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spk06: Welcome to the Community Bank System's second quarter 2022 earnings conference call. Please note that this presentation contains forward-looking statements within the provisions of the Private Security Litigation Reform Act of 1995 that are based on current expectations, estimates, and projections about the industry, markets, and economic environment in which the company operates. Such statements involve risks and uncertainties that could cause actual results to differ materially. from the results discussed in these statements. These risks are detailed in the company's annual report and Form 10-K filed with the Securities and Exchange Commission. Today's presenters are Martin Chinisky, President and Chief Executive Officer, and Joseph Soutaris, Executive Vice President and Chief Financial Officer. Gentlemen, you may begin.
spk08: Thank you, Rocco. Good morning, everyone. Hope all is well, and thank you for joining our second quarter conference call. Operating earnings for the quarter were very strong and similar to last year on a reported basis, but excluding PPP and reserve release from 21 results, this year's quarter is up 13% over last year. Last quarter I referred to margin as a lessening headwind, but in Q2 it turned into a tailwind as originated loan yields increased substantially and total cost of funds were unmoved at nine basis points. resulting in a 16 basis point expansion in net interest margin for the quarter. As pleased as we are with margin results, the highlight of the quarter in my view was the performance of our credit businesses, which continue to be historically strong for us. Organic loan growth for the quarter was 4.2% and year over year was over 10%. Given the investments and talent we have made in our commercial and mortgage businesses and the current pipelines, we expect growth to continue. The recent strength of our benefits, wealth, and insurance business is moderated in the quarter, with revenue growth slowing to 7%, largely due to financial market-related impacts, and margin actually declined slightly. Pipeline activity, particularly in the benefits business, remains very strong, and the insurance market continues to harden, which will be supportive of forward revenue and margin growth in that business. I won't say a lot about the Elmira Savings Bank transaction other than we closed in May, It went extremely well, and we continue to expect 15 cents per share of accretion on a full year basis, ex-acquisition expenses. We also announced recently an increase in our dividend, which marks the 30th consecutive year of dividend increases. Looking ahead, we fully expect our current operating momentum to continue, particularly as it relates to credit generation. We continue to add experienced and talented bankers, and the commercial pipeline is at an all-time high. We expect margin expansion will continue and credit quality to remain strong. So as we sit here today, I like our prospects for the second half of 2022. Joe? Thank you, Mark.
spk09: Good morning, everyone. As Mark noted, the second quarter earnings results were solid. Fully diluted gap earnings per share were 73 cents while operating earnings per share, which exclude acquisition-related charges, were 85 cents in the quarter. These compare... These compared to fully diluted GAAP and operating earnings per share of 88 cents in the second quarter of 2021. A $2.8 million decrease in PPP-related revenues between the periods and a $6.4 million increase in the provision for credit losses excluding acquisition-related provision were responsible for a 13-cent decrease in fully diluted operating earnings per share net of tax over comparable periods. The company recorded a $2.1 million provision for credit losses in the second quarter of 2022, excluding acquisition-related provision. This compares to a $4.3 million net benefit recorded in the provision for credit losses in the second quarter of 2021 as the U.S. economy emerged from the depths of the pandemic. Fully diluted GAAP earnings per share were 86 cents in the first quarter of 2022, and operating earnings per share For 87 cents excluding a penny per share of acquisition expenses the two cents or 2.3% decrease in operating earnings per share from the link first quarter results. was largely driven by higher operating expenses, a higher provision for credit losses and lower non interest revenues offset in part by decrease in net interest income and decrease in income taxes. Adjusted pre-tax, pre-provision net revenue per share, which excludes the provision for credit losses, acquisition-related expenses, other non-operating revenues and expenses, and income taxes, was $1.13 in the second quarter of 2022, 7 cents or 6.6% higher than the prior year's second quarter, and a penny per share higher than the linked first quarter. The company reported total revenues of $167.2 million in the second quarter of 2022, a new quarterly record for the company. and a $15.7 million or 10.3% increase over the prior year's second quarter. The increase in total revenues between the periods was driven by an $11 million or 12% increase in net interest income and a $4.6 million or 7.8% increase in non-interest revenues. Non-interest revenues accounted for 38% of the company's total revenues during the second quarter of 2022. Comparatively, total revenues were up $6.7 million or 4.2% over first quarter 2022 results due to an $8.3 million or 8.7% increase in net interest income, partially offset by a $1.6 million or 2.4% decrease in non-interest revenues. The company reported net interest income of $103.1 million in the second quarter of 2022 as compared to $92.1 million in the second quarter of 2021. Between comparable periods, the company's average interest earning assets increased $1.1 billion, or 8.2%, and the tax equivalent net interest margin was up 10 basis points from 2.79% in the second quarter of 2021 to 2.89% in the second quarter of 2022. The margin expansion was primarily driven by a shift in the composition of earning assets from lower yielding cash equivalents to higher yielding investment securities and loans, including significant organic loan growth between the periods. The tax equivalent average yield on interest earning assets in the second quarter of 2022 was 2.97%. Eight basis points higher than the tax equivalent average yield on interest earning assets of 2.89% in the second quarter of 2021, despite a decrease in PPP related interest income. while the cost of interest-bearing liabilities decreased from 15 basis points to 13 basis points. Comparatively, the company recorded net interest income of $94.9 million during the first quarter of 2022, $8.3 million less than the second quarter of 2022 results, while the tax equivalent net interest margin was 2.73%. The company's total cost of funds was nine basis points in the second quarter, consistent with the linked first quarter, and one basis point lower than the second quarter of the prior year. Employee benefits services revenues for the second quarter of 2022 were $28.9 million, up $1.4 million or 5.3% in comparison to the second quarter of 2021. The improvement in revenues was driven by increases in employee benefits, trust and custodial fees, as well as incremental revenues from the acquisition of furnished benefits designed in Minnesota during the third quarter of 2021. Wealth management revenues for the second quarter of 2022 or $8.1 million down slightly from $8.2 million in the second quarter of 2021. The company reported insurance services revenues of $9.8 million in the second quarter of 2022, which represents a $1.6 million or 19.1% increase over the prior year's second quarter driven by both organic expansion and the acquisition of several insurance practices and books of business between the periods. Banking non-interest revenues increased $1.7 million, or 11%, from $15.5 million in the second quarter of 2021 to $17.2 million in the second quarter of 2022, due primarily to an increase in deposit service and other banking fees. Comparatively, financial services revenues decreased $1.8 million from the linked first quarter due to lower asset-based fiduciary revenues in the employee benefits and services and wealth management businesses. According to the second quarter of 2022, the company reported a provision for credit losses of $6 million, $3.9 million of which was due to the acquisition of Elmira. This compares to $4.3 million net benefit recorded in the provision for credit losses in the second quarter of 2021. The company's allowance for credit losses increased $5.4 million from the end of the first quarter of 2022 to $55.5 million, but remained consistent with The prior quarter at 68 basis points of total loans outstanding. The company reported net loan charge-offs of $0.4 million or an annualized two basis points of average loans outstanding during the second quarter of 2022 as compared to net loan recoveries of $0.6 million or an annualized three basis points of average loans outstanding for the second quarter. On a year-to-date basis, the company has recorded net loan charges of $0.9 million, or an annualized two basis points of average loans outstanding. The company reported $110.4 million in total operating expenses in the second quarter of 2022, or $106.1 million in core operating expenses exclusive of acquisition-related expenses. This compares to $93.5 million of total and core operating expenses in the prior year's second quarter. The $12.5 million or 13.4% increase in core operating expenses was attributable to a $7.5 million or 13% increase in salaries and employee benefits, a $3.4 million or 36.5% increase in other expenses, as well as increases in data processing and communication expenses, occupancy and equipment expenses, and intangible asset amortization totaling $1.6 million. The increase in salaries and benefits expense was driven by increases in merit incentive-related employee wages, acquisition-related staffing increases, higher payroll taxes, and higher employee benefit-related expenses. The other non-compensation expenses were up due to the general increase in the level of business activities, including costs incurred to pursue several new business opportunities in the company's non-banking businesses, and incremental expenses associated with operating an expanded franchise due to several non-bank acquisitions between the periods and the second quarter acquisition of Elmira Savings Bank. Comparatively, the company reported $99.8 million of total operating expenses in the first quarter of 2022. The $10.6 million or 10.6% increase in total operating expenses on a late quarter basis is largely attributable to a $4 million increase in acquisition-related expenses, a $3.8 million, 6.1% increase in salaries and employee benefits, and a $2.3 million increase in other expenses. The effective tax rate for the second quarter of 2022 was 21.6% down from 23.1% in the second quarter of 2021. In the second quarter of 2021, the company's effective tax rate was driven up by an increase in certain state income taxes that were enacted during the period. During the second quarter, the company completed its acquisition of Elmira Savings Bank in connection with the acquisition of the company at eight branch locations and acquired total deposits of approximately $522 million and total loans of approximately $437 million, including $20.8 million in non-PCD marks. The company also booked $8 million of core deposit and changeable assets. The company's total assets were $15.49 billion at June 30, 2022, representing a $686.5 million or 4.6% increase from one year prior and $138.1 million or 0.9% decrease from the prior quarter end. The increase in the company's total assets during the prior 12-month period was primarily due to a net inflows of deposits between the periods. And the Elmire acquisition average deposit balance has increased $1.03 billion or 8.4% between the second quarter of 2021 and the second quarter of 2022. Likewise, average earning assets were up from $13.37 billion in the second quarter of 2021 to $14.47 billion in the second quarter of 2022, representing a $1.1 billion 8.2%. This included a $2.32 billion, 58.6% increase in average full value investment securities, and a $383.9 million, or 5.2% increase in average loans outstanding, partially offset by a $1.6 billion, or 77.2% decrease in average cash equivalents. On a late quarter basis, average earning assets increased $235.3 million, or 1.7%, due primarily to the Elmira acquisition. Despite the acquisition during the second quarter of 2022, total assets decreased from the prior quarter and due primarily to the net alpha of municipal deposits holding $368.4 million due in part to seasonal factors and a $268.2 million decrease in the market value adjustment on the available for sale investment securities portfolio due to an increase in market interest rates. Ending loans at June 30th, 2022 of $8.14 billion. were $722.4 million, or 9.7% higher than the first quarter of 2022, and $900.5 million, or 12.4% higher than one year prior. The increase in ending loans year over year was driven by increases in all categories of loans, including consumer mortgage, consumer indirect, business lending, home equity, and consumer direct loans, due to the Elmira acquisition and net organic growth, despite a $259.9 million decrease in PPP loans. The increase in loans outstanding on a linked quarter basis was driven by the Elmira acquisition and solid organic growth across all five home-based loan portfolios. On a full year basis, ending loans increased $900.5 million or 12.4%. Excluding loans acquired in connection with the Elmira acquisition and PPP loans, ending loans increased $723.4 million or 10.4% year-over-year. The company's regulatory capital ratios remain strong in the second quarter. The company's Tier 1 leverage ratio was 8.65% at June 30, 2022, which substantially exceeds the well-capitalized regulatory standard of 5%. During the quarter, the company reported $196.7 million in after-tax other comprehensive loss driven by the decline in the market value of the company's available-for-sale investment securities portfolio. The company has an abundance of liquidity. The combination of the company's cash and cash equivalents, BARG, available at the Federal Reserve Bank, BARG capacity at the Federal Home Loan Bank, and unpledged available for sale investment securities portfolio provide the company with over $5.8 billion of immediately available sources of liquidity at the end of the second quarter. Asset quality remains strong in the second quarter. At June 30, 2022, non-performing loans worth $37.1 million, or 0.46% of total loans outstanding, This compares to $36 million or 0.49% of total loans outstanding at the end of the first quarter of 2022 and $70.2 million or 0.97% of total loans outstanding one year earlier. The decrease in non-performing loans as compared to the prior year's second 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 0.29% of total loans outstanding at June 30, 2022, down slightly from 0.35% at the end of the first quarter of 2022, but up from 0.25% one year earlier. Looking forward, we are encouraged by the momentum in our business. The company generates strong organic loan growth over the prior four quarters, then an interest margin expanded meaningfully in the quarter. Asset quality remains strong and the loan pipeline is robust. In addition, the pipeline of new business opportunities in the financial services businesses remains strong. In 2022, we remain focused on new loan generation, managing the company's funding strategies in a rapidly changing interest rate environment while continuing to pursue accretive, low-risk, and strategically valuable merger and acquisition opportunities. And lastly, we sincerely appreciate the efforts of the bank staff and the former Elmira Savings Bank staff for seamlessly integrating the two companies. Thank you. Now I will turn it back over to Rocco to open the line for questions.
spk06: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speaker phone, please pick up your handset before pressing the key. To withdraw your question, please press star then two. Today's first question comes from Alex Turtle with Piper Sandler. Please go ahead.
spk09: Hey, good morning, guys. Rocco, just so you're aware, the feed on our end is a bit garbled.
spk06: Thank you. I will make some adjustments here. Mr. Turtle, the floor is yours.
spk10: Thank you. Can you guys hear me okay? Can you hear me okay?
spk06: Hello, this is the operator. We can hear you. Yeah, we can hear you loud and clear. Are you able to hear Mr. Twardall?
spk08: Yeah, one of us has a bad line here.
spk10: I can hear you. Can you hear me? Yes, we could try to call in from the other telephone that's on our end.
spk09: I don't know if it's on our end.
spk06: And pardon the interruption, everyone. It seems we are having some difficulties here. We're going to have another line dial in. Thank you. Thank you for holding, everyone. It looks like we have lost the speaker line. We will have them dial back in, and we'll get back underway here shortly. Please stand by. Thank you. Thank you. Thank you. Thank you. And everyone, we thank you for holding. We have reconnected the speaker location. Mr. Ford, all of you, you can begin your questions. Thank you.
spk10: Great. Good morning. Mark and Joe, can you hear me now?
spk09: We can. Good morning, Alex. Good morning.
spk10: Perfect. Good morning. I wanted to first ask about liquidity. Your cash position seems to have normalized back to sort of pre-pandemic levels, and I was just hoping you could help us think through sort of the deposit flows, you know, and the expectations for deposits over the next quarter, given the municipal potential inflows in the third quarter, as well as if you have any bullet securities that could mature in the third quarter to provide sources of liquidity in the near term.
spk09: Yeah, Alex, good question. So we look back to the pre-pandemic periods regarding deposit outflows, and this pattern is pretty consistent with those periods. The municipalities basically have tax collection in the fall and early in the wintertime. Those funds tend to flow out in the second quarter, kind of flow out to some extent in the third, but then they come back late in the third quarter with tax collection. So, you know, we are expecting, you know, some growth in the third quarter. I can't speak specifically as to the amounts other than, you know, because it's tax collection season. But typically, you know, we net back about, you know, even during tax collection season. So, you know, we had an outflow of $368 million. So we're hopeful, you know, most of that comes back. Although we did see We do believe that there was some spend down of deposits that municipalities accumulated during the pandemic, kind of in the back end of the 2022 school year and also some capital projects I think got funded as well. But we do expect a couple hundred million dollars back in the third quarter and then there's also some collections in the beginning of next year. With respect to securities, We do have over the balance of the summer another $140, $150 million of cash flows, and then the next lump cash flow is in the May timeframe. In the meantime, we have tax collection to support it. With that said, it's not uncommon for us to go into a temporary borrowing position. you know, in the past. And, you know, given the size of our balance sheet, you know, a couple hundred million dollars in borrowings I don't think is all that concerning.
spk08: Yeah, the only thing I would add there, Alex, you know, I think if you look at what happened in our deposit, you know, organic deposit growth rate pre-COVID, it's, you know, low to mid single digits. And COVID hits, it's double digits. I mean, you know, in some cases, We're at 20%, you know, one after another. I think that's pretty much moderated, and we're back to more of a, you know, pre-COVID organic run rate. The municipal, as you know, they go up and they go down. I think in the quarter, the non-municipal deposits were down a little bit, but not very much. Business deposits were actually up. more of a pre-COVID, you know, environment in terms of if you look at the national savings rate and the like. You know, we're back to a more normalized kind of deposit environment in our view.
spk10: And I guess, you know, the sort of million-dollar question in the industry is what's going to happen with deposit betas, and you guys have obviously done an amazing job through past tightening cycles. I'm just curious. Just given, you know, all that's changed in the world, if you're starting to see any pressure on your deposit base or if you think you'll be able to maintain those betas consistent with historical experience.
spk08: It's been very limited in terms of the pressure. You know, if you look at our deposit base, 76% of our deposit base is checking and savings accounts, and those are not going to move much, if at all. So I think our setup quite good in terms of deposit data, also in terms of margin expansion, which we saw obviously this quarter as did everyone else. You know, I think on the first quarter's call, we said that we expected originated loan rates would exceed the portfolio rate in the third quarter or maybe fourth. Well, it actually happened this quarter, not by a lot, but by a little bit. So we, you know, this, There's a good tailwind, I think, on the, you know, the margin right now heading into the second half of the year. It's because the loan yields, even on what's on the pipeline right now, even if, you know, there's a rate change environment because the Fed or, you know, recession or some other event, you know, what we have in the pipeline is still going to go on, which is pretty substantial. It's still going to go on at higher rates. And so I think the, you know, the margin outlook is pretty good for the remainder of the year.
spk10: Good. And I'm just curious, as you think about M&A, obviously you guys have a lot of experience with M&A. With the moving rates and the impact that that will have on many banks on the loan mark and interest rate mark in a lot of banks' portfolios, is that going to put a damper on your appetite for M&A in the near term?
spk08: No. I mean, it never has. Rates go up, rates go down. We try to be you know, disciplined around what we do from an M&A, you know, perspective. Some are, you know, some opportunities are more tactical in terms of, you know, earnings accretion and the, you know, shareholder benefit. Others are more strategic in terms of, you know, longer-term potential and opportunities in certain markets. The loan marks, the credit marks, the core deposit and tangible marks, none of that really makes a difference. All those adjustments are non-cash anyway, and we really look at the company from more of a cash flow perspective in terms of the cash flow impacts and less on the gap earnings impact, which is not unimportant, but it not necessarily, in our view, aligned with economic value. And so I would say no. The change in the interest rate environment will have no impact whatsoever on our M&A strategy, Alex.
spk10: Great. Thanks for taking my questions.
spk02: Thank you, Alex.
spk05: Thank you. And our next question today comes from Eric Zwick with Hobby Group. Please go ahead.
spk11: Good morning, guys. Good morning, Eric. Good morning, Eric. First, I wanted to start on kind of looking at the outlook for commercial loan growth. I think you mentioned several times in the prepared remarks that the pipeline remains strong, commercial pipeline, I think, even at an all-time high. So maybe kind of a two-part question. First, I'm wondering if you could just provide a little color in terms of the geographies and industries that are contributing to the growth and strength in the commercial pipeline. And then secondly, just wondering about your expectations for pull-through in the second half of the year and your ability to close these loans, just given that there's maybe some heightened economic uncertainty today relative to six months ago?
spk08: First, I would just say that we have made some strategic investments in people in some of our markets. Not to be too historical, but we've always, the majority of our business has been in kind of these more non-metropolitan, smaller, rural type markets where we have high market share. Over the last, let's call it 10 years, in some of the larger markets that we are in and have gotten in in a more meaningful way in the last, let's say, 10 years, like you know, Syracuse, Buffalo, markets in Northeast Pennsylvania. We don't have a lot of market share. We have, if you look at Syracuse, our headquarters are here. We have a huge banking business here, but we do now, or it's going to get much better because of talent. But we have a lot of market share opportunity. So in, you know, even in the Capital District and Syracuse, Rochester, Buffalo, Burlington. We just brought in at the beginning of the year someone who's really talented to continue to grow our business in that market, which it's doing. So we have made investments in people. We've had some transition in leadership. And the results are starting to show themselves. So We just think we have a lot of market share opportunity. And you look at these, you know, somewhat larger markets that we're in, as I mentioned, and our market share is under 10%. And so there's a fair bit of opportunity in these markets to, you know, to grow. So we've made the investments in, you know, people and leadership to try to accomplish that. And the results are, as I said, the results are showing. In terms of the markets, if you look on a percentage basis, the largest – growth market we've had on a percentage basis is Buffalo. But they're all doing quite well. We've got a lot going on in New England. The greater central New York, Syracuse central New York market has been really strong. We continue to grow in northeast Pennsylvania. So it's really, honestly, it's It's everywhere. Some are growing a little faster than others, but it's pretty much across the footprint. In terms of the kind of business, I would say right now it's mostly CRE, but the C&I business is also growing. It's interesting. There's a lot of projects and a lot of investment going on right now. Maybe it's just our markets, and they tend to lag the national markets, and this is kind of, you know, the result of that. But there is a lot of opportunity right now, and we're going to have, I think, a very good, solid remainder of the year, particularly given the pipeline. As I said, I think last quarter it was, you know, a billion. This quarter it's a billion one, and it's up 10% in, you know, a quarter. I expect that momentum to continue given kind of the investments we've made and the newish leadership team we have, which has really been in place since the beginning of the year. And so I think we'll do a better job of getting better opportunities in our core markets and grow our market share a little bit over time. I mean, one of the strategies, and this is kind of maybe off the question a bit, but I think it's not unimportant to understand this, If you look at our balance sheet, we have $6 billion of securities and $8 billion of loans. And that is not, in our view, an optimized balance sheet. So we need to make investments in trying to, over time, improve our balance sheet. We have a very solid balance sheet. Liquidity is incredible, actually, too much liquidity. But I think the risk-reward opportunity we've been to, too prudent in terms of our balance sheet asset quality and liquidity. So the strategy is really to just kind of let our investment portfolio sit as it is, if you will, and reinvest maturities into the loan book to create greater economic returns, more consistent with kind of the risk-reward profile we're looking sheet and we need to move the needle a little bit on that which I think we're in the in the process of doing I think to your last question Eric was around whether or not we think we pull that through I'm pretty confident we can I would be surprised if we didn't also see you know very strong balance sheet growth particularly in commercial in the third quarter and hopefully the you know, on that pipeline, particularly, you know, based on some of the things that I know is going on in there and the things that I see. So I think we'll, I mean, I'm hoping that the execution is good and we get good pull through in both Q3 and Q4 in that pipeline.
spk11: Great. I really appreciate the detailed answers there. And then I think in the prepared comments, Mark, you mentioned that the mortgage market is firming. You're seeing some firming there. I assume that's the residential mortgage market. And I'm curious if you could add a little color there, whether it's volume or application activity or spreads. And just your thoughts today on selling any originations into the secondary market versus holding today. And I know from an income statement perspective, it's a relatively small contribution to your revenue, but just curious on your thoughts on that market today.
spk08: Are you talking about the insurance business or the mortgage business?
spk11: I thought I heard you say mortgage market is farming, but I could have misheard that.
spk08: No, it was insurance. The insurance market is hardening, so that will be helpful to that market. I would say as it relates to the mortgage business, that's actually softening a bit, not inconsistent with what we're seeing elsewhere across the country. But we have brought on board some newer sales and origination leadership, some frontline folks in our mortgage business. And so I think our pipeline is not, I don't remember the exact number, maybe you do, Joe. It's around where it was last year, give or take. But we also are pushing them through much quicker because we made some investments in people and process and technology in that business. Our days to close are a lot less, so we're pushing through quicker. But the pipeline is around the same as last year. It might be down a little bit. The refi market is almost gone. I think the purchase money part of our originations now are almost 90%. So it's basically a purchase money market right now, which makes sense because rates are up a fair bit. If you haven't already refinanced, it's probably too late. So, but we expect that business to continue to grow as well, given, you know, also given our markets. If you look, even when the national market is boom and bust, we just, we're still growing at, you know, three, 4% a year in the mortgage business. And I expect we'll continue to do that. I would hope we do a little better only because of some of the kind of investments we've made in that business. But I think it will continue to be okay for us to continue to grow. We like the assets. We're not going to sell them. You know, the average, mortgage you know last 10 years or less and so you know 10-year paper with a our historical loss rate on mortgages is what eight six basis points or something like that um at a yield of over four pushing five is a you know is a fabulous asset so we'll continue to put those on the uh you know on the on the on the books
spk11: Got it. Yes, insurance market firming and residential mortgage market softening makes sense. Thanks for the correction there, and I appreciate you taking my questions today.
spk06: Thank you, Eric.
spk05: And our next question today comes from Chris O'Connell at KBW. Please go ahead.
spk04: Good morning, gentlemen. So I wanted to start, you know, you made some comments about the origination yields exceeding the portfolio yield a bit faster than anticipated last quarter. Could you maybe quantify where those origination yields are coming on relative to the portfolio yield?
spk09: Chris, I think we made a comment last quarter just saying that we saw the origination yields creeping up. At that point, our book yields were about 4% on the loan portfolio. And we thought that potentially the new origination yields would, you know, hit 4%, maybe late in the second quarter or third quarter. For the quarter, we actually originated at about a four and a quarter on a blended basis across all the portfolios. So, you know, we were booking new loans at, call it 25 basis points higher than the book yield. And that obviously continues to go up, you know, because some of the originations in the second quarter were basically in the pipeline during the first quarter, you know, before significant rate movements. So, you know, we continue to expect that the new origination yields will exceed the book yields. But they were about a quarter point above in the quarter.
spk04: Okay, great. Thank you. As far as, you know, capital goes, I mean, you guys, you know, primarily focus on regulatory capital. That saw, you know, a little bit of buyback this quarter. One, you know, usually that's for kind of tightening up the share count, you know, from compensation-related issuance. Is there any expected buyback going forward in general? How are you guys feeling about, you know, capital ratios and, you know, the plan going forward, given the, you know, disparity between kind of TC and the regulatory capital.
spk09: Yeah, Chris, with respect to, you know, share repurchase activity, our plan really hasn't, our intentions really haven't changed, which is just intending to just kind of clean up the, you know, equity plan dilution that occurs throughout the year. So no, I don't anticipate any significant changes there. You know, we always prefer to keep a little powder dry for M&A activity. So, you know, we're still hopeful that we can deploy, you know, some of our capital and, for that matter, some of the, you know, cash we have at the holding company in future M&A transactions. So really no anticipated changes in our strategy there with respect to stock repurchase.
spk04: Okay, great. And then, so I'm going to get an update as to, you know, where you think operating expenses will be going or core operating expenses will be going in the back half of the year here now that El Miro deal is closed and just, you know, how the cost stage are going to flow through over the next quarter or two.
spk09: Sure. So, Chris, just as a matter of kind of a backdrop, if we look at the third quarter of 21, the fourth quarter of 21, and the first quarter of 22, and take kind of a simple average of the operating expenses for the company in those three quarters, just about $100 million, the expectation for the quarterly run rate on Elmira is about $3 million. You know, that's the expectation based on what we had announced. Now, with that said, we... also signaled that we thought, you know, I'll call it the core expenses were going to increase at a little more rapid or a little higher level than they have in the past just because of various inflationary pressures. And for that matter, you know, business activity has kind of come back to kind of normal activity levels. So we're kind of on the back end of the pandemic. People are traveling again. They're going out and meeting customers. There's just more general activities. So, you know, our expectation was that kind of – call it that 3% to 5% organic or growth rate in expenses is what the expectation is on a going forward basis. With that said, in the second quarter, we booked a little over $106 million of operating expenses. My calculation estimates that there's probably a million or two of kind of non-recurring items in there. That doesn't mean we won't have another you know, non-recurring expense item, you know, next quarter. I mean, they are operating expenses, but they're just items that, you know, that cost us a little money to come on the back end of the Elmira transaction and a couple other items, you know, and professional fees and marketing and, you know, kind of other write-downs and things of that nature that are non-recurring. So I hope that provides some color for you on operating expenses going forward.
spk12: Yeah, absolutely.
spk04: That is helpful. And then you talked a little bit about, you know, the benefits of administration business and, you know, some great opportunities that you're seeing there and just kind of, you know, good business activity. Just, you know, wondering if you could provide any additional color on kind of, you know, what you're seeing and, you know, the outlook for that business.
spk08: Yeah, no, sure. You know, I think there's a couple of segments we operate in about eight I call them verticals, I guess, or business lines in our benefits business that are all related but distinct. Two of those, the 401k administration record-keeping business and the collective investment trust business both have pretty solid pipelines right now and opportunities. And I would say a lot of that arises from the idea that, one, we have a very, very good mousetrap in both of those businesses. And We've gotten to the kind of scale and capability and expertise and reputation to execute in those businesses. And those are both national businesses, by the way. They're completely, you know, they operate and have offices all over the U.S. But we now have, I guess, we're playing a bigger market now because of, those two particular rounds. And so we're getting a lot more opportunities, some of which is playing at the next level up in terms of partnering with some of the national, let's call it international, very large financial players who are outsourcing some of their record keeping and administration and collective trust work to our shops. So it's not just all retail. I guess you would call it something institutional. Some of it is us being able to partner with much larger firms to outsource what they are doing. For example, in the Viva business, we've partnered with Boya as an example. In the collective business, we've partnered with some large insurance companies and others to outsource some of their operations. very well or very efficiently. So it's a couple of things. It's kind of typical retail, institutional, organic stuff, and it's also the opportunity to partner with larger players and have a seat at the table in terms of their platforms.
spk04: Okay, great. Appreciate the color there. And then two final small ones, if I could. Just one... Where do you think accretion kind of normalizes here, you know, post Elmira? And then what's a good tax rate going forward?
spk09: Yeah, so I think the expectation around tax, I'll take tax rate first. You know, probably the current level is a reasonable expectation going forward, you know, plus or minus half a point on either side of that, generally speaking. you know, excluding any kind of, you know, distinct tax events. So I think that's reasonable. Regarding accretion, you know, I mentioned in my comments that, you know, we booked about $20 million in non-PCD loan mark. Average life of that book was largely, you know, it's a residential mortgage, so a little longer average life. So that mark with the, you know, plus the current, the existing marks prior to the Elmira acquisition may be totaled about 20, 25 million, you know, over, call it a, you know, 10 or 15-year average life. So that's the expectation, I think, on the accreting to that mark. And core deposit, intangible, we booked $8 million. We typically... amortize that on an accelerated basis over, call it eight years. So, you know, that's each side of the accretion amortization. That is helpful, hopefully.
spk12: Yeah, definitely. Thanks. I'll step out.
spk05: Okay. And our next question today comes from Matthew Breezy at Stevens, Inc.
spk06: Please go ahead.
spk07: Good morning. Good morning, Matt. Good morning. Just going back to loan growth, XLMira, obviously this was a better than usual type organic growth quarter for you. I'm just curious, given your commentary, whether or not you think that's sustainable in the back half of the year. And then longer term, given your comments around just overall investments and penetrating some of the economically larger areas across your footprint, does the low single-digit growth rate go to a mid-single-digit growth rate per se? Just curious there.
spk08: Yeah, I'll answer the second part of the question first, which is yes, I believe it does. You always hesitate to go out on a limb in terms of predicting things that would appear to be favorable, and we're not prone to do that. But I do think that we've improved our business. Our ability to grow organically is different than what it was last year and the year before, and So I think the answer is yes, I would be going forward somewhat disappointed if we didn't improve our growth rates on our historical levels, just given the investments we've made in people and talent and the like in some of these larger markets where we don't have significant market share and we have tremendous opportunity, particularly against some of the larger banks. I mean, right now, a lot of the things that we're, we certainly, given our balance sheet, in our capacity. And now our expertise have the ability to compete with the larger banks in a way that we didn't always have. And, you know, we have that now. So, you know, a lot of the opportunities we're getting, frankly, are from larger banks who are, you know, just they're different, right? They're bigger. Regulatory concerns are different. It's all different. And so, you know, expertise of the larger banks is what's really, you know, going to continue to drive that. So I think you said it well. I think we would hope that our organic growth goes from generally low single digits to mid single digits. I think right now and for the remainder of the year, you know, you look at the, as I said, the I think that will continue through the remainder of the year. We typically do a fall off in the fourth quarter in the mortgage lending just because of seasonality. But I think given the pipelines of both those businesses and the investments we've made and the opportunity we have in some of those larger markets, I think we will continue to execute in terms of organic loan growth at a higher level than we have in the past. You know, loan growth in the first quarter for commercial, I think, was, what, 4.5%? I mean, you analyze that, you get a big number. I think that it will also be a very good result in the third and fourth quarter. So, you know, whether what happens in, you know, 2023, 2024, or who can predict that, I'm just saying I think we've made the investments in people and expertise and capabilities that will allow us to grow into the future at a higher rate, given the markets and the environment we're in than we have historically. I expect that will continue.
spk07: Understood. Okay. And then, Joe, you know, I think throughout all the prepared comments, it feels like, yes, we're going to see higher interest expense. We're going to see higher interest income. The margin is going to expand. Just given volatility in rates right now, I was hoping you could, you know, give us some idea of what we might see in margin expansion. You know, if we get the 75 basis point hike in July, and then, you know, I think you can assume there's more behind that. I guess said another way, you know, do you expect the kind of 16 basis points NIM expansion we saw this quarter, or if you back out PP and accretion closer to 20 bps, is that what we should expect for next quarter as well, that kind of type of NIM expansion?
spk09: Yeah, that's a fair question, Matt. You know, to book 16 basis point as 16 basis point increase every quarter is a challenge. I see it's possible certainly for the next quarter, you know, meaning the third quarter. I'm not sure about the fourth quarter because the other side of that, too, is that, you know, the long end of the curve is kind of, you know, I'll say plateaued around three, right? So you don't necessarily get lift quarter over quarter. you know, in the new volume rate, right? It's potentially, you know, particularly on mortgages or anything that's kind of on the longer end of the curve, you know, potentially the third quarter looks a lot like the second quarter and, you know, for that matter, the fourth quarter looks like the third quarter. So, you know, it may not be possible to increase by, you know, call it 16 basis points every quarter. With that said, you know, the loan pipeline and the expectations around loan growth are certainly a significant tailwind. you know, to push us along in terms of margin expansion. So, you know, obviously if we get, which it looks like the Fed is going to increase the short end of the curve, that certainly will help, you know, some of the variable rate loans in the portfolio and help, you know, the stuff that's priced off of the shorter end of the curve, you know, like the prime rate. So, I think there's an expectation that we're going to continue to see increases. I'm not sure we can lock in 16 basis points every quarter, but we are certainly optimistic about the expansion of the margins, certainly for the next quarter or two.
spk07: Okay. I did want to go back to tangible common equity. I heard you loud and clear last quarter on your thoughts around AOCI and its impact, but with the TCE ratio in kind of the low 5% range, Curious if there's any sort of self-imposed or externally imposed pressure to get that number higher, and just your overall thoughts there.
spk09: No, there's no particular self-imposed minimum or limit. We do focus on the regulatory capital. I think for good reason. The regulators do not count the changes in the value on the AFS. portfolio, which is the primary driver of the decrease in intangible common equity for us. So no, I still think we're kind of focused on maintaining strong regulatory capital ratios. And so we haven't imposed any sort of house limits on TCE.
spk07: Okay. Last one for me, just the last CPI reading, fuel costs across the country, I think we're up 99% year over year. And I don't recall how the majority of homes across your markets are heated, you know, natural gas or oil, but your winters tend to be longer and a little bit harsher than others. So I'm curious your thoughts on the ability to withstand higher heating costs for your consumers. And as you get into the colder winter months, do you have any sort of thoughts around potential for increased delinquencies or MPAs on the back of that?
spk09: Matt, with that issue in particular, yes. You know, we think the consumer is feeling the stress of higher prices at the pump, you know, general inflationary pressures. And to your point, you know, there's still a lot of customers using home heating oil, which, you know, we'll see where that comes out, but it's likely to be more expensive putting pressure on the consumer. So, you know, with respect to our reserves, we have not released reserves around the consumer portfolios, kind of in anticipation expectations that, you know, the consumer will begin to feel stress. With that said, the loss rates in those portfolios have been well below historical norms for us, you know, for all the reasons I think we stated on the prior earnings calls. So, you know, is it, Possible that we go back to more normal levels of pre-COVID levels of delinquency and losses? The answer is yes. But we've also did not release reserves in those portfolios for that to potentially happen. So yeah, there will be some stress on the consumer. We have seen gas prices come down a little bit here. Certainly not to the levels I'm sure all the consumers would like, including all of us on the call. But we do expect to see some more... incremental stress on consumers, particularly as we head into the winter months.
spk07: Got it. Okay. That's all I had. Thanks for taking my questions. Thank you. Thank you, Matt.
spk05: And our next question comes from Russell Gunther at DA Davidson. Please go ahead.
spk02: Hey, good morning. It's Manuel Navas on for Russell. Good morning, Manuel.
spk03: Hey, so... A lot of my questions have been answered. I just wanted to confirm that when you talk about in the release, this pipeline in financial services businesses remaining strong, is that where you're kind of getting that batch to higher level with a 401k record-keeping business and trust business? And are there any other fee pipelines you want to add in that comment?
spk08: Yeah, no. I mean, I think that kind of covers it. It's both. It's kind of the organic kind of typical sale to end user customers, whether they be retail or institutional. It's mostly institutional, but also some of it is the opportunity to, you know, partner with the big international, you know, financial company. So it's a little of both. Meanwhile, you know, on the other, the pipeline side, you know, we don't really track kind of pipeline and wealth management to the same degree. And I think of all the businesses, the one that's going to be most challenged next quarter is going to be wealth management. They're the most challenged this quarter. The vast majority of their revenues are directly tied to the market, which is down, what, 20% or something, give or take. So I think they will be affected, absent any changes in market conditions, they will be affected more in the third quarter than those other two, the benefits business because of the organic pipeline, also less of their assets are tied to directly to the market. Actually, less than half, I think, are tied directly to the market. And then on the insurance business, as I said, the market in insurance is hardening, and you're seeing, in some cases, kind of double-digit increases in premiums, which will be helpful to us into the second half of the year. So that's kind of a little bit more detail on the businesses there in the pipelines.
spk03: Perfect. Thank you very much.
spk02: Thank you.
spk05: It appears we have a follow-up from Chris O'Connell, KBW. Please go ahead.
spk04: Yeah, just wanted one follow-up on the outlook for indirect auto and how that's looking into the back half of the year. It looks like to be you know, extremely strong this past quarter on an organic basis. And I know you guys have kind of telegraphed that in the prior quarter, but if that strength is, you know, remaining into the back half of the year and how you're kind of seeing it there.
spk08: Yeah, it's interesting. You know, you hear all about there's no inventory and there's no chips and people can't get new cars. And, you know, I look at our auto business, and we're up 10% this quarter. And, you know, over last year, that business is up, I think, 17%. So, but that business is very volatile, right? I mean, you can go up 15% one year, and you can go down 15% the next year. So it's a different kind of business than mortgage and commercial, but... It's strong right now. A lot of what we do is used because we like the risk-reward profile of the used auto business a lot better. Yields are higher and the residual risk is lower. Usually terms are, you know, duration is less, so we kind of like that business better, but it's, you know, that business turns on and off quick, and, you know, right now I think the chip supply is cleared up, and everybody, you know, the main year manufacturing, you know, they're making cars as fast as they can and shipping them, and so cars that come back, there's kind of that, you know, built-up demand that has been unsatisfied in the last two years, and right now, you know, that business is very busy. I wouldn't expect it to run at the same rate. You know, maybe the third quarter will be good also, but, I mean, at some juncture, that business is going to go back to, you know, something different, and as I said, something years you can grow double digits, and some years you shrink double digits. So it's really, it's pretty unpredictable, to be honest with you. But right now it's very strong.
spk04: Great. Appreciate the call there. Thank you.
spk02: Thank you. Thank you, Chris.
spk06: And then, ladies and gentlemen, this concludes our question and answer session. I'd like to turn the call back over to Mr. Finiski for any closing remarks.
spk08: Great. Thank you, Rocco. Thank you, everyone, for joining. Sorry we had some technical difficulties we had to address, but appreciate your patience, and we will talk to you again at the end of the third quarter. Have a good rest of the summer. Thank you.
spk06: Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
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