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spk01: and welcome to the community banks 2023 third quarter earnings conference call all participants will be in 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 please note this event is being recorded i would now like to turn the conference over to Dmitry Karaivanov, Chief Operating Officer of Community Bank. Please, go ahead.
spk03: Dmitry Karaivanov, Chief Operating Officer of Community Bank Thank you, Marlies, and good morning, everybody. Welcome to our conference call for the third quarter of 2023. As Mark noted in the press release, the company's revenue performance was strong in the quarter. In fact, our revenue has been quite consistent over the past five quarters, regardless of all the macroeconomic and banking industry noise. This is a great example of the diversification of our business and the focus on lowering volatility for our investors. On the flip side, this quarter we had expense pressures that were above our expectations as well. Some of those are transient. Some of those are due to the general inflation pressures, which should abate, and some are a function of the continuous investments in the company. Over the past 24 months, we have invested in our organic capabilities across all of our businesses, and those investments run through the P&L. These organic investments are contributing to the growth in our outstanding in the banking business, the revenue performance in our benefits, insurance, and wealth businesses, and position us even better for the future. Our businesses are strong and healthy, supported by a strong balance sheet. As of the end of the quarter, our funding and liquidity are up compared to the beginning of the year. Our cycle-to-date deposit data is 13%, and our Tier 1 leverage capital is almost double the well-capitalized standard. That is in spite of the turmoil in the banking industry this year. With that, I will pass it on to Joe.
spk07: Thank you, Dimitar, and good morning, everyone. As Dimitar noted, the company's earnings results were down a bit in the third quarter. Fully diluted gap earnings per share were $0.82 in the quarter, which were $0.08 lower than the prior year's third quarter and $0.07 lower than than the linked second quarter results. Fully diluted operating earnings per share and non-GAAP measures defined in the press release were also 82 cents in the quarter, 8 cents per share lower than the prior year's third quarter, and 9 cents per share lower than the linked second quarter results. The 8 cent decrease in operating earnings per share on a year-over-year basis were primarily driven by higher operating expenses. The $0.09 decrease in operating earnings per share on a linked quarter basis was driven by a decrease in net interest income and increases in the provision for credit losses and operating expenses, offset in part by an increase in non-interest revenues and a decrease in income taxes. Reflective of our diversified revenue business model, the company's total revenues in the third quarter of $175.4 million were generally consistent with the prior year's third quarter total revenues of $175.6 million. and the linked second quarter total revenues of $175.3 million. These results were driven by decreases in net interest income between the comparable periods due to higher funding costs, but were largely offset by increases in non-interest revenues. The company recorded net interest income of $107.8 million in the third quarter of 2023. This was down $1.5 million or 1.4% on a linked quarter basis and $2.6 million or 2.4% on a year-over-year basis. The third quarter result was consistent with our expectations of a sideways outcome for a few quarters as funding costs increases outpaced loan portfolio-related rate and volume improvements. The company's total cost of funds in the third quarter of 2023 was 88 basis points as compared to 67 basis points in a linked second quarter. The 21 basis point increase in funding costs in the quarter outpaced a 12 basis point increase increase in earning asset yields resulting in an eight basis point decrease in the company's fully taxed equivalent net interest margin from 3.18% in the second quarter to 3.10% in the third quarter. The year-over-year increase in non-interest revenues totaling $2.3 million or 3.6% was driven by a $2.1 million or 7.6% increase in employee benefit services revenues, a $0.8 million or 6.9% increase in insurance services revenues, and a $0.4 million or 5.8% increase in wealth management services revenues, offset in part by a $1 million or 5.3% decrease in banking service revenues. The increase in employee benefit services revenues was driven by conversion of new business and a significant year-over-year increase in total participants under administration, along with a modest increase for market appreciation. The increase in insurance services revenues are reflective of a strong premium market organic expansion, along with acquired growth between the periods. The increase in wealth management services revenues are reflective of the slightly more favorable investment market conditions, which drove an increase in assets under management. The decrease in banking non-interest revenues are reflective of the company's implementation of certain deposit fee changes, including the elimination of non-sufficient and unavailable funds fees on personal accounts late in the fourth quarter of 2022. Reflective of an increase in loans outstanding and a stable economic forecast, the company recorded a provision for credit losses of $2.9 million during the third quarter. Comparatively, the company recorded a $5.1 million provision for credit losses in the third quarter of the prior year and $0.8 million in the linked second quarter of 2023. The company recorded $116.5 million in total operating expenses in the third quarter of 2023 compared to $108.2 million of total operating expenses in the prior year's third quarter in The $8.3 million, 7.7% increase between the periods was mainly driven by higher compensation employee benefits expense, data processing communication expenses, business development and marketing, and other expenses. The $4.5 million, 6.8% increase in salaries and employee benefit expense was primarily driven by merit and market-related increases in employee wages, higher employee medical expenses, and certain executive retirement expenses. The $1.3 million or 9.1% increase in data processing and communication expenses reflected the company's continued investment in customer-facing and back-office digital technologies. Business development and marketing expenses increased $1 million or 28% due to the company's investment in digital initiatives and higher levels of targeted advertisements intended to generate deposit inflows. Other expenses were up $1.5 million, or 23.1%, primarily due to increase in insurance expenses and non-service-related components of net periodic pension credit. Total operating expenses were up $3.5 million, or 3.1% on a link quarter basis, largely driven by a $2.7 million, or 3.9% increase in salaries and employee benefit expenses, and a $1.2 million, or 8.3% increase in data processing and communication expenses. The effective tax rate for the third quarter of 2023 was 21.2%, down from 22% in the third quarter of 22 and 21.4% in the linked second quarter. The company's total assets were $15.39 billion at September 30, 2023, representing a $208.2 million or 1.3% decrease from one year prior and a $278.3 million or 1.8% increase from the end of the second quarter of 2023. Ending loans increased $279.3 million, or 3% during the quarter, and $906.5 million, or 10.6% over the prior year. The increase in loans outstanding in the third quarter was driven by an $81.2 million, or 2.1% increase in the business lending portfolio, and $198.1 million, or 3.7% increase in the company's consumer loan portfolios. The increase in ending loans year over year was driven by organic loan growth in the company's business lending portfolio, totaling $420.5 million, or 12%, and growth in all four consumer loan portfolios, totaling $486 million, or 9.6%. The company's ending total deposits were up $159 million, or 1.2%, from the end of the second quarter. Interest-bearing deposits increased $233.6 million, or 2.6%, during the quarter, while non-interest-bearing deposits decreased $74.6 million, or 1.9%. On a year-to-date basis, ending total deposits were up $18.5 million, or 0.1%. The company's deposit base is well diversified across customer segments, comprised of approximately 61% consumer balances, 26% business balances, and 13% municipal balances. and broadly dispersed with an average consumer deposit account balance of approximately $12,000 and average business deposit relationship of approximately $60,000. The company's cycle to date deposit data is 13%, reflective of a high proportion of checking and savings accounts, which represents 70% of total deposits, and the composition and stability of the customer base. The weighted average age of the company's non-maturity deposit accounts is approximately 15 years, and the company does not currently carry any broker or wholesale deposits on its balance sheet. The company's cycle-to-date interest-bearing deposits beta is 18%, and the total funding beta is 15%. During the quarter, the company secured $300 million in term borrowings at the Federal Home Loan Bank of New York at a weighted average cost of 4.69% to fund continued loan growth. The company's liquidity position remains strong, readily available sources of liquidity, including cash and cash equivalents, funding availability at the Federal Reserve Bank's discount window, unused borrowing capacity at the Federal Home Loan Bank of New York, and unplugged investment securities totaled $4.81 billion at the end of the third quarter, which is up from $4.23 billion at the end of the second quarter. During the third quarter, the company pledged additional loan collateral at the Federal Reserve Bank to further enhance its borrowing capacity. These sources of immediately available liquidity represent over 200% of the company's estimated uninsured deposits, net of collateralized and intercompany deposits. The company's loan-to-deposit ratio at the end of the third quarter was 72.5%, providing future opportunity to migrate lower-yielding investment security balances into higher-yielding loans. At September 30, 2023, all the companies and the bank's regulatory capital ratios significantly exceeded well-capitalized standards. More specifically, the company's Tier 1 leverage ratio was 9.44% at the end of the third quarter, which substantially exceeded the regulatory well-capitalized standard of 5%. The company's net tangible equity and net tangible assets ratio non-GAAP measure was 4.81% at the end of the third quarter as compared to 5.34% at the end of the second quarter and 4.08% one year prior. During the quarter, the third quarter, the company repurchased 100,000 shares of its common stock at an average price of $51 per share pursuant to its board-approved 2023 stock repurchase program. At June 30, 2023, the company's allowance for credit losses totaled $64.9 million for 69 basis points of total loans outstanding. This compares to $63.3 million for 69 basis points of total loans outstanding at the end of the second quarter of 2023. and $60.4 million to 71 basis points of total loans outstanding at September 30, 2022. During the third quarter, the company recorded net charge-offs of $1.2 million, or five basis points of average loans annualized. Annualized net charge-offs on a year-to-date basis are also five basis points. At September 30, 2023, non-performing Loans totaled $36.9 million or 39 basis points of total loans outstanding. This is up from 36 basis points at the end of the second quarter and 38 basis points one year prior. Loans 30 to 89 days delinquent were 51 basis points of total loans outstanding in September 30, 2023, up from 47 basis points at the end of the second quarter of 23 and up from 33 basis points one year prior. Overall, the company's asset quality remains strong and stable on the quarter. We believe the company's strong liquidity profile, regulatory capital reserves, stable core deposit base, historically strong asset quality, and revenue profile provide a solid foundation for future opportunities and growth. Looking forward, we are encouraged by the momentum in our business and prospects for continued organic loan growth. We believe funding cost pressures are abating, providing the company an opportunity to increase net interest income in the fourth quarter. In addition, new business opportunities in the company's financial services businesses remain strong. As noted in our press release, the company has taken actions to optimize the customer service staffing levels in its retail business, which are expected to contain branch-related operating expenses for the next few quarters. Estimated severance and related expenses of $1 million to $1.5 million will be incurred and reflected in the fourth quarter results. Thank you. Now I'll turn it back to Marlise to open the line for questions. Oh, excuse me. I will turn it over to Mark to make a few comments. My apologies.
spk06: Thank you, Joe. Good morning, everyone, and thanks for joining the call today. Given my impending retirement in a couple of months, I won't be coming on the quarter, but I did want to make a couple of brief comments before we answer questions. First, to our investors, thank you for your trust and confidence in us and our company over so many years. All that we do is done through the lens of shareholder value with the objective of providing above average returns with below average risk and that will continue to be our primary operating priority to our analysts, thank you for your engagement effort and understanding of our company and always doing your best with imperfect information. I would also like to thank our board of directors for their trust and confidence in me over the past 17 years. It's been a privilege and the joy of my professional life to lead this company and work with such an engaged, caring, and shareholder-focused board. Finally, to our employees, thank you for all you have done and will continue to do to make this a great company and for your efforts, pride, and passion in serving our customers, our communities, our shareholders, and each other. You are truly the lifeblood of this organization. Community Bank System is incredibly well-positioned for the future. We have four tremendous businesses and the best leadership and operating teams we have ever had. I have absolute confidence in Dimitar and am very much looking forward to watching the continued progress and success of the company under his capable leadership. Thank you, everyone, and best wishes to all of you for personal and professional prosperity.
spk09: So now I'll turn it over to Marlise for questions.
spk00: Thank you very much.
spk01: And we will start the question and answer session. And if you want to ask a question, please press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. And if at any time your question has been addressed and you would like to withdraw your question, please press star two.
spk00: At this time, let me pause momentarily to assemble the roster.
spk01: And our first question comes from Nick Cucciaroli from Hovde Group. Nick, please go ahead.
spk05: Good morning, everyone, and best wishes to you, Mark.
spk07: Thanks. Good morning, Nick. Good morning, Nick.
spk05: Good morning. So you touched on it in the release and in your remarks, but can you provide more detail on the de novo initiatives? What markets are you targeting? And at this point, do you have a sense for how many locations you plan to open as you re-optimize the branch network?
spk03: Sure, Nick. It's Dimitar. So we're embarking on a continued organic growth in all of our larger markets. So we have entered them commercially, and we've been in them to some degree on the retail side for a number of years now. But on the tail of our success on the commercial business, we're going to be expanding on the retail side as well, kind of in earnest, in Buffalo, Rochester, Syracuse, Lehigh Valley in PA, southern New Hampshire, probably a little bit in the Capital District as well. So those are kind of the areas we're looking at. It varies by market in terms of how many locations and what we're going to be opening. But right now, I think in the next 18 months or so, we can pencil in about 12 to 15 locations across those markets. Might be a couple more, depending if we find the right locations. At the same time, as John noted, we are reconfiguring our existing network and staffing levels, and the purpose of all of this is for this initiative to be self-funding in many ways and just provide us with a much better, much more productive, I would say, go-forward retail presence.
spk05: That's a great color. Maybe just a related follow-up. Can you help us think about the overall expense run rate going forward and how much of this quarter's elevation is likely to persist?
spk07: Yeah, so with respect to expenses, you know, as I think David mentioned, there are some which, you know, we anticipate as being sort of transient, some of which are, you know, really reflective of our investment in, you know, the organic growth machine over the last couple of years, and some of which, you know, is really related to, I'll call it wage-related, you know, inflationary pressures that we, you know, had to endure, if you will, in 2022. So our full-year expectation for 23 versus 22 is, as I think we've said earlier, somewhere between 5% and 9%. It looks like it's trending to something closer to 8% on a full-year run rate basis. But the expectation is that we would settle back into something kind of in the mid-single-digit run rate increase year-over-year on a full-year basis. There's always a bit of volatility there. you know, quarter to quarter. Sometimes it's just, you know, timing, if you will, in a particular quarter. And obviously, you know, this quarter was a little bit harder hit with some transient expenses than we've had in the past. But our, you know, expectation, I think, for 2024 has kind of been single digits on operating expense increases on a full year basis.
spk05: That's very helpful. And then lastly, for me, just given the strong loan growth and an increase in borrowings this quarter, Can you share with us your thought process and appetite for executing another securities restructure?
spk03: I think, Nick, at this point, given where rates are and what we have left in the portfolio, the math is pretty challenging. We're looking at that in the sense of, is it a positive net present value transaction? So if we're accelerating cash flows and at the end of the day we're all better off by getting our money sooner, then later we will consider it, which is what we did earlier this year. As a reminder, we sold roughly three-year tenured securities, and we're getting the cash flows back in two years. So we've got essentially a year worth of positive value on that transaction. That's when the 10-year was in the threes. And I think given where the 10-year is today and kind of the front end of the curve as well, those numbers just don't pencil out.
spk05: Thank you for taking my questions.
spk00: And our next question is coming from Steve Moss from Raymond James. Steve, please proceed.
spk10: Good morning. Good morning, Steve.
spk09: Good morning, Steve.
spk10: And Mark, congratulations on your retirement and best wishes. I just wanted to, you know, follow up on the loan side of things here. You know, very strong quarter for growth, you know, Could we see this pace continue for another quarter, or could we see some moderation here just given the extra move-in rates even in the last couple of weeks here?
spk03: I think, Steve, if you look and you break it down by portfolio, the commercial pipeline is still strong, but not as strong as it was at the end of the second quarter. So you'll probably see a bit of a pullback there. Mortgage is going to be seasonally a little bit weaker as well in the fourth quarter, and I think the same applies for auto in the sense that right now that flow and kind of what we're charging there is a little bit less. So I think it's still going to be a very strong quarter in terms of growth, but I don't think it's going to be close to this past quarter, which was close to a record for us in terms of total loan growth.
spk10: Right. And curious, Dimitar, you know, what rates are you guys doing for loan yields these days that you're putting on the books?
spk03: I think the blended trade for the third quarter was 720. Okay.
spk10: And then just on the deposit pricing moderating here, just curious, you know, Jerry seemed to imply, you know, further slowdown in interest-bearing deposit costs. You know, just any incremental call you can give around. you know, the pace of slowdown or kind of, you know, where you think deposit costs could shake out in the next couple of quarters?
spk07: Yeah, so we did experience a little bit of a slowdown in costs in Q3 versus Q2. And I think on the Q2 call, we, you know, we used the word abate that, you know, we expected those pressures to abate a bit. We are seeing some evidence of that. It's not... You know, we still are seeing increasing costs, but, you know, kind of our expectations is that our belief is that we've maybe have crossed over into positive, you know, positive territory. In other words, we hit the trough on net interest income in Q3. At least that's our expectations and that we would start to sort of come out of that, if you will, in Q4 and hopefully through 2024. You know, obviously the wild card in the deck is just, you know, deposit funding. It's kind of held in well for us. I mean, we're kind of flat on a full year basis, which is okay. But, you know, if we see a turn in the tide, obviously if you flip from a, you know, what is roughly a little under 100 basis points in terms of your deposit funding cost and you were to flip in a barring position, you know, that could change. But right now we believe we have kind of hit the crossover point or the trough in the third quarter, and then we should see some NII expansion in Q4, not necessarily margin expansion. You know, as Dimitar mentioned, the new loans went on at a little north of 7%. You know, we took down some funding kind of in the high fours that generated about a 250 basis point kind of, you know, we'll call it marginal spread, if you will, on the new volume. You know, so that's not going to necessarily be additive to NIM on a go-forward basis, but it should be additive to net interest income.
spk10: Okay, great. And then on the employee benefits services, you know, good quarter from a revenue standpoint, quite a bit of crosswinds here, especially in the last couple months. Just curious, you know, you've seen year-over-year growth, but maybe, you know, do we come off those highs just given, you know, what we've seen in the bond market and some volatility we're having in equities here?
spk03: Yeah, I think, Steve, I think it's hard to predict that line too much because, as you know, it is tied to market values. And, you know, if you look at the aggregate portfolio, it's a retirement business, so it not surprisingly kind of resembles a 60-40 type of split. So there's a fair amount of bonds that are trading at a lower value today than they were during the third quarter. With that said, we have also continuing the organic momentum. So if there's a bit of a pullback in that line, I don't think it's going to be that big. And in fact, if asset values stabilize, I think we could have as good of a quarter in the fourth quarter.
spk10: Okay, great.
spk09: Appreciate all the color. Thanks very much, guys.
spk08: Thank you, Steve.
spk01: And we will proceed now with a question from Alex from Piper Sandler. Alex, please go ahead.
spk04: Hey, good morning all. And again, or I'll reiterate, congrats to you, Mark. It's been a pleasure working with you over the last decade or so and certainly wish you all the best in the next chapters of your life.
spk02: Thanks, Alex.
spk04: I wanted to ask about this branch optimization program. And you guys have a top-in-class deposit profile, and I always sort of assumed or associated that with the branch network and sort of what you have built from a legacy standpoint. How do you think through the branch optimization and closing branches and then opening into new markets without tainting the quality of the deposit profile?
spk03: Alex, to give you some color, in the past four or five years, we've consolidated close to 50 branches. Some of those acquired, some of them our own. We've already had a fairly sizable number of branch closures, which has not really impacted the quality of our deposit base. Clearly, as we move into the larger markets, we're going to have different strategies for winning market share and deposits. And there's going to be a trade-off between volume and rate in the larger markets. They're more competitive. With that said, if you just think about the quantum of what we're doing here on a 200 branch network and 13 billion of deposits, 15 branches let's call it, at whatever number you want to assume they get to in a larger market, which should be fairly good, is not going to meaningfully change the quality of our aggregate blended deposit base, which we believe will continue to be one of the best in the country.
spk04: And then, you know, maybe you said it earlier and maybe I missed it, but just in terms of the timeframe, it sounds like you're closing a bunch of branches this quarter. That's going to result in some severance in 2023. And then how long before some of these markets, you know, get up and running? And I guess, does that wind up, I guess, you know, back to the expense question, can you just sort of lay out sort of exactly what that means over the next couple of years? You know, I get your sort of high level guidance for next year. but just kind of specifically associated with this program.
spk03: Yeah, so I think the way to think about the expenses of the expansion is, and the timing of it, one, the timing varies because you've got to sign leases. We've been at this for a few months, so we've got a number of locations identified Most of them are just remodeling or existing branches that the large banks abandoned that we're going to be going into. But still, you have leases. You have to redo the branch a little bit or the location. You have to hire people, and then you open the branch. So you're talking about nine months of a process if you were to start today in most cases. In some cases, there's more work to be done. That's why we think of it over kind of an 18-month period. And in that timeframe, I think what our expectation is is that everything else that we're doing with the branch network and the existing retail business, including what we did this quarter, is going to offset the cost for net zero.
spk04: Okay. And then it seems, based on the markets and sort of the expansion that you mentioned earlier that you're going into, it seems like a pretty clear signal that organic has now maybe officially, maybe it was a quarter or two ago, officially overtaken M&A as sort of the primary growth mechanism for community. Is that a fair characteristic?
spk03: I think the fair characteristic is that it will be a mix going forward. And as we've communicated, it would just be less reliant on M&A. And that's why you're going to see some of these expenses every once in a while pop up a little bit more unusual in a given quarter because we're now investing through the P&L versus investing through the balance sheet. And I think given where rates are today, given the time that the regulators take from a bank approval transaction, kind of timeline perspective, the math on the M&A side is just harder. And we frankly can't wait for that in order to grow our company. So we need to find ways to follow our success, which has been great on the commercial side, and now we're going to follow it on the retail side. And that doesn't preclude any M&A happening throughout that period because take any of the markets we're looking at to expand in, opening three or four or five branches in any of those markets is not going to be the end game for us. So we're going to continue to be looking for M&A in all of our markets, but it just will be a complement to what we're doing organically as opposed to the only way of growth going forward.
spk04: Great. Thank you for taking my questions.
spk08: You're welcome.
spk01: And our next question comes from Chris O'Connell from KBW. Chris, please go ahead.
spk11: Good morning. And congratulations, Mark, on the retirement and best wishes on the next chapter. I wanted to start off to see what your thoughts are on the insurance business and given recent peer transactions in the market, whether that's something... that you would ever consider selling? And if so, just, you know, what your thoughts are in terms of, you know, the cost and benefit analysis and what goes into that thought process.
spk03: Morning, Chris. Well, our thoughts are that it's an extremely valuable business. You know, roughly at 5.4 times revenue, seems to be going multiple these days, and $45 million of revenue. It's a very, very valuable business. which is a reminder, is not reflected anywhere on the balance sheet, the same way with our benefits business or wealth business. So as it relates to the value to us and to our shareholders, that is the value. And we look at our company as a precious collection of businesses that work in different ways through an economic cycle. I mentioned in the beginning that our revenue has been essentially the same, right around $175 million over the past five quarters. And just think about what's occurred through that timeframe. You had NII expanding way up. You had NII contracting way down. And you had market values contracting, then going sideways, then going up, now contracting again. And our revenue has not budged. If we were just in one of those lines of businesses, we will have a much tougher time sustaining that revenue and the low volatility and the predictability of our company. So we think that it adds tremendous value, the insurance business, the benefits business, the wealth business. It adds tremendous value to the banking business and tremendous value to the aggregate company.
spk09: So we just think it's really valuable.
spk11: Okay, got it. I mean... And just to be clear, I mean, is it something that you, I mean, obviously, you know, you guys see a lot of value with it internally. Is it something that you have, you know, explored or looked into? Or is it, or is the value so high, you know, to you on an organic basis that, you know, you think it's more valuable in-house?
spk03: We have not because we like to focus on keeping our most valuable businesses to our company and our investors safe. and we don't think that we can replace that kind of a business, nor could we buy it again. So it's something that we have that is precious, and we intend to grow it, which we have done pretty successfully. That was a $20 million business when we acquired it in 2016, and I think it's on track for well over double that this year.
spk11: Great. Appreciate the color. And then on the... On the $300 million of the FHLB that you guys locked in at $469, what was the maturity or duration on that?
spk07: Yeah, so Chris, this is Joe. It's about a three-and-a-half-year average life. We locked in some amortizing advances and some fixed components effectively that matched the effective average life of the loans that we booked. generally, and it also bridges us to some of the securities cash flows in some of the out years.
spk11: Okay, great. And on the remainder of the borrowings on balance sheet, which I believe are customer repurchase agreements, what was the rate on those this quarter?
spk07: Precisely, Chris, they tend to run in the you know, close to, you know, it's a municipal book largely, and it's kind of in the twos from an overall cost perspective. You know, some of that is operating accounts, and some of that is more, you know, call it rate-sensitive repurchase agreements. But they're all with our customers, which I think is important. You know, internally, we look at that as as it's more akin to a customer deposit. It just happens to be set up in a repurchase structure.
spk11: Got it. Thanks. And then lastly, can you just remind us as to what the securities cash flows are coming on off in Q4 and then into 2024 as well, please?
spk07: Yeah, so securities cash flows are pretty nominal in Q4, about $17, $18 million, so just a couple of sort of trickling amortizing payments. And in 2024, it's about $60 million. And if you recall, Chris, when we did the repositioning, we brought forward 2024 and 2025 cash flows because of the inverted curve and the opportunity gap. that we had. So, you know, so effectively what is remaining for 2024 cash flows are basically amortizing cash flows off of our MBS portfolio, largely.
spk11: Great. And do you have just, you know, what the duration of the AFS and the HCM book is right now?
spk07: Yeah, so the AFS duration is about six years, and the HDM duration is about 11 years. Thank you.
spk08: Thanks for taking my question. You're welcome.
spk01: And we proceed with a question from Matthew Brees from Stevens. Matthew, please go ahead.
spk02: Thank you. Good morning. And, uh, Mark, uh, congrats on a long and successful career and best wishes to you in retirement. Um, on the question front, you know, first I was hoping you could touch on, uh, the auto book. There's some data points out there just showing kind of, you know, gradually deteriorating, uh, conditions, delinquencies. And I was curious if you're seeing any signs of that on, on your end and, and how should we be thinking about charge offs within this book?
spk03: I think Matt, um, As a reminder, our book is prime and super prime, essentially. The average FICO is 750. You're looking at values, you know, debt to income levels that are kind of in the 30s, 20s and 30s. And the credit performance over multiple cycles has been outstanding. So, If you actually look at our charge-offs year-to-date, Joe can correct me here, but I think it's in the 20s.
spk07: Yeah, 17, 18.
spk03: Yeah, basis points. So, frankly, better than we expected, and frankly, better than our historical averages. So, we continue to believe that the historical average of kind of 35 basis points, plus or minus, you know, five, is... is a number that we expect in terms of loss rates on that paper, but we continue to be surprised so far about the strength of our type of borrowers. We are well aware of the subprime delinquency rates, which I think are at an all-time high as it relates to auto, but those are not our customers.
spk07: Just for a little additional color there is if we look at kind of the delinquency 30 to 89 days, it's been pretty flat for about five quarters. You know, it does fluctuate from quarter to quarter. And if you actually go back to kind of our, you know, kind of normalized loss rates on a pre-COVID basis, they were kind of in the mid-30s. And as Dimitar said, you know, A and B paper, great paper. And they've been running about half of that. So, you know, if we normalize If we normalize, you know, the expectations are kind of the mid, you know, 30 basis points, 40 basis points of net charge-offs, which is, will be half of the, we expect that's going to be half of the industry average.
spk09: Got it. All right.
spk02: I appreciate all that color. Just another one, you know, loan growth remains, you know, very solid, given, like you said, near record levels this quarter. And I know we've talked a lot about hiring on your end. That said, I was hoping you could discuss the overall economic vibrancy across your markets and whether beyond just added lending capacity, you're seeing improving trends on the ground, and if there's any markets you'd highlight in particular.
spk03: Yeah, I mean, broadly, our markets remain in very good shape, literally in every category. Some of it is the customers we traffic in, and some of it is the markets. And there's been a bit of a... An uptick in upstate New York in terms of investments and activity. Certainly we're seeing it in central New York quite a bit, and that's not really just Micron related. In fact, very little of it is Micron related right now. But our markets are strong across the board. Northeast PA is doing very well as well. New England remains one of the best markets in the countries it relates to credit. So it is very positive. We're not seeing a lot of cracks. We are seeing some of our borrowers putting down more money if they need to in order to make numbers work with higher rates, but they have money to do so. The cash levels in our commercial borrowers remain strong, and certainly we're not seeing
spk09: much in the way of challenges on the consumer side. Understood. Great. Okay.
spk02: And then, Joe, you had mentioned that you expect NII upside from here, but potentially some NIM compression. I was curious to what extent you expect near-term NIM pressure and where might we see that point of stability as you look out?
spk07: Yeah, it's a good question, Matt. You know, as I mentioned, you know, if deposits hang in there, which so far they seem like they are for us, they're fairly stable. You know, we kind of believe we hit the crossover point for net interest income in Q4. You know, the margin side of it, obviously, you know, I think our margin for the quarter was 310. New business is going on at 250-something. You know, the next quarter, you know, the next cycle of loan growth is if we can, you know, lock in 250, we'll probably take that, but obviously it's going to negatively impact margin. But our expectation really is that we will just sort of start to come out of the trough in Q4. You know, just as we kind of looked at kind of, you know, as we exited the quarter, we started to see kind of that dynamic change a bit as the, you know, the increases on loan interest income were sort of outpacing The funding cost increases. You know, I'm not sure, you know, that's obviously a couple months, you know, so it's not quite a trend yet. But our expectations are that that trend will continue and that we'll see expansion in Q4. And, you know, I don't know what the rate environment will be in, you know, in Q1 of next year and Q2 of next year. But assuming that, you know, the rate environment is, you know, comparable to what it is now, I think our expectation is that we would just continue to see some potential expansion in NII. Again, just to be aware, some of it is dependent on the stability and growth of the deposit base.
spk02: Okay, got it. And then last one for me is just going back to the whole tangible common equity discussion and well aware your kind of views on the tangible common equity to tangible assets ratio. It's just that the market seems to be reacting a bit to it, and I'm curious if that does have an impact or changes your thinking around capital adequacy as measured by tangible current equity, tangible assets.
spk03: It does not change our view on capital adequacy, which remains well, well above the regulatory capital levels that are required for a well-capitalized institution. It doesn't change how we run the business. It doesn't change our ability to service customers. As you can see, our balance sheet is in tremendous shape. And again, as we just touched on a couple of minutes ago, the amount of value in our company that is not reflected anywhere in that one single number is just Huge. We talked about the value of the insurance business. You can take that and multiply it by three for the value of the benefits business. Then you've got the wealth business. So looking at just one number that reflects only one small sliver of the balance sheet as well is to us not a way to economically run the business. The other thing I would just point out is that I don't know how anyone can run a business based on that ratio, given that if you think about what's occurred in the past two or so years, we've done nothing but make money for our shareholders. And we have not, you know, given out a huge amount of money or done a huge amount of buybacks or diluted ourselves in any other way. The point here is that we've continued to add retained earnings to the balance sheet. and the starting point for that ratio was quite a bit higher. So we've done nothing but make money, and that ratio changes every quarter. So that's why it's hard for us to really manage a business based on external market factors.
spk09: Got it.
spk08: I appreciate all the thoughts there. I'll leave it there. Thanks for taking my questions.
spk00: Thank you, and we have a follow-up question from Chris O'Connell. Chris, please go ahead.
spk11: I was wondering, you know, you had a little bit more share repurchases this quarter. You have plenty left in the plan before year-end. Is that something that you intend to continue to do in the fourth quarter?
spk07: Yeah, so Chris, I would say potentially yes, and probably, you know, continue to be fairly nominal in terms of the, you know, grand scheme of our outstanding shares and even within the repurchase authority, which was 2.7 million shares for 2023. You know, obviously, with the valuation down, it makes some sense now to repurchase Chris Winslow, M.D.: : Can you repurchasing some shares probably slightly above what you know, otherwise would be equity plan. Chris Winslow, M.D.: : You know creep, if you will, so we've just generally try to keep our share count flat there's an opportunity to take it down a bit just because of where the prices, but I don't we're not going to we're not intending to embark on a. Chris Winslow, M.D.: : On a large you know repurchase plan here, and at least this quarter we like to keep a little powder dry for. for, you know, other opportunities. And that's, you know, so we'd rather kind of lean into growth more than we would to, you know, to buy back our own shares.
spk11: Got it. And just on the cash build-up liquidity build this quarter, you know, with the locking and the borrowings here, is that something that you expect to kind of right-size itself fairly rapidly next quarter back towards, you know, the levels that you've been in the past few quarters? Or do you think some of that will stick around and kind of come in over time or just stay flat depending on, you know, how long growth shakes out?
spk07: Yeah, so, Chris, I think we finished the quarter a little over $200 million in cash equivalents. We do have a bit of a, you know, seasonal pattern in Q3 and Q4 in tax collection. You know, my expectations is that typically, you know, I'll say into Q4, Q1, less so, but into Q2, we start to see some of that drift down a bit. But right now, you know, we expect that those kind of cash equivalents could carry some of the loan growth into Q4, and then we'll have to reassess in Q1. But, you know, our expectation on a longer-term basis is that, you know, as we continue to lean into loans and grow loans, and if deposit growth does not keep pace with that over the next couple of years, we're going to continue to probably you know, lever up on some term funding until we get rich to our securities cash flows in 26 and 27.
spk11: Great. And then just last touch up one for me. Can you just remind us as to, I believe there's some seasonality in the insurance business into the fourth quarter where it comes down a bit. Can you just, you know, remind us as the typical magnitude there?
spk07: Yeah. Yeah, it does vary a bit, Chris, but typically the renewal periods are January 1st and July 1st, so that usually results in a little higher run rate in Q1 and Q3. That's just typical insurance renewal periods. So typically we drift down a little bit in Q2 and Q4, and I'm not sure I can peg an exact number, but it could be down a million or two in a quarter and then back up in the subsequent quarter. But the longer-term run rate, which I think Dimitar indicated, is about $45 million right now. And the markets are hard for insurance premiums, and that translates into higher commission levels. So our expectations around just kind of the – absent any sort of acquisitions is that the organic growth rate on commissions is – we have a pretty solid outlook on that into 2024.
spk08: Great. Appreciate you taking the follow-ups. Thank you.
spk01: And this concludes our question and answer session, as well as this conference. Thank you very much for attending today's presentation. You may now disconnect.
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