Community Financial System Inc (CBU) 2022 Q2 法說會逐字稿

Welcome to the Community Bank System Second Quarter 2022 Earnings Conference Call. Please note that this presentation contains forward-looking statements within the provisions of the Private Securities Litigation Reform Act of 1995 that are based on current expectations, estimates and projections about the industry, markets and 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 Mark Tryniski, President and Chief Executive Officer; and Joseph Sutaris, Executive Vice President and Chief Financial Officer. Gentlemen, you may begin.

Thank you, Rocco. Good morning, everyone. Hope all is well and thank you for joining our second quarter conference call. Operating earnings for the quarter were very strong and similar to last year on a reported basis. But excluding PPP and reserve release from '21 results, this year's quarters up 13% over last year. Last quarter, I referred to margin as a lessening headwind, but in Q2 it turned into a tailwind as originated loan yields increased substantially until the cost of funds were unmoved in 9 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 in talent, we have in our commercial and mortgage businesses and the current pipelines, we expect growth to continue. The recent strength of our benefits, wealth and insurance businesses moderated in the quarter with revenue growth slowing to 7%, largely due to financial market-related impacts and margin actually declined slightly.

Pipeline activity, particularly in the Benefits business remains very strong and the insurance market continues to harden, which will be supportive of forward revenue and margin growth in that business. I won't say a lot about the Elmira Savings Bank transaction other than we closed in May. It went extremely well, and we continue to expect $0.15 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, and good morning, everyone. As Mark noted, the second quarter earnings results were solid. Fully diluted GAAP earnings per share were $0.73, while operating earnings per share, which exclude acquisition-related charges were $0.85 in the quarter. These compared to fully diluted GAAP and operating earnings per share of $0.88 in the second quarter of 2021, a $2.8 million decrease in PPP-related revenues between the periods and $6.4 million increase in the provision for credit losses, excluding acquisition-related provision were responsible for a $0.13 decrease in fully diluted operating earnings per share net of tax over comparable periods.

The company recorded a $2.1 million provision for credit losses in the second quarter of 2022, excluding acquisition-related provision. This compares to a $4.3 million net benefit recorded the provision for credit losses in the second quarter of 2021 as the U.S. economy emerged from the depths of the pandemic.

Fully diluted GAAP earnings per share were $0.86 in the first quarter of 2022. And operating earnings per share were $0.87, excluding $0.01 per share of acquisition expenses, a 2% or 2.3% decrease in operating earnings per share from the linked first quarter results was largely driven by higher operating expenses and higher privileged for credit losses and lower noninterest revenues, offset in part by a decrease in net interest income and a decrease in income taxes.

Adjusted pre-provision net revenue per share, which excludes the provision for credit losses, acquisition-related expenses, other nonoperating revenues and expenses and income taxes was $1.13 in the second quarter of 2022, $0.07 or 6.6% higher than the prior year second quarter and $0.01 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 $15.7 million or 10.3% increase over the prior year second quarter. The increase in total revenues between the periods was driven by an $11 million, a 12% increase in net interest income and a $4.6 million or 7.8% increase in noninterest revenue.

Noninterest revenues accounted for 38% of the company's total revenues during the second quarter of 2022. Comparatively, total revenues were up $6.7 million or 4.2% over first 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 noninterest 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.

But between comparable periods, the company's average interest-earning assets increased $1.1 billion or 8.2%. And a tax equivalent net interest margin was up 10 basis points from 2.79% in second 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 grow between the periods.

The tax equivalent average yield on interest-earning assets in the second quarter of 2022 was 2.97%, 8 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 2022 results, while the tax equivalent net interest margin was 2.73%. The company's total cost of funds was 9 basis points in the second quarter, consistent with the linked first quarter and 1 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, (inaudible) fees as well as incremental revenues from the acquisition of Fringe Benefits Design of Minnesota during the third quarter of 2021.

Wealth Management revenues for the second quarter of 2022 were $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 second quarter driven by both organic expansion and the acquisition of several insurance practices and books of business between the periods.

Banking noninterest 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 and employee benefits and services and wealth management businesses.

According to 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 and 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 2 basis points of average loans outstanding during the second quarter of 2022 as compared to net loan recoveries of $0.6 million for a 3 -- or an annualized 3 basis points of average loans outstanding for the second quarter of 2021. On a year-to-date basis, the company has recorded net loan charge-offs of $0.9 million or an annualized 2 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 in core operating expenses in the prior year 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, in employee benefits, a $3.4 million or 36.5% increase in other expenses as well as increases in data processes -- data processing and communication expenses, occupancy and equipment expenses and intangible asset and amortization totaling $1.6 million.

The increase in salaries and benefits expense was driven by increases in numeric incentive-related employee wages, acquisition-related staffing increases, higher payroll taxes and higher employee benefit-related expenses. The other non-compensation expenses were up due to the general increase in the level of business activities, including cost incurred to pursue several new business opportunities in the company's nonbanking businesses and incremental expenses associated with operating an expanded franchise due to several nonbank 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 linked quarter basis was 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. And in the second quarter of 2021, the company's effective tax rate was driven 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, added 8 branch locations and acquired total deposits of approximately $522 million and total loans of approximately $437 million, including $20.8 million of non-PCD marks. The company also booked $8 million of core deposit intangible assets.

The company's total assets were $15.49 billion at June 30, 2022, representing a $686.5 million or 4.6% increase from 1 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 net inflows of deposits between the periods in the Elmira acquisition. Average deposit balances 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 or 8.2% increase. This included a $2.32 billion or 58.6% increase in average book value of investment securities and (inaudible) $3.9 million, a 5.2% increase in average loans outstanding, partially offset by of $1.6 billion or 77.2% decrease in average cash equivalents.

On a linked quarter basis, average earning assets increased $235.3 million or 1.7% due primarily to the Elmira acquisition. Despite the Elmira acquisition during the second quarter of 2022, total losses decreased from the prior quarter end, due primarily to the net outflow of municipal deposits totaling $368.4 million, due in part to seasonal factors and a $260.2 million decrease in market value adjustment on the available-for-sale investment securities portfolio due to an increase in market interest rates.

Ending loans at June 30, 2022, of $8.14 billion or $722.4 million or 9.7% higher than the first quarter of 2022 and $900.5 million or 12.4% higher than 1 year prior. The increase in ending loans year-over-year was driven by increases in all categories of loans, including consumer mortgage, consumer and direct, 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 the 5 company's 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 remained 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 operate loss driven by the decline in the market value the company is available for sale investment securities portfolio. The company has abundance of liquidity, the combination of the company's cash and cash equivalents borrowing ability and Federal Reserve Bank borrowing capacity to Federal Home Loan Bank and unpledged available for sale investment securities portfolio provided the company with over $5.8 billion of immediately available source of liquidity at the end of the second quarter.

Asset quality remained strong in the second quarter. At June 30, 2022, nonperforming loans were $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 of 2022 and $70.2 million or 0.97% of total loans outstanding 1 year earlier. The decrease in nonperforming loans as compared to the prior year second quarter primarily due to the reclassification of certain pandemic-impacted hotel loans from nonaccrual status back to recurring 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% 1 year earlier. Looking forward, we are encouraged by the momentum in our business. The company generated strong organic loan growth over the prior 4 quarters. The net interest margin expanded meaningfully in the quarter.

Asset quality remains strong, and the loan pipeline is robust. In addition to the pipeline of new business opportunities in the financial services businesses remain strong. In 2022, we'll 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's staff and the former Elmira Savings Bank's staff for seamlessly integrating the 2 companies.

Thank you. Now I will turn it back over to Rocco to open the line for questions.

(Operator Instructions)

Today's first question comes from Alex Twerdahl with Piper Sandler.

Rocco, just so you're aware, the feed on our end is a bit garbled.

I will make some adjustments here. Mr. Twerdahl, the floor is yours.

Can you guys hear me okay? Can you hear me okay?

Hello, this is the operator. We can hear you. Yes, we can hear you loud and clear. Are you able to hear Mr. Twerdahl?

One of us has a bad line here.

I can hear you. Can you hear me?

(technical difficulty)

And everyone, we thank you for holding. We have reconnected the speaker location.

Mark and Joe, can you hear me now?

We can.

Perfect. 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 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?

Yes. 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 we are expecting some growth in the third quarter. I can't speak specifically as to the amounts other than -- because it's tax collection season.

But typically, we net back to about even during tax collection season. So we had an outflow of $368 million. So we're hopeful most of that comes back although we do -- we did -- 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. So -- but we do expect a couple of 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, call it, $140 million, $150 million of cash flows. And then the next lump cash flow is kind of in the May time frame. But meantime, we have tax collection to support it. With that said, it's not uncommon for us to go into kind of a temporary borrowing position when -- in the past. And given the size of our balance sheet, a couple of hundred million dollars in borrowings, I don't think is all that concerning.

Yes. The only thing I would add there, Alex. I think the -- if you look at what happened in our deposit organic deposit growth rate, pre-COVID, it's low to mid-single digits, and probably hit to double digits. I mean, in some cases, or 20% one after another. I think that's pretty much moderated and we're back to more of a pre-COVID organic run rate.

The municipal, as you know, they go up and they go down. I think in the quarter, the nonmunicipal deposits were down a little bit but not very much. Business deposits were actually up. So the business deposits continue to be pretty strong. So I think we're back to more of a pre-COVID environment in terms of -- if you look at the national savings rate and the like. We're back to a more normalized kind of deposit environment in our view.

And I guess the sort of a 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 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?

It's been very limited in terms of the pressure. 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 set up here into a rising rate environment is quite good in terms of deposit beta also in terms of margin expansion, which we saw, obviously, this quarter as did everyone else.

I think on the first quarter's call, we said that we expected originated loan rates would exceed the portfolio rate in the third quarter, or maybe fourth, but it actually happened this quarter, not a lot, but by a little bit. So there's a good tailwind, I think, on the margin right now heading into the second half of the year is because of the loan yield, even on what's in the pipeline right now, even if there is a rate change environment because of the Fed or recession or some other event. What we have in the pipeline is the good one, which is pretty substantial. It's still going to want the higher rates. And so I think the margin outlook is pretty good for the remainder of the year.

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 move in 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?

No. I mean it never has. As rates go up, rates go down, we try to be disciplined around what we do from an M&A perspective. Some are -- some opportunities are more tactical in terms of earnings accretion and the shareholder benefit. Others are more strategic in terms of longer-term potential and opportunities in certain markets. So -- but the loan marks, the credit marks, the core deposit intangible marks, none of that really makes a difference.

It's all those adjustments are noncash anyway, and we really look at the company from a more of a cash flow perspective in terms of the cash flow impacts and less kind of the GAAP earnings impact, which is not unimportant, but it's not necessarily, in our view, aligned with economic value. And so I would say, no, there's -- the change in the interest rate environment will have no impact whatsoever on our M&A strategy, Alex.

And our next question today comes from Erik Zwick with [Hobby] Group.

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. Our commercial pipeline, I think you've been at an all-time high. So maybe kind of a 2-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 6 months ago?

Sure. 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 nonmetropolitan 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 Syracuse, Buffalo, markets in Northeast Pennsylvania. We don't have a lot of market share.

We have -- I mean if you look at Syracuse, our headquarters here, we, obviously, have the 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 opportunities. So 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 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 grow. We made the investments in people and leadership to try to accomplish that. And the results are -- as I said, the results are showing.

In terms of the markets, if you look on a percentage basis, the largest growth market we've had on a percentage basis in Buffalo. But they're all doing quite well. We've got a lot of -- a lot going out 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 everywhere. I mean 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. And it's just -- it's interesting. The -- 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 kind of lag the national markets. And this is kind of the results of that, but there's a lot of opportunity right now. And we're going to have, I think, that it's very good solid remainder of the year, particularly given the pipeline.

As I said, I think -- last quarter, it was $1 billion. This quarter, it's $1.1 billion, and it's up 10% in a quarter. So I expect that momentum to continue given kind of the investments we made and the newest 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 get -- grow our market share a little bit over time. I mean I think one of the strategies -- and this kind of maybe off the question a bit, but I think it's not important to understand. If you look at our balance sheet, we have $6 billion of securities and what, $8 billion of loans. And that is not in our view, an optimized balance sheet. So we need to make the investments in trying to, over time, improve our balance sheet. That don't mean -- I mean probably we have a very solid balance sheet, liquidity is incredible, actually, too much liquidity. But I think the risk/reward opportunity, we've been 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 return -- risk/reward profile we're looking at.

I think we've just historically have too conservative of the balance sheet, and we need to move the needle a little bit on that, which I think we're in the process of doing. I think to your last question, Erik, was around whether or not we think we can pull that through. I'm pretty confident we can. I would be surprised if we didn't also see very strong balance sheet growth, particularly in commercial in the third quarter and hopefully, the fourth quarter as well. So I think we'll get pretty good pull-through on that pipeline, particularly based on some of the things that I know that's 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.

Great. I really appreciate that and 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-to-market, 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 those -- 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?

So Erik, you're talking about the insurance business or the mortgage business?

I thought I heard you say mortgage market is firming, but I could have misheard that.

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 leaderships and frontline folks in our mortgage business. And so I think our pipeline is not -- it's -- I don't remember the exact number, maybe Joe -- but it's just around where it was last year, give or take. But we also are pushing them through much quicker because we made some investments in people and process and technology in that business. So our time -- our days to close are lot less, so we're pushing through quicker. But the pipeline is around the same last year. It might be down a little bit.

There's almost -- the refi market has 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, again already refinanced is probably too late. So -- but we expect that business to continue to grow as well, given -- also given our markets, if you look -- even when the national market is boom and bust, we just -- we're still growing at 3%, 4% a year in the mortgage business. And I expect we'll continue to do that. I would hope to 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. The average mortgage last 10 years or less -- and so 10-year paper with our historical loss rate on mortgages is what, 8, 6 basis points or something like that. At a yield of over 4%, pushing 5% is a fabulous asset. So we'll continue to put those on the books.

Got it. Yes, insurance market firming and residential mortgage market softening makes sense.

And our next question today comes from Chris O'Connell of KBW.

So I wanted to start -- 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 insurance -- or were those origination yields are coming on relative to the portfolio yield?

Yes. Go ahead. Do you want to take that?

No. You go ahead.

Yes. With -- 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 hit 4%, maybe late in the second quarter or third quarter. For the quarter, we actually originated at about 4.25% on a blended basis across all the portfolios. So we were booking new loans at, call it, 25 basis points higher than the book yield, and that obviously continues to go up because some of the originations in the second quarter were basically in the pipeline during the first quarter before significant rate movements.

So we continue to expect that the new origination yields will exceed the book yields, but they're about 0.25 point above in the quarter.

Okay. Great. And then as far as capital goes, I mean, you guys primarily focused on regulatory capital that saw a little bit of a buyback this quarter. One, usually that kind of tightening up the share count from compensation-related issuance. Is there any expected buyback going forward? And then in general, how are you guys feeling about capital ratios and the plan going forward, given the disparity between kind of TC and the regulatory capital?

Yes. Chris, with respect to 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 equity plan dilution that occurs throughout the year. So no, I don't anticipate any significant changes there. We always prefer to keep a little powder dry for M&A activity. So we're still hopeful that we can deploy some of our capital and for that matter, some of the cash we have at the holding company and future M&A transactions. So really no anticipated changes in our strategy there with respect to stock repurchase.

Okay. Great. And then was hoping to get an update as to where you think operating expenses will be going or core operating expenses will be going in the back half of the year, now that Elmira deal is closed and just how the cost saves are going to flow through over the next quarter or 2?

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 3 quarters, just about $100 million. The expectation for the quarterly run rate on Elmira is about $3 million. That's the expectation based on what we have announced. Now with that said, we also signal that we thought, I'll call it, the core expenses, we're going to increase at a little more rapid are at little higher level than they have in the past just because of various inflationary pressures. And for that matter, 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 meeting customers. There's just more general activities. So our expectation was that kind of -- call it, that 3% to 5% organic or core growth rate in expenses is what the expectation is on a going-forward basis. With that said, in the second quarter, we booked a little over $106 million of operating expenses. My calculation estimates that there's probably $1 million or $2 million of kind of nonrecurring items in there. That doesn't mean we won't have another nonrecurring expense item next quarter. I mean they are operating expenses, but just items that costs us a little money, came on the back end of the Elmira transaction to couple of other items in professional fees and marketing and kind of other write-downs and things of that nature that are recurring. So I hope that provides some color for you on operating expenses going forward.

Absolutely. That is helpful. And then you talked a little bit about the benefits of the administration business and some great opportunities that you're seeing there and just kind of good business activity. Just wondering if you could provide any additional color on kind of what you're seeing in the outlook for that business?

Yes, O'Connell. Sure. I think there's a couple of segments we operate in -- about 8, I call them verticals, I guess, there are business lines in our benefits business that are all related, but the same -- 2 of those, the 401(k) administration record-keeping business and the collective investment trust business, both have pretty solid pipelines right now of 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 in reputation to execute in those businesses. And those are both national businesses, either way, there completely, 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 not just the growth but the quality of the mousetrap, the quality of the people, the expertise in those 2 particular realms. And so we're getting a lot more opportunity, 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 recordkeeping 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're doing, for example, in the VEBA business, we've partnered with Voya as an example. In the collective business, we've partnered with some large insurance companies and others to outsource some of their operations, which they find because of their scale. They don't do very well or very efficiently. So it's a couple of things. It's kind of typical retail, institutional organic stuff, and it's also the opportunity to partner with larger players and have a seat at the table in terms of their platforms.

Okay. Great. Appreciate the color there. And then 2 final small ones, if I could. Just one, where do you think accretion kind of normalizes this year, post Elmira? And then what's can tax rate going forward?

Yes. So I think the expectation around tax -- I'll take tax rate first. Probably the current level is a reasonable expectation going forward, plus or minus 0.5 point on either side of that, generally speaking, excluding any kind of distinct tax events. So I think that's real.

Regarding accretion, I mentioned in my comments that we booked about $20 million in non-PCD loan mark. The average life of that book was largely to residential mortgage, so a little longer average life. So that mark with the -- plus the current -- the existing marks prior to the Elmira acquisition, maybe totaled about $20 million, $25 million over, call it, a 10- or 15-year average life. So that's the expectation, I think, on accreting to that mark. And core deposit intangible, we booked $8 million. We typically amortize that on an accelerated basis over, call it, 8 years. So that's each side of the accretion amortization. That is helpful, hopefully.

And our next question today comes from Matthew Breese at Stephens Inc.

Just going back to loan growth. Ex Elmira, 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.

Yes, I'll answer the second part of the question first, which is yes, I believe it does. You always hesitated a while on [a limb] in terms of predicting things that would appear to be favorable, and we're not going to do that. But I do think that the -- we've improved our business, our organic -- our ability to grow organically is different than what it was last year and the year before. And so I think the answer is yes. And 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 you -- right now a lot of the other things that we're -- and we certainly -- given our balance sheet and our capacity, and now our expertise to have the ability to compete with the larger banks in a way that we didn't always have and we have that now. So a lot of the opportunities we're getting, frankly, are from larger banks who are just -- they're different, right? They're bigger. Their regulatory concerns are different, it's all different. And so the ability to kind of execute as a commercial bank that have the capacity to deliver the products and services and expertise of the larger banks is what's really going to continue to drive that. So I think you said it well. I think we would hope that our organic growth goes from generally low single digits to mid-single digits. I think right now, and for the remainder of the year, when you look at the -- as I said in the last 12 months, the commercial growth was 10%. I think the mortgage growth was [90%]. I think that will continue through the remainder of the year. We typically can fall off in the fourth quarter in the mortgage lining just because of seasonality. But I think given the pipeline in 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. I think that will continue. I think if you look at loan growth in the first quarter for commercial, I think, was, what, 4.5%. I mean if you annualize that, you get a big number.

I think that it will also be a very good result in the third and fourth quarter. So whether -- what happens in 2023, in 2024, or who we can predict that. I'm just saying, I think we 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. And I expect that will continue.

Understood. Okay. And then, Joe, 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 the volatility in rates right now, I was hoping you could give us some idea of what we might see in margin expansion. If we get the 75 basis point hike in July, and then I think you can assume there's more behind that. I guess said another way, do you expect the kind of 16 basis points NIM expansion we saw this quarter or if you back out PPP and accretion closer to 20 bps. Is that what we should expect for next quarter as well, that type of NIM expansion?

Yes. That's a fair question, Matt. I -- to book 16 basis point -- a 16 basis point increase every quarter is a challenge. I see it's possible certainly for the next quarter, meaning the third quarter. I'm not sure about the fourth quarter because the other side of that, too, is that the long end of the curve is kind of, I'll say, plateaued around 3, right? So you don't necessarily get lift quarter-over-quarter in the new volume rate, right?

It's potentially -- particularly on mortgages or anything that's kind of on the longer end of the curve. It is -- potentially third quarter looks a lot like the second quarter. And for that matter, fourth quarter looks like the third quarter. So it may not be possible to increase by, call it, 16 basis points every quarter. With that said, the loan pipeline and the expectations around loan growth are certainly a significant tailwind to push us along in terms of margin expansion. So obviously, if we get -- which it looks like that the Fed is going to increase the short end of the curve, that certainly will help some of the variable rate, loans in the portfolio and help the stuff that it's priced off of the shorter end of the curve, like the prime rate. So I think there's 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 margin, certainly for the next quarter or 2.

Okay. And then I did want to go back to tangible common equity. I heard you loud and clear last quarter on your thoughts around AOCI and its impact, but with the TCE ratio in the kind of the low 5% range. Curious if there is any sort of self-imposed or externally imposed pressure to get that number higher? And just your overall thoughts there.

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 tangible common equity for us. So no, I still think we're kind of focused on maintaining our strong regulatory capital ratios. And so we haven't been posed any sort of house limits on TCE.

Okay. Last one for me. Just the last CPI reading -- fuel costs across the country, I think, were up 99% year-over-year. And I don't recall how the majority of homes across your markets are heated, natural gas or oil. But your winters tend to be longer and a little bit harsher than others. So I'm curious on your thoughts on the ability to withstand the 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 NPAs on the back of that?

Matt, with that issue, in particular, yes, we think the consumer is feeling the stress of higher prices at the pump, general inflationary pressures. And to your point, there's still a lot of customers using home heating oil, which we'll see where that comes out, but it's lot likely to be more expensive, putting pressure on the consumer. So with respect to our reserves, we have not released reserves around the consumer portfolios kind of an anticipation expectations that the consumer will begin to feel stress. With that said, the loss rates in those portfolios have been well below historical norms for us. For all the reasons, I think we stated on the prior earnings calls.

So is it possible that we go back to more, I'll call it, 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 yes, there will be some stress on the consumer. We have seen gas prices come down a little bit here, certainly not to the levels I'm sure all the consumers would like, including all of us on the call, but we do expect to see some more incremental stress on our consumers, particularly as we head into the winter months.

And our next question comes from Russell Gunther of D.A. Davidson.

It's Manuel Navas on for Russell. So all of my questions have been answered. I just wanted to confirm that when you talk about in the release of this pipeline in financial services business is remaining strong, is that what are -- is that the -- where you're kind of getting that at the higher level with the 401(k) recordkeeping business and trust business? And are there any other fee pipelines you want to add in that comment?

Yes. No, I mean I think that kind of covers it. It's both. It's kind of the organic kind of typical sales to end user customers, whether they be retail or institutional. It's mostly institutional, but also some of it is the opportunity to partner with the big international financial company. So it's a little above, Manuel.

On the other, the pipeline side, we don't really track kind of the pipeline and wealth management to the same degree. And I think of all the businesses, the ones going to be most challenged next quarter is going to be wealth management. They were 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 2, the benefits business because of the organic pipeline. Also, less of their assets are tied directly to the market. Actually less than half, I think, are tied directly to the market. And then on the insurance business, 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.

It appears we have a follow-up from Chris O'Connell of KBW.

Yes. I 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 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 remaining into the back half of the year, and how you're kind of seeing it there?

Yes. It's interesting. You hear all about, there's no inventory and there's no chips and people can't get new cars. And I look at our auto business, and we were up 10% this quarter. And over last year, that business is up, I think, 17%. So -- but that business is very volatile, right? I mean you can go up 15% 1 year, and then get up 15% the next year. So it's 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 -- duration is less. So we kind of like that business better. But it's -- that business turns on and off quick. And right now, I think the chip supply has cleared up and everybody -- the manufacturing -- they're making cars as fast as they can and ship them. And so it's hard to come back, there's kind of that built-up demand that has been unsatisfied with the last 2 years. And right now, that business is very busy.

I wouldn't expect it to run at the same rate. Maybe the third quarter will be good also. But I mean, at some juncture, that business is going to go back to something different. And as I said, some years, you can grow double digits and some years, you shrink double digits. So it's really -- it's pretty unpredictable to be (inaudible). But right now, it's very strong.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the call back over to Mr. Tryniski for any closing remarks.

Great. Thank you, Rocco. Thank you, everyone, for joining. Sorry, we had some technical difficulties we had to address, but I 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.

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.