. I'll jump in on that one. You know, we don't pay very much attention, honestly. kinds of things. And I think, you know, one of the reasons is because, you know, you run an ongoing business and the notion of a TCE ratio or, you know, tangible, you know, per share and those kinds of metrics is there's an assumption inherent in those that your intangibles have zero value. And You know, you can't run an ongoing business around the assumption that you have no value to your intangibles. So, you know, the regulators pay no attention to it whatsoever, which I understand. We don't really pay a lot of attention to it. We disclose it because other people are interested in it. But in terms of how we think about how we manage the company, it's never really been around TCE, particularly as it relates to the non-banking businesses. You know, I'd use our benefits business as an example. There's probably $800 million of unrecognized goodwill on the books associated with our benefits business. So, likewise for the insurance and benefits. wealth businesses. So, I mean, I understand the math of it all, but in terms of how it has any real-life implications on how you think about the business or manage the business, you know, we don't really think about it. I mean, the other thing I would add in is the, you know, the delta in the change in TCE this quarter was mostly attributable to the change in the value of the investment portfolio. Well, if you think about it, we have... That's around $30 billion of financial instruments on our balance sheet. You know, 15 on the asset side, 15 or close on the liability side. The concept of, you know, tangible equity ratio, you know, assumes a mark-to-market, a fair value adjustment of only one of those financial instruments. So now I haven't done the math, but I would guess that the value, the core deposit and tangible value of our core deposit base just went up by a whole lot more than whatever the securities book declined by. So, and you also have the loans, which are financial instruments. They would get marked to market. They would go down in a period of rising rates. Your deposit base goes up. So, I mean, we look more at EVE, the economic value of equity, which is essentially a fair valuing of all of your and that's done in the context of interest rate risk management, asset liability management. So the TCE ratio or TCE tangible book value and all those kinds of things, we don't think about it. It's irrelevant to actual economics and actual value, so we don't really spend a lot of time thinking about it. The or the capital ratios that we look at, frankly, most important are the, you know, tier one leverage ratio from a regulatory perspective. That we think about, that we look at, that we pay attention to. You know, if you look at the risk-based capital ratios, they're, what, 3X or something, the minimum. I don't even know what the number is or so. But if you look at the, you know, we have, still ever. So, I mean, we think we're in pretty good stead from a capital standpoint, um, and, uh, whatever happens to the, you know, tangible ratios and tangible capital, uh, we don't really, uh, pay much mind to.
spk07: Got it. Appreciate that, um, that commentary. And just a final question for me. I think you said that the, um, accretion from the Elmira deal is still scheduled to be about $0.15, which I think is what it was when you guys announced it. But correct me if I'm wrong, they're a fairly mortgage-heavy institution. Is the change in the mortgage market and rate environment incorporated in that EPS accretion guidance?
spk03: Yes, Alex. When we modeled, we kind of modeled for the unlikely continuation of high mortgage volumes. We didn't think that that was going to continue at 20 and 2021 levels. So we had already kind of modeled some of that into our expectations that there would be a drop-off in origination. So we've already had that built into the 15 cents when we announced it.
spk07: Fantastic. Thanks for taking my questions.
spk00: And the next question will be from Russell Gunther from D.A. Davidson. Please go ahead.
spk05: Hey, good morning, guys. Good morning. Good morning, Russell. I wanted to touch on the growth outlook and commentary. So, you know, really good results, very constructive view you guys just laid out both in terms of the commercial and consumer perspective. When I think of you guys historically, I tend to be in that sort of low to mid-single-digit range pretty consistently for organic growth. I mean, based on, you know, your guys' constructive view, if the stars align, could there be an upward bias to that range? Just curious as to how you're thinking about growth over the, you know, remainder of the year.
spk02: Yeah, I would think if you look, Russell, I mean, the answer to your question, I think, is yes, relative to our historical outlook. growth trajectories in our markets. As I said in my comments, we've invested in some leadership resources, some frontline resources in both our commercial and our mortgage business in markets where we think we have a lot more opportunity and can do a better job executing than we have historically. So I think we're already making progress particularly on the commercial side. As I commented on the pipeline, it's substantially up from where it historically is, particularly this time of year. So if I look at where the pipeline and the committed not funded is right now, it is hard not to conclude that the next couple of quarters are going to be above trend for commercial are impacting affordability. So that could have an impact that we can't, you know, foresee. But regardless of the environment, we almost never not grow our mortgage business in the second and third quarters. So we would expect, absent something we can't predict, that we will also have good growth in the second and third quarters. Now, with that said, last year our commercial mortgage business, I think, grew 6%. which is an outlier for us. It's historically 3%, you know, give or take a point. And, you know, 6% was not, we didn't do things a lot different other than we worked hard to execute. But I think that was a function of the market more than anything. So I think in the aggregate, loan growth in the next couple quarters, I would expect looking out will be above historical trend.
spk05: That's really helpful, Collar. Thank you. Just a quick follow-up on that. In terms of the talent leadership you guys have added, is that initiative largely complete? I imagine you look for good folks all the time, but in terms of a targeted ramp, is there anything significant left to do there?
spk02: I think there's some areas where we're going to add some more resources, and I made reference to years ago um brought him back on board he's already hit the ground running he's only been on board for a couple of weeks we've asked him to build out a team over time uh talented people that's a that's a really strong market and so you know we've we've started we've started there um in and drop it in you know we don't we've never really done things like that it's really just focusing more on finding really talented people and experienced people who we we think can move the needle for us um In markets where we think we have opportunity because they're either, you know, newer markets to us, like the Lehigh Valley, or they're markets where we have, you know, underperformed historically. I mean, I'll use Western New York as an example. We've kind of been in the Rochester Buffalo market for a long time, haven't really done as much renewed focus on that. And, you know, a significant part of our current pipeline and opportunity is in Western New York. Pennsylvania is really strong, notwithstanding the startup effort in Lehigh Valley, but Northeast Pennsylvania is really strong. It's very good right now, and the momentum is really good. That's been a function of leadership resources, frontline resources. We've done some things to try to improve our process. We haven't changed our lending and credit policies, but we have changed some of the processes. We'll continue to do some of that. So it's just a refocus on that business and how we think we can do better in existing markets and markets that are, you know, somewhat newer to us.
spk05: Okay, great. Thank you, Mark. And then just last one for me is in terms of average earning asset mix. So given the momentum on the loan growth side of things and recent growth in the securities portfolio, how are you thinking about the investment portfolio going forward in terms of overall mix of earning assets?
spk03: So, Russell, right now the securities portfolio is about 40% of our earning assets, just the investment securities. We also, as I mentioned, have about $800 million of call it dry powder. We are potentially going to invest some, some smaller portion of that. Um, we also want to leave a little aside for, um, you know, potentially further rate improvement and also, um, you know, just in case we see some runoff in the, in the deposit book, um, you know, the stimulus funds that gave us a tailwind the last couple of years are effectively gone. Um, so we just wanted to make sure that, uh, you know, we have some, some cash reserves in case we experienced a little bit of, uh, back up on the deposit side. So I would think that modest continued investment of those cash equivalents to the tune of a couple hundred million dollars, but effectively we expect to keep some of that liquid for either runoff or future opportunities for deployment if rates continue to go up.
spk05: Okay, perfect.
spk03: Very helpful. Thank you guys. That's it for me.
spk05: Thanks, Russell.
spk00: The next question is from Matthew Brees from Stevens, Inc. Please go ahead.
spk04: Good morning. I was hoping we could touch on the auto business, particularly on the growth outlook, but also the credit front as well. I just was curious if you're seeing any signs of deterioration on the underlying consumer's ability to pay at this point.
spk02: Yeah, fair question. too late for the season or are they going to come in time? And, you know, what does the change in interest rate environment do to demand? So I think there's too many, you know, there's too many variables there. I would expect that there will be some growth in that business. There's almost always growth in that business in Q2 and Q3. So I would expect that would, you know, continue. But is it going to be, you know, sometimes that portfolio has grown 10, you know, double digits and sometimes it shrinks. No, you're sure. It's very difficult to predict. I would expect just given the current run rate and trajectory and trend and the seasonality given it's second and third quarter as well, I would expect that business would grow a little bit so I think the balance sheet will get bigger. So far we have seen no change in asset quality indicators in that portfolio frankly or any other portfolio. The asset quality has actually gotten better if you look at You know, some of the metrics, the, you know, delinquencies and non-performers, the charge-offs are all really strong right now. But that, you know, I think that in the consumer businesses can turn a little quicker than on the commercial, you know, banking side of the business. So, but right now it's very good. There's no, you know, indicators that that will turn. I will say, you know, part of the reason why if you look at the historical kind of loss experience in that We're running less than that right now because of what's happened with used car prices. So, you know, we do have those who weren't able to pay, and we have to repossess the car and sell it at auction. And those prices are so high, there's almost no losses right now. So I think... What I would say is the expected future losses would not come from any higher level of folks who can't make their payment, which I think has always been reasonably consistent in terms of repo activity. But I do think that at some juncture, when the market cools off, there will be a quick turn in the value of used car prices, and we won't be able to get as much at auction. So there will be an increase. At some juncture, I don't know when that might be, I can't predict, but there will be an increase in loss rates at some juncture just because of the used car values.
spk04: Interesting. Okay, I appreciate that. I'm going to jump around on my questions a little bit because of that last point. As you think about M&A, does what you see on the upcoming rate cycle or credit cycle change the characteristics of what you might look for in a bank? Acquisition and Partner.
spk02: Interesting question. I would say generally no, but there could be circumstances where if you had a bank that was extremely ill-positioned for the current potential trajectory of the rate environment, that would affect our perception of valuation if it was otherwise something that we considered for strategic reasons to be a high-value opportunity for our shareholders. So we would, I guess, factor it into valuation. You know, it's typically not been a, you know, significant driver of our strategy around M&A. It's kind of the balance sheet. I mean, I will say we don't – given our loan-to-deposit ratio, we don't – it would be helpful to do something, you know – M&A, from an M&A perspective, that had a higher loan-to-deposit ratio than we did. And I think that's kind of what we've done, which, I mean, most banks do have a higher loan-to-deposit ratio than we do. And then we can be disciplined about the pricing and right-size the if there's issues around the deposit base and the acquired institution. But I would say generally it's not something that we think about actively. We certainly look at what's their balance sheet. Is it high quality? Is it additive to us strategically? But in terms of trying to predict even which way interest rates will go and what the impact will be, that's a little challenging to do. I mean, it's not inconceivable that we have some – and they have been historically. It's not inconceivable that we revert back to a much lower or declining interest rate environment. That's conceivable. So I think it's just difficult to predict. I don't think we would look to their balance sheet in terms of their interest rate sensitivity to understand it, but there's probably other factors that are certainly more consequential to our consideration than the balance sheet. sensitivity. Understood. Okay.
spk04: And how have conversations gone on the M&A front? You know, the tape has been volatile, but just curious if there's been more or less discussions and, you know, you guys have been known to do more than one deal in a year.
spk02: Yeah, I think it's surprising. I would say that our level of activity in terms of our active interest and specific partners has not changed. What I have seen change is the volume, let's call it, of inbound calls from either banks or their bankers, you know, in terms of deal opportunities. So that's been a little bit surprising. But I think it goes up and down. Sometimes it's more active than other times. It appears to be maybe a little bit less active right now than it historically has been. But, again, our active dialogue with parties of strategic interest and value to us continues apace.
spk04: Got it. Okay. I appreciate it. Thank you for taking the time. Thank you.
spk00: And once again, if you have a question, please press star and one. The next question will come from Chris O'Connell with KBW. Please go ahead.
spk06: Hey, good morning, guys. We're going to start off with the securities yields coming on. I know you guys mostly purchased pretty heavily way to the front end of the quarter this past quarter. What's the duration of the securities that you guys are putting on now? And as far as, you know, origination yields on, you know, what you're going to be putting on, you know, in the next quarter. So what are those security yields at?
spk03: So the most recent purchases, as you noted, have been on the shorter end of the curve, three to, you know, four or five years earlier in the quarter. So definitely shorter than the overall duration. You know, I think we would, based on the slope of the curve now, we would expect to stay to the short end of the curve, you know, somewhere between two, three years, you know, with the incremental opportunities that we have. It just makes sense given our overall mix of assets and liabilities to stay on that, you know, on the shorter end of the curve, Chris.
spk02: recently, so that's a market we're looking at right now. I think we did something this quarter. I don't remember how much it was, but I think the muni market is looking much more attractive, at least right now.
spk06: Okay, got it. I appreciate the color on the loan origination yields. What are the loan origination yields coming on at today versus the 4% or so portfolio yields?
spk03: So on a blended basis, we were just close to about a 3.75 in the first quarter. With rates moving up, we would expect that that blended weighted average rate of new originations will go up a bit more in this quarter. Our overall book yield on the loan portfolio was about 4%. So I think we're going to start to approach new loan origination yields that are effectively replacement yields. for loans that are running off. I think we're getting there fairly quickly as rates have increased here in the last 30, 40 days or so.
spk06: Got it. And then, you know, as far as the expense outlook goes, I mean, this quarter, you know, pretty good in terms of expense control. And I know you guys did some hiring this quarter, and so maybe it's a little bit back-loaded, but I think prior guidance was a little bit above the typical 3% growth rate organic, closer to 4% or 5%. Are you still thinking about that as a good growth rate for the year from an organic basis, or given the start to the year, could that come in closer to the legacy 3% or so growth rate?
spk03: Chris, I believe we're still going to trend a bit higher. There's just a lot of you know, push from an inflation perspective on wages and costs, you know, across the board. So I would expect that we're going to, you know, probably trend higher in 2022 than we have historically, you know, to something, you know, kind of mid-single digits. You know, just kind of the inflationary pressures are, you know, affecting every company, including us. We're not immune to those. So I think we're going to continue to see that. We are investing in in some very talented people, which I think will certainly pay off on the other side of the equation from a revenue generation standpoint. So I still think that mid-single-digit expectation is fair. We did have some lower-than-expected expenses, particularly in some of our Benefits plans, I would expect those to normalize in the quarters going forward. So I think that 4% to 6% is probably a fair expectation for the quarters moving ahead.
spk02: The other thing just to add by way of kind of overall commentary on the expense base, we are down about over 100 FTEs over last year. So specified markets and roles. We're also overall reducing FTEs in other places in the business as we invest more in our digital capabilities. So I think that will continue as well. So just to add some overall color to the understanding around the expense base.
spk06: Great. That's good color. Makes sense. And on the wealth side of the business, I know you guys usually have a strong seasonal quarter for the first quarter, but it seemed particularly strong this quarter given the market moves. Anything driving that? Any teams picked up or anything like that that was unusual or that caused a solid growth this quarter?
spk01: Hi, Chris. It's Dimitar. Nothing on the inorganic side. It's just been solid execution organically. We have a lot of momentum right now across all of our non-banking businesses. So we've got the right capabilities. We've got the right people. We've done some things on the margin to kind of improve some of our market presence and go-to-market strategies. So all of that is coming into play. Also keep in mind our portfolios that we manage on the wealth side are probably a little bit more conservative than the market outcomes you see. So I think we've held up reasonably well there. As you know, we were ahead of last year and ahead of Q4, actually, so that was good to see.
spk02: The other thing I would just add, and Dimitar, you're closer to this than me, but from what I see, it seems like in our benefits, in The same thing with the wealth. Maybe even more, or at least have the ability now to compete and win at a different level. I think that's going to continue to make a business, to make a difference. It feels like those markets have opened up to us in other places that we historically had a more difficult time competing in.
spk06: Yep. Got it. That makes sense. And then lastly, you know, giving the comments around, you know, capital and, you know, regulatory versus TC and everything. One, what was the average price of the repurchases this quarter? And how are you guys thinking about, you know, utilization of the buyback plan going forward?
spk03: Yeah, so I'm not sure off the top of my head, Chris, I can give you the average price. But, you know, it was around $78. was the average price. The way we've looked at share repurchases is really just to kind of clean up the, you know, dilution from various, you know, equity plans and the like. We've always liked to keep some, you know, a lot of dry powder for future M&A opportunities and investment opportunities, you know, at the holding company. And so we haven't done a lot of stock repurchase. I think that's going to, we're going to continue along that path, but we're just trying to effectively, you know, clean up some potential dilution that occurs because of just drift on the equity plans, and that's really our plan going forward.
spk06: Understood.
spk00: Thanks for taking my question.
spk03: Thank you.
spk00: And the next question is a follow-up question from Alex Twardall with Piper Sandler. Please go ahead.
spk07: Hey, guys, just a couple of follow-ups just so we can get the modeling, hopefully get the modeling a little bit more accurate. In terms of the benefits, I guess the decline in benefit costs that you alluded to in the first quarter, Joe, do you have how much that was and what that was related to?
spk03: Yeah, so we have health insurance costs that spiked a bit at the end of last year. You know, some was COVID, some was deferred, you know, elective procedures and the like of our population of people that take out our medical plan. And there was just, you know, inflation push, if you will, on, you know, healthcare costs. And so, you know, we saw increases in the last couple of quarters that were running, you know, 20% kind of over and above the, you know, the trailing 12 months, which were You know, meaningful, you know, probably pushing $800,000, $900,000 a quarter over our run rate. We kind of settled back into a, you know, an amount that looks more like, you know, we'll call it more standard medical cost inflation of like 8% to 6% or 6% to 8%, I'm sorry, on a quarterly basis. You know, I don't know if that's going to hold. but it held certainly in the first quarter as things kind of backed up a bit. And, you know, obviously there's not, you know, COVID-related, you know, cases and all of the, you know, things that brings to the table. So I would expect that, you know, hopefully we'll keep those costs down below where they were at the end of the third or in the third and the fourth quarter of last year. But, you know, they'll continue to probably go up on a longer-term basis, you know, high single digits.
spk07: Okay. Is that... self-insurance and people just kind of hitting their deductible as you get later in the year and so the costs go up a little bit?
spk03: Yeah, and there's underlying reasons for just a number of claims going up as well in the latter part of the year, which is a lot of people just deferred seeing their doctor during COVID, and we saw some of that snap back in the you know, in the third and fourth quarter last year, people were utilizing their health care benefits just a bit more.
spk07: Okay. And then back on the insurance side, it was a pretty decent pickup from the fourth quarter. I know you get some M&A that contributed and some seasonality, but where would you expect that to, you know, if you kind of were looking at the seasonality and trying to strip that out, you know, where would you think that that line, the wealth management inclusive of insurance, would run over the next couple quarters or, maybe kind of for the full year.
spk01: Like I said, Dimitar, you're right. Our first quarter was record quarter, both revenue-wise and margins-wise for the business. We did get the benefit of some of the acquisitions we did last year. I would say there's also a benefit of rates going up across the board, so the market is hardening, so that's good news. I think we've also become a little bit more efficient in how we service the market. You know, we don't necessarily – it's hard to – it will be hard to take that run rate and extrapolate it. Their seasonality in the second half of the year is a little bit slower for us in that business. So if you're referring to purely the insurance business, you know, we think we'll be up kind of single digits over last year, mid to high single digits, but, you know, hard to extrapolate from the first quarter. Again, it's very seasonal.
spk07: Great. So if you were kind of the starting point for the second quarter, you'd kind of look more towards the fourth quarter than the first quarter for wealth management insurance together?
spk01: Yes, I think that's fair.
spk07: Great. All right. Thanks for taking my follow-ups.
spk02: Okay. Thanks, Alex. Thank you.
spk00: Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Mr. Trenisky for any closing remarks.
spk02: Thank you, Chad. Thank you all for joining us today, and we will talk to you again in July. Thank you.
spk00: Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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