Welcome to the Community Bank System Second Quarter 2022 Earnings Conference Call. Please note that this presentation contains forward-looking statements within the provisions of the Private Securities Litigation Reform Act of 1995 that are based on current expectations, estimates, and projections about the industry, markets, and economic environment in which the company operates. Such statements involve risks and uncertainties that could cause actual results to differ materially from the results discussed in these statements.
These risks are detailed in the company's annual report and Form 10-K filed with the Securities and Exchange Commission. Today's presenters are Mark Tryniski, President and Chief Executive Officer, and Joseph Sutaris, Executive Vice President and Chief Financial Officer . Gentlemen, you may begin.
Thank you, Rocco. Good morning, everyone. Hope all is well, and thank you for joining our second quarter conference call. Operating earnings for the quarter were very strong and similar to last year on a reported basis, but excluding PPP and reserve release from 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 nine basis points, resulting in a 16 basis point expansion in net interest margin for the quarter.
As pleased as we are with margin results, the highlight of the quarter in my view was the performance of our credit businesses, which continue to be historically strong for us. Organic loan growth for the quarter was 4.2% and year-over-year was over 10%. Given the investments 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 market related impacts and margin actually declined slightly.
Pipeline activity, particularly in the benefits business, remains very strong and the insurance market continues to harden, which will be supportive of forward revenue and margin growth in that business. I won't say a lot about the Elmira Savings Bank transaction other than we closed in May. It went extremely well, and we continue to expect $0.15 per share of accretion on a full year basis ex acquisition expenses. We also announced recently an increase in our dividend, which marks the 30th consecutive year of dividend increases.
Looking ahead, we fully expect our current operating momentum to continue, particularly as it relates to credit generation. We continue to add experienced and talented bankers, and the commercial pipeline is at an all-time high. We expect margin expansion will continue and credit quality to remain strong. As we sit here today, I like our prospects for the second half of 2022. Joe?
Thank you, Mark. Good morning, everyone. As Mark noted, the second quarter earnings results were solid. Fully diluted GAAP earnings per share were $0.73, while operating earnings per share, which exclude acquisition-related charges, were $0.85 in the quarter. These compare to fully diluted GAAP and operating earnings per share of $0.88 in the second quarter of 2021. A $2.8 million decrease in PPP-related revenues between the periods and 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 recorded a $2.1 million provision for credit losses in the second quarter of 2022, excluding acquisition-related provision. This compares to a $4.3 million net benefit recorded in the provision for credit losses in the second quarter of 2021 as the U.S. economy emerged from the depths of the pandemic. Fully diluted GAAP earnings per share were $0.86 in the first quarter of 2022, and operating earnings per share were $0.87, excluding $0.01 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, a higher provision for credit losses, and lower non-interest revenues, offset in part by an increase 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, 7 cents or 6.6% higher than the prior year's second quarter and 1 cent per share higher than the linked first quarter.
The company reported total revenues of $167.2 million in the second quarter of 2022, a new quarterly record for the company, and a $15.7 million or 10.3% increase over the prior year's second quarter. The increase in total revenues between the periods was driven by an $11 million or 12% increase in net interest income and a $4.6 million or 7.8% increase in non-interest revenues. Non-interest revenues account 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 of 2022 results due to an $8.3 million or 8.7% increase in net interest income, partially offset by $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 a shift in the composition of earning assets from lower yielding cash equivalents to higher yielding investment securities and loans, including significant organic loan growth between the periods.
The tax-equivalent average yield on interest-earning assets in the second quarter of 2022 was 2.97%, 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 one 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 benefits 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 over the prior year second quarter, driven by both organic expansion and the acquisition of several insurance practices and books of business between the periods.
Banking non-interest revenues increased $1.7 million or 11% from $15.5 million in the second quarter of 2021 to $17.2 million in the second quarter of 2022, due primarily to an increase in deposit service and other banking fees. Comparatively, financial services revenues decreased $1.8 million from the linked first quarter due to lower asset-based fiduciary revenues in the employee benefits and services and wealth management businesses. During the second quarter of 2022, the company reported a provision for credit losses of $6 million, $3.9 million of which was due to the acquisition of Elmira.
This compares to $4.3 million net benefit recorded in the provision for credit losses in the second quarter of 2021. The company's allowance for credit losses increased $5.4 million from the end of the first quarter of 2022 to $55.5 million, but remained consistent with the prior quarter at 68 basis points of total loans outstanding. The company reported net loan charge-offs of $0.4 million or an annualized 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 and core operating expenses in the prior year second quarter.
The $12.5 million or 13.4% increase in core operating expenses was attributable to a $7.5 million or 13% increase in salaries and employee benefits, a $3.4 million or 36.5% increase in other expenses, as well as increases in data processing and communication expenses, occupancy and equipment expenses, and intangible asset amortization totaling $1.6 million. The increase in salaries and benefits expense was driven by increases in merit incentive-related employee wages, acquisition-related staffing increases, higher payroll taxes, and higher employee benefit-related expenses.
The other non-compensation expenses were up due to the general increase in the level of business activities, including costs incurred to pursue several new business opportunities in the company's non-banking businesses and incremental expenses associated with operating an expanded franchise due to several non-bank acquisitions between the periods and the second quarter acquisition of Elmira Savings Bank. Comparatively, the company reported $99.8 million of total operating expenses in the first quarter of 2022.
The $10.6 million or 10.6% increase in total operating expenses on a linked-quarter basis was 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 a $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. The Elmira acquisition. Average deposit balance has increased $1.03 billion or 8.4% between the second quarter of 2021 and the second quarter of 2022. Likewise, average earning assets were up from $13.37 billion in the second quarter of 2021 to $14.47 billion in the second quarter of 2022, representing a $1.1 billion, 8.2% increase.
This included a $2.32 billion, 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 from 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 or $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 and direct, business lending, home equity, and consumer direct loans due to the Elmira acquisition and net organic growth despite a $259.9 million decrease in PPP loans. The increase in loans outstanding on a linked-quarter basis was driven by the Elmira acquisition and solid organic growth across all five loan-based loan portfolios. On a full year basis, ending loans increased $900.5 million or 12.4%.
Excluding the loans acquired in connection with the Elmira acquisition in PPP loans, ending loans increased $723.4 million or 10.4% year-over-year. The company's regulatory capital ratios remained strong in the second quarter. The company's Tier 1 leverage ratio was 8.65% at June 30, 2022, which substantially exceeds the well-capitalized regulatory standard of 5%. During the quarter, the company reported $196.7 million in after-tax other comprehensive loss driven by the decline in the market by the company's available for sale investment securities portfolio.
Company has an abundance of liquidity. The combination of the company's cash and cash equivalents, borrowing available at the Federal Reserve Bank, borrowing capacity at the Federal Home Loan Bank, and 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 remained strong in the second quarter at June 30, 2022.
Non-performing loans were $37.1 million, or 0.46% of total loans outstanding. This compares to $36 million or 0.49% of total loans outstanding at the end of the first 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 days- 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. Interest margin expanded meaningfully in the quarter. Asset quality remains strong and the loan pipeline is robust. In addition, the pipeline of new business opportunities in the financial services businesses remains strong.
In 2022, we remain focused on new loan generation, managing the company's funding strategies in a rapidly changing interest rate environment while continuing to pursue accretive low risk and strategically valuable merger and acquisition opportunities. 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 begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Today's first question comes from Alexander Twerdahl with Piper Sandler. Please go ahead.
Hey, 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.
Rocco, can you hear us?
We can hear you. Yeah, we can hear you loud and clear. Are you able to hear Mr. Twerdahl?
Yeah. I can- Has a bad line here.
I can hear you. Can you hear me?
Guess we could try calling from the other telephone if it's on our end. I don't know if it's on our end.
Pardon the interruption, everyone. It's looking like we are having some difficulties here. We're gonna have another line dial in. Thank you.
We can go do that and see if it clears up.
Thank you for holding, everyone. Looks like we have lost the speaker line. We will have them dial back in, and we'll get back underway here shortly. Please stand by. Everyone, we thank you for holding. We have reconnected the speaker location. Mr. Twerdahl, all of you can begin your questions. Thank you.
Great. Good morning, Mark and Joe. Can you hear me now?
We can.
We can.
Good morning, Alex.
Good morning.
Perfect. Good morning. I wanted to first ask about liquidity. Your cash position seems to have normalized back to sort of pre-pandemic levels, and I was just hoping you could help us think through sort of the deposit flows, you know, and the expectations for deposits over the next quarter, given the municipal potential inflows in the third quarter, as well as if you have any bullet securities that could mature in the third quarter to provide sources of liquidity in the near term.
Yeah. Alex, good question. So we look back to the pre-pandemic periods regarding you know, deposit outflows and this pattern is pretty consistent with those periods. You know, the municipalities basically have tax collection in the fall and early in the wintertime. Those funds tend to flow out in the second quarter, kind of, you know, flow out to some extent in the third, but then they come back late in the third quarter with tax collection. So, you know, we are expecting you know, some growth in the third quarter. I can't speak specifically as to the amounts, other than, you know, because it's tax collection season.
Typically, you know, we net back to about, you know, even, during tax collection season. You know, we had an outflow of $368 million, so we're hopeful, you know, most of that comes back. Although we do believe that there was some spend down of deposits that municipalities accumulated during the pandemic, you know, kind of in the back end of the 2022 school year and also some capital projects I think got funded as well. We do expect $200 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, you know, 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. In the meantime, we have tax collection to support it. With that said, it's not uncommon for us to, you know, to go into kind of a temporary borrowing position, you know, when in the past and, you know, given the size of our balance sheet, you know, $200 million in borrowings I don't think is all that concerning.
Yeah. The other thing I would add there, Alex, I think if you look at what happened in our organic deposit growth rate pre-COVID, it's a low to mid single digits. Then COVID hits, it's double digits. I mean, you know, in some cases quarter over 20% you know, one after another. I think that's pretty much moderated, and we're back to more of a you know, pre-COVID organic run rate. The municipal, as you know, they go up, and they go down. I think in the quarter the non-municipal deposits were down a little bit, but not very much.
The business deposits were actually up, so the business deposits continue to be pretty strong. I think we're back to more of a pre-COVID, you know, environment in terms of if you look at the national savings rate, and the like, you know, we're back to a more normalized kind of deposit environment in our view.
I guess, you know, the sort of million-dollar question in the industry is what's going to happen with deposit betas, and you guys have obviously done an amazing job through past tightening cycles. I'm just curious, just given, you know, all that's changed in the world, if you're starting to see any pressure on your deposit base or if you think you'll be able to maintain those betas, consistent with historical, experience.
It's been very limited in terms of the pressure. You know, if you look at our deposit base, 76% of our deposit base is checking and savings accounts. Those are not going to move much, if at all. I think our set-up here into a rising rate environment is quite good in terms of deposit beta, also in terms of margin expansion, which we saw obviously this quarter, as did everyone else. You know, I think on the first quarter's call, we said that we expected originated loan rates would exceed the portfolio rate in the third quarter or maybe fourth. Well, it actually happened this quarter. Not by a lot, but by a little bit.
You know, there's a good tailwind, I think, on the margin right now, heading into the second half of the year just because the loan yields, even on what's on the pipeline right now. Even if you know there was a rate change environment because the Fed or recession or some other event you know what we have in the pipeline is still going to go on, which is pretty substantial. It's still going to go on at higher rates. I think you know the margin outlook is pretty good for the remainder of the year.
Good. I'm just curious, you know, as you think about M&A, obviously, you guys have a lot of experience with M&A. With the move in rates and the impact that that will have on many banks, on the loan mark and interest rate mark in a lot of banks' portfolios, is that going to put a damper on your appetite for M&A in the near term?
No. I mean, it never has. Rates go up, rates go down. We try to be, you know, disciplined around what we do from an M&A, you know, perspective. Some opportunities are more tactical in terms of, you know, earnings accretion and the shareholder benefit. Others are more strategic in terms of kind of longer-term potential and opportunities in certain markets. You know, the loan marks, the credit marks, you know, the core deposit and tangible marks, none of that really makes a difference. It's all, you know, all those adjustments are non-cash anyway.
We really look at, you know, the company from a more of a cash flow perspective in terms of the cash flow impacts and less on kind of the, you know, the GAAP earnings impact, which is not unimportant. It's not necessarily, in our view, aligned with economic value. I would say, no. The change in the interest rate environment will have no impact, you know, 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 with Hovde Group. Please go ahead.
Good morning, guys.
Good morning, Erik.
Morning, Erik.
I first wanted to start on, you know, kind of looking at the outlook for commercial loan growth. I think you mentioned several times in the prepared remarks that the pipeline remains strong. Commercial pipeline, I think even at an all-time high. Maybe a kind of a two-part question. First, I'm wondering if you could just provide a little color in terms of the geographies and industries that are contributing to the growth and strength in the commercial pipeline. 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, you know, maybe some heightened economic uncertainty today relative to six months ago.
Sure. First, I would just say that we have made some strategic investments in people in some of our markets. You know, not to be too historical, but you know, the majority of our business has been in kind of these more non-metropolitan, smaller rural type markets where we have high market share. You know, over the last, let's call it 10 years, in some of the larger markets that we are in and have gotten in in a more meaningful way in the last, let's say 10 years, like, you know, Syracuse, Buffalo, some markets in Northeast Pennsylvania, we don't have a lot of market share.
You know, I mean, if you look at Syracuse, our headquarters are here. We don't have a huge banking business here, but we do now, or it's going to get much better because of talent. We have a lot of market share opportunity. In you know even in the Capital District and Syracuse, Rochester, Buffalo, Burlington, we just brought in at the beginning of the year, someone who's you know really talented to you know to continue to grow our business in that market, which it's doing. We have made investments in people. We've had some transition in leadership. You know the results are starting to show themselves.
We just think we have a lot of market share opportunity. You look at these, you know, somewhat larger markets that we're in, as I mentioned, and our market share is under 10%. There's a fair bit of opportunity in these markets to, you know, to grow. We made the investments in, you know, people and leadership to try to accomplish that, and the results are, as I said, showing. In terms of the markets, if you look on a percentage basis, the largest growth market we've had on a percentage basis is Buffalo quite well. You know, we've got a lot going on in New England.
The, you know, greater Central New York, Syracuse, Central New York market has been really strong. We continue to grow in Northeast Pennsylvania. It's really honestly it's everywhere. I mean, some are growing a little faster than others, but it's pretty much across the footprint. You know, in terms of the kind of business, I would say right now it's mostly CRE, but the C&I business is also growing. It's just interesting. You know, there's a lot of projects and a lot of investment going on right now. Maybe it's just our markets, and they tend to kind of lag the national markets, and this is kind of, you know, the result of that.
There is a lot of opportunity right now, and we're, you know, we're gonna have, I think a very good, solid remainder of the year, particularly given the pipeline. As I said, I think last quarter it was, you know, $1 billion. This quarter it's $1 billion and 1, and it's up 10% in a quarter. I expect that momentum to continue given kind of the investments we've made and the new-ish leadership team, you know, we have, which has really been in place since the beginning of the year. I think we'll do a better job of getting better opportunities in our core markets and, you know, grow our market share a little bit, you know, over time.
I mean, I think one of the strategies, and this is kind of maybe off the question a bit, but I think it's not unimportant to understand. You know, if you look at our balance sheet, we have $6 billion of securities and what, $8 billion of loans. That is not, you know, in our view, an optimized balance sheet. We needed to make the investments in trying to, over time, improve our balance sheet. I don't mean, I mean, improve. We have a very solid balance sheet. Liquidity is incredible, actually, too much liquidity.
But I think the, you know, the risk-reward opportunity, we've been too, you know, too prudent in terms of, you know, our balance sheet, asset quality and liquidity. You know, the strategy is really to just kind of let our investment portfolio sit as it is, if you will, and reinvest maturities into the loan book to create, you know, greater economic returns, more consistent with kind of the, you know, the risk-return risk-reward profile we're looking at. I think we just historically are too conservative of a balance sheet, and we need to move the needle a little bit on that, which I think we're in the process of doing.
I think to your last question, Erik, was around whether or not we think we can pull that through. I'm pretty confident we can. I would be surprised if we didn't also see, you know, very strong balance sheet growth, particularly in commercial, in the third quarter and hopefully the fourth quarter as well. I think we'll get pretty good pull-through on that, you know, on that pipeline, particularly, you know, based on some of the things that I know that's going on in there and the things that I see. I mean, I'm hoping that the execution is good and we get good pull-through in both Q3 and Q4 in that pipeline.
Great. I really appreciate the detailed answers there. Then I think in the prepared comments, Mark, you mentioned that the mortgage market is firming. You're seeing some firming there. I assume that's the residential mortgage market.
Curious if you could add a little color there, whether it's you know, volume or application activity or spreads, and just your thoughts today on you know, selling those any originations into the secondary market versus holding today. I know from an income statement perspective, it's a you know, relatively small you know, contribution to your revenue. Just curious in your thoughts on that market today.
Erik, are you talking about the insurance busin ess or the mortgage business?
I thought I heard you say mortgage market is firming, but I could have misheard that.
No, it was insurance. The insurance market is hardening, so that will be helpful to that market. I would say as it relates to the mortgage business, that's actually softening a bit, not inconsistent with what we're seeing, you know, elsewhere across the country. We have brought on board some newer sales and origination leadership, some frontline folks in our mortgage business. I think our pipeline is. I don't remember the exact number. Maybe you do, Joe. It's around where it was last year, give or take.
We also are pushing them through much quicker because we made some investments in, you know, people and process and technology in that business. Our time, our days to close are a lot less, so we're pushing them through quicker. The pipeline is around the same as last year. It might be down a little bit. You know, the refi market is almost gone. I think the purchase money part of our originations now are almost 90%. It's basically a purchase money market right now, which makes sense because, you know, rates are up a fair bit. If you hadn't already refinanced, it's probably too late.
We expect that business to continue to grow as well, given, you know, also given our markets. If you look, even when the national market is boom and bust, we're still growing at, you know, 3%-4% a year in the mortgage business, and I expect we'll continue to do that. I would hope we do a little better only because of some of the kind of investments we've made in that business. I think it will continue to be okay for us and continue to grow. We like the assets. We're not gonna sell them.
You know, the average mortgage, you know, lasts 10 years or less. You know, 10-year paper with a. Our historical loss rate on mortgages is what? 86 basis points or something like that. At a yield of over 4%, pushing 5% is a, you know, fabulous asset. We'll continue to put those on the, you know, on the books.
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.
Our next question today comes from Chris O'Connell at KBW. Please go ahead.
Good morning, gentlemen. Why don't you start? You know, you made some comments about the origination yields exceeding the portfolio yield a bit faster than anticipated last quarter. Could you maybe quantify, you know, where those origination yields are coming in relative to the portfolio yield?
Yeah. Do you want to take that?
No.
Okay. Yeah. With Chris, I think we made a comment last quarter just saying that, you know, 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, you know, hit 4% maybe late in the second quarter or third quarter. For the quarter, we actually originated at about 4.25% on a blended basis across all the portfolios. You know, we were booking new loans at, call it 25 basis points higher than the book yield.
That obviously continues to go up, you know, 'cause some of the originations in the second quarter were basically in the pipeline during the first quarter, you know, before significant rate movements. 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. As far as, you know, capital goes, I know you guys, you know, primarily focus on regulatory capital. But saw, you know, a little bit of a buyback this quarter. One, you know, usually that's for kind of tightening up the share count, you know, from compensation related issuance. Is there any expected buyback going forward? And in general, how are you guys feeling about, you know, capital ratios and, you know, the plan going forward given the, you know, disparity between kind of TC and, the regulatory capital?
Yeah. Chris, with respect to you know share repurchase activity, our plan really hasn't, our intentions really haven't changed, which is just intending to just kind of clean up the you know equity plan dilution that occurs throughout the year. No, I don't anticipate any significant changes there. You know, we always prefer to keep a little powder dry for M&A activity.
You know, we're still hopeful that we can deploy you know some of our capital and for that matter some of the you know cash we have at the holding company in future M&A transactions. Really no anticipated changes in our strategy there with respect to stock repurchase.
Okay. Great. Just hoping to get an update as to, you know, where you think operating expenses will be going or core operating expenses will be going in the back half of the year here now that Elmira deal is closed, and just, you know, how the cost savings are gonna flow through over the next qua rter or two.
Sure. Chris, just as a matter of kind of a backdrop, if we look at the third quarter of 2021, the fourth quarter of 2021 and the first quarter of 2022 and take kind of a simple average of the operating expenses for the company in those three quarters, just about $100 million. The expectation for the quarterly run rate on Elmira is about $3 million. You know, that's the expectation based on what we have announced.
Now with that said, we also signaled that we thought, you know, I'll call it the core expenses were going to increase at a little more rapid or a little higher level than they have in the past just because of various inflationary pressures. For that matter, you know, business activity has kinda come back to kinda normal activity levels. 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.
You know, our expectation was that kind of, you know, call it that 3%-5% organic or quarterly 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. You know, my calculation estimates that there's probably $1 million or $2 million of kind of non-recurring items in there. That doesn't mean we won't have another, you know, non-recurring expense item, you know, next quarter.
I mean, they are operating expenses. They're just items that, you know, that cost us a little money come on the back end of the Elmira transaction, a couple other items, you know, in professional fees and marketing and, you know, kind of other write-downs and things of that nature that are non-recurring. I hope that provides some color for you on operating expenses going forward.
Yeah, absolutely. That is helpful. You talked a little bit about, you know, the benefits of the administration business and, you know, some great opportunities that you're seeing there and just kind of, you know, good business activity. Just, you know, wondering if you could provide any additional color on kind of, you know, what you're seeing and, you know, the outlook for that business.
Yeah. No, sure. You know, I think there's a couple of segments we operate in, about eight, I call them verticals, I guess, or business lines, in our benefits business that are all, you know, related but distinct. Two of those, the 401 administration record-keeping business and the collective investment trust business both have pretty solid pipelines right now and opportunities. I would say a lot of that arises from, you know, the idea that, one, we have a very, very good mousetrap in both of those businesses.
We've gotten to the kind of scale and capability and expertise, and reputation to execute in those businesses. Those are both national businesses, by the way. They're completely, you know. They operate and have offices all over the U.S. 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 realms.
You know, we're getting a lot more opportunities, some of which is playing at the next level up in terms of partnering with some of the national, let's call it international, very large financial players who are outsourcing some of their record keeping and administration and collective trust work to our shops. It's not just all retail, I guess you would call it. You know, some in institutional, some of it is us, you know, being able to partner with much larger firms to, you know, to outsource what they are doing.
For example, in the Veeva business, we've partnered with Voya as an example. In the collective business, we've, you know, partnered with some large insurance companies and others to outsource some of their, you know, operations, which they find because of their scale, they don't do very well or very efficiently. It's a couple of things. It's kind of typical retail, institutional, organic stuff, and it's also the opportunity to partner with larger players and have a seat at the table in terms of their platforms.
Okay, great. Appreciate the color there. Two final small ones if I could. Just one, where do you think accretion it kind of normalizes here, you know, post Elmira? What's a good tax rate going forward?
Yeah. I think the expectation around tax. I'll take tax rate first. You know, probably the current level is a reasonable expectation going forward, you know, ± half a point on either side of that, generally speaking, you know, excluding any kind of, you know, distinct tax events. I think that's reasonable. Regarding accretion, you know, I mentioned in my comments that, you know, we booked about $20 million in non-PCD loan mark. The average life of that book was largely, you know, it's residential mortgage, so a little longer average life.
That mark with the, you know, plus the current or the existing marks prior to the Elmira acquisition maybe total about $20 million-$25 million, you know, over, call it a, you know, 10-year or 15-year average life. That's the expectation, I think, on the accreting to that mark. Core deposit intangible, we booked $8 million. We typically amortize that on accelerated basis over, call it eight years. You know, that's each side of the accretion amortization. That is helpful.
Great.
Hopefully.
Yeah, definitely. Thanks. I'll step out.
Okay.
Our next question today comes from Matthew Breese at Stephens Inc. Please go ahead.
Good morning.
Morning, Matt.
Morning.
Just going back to loan growth. You know, 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. 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.
Yeah. I'll answer the second part of the question first, which is, yes, I believe it does. You know, you always hesitate to go out on a limb in terms of predicting things that would appear to be favorable, and we're not prone to do that. I do think that. You know, we've improved our business. Our organic ability to grow organically is different than what it was last year and the year before. I think the answer is yes. I would be, you know, going forward, somewhat disappointed if we didn't, you know, improve our growth rates on our historical levels, just given the investments we've made in people and talent and the like.
In some of these larger markets where we don't have significant market share and we have tremendous opportunity, particularly against some of the larger banks. I mean, you know, right now, a lot of the things that we're, you know, 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. You know, we have that now. You know, a lot of the opportunities we're getting, frankly, are from larger banks, who are, you know, just, they're different, right? They're bigger.
Regulatory concerns are different. The, you know, it's all different. The ability to kind of execute as a commercial bank, but have the capacity to deliver the products and services and, you know, expertise of the larger banks is what's really, you know, gonna continue to drive that. I think you said it well. I think we would hope that our organic growth goes from generally low single digits to mid-single digits, I think, right now and for the remainder of the year. You know, you look at the, as I said, the last twelve months, the commercial growth was 10%.
I think the mortgage growth was 9%. I think that will continue through the remainder of the year. You know, we typically get a fall off in the fourth quarter in the mortgage lending just because of seasonality. I think given the pipelines in both of those businesses and the investments we've made, and the opportunity we have in, you know, some of those larger markets, I think we will continue to execute in terms of organic loan growth at a higher level than we have in the past. I think that will continue. I think you look at, you know, loan growth in the first quarter for commercial, I think was, what, 4.5%.
I mean, 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. You know, whether what happens in, you know, 2023 or 2024 or who can predict that? I'm just saying I think we've made the investments in people and expertise and capabilities that will allow us to grow into the future at a higher rate given the markets and the environment we're in than we have historically, and I expect that will continue.
Understood. Okay. And then, Joe, you know, I think throughout all the prepared comments, it feels like, yes, we're gonna see higher interest expense. We're gonna see higher interest income. The margin's going to expand. Just given the volatility in rates right now, I was hoping you could, you know, give us some idea of what we might see in margin expansion. You know, if we get the 75 basis point hike in July, and then, you know, I think you can assume there's more behind that.
I guess said another way, you know, do you expect the kind of 16 basis points NIM expansion we saw this quarter, or if you back out PPP and accretion closer to 20 basis points? Is that what we should expect for next quarter as well, that kind of type of NIM expansion?
Yeah, that's a fair question, Matt. You know, 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, you know, the long end of the curve is kind of plateaued around 3%, right? So you don't necessarily get lift quarter-over-quarter in the new volume rate, right?
It's potentially, you know, particularly on mortgages or anything that's kind of on the long run of the curve. Potentially the third quarter looks a lot like the second quarter and, you know, for that matter, the fourth quarter looks like the third quarter. It may not be possible to increase by, you know, call it 16 basis points every quarter. With that said, you know, the loan pipeline and the expectations around loan growth are certainly a significant tailwind, you know, to push us along in terms of margin expansion.
You know, 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, you know, some of the variable rate loans in the portfolio, and help, you know, the stuff that's priced off of the shorter end of the curve like the, you know, like the prime rate. I think there's a expectation that we're gonna continue to see increases. Not sure we can, you know, lock in 16 basis points every quarter. We are certainly, you know, optimistic about the expansion of the margin certainly for the next quarter or two.
Okay. I did want to go back to tangible common equity. I heard you loud and clear last quarter on your thoughts around AOCI and its impact. With, you know, the TCE ratio in kind of the low 5% range, curious if there's any sort of self-imposed or externally imposed pressure to get that number higher and just your overall thoughts there?
No, there's no particular, you know, self-imposed minimum or limit. You know, we do focus on the regulatory capital. I think for good reason, you know, the regulators do not, you know, count the changes in the value on the AFS portfolio, which is the primary driver of, you know, the decrease in tangible common equity for us. No, I still think we're kind of focused on maintaining, you know, strong regulatory capital ratios and, you know, so we haven't imposed any sort of house limits on TCE.
Okay. Last one for me. You know, just the last CPI reading, you know, fuel costs across the country, I think we're up 99% year-over-year. I don't recall how the majority of homes across your markets are heated, you know, natural gas or oil, but your winters tend to be longer and a little bit harsher than others. I'm curious your thoughts on the ability to withstand higher heating costs for your consumers. As you get into the colder winter months, do you have any sort of thoughts around potential for increased delinquencies or PAs on the back of that?
Matt, with that issue in particular, yes. You know, we think the consumer is feeling the stress of higher prices at the pump, you know, general inflationary pressures. To your point, you know, there's still a lot of customers using home heating oil, which, you know, we'll see where that comes out, but it's likely to be more expensive, putting pressure on the consumer. You know, with respect to our reserves, we have not released reserves around the consumer portfolios, kind of in anticipation expectations that, you know, the consumer will begin to feel stress.
With that said, the loss rates in those portfolios have been well below historical norms, for us, you know, for all the reasons I think we stated on the prior earnings calls. You know, is it possible that we go back to, you know, more, call it, normal levels of, you know, pre-COVID levels of delinquency and losses? The answer is yes.
We've also, you know, did not release reserves in those portfolios for that to potentially happen. Yeah, there will be some stress on the consumer. You know, 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. We do expect to see some more or 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.
Thank you, Matt.
Our next question comes from Russell Gunther at D.A. Davidson. Please go ahead.
Hey, good morning. It's Manuel Navas on for Russell.
Good morning, Manuel.
Hey. A lot of my questions have been answered. Just wanted to confirm that when you talk about in the release, this pipeline in financial services business is remaining strong, is that where you're getting that BPAS to higher level with the 401(k) record-keeping business and trust business? And are there any other fee pipelines you wanna add in that comment?
Yeah, no. I mean, I think that kinda covers it. It's both. It's kind of the organic kind of typical sale to end user customers, whether they be retail or institutional. It's mostly institutional. But also some of it is the opportunity to, you know, partner with the big international, you know, financial company. So it's a little of both, Manuel. You know, on the other, the pipeline side, you know, we don't really track kind of the pipeline and wealth management to the same degree. I think of all the businesses, the one that's gonna be most challenged next quarter is gonna be wealth management.
They're the most challenged this quarter. The vast majority of their revenues are directly tied to the market, which is down, what, 20% or something, give or take. I think, you know, they will be affected, you know, absent any changes in market conditions. They will be affected more in the third quarter than, you know, those other two, the benefits business because of the organic pipeline. Also, less of their assets are tied directly to the market. Actually, it's less than half, I think, are tied directly to the market.
Then on the insurance business, I said the market in insurance is hardening, and you're seeing, you know, in some cases, kind of double digit increases in premiums, which will, you know, be helpful to us, you know, into the second half of the year. That's kind of a little bit more detail on the businesses there and the pipelines.
Perfect. Thank you very much.
Thank you.
It appears we have a follow-up from Chris O'Connell, KBW. Please go ahead.
Yeah. Just wanted one follow-up on the outlook for indirect auto and how that's looking into the back half of the year. It looks like to be, you know, extremely strong this past quarter on an organic basis. I know you guys have kind of telegraphed that in the prior quarter. If that strength is, you know, remaining into the back half of the year, how are you kinda seeing it there?
Yeah. It's interesting. You know, you hear all about there's no inventory and there's no chips and people can't get new cars. You know, I look at our auto business, and we're up 10% this quarter. You know, over last year, that business is up, I think 17%. That business is very volatile, right? I mean, it can go up 15% one year and it could down 15% the next year. It's a different kind of business than mortgage and commercial. It's strong right now. A lot of what we do is used because we like the risk-reward profile of the used auto business a lot better. Yields are higher, and the residual risk is lower.
Usually terms are, you know, duration is less, so we kinda like that business better. It's, you know, that business turns on and off quick. You know, right now, I think the chip supply is cleared up and everybody, you know, the major manufacturing, you know, they're making cars as fast as they can and shipping them. Cars have come back. There's kind of that, you know, built up demand that has been unsatisfied over the last two years.
Right now, it's, you know, that business is very busy. I wouldn't expect it to run at the same rate. You know, maybe the third quarter will be good also. I mean, at some juncture, that business is gonna go back to, you know, something different. As I said, some years you can grow double digits and some years you shrink double digits. It's really pretty unpredictable, to be honest with you. Right now it's very strong.
Great. Appreciate the color there. That's all I had. 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. 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.