Community Financial System, Inc. Q2 FY2022 Earnings Call

Welcome to the Community Bank System's Second Quarter 2022 Earnings Conference Call. Please note that this presentation contains forward-looking statements within the provisions of the Private 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. I 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 2021 results, this year's quarter is up 13% over last year. Last quarter, I referred to margin as a lessening headwind, but in Q2, it turned into a tailwind as originated loan yields increased substantially, and total cost of funds were unmoved at 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 made in our commercial and mortgage businesses and the current pipelines, we expect growth to continue. The recent strength of our benefits, wealth, and insurance businesses moderated in the quarter, with revenue growth slowing to 7%, largely due to financial and 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, excluding 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 excludes acquisition-related charges, were $0.85 in the quarter. These compared to fully diluted GAAP and operating earnings per share of $0.88 for the second quarter of 2021. A $2.8 million decrease in PPP-related revenues between the periods and a $6.4 million increase in the provision for credit losses, excluding acquisition-related provision, were responsible for a $0.13 decrease in fully diluted operating earnings per share net of tax over comparable periods. The company reported a $2.1 million provision for credit losses in the second quarter of 2022, excluding acquisition-related provision. This compares to a $4.3 million net benefit recorded in the provision for credit losses in the second quarter of 2021 as the U.S. economy emerged from the depths of the pandemic. Fully diluted GAAP earnings per share were $0.86 in the first quarter of 2022, and operating earnings per share were $0.87, excluding a penny per share of acquisition expenses. The $0.02 or 2.3% decrease in operating earnings per share from the linked first quarter results was largely driven by higher operating expenses or higher provision for credit losses and lower non-interest revenues, offset in part by a decrease in net interest income and a decrease in income taxes. Adjusted pre-tax pre-provision net revenue per share, which excludes the provision for credit losses, acquisition-related expenses, other non-operating revenues and expenses, and income taxes, was $1.13 in the second quarter of 2022, $0.07 or 6.6% higher than the prior year second quarter and a penny per share higher than the linked first quarter. The company reported total revenues of $167.2 million in the second quarter of 2022, a new quarterly record for the company, and a $15.7 million or 10.3% increase over the prior year second quarter. The increase in total revenues between the periods was driven by an $11 million or 12% increase in net interest income and a $4.6 million or 7.8% increase in non-interest revenues. Non-interest revenues accounted for 38% of the company's total revenues during the second quarter of 2022. Comparatively, total revenues were up $6.7 million or 4.2% over first quarter 2022 results due to an $8.3 million or 8.7% increase in net interest income, partially offset by a $1.6 million or 2.4% decrease in non-interest revenues. The company reported net interest income of $103.1 million in the second quarter of 2022, as compared to $92.1 million in the second quarter of 2021. Between comparable periods, the company's average interest-earning assets increased $1.1 billion or 8.2% and a tax-equivalent net interest margin was up 10 basis points from 2.79% in the second quarter of 2021 to 2.89% in the second quarter of 2022. The margin expansion was primarily driven by shifting the composition of earning assets from lower yielding cash equivalents to higher yielding investments, securities, and loans, including significant organic loan growth between 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 reported 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 benefit 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 benefit trust and custodial 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 for the prior year second quarter driven by both organic expansion, the acquisition of several insurance practices, and books of business between the periods. Banking non-interest revenues increased $1.7 million or 11% from $15.5 million in the second quarter of 2021 to $17.2 million in the second quarter of 2022 due primarily to an increase in deposit service and other banking fees. Comparatively, financial services revenues decreased $1.8 million from the linked first quarter due to lower asset-based fiduciary revenues in the employee benefit services and wealth management businesses. For the second quarter of 2022, the company reported a provision for credit losses of $6 million, with $3.9 million of which was due to the acquisition of Elmira. This compares to a $4.3 million net benefit recorded in the provision for credit losses in the second quarter of 2021. The company's allowance for credit losses increased $5.4 million from the end of the first quarter of 2022 to $55.5 million but remained consistent with the prior quarter at 68 basis points of total loans outstanding. The company reported net loan charge-offs of $0.4 million, or an annualized 2 basis points of average loans outstanding during the second quarter of 2022 as compared to net loan recoveries of $0.6 million or an annualized 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 38% increase in salaries and employee benefits, a $3.4 million or 36.5% increase in other expenses, as well as increases in data processing, communication expenses, occupancy and equipment expenses, and intangible asset amortization totaling $1.6 million. The increase in salaries and benefits expense was driven by increases in merit and incentive-related employee wages, acquisition-related staffing increases, higher payroll taxes, and higher employee benefit-related expenses. The other non-compensation expenses were up due to the general increase in the level of business activities, including costs incurred to pursue several new business opportunities in the company's non-banking businesses and incremental expenses associated with operating an expanded franchise due to several non-bank acquisitions between the periods and the second quarter acquisition of Elmira Savings Bank. Comparatively, the company reported $99.8 million of total operating expenses in the first quarter of 2022. The $10.6 million or 10.6% increase in total operating expenses on a linked quarter basis is largely attributable to a $4 million increase in acquisition-related expenses, a $3.8 million or 6.1% increase in salaries and employee benefits, and a $2.3 million increase in other expenses. The effective tax rate for the second quarter of 2022 was 21.6%, down from 23.1% in the second quarter of 2021. In the second quarter of 2021, the company's effective tax rate was driven up by an increase in certain state income taxes that were enacted during the period. During the second quarter, the company completed its acquisition of Elmira Savings Bank. In connection with the acquisition, the company added eight branch locations and acquired total deposits of approximately $522 million and total loans of approximately $437 million, including $20.8 million in non-PCD marks. The company also booked $8 million of core deposit 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 one year prior and $138.1 million or 0.9% decrease from the prior quarter end. The increase in the company's total assets during the prior 12-month period was primarily due to net inflows of deposits between the periods and 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 a $383.9 million or 5.2% increase in average loans outstanding, partially offset by a $1.6 billion or 77.2% decrease in average cash equivalents. On a 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 assets decreased in the prior quarter 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 the 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 were $722.4 million, or 9.7%, higher than the first quarter of 2022 and $900.5 million, or 12.4%, higher than one year prior. The increase in ending loans year-over-year was driven by increases in all categories of loans, including consumer mortgage, consumer indirect, business lending, home equity, and consumer direct loans, due to the Elmira acquisition and net organic growth despite a $259.9 million decrease in PPP loans. The increase in loans outstanding on a linked quarter basis was driven by the Elmira acquisition and solid organic growth across all five of the company's loan portfolios. On a full year basis, ending loans increased $900.5 million, or 4.4%. Excluding loans acquired in connection with the Elmira acquisition and PPP loans, ending loans increased $723.4 million, or 10.4%, year-over-year. The company's regulatory capital ratios remain strong in the second quarter. The company's Tier 1 leverage ratio was 8.65% at June 30, 2022, which substantially exceeds the well-capitalized regulatory standard of 5%. During the quarter, the company reported $196.7 million in after-tax other comprehensive loss driven by the decline in the market by the company's available for sale investments securities portfolio. The company has an abundance of liquidity. The combination of the company's cash and cash equivalents, borrowing available in the Federal Reserve Bank, borrowing capacity of the Federal Home Loan Bank, and an unpledged available-for-sale investment securities portfolio provide the company with over $5.8 billion in immediately available sources of liquidity at the end of the second quarter. Asset quality remains strong in the second quarter at June 30, 2022. Non-performing loans were $37.1 million or 0.46% of total loans outstanding as compared to $36 million or 0.49% of total loans outstanding at the end of the first quarter of 2022 and $70.2 million or 0.97% of total loans outstanding one year earlier. The decrease in non-performing loans as compared to the prior year second quarter is primarily due to the reclassification of certain pandemic-impacted hotel loans from non-accrual status back to accruing status. Loans 30 to 89 days delinquent were 0.29% of total loans outstanding at June 30, 2022, down slightly from 0.35% at the end of the first quarter of 2022, but up from 0.25% one year earlier. Looking forward, we are encouraged by the momentum in our business. The company generates strong organic loan growth over the prior four quarters with net interest margin expanding meaningfully in the quarter. Asset quality remains strong, and the loan pipeline is robust. In addition, the pipeline of new business opportunities in financial services businesses remains strong. In 2022, we will remain focused on new loan generation, managing the company's funding strategies in a rapidly changing interest rate environment while continuing to pursue accretive low-risk and strategically valuable merger and acquisition opportunities. And lastly, we sincerely appreciate the efforts of the bank staff and the former Elmira Savings Bank staff for seamlessly integrating the two companies. Thank you. Now I will turn it back over to Rocco to open the line for questions.

Thank you. We will now start the question-and-answer session. Today's first question comes from Alex Twerdahl with Piper Sandler. Please go ahead.

Hi. Good morning, guys.

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

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

Thank you. Can you guys hear me okay? Can you hear me okay?

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

Yes, one of us has a bad line here.

I can hear you. Can you hear me?

Pardon to interrupt everyone. We are having some difficulties here. We're going to have another line dial in. Thank you. Thank you for holding everyone. It looks like we have lost the speaker line. We will have them dial back in and we'll get back on our way here shortly. Please stand by. Everyone, we thank you for holding. We have reconnected the speaker location. Mr. Twerdahl, you can begin your questions. Thank you.

Great. Good morning. Mark and Joe, can you hear me now?

We can. Good morning, Alex.

We can. Good morning, Alex.

Perfect. Good morning. I wanted to first ask about liquidity. Your cash position seems to have normalized back to sort of pre-pandemic levels. I was just hoping you can help us think through 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 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 believe that there was some spending 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 that got funded as well, but we do expect a couple of hundred million 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 timeframe. But in the 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 in the past. Given the size of our balance sheet, a couple of hundred million in borrowings, I don't think is all that concerning.

I think I would add there, Alex, if you look at what happened in our deposits, organic deposit growth rate pre-COVID, low to mid-single digits. When COVID hit, it was double digits, in some cases 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 non-municipal deposits were down a little bit, but not very much. The 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 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 this change 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 setup 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 by 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, because the loan yields, even on what's on the pipeline right now, even if there was a rate change environment because of the Fed or recession or some other event. What we have in the pipeline is standard, which is pretty substantial. It's still going to go out at 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 had a lot of experience with M&A. With the movement of 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. We never had rates go up, rates go down. We try to be disciplined around what we do from an M&A perspective. 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. But the loan marks, credit marks, the core deposit intangible marks, none of that really makes a difference. All those adjustments are non-cash anyway, and we really look at the company from more of a cash flow perspective in terms of the cash flow impacts and less on 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, the change in the interest rate environment will have no impact whatsoever on our M&A strategy, Alex.

Great. Thanks for taking my questions.

Thank you, Alex.

Thank you. Our next question today comes from Erik Zwick. Please go ahead.

Good morning, guys.

Good morning, Erik.

Good morning, Erik.

I first wanted to start on looking at the outlook for commercial loan growth. I think you mentioned several times in the prepared remarks that the pipeline remains strong. Commercial pipeline, I think you've been at an all-time high, so maybe a two-part question. First, I'm wondering if you could just provide a little color in terms of the geographies and industries that are contributing to the growth and strength in the commercial pipeline. And then secondly, just wondering about your expectations for pull-through in the second half of the year and your ability to close these loans, just given that there's maybe some heightened economic uncertainty today relative to six months ago?

Sure. We've made some strategic investments in personnel in various markets. Historically, most of our business has been in smaller, rural areas where we hold a significant market share. Over the past decade, we have expanded in larger markets such as Syracuse, Buffalo, and areas in Northeast Pennsylvania, where our market share is relatively low. In Syracuse, for instance, despite our headquarters being here and having a strong banking presence, we see substantial growth potential due to our new talent. We are actively pursuing market share in areas like the capital district, Buffalo, and Burlington, and we’ve recently brought in a talented individual to help grow our business in those regions. We have seen some leadership transitions, and the results are beginning to materialize, highlighting our market share opportunities. In these larger markets, our share remains under 10%, indicating plenty of room for growth. Looking at our performance, Buffalo has shown the most growth percentage-wise, with other markets also performing well, particularly across New England and Central New York. Our growth is driven primarily by Community Reinvestment Act (CRA) activities, although our Commercial and Industrial (C&I) business is also expanding. There’s significant ongoing investment and projects within our markets, which may be lagging behind national trends but provide ample opportunities. Our pipeline has improved, rising from $1 billion last quarter to $1.1 billion this quarter, indicating a 10% increase. I expect this momentum to persist due to the new leadership team we have established this year. One strategy we're focusing on is refining our balance sheet, which currently shows $6 billion in securities and $8 billion in loans. We believe this isn’t optimized, prompting us to invest wisely over time. While our balance sheet remains solid with excellent liquidity, we consider ourselves too conservative in that aspect. Thus, we're aiming to shift our investment portfolio and reinvest in loans for better economic returns aligned with our risk-reward profile. I am optimistic about achieving solid balance sheet growth, especially in commercial sectors during the third and fourth quarters. I anticipate effective execution and successful follow-through on our pipeline in both upcoming quarters.

Great. I really appreciate the detailed answer 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 think that's the residential mortgage market. And, Chris, if you could add a little color there, whether it's volume or application activity or spreads and just your thoughts today on selling any originations into the secondary market versus holding today? And I know from an income statement perspective that's relatively small contribution to your revenue, but just curious on your thoughts on that market today?

Are you talking about the insurance business or the mortgage business?

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

No, it was insurance. The insurance market is hardening, which will be beneficial. In contrast, the mortgage business is softening a bit, aligning with trends observed nationwide. We have recently added new sales and origination leaders, as well as frontline personnel, to our mortgage division. I think our pipeline is roughly similar to where it was last year, perhaps a little lower. However, we are advancing applications much faster due to investments we've made in personnel, processes, and technology. Our days to close have significantly decreased, allowing us to move through the pipeline more quickly. The refinance market has nearly disappeared, and about 90% of our originations now come from home purchases. This shift makes sense, given the rise in interest rates; if you haven't refinanced yet, it's likely too late. Nevertheless, we anticipate continued growth in this sector, especially considering our market conditions. Even amidst national fluctuations, we have consistently grown at around 3% to 4% annually in the mortgage business, and I hope to achieve a slightly better performance due to our recent investments. We believe in the value of our assets and have no intention of selling them. The average mortgage lasts 10 years or less, and with our historical loss rate on mortgages being around 86 basis points, a yield of over 4%, close to 5%, represents an excellent asset. Therefore, we will continue to add these to our portfolio.

Got it. Yes, insurance market firming and residential mortgage market softening makes sense. Thanks for the correction there. And I appreciate you taking my questions today.

Thank you, Erik.

And our next question today comes from Chris O’Connell at KBW. Please go ahead.

Good morning, gentlemen. So let me just 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 yield — where those origination yields are coming on relative to the portfolio yield?

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. We thought that potentially the new origination yields would hit 4%, maybe late in the second quarter, third quarter. For the quarter, we actually originated at about a 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 were about a quarter point above in the quarter.

Okay, great. Thank you. And then as far as capital goes, you guys primarily focus on regulatory capital that saw a little bit of buyback this quarter. One, usually that's for kind of tightening up the share count from compensation-related issuances. Is there any expected buyback going forward? And in general, how are you guys feeling about capital ratios and the plan going forward, given the disparity between kind of TCE 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 of 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 I was hoping to get an update as to where you think operating expenses will be going — your core operating expenses will be going in the back half of the year here now that the Elmira deal is closed? And just how the cost saves are going to flow through over the next quarter or two?

Sure. So, Chris, just as a matter of kind of a backdrop, if we look at the third quarter of '21, the fourth quarter of '21, and the first quarter of '22, and take kind of a simple average of the operating expenses for the company in those three quarters, it's just about $100 million. The expectation for the quarterly run rate on the Elmira is about $3 million. That's the expectation based on what we announced. Now with that said, we also signaled that we thought, I'll call it, the core expenses were going to increase at a little more rapid or a little higher level than they have in the past just because of various inflationary pressures. And for that matter, 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 per quarter 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. They are operating expenses, so just items that cost us a little money come on the back end of the Elmira transaction, a couple of other items in professional fees and marketing and kind of other write-downs and things of that nature that are nonrecurring. So I hope that provides some color for you on operating expenses going forward.

Yes, 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, sure. I think there's a couple of segments we operate in, about eight, I call them verticals, or business lines, in our benefits business that are all related but the same. Two of those, the 401(k) administration record keeping business and the collective investment trust business, both have pretty solid pipelines right now and opportunities. And I would say a lot of that arises from the idea that, one, we have a very, very good mousetrap in both of those businesses. And we've gotten to the kind of scale and capability and expertise and reputation to execute in those businesses. Those are both national businesses either way. They operate and have offices all over the U.S. But we now have — I guess we're playing in 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 two particular rounds. 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 record keeping and administration and collective trust work to our shops. So it's not just all retail. I guess you would call it something institutional. Some of it is 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. I appreciate the color there. And then two final small ones, if I could. Just one, where do you think accretion kind of normalizes here post Elmira? And then what's a good tax rate going forward?

Yes. So I think the expectation around tax — I'll take tax rate first. Probably the current level is reasonable expectation going forward, plus or minus half a point on either side of that, generally speaking, excluding any kind of distinct tax events. So I think that's reasonable. 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 residential mortgage, so little longer average life. So that mark plus the existing marks prior to the Elmira acquisition may have totaled about $20 million, $25 million over, call it, 10 or 15-year average life. So that's the expectation I think on accreting to that mark. Core deposit intangible, we booked $8 million. We typically amortize that on an accelerated basis over, call it, eight years. So that's each side of the accretion amortization. That is helpful, hopefully.

Yes, definitely. Thanks. I'll step out.

And our next question today comes from Matthew Breese with Stephens, Inc. Please go ahead.

Good morning.

Good morning, Matt.

Good morning.

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. If you want me to predict things that would appear to be favorable — and we're not prone to do that. But I do think that we've improved our business. Our ability to grow organically is different than what it was last year and the year before. So I think the answer is yes. I would be going forward somewhat disappointed if we didn't improve our growth rates on our historical levels, just given the investments we've made in people and talent and the like in some of these larger markets where we don't have significant market share and we have tremendous opportunity, particularly against some of the larger banks. Right now, a lot of the things that we're — we certainly, given our balance sheet and our capacity and now our expertise, have the ability to compete with the larger banks in a way that we didn't always have, and 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; regulatory concerns are different. It's all different. And so the ability to kind of execute as a commercial bank, but 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, you look at — I said the last 12 months the commercial growth was 10%. I think the mortgage growth was 9%. I think that will continue through the remainder of the year. We typically do fall off in the fourth quarter in the mortgage lending just because of seasonality. But I think given the pipelines in both those businesses and 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 had 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 4.5%. When 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 what happens in 2023, 2024, who can predict that? I'm just saying I think we've made the investments in people and expertise and capabilities that will allow us to grow into the future at a higher rate, given those marks in the environment we're in, than we have historically. I suspect 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 kind of type of NIM expansion?

Yes, that's a fair question, Matt. To book a 16-basis point increase every quarter is a challenge. I see it's possible certainly for the next quarter, meaning the third quarter. 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. Potentially the third quarter looks a lot like the second quarter, and for that matter, the 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 it, which it looks like 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 is priced off of the shorter end of the curve, like the prime rate. So I think there's an expectation that we're going to continue to see increases. Next year 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 two.

Okay. And 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's 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 strong regulatory capital ratios. So we haven't imposed 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 your thoughts on the ability to withstand higher heating costs for your consumers? And as you get into the colder winter months, do you have any sort of thoughts around potential for increased delinquencies or MPAs on the back of that?

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 likely to be more expensive, putting pressure on the consumer. With respect to our reserves, we have not released reserves around the consumer portfolios kind of in anticipation of 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, call it, normal levels of pre-COVID levels of delinquency and losses? The answer is yes. But we 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 consumers, particularly as we head into the winter months.

Got it. Okay. That's all I had. Thanks for taking my questions.

Thank you, Matt.

And our next question comes from Russell Gunther with D.A. Davidson. Please go ahead.

Hi. Good morning. It's Manuel Navas on for Russell.

Good morning, Manuel.

Hi. So a lot of my questions had been answered. Just wanted to confirm that when you talk about in the release this pipeline in financial services businesses remaining strong, is that where you're kind of getting that higher level with a 401(k) record keeping business and trust business? And are there any other fee pipelines you want to add in that comment?

Yes. No, I think that kind of covers it. It's both. It's kind of the organic kind of typical sale to end-user customers, whether they be retail or institutional. It's mostly institutional, but also some of it is the opportunity to partner with the big international financial company. So it's a little of both, 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 one that's going to be most challenged next quarter is going to be wealth management. They're the most challenged this quarter. The vast majority of their revenues are directly tied to the market, which is down 20% or something, give or take. So I think they will be affected absent any changes in market conditions. They will be affected more in the third quarter than those other two, the benefits business because of the organic pipeline, also less of their assets are tied directly to the market, actually less than half I think are tied directly to the market. And then on the insurance business, as I said, the market in insurance is hardening, and you're seeing in some cases kind of double-digit increases in premiums, which will be helpful to us into the second half of the year. So that's kind of a little bit more detail on the businesses there and the pipelines.

Perfect. Thank you very much.

Thank you.

And it appears we have a follow-up from Chris O’Connell with KBW. Please go ahead.

Yes. 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%. But that business is very volatile, right? They go up 15% one year and they go down 15% the next year. So it's a different kind of business than mortgage and commercial, but it's strong right now. A lot of what we do is used because we like the risk-reward profile to use auto business a lot better. Yields are higher, and the residual risk is lower. Usually terms are — duration is less. We kind of like that business better. But that business turns on and off quickly. 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 shipping them and selling cars that come back. There's kind of that built-up demand that has been unsatisfied these last two years. And right now, their business is very busy. I wouldn't expect it to run at the same rate. Maybe the third quarter will be good also. But 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 pretty unpredictable, to be honest with you. But right now, it's very strong.

Great. I appreciate the color there. Thank you.

Thank you.

Thank you, Chris.

Ladies and gentlemen, this concludes our question-and-answer session. I'd 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 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.