Community Financial System Inc (CBU) 2022 Q1 法說會逐字稿

Good morning, and welcome to the Community Bank System First Quarter 2022 Earnings Conference Call. (Operator Instructions) Please note, today's event is being recorded.

And also please note that this presentation contains forward-looking statements within the provisions of the Private Securities Litigation Reform Act of 1995 that are based on current expectations, estimates and projections about the company, markets and economic environment in which the company operates. Such statements involve risks and uncertainties that could cause actual results to differ materially from the results discussed in these statements. These risks are detailed in the company's annual report and Form 10-K filed with the Securities and Exchange Commission.

Today's call presenters are Mark Tryniski, President and Chief Executive Officer; and Joseph Sutaris, Executive Vice President and Chief Financial Officer. We will be joined by Dimitar Karaivanov, Executive Vice President of Financial Services and Corporate Development for the question-and-answer session.

Gentlemen, at this time, you may begin.

Thank you, Chad. Good morning, everyone, and thank you for joining our first quarter conference call. I hope everyone is well. I think earnings for the quarter were very solid across the board. Margin continues to be a lessening headwind, in loan growth expenses, deposit fees and the continuing strength of our financial services businesses or tailwinds. Loan performance continues to be really good. We had annualized growth of 4% in a quarter that is seasonally negative for us and which continues a favorable trend in the second half of '21. Commercial and Consumer Mortgage led the way on the strength of solid execution by our teams and the pipeline remains very strong.

In fact, our commercial pipeline right now is over 50% higher than it's ever been. Joe will comment further on margin, but we were also encouraged by the 40 basis point increase in originated loan yields this quarter over last. We expect that it would take until the end of the year for originated loan yields to exceed the portfolio yields, but the current trend suggests that will happen sooner.

Also, our deposit costs ticked down to 8 basis points this quarter. And since our deposit base is 75% checking and savings, we do expect our low beta funding costs will be contributory to margin expansion going forward.

The recent strength of our financial services businesses continued in the quarter with revenues up 13% and pretax earnings up 8% over 2021. Our benefits, wealth and insurance businesses are all performing extremely well right now. And given their organic growth momentum and new business pipelines, we expect that trend to continue.

As we announced last week, we have received regulatory approval for the pending Elmira Savings Bank transaction, a $650 million asset bank with 12 offices across the Southern Tier and Finger Lakes regions, New York State. It's a very nice franchise with a very good mortgage business that we expect will be $0.15 per share accretive on a full year basis, excluding acquisition expenses, so a very productive low-risk transaction that we expect to close early next month.

Looking ahead, we expect our current operating momentum to continue, particularly as it relates to our commercial banking business. Over the past quarter, we've added many experienced and talented bankers to our leadership and front lines, including in New England, Upstate New York and the Lehigh Valley in Pennsylvania. We also expect the seasonally strong consumer mortgage and indirect lending businesses to accelerate subject to inventory availability in those businesses.

Lastly, I would like to give a shout out to the entire Community Bank team for being recognized by Newsweek, as the sixth most trusted bank in the nation in their annual feature of America's most trusted companies. Trust is our product, and we could not be more proud of this recognition of our team's efforts. Joe?

Thank you, Mark, and good morning, everyone. As Mark noted, the first quarter results were solid with fully diluted GAAP earnings per share of $0.86. The GAAP earnings results were $0.11 per share or 11.3% below the first quarter 2021 GAAP earnings and $0.06 per share or 7.5% higher than linked fourth quarter results.

Fully diluted operating earnings per share, which excludes acquisition-related expenses and other nonoperating revenues and expenses were $0.87 for the quarter, $0.10 per share or 10.3% below the prior year's first quarter and $0.06 per share or 7.4% higher than the linked fourth quarter results.

The $0.10 decrease in operating earnings per share as compared to the first quarter of 2021 was driven by increases in the provision for credit losses, operating expenses, income taxes and the fully diluted shares outstanding offset in part by increases in net interest income and noninterest revenues, a $5.2 million decrease in PPP-related revenues between the periods and a $6.6 million increase in the provision for credit losses were responsible for a $0.17 decrease in fully diluted operating earnings per share net of tax over comparable periods.

The company recorded $0.9 million in the provision for credit losses in the first quarter of 2022 as compared to $5.7 million net benefit in the provision for credit losses in the first quarter of 2021, as the U.S. economy emerged from the depths of the pandemic. The company PPP-related interest income totaled $1.7 million in the first quarter of 2022 as compared to $6.9 million of PPP-related interest income in the first quarter of 2021.

The $0.06 or a 7.4% increase in operating earnings per share over the linked fourth quarter results were largely driven by a decrease in the provision for credit losses, higher noninterest revenues and lower operating expenses.

Adjusted pretax, pre-provision net revenue per share, which excludes the provision for credit losses, acquisition-related expenses, other nonoperating revenues and expenses and income taxes were $1.12 in the first quarter of 2022 as compared to $1.09 in both the prior year's first quarter and the linked fourth quarter.

The company recorded total revenues of $160.5 million in the first quarter of 2022, a new quarterly record for the company and an $8.1 million or 5.3% increase over the prior year's first quarter. The increase in total revenues between the periods was driven by a $0.9 million, or 1% increase in net interest income and a $7.2 million or 12.2% increase in noninterest revenues. Noninterest revenues accounted for 41% of the company's total revenues during the first quarter of 2022. Comparatively, total revenues were up $0.9 million or 0.5% over fourth quarter 2021 results due to a $1.8 million or 2.7% increase in noninterest revenues, partially offset by $0.9 million, a 0.9% decrease in net interest income, driven by a $1.9 million decline in PPP-related interest income.

The company recorded net interest income of $94.9 million in the first quarter of 2022. This compares to $94 million of net interest income recorded in the first quarter of 2021. Although the company's earning asset yields decreased 34 basis points over the prior year's first quarter due to lower market interest rates on new loan originations and investment securities and the previously mentioned decrease in PPP-related interest income, net interest income increased by $0.9 million or 1%. This result was driven by lower funding costs, a significant increase in the average earning assets an 11 basis point increase in investment yields, including cash equivalents, as the company meaningfully shifted the composition of earning assets away from low-yield cash equivalents to higher-yield investment securities between the periods.

Comparatively, the company reported net interest income of $95.7 million during the fourth quarter of 2021, $0.9 million higher than the first quarter 2022 results, the company's tax equivalent net interest margin was 2.73% in the first quarter of 2022 as compared to [3.03%] in the prior year's first quarter and 2.74% in the linked fourth quarter.

Employee benefit services revenues for the first quarter of 2022 were $29.6 million, up $3.1 million, or 11.5% in comparison to the first quarter of 2021. The improvement in revenues was driven by increases in employee benefits trust and custodial fees as well as incremental revenues from the acquisition of Fringe Benefits Design of Minnesota Inc. during the third quarter of 2021.

Wealth Management revenues for the first quarter of 2022 were $8.6 million, up from $8.2 million in the first quarter of 2021. The increase in wealth management revenues was primarily driven by increases in investment management trust service revenues. The company recorded insurance service revenues of $10.4 million in the first quarter of 2022, which represents a $2.3 million or 27.7% increase over the prior year's first quarter driven by organic expansion as well as the second quarter 2021 acquisition of a Florida-based personal lines insurance agency and the third quarter 2021 acquisition of a Boston-based specialty-lines insurance practice.

Banking noninterest revenues increased $1.4 million or 9% from $15.6 million in the first quarter of 2021 to $17 million in the first quarter of 2022. This was driven by a $1.9 million or 13.1% increase in deposit service and other banking fees, offset in part by a $0.5 million decrease in mortgage banking revenue.

Comparatively, the company's financial services business revenues increased $1.3 million or 2.7% over the linked fourth quarter results, while banking-related noninterest revenues were up $0.4 million or 2.8%. During the first quarter of 2022, the company recorded a provision for credit losses of $0.9 million. This compares to a $5.7 million net benefit recorded in the provision for credit loss in the first quarter of 2021.

The company recorded net loan charge-offs of $0.5 million on annualized 3 basis points of average loans outstanding during the first quarter of 2022 as compared to net loan charge-offs of $0.4 million on annualized 2 basis points of average loans outstanding in the first quarter of 2021.

Although economic forecast remained generally consistent with the prior quarter, the company's allowance for credit losses increased $0.3 million from the end of the fourth quarter of 2021, due in part to a $90.7 million increase in non-PPP loans outstanding.

Comparatively, in the first quarter of 2021, economic forecasts had improved significantly, resulting in a release of reserves in that quarter. Although asset quality remains strong, the company will continue to closely monitor the effects of an inflationary environment will have on both the company's consumer and business borrowers.

The company recorded $99.8 million in total operating expenses in the first quarter of 2022, compared to $93.2 million of total operating expense in the prior year's first quarter. The $6.6 million or 7% increase in operating expenses was primarily driven by a $4 million or 7% increase in salaries and employee benefits and a $2 million or 23.1% increase in other expenses.

The increase in salaries and employee benefits expense was driven by increases in merit and incentive-related employee wages, higher payroll taxes and higher employee benefit-related expenses, offset in part by a decrease in full-time equivalent staff between the periods.

Other expenses were up due to a general increase in the level of business activities, including increases in business development and marketing expenses, insurance, professional fees and travel-related expenses. In comparison, the company reported $100.9 million of total operating expenses in the fourth quarter of 2021. The effective tax rate for the first quarter of 2022 was 21.4%, up from 18.6% in the first quarter of 2021. The company recorded a significantly higher level of income tax benefit related to stock-based compensation activity in the first quarter of 2021 as compared to the first quarter of 2022, which drove down the effective tax rate.

Exclusive of stock-based compensation benefits, the company's effective tax rate was 22.3% in the first quarter of '22 as compared to 21.4% in the first quarter of 2021, primarily attributable to an increase in certain state income taxes.

The company's total assets increased to $15.63 billion at March 31, 2022. This represented a $1.01 billion or 6.9% increase from 1 year prior and a $73.2 million or 0.5% increase from the end of the linked fourth quarter. The substantial increase in the company's total assets during the prior 12-month period was primarily due to large inflows of government stimulus-related deposit funding. Average deposit balances increased $1.52 billion or 13.1%, between the first quarter of 2021 and the first quarter of 2022. Likewise, average earning assets increased $1.54 billion or 12.2% over the same period.

This included a $2.25 billion or 61.4% increase in the average book value of the investment securities due to the company's security purchase activities and a $30.4 million or 0.4% increase in average loans outstanding partially offset by a $735.8 million or 44.1% decrease in average cash equivalents.

On a linked quarter basis, average earning assets increased $275.2 million or 2% due to the continued net inflows of deposits. Ending loans at March 31, 2022, of $7.42 billion were $48.6 million or 0% -- 0.7% higher than the fourth quarter of 2021 and $53.9 million or 0.7% higher than 1 year prior. The increase in ending loans year-over-year was driven by increases in consumer mortgage, consumer indirect, consumer direct and home equity loans, offset in part by a decrease in business lending due primarily to forgiveness of PPP loans. Exclusive of PPP loans, ending loans increased $410.3 million or 5.9% over the prior 12-month period and $90.7 million or 1.2% over the prior quarter.

Although the company's low-yield cash equivalents remain significantly higher than pre-pandemic levels, totaling $840.6 million at March 31, 2022, the company deployed a significant portion of its excess liquidity during the first quarter by purchasing $1.26 billion of investment securities. The company's regulatory capital ratios remained strong in the fourth quarter, company's Tier 1 leverage ratio was 9.09% at March 31, 2022, which is nearly 2x the well-capitalized regulatory standard of 5%.

During the company, the recorded -- during the company -- excuse me -- during the quarter, the company reported $271.4 million and after-tax other comprehensive loss driven by a decline in the market value of the company's available-for-sale investment securities portfolio. The company has an abundance of liquidity, the combination of company's cash, cash equivalents, barge availability at the Federal Reserve, Federal Reserve Bank's borrowing capacity at the Federal Home Loan Bank and the employee's available-for-sale investment securities portfolio provided company with $6.41 billion of immediately available source of liquidity at the end of the first quarter.

At March 31, 2022, the company allowance for credit losses totaled $50.1 million or 0.68% of total loans outstanding. This compares to $49.9 million or 0.68% at the end of the fourth quarter of 2021 and $55.1 million or 0.75% a year prior. The small increase in the allowance for credit losses during the first quarter was reflective of non-PPP related loan growth and certain qualitative factors.

At March 31, 2022, nonperforming loans were $36 million or 0.49% of total loans outstanding. This compares to $45.5 million or 0.62% of total loans outstanding at the end of the fourth quarter of 2021 and $75.5 million or 1.02% of total loans outstanding at 1 year earlier. The decrease in nonperforming loans as compared to the prior year's first quarter and fourth quarter was primarily due to the reclassification of certain pandemic impacted hotel loans from nonaccrual status back to accruing status.

Loans 30 to 89 days delinquent were 0.35% of total loans outstanding at March 31, 2022, down slightly from 0.38% at the end of the fourth quarter of 2021, but up from 0.27%, 1 year earlier. We believe the company's asset quality remains strong, but acknowledged that the historically low levels of net charge-offs experienced over the prior 12 months were supported by extraordinary Federal and State Government financial assistance provided to businesses and consumers throughout the pandemic.

Looking forward, we are encouraged by the momentum in our business. The company generated solid organic loan growth over the previous 3 quarters. The financial services business have been growing and performing very well. Asset quality remains strong and the loan pipeline is robust. In 2022, we will remain focused on new loan generation, managing the company's balance sheet, a rapidly changing interest rate environment while continuing to pursue accretive low-risk and strategically valuable mergers and acquisition opportunities.

And lastly, to echo Mark's comments, we look forward to partnering with Elmira Savings Bank and sincerely appreciate the efforts of our colleagues at Elmira Savings Bank to make the transition as seamless as possible for its customers.

Elmira has been serving its communities for 150 years and will enhance our presence in the 5 counties in New York’s Southern Tier and Finger Lakes regions. Thank you. I will now turn it back over to Chad to open the line for questions.

(Operator Instructions) And the first question will come from Alex Twerdahl with Piper Sandler.

First off, I think you guys were just modestly asset sensitive at the end of the year. I'm just wondering with the securities purchases that you did during the quarter, if you could give us an update on how the balance sheet is positioned for all these pending rate hikes that we're now expecting through the end of '23?

Yes. Well, Alex, I think you're on point there. We deployed a fair amount of our investment securities in the first quarter and for that matter, going back to the fourth quarter of last year, which we were largely on the sidelines for most of 2021 as rates were extremely low. So I think we've successfully deployed those securities and our outlook for core net interest income ex-PPP is up significantly.

So by way of example, in the last trailing 12 months, core net interest income was $361 million. We expect that the next 4 quarters will be significantly higher, in fact to the -- I believe to the tune of high single digits, approaching a 10% improvement over the trailing 12 months.

We have about $800 million in overnight cash equivalents that could be deployed in a higher rate environment. We also have some securities maturities. So on the securities and cash equivalents, about $1.1 billion to potentially deploy or reinvest throughout the year.

We do have about $1.7 billion or so in variable rate loans, of which about $800 million is repriceable in the next 12 months. So if rates continue to increase and stay high, we'll have those opportunities to redeploy some maturing principal payments into higher-yielding loans.

As Mark mentioned, our new loan generation rates were up about 40 basis points this quarter over the last quarter. So we are putting loans on at a higher rate certainly than we did in the fourth quarter, we expect that in the second, third quarter to effectively approach our current book yields.

And then so -- and then we have maturing loans, last quarter, we had about $400 million of principal payments on loans. And so they're coming off at the current rates, and we'll have an opportunity to redeploy those at higher rates if rates stay where they are. I guess the last piece, Alex, just to mention is that the last cycle of tightening our deposit beta was one of the best in the industry, and I think we're going to continue to certainly have one of the better core deposit franchises, one lower deposit betas in the industry. So I think we're fairly well positioned.

And then based on all the stuff you say, I would certainly agree. I'm just curious in the disclosures that you put out for the GAAP analysis, does that assume a higher deposit beta than you kind of historically have shown? Or what would cause that to be -- what would cause you to kind of screen more neutral relative to asset sensitive given all the things you just went through?

Yes. No, that's a fair question, Alex. But the challenge with that disclosure is the requirement around the disclosure, which is basically to take your expected run rate to look out 12 months. What's changed is the run rate from the end of the fourth quarter was much, much lower. We've deployed a lot of our securities. The run rate is higher. So the baseline expectation is up significantly over the projection that we put out in the fourth quarter. So when you put the Q disclosure, all it's suggesting is if you have a change in rates from that point forward, what might happen to your net interest income.

And that has minimized a bit, but we've already stepped it up considerably in the last quarter in terms of the core NII. So no, we don't assume -- we still assume a less than a 10 deposit beta based on our experience. It's just that what's happened is we've already stepped up the NII projection between the last disclosure and the first quarter disclosure, meaningfully.

Okay. And then I'm just curious, obviously, the regulatory capital levels are very healthy but TCE dropping below 7% and presumably maybe a little bit more decline with the ESBK deal coming on the middle of the quarter. How important is that TCE to TA ratio to you guys either internally or to the regulators? And is it going to -- does that level of capital change the way you guys think about things like M&A or at least the consideration that you might use for M&A, things like that?

Alex, it's Mark. I'll jump in on that one. We don't pay very much attention honestly internally to TCE ratios and TCE and TCE multiples and all those kinds of things. I think one of the reasons is because you run an ongoing business and the notion of a TCE ratio or the tangible common per share and those kinds of metrics is there an assumption inherent in those that your intangibles have 0 value. And you can't run an ongoing business around the assumption that you have no value to your intangibles.

So the regulators pay no attention to whatsoever, which I understand. We don't really pay a lot of attention to. We disclose it because other people are interested in it. But in terms of how we think about -- how we manage the company, it's never really been around TCE, particularly as it relates to the nonbanking businesses.

I'd use our benefits business as an example. There's probably $800 million of unrecognized goodwill on the books associated with our benefits business. So likewise, for the insurance and wealth businesses. So I mean, I understand the math of it all. But in terms of how it has any real-life implications of how you think about the business or manage the business, -- it doesn't -- we don't really think about it.

And the other thing I would add in is the delta and the change in TCE this quarter was mostly attributable to the change in the value of the investment portfolio.

When you think about it, we have, what's around $30 billion of financial instruments on our balance sheet, $15 billion on the asset side, $15 billion are closed on the liability side. The asset of tangible equity ratio assumes a mark-to-market, a fair value adjustment of only one of those financial instruments. So now -- I haven't done the math, but I would guess that the value -- the core deposit intangible value of our core deposit base just went up by a whole lot more than whatever the securities book declined by. So I mean you also have the loans which are financial instruments, they would get mark-to-market. They would go down in a period of rising rates, your deposit base goes up.

So I mean we look more at EVE, the economic value of equity, which is essentially a fair valuing of all of your instruments, and that's done in the context of interest rate risk management, asset liability management. So the TCE ratio or TCE -- tangible book value and all those kinds of things that we don't think about it. It's irrelevant to actual economics in actual value.

So we don't really spend a lot of time thinking about it. The regulatory or the capital ratios that we look at, frankly, the most important are the Tier 1 leverage ratio from a regulatory perspective that we think about, that we look at, that we pay attention to.

If you look at the risk-based capital ratios are, what, 3x or something, the minimum. I don't know, you know what the numbers or so. But if you look at -- we have what, $6 billion of assets on our balance sheet that carry no capital charge whatsoever. So I mean, we think we're in pretty good stead from a capital standpoint. And whatever happens to the tangible ratios and tangible capital, we don't really pay much mind to.

Got it. Appreciate that commentary. And then just a final question for me. I think you said that the accretion from the Elmira deal is still scheduled to be about $0.15, which I think is what it was when you guys announced it, but correct me if I'm wrong, they're a fairly mortgage-heavy institution. Is that -- is the change in the mortgage market rate environment incorporated in that EPS accretion guidance?

Yes, Alex. We -- when we modeled, we kind of modeled for the unlikely continuation of high mortgage volumes. We didn't think that, that was going to continue at '20 and 2021 levels. So we had already kind of modeled some of that into our expectations that there will be a drop-off in originations. So we've already had that built into the $0.15 when we announced it.

And the next question will be from Russell Gunther from D.A. Davidson.

Wanted to touch on the growth outlook and commentary. So really good results, a very constructive view you guys just laid out, both in terms of the commercial and consumer. When I think you guys historically, I tend to be in that sort of low to mid-single-digit range pretty consistently for organic growth. I mean based on your guys constructive view, if the stars aligned, could there be an upward bias to that range? Just curious as to how you're thinking about growth over the remainder of the year?

Yes. I would think, if you look, Russell -- I mean the answer to your question, I think, is yes, relative to our historical growth trajectories in our markets. As I said in my comments, we've invested in some leadership resources, some frontline resources in both our commercial and our mortgage business in markets where we think we have a lot more opportunity and can do a better job executing than we have historically. So I think we're already making progress, particularly on the commercial side. As I commented on the pipeline, it's substantially up from where it historically is, particularly this time of year.

So if I look at where the pipeline and the committed that fund it is right now, it is hard not to conclude that the next couple of quarters are going to be above trend for commercial. Mortgage, we will see -- we're entering the, I call it, busy season in our markets but inventory is the challenge.

Interest rates are impacting affordability. So that could have an impact that we can't foresee. But we -- regardless of the environment, we almost never not grow our mortgage business in the second and third quarter. So we would expect absent something we can't predict that we will also have good growth in the second and third quarters.

Now with that said, last year, our commercial mortgage business, I think, grew 6%, which is an outlier for us. It's historically 3%, give or take a point and 6% was not -- we didn't do things a lot different other than we worked hard to execute, but I think that was a function of the market more than anything. So I think the -- in the aggregate, loan growth in the next couple of quarters, I would expect looking out will be above historical trend.

That's really helpful color. Just a quick follow-up on that. In terms of the talent leadership you guys have added, is that initiative largely complete? I imagine you look for good folks all the time, but in terms of a targeted ramp is there anything significant left to do there?

I think there's some areas where we're going to add some more resources, and I made reference to someone we just hired from one of the larger banks, really talented individual actually used to work for us years ago, brought him back on board. He's already hit the ground running. He's only been on board for a couple of weeks. We've asked him to build out a team over time, talented people, that's a really strong market.

And so we started there. And I think there's other markets within or adjacent to our current footprint that we would continue to look to add resources. We're not going to lift the team out of another bank and pay a fortune and drop it in. We don't -- we've never really done things like that. It's really just focusing more on finding really talented people and experienced people, who we think can move the needle for us in markets where we think we have opportunity because they're either newer markets set like the Lehigh Valley or there are markets where we have underperformed historically.

I mean I'll use Western New York as an example. We've kind of been in the Rochester, Buffalo market for a long time, haven't really done as much renewed focus on that and a significant part of our current pipeline and opportunity is in Western New York. So the capital district continues to be very strong. The New England market right now is really strong. So it's -- Pennsylvania is really strong, notwithstanding the kind of start-up effort in Lehigh Valley, but Northeast Pennsylvania is really strong.

So it's very good right now, and the momentum is really good. That's been a function of leadership resources, frontline resources. We've done some things to try to improve our process. We haven't changed our lending and credit policies, but we have changed some of the processes, we'll continue to do some of that. So it's just a refocus on that business and how we think we can do better in existing markets and markets that are somewhat newer to us.

Okay. Great. And then just last one for me is in terms of average earning asset mix. So given the momentum on the loan growth side of things and recent growth in the securities portfolio. How are you thinking about the investment portfolio going forward in terms of overall mix of earning assets?

So Russell, right now, the securities portfolio is about 40% of our earning assets, just the investment securities. We also, as I mentioned, have about $800 million of, call it, dry powder. We are potentially going to invest some smaller portion of that. We also want to leave a little aside for potentially further rate improvement and also just in case we see some runoff in the deposit book, the stimulus funds that gave us a tailwind for the last couple of years are effectively gone.

So we just wanted to make sure that we have some cash reserves in case we experienced a little bit of back up on the deposit side. So I would think that modest continued investment of that -- those cash equivalents to the tune of a couple of hundred million dollars. But effectively, we expect to keep some of that liquid for either run off or future opportunities for deployment if rates continue to go up.

And the next question is from Matthew Breese from Stephens Inc.

I was hoping we could touch on the auto business, particularly on the growth outlook, but also the credit front as well. I just was curious if you're seeing any signs of deterioration on the underlying consumers' ability to pay at this point?

Yes, fair question. I cannot give you an expectation on the outlook. That business has always been really volatile. The demand changes quickly. You've got inventory issues, supposedly, the chips are coming. When are they going to come? Is it going to be too late for the season? Or are they going to come in time? And what is the change in interest rate environment due to demand? So I think there's too many variables there. I would expect that there'll be some growth in that business. There's almost always growth in that business in Q2 and Q3.

So I would expect that would continue, but is it going to be -- sometimes that portfolio has grown double digits and sometimes it shrinks -- never shrinks double digit, but it will shrink high single digits.

So it's very difficult to predict. I would expect just given the current run rate and trajectory and trend and the seasonality in mid second, third -- third quarter as well. I would expect that business would grow a little bit. So I think the balance sheet will get bigger. So far, we have seen no change in asset quality indicators in that portfolio, frankly, or any other portfolio. The asset quality has actually gotten better. If you look at some of the metrics, the delinquencies and nonperformers. The charge-offs are all really strong right now.

But that -- I think that in the consumer businesses can turn a little quicker than on the commercial banking side of the business. So -- but right now, it's very good. There's no indicators that, that will turn. I will say part of the reason why, if you look at the historical kind of loss experience in that portfolio, we're running less than that right now because of what's happened with used car prices.

So we do have those who weren't able to pay, and we have to repossess the car and sell at auction. And those prices are so high. There's almost no losses right now.

So I think -- what I would say is the expected future losses would not come from any higher level of folks, who can't make their payment, which I think has always been reasonably consistent in terms of repo activity. But I do think that at some juncture when the market cools off, there will be a quick turn in the value of used car prices, and we won't be able to get as much at auction.

So there will be an increase at some juncture, I don't know when that might be, I can't predict, but there will be an increase in loss rates at some juncture just because of the used car values.

Interesting. Okay. I appreciate that. I'm going to jump around on my question a little bit because of that last point. As you think about M&A, does what you see on the upcoming rate cycle or credit cycle change the characteristics of what you might look for in a bank acquisition and partner?

Interesting question. I would say generally, no, but there could be circumstances where if you had a bank that was extremely ill positioned for the current potential trajectory of the rate environment that would affect our perception of valuation, if it was otherwise something that we considered for strategic reasons to be a high-value opportunity for our shareholders.

So we would, I guess, factor into valuation. It's typically not been a significant driver of our strategy around M&A is kind of the balance sheet. I mean I will say we don't -- given our loan-to-deposit ratio, we don't -- it'd be helpful to do something M&A from an M&A perspective that was -- they had higher loan-to-deposit ratio than we did. And I think that's kind of what we've done, which, I mean, most banks do have a higher loan-to-deposit ratio than we do.

And then we can be disciplined about the pricing and rightsize the -- if there's issues around the deposit base and the acquired institution. But I would say, generally, it's not something that we think about actively. We certainly look at what's their balance sheet? Is it high quality? Is it additive to us strategically but in terms of trying to predict even which way interest rates will go and what the impact will be, that's a little challenging to do. I mean, it's not inconceivable that we have some GDP, the challenges. The fact is -- even though they're hawkish right now, as a group, they are much more dovish than they have been historically. And I could -- it's not inconsiderable that we revert back to a much lower or declining interest rate environment, that's conceivable.

So I think it's just difficult to predict. I don't think we would look to their balance sheet in terms of their interest rate sensitivity to understand it. But there's probably other factors that are certainly more consequential to our consideration than the balance sheet rate sensitivity.

Understood. Okay. And how have conversations gone on the M&A front? The tape has been volatile, but just curious if there's been more or less discussions. And you guys have been known to do more than 1 deal in a year?

Yes. I think it's surprising. I would say that the -- our level of activity in terms of our active interest and specific partners has not changed. What I have seen change is the volume, let's call it, of inbound calls from either banks or their bankers in terms of deal opportunities. So that's been a little bit surprising. But I think it's -- it was up and down. Sometimes it's more active than other times. It appears to be maybe a little bit less active right now than it historically has been. But again, our active dialogue with parties of strategic interest and value to us continues the pace.

(Operator Instructions) Next question will come from Chris O'Connell with KBW.

I want to start off with the securities yields coming on. I know you guys mostly purchased pretty heavily weighted to the front end of the quarter, this past quarter. What's the duration of the securities that you guys are putting on now? And as far as origination yields on what you're going to be putting on in the next quarter or so? What are those security yields at?

So the most recent purchases, as you noted, have been on the shorter end of the curve, 3 to 4, 5 years earlier in the quarter. So definitely shorter than the overall duration. I think we would -- based on the slope of the curve now, we would expect to stay to the short end of the curve somewhere between 2, 3 years with the incremental opportunities that we have. Just makes sense given our overall mix of assets and liabilities to stay on that on the shorter end of the curve, Chris.

The other thing we've done, I think we've picked up some munis, right, this quarter, and I think we may look at some munis. The muni spreads have gotten much more favorable recently. So that's a market we're looking at right now. I think we've added -- we did something this quarter, I don't remember how much it was. But I think the muni market is looking much more attractive at least right now.

Okay. Got it. And I appreciate the color on the loan origination yields. What are the loan origination yields coming on at today versus the 4% or so portfolio yields?

So on a blended basis, we were like just close to about a 3.75% in the first quarter. With rates moving up, we would expect that, that blended weighted average rate of new originations will go up a bit more in this quarter. Our overall book yield on the loan portfolio was about 4%. So I think we're going to start to approach new loan origination yields that are effectively a replacement for loans that are running off. I think we're getting there fairly quickly as rates have increased here in the last 30, 40 days or so.

Got it. And then as far as the expense outlook goes, I mean, this quarter, pretty good in terms of expense control. And I know you guys did some hiring this quarter. And so maybe it's a little bit backloaded, but I think prior guidance was a little bit above the typical 3% growth rate organic, closer to 4% to 5%. Are you still thinking about that as a good growth rate for the year from an organic basis? Or given the start to the year, could that kind of come in closer to the legacy 3% or so growth rate?

Chris, I believe we're still going to trend a bit higher. There's just a lot of push from an inflation perspective on wages and costs across the board. So I would expect that we're going to probably trend higher in 2022 than we have historically to something kind of mid-single digits. Just kind of the inflationary pressures are affecting every company, including us. We're not immune to those. So I think we're going to continue to see that.

We are investing in some very talented people, which I think will certainly pay off on the other side of the equation from a revenue generation standpoint. But -- so I still think that mid-single-digit expectation is fair. We did have some lower-than-expected expenses, particularly in some of our benefits plans. I would expect those to normalize in the quarters going forward. So I think that 4 to -- call it 4% to 6% is probably a fair expectation for the quarters moving ahead.

The other thing just to add by way of kind of overall commentary on the expense base. We are down about over 100 FTEs over last year. So as we kind of continue to invest in digital and rationalize analog, I would expect that as much as, yes, we are bringing on some very talented people in certain specified markets enrolled.

We're also overall reducing FTEs in other places in the business, as we invest more in our digital capability. So I think that will continue as well. So just to add some overall color to the understanding around the expense base.

Great. That's good color. Makes sense. And on the wealth side of the business, I know you guys usually have a strong seasonal quarter for the first quarter, but it seemed particularly strong this quarter given the market moves. Anything driving that? Any teams picked up or anything like that, that was unusual or that caused the solid growth this quarter?

Chris, it's Dimitar. Nothing on the inorganic side. It's just been solid execution organically. We have a lot of momentum right now across all of our nonbanking businesses. So we got the right capabilities. We've got the right people. We've done some things on the margin to kind of improve some of our market presence and go-to-market strategies.

So all that is coming into play. Also keep in mind, our portfolios that we manage on the wealth side are probably a little bit more conservative than the market outcomes you see. So I think we've held up reasonably well there, as you know we were ahead of last year and ahead of Q4, actually, so that was good to see.

The other thing I would just add, and Dimitar, you're closer to this and I mean that from what I see it seems like our -- in our benefits in wealth and insurance businesses that they've gotten to the point in terms of scale where in every business, you compete in certain segments of different markets. And we've always competed in a certain segment In the benefits business, and now we're competing in a different segment.

The same thing with the wealth, maybe even more or at least equally is opportunistic in the wealth side that we have the people and the platform capabilities that we can compete at a different level in terms of where we did historically. And I would say that it's identical in the insurance business. We just have the ability now to compete and win at a different level. I think that's going to continue to make a business -- to make a difference. It feels like those markets have opened up to us in other places that we historically had a more difficult time competing in.

Yes. Got it. That makes sense. And then lastly, given the comments around capital and regulatory versus TC and everything. One, where -- what was the average price of the repurchases this quarter? And how are you guys thinking about utilization of the buyback plan going forward?

Yes. So I'm not sure off the top of my head, Chris, I can give the average price, but it was around [70%] was the average price. The way we've looked at share repurchases is really just to kind of clean up the dilution from various equity plans and the like. We've always liked to keep some -- a lot of dry powder for future M&A opportunities and investment opportunities at the holding company. And so we haven't done a lot of stock repurchase. I think that's going to -- we're going to continue along that path, but we're just trying to effectively clean up some potential dilution that occurs because of just drift on the equity plans, and that's really our plan going forward.

And the next question is a follow-up question from Alex Twerdahl with Piper Sandler.

Just a couple of follow-ups, just so we can get the modeling -- hopefully, get the modeling a little bit more accurate. In terms of the benefit I guess, the decline in benefit costs that you alluded to in the first quarter, Joe, do you have how much that was and what that was related to?

Yes. So we have health insurance costs that have spiked a bit in the -- at the end of last year some was COVID, some as call it deferred, elective procedures and the like of our population of people that take out our medical plan. And there was just inflation push, if you will, on health care costs. And so we saw increases in the last couple of quarters that we're running 20% kind of over and above the trailing 12 months, which were meaningful, probably pushing $800,000, $900,000 a quarter over our run rate.

We kind of settled back into an amount that looks more like, call it, more standard medical cost inflation of like 8% to 6% -- or 6% to 8%, I'm sorry, on a quarterly basis. I don't know if that's going to hold, but it helped certainly in the first quarter as things kind of backed up a bit. And obviously, there's not COVID-related cases and all of the things that brings to the table.

So I would expect that, hopefully, we'll keep those costs down below where they were at the end of the third or the third and the fourth quarter of last year. But they'll continue to probably go up on a longer-term basis, high single digits.

Okay. Is that self-insurance and people just kind of hitting their deductible as you get later in the year and so the costs go up a little bit?

Yes, yes. And there's underlying -- there are reasons for just number of claims going up as well in the latter part of the year, which is a lot of people just deferred seeing their doctor and -- during COVID. And we saw some of that snapback in the third and the fourth quarter last year, people were utilizing their healthcare benefits just a bit more.

Okay. And then on the -- back on the insurance side, it was a pretty decent pickup from the fourth quarter. I know you get some M&A that contributed some seasonality. But where would you expect that to if you kind of -- we're looking at the seasonality and trying to strip that out, where would you think that, that line, the wealth management inclusive of insurance would run over the next couple of quarters or maybe kind of for the full year?

Alex, it's Dimitar. You're right. Our first quarter was a record quarter, both revenue-wise and margin-wise for the business. We did get the benefit of some of the acquisitions we did last year. I would say there's also that set of rates going up across the board. So the market is hardening. So that's good news.

I think we've also become a little bit more efficient in how we service the market. We don't necessarily -- it's hard to -- it will be hard to take that run rate and extrapolate it. The seasonality in the second half of the year is a little bit slower for us in that business. So as we -- if you're referring to pure the insurance business, we think we'll be up kind of single digits over last year mid- to high single digits, but hard to extrapolate from the first quarter. Again, it's very seasonal.

Great. So if you were kind of the starting point for the second quarter, it would -- you're kind of looking more towards the fourth quarter than the first quarter, the wealth management and insurance together?

Yes. I think that's fair.

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

Thank you, Chad. Thank you all for joining us today, and we will talk to you again in July. Thank you.

Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.